As filed with the Securities and Exchange Commission on May 10,
2010
Registration No. 333-149171
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 6
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
ENERGROUP
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
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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:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345
Park Avenue
New
York, NY 10154
Tel.
No.: 212-407-4159 Fax No.: 212-407-4990
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.
o
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.
o
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.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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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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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.
Subject
to Completion, dated May 10, 2010
Prospectus
ENERGROUP
HOLDINGS CORPORATION
6,197,305 shares
Common
Stock
This
prospectus covers the resale by selling shareholders of up to 6,197,305
shares of our common stock, $0.001 par value.
The
selling shareholders may sell 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 prices, at prevailing
market prices at the time of sale, at prices related to the prevailing market
price, at varying prices determined at the time of sale, or at negotiated
prices. See “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” The last
reported closing sale price for our common stock was $3.95, as quoted
on the OTC Bulletin Board on May 7, 2010.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING
ON PAGE 9.
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
__
,
2010
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 on the front cover page 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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5
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Risk
Factors
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6
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Business
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18
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Special
Note Regarding Forward-Looking Statements
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33
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Use
of Proceeds
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33
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Plan
of Distribution
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34
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Selling
Shareholders
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36
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Selected
Consolidated Financial Data
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38
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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40
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Legal
Proceedings
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52
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Management
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52
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Security
Ownership of Certain Beneficial Holders and Management
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57
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Certain
Relationships and Related Party Transactions
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58
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Description
of Securities
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60
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Dividends
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61
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Legal
Matters
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62
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Experts
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62
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Disclosure
of Commission Position on Indemnification
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62
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Additional
Information
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62
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Index
to Consolidated Financial Information
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F-1
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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.
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. We are
headquartered in the City of Dalian, Liaoning Province of China. Throughout this
prospectus, Energroup Holdings Corporation, Precious Sheen Investments
Limited, Dalian Chuming Precious Sheen Investments Consulting Co.,
Ltd. and the Chuming Operating Subsidiaries are sometimes collectively
referred to as “Chuming.”
Our
Current Corporate Structure
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. 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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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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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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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.
Financial
Results
Our
consolidated financial statements for the years ended December 31, 2009 and
2008 are included in this prospectus. In 2009 and 2008, we had
approximately $213.5 million and $176.4 million in sales, respectively, and $6.1
million and $6.8 million in net income, respectively.
See
“Index of Financial
Statements”
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 offered under this prospectus. These risks are discussed
in the summary below and in the section titled “
Risk Factors
” beginning on
page 6 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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our ability to timely and
accurately complete orders for our
products;
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our dependence on a limited
number of major customers;
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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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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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·
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acceptance in the marketplace of
our new products and changes in consumer
preferences;
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foreign currency exchange rate
fluctuations;
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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 6 of this
prospectus.
STRATEGIC
FINANCING AND RELATED SETTLEMENT
On
December 31, 2007, we entered into a Securities 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 share exchange transaction with Precious Sheen Investments
Limited, a BVI Corporation and its shareholders.
On
December 30, 2009, we entered into a settlement agreement (the “Settlement
Agreement”) with the investors from the Financing (the “Investors”).
Pursuant to the Settlement Agreement, we agreed to new arrangements regarding
(i) the release of certain “make good” shares placed into escrow by certain of
our affiliates in connection with the Financing, (ii) the potential waiver of
$1.7 million of liquidated damages currently owed by the Company to the
investors (the “Liquidated Damages”) if the resale registration statement
relating to the shares of our common stock held by the Investors, of which this
prospectus forms a part, is declared effective by March 31, 2010, or
alternatively, if certain conditions are met, May 15, 2010 (the “S-1
Requirement”),and (iii) the release of certain cash amounts that were held back
in escrow pending our appointment of independent directors and our appointment
of a new Chief Financial Officer. As of the date hereof, the make
good shares have been released to our affiliate and the cash holdback
amounts have been released to us (less the $1.7 million Liquidated
Damages amount) because we have satisfied the conditions precedent set forth in
the Settlement Agreement for the release of those shares and holdback
amounts. Certain conditions also have been met so as to extend the
deadline for the S-1 Requirement to May 15, 2010. If we meet the S-1 Requirement
by May 15, 2010, then the $1.7 million Liquidated Damages amount will be
released to us within 10 days of the deadline. If we do not meet the
S-1 Requirement by May 15, 2010, then the $1.7 million Liquidated Damages amount
will be released to the Investors on a pro rata basis within 10 days of the
deadline. The parties have agreed that, subject to the receipt of the
make good shares and holdback amounts in accordance with the Settlement
Agreement, to waive and release one another from all other claims relating to
the matters governed by the Settlement Agreement.
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 .
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 and for the
years ended December 31, 2009 and 2008 have been derived from our
consolidated financial statements included in this prospectus. The financial
data as of and for the years ending December 31, 2007, 2006 and 2005 were
derived from audited financial statements from previously filed
reports. Historical results are not necessarily indicative of the
result to be expected for any future period.
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(US dollars in thousands)
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Twelve Months Ended
December 31,
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2009
(audited)
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2008
(audited)
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2007
(audited)
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2006
(audited)
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2005
(audited)
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Consolidated
Statements of Operations
Data:
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Sales
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$
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213,545
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$
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176,360
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$
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124,696
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$
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70,396
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$
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54,119
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Cost
of Sales
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183,391
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149,794
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104,379
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57,794
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45,284
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Gross
Profit
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30,154
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26,566
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20,317
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12,601
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8,835
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Operating
Expenses
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4,660
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7,823
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6,246
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2,891
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1,647
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Income
from Operations
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25,494
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18,743
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14,071
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9,709
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7,188
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Other
Income (Expense), net
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(17,349
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)
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(11,385
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)
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(1,476
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)
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(1,583
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(1,008
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)
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Income
Before Taxes
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8,144
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7,357
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12,620
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8,126
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6,180
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(Income
Taxes Expenses)/Deferred Tax Benefit
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(2,090
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)
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(520
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968
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1.6
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191
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Net
Income
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6,054
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6,837
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11,652
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8,128
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5,988
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Foreign
Currency Translation
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1,776
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528
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2,064
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611
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286
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Comprehensive
Income
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7,831
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7,366
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13,716
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8,739
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6,274
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Basic
Net Income Per Share (in US$)
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0.35
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0.40
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0.67
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0.47
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0.35
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Diluted
Net Income Per Share (in US$)
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0.29
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0.32
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0.67
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0.47
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0.35
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Basic
Weighted Average Number of Shares Outstanding
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17,272,756
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17,272,756
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13,409,120
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13,409,120
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13,409,120
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Diluted
Weighted Average Number of Shares Outstanding
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21,136,392
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21,182,756
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17,272,756
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17,272,756
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17,272,756
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(US dollars in thousands)
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At December 31,
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2009
(audited)
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2008
(audited)
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2007
(audited)
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2006
(audited)
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2005
(audited)
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Balance
Sheet Data:
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Total
Assets
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$
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133,482
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$
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90,683
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$
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66,620
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$
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56,846
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$
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50,993
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Current
Liabilities
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42,259
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23,758
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17,682
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16,764
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18,979
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Long
Term Liabilities
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-
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-
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-
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17,909
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18,580
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Stockholders
Equity
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91,224
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66,926
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48,938
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22,174
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13,434
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|
RISK FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this report that are not historic facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
Risks Relating
to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Our holding company in China, Chuming WFOE, and the
companies that form its present subsidiaries were incorporated in 2004.
Accordingly, you should consider our future prospects in light of the risks and
uncertainties experienced by early stage companies in evolving industries such
as the meat industry in China. Some of these risks and uncertainties relate to
our ability to:
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·
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maintain our market position in
the meat business in China;
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·
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offer new and innovative products
to attract and retain a larger customer
base;
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attract additional customers and
increase spending per
customer;
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increase awareness of our brand
and continue to develop user and customer
loyalty;
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·
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respond to competitive market
conditions;
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respond to changes in our
regulatory environment;
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·
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manage risks associated with
intellectual property
rights;
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·
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maintain effective control of our
costs and expenses;
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·
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raise sufficient capital to
sustain and expand our
business;
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attract, retain and motivate
qualified personnel; and
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·
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upgrade our technology to support
additional research and
development.
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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 the 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.
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
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.
We
currently rely upon and conduct significant related-party transactions, and most
of these stem from our the status of our Operating Subsidiaries, which were
formerly subsidiaries of the Dalian Chuming Group Co., Ltd. prior to their spin
off to become a part of the Company. While we intend to require independent
directors, or appropriate committee of the board, to review all related-party
transactions, these transactions may present a conflict of interest situation in
which the interests of the Group are directly opposed to the interests of the
Company. If these conflicts of interest are not effectively dealt with in a
manner satisfactory to the Company, our interests may be harmed, which may
adversely affect our operations and financial condition.
We
presently conduct business with the Group in several capacities - the main areas
where we have transactions with this related party are the purchase of feed for
hogs by us from the Group, and the purchase of live pigs by us from the Group,
with live pigs being by far the most significant set of transactions (under our
Long Term Hog Procurement Agreement). We paid the Group an aggregate of $64.7
million, $72.7 million and $61.7 million for live pigs during the full years of
2009, 2008 and 2007, respectively.
Mr. Shi
Huashan, who is our Chief Executive Officer, is also the Chief Executive Officer
of the Group, our former parent company. See also, “Certain Relationships and
Related Party Transactions” on page 72. Due to the non-exclusive roles of Mr.
Shi as our CEO and the principal executive officer of the Group, with whom
we conduct business from time to time, potential conflicts of interest may
arise. In particular, situations could arise in which we transact business
with the Group, and certain terms of agreements could be favorable to us,
but conversely unfavorable to the Group, and vice versa. If 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. In an
effort to reinforce management’s efforts to handle these potential conflicts of
interest effectively and fairly, we have retained two additional independent
directors for our board of directors, and intend to submit all appropriate
related party transactions to our independent board members, or appropriate
committee of the board, for review and approval.
Our
buildings and land use rights are pledged to secure an obligation of the Group,
and those assets would be at risk if the Group were to default on this
obligation. Loss of those assets would have a material adverse effect
on our business, financial condition and results of operations.
In
addition, in 2004 we obtained a loan of $20,466,901 (RMB 160,000,000)
from the Group, 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. The 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. We pledged both land use rights and buildings to the Bond Issuer. We
pursued a loan from the Group as the financing solution of choice at the
time because our tangible assets, at the time of origination, were insufficient
to collateralize the loan. Additionally, at that time we lacked the favorable
credit history to directly establish credit facility with the bank.
At
December 31, 2007, we repaid our debt in its entirety to the Group by
setting off receivables owed by the Group to us. We repaid the loan in order to
meet the requirements of the equity financing transaction detailed in Note 18 of
our consolidated financial statements for the years ended December 31, 2005,
2006 and 2007. The balances are now owed by the Group 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, our assets,
namely the buildings and land use rights would be at risk if the Group were to
default on this loan. Loss of those assets would have a
material adverse effect on our business, financial condition and results of
operations.
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. In 2009, these retail outlets accounted for
approximately 38% 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. We 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 the
integrity of 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 beginning with our Annual Report on Form 10-K for the fiscal year
ended December 31, 2010 have our independent registered public accounting firm
annually attest to our evaluation. The process of strengthening our
internal controls and complying with Section 404 is expensive and time
consuming, and requires significant management attention. During the
assessment of our internal controls over financial reporting for the year ended
December 31, 2009, our management concluded that our controls were ineffective
as a result of several material weaknesses. Many of the weaknesses
stem from our operation as a private company where a formal control system was
not in place prior to our becoming public. We have developed a
remediation plan, which we anticipate will be completed during
2010. Our remediation plan consists of (1) hiring a third party SOX
404 compliance consultant to help us implement an internal controls system, (2)
establishing an internal audit department, (3) purchasing a new ERP system with
built-in controls and (4) appointing additional members to the Board of
directors, who shall serve as independent directors and serve on the
audit committee. We cannot be certain that these 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 may become more
complex, and significantly more resources may 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 fail to
execute the remediation plan for 2010, our stockholders and other potential
investors may lose confidence in our business operations and the integrity of
our financial statements, and may be discouraged from future investments in our
company, which may delay or hinder any future business development or expansion
plans if we are unable to raise funds in future financings, and our current
stockholders may choose to dispose of the shares of common stock they own in our
company, which could have a negative impact on 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 other national securities exchanges, and the
inability of registered broker-dealers to make a market in our common stock,
which could 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, we 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 no 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. 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 or human diseases could adversely affect our
operations.
An
occurrence of serious animal or human diseases, such as foot-and-mouth disease
or swine influenza (A/H1N1 flu), 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. Even though it is
believed that A/H1N1 flu cannot be contracted by humans through eating
properly-handled and cooked pork or pork products, negative association of the
A/H1N1 flu with pigs and pork products could have a negative impact on sales of
pork products. Accordingly, there can be no assurance that our facilities or
products will not be affected by an outbreak of A/H1N1 or any other 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 RMB 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 2009 is
-0.7% and the rate of inflation for food in 2009 was 0.7% 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 and 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 Chuming WFOE. 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. There remains
significant international pressure on the PRC government to adopt a more
flexible currency policy, which could result in further and more significant
appreciation of the RMB against the U.S. dollar and other foreign
currencies.
As very
limited types of hedging transactions are available in the PRC to reduce our
exposure to exchange rate fluctuations, we have not entered into any such
hedging transactions. Accordingly, we cannot predict the impact of future
exchange rate fluctuations on our results of operations and may incur net
foreign exchange losses in the future.
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 2004 and A/H1N1 in
2009. Any prolonged recurrence of SARS, A/H1N1 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,
A/H1N1 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 PSI, a British Virgin Islands company. PSI
owns 100% of the equity in Chuming WFOE, a wholly foreign owned enterprise in
the PRC. Chuming WFOE 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.
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 our parent
company.
We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investment in Chuming and
their operating subsidiaries in China. As a result of our holding company
structure, we rely entirely on payments or dividends from Chuming for our cash
flow to fund our corporate overhead and regulatory obligations. The PRC
government also imposes controls on the conversion of RMB 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.
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.
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 shares of common stock, 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 may in
the future require additional cash resources due to changed business conditions
or other developments, including any capital expenditures, investments or
acquisitions we may wish 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.
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”):
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1.
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Dalian Chuming Slaughter and
Packaging Pork Company Ltd. (the “Meat Company”), whose primary business
activity is acquiring, slaughtering and packaging of
pork;
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Dalian Chuming Processed Foods
Company Ltd. (the “Food Company”), 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.
(the “Sales Company”), which is responsible for our sales, marketing and
distribution activities.
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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. 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, Dalian Precious Sheen Investments Consulting Co., Ltd.
("Chuming WFOE") entered into share transfer agreements with the
Group, under which the Group agreed to transfer ownership of the Chuming
Operating Subsidiaries to Chuming WFOE. On October 23, 2007, Chuming WFOE
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 the Group’s 68% interest in
Chuming WFOE to PSI, and upon this transfer, Chuming WFOE became a wholly
foreign owned enterprise, with PSI as the 100% owner of Chuming WFOE (including
its subsidiaries). On December 13, 2007, the PRC government authorities issued
Chuming WFOE 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
Chuming WFOE, which in turn owns 100% of the Chuming Operating Subsidiaries: the
Meat Company, the Food Company and the Sales Company. The business and
operations of the Chuming Operating Subsidiaries now comprise the principal
business and operations of our company.
Throughout
this prospectus, PSI, Chuming WFOE 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
our December 31, 2007 financing transaction). 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 which now comprise the
principal business and operations, and we became a U.S. public reporting company
incorporated in the State of Nevada. Through our holding companies,
we own the Chuming Operating Subsidiaries that continue to operate in the city
of Dalian, in Liaoning Province, China. Our common stock is quoted on
the OTC Bulletin Board under the symbol “ENHD”
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.
Company
Overview and History
Our
business originated from the founding in 1999 of Dalian Chuming Group
Co., Ltd. (the “Group”), 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
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 Liaoning Province, 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.
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 increased by 21.08% from 2008 to 2009, and 41.43% from
2007 to 2008, and our net income has increased by 29% from 2008 to 2009, and
49.83% from 2007 to 2008. 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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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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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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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. 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.
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.
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.
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 all categories of foods on a per capita
basis.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.
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Transitioning
from “wet-market” to
“dry-market”
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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.
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Government
quality control
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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.
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Government’s
strong support of meat processing
industry
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The main
theme of China’s 11
th
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 through the plenary sessions of the Central
Committee and National Congress. 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 11
th
Five-Year Plan covers the period from 2006 to 2011.
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National
retailers provide platform for
growth
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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 Walmart, 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.
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Industry
consolidation benefits scaled
players
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In the
more mature U.S. 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:
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China’s middle class - citizens
making at least 60,000 Yuan (US$8,785) - are expected to double by 2010 to
25% of the country’s population, fueling domestic
consumption.
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While overall income grew
rapidly, urban per capita disposable income grew even faster at 9.8% from
2008 to 2009, compared to 8.5% for per capita rural income during the same
period. Urban per capita consumption of meat is twice that of the national
average.
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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.
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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.
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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:
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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.
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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.
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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.
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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 500 supermarkets, including Carrefour, Walmart, Metro,
New-mart, Hymall and others. We also distribute our products to over 5,000
schools, hospitals, factory canteens and restaurants, and more than 900
“Chuming” branded showcase stores or specialty counters in wet
markets. These showcase stores and specialty counters are operated by
resellers of our products with whom we have arrangements to sell our product
under the Chuming brand name (the principal difference between showcase
stores and specialty counters being location within a supermarket for the
former, and location in a wet market for the latter).
We have a
250,000 square meter campus which houses an international standards-based meat
processing plant located in the city of Dalian in Liaoning Province, 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 Liaoning Province and nearby areas, in addition to having an
exclusive contract with farms owned and operated by the Group to
supply us with live hogs in local market prices. The Group 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 resellers 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
The
public generally perceives 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 resellers’ 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 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 15.59% of our 2009 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 two 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
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 5.8% of our revenue in 2009. Due to the abundance of seafood
in Dalian, 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
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Barbequed Prawn
Sausage
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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) the Meat Company in Wangfangdian, and (ii) the Food
Company 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. The 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 the 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. The Food Company 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 the
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, management believes that the 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, the Group,
and from other suppliers who aggregate supply from local pig farms. We purchase
live pigs from the Group and third party suppliers on a cash-on-delivery basis.
While the Group’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 as 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
farmers 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 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 agreed to supply us approximately
650,000 pigs in 2009. 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.
We pay
different “market prices” for live pigs depending on quality and weight.
Incoming live pigs are graded by our quality control personnel based on a number
of criteria (including fat content, health of the animal, absence of injuries,
the net weight), into several categories including “Grades 1- 4” and
“below-grade,” with Grade 1 being the highest quality (and accordingly the
highest price per kilogram). We then determine prevailing market prices
for live pigs for these various grades based on market data drawn from the local
marketplace, which fluctuates daily. Approximately 80% of the live pigs
purchased by us are in the Grade 1 and Grade 2
categories. Since we generally select higher-quality pigs
(Grades 1 and 2) among all live pigs available for purchase in the marketplace,
as a result we pay a higher than average price per kilogram for our overall
supply of live pigs.
In 2007,
2008 and 2009, we paid a total of $110.4 million, $125.6 million and $144.1
million, respectively, for our total supply of live
pigs. We paid the Group an aggregate of $61.7 million and $72.7
million and $64.7 million for live pigs during the full years of 2007, 2008 and
2009, respectively, and the amounts paid were determined as described
above.
Under our
Long-Term Hog Procurement Agreement between the Group and the Meat
Company, the Group agreed to supply no less than 800,000 live
hogs in 2009, 2010 and 2011 and the price for the hogs is set at the
fair market price at the time of delivery.
Retail
pork prices are an important component of China’s Consumer Price Index (CPI), a
key inflation indicator. In order to moderate increases in the CPI and maintain
the living standard of its lower-income population, the Chinese government (as
it pertains to the pork industry) has implemented a number of policies to
encourage pork production. Due to a shortage in supply, live hog
prices rose significantly in 2008. However, during the first half of
2009, the average pork price declined as compared to the average price during
the same periods in December 2008. The decline in pork prices was due
to a decline in demand which was the result of wide public perception that the
swine flu epidemic in late April and early May affected the health and quality
of pork produced during such time. In June 2009, in
response to the decline in pork prices and demand, the Chinese government
purchased and placed into storage large quantities of pork
products. This was done to help reduce public fear that the pork
supplies were contaminated due to the swine flu epidemic and as an attempt to
cause the pork price to rebound to a reasonable
level. This action by the PRC government helped to regain consumer
confidence to increase the purchase of pork products, and as the demand began to
rise, the prices of pork began to rise again in July 2009, and by the end of the
year ultimately rose to a level higher than the prices seen during the first
half of 2009. The average price of pork for fiscal year 2009 was RMB
11.62 and for fiscal year 2008 was RMB 14.63, which was a 20.6% decline. The
prices are now continuing to trend higher.
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. Management believes that since
our breeding program has successfully increased farmer income and tax
revenue in our region, our local government has welcomed these
programs.
Among our
suppliers, Zheng Baojiang, Zhang Zhiying, Wang Fuzhi, Ge Hongqi, and Chen Lianhe
are the most successful pig farmers in our supply chain, and they supplied an
aggregate of 15,603, 13,165, 12,056, 11,956 and 19,866 hogs respectively through
each of the 12 months of 2009, contributing to 6.26% 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.
We have
found that 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™ branded showcase stores to buy the fresh pork based on
convenience. This type of customer accounted for 89% of our revenues in
2009.
Canteens
include the cafeterias of government agencies, schools, factories and hospitals.
These customers, including restaurants, often purchase our pork from
Chuming™ branded showcase stores or directly from agents or
wholesalers of the Company. This customer segment accounted for 7% of our
revenues in 2009.
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 4% of our revenue in 2009. 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 9% and 8.4% respectively of our
total turnover for the years ended December 31, 2008 and 2009. Our
top five customers together accounted for approximately 37.5% and 39.3% of
our total turnover for the years ended December 31, 2008 and 2009,
respectively. None of our directors, their associates or any
significant 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 to
maintain 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, 2009
|
Dalian
|
|
|
62
|
%
|
|
Shenyang
|
|
|
22
|
%
|
|
East
Liaoning
|
|
|
6
|
%
|
|
North
Liaoning
|
|
|
4
|
%
|
|
West
Liaoning
|
|
|
4
|
%
|
|
Others
|
|
|
2
|
%
|
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, Walmart, Hymall, New-mart and Metro. Our
affiliated agents assist in identifying locations and opening
Chuming™ branded showcase 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 Walmart 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 581 large supermarkets located in Northeast
China.
Our most
popular product, fresh pork, is sold primarily though our Chuming™ branded
showcase stores. Chuming™ branded showcase stores are usually
located in high-density, urban residential areas easily accessible by our
customers. The Chuming™ branded showcase stores also save time compared to long
lines sometimes found at large supermarkets. Chuming™ branded
showcase stores are all equipped with refrigerators to keep the pork fresh.
We have established more than 942 Chuming™ branded showcase stores as
of December 31, 2009 now operating in Dalian and throughout the Liaoning
Province. In the next few years, we aim to increase the number of our
Chuming™ branded showcase stores to more than 1,000
outlets.
We
provide operators of showcase 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 start-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. We do not
collect any material “franchise fees” from these resellers.
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 operate 43 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 82 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 64 employees who
work in our quality assurance program consist of 22 quality control engineers,
and 42 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 Heilongjiang. 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 one 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. 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 since 1995
and currently operates processing factories in Shanghai and
Beijing.
Advertising and Promotional
Activities
Advertising
and promotional expenses were $638,904, and $2,629,853 for the years ended
December 31, 2009, and 2008, respectively. Our advertising and marketing
expenditures decreased considerably from $2,629,853 in 2008 to $638,904, which
was partly attributable to outsourcing some of the marketing and promotion of
our products to our independent sales agents, and in return giving them
bigger discounts and incentives on our products. The Company believes that
advertisements can be handled more effectively at a regional and local level by
the sales agents individually, and at the same time it is also more cost
effective for the Company. In 2009, we allocated more of our resources to
increase the advertising and promotional activities aimed at higher performing
regions, retailers and supermarkets.
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. These
activities include television commercials, radio, magazine and newspaper
advertisements, and exhibitions. We increase the frequency of advertisements
whenever new products are launched.
Intellectual
Property Rights
Due to
our advertising efforts and the consistent quality of our 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. 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.
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.
We
require all resellers who we work with, including specialty counters
and showcase store operators, to comply with our trademark usage policy,
and require them to pay trademark usage guarantee deposits. We also employ
approximately 29 engineers who randomly inspect the facilities of the over
942 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 39 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 149 products available to consumers, with the average rate of two 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 premises with a daily treating capacity of
six hundred tons for each plant. These plants are 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 735 employees, the composition of which is as
follows:
|
|
|
R&D and
Engineering
|
|
|
Production
|
|
|
General and
Administrative
|
|
|
Sales and
Marketing
|
|
|
Quality
Control
|
|
|
Total
|
|
|
Meat
Company
|
|
|
14
|
|
|
|
171
|
|
|
|
25
|
|
|
|
52
|
|
|
|
40
|
|
|
|
302
|
|
|
Food
Company
|
|
|
25
|
|
|
|
163
|
|
|
|
13
|
|
|
|
28
|
|
|
|
14
|
|
|
|
243
|
|
|
Sales
Company
|
|
|
0
|
|
|
|
0
|
|
|
|
12
|
|
|
|
178
|
|
|
|
0
|
|
|
|
190
|
|
|
Total
|
|
|
39
|
|
|
|
334
|
|
|
|
50
|
|
|
|
258
|
|
|
|
54
|
|
|
|
735
|
|
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 are provided with 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 land.
We have
also opened offices in eleven cities outside of Dalian. We have entered into
leasing agreements for these 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 Liaoning Province. In
total, we paid approximately $84,000, and $69,000 in rent in 2009, and 2008
for these eleven offices, respectively.
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.
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 4, in the section entitled “Risk Factors” on page 8, 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
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:
|
|
·
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
Investors;
|
|
|
·
|
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;
|
|
|
·
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
|
·
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately negotiated
transactions;
|
|
|
·
|
to cover short sales made after
the date that this registration statement is declared effective by the
Securities and Exchange
Commission;
|
|
|
·
|
broker-dealers may agree with the
selling shareholders to sell a specified number of such shares at a
stipulated price per share;
|
|
|
·
|
a combination of any such methods
of sale; and
|
|
|
·
|
any other method permitted
pursuant to applicable law.
|
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 December 30, 2009. 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. As of May 6,
2010, we have 21,136,392 shares of common stock issued and
outstanding.
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
Aaron
M. Gurewitz
Trustee
of AMG Trust
30
Twilight Bluff
Newport
Coast, CA 92657 (9)
|
|
|
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 (10)
|
|
|
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 (11)
|
|
|
10,690,668
|
|
1,931,818
|
|
|
8,758,850
|
|
41.4
|
%
|
|
Halter
Financial Investments, LP
12890
Hill Top Road
Argyle,
TX 76226 (12)
|
|
|
347,827
|
|
347,827
|
|
|
0
|
|
0
|
%
|
|
Jenson
Services, Inc.
4685
S. Highland Drive, Suite 202
Salt
Lake City, UT 84117 (13)
|
|
|
65,389
|
|
65,389
|
|
|
0
|
|
0
|
%
|
|
SCG
Private Holdings, LLC
20400
Stevens Creek Blvd., Ste 840
Cupertino,
CA 95014 (14)
|
|
|
62,500
|
|
62,500
|
|
|
0
|
|
0
|
%
|
|
TOTAL
|
|
|
14,944,791
|
|
6,197,305
|
|
|
8,758,850
|
|
41.4
|
%
|
|
|
(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.
|
|
|
(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. Aaron M. Gurewitz has voting
and dispositive control over securities held by the Aaron M. Gurewitz,
Trustee of AMG Trust.
|
|
|
(10)
|
Mr. Peter Castellanos has voting
and dispositive control over securities held by Glacier Partners,
L.P.
|
|
|
(11)
|
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.
|
|
|
(12)
|
Mr. Timothy Halter has voting and
dispositive control over securities held by Halter Financial Investments,
LP.
|
|
|
(13)
|
Mr. Travis Jenson has voting and
dispositive control over securities held by Jenson Services,
Inc.
|
|
|
(14)
|
Dr. David Burny has voting and
dispositive control over securities held by SCG Private Holdings,
LLC.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
You should read the summary consolidated
financial data set forth below in conjunction with “
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
” and our predecessor’s
financial statements and the related notes included elsewhere in this
prospectus. The financial data as of and for the years ending December
31, 2009 and 2008 were derived from audited financial statements included in
this prospectus. The financial data as of and for the years ending December
31, 2007, 2006 and 2005 were derived from audited financial statements from
previously filed reports. Historical results are not necessarily indicative of
the results to be expected for any future period.
|
|
|
(US dollars in thousands)
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
2009
(audited)
|
|
|
2008
(audited)
|
|
|
2007
(audited)
|
|
|
2006
(audited)
|
|
|
2005
(audited)
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
213,545
|
|
|
$
|
176,360
|
|
|
$
|
124,696
|
|
|
$
|
70,396
|
|
|
$
|
54,119
|
|
|
Cost
of Sales
|
|
|
183,391
|
|
|
|
149,794
|
|
|
|
104,379
|
|
|
|
57,794
|
|
|
|
45,284
|
|
|
Gross
Profit
|
|
|
30,154
|
|
|
|
26,566
|
|
|
|
20,317
|
|
|
|
12,601
|
|
|
|
8,835
|
|
|
Operating
Expenses
|
|
|
4,660
|
|
|
|
7,823
|
|
|
|
6,246
|
|
|
|
2,891
|
|
|
|
1,647
|
|
|
Income
from Operations
|
|
|
25,494
|
|
|
|
18,743
|
|
|
|
14,071
|
|
|
|
9,709
|
|
|
|
7,188
|
|
|
Other
Income (Expense), net
|
|
|
(17,349
|
)
|
|
|
(11,385
|
)
|
|
|
(1,476
|
)
|
|
|
(1,583
|
)
|
|
|
(1,008
|
)
|
|
Income
Before Taxes
|
|
|
8,144
|
|
|
|
7,357
|
|
|
|
12,620
|
|
|
|
8,126
|
|
|
|
6,180
|
|
|
(Income
Taxes Expenses)/Deferred Tax Benefit
|
|
|
(2,090
|
)
|
|
|
(520
|
)
|
|
|
968
|
|
|
|
1.6
|
|
|
|
191
|
|
|
Net
Income
|
|
|
6,054
|
|
|
|
6,837
|
|
|
|
11,652
|
|
|
|
8,128
|
|
|
|
5,988
|
|
|
Foreign
Currency Translation
|
|
|
1,776
|
|
|
|
528
|
|
|
|
2,064
|
|
|
|
611
|
|
|
|
286
|
|
|
Comprehensive
Income
|
|
|
7,831
|
|
|
|
7,366
|
|
|
|
13,716
|
|
|
|
8,739
|
|
|
|
6,274
|
|
|
Basic
Net Income Per Share (in US$)
|
|
|
0.35
|
|
|
|
0.40
|
|
|
|
0.67
|
|
|
|
0.47
|
|
|
|
0.35
|
|
|
Diluted
Net Income Per Share (in US$)
|
|
|
0.29
|
|
|
|
0.32
|
|
|
|
0.67
|
|
|
|
0.47
|
|
|
|
0.35
|
|
|
Basic
Weighted Average Number of Shares Outstanding
|
|
|
17,272,756
|
|
|
|
17,272,756
|
|
|
|
13,409,120
|
|
|
|
13,409,120
|
|
|
|
13,409,120
|
|
|
Diluted
Weighted Average Number of Shares Outstanding
|
|
|
21,136,392
|
|
|
|
21,182,756
|
|
|
|
17,272,756
|
|
|
|
17,272,756
|
|
|
|
17,272,756
|
|
|
|
(US dollars in thousands)
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2009
(audited)
|
|
2008
(audited)
|
|
2007
(audited)
|
|
2006
(audited)
|
|
2005
(audited)
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
133,482
|
|
|
$
|
90,683
|
|
|
$
|
66,620
|
|
|
$
|
56,846
|
|
|
|
50,993
|
|
|
Current
Liabilities
|
|
|
42,259
|
|
|
|
23,758
|
|
|
|
17,682
|
|
|
|
16,764
|
|
|
|
18,979
|
|
|
Long
Term Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,909
|
|
|
|
18,580
|
|
|
Stockholders
Equity
|
|
|
91,224
|
|
|
|
66,926
|
|
|
|
48,938
|
|
|
|
22,174
|
|
|
|
13,434
|
|
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 the Company for
the fiscal years ended December 31, 2008 and 2009 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
Headquartered
in the City of Dalian, Liaoning Province of the People’s Republic of China (the
“PRC” or “China”), we are a meat processing company primarily involved in the
slaughtering, processing, packaging and distribution of pork and pork products.
We also process and sell seafood, such as minced fillet products, which
accounted for a small portion of our revenue (approximately 7.94%)
in 2009.
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. 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. We also received
ISO 9001:2000 certification that covers our production, research and development
and sales activities.
Currently
we have a wholesale and retail distribution network and sell either directly or
indirectly across northeast China, including supermarkets and
hypermarkets.
As of
December 31, 2009, we had 735 employees, of whom 388 were operating personnel,
258 were sales personnel, 39 were research and development personnel and 50 were
administrative personnel.
Dalian
Precious Sheen Investments Consulting Co., Ltd., or Chuming WFOE, is our holding
company established in China for our three PRC operating subsidiaries,
collectively referred to elsewhere in this report as the “Chuming Operating
Subsidiaries”:
|
|
1.
|
Dalian Chuming Slaughter and
Packaging Pork Company Ltd. ( “Meat Company”), whose primary business
activity is acquiring, slaughtering and packaging of
pork;
|
|
|
2.
|
Dalian Chuming Processed Foods
Company Ltd. ( “Food Company”), whose primary business activity is the
processing of raw and cooked meat products;
and
|
|
|
3.
|
Dalian Chuming Sales Company Ltd.
(“Sales Company”), which is responsible for our sales, marketing and
distribution operations.
|
The
Chuming Operating Subsidiaries are spin-off constituents of a former parent
company, Dalian Chuming Group Co., Ltd., or the “Group.” Our primary business
activities are the production and packing of fresh pork and production of
processed meat products for distribution and sale to clients throughout the
PRC. Chuming WFOE was incorporated in China as a wholly foreign owned
enterprise in December 2007. Chuming WFOE is 100% owned by Precious Sheen
Investments Limited (“PSI”), a holding company established in the British Virgin
Islands in May 2007.
Pork is
widely regarded as China’s most important source of meat and is consumed at a
much higher rate than other categories of meat. We believe that increasing
levels of consumption of pork products in China is linked to the rapid
development of the Chinese economy, urbanization and strong income
growth.
Aside
from increasing aggregate consumption, based on management’s research, pork
consumption patterns in recent years have shown two main characteristics. The
first is that per capita pork is consumed at higher rates in the urban areas of
China as opposed to rural areas, although the rate of growth in these urban
consumption rates is relatively slight. The second is that consumers’
consumption preferences appear to have shifted from frozen meat to fresh meat,
and from fat meat to lean meat, with a tendency toward high quality cuts.
Management believes these trends continue to be very favorable to our business
which is based on mechanized meat processing and sales to urban
consumers.
Our
total sales volume was 31,327 metric tons in the fourth quarter of
2009, 82,585 metric tons in the third quarter of 2009, 27,697 metric tons in the
second quarter of 2009, 18,512 metric tons in the first quarter of
2009, 18,007 metric tons in the fourth quarter of 2008.
Retail
pork prices are an important component of China’s Consumer Price Index (CPI), a
key inflation indicator. In order to moderate increases in the CPI and maintain
the living standard of its lower-income population, the Chinese government (as
it pertains to the pork industry) has implemented a number of policies to
encourage pork production. Due to a shortage in supply, live hog
prices rose significantly in 2008. However, During the first half of
2009, the average pork price declined as compared to the average price during
the same periods in December 2008. The decline in pork prices was due
to a decline in demand which was the result of wide public perception that the
swine flu epidemic in late April and early May affected the health and quality
of pork produced during such time. In June 2009, in
response to the decline in pork prices and demand, the Chinese government
purchased and placed into storage large quantities of pork
products. This was done to help reduce public fear that the pork
supplies were contaminated due to the swine flu epidemic. in an effort to
cause the pork price to rebound to a reasonable
level. This action by the PRC government helped to regain consumer
confidence to increase the purchase of pork products, and as the demand began to
rise, the prices of pork began to rise again in July 2009, and by the end of the
year ultimately rose to a level higher than the prices seen during the first
half of 2009. The average price of pork for fiscal year 2009 was RMB
11.62 and for fiscal year 2008 was RMB 14.63, which was a 20.6% decline. The
prices are now continuing to trend higher. We processed approximately 1.2
million live pigs through December 31, 2009, the amount of which met our target
for fiscal year 2009.
We expect
that the combined factors of stricter hygiene regulations, increasing
competition from well-financed players, and struggling meat suppliers, will
induce industry consolidation in the coming years. We believe we are in a strong
position to continue to take advantage of the Chinese government’s support for
leading pork producers, these market consolidation trends, and the emerging hog
supply situation. Management believes that this is a long-term
trend.
Given the
current competitive market conditions, we constantly strive to impose strict
quality control in our products and utilize state-of-art slaughtering and
cutting lines (which are imported from Stork Co. of the Netherlands), to ensure
our product quality, increase awareness of our brand and develop customer
loyalty. Our research suggests that consumers in China are increasingly
conscious of food safety and nutrition, and they are using their purchasing
power to demand safer and higher quality food products for their
families.
We place
a very high priority on food safety and integrity. For the feeds which are used
for our hogs, we control and monitor our feed sources by acquiring feeds only
from qualified suppliers who are licensed in the nation or the province, and
then carry out comprehensive tests to ensure quality. 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. 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.
Management
believes that we need to broaden our geographic sales network and diversify our
customer base. Our distribution network has been expanded to all three
northeastern provinces where we have established our branches in the cities of
Harbin and Daqing, Heilongjiang Province, and the City of Changchun, Jilin
Province. A broader customer base can not only mitigate our reliance
on certain big customers, but also bring us more opportunities. We believe a
broader market for our products can increase demand for our products, reduce our
vulnerability to market changes, and provide additional areas of growth in the
future.
Our top
five customers accounted for 39.3% for our total sales for the fiscal year 2009.
We plan to position our business to diversify our customer base, which is
expected to lower this percentage gradually in the future.
Management
presently anticipates continued growth in volume of
sales. Nevertheless, our ability to meet increased customer demand
and maintain profitability will however continue to depend on factors such as
our production capacity, availability of working capital, input costs, as well
as the other factors described throughout this report..
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our combined financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
While our
significant accounting policies are more fully described in Note 2 to our
combined financial statements included elsewhere in this prospectus, 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
founders have directly or indirectly owned the three operating subsidiaries
since their inception. We also own two intermediary holding companies. As of
December 31, 2009, 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
|
91,009,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 may extend credit
to new customers who have met the criteria of our revised credit
policy.
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.
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.
Property
and equipment are depreciated using the straight-line method over their
estimated useful life with a 5% salvage value. Their useful lives are as
follows:
|
Fixed Asset Classification
|
|
Useful
Life
|
|
Land
Improvements
|
|
10
years
|
|
Buildings
|
|
20
years
|
|
Building
Improvements
|
|
10
years
|
|
Manufacturing
Machinery & Equipment
|
|
10
years
|
|
Office
Equipment
|
|
5
years
|
|
Furniture
& Fixtures
|
|
5
years
|
|
Vehicles
|
|
5
years
|
Land
Use Rights
Land Use
Rights are stated at cost less accumulated amortization. Amortization is
provided over its useful life, using the straight-line method. The useful life
of the land use right is 50 years.
Customer
Deposits
Customer
Deposits represents money we have received in advance for purchases of pork and
pork products. We consider customer deposits as a liability until products have
been shipped and revenue is earned. We collect a damage deposit (as a deterrent)
recorded on other payable from showcase store operators as a means of enforcing
the proper use of our trademark. We carry the amount of these deposits as a
current liability because we will return the deposit to the operator when we
cease to conduct business with the operator.
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 registered
capital.
Earnings
Per Share
We
compute earnings per share (“EPS”) in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings per share” (“FASB ASC 260”), and SEC
Staff Accounting Bulletin No. 98 (“SAB 98”). FASB ASC 260 requires companies
with complex capital structures to present basic and diluted EPS. Basic EPS is
measured as the income or loss available to common shareholders divided by the
weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., contingent shares, convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS. The
Company’s basic EPS reflects earnings that are available to common shareholders
for the year. The numerator in the basic and diluted EPS calculation was
the net income of the Company. The Company did have any to add back to its
diluted EPS calculation because it did not have any convertible securities (such
as convertibles notes or convertible preferred stock) outstanding. The
number of shareholders in the calculation is on weighted average basis.
The Company did not issue any stock for the year; however the number disclosed
in the weighted average shares outstanding is equal to the total shares
outstanding less the shares held in escrow, which, for the purposes of
calculating EPS are considered contingent. The contingent shares are
considered potentially dilutive securities; therefore, they are include in the
diluted EPS calculation. The Company also considered but excluded the
potentially dilutive effect of the warrants outstanding issued to the placement
agent in the 2007 financing transaction. They were exclude because they
would have been antidilutive based on the Company weighted average stock price
for the 2009. The warrants were potentially dilutive in 2008, therefore,
they were included in the diluted EPS calculation for 2008.
Recent
Accounting Pronouncements
See Note
2(Z) to the consolidated financial statements included elsewhere in this
Report for discussions on recently issued accounting announcements. We are
currently evaluating the potential impact, if any, of the adoption of the above
recent accounting pronouncements on our consolidated results of operations and
financial condition. .
RESULTS
OF OPERATIONS
Comparison
of Years Ended December 31, 2009 and December 31, 2008.
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
|
|
|
|
|
2009
|
|
Sales
|
|
|
2008
|
|
Sales
|
|
|
Sales
|
|
$
|
213,545,175
|
|
100.00
|
%
|
|
|
176,360,013
|
|
100.00
|
%
|
|
Cost
of Sales
|
|
|
183,391,490
|
|
85.88
|
%
|
|
|
149,794,249
|
|
84.94
|
%
|
|
Gross
Profit
|
|
|
30,153,685
|
|
14.12
|
%
|
|
|
26,565,764
|
|
15.04
|
%
|
|
Selling
Expenses
|
|
|
2,151,988
|
|
1.01
|
%
|
|
|
5,147,366
|
|
2.92
|
%
|
|
General
& Administrative Expenses
|
|
|
2,507,688
|
|
1.17
|
%
|
|
|
2,675,661
|
|
1.52
|
%
|
|
Total
operating Expense
|
|
|
4,659,676
|
|
2.18
|
%
|
|
|
7,823,027
|
|
4.44
|
%
|
|
Operating
Income / (Loss)
|
|
|
25,494,009
|
|
11.94
|
%
|
|
|
18,742,737
|
|
11.32
|
%
|
|
Other
Income (Expense)
|
|
|
(17,349,307
|
)
|
(8.12
|
)
%
|
|
|
(11,385,383
|
)
|
(6.46
|
)
%
|
|
Earnings
Before Tax
|
|
|
8,144,702
|
|
3.81
|
%
|
|
|
7,357,354
|
|
4.17
|
%
|
|
(Income
Tax Expense) / Deferred Tax Benefit
|
|
|
(2,090,260
|
)
|
(0.98
|
)
%
|
|
|
(520,089
|
)
|
(0.29
|
)
%
|
|
Net
Income
|
|
$
|
6,054,442
|
|
2.84
|
%
|
|
|
6,837,265
|
|
3.88
|
%
|
|
Basic
and Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
0.35
|
|
|
|
|
|
0.40
|
|
|
|
|
-
Diluted
|
|
|
0.29
|
|
|
|
|
|
0.32
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
17,272,756
|
|
|
|
|
|
17,272,756
|
|
|
|
|
-
Diluted
|
|
|
21,136,392
|
|
|
|
|
|
21,182,756
|
|
|
|
Sales.
Our sales include
revenues from sales of our Fresh Pork, Frozen Pork, and Processed Food Products.
During the year ended December 31, 2009, we had sales of $213,545,175, as
compared to sales of $176,360,013 for the year ended December 31, 2008, an
increase of approximately 21.08%. This increase consisted of an increase in the
sales of Fresh Pork of $ 16.5 million or 11.66%, from $141.8 million in 2008 to
$158.3 million in 2009, an increase in the sale of Frozen Pork of $7.7 million
or 54.14%, from $14.1 million to $21.8 million, and an increase in the sale of
Processed Food Products of $12.9 million or 62.95%, from $20.4 million in 2008
to $33.3 million in 2009. In 2009, we reduced our average per-kilogram
sale prices to our customers, which coincided with a decrease in the average
cost of live pigs and other production costs as compared to fiscal year
2008. The average price of pork for fiscal year 2009 fell 20.6%, from
RMB 14.63 in fiscal year 2008 to RMB 11.62 in fiscal year 2009. The
average per-kilogram sales price for our Fresh Pork, Frozen Pork and Processed
Foods to customers decreased by 25.25%, 33.01% and 69.13%, respectively,
compared to the prior year.
Our sales
volume of products (by weight) increased considerably for Fresh Pork and Frozen
Pork by 49.38% and 130.09%, respectively, compared to 2008. We
usually sell our Fresh Pork through our independent sales agents and
supermarkets. Our profit margin for sales through supermarkets is
generally higher than other channels, which is the reason why we are continuing
to actively pursue this particular sales channel. In 2009, many of
our sales agents were able to achieve higher sales since we implemented the
extension of payment terms to creditworthy customers. Since many of
our sales agents are long standing customers with good credit, they were able to
take advantage of the extension of payment terms to generate greater cash flow
and to create higher sales in 2009. Another factor attributable to
the increase of sales and sales volume was that we increased the number of our
sales agents and showcase stores from 9,200 in 2008 to 9,659 in
2009. Management believes that this increase in sales and sales
volume resulted from increased consumer demand, and increased consumer awareness
of our brand and availability of our products, much of which resulted from the
activities of our sales agents. We were able to achieve these results
even though prices per unit sold to sales agents reflect a discount in
recognition of the sales agents’ marketing contributions. However,
the sales volume of our Processed Food Products decreased slightly in 2009, with
3.65% less sales volume compared to the prior year.
Cost of Sales.
Cost of sales
for 2009 increased by $33,597,241 or 22.43%, from $149,794,249 for the year
ended December 31, 2008 to $183,391,490 for the year ended December 31, 2009.
The increase in cost of sales was mainly attributable to an increase in sales
volume. Our cost of sales for our various product categories in 2009
is summarized as follows:
|
|
|
(In thousands of U.S.
Dollars)
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
2009
|
|
|
Sales
|
|
|
2008
|
|
|
Sales
|
|
|
Fresh
Pork
|
|
$
|
141,174
|
|
|
|
77
|
%
|
|
$
|
121,742
|
|
|
|
81.2
|
%
|
|
Frozen
Pork
|
|
|
17,438
|
|
|
|
9.5
|
%
|
|
|
11,026
|
|
|
|
7.4
|
%
|
|
Processed
Food Products
|
|
|
24,779
|
|
|
|
13.5
|
%
|
|
|
17,026
|
|
|
|
11.4
|
%
|
|
Total
Cost of Sales:
|
|
$
|
183,391
|
|
|
|
100
|
%
|
|
$
|
149,794
|
|
|
|
100
|
%
|
Management
estimates that the average cost of live pigs decreased by approximately 20.6%
for 2009, as compared with the prior year. In 2008, the price of live
pigs reached RMB16 per kilogram in the first quarter, then the average price
decreased slightly to RMB15.76 in the second quarter, and then further declined
to an average price of RMB14.43, where it remained for the last two quarters of
2008. The average price for live hogs was RMB14.63 per kilogram for
the full year of 2008. In 2009, the price of live pigs reached
RMB12.06 per kilogram in the first quarter, then the average price decreased to
RMB10.27 in the second quarter, increased to RMB11.95 in the third quarter, and
increased to RMB12.23 in the fourth quarter. The average price for
live hogs was RMB11.62 per kilogram for the full year of 2009.
In 2009,
we experienced price increases in electricity, water and coal, all of which we
use in our production process. However, this increase in utilities
was in proportion to the increase of our sales volume, and not due to an
increase in the unit price of the utilities, with the exception of coal for
which the unit price did increase slightly. Total wages increased in 2009
due to the addition of new employees to handle the increase of our sales, but
the salaries of our employees remained stable. Lastly, similar to
2008, we experienced slight increases in transportation and delivery costs in
2009, corresponding with the increased sales. Management also
believes that productivity remained steady, with no significant changes from
2008 to 2009. Our increased use of sales agents did not increase our
cost of sales as unit price discounts granted to sales agents during a given
period are reflected as a reduction in sales for that
period. Instead, cost of sales were decreased because the marketing
activities of our sales agents allowed us to decrease our direct marketing
expenses.
Gross Profit.
Gross profit
was $30,153,685 for the year ended December 31, 2009 as compared to $26,565,764
for the year ended December 31, 2008, representing an increase of $3,587,921, or
approximately 14%. The gross profits for Fresh Pork, Frozen
Pork and Processed Foods in 2009 were $17,161,348, $4,352,234 and $8,498,235,
respectively. Management attributes the increase in gross profit to
strong increases in sales, driven by strong demand for our
products. In 2009, though the price of fresh pork and frozen pork was
decreased, the strong demand for these two products led to the increase in gross
profit in 2009. Our gross profit as a percentage of sales was 13% in 2009 as
compared to 15.04% in 2008. The slight decrease in gross profit as a percentage
of sales was attributable to lower sales prices per unit. Any reduction in sales
due to discounts granted to sales agents did not have a material effect on gross
profit due to the increase in sales generated by the marketing activities of the
new sales agents, and the decrease in our direct selling expenses given our
greater reliance on the marketing activities of the sales agents. We believe
that, in the long run, the increased end users of our products generated by
sales agents will outweigh any discounts granted to sales agents.
Selling Expenses.
Selling
expenses totaled $2,151,988 for the year ended December 31, 2009, as compared to
$5,147,366 for the year ended December 31, 2008, a decrease of $2,995,378 or
58.2%. The decrease in our selling expenses in 2009 is attributable
to the increase of sales to sales agents, through whom selling expenses are
lower than through other sales channels because we do not have to market our
products to end users who buy our products from sales agents. In fact, our
advertising and marketing expenditures decreased considerably because the major
part of the marketing and promotion of our products were handled directly by
sales agents. In return for these services, we granted our sales
agents larger discounts and incentives on our products.
General and Administrative
Expenses.
General and Administrative Expenses totaled $2,507,688 for the
year ended December 31, 2009 as compared to $2,675,661 for the year ended
December 31, 2008, a decrease of $167,973 or 6.3%. We achieved this small
decrease by being able to reduce slightly the costs of doing business as a
public company. In 2009, for example, our expenses for hiring independent
directors decreased, as compared to the prior year, as the number of independent
directors reduced to one in 2009 from four in 2008. In 2009, the
local government granted exemption of a portion of our land use tax which also
decreased our general expenses.
Other Income (Expense).
Our
other income (expense) consisted of Other Income, Interest Income, Other
Expenses, Interest Expense, and Release of Escrowed Make Good Shares. We had
total Other Expenses of $17,349,307 for the year ended December 31, 2009 as
compared to $11,385,383 for the year ended December 31, 2008, an increase of
$86,515, or 30.38%. The substantial increase in Other Expenses in 2009 was
primarily attributable to the accrual of the expected release of escrowed shares
pursuant to a make good agreement related to the Exchange Transaction and
Financing on December 31, 2007. Our Other Income (Expense) for the
year ended December 31, 2009 and 2008 is summarized as follows:
|
|
|
2009
|
|
|
2008
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
Other
Income
|
|
|
43,568
|
|
|
|
5,780
|
|
|
Other
Expense
|
|
|
(91,943
|
)
|
|
|
(100,183
|
)
|
|
Interest
Income
|
|
|
198,259
|
|
|
|
284,774
|
|
|
Interest
Expense
|
|
|
(1,031,197
|
)
|
|
|
(953,460
|
)
|
|
Release
of Escrowed Make Good Shares
|
|
|
(16,467,994
|
)
|
|
|
(10,622,294
|
)
|
|
Total
Other Income and Expense
|
|
|
(17,349,307
|
)
|
|
|
(11,385,383
|
)
|
Pursuant
to such make good agreement, 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. These
shares were to be released back to Mr. Shi and his family if the Company met 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 did not meet the
aforementioned financial targets, the escrowed shares would be released, on a
pro-rata basis, to the investors in the Financing. In accordance with a
settlement agreement that we signed with certain investors in the
Financing, the 1,931,818 shares held in escrow in connection with the
2008 earnings targets have been released. In accordance with Topic
5.T of the Staff Accounting Bulletins (SAB 79), the Company has recorded a
compensatory expense for the shares with a corresponding credit to the Company’s
contributed paid in capital. The compensatory expense in the
aggregate is equal to $16.5 million and $10.6 million for the years ended
December 31, 2009 and 2008. For the year ended December 31, 2009, the Company
has met its financial target, and therefore the remaning 1,931,818 shares will
be released.
Net Income
. Our net income
for the year ended December 31, 2009 was $6,054,442 as compared to $6,837,265
for the year ended December 31, 2008, a decrease of $782,823 or 11%. This
decrease in net income is basically attributable to the recorded expense in the
amount of $16,467,994 in 2009 as above-mentioned.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Twelve
Months Ended December 31, 2009
Net cash
inflow sources from operating activities was $28.98 million in fiscal 2009 while
net cash flow used in operating activities was $3.23 million in fiscal
2008. 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 2008, we established a more comprehensive set of
payment terms determined by the creditworthiness and the length of time we have
worked with such agents and retailers. For example, we require our
new customers to pre-pay or pay upon delivery for our products since we are
unfamiliar with their history and creditworthiness. For customers we
have worked with over a period of time and with good credit, we give them until
the end of the month to pay for our products. For customers we have
worked with for over 3 years and have established their creditworthiness, we
offer them payment terms of 30 to 60 days. We are more lenient toward
large retailers and supermarkets since they have a more complete accounting and
purchasing system and there is a lesser possibility of breach of payment terms
or non-payment. The payment terms for such large retailers usually
range between 45 to 75 days, to be negotiated with each individual retailer
prior to the execution of contract. To improve our process of
collecting accounts receivable as compared to the prior year, we have also
placed a cap on accounts receivable in proportion to the quantity
ordered. The agent or retailer must pay down the balance of the
accounts payable once the maximum cap is reached on their accounts, even if it
is prior to the expiration of their payment terms.
In 2009,
there was a decrease in interest paid to $0.83 million compared to the prior
year. The decrease of such interest paid was due to the fact that all
the outstanding loans were made during the fourth quarter of 2009, which carried
on a small amount of interest expenses in 2009. We had a decrease in interest
earned of $198,259 in 2009.
We had
$4.25 million in escrowed funds in December 2007. Pursuant to a
holdback escrow agreement executed on December 31, 2007, $2 million was held in
escrowed funds subject to hiring a certain number of independent directors, $1.5
million was held subject to hiring a qualified Chief Financial Officer, $250,000
was held to hire one of the agreed upon investor relations firms, and $500,000
was held to hire one of the independent public accounting firms of
record. As of fiscal year 2009, only $35,675 in the escrow account
had been released in connection with the hiring of an investor relations
firm. Currently, we no longer are retaining such
firm.
On
December 30, 2009, we entered into a settlement agreement (the “Settlement
Agreement”) with certain investors (the “Investors”) in our December 2007 $17
million common stock financing (the “Financing”). Pursuant to the Settlement
Agreement, we agreed to new arrangements with the Investors regarding (i) the
release of certain “make good” shares placed into escrow by certain our
affiliates in connection with the Financing, (ii) the potential waiver of $1.7
million of liquidated damages owed by the Company in connection with the
Financing (the “Liquidated Damages”) if a resale registration statement relating
to the shares of our common stock held by the Investors is declared effective by
March 31, 2010, or alternatively, if certain conditions are met, May 15, 2010
(the “S-1 Requirement”),and (iii) the release of certain cash amounts that were
held back pending our appointment of independent directors and our appointment
of a new Chief Financial Officer. The make good shares have been
released to our affiliate and the cash holdback amounts have been
released to us (less the $1.7 million Liquidated Damages amount) because we have
satisfied the conditions precedent set forth in the Settlement Agreement for the
release of those shares and holdback amounts. Certain conditions also
have been met so as to extend the deadline for the S-1 Requirement to May 15,
2010. If we meet the S-1 Requirement by May 15, 2010, then the $1.7 million
Liquidated Damages amount will be released to us within 10 days of the
deadline. If we do not meet the S-1 Requirement by May 15, 2010, then
the $1.7 million Liquidated Damages amount will be released to the Investors on
a pro rata basis within 10 days of the deadline. The parties have
agreed that, subject to the receipt of the make good shares and holdback amounts
in accordance with the Settlement Agreement, to waive and release one another
from all other claims relating to the matters governed by the Settlement
Agreement.
Net cash
flow used in investing activities was $3.99 million in fiscal 2009, compared to
cash used in investing activities of $3.76 million in fiscal
2008. There was a decrease from $5.8 million to $3.70 in expenditures
for plant and equipment in 2009. We used $327,647 in purchasing intangible
assets.
Net cash
flow sourced in financing activities was $9.52 million in fiscal 2009 as
compared to net cash used from financing activities of $1.44 million in fiscal
2008. We borrowed additional monies in fiscal year 2009 because the
term of certain of our credit facilities was expiring, and we determined that,
given the tightening of credit in China, that it would be in our best interest
to take this extension of credit when available. We plan to use the cash sourced
in financing activities for general working capital purposes. The Company
maintains three revolving bank loans with the Bank of China (Liaoning Branch) in
the term of 12 months and one bank loan with the Agricultural
Bank of China (Wafangdian Branch) in the term of 3 months, one bank loan with
the Shanghai Pudong Development Bank (Dalian Branch) in the term of 12 month and
one bank loan with the Bank of East Asia (Dalian Branch) in the term of 12
months. The amount of credit and interest rate of the bank loans are
re-negotiated at the end of each term, and the parties re-execute a new
revolving loan agreement every year after negotiation. Compared
to 2008, the total amount of our revolving bank loans increased by $ 9.52
million in 2009. For additional details concerning the repayment, see
Note 9(B) in the footnotes to our financial statements included with this
report.
Our
Accounts Payable decreased significantly in 2009 to $3.27
million. The reason was attributable to the payments we made in cash
for purchasing live pigs from farmers and the Group in order for us to obtain
more sufficient amount of and high quality live pigs. Our taxes
payable also increased in 2009 due to an increase of our payable value-added
tax. Our Customer Advances decreased to $2.41 million in
2009. The decrease of such advances was due to the fact that we
offered our creditworthy customers longer and more flexible payment terms, which
in turn reduced our Customer Advances.
Our
Related Party Receivable decreased to zero in 2009. The
significant decrease is due to the accounting of the Company’s transactions with
certain related parties. 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., (“Industrial Development Co.”) (2) Dalian Chuming Trading
Co., Ltd, (“Trading Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd.,
(“Mingxing”) (4) Dalian Chuming Stockbreeding Combo Development Co., Ltd.,
(“Combo Development Co.”) (5) Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”),
and (6) Dalian Chuming Biological Technology Co., Ltd., (“Biological Co.”) and
(7) Dalian Huayu Seafood Food Co., Ltd. (“Huayu”). The Company and
the aforementioned related parties share common beneficial
ownership. All transactions with related parties are generally
performed at arm’s length.
In the
event that the Company has both receivables from, and payables to the Group, it
will setoff the balances in order to arrive at a single balance that is either
due from, or due to the Group. The Company’s net payable balance at
December 31, 2009 was 2,307,429.
Twelve
Months Ended December 31, 2008
Net cash
inflow used from operating activities was $3.23 million in fiscal 2008 and while
net cash flow sourced in operating activities was $1.97 million in fiscal
2007.
In 2008,
there was an increase in interest paid to $1.76 million compared to the prior
year. We owed interest payment of $809,994 in 2007 which the Group
has paid on our behalf in 2007. We repaid the Group the 2007 interest
payment of $809,994 in 2008. In 2008, we also made an interest
payment for the interest we owed in 2008 in the amount of
$953,460. We had an increase in interest earned of $264,774 in 2008
due to the deposit of more money in our bank accounts and we also earned higher
interest by moving some of our money to certificate of deposit
accounts.
We had
$4.25 million in escrowed funds in December 2007. Pursuant to a
holdback escrow agreement executed on December 31, 2007, $2 million was held in
escrowed funds subject to hiring a certain number of independent directors, $1.5
million was held subject to hiring a qualified Chief Financial Officer, $250,000
was held to hire one of the agreed upon investor relations firms, and $500,000
was held to hire one of the independent public accounting firms of
record. As of fiscal year 2008, only $2 million in the escrow account
has been released for satisfying the criteria of hiring the independent
directors. Net cash flow used in investing activities was $3.76
million in fiscal 2008, compared to cash used in investing activities of $11.3
million in fiscal 2007. There was an increase from $2.8 million
to $5.8 million in expenditures for plant and equipment in 2008. The
$3 million increase in spending was used in the renovation and expansion of the
production facilities for prepared foods. As a result of the
expansion, starting 2009 we can increase our production of prepared foods from
15,000 metric tons to 30,000 metric tons per year. We did not incur
any expenses for land use rights in 2008 compared to the $4.1 million we paid
for land use rights in 2007. The expense for land use rights in 2007 was a
one-time payment that we paid off in 2007.
Net cash
flow used in financing activities was $1.44 million in fiscal 2008 as compared
to net cash sourced from financing activities of $18.26 million in fiscal
2007. The Company maintains two revolving bank loans with the Bank of
China (Liaoning Branch) in the term of eleven months. The amount of
credit and interest rate of the bank loans are re-negotiated at the end of each
term, and the parties re-execute a new revolving loan agreement every year after
negotiation. Upon the expiration of both of our revolving loan
agreements executed with the Bank of China (Liaoning Branch) in 2007 that
expired during October 2008, we renegotiated and executed two new revolving loan
agreements in the total amount of $9.26 million in November
2008. However, this cash inflow was offset by repayment of the above
mentioned 2007 bank loans that expired in October 2008 in the amount of $10.07
million. Compared to 2007, the total amount of our revolving bank
loans decreased by $1.44 million in 2008. For additional details
concerning the repayment, see Note 9(B) in the footnotes to our financial
statements included with this report.
The cash
flow statement shows that there was an $18 million increase in Accounts
Receivable in 2008 compared to 2007. The significant increase was
attributable to the more comprehensive billing system implemented by the Company
in 2008, which offered our creditworthy customers longer and more flexible
payment terms. The implementation of the new billing system boosted
our Accounts Receivable and also increased our sales and gross
profits. Other Receivable also increased by over $1 million in 2008
because we implemented new credit/debit card machines and had to make
adjustments in our accounting to correspond with such change. Many of
our showcase stores and customers made cash payments in the past. Due
to safety reasons and the problem of counterfeit money, we no longer accepted
cash payments in 2008 and switched to using credit/debit card machines provided
by the Bank of China. The time of process for the actual payment to
be deposited into our bank account takes approximately 4 business
days. During this time, the payments are recorded in Other Receivable
since they are not actually received and cannot be counted as Accounts
Receivable yet. After the money has been transferred into our bank
account, we settle and deduct the relevant Accounts Receivable from Other
Receivable accordingly.
Our
Related Party Receivable decreased by $9.2 million in 2007, yet has an increase
of $6.9 million in 2008. The significant increase is due to the
accounting of the Company’s transactions with certain related parties. 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.,
(“Industrial Development Co.”) (2) Dalian Chuming Trading Co., Ltd, (“Trading
Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd., (“Mingxing”) (4) Dalian
Chuming Stockbreeding Combo Development Co., Ltd., (“Combo Development Co.”) (5)
Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”), and (6) Dalian Chuming
Biological Technology Co., Ltd., (“Biological Co.”) and (7) Dalian Huayu Seafood
Food Co., Ltd. (“Huayu”). The Company and the aforementioned related
parties share common beneficial ownership. All transactions with
related parties are generally performed at arm’s length.
In the
event that the Company has both receivables from, and payables to the Group, it
will setoff the balances in order to arrive at a single balance that is either
due from, or due to the Group. The Company’s net receivable balance
at December 31, 2008 was $10,919,777. Of the $10,919,777 net
receivable owed by the Group to the Company, the entire amount has been
securitized by bank drafts issued by the bank on behalf of subsidiaries of the
Group to the Company. These notes are collateralized by deposits at
the bank by those particular subsidiaries of the Group. The drafts
can be endorsed and discounted to the bank for cash; however the Company
currently intends to hold these drafts until maturity.
Our
Accounts Payable increased significantly in 2008 to $3.9 million. The
reason was attributable to the extension of our billing period from the original
30 to 60 days granted by our supplier who sells us supplementary materials and
packaging materials. The extension of payment term was to reward us
for being a good customer. Another contributing factor was we had to
pay for the renovation and equipment costs due to the expansion of our
production facilities in 2008. Our taxes payable also increased in
2008 due to an increase of our payable value-added tax. Our Customer
Advances increased by $3.2 million in 2008. The increase of such
advances was for the renovation and expansion of production facilities and
purchasing of new equipments. Since the Company has yet to receive an
invoice for such renovation and equipment expenses, such costs cannot be
accounted into the Company’s assets yet.
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, 2009,
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
|
|
$
|
15,942,197
|
|
|
$
|
15,942,197
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Other
Indebtedness
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Capital
Lease Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating
Leases
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Purchase
Obligations
|
|
$
|
164,674,737
|
|
|
$
|
164,674,737
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total
Contractual Obligations:
|
|
$
|
180,616,914
|
|
|
$
|
180,616,914
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
As indicated in the table, as of
December 31, 2009 we had $164,674,737 in purchase obligations, which relates to
our agreement for the purchase and sale of hogs. On December 19, 2007, we
entered into a hog purchase agreement whereby the Group will provide, at fair
market prices, a minimum number of hogs to us.
At December 31, 2009, management
projected minimum quantities of hogs as detailed in the following
table:
|
Year
|
|
Hogs
|
|
|
Price Per Hog
|
|
|
Amount
|
|
|
2010
|
|
|
800,000
|
|
|
$
|
205.84
|
|
|
$
|
164,674,737
|
|
For
purposes of estimating future payments, we project that the fair market price of
the hogs will increase by 10% each year. The assumption of 10% reflects our
expectations with regard to inflation and the rising costs of inputs in breeding
livestock.
Off-balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Related
Party Transactions
For a
description of our related party transactions, see the section of this Report
entitled “Certain Relationships and Related Party
Transactions.”
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
obligations; thus, fluctuations in interest rates would not have a material
impact on the fair value of these securities. At December 30, 2009, we had
approximately $41.98 million 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 Rate.
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 $2,064,272,
$528,277 and 1,776,168 in 2007, 2008 and 2009, 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.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
executive management team and board of directors is comprised of the following
individuals, as of April 7, 2010
|
Name
|
|
Age
|
|
Position
|
|
Effective Date of
Appointment
|
|
Shi
Huashan
|
|
50
|
|
President,
Chief Executive Officer and Chairman
|
|
December
31, 2007
|
|
Sharon
(Xiaorong) Tang
|
|
51
|
|
Chief
Financial Officer
|
|
March 31,
2010
|
|
Ma
Fengqing
|
|
47
|
|
Vice
President and Director
|
|
January
28, 2008
|
|
Wang
Shuying
|
|
58
|
|
Director
|
|
January
28, 2008
|
|
Wenbing Christopher Wang
|
|
38
|
|
Director
|
|
March
23, 2010
|
|
Joseph
Levinson
|
|
33
|
|
Director
|
|
March
23, 2010
|
Mr. Shi Huashan
, age 50, 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. Sharon (Xiaorong) Tang
,
age 51, served as the Chief Financial Officer of EFT Biotech Holdings, Inc. (PK:
EFTB) from June 2008 until February 2010. From April 2007 to May 2008, she
served as the Chief Financial Officer of Advanced Battery Technologies, Inc.
(NASDAQ: ABAT) located in New York City. From May 2006 to April 2007, Ms. Tang
served as a Managing Director of First Federal Group of Companies, Inc. located
in New York City. From April 1998 to February 2006, she served as a Financial
Advisor at Smith Barney, Citigroup in New York City. Ms. Tang holds a MBA from
Baruch College in New York City (June 2005), Master of Science in Chemical
Engineering from the University of Rochester in New York (1988), and a Bachelor
of Science in Chemistry from Peking University in Beijing, China
(1986).
Ms. Ma Fengqin
, age 47, 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. Wang Shuying
, age 58,
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.
Joseph Levinson,
age 33
,
has been a United States
Certified Public Accountant for more than 14 years. He speaks, reads and writes
Chinese fluently and has vast experience in China working with Chinese
companies. He was previously a Manager in the banking practice of the New
York office of Deloitte and Touche and was involved in numerous transactions
involving complex financial structures. He also previously worked at KPMG in New
York and Hong Kong. In the 1990s, Mr. Levinson served as an executive
of Hong Kong Stock Exchange-listed China Strategic Holdings, where his major
responsibilities included its subsidiary China Tire, one of the first Mainland
Chinese companies to list on the NYSE. Mr. Levinson graduated summa
cum laude from the University at Buffalo in 1994 with a double major in
accounting and finance.
Wenbing Christopher Wang,
age
38
,
has served as
President of Fushi Copperweld, Inc., (Nasdaq:FSIN) since January 21, 2008. He
also served as Chief Financial Officer of Fushi from December 2005 to August
2009 and has as interim Chief Financial Officer since February 28, 2010. Prior
to Fushi, Mr. Wang worked for Redwood Capital, Inc., China Century Investment
Corporation, Credit Suisse First Boston and VCChina in various capacities.
Fluent in both English and Chinese, Mr. Wang holds an MBA in Finance and
Corporate Accounting from Simon Business School of the University of Rochester.
Mr. Wang also currently serves as a director of General Steel Holdings (NYSE:
GSI), China Integrated Energy, Inc. (Nasdaq: CBEH) and Orient Paper, Inc. (NYSE
Amex: ONP).
Family
Relationships
President
and Chairman of the board of directors Mr. Shi Huashan, and Ms. Ma Fengqin, who
is a vice president and director, are husband and wife.
The
Board of Directors and Committees
On March
23, 2010, the Board of Directors of the Company established an Audit Committee,
a Nominating and Governance Committee and a Compensation Committee. Messrs.
Levinson and Wang and Ms. Wang, each of whom are independent directors as
defined by Rule 5605(a)(2) of the Marketplace Rules of The Nasdaq Stock Market
LLC (the “Nasdaq Marketplace Rules”) serve on each committee. Mr.
Levinson serves as the Chairman of the Audit Committee, Ms. Wang serves as the
Chairman of the Nominating and Corporate Governance Committee, and Mr. Wang
serves as the Chairman of the Compensation Committee.
The Board
of Directors determined that Joe Levinson possesses accounting or related
financial management experience that qualifies him as financially sophisticated
within the meaning of Rule 5605(c)(2)(A) of the Nasdaq Marketplace Rules and
that he is an “audit committee financial expert” as defined by the rules and
regulations of the Securities and Exchange Commission.
We do not
currently have a process for security holders to send communications to the
Board.
Director
Independence
On March
23, 2010, our Board of Directors appointed two new directors, Joseph Levinson
and Wenbing (Christopher) Wang to join Ms. Shuying Wang, as independent
directors on our Board. On the same date, Ms. Shu Wang resigned from
our Board of Directors.
Our
Board of Directors reviewed the independence of Messrs. Levinson and Wang and
Ms. Wang using the criteria established by The Nasdaq Stock Market LLC for
independence, and determined that each of them meet the criteria for
independence set forth in Rule 5605(a)(2) of the Nasdaq Marketplace
Rules.
Section
16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and certain of our officers, as well as persons who own more than 10% of a
registered class of our equity securities (“Reporting Persons”), to file reports
with the Securities and Exchange Commission. To our knowledge, based solely on
review of the copies of such reports furnished to us and written representations
that no other reports were required, during the fiscal year ended December 31,
2009, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent shareholders were complied
with.
Code
of Ethics
The
Company has adopted a formal code of ethics , a copy of which was filed as
Exhibit 14 to the Company’s Annual Report on Form 10-K for 2008. The Company has
developed a formal code of ethics that will apply to all of its employees
(including its executive officers). The Code of Ethics is designed to deter
wrongdoing and to promote ethical conduct and full, fair, accurate, timely and
understandable reports that the Company files or submits to the Securities and
Exchange Commission and others. A printed copy of the Code of Ethics
may also be obtained free of charge by writing to us at our headquarters located
at No. 9, Xin Yi Street, Ganjingzi District, Dalian City, Liaoning Province, PRC
116039.
EXECUTIVE
COMPENSATION
Our
current executive compensation program presently includes a base salary. Our
compensation program does not include (i) discretionary annual cash
performance-based incentives, (ii) termination/severance and change of control
payments, or (iii) perquisites and benefits.
Our
Compensation Philosophy and Objectives
Our
philosophy regarding compensation of our executive officers includes the
following principles:
|
|
·
|
our compensation program should
align the interests of our management team with those of our
shareholders;
|
|
|
·
|
our compensation program should
reward the achievement of our strategic initiatives and short- and
long-term operating and financial
goals;
|
|
|
·
|
compensation should appropriately
reflect differences in position and
responsibility;
|
|
|
·
|
compensation should be reasonable
and bear some relationship with the compensation standards in the market
in which our management team operates;
and
|
|
|
·
|
the compensation program should
be understandable and
transparent.
|
In order
to implement such compensation principles, we have developed the following
objectives for our executive compensation program:
|
|
·
|
overall compensation levels must
be sufficiently competitive to attract and retain talented leaders and
motivate those leaders to achieve superior
results;
|
|
|
·
|
a portion of total compensation
should be contingent on, and variable with, achievement of objective
corporate performance goals, and that portion should increase as an
executive’s position and responsibility
increases;
|
|
|
·
|
total compensation should be
higher for individuals with greater responsibility and greater ability to
influence our achievement of operating goals and strategic
initiatives;
|
|
|
·
|
the number of elements of our
compensation program should be kept to a minimum, and those elements
should be readily understandable by and easily communicated to executives,
shareholders, and others;
and
|
|
|
·
|
executive compensation should be
set at responsible levels to promote a sense of fairness and equity among
all employees and appropriate stewardship of corporate resources among
shareholders.
|
Determination
of Compensation Awards
Our Board
of Directors is provided with the primary authority to determine the
compensation awards available to our executive officers. To aid the board of
directors in making its determination for the last fiscal year, our current
senior management provided recommendations to the board of directors regarding
the compensation of all executive officers.
Director
Compensation
For the
fiscal year of 2009, we paid our independent director, Ms. Wang Shuying, a flat
fee of $1,000 per month as compensation for her services on the
Board.
Executive
Compensation
The
following executive compensation disclosure reflects all compensation for fiscal
year 2009 received by our principal executive officer, principal financial
officer, and, if applicable, three most highly compensated executive
officers whose salary exceeded US$100,000. We refer to these individuals in this
report as “named executive officers.”
Summary
Compensation
The
following table reflects all compensation awarded to, earned by or paid to our
named executive officers for our fiscal years ended December 31, 2009 and
2008:
Summary
Compensation
|
|
|
|
|
Annual Compensation (2)
|
|
|
Name and
Principal Position
|
|
Fiscal
Year
|
|
Salary (1)
($)
|
|
All Other
Compensation (3)
($)
|
|
Total
($)
|
|
|
Shi
Huashan
|
|
2009
|
|
$
|
200,000
|
|
-
|
|
|
200,000
|
|
|
Chief
Executive Officer, President
|
|
2008
|
|
$
|
100,000
|
|
-
|
|
|
100,000
|
|
|
Wang
Shu
|
|
2009
|
|
$
|
100,000
|
|
-
|
|
|
100,000
|
|
|
Chief
Financial Officer
|
|
2008
|
|
$
|
40,000
|
|
-
|
|
|
40,000
|
|
|
|
(1)
|
Expressed in U.S. Dollars based
on the interbank exchange rate of 6.85420 RMB for each 1.00
U.S. Dollar for the year ended December 31,
2009.
|
|
|
(2)
|
In
2008, 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)
|
In 2008, all other compensation
includes transportation subsidy, telecommunication subsidy, and other
fringe benefits.
|
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, 2009.
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, 2009.
Option
Exercises and Stock Vested
There
were no exercises of stock options, stock appreciation rights, 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 report, 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.
Employment
Agreements
Effective
at closing of the Exchange Transaction described elsewhere in this report, 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.
Ms. Wang
assumed the duties of Chief Financial Officer effective December 23, 2008. The
terms of Wang Shu's employment as Chief Financial Officer of the Company are set
forth in her original employment agreement dated December 31, 2007. On March 31,
2010, Ms. Wang resigned from her position as Chief Financial
Officer.
The
following is a summary of the compensation to be paid under these employment
agreements in the upcoming fiscal year ended December 31, 2010 to our named
executive officers:
Summary
of Compensation To Be Paid Under Employment Agreements for
Fiscal
Year Ended December 31, 2010
|
|
|
Annual Compensation
|
|
|
Name and Principal
Position
|
|
Salary
|
|
|
Bonus (1)
|
|
|
Other annual
Compensation
|
|
|
Shi
Huashan
President,
Chief Executive Officer
|
|
$
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wang
Shu
Chief
Financial Officer
|
|
$
|
120,000
|
|
|
|
—
|
|
|
|
—
|
|
We have
no arrangements with our executive officers to pay bonuses or other annual
compensation.
Indemnification
of Officers and Directors
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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of our
common stock as of May 6, 2010, for each of the following
persons:
|
|
·
|
each
of our directors and each of the named executive officers in the
“Management” section of this
report;
|
|
|
·
|
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 21,136,392 shares of our common stock outstanding on May
6, 2010.
|
|
|
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
|
%
|
|
Ma
Fengqin
|
|
|
0
|
|
|
|
0
|
%
|
|
Wang
Shuying
|
|
|
0
|
|
|
|
0
|
%
|
|
Wenbing
Christopher Wang
|
|
|
0
|
|
|
|
0
|
%
|
|
Joseph
Levinson
|
|
|
0
|
|
|
|
0
|
%
|
|
All
directors and executive officers as a group (5 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
|
|
|
2,045,454
|
(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 disclosed in the Schedule 13G filed on January 7, 2008, 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 December 31,
2009.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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,
under the heading “Employment Agreements” earlier in this report. 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 WFOE and the Group. All transactions
with related parties are generally performed at arm’s length, and in 2008, all
such transactions were conducted at arm’s length.
Management
believes that these transactions are material to our operations and
results. For further details concerning the nature of these
transactions, refer to footnote 5 in the Notes to Consolidated Financial
Statements as at and for the years ended December 31, 2009 and
2008. Paragraph 2(c) of the Statement of Financial Accounting
Standards No. 57 (SFAS 57) (FASB ASC 850) requires us to disclose in our
financial statements the dollar amounts of each of the periods presented, as
well as the effect of any change in the method of establishing the terms from
that used in the preceding period, for our related-party
transactions. Due to certain limitations in our historical records
heading up to the end of fiscal 2007, the present capacity of our accounting
staff, and the fact that our historical records relating to these related party
transactions are manually-based, we have presented these related party
transactions according to their general category and current balance, and each
such balance may represent a series of prior transactions culminating in such
balance. The Company and management acknowledge our responsibility to
comply with the requirements of (FASB ASC 850), and fully intend to take all
necessary steps to update our accounting systems and procedures in order to
achieve such compliance on an ongoing basis. Specifically, we intend
to update our systems and methods of tracking related party transactions, by
adding appropriate accounting staff to enhance our capabilities, and put in
place procedures to track and record all relevant aspects of our related party
transactions as necessary to comply with the requirements of (FASB ASC 850) and
the SEC disclosure rules.
The
Company believes that its related-party transactions with the Group, as a whole,
have a significant bearing on our financial results. As of December
31, 2009, approximately 45% of our supply of live hogs was acquired from the
Group. Accordingly, our cost of sales is significantly correlated
with our hog purchasing arrangement with the Group. The hogs that
were purchased from the Group comprised . 41%, 49% and 52% of our total cost of
sales for the years 2009, 2008 and 2007, respectively. The remainder
of our supply of hogs was purchased by us directly from breeders, whom we
provide training and technical advice to help ensure quality.
Due to
the non-exclusive roles of Mr. Shi as our CEO and the principal executive
officer of the Group, 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 the Group, and certain terms of agreements might be
favorable to us, but conversely unfavorable to the Group, 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 the Group, our former parent. This agreement specifies that the
Group should supply no less than 800,000 live hogs in 2009 and 800,000 in 2010,
and the price for the hogs is at the fair market price at the time of
acquisition.
In 2004,
we obtained a loan of $20,466,901 (RMB 160,000,000) from the Group, 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. The 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 us. The loan
carries a fixed interest of 5.76% per annum. We pledged both land use rights and
buildings to the Bond Issuer. We pursued a loan from the Group as the financing
solution of choice because our tangible assets, at the time of origination, were
insufficient to collateralize the loan. Additionally, we at that time lacked the
favorable credit history to directly establish credit facility with the
bank.
At
December 31, 2007, we repaid the debt in its entirety to the Group by setting
off receivables owed by the Group to us. We repaid the loan in order to meet the
requirements of the equity financing transaction detailed in Note 18 of our
financial statements included in this report. The balances are now owed
by the Group 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, our assets, namely the buildings and land use rights are at
risk if the Group were to default on this loan.
At
December 31, 2009, the Company had the following short term loans
outstanding:
|
Bank
|
|
Interest Rate
|
|
Due Date
|
|
Amount
|
|
|
Bank
of China - Liaoning Branch
|
|
|
5.841
|
%
|
11/11/2010
|
|
$
|
2,252,384
|
|
|
Bank
of China - Liaoning Branch
|
|
|
5.841
|
%
|
11/18/2010
|
|
|
2,135,377
|
|
|
Bank
of China - Liaoning Branch
|
|
|
5.841
|
%
|
10/27/2010
|
|
|
2,047,620
|
|
|
Agricultural
Bank of China - Wafangdian Branch
|
|
|
5.310
|
%
|
10/30/2010
|
|
|
2,925,174
|
|
|
Shanghai
Pudong Development Bank - Dalian Branch
|
|
|
5.841
|
%
|
7/16/2010
|
|
|
4,387,761
|
|
|
Bank
of East Asia - Dalian Branch
|
|
|
5.841
|
%
|
10/22/2010
|
|
|
2,193,881
|
|
|
|
|
|
|
|
|
|
$
|
15,942,197
|
|
The loans
provided by the Bank of China are 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 Agricultural Bank and Shanghai Pudong
Development Bank loans have been guaranteed by the Dalian Chuming Group Co.,
Ltd. Both the CEO Mr. Shi huashan and Dalian Chuming Group Co., Ltd. have
guaranteed the loan from Bank of East Asia.
Related
Party Transactions Prior to Change in Control
Set forth
below are the related party transactions that took place since January 1, 2007,
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 nor 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.
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 or for
the review, approval or ratification of such related party
transactions.
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 share
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 SEC as exhibits to the
registration statement on Form S-1 of which this prospectus forms a
part.
General
As
of May 6, 2010 we have 31,739,130 shares authorized of which
21,739,130 are shares of common stock, par value $0.001 and 10,000,000 are
shares of preferred stock, par value $0.001. There are 21,136,392 shares of
common stock issued and outstanding and -0- shares of preferred stock issued and
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. We were
obligated to have the Registration Statement of which this prospectus forms a
part, declared effective by the Securities and Exchange Commission (the “SEC”)
no later than 135 days after the closing of the Financing, or be subject to the
payment of liquidated damages payable in cash of 1% of the total Financing
amount per month up to a maximum amount of 10% of the total Financing amount, or
$1.7 million. We were unable to meet this deadline, and as a result
we currently owe liquidated damages in the amount of
$1.7million. Under the terms of the Settlement Agreement, the
investors have agreed to waive the liquidated damages owing if we comply with
new deadlines for the appointment of the new CFO, the independent directors and
the effectiveness of the Registration Statement
Registration
of these shares of common stock 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 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
period, 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
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
Quarter
ended March 31, 2010
|
|
$
|
2.80
|
|
|
$
|
4.20
|
|
|
Second
Quarter (through May 6, 2010)
|
|
$
|
3.50
|
|
|
$
|
4.60
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Quarter
ended December 31, 2009
|
|
$
|
2.00
|
|
|
$
|
3.00
|
|
|
Quarter
ended September 30, 2009
|
|
$
|
2.00
|
|
|
$
|
3.05
|
|
|
Quarter
ended June 30, 2009
|
|
$
|
0.51
|
|
|
$
|
2.15
|
|
|
Quarter
ended March 31, 2009
|
|
$
|
0.40
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Quarter
ended December 31, 2008
|
|
$
|
0.25
|
|
|
$
|
0.51
|
|
|
Quarter
ended September 30, 2008
|
|
$
|
0.25
|
|
|
$
|
5.00
|
|
|
Quarter
ended June 30, 2008
|
|
$
|
5.00
|
|
|
$
|
5.00
|
|
|
Quarter
ended March 31, 2008
|
|
$
|
5.00
|
|
|
$
|
53.00
|
|
Holders
As
of May 6, there were approximately 176 shareholders of record of our
common stock.
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 share exchange transaction with PSI and its shareholders,
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. PRC regulations, which apply to
Chuming WFOE, Meat Company, Food Company and Sales Company currently permit
payment of dividends only out of accumulated profits, as determined in
accordance with PRC accounting standards and regulations. The PRC government
imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of the PRC. We may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign
currency.
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 fiscal years ending December
31, 2009 and 2008, have been audited by our independent auditor, Samuel H. Wong
& Co., LLP, certified public accountants registered with the Public Company
Accounting Oversight Board. 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.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION
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
).
Energroup
Holdings Corporation
Audited
Consolidated Financial Statements
December
31, 2009 and 2008
(Stated
in US Dollars)
Energroup
Holdings Corporation
|
Contents
|
Pages
|
|
|
|
|
Report
of Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated
Balance Sheets
|
F-2
– F-3
|
|
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-5
– F-6
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-7
– F-8
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
– F-32
|
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, 2009 and 2008, 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, 2009 and 2008, 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
|
|
January
26, 2010
|
Certified
Public Accountants
|
Energroup
Holdings Corporation
Consolidated
Balance Sheets
As
of December 31, 2009 and 2008
(Stated
in US Dollars)
|
|
Notes
|
|
At
|
|
|
At
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
ASSETS
|
|
|
2009
|
|
|
2008
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
|
2
(D)
|
|
$
|
41,984,101
|
|
|
$
|
5,695,798
|
|
|
Restricted
Cash
|
3
|
|
|
2,176,224
|
|
|
|
2,177,091
|
|
|
Accounts
Receivable
|
2
(E),
4
|
|
|
39,876,187
|
|
|
|
18,661,065
|
|
|
Other
Receivable
|
|
|
|
591,025
|
|
|
|
2,162,412
|
|
|
Related
Party Receivable
|
5
|
|
|
-
|
|
|
|
10,919,777
|
|
|
Inventory
|
2
(F),
6
|
|
|
3,683,989
|
|
|
|
6,051,109
|
|
|
Purchase
Deposit
|
2
(G)
|
|
|
844,964
|
|
|
|
1,453,861
|
|
|
Prepaid
Expenses
|
|
|
|
30,103
|
|
|
|
62,734
|
|
|
Prepaid
Taxes
|
|
|
|
231,567
|
|
|
|
334,413
|
|
|
Deferred
Tax Asset
|
2
(Q)
|
|
|
468,922
|
|
|
|
643,609
|
|
|
Total
Current Assets
|
|
|
|
89,887,082
|
|
|
|
48,161,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current
Assets
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant & Equipment,
net
|
2
(H),
7
|
|
|
23,727,484
|
|
|
|
25,794,151
|
|
|
Land
Use Rights,
net
|
2
(I),
8
|
|
|
13,175,559
|
|
|
|
13,430,435
|
|
|
Construction
in Progress
|
2
(J)
|
|
|
6,692,837
|
|
|
|
3,262,146
|
|
|
Other
Assets
|
|
|
|
-
|
|
|
|
34,807
|
|
|
Total
Assets
|
|
|
$
|
133,482,962
|
|
|
$
|
90,683,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Bank
Loans
|
9
(A)
|
|
$
|
15,942,197
|
|
|
$
|
6,419,422
|
|
|
Notes
Payable
|
|
|
|
7,312,935
|
|
|
|
-
|
|
|
Accounts
Payable
|
|
|
|
3,272,626
|
|
|
|
7,695,208
|
|
|
Taxes
Payable
|
|
|
|
6,987,848
|
|
|
|
2,341,971
|
|
|
Other
Payable
|
|
|
|
2,096,958
|
|
|
|
2,318,142
|
|
|
Accrued
Liabilities
|
|
|
|
1,922,105
|
|
|
|
1,724,266
|
|
|
Customer
Deposit
|
2
(L)
|
|
|
2,416,613
|
|
|
|
3,258,752
|
|
|
Related
Party Payable
|
5
|
|
|
2,307,429
|
|
|
|
-
|
|
|
Total
Current Liabilities
|
|
|
|
42,258,711
|
|
|
|
23,757,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
Bank
Loans
|
9
(B)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
$
|
42,258,711
|
|
|
$
|
23,757,761
|
|
See Notes
to Financial Statements and Accountant’s Report
Energroup
Holdings Corporation
Consolidated
Balance Sheets
As
of December 31, 2009 and 2008
(Stated
in US Dollars)
|
|
|
|
At
|
|
|
At
|
|
|
|
Notes
|
|
December
31,
|
|
|
December
31,
|
|
|
Stockholders'
Equity
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock - $0.001 Par Value
10,000,000
Shares Authorized;
0
Shares Issued & Outstanding at December 31, 2009 and
2008.
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock - $0.001 Par Value 21,739,130 Shares Authorized; 21,136,392 Shares
Issued & Outstanding at December 31, 2009 and 2008.
|
10
|
|
|
21,137
|
|
|
|
21,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid in Capital
|
|
|
|
42,530,331
|
|
|
|
26,062,337
|
|
|
Statutory
Reserve
|
2
(M),
11
|
|
|
2,077,488
|
|
|
|
2,077,488
|
|
|
Retained
Earnings
|
|
|
|
41,329,899
|
|
|
|
35,275,457
|
|
|
Accumulated
Other Comprehensive Income
|
2
(N)
|
|
|
5,265,396
|
|
|
|
3,489,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
|
91,224,251
|
|
|
|
66,925,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities & Stockholders' Equity
|
|
|
$
|
133,482,962
|
|
|
$
|
90,683,408
|
|
See Notes to
Financial Statements and Accountant’s Report
Energroup
Holdings Corporation
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
year
ended
|
|
|
year
ended
|
|
|
|
Note
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Sales
|
2
(O),
22
|
|
$
|
213,545,175
|
|
|
$
|
176,360,013
|
|
|
Cost
of Sales
|
2
(P)
|
|
|
183,391,490
|
|
|
|
149,794,249
|
|
|
Gross
Profit
|
|
|
|
30,153,685
|
|
|
|
26,565,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
2
(Q)
|
|
|
2,151,988
|
|
|
|
5,147,366
|
|
|
General
& Administrative Expenses
|
2
(R)
|
|
|
2,507,688
|
|
|
|
2,675,661
|
|
|
Total
Operating Expense
|
|
|
|
4,659,676
|
|
|
|
7,823,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income/(Loss)
|
|
|
|
25,494,009
|
|
|
|
18,742,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
(Expenses)
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
43,568
|
|
|
|
5,780
|
|
|
Other
Expense
|
|
|
|
(91,943
|
)
|
|
|
(100,183
|
)
|
|
Interest
Income
|
|
|
|
198,259
|
|
|
|
284,774
|
|
|
Interest
Expense
|
|
|
|
(1,031,197
|
)
|
|
|
(953,460
|
)
|
|
Release
of Escrowed Make Good Shares
|
|
|
|
(16,467,994
|
)
|
|
|
(10,622,294
|
)
|
|
Total
Other Income and Expense
|
|
|
|
(17,349,307
|
)
|
|
|
(11,385,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
|
8,144,702
|
|
|
|
7,357,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income
Tax Expense)/Deferred Tax Benefit
|
2
(V),
14
|
|
|
(2,090,260
|
)
|
|
|
(520,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
$
|
6,054,442
|
|
|
$
|
6,837,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
2
(Y),
16
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
-
Diluted
|
|
|
$
|
0.29
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
|
17,272,756
|
|
|
|
17,272,756
|
|
|
-
Diluted
|
|
|
|
21,136,392
|
|
|
|
21,182,756
|
|
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
|
|
year
ended
|
|
|
year
ended
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
Accumulated
|
|
|
Comprehensive
Income
|
|
2009
|
|
|
2008
|
|
|
Totals
|
|
|
Net
Income
|
|
$
|
6,054,442
|
|
|
$
|
6,837,265
|
|
|
$
|
12,891,707
|
|
|
Other Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
1,776,168
|
|
|
|
528,277
|
|
|
|
2,304,445
|
|
|
|
|
$
|
7,830,610
|
|
|
$
|
7,365,542
|
|
|
$
|
15,196,152
|
|
See Notes to Financial Statements and
Accountant’s Report
Energroup
Holdings Corporation
Consolidated
Statements of Changes in Stockholders’ Equity
As
of and for the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Paid
in
|
|
|
Statutory
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserve
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
21,136,392
|
|
|
$
|
21,137
|
|
|
$
|
15,440,043
|
|
|
$
|
751,444
|
|
|
$
|
29,764,236
|
|
|
$
|
2,960,951
|
|
|
$
|
48,937,811
|
|
|
Release
of Shares Placed in Escrow
|
|
|
-
|
|
|
|
-
|
|
|
|
10,622,294
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,622,294
|
|
|
Net
Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,837,265
|
|
|
|
-
|
|
|
|
6,837,265
|
|
|
Appropriations
of Retained Earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,326,044
|
|
|
|
(1,326,044
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
528,277
|
|
|
|
528,277
|
|
|
Balance
at December 31, 2008
|
|
|
21,136,392
|
|
|
$
|
21,137
|
|
|
$
|
26,062,337
|
|
|
$
|
2,077,488
|
|
|
$
|
35,275,457
|
|
|
$
|
3,489,228
|
|
|
$
|
66,925,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
21,136,392
|
|
|
$
|
21,137
|
|
|
$
|
26,062,337
|
|
|
$
|
2,077,488
|
|
|
$
|
35,275,457
|
|
|
$
|
3,489,228
|
|
|
$
|
66,925,647
|
|
|
Release
of Shares Placed in Escrow
|
|
|
-
|
|
|
|
-
|
|
|
|
16,467,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,467,994
|
|
|
Net
Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,054,442
|
|
|
|
-
|
|
|
|
6,054,442
|
|
|
Appropriations
of Retained Earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,776,168
|
|
|
|
1,776,168
|
|
|
Balance
at December 31, 2009
|
|
|
21,136,392
|
|
|
$
|
21,137
|
|
|
$
|
42,530,331
|
|
|
$
|
2,077,488
|
|
|
$
|
41,329,899
|
|
|
$
|
5,265,396
|
|
|
$
|
91,224,251
|
|
See Notes to
Financial Statements and Accountant’s Report
Energroup
Holdings Corporation
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
year
ended
|
|
|
year
ended
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
Flow from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Received from Customers
|
|
$
|
203,979,080
|
|
|
$
|
153,507,080
|
|
|
Cash
Paid to Suppliers & Employees
|
|
|
(174,408,890
|
)
|
|
|
(155,266,953
|
)
|
|
Interest
Received
|
|
|
198,259
|
|
|
|
284,774
|
|
|
Interest
Paid (net of amount capitalized)
|
|
|
(831,509
|
)
|
|
|
(1,763,404
|
)
|
|
Income
Tax Paid
|
|
|
3,541
|
|
|
|
-
|
|
|
Miscellaneous
Receipts
|
|
|
43,567
|
|
|
|
5,780
|
|
|
Cash
Sourced/(Used) in Operating Activities
|
|
|
28,984,048
|
|
|
|
(3,232,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrowed
Funds from Private Placement Placed in Restricted Cash
|
|
|
35,675
|
|
|
|
2,072,909
|
|
|
Payments
for Purchases of Equipment & Construction of Plant
|
|
|
(3,702,716
|
)
|
|
|
(5,832,731
|
)
|
|
Payments
for Purchases of Intangible Assets
|
|
|
(327,647
|
)
|
|
|
-
|
|
|
Cash
Sourced/(Used) in Investing Activities
|
|
|
(3,994,688
|
)
|
|
|
(3,759,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Bank Borrowings
|
|
|
16,437,196
|
|
|
|
9,264,246
|
|
|
Repayment
of Bank Loans
|
|
|
(6,914,421
|
)
|
|
|
(10,700,664
|
)
|
|
Cash
Sourced/(Used) in Financing Activities
|
|
|
9,522,775
|
|
|
|
(1,436,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash & Cash Equivalents for the
Year
|
|
|
34,512,135
|
|
|
|
(8,428,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Currency Translation
|
|
|
1,776,168
|
|
|
|
92,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at Beginning of Year
|
|
|
5,695,798
|
|
|
|
14,031,851
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at End of Year
|
|
$
|
41,984,101
|
|
|
$
|
5,695,798
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing
Activity:
|
|
|
|
|
|
|
|
|
|
Release
of shares held in escrow account
|
|
$
|
16,467,994
|
|
|
$
|
10,622,294
|
|
See Notes to
Financial Statements and Accountant’s Report
Energroup
Holdings Corporation
Reconciliation
of Net Income to Cash Provided/(Used) in Operating Activities
For
the years ended December 31, 2009 and 2008
(Stated
in US Dollars)
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
year
ended
|
|
|
year
ended
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
6,054,442
|
|
|
$
|
6,837,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Cash
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
Cash Expense Recorded for the Release of Escrowed Shares
|
|
|
16,467,994
|
|
|
|
10,622,294
|
|
|
Amortization
|
|
|
582,523
|
|
|
|
331,468
|
|
|
Depreciation
|
|
|
2,338,691
|
|
|
|
2,540,797
|
|
|
Provision
for Bad Debt
|
|
|
214,294
|
|
|
|
103,773
|
|
|
Decrease/(Increase)
in Accounts Receivable
|
|
|
(21,429,416
|
)
|
|
|
(18,142,404
|
)
|
|
Decrease/(Increase)
in Other Receivable
|
|
|
1,571,387
|
|
|
|
(1,093,473
|
)
|
|
Decrease/(Increase)
in Related Party Receivable
|
|
|
10,919,777
|
|
|
|
(6,955,420
|
)
|
|
Decrease/(Increase)
in Inventory
|
|
|
2,367,120
|
|
|
|
(3,135,093
|
)
|
|
Decrease/(Increase)
in Advance to Suppliers
|
|
|
608,898
|
|
|
|
(1,186,054
|
)
|
|
Decrease/(Increase)
in Prepaid Taxes
|
|
|
102,845
|
|
|
|
(149,096
|
)
|
|
Decrease/(Increase)
in Prepaid Expenses
|
|
|
32,631
|
|
|
|
(16,333
|
)
|
|
Decrease/(Increase)
in Deferred Tax Benefit
|
|
|
174,686
|
|
|
|
(29,764
|
)
|
|
Increase/(Decrease)
in Notes Payable
|
|
|
7,312,935
|
|
|
|
-
|
|
|
Increase/(Decrease)
in Accounts Payable
|
|
|
(4,422,583
|
)
|
|
|
3,915,934
|
|
|
Increase/(Decrease)
in Taxes Payable
|
|
|
4,645,877
|
|
|
|
664,777
|
|
|
Increase/(Decrease)
in Other Payable
|
|
|
(221,184
|
)
|
|
|
846,762
|
|
|
Increase/(Decrease)
in Related Party Payable
|
|
|
2,307,429
|
|
|
|
-
|
|
|
Increase/(Decrease)
in Accrued Liabilities
|
|
|
197,839
|
|
|
|
(1,622,747
|
)
|
|
Increase/(Decrease)
in Customer Advances
|
|
|
(842,137
|
)
|
|
|
3,234,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of all adjustments
|
|
|
22,929,606
|
|
|
|
(10,069,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by/(Used in) Operating Activities
|
|
$
|
28,984,048
|
|
|
$
|
(3,232,723
|
)
|
See Notes to Financial Statements and
Accountant’s Report
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
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., (“Food
Company”) (2) Dalian Chuming Slaughter and Packaging Pork Company Ltd. (“Meat
Company”), and (3) Dalian Chuming Sales Company Ltd. (“Sales Company”), which
are incorporated in the People’s Republic of China (“PRC”). The
Company is headquartered in the City of Dalian, Liaoning Province of
China.
The three
operating subsidiaries were spun-off constituents of the former parent company,
Dalian Chuming Group Co. Ltd (“Group”). 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 (“BVI”) corporation, and (B) Dalian Chuming Precious Sheen Investments
Consulting Co., Ltd., (“Chuming”), a wholly foreign owned enterprise
incorporated in the PRC.
The
Company’s primary business activities are the production and packing of fresh
pork and also production of processed meat products for distribution and sale to
clients throughout the PRC and Russia.
Corporate
Reorganization
PRC law
currently has limits on foreign ownership of certain companies. To
enable Chuming to raise equity capital from investors outside of China, it
established an offshore holding company by incorporating Precious Sheen
Investments Limited in the British Virgin Islands in May 2007. On
September 26, 2007, Chuming entered into share transfer agreements with Dalian
Chuming Group Co., Ltd., under which Dalian Chuming Group Co., Ltd. agreed to
transfer ownership of three operating subsidiaries (collectively known as
“Chuming Operating Subsidiaries”) to Chuming. On October 23, 2007,
Chuming completed all required registrations to complete the share transfer, and
became the 100% owner of the Chuming Operating Subsidiaries. On
November 14, 2007 the Dalian Commerce Bureau approved the transfer of Dalian
Chuming Group Co., Ltd’s 68% interest in Chuming to PSI, and upon this transfer,
Chuming became a wholly foreign owned enterprise, with PSI as the 100% owner of
Chuming (including its subsidiaries). On December 13, 2007, the PRC government
authorities issued Chuming a business license formally recognizing it as a
wholly foreign owned enterprise, of which PSI is the sole
shareholder.
The
following is a description of the Chuming Operating Subsidiaries: -
A. Dalian
Chuming Slaughter and Packaging Pork Company Ltd., whose primary business
activity is acquiring, slaughtering, and packaging of pork and
cattle;
B. Dalian
Chuming Processed Foods Company Ltd., whose primary business activity is the
processing of raw and cooked meat products; and
C. Dalian
Chuming Sales Company Ltd., which is responsible for Chuming’s sales, marketing,
and distribution operations.
Share
Exchange Transaction
On
December 31, 2007, the Company acquired all of the outstanding shares of PSI in
exchange for the issuance of 16,850,000 restricted shares of our common stock to
the shareholders of PSI, which represented approximately 97.55% of the
then-issued and outstanding common stock of the Company (excluding the shares
issued in the Financing). As a result of that transaction, PSI became our wholly
owned subsidiary and we acquired the business and operations of the three
operation subsidiaries.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
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.
|
|
(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, 2009, 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
91,009,955
|
|
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 (FASB ASC 810
Consolidation
).
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
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.
The
Company extends unsecured, non-interest bearing credit to its customers;
accordingly, the Company carries an allowance for doubtful accounts, which is an
estimate, made by management. Management makes its estimate based on
prior experience rates and assessment of specific outstanding customer
balances. Management may extend credit to new customers who have met
the criteria of the Company’s credit policy.
|
|
(F)
|
Inventory
Carrying Value
|
Inventory,
consisting of raw materials in the form of livestock, work in progress, and
finished products, is stated at the lower of cost or market
value. Finished products are comprised of direct materials, direct
labor and an appropriate proportion of overhead. Periodic evaluation
is made by management to identify if inventory needs to be written down because
of damage, or spoilage. Cost is computed using the weighted average
method.
Purchase
deposit represents the cash paid in advance for purchasing raw
materials. The purchase deposit is interest free and
unsecured.
|
|
(H)
|
Property,
Plant, and Equipment
|
Property,
Plant, and Equipment are stated at cost. Repairs and maintenance to
these assets are charged to expense as incurred; major improvements enhancing
the function and/or useful life are capitalized. When items are sold
or retired, the related cost and accumulated depreciation are removed from the
accounts and any gains or losses arising from such transactions are
recognized.
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
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
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
deposit 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.
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.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
|
(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
.
Beginning
in March 2008, the
Company encouraged its independent sales agents to share the cost in marketing
Chuming pork products. The Company encouraged such behavior by
offering to its agents: (1) favorable credit terms, such as 45 to 60 days
unsecured credit and (2) more significant discount. The Company
recognizes the sales revenue directly based on the dollar amount sold to
independent sales agents. In accordance to 605-50-45-2, discounts
offered to independent sales agent are accounted for as reductions in
revenue. The increase in receivables after March 2008 gives rise to
the Company carrying an allowance for doubtful accounts as detailed in 2
(E)
.
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. Selling expense, in absolute dollars, and as a percentage
of revenue, has decreased because of the coordinated effort with independent
sales agents to gain higher return on marketing efforts. Refer to
Note 2
(O)
for further
details.
|
|
(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.
|
|
(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.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and
2008
The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are available. The
Company has implemented Statement of Financial Accounting Standards (SFAS) No.
109 (FASB ASC 740), Accounting for Income Taxes. Income tax liabilities computed
according to the United States and People’s Republic of China (PRC) tax laws are
provided for the tax effects of transactions reported in the financial
statements and consists of taxes currently due plus deferred taxes related
primarily to differences between the basis of fixed assets and intangible assets
for financial and tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will be
either taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes also are recognized for operating losses that are
available to offset future income taxes. A valuation allowance is created to
evaluate deferred tax assets if it is more likely than not that these items will
either expire before the Company is able to realize that tax benefit, 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.
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
|
|
12/31/2009
|
|
|
12/31/2008
|
|
|
Period
end RMB : US$ exchange rate
|
|
|
6.8372
|
|
|
|
6.8542
|
|
|
Average
period RMB : US$ exchange rate
|
|
|
6.8409
|
|
|
|
6.9623
|
|
RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
The
Company computes earnings per share (“EPS”) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per share” (FASB ASC 260), and
SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies
with complex capital structures to present basic and diluted EPS. Basic EPS is
measured as the income or loss available to common shareholders divided by the
weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., contingent shares, convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and
2008
|
|
(Z)
|
Recent
Accounting Pronouncements
|
In June
2009, FASB issued FASB Statement No. 166,
Accounting for Transfers for
Financial Assets
(FASB ASC 860
Transfers and Servicing
) and
FASB Statement No. 167 (FASB ASC 810
Consolidation
), a revision to
FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest
Entities
(FASB ASC 810
Consolidation
)
.
Statement
166 is a revision to FASB Statement No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(FASB
ASC 860
Transfers and
Servicing
)
,
and
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. Statement No. 166 (FASB
ASC 860
Transfers and
Servicing
) must be applied as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. This Statement
must be applied to transfers occurring on or after the effective
date. The Company is still evaluating the impact of the above
pronouncement.
Statement
167 is a revision to FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest
Entities
(FASB ASC 810
Consolidation
)
,
and changes how a reporting
entity determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic performance.
Statement
No. 167 (FASB ASC 810
Consolidation
) shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company is still
evaluating the impact of the above pronouncement.
On June
30, 2009, FASB issued FASB Statement No. 168,
Accounting Standards Codification™
(FASB ASC 105
Generally
Accepted Accounting Principles
)
a replacement of FASB
Statement No. 162
the
Hierarchy of Generally Accepted Accounting Principles
. On the effective
date of this standard, FASB Accounting Standards Codification™ (ASC) became the
source of authoritative U.S. accounting and reporting standards for
nongovernmental entities, in addition to guidance issued by the Securities and
Exchange Commission (SEC). This statement is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. If an accounting change results from the application of this
guidance, an entity should disclose the nature and reason for the change in
accounting principle in their financial statements. This new standard
flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB
ASC) and one that is non-authoritative (not in FASB ASC). Exceptions include all
rules and interpretive releases of the SEC under the authority of federal
securities laws, which are sources of authoritative GAAP for SEC registrants,
and certain grandfathered guidance having an effective date before March 15,
1992. Statement No. 168 is the final standard that will be issued by FASB in
that form. There will no longer be, for example, accounting standards
in the form of statements, staff positions, Emerging Issues Task Force (EITF)
abstracts, or AICPA Accounting Statements of Position.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
The
Company is currently evaluating the potential impact, if any, of the adoption of
the above recent accounting pronouncements on its consolidated results of
operations and financial condition.
The
restricted cash reflects funds received from the financing transaction described
in Note 19 that has been held in an escrow with US Bank in the United States
that requires releases authorized by the lead investor. The balance
remaining in the escrow account is attributed to two criteria the Company was
not able satisfy by prescribed dates in accordance to the financing
transaction. The two unfilled criteria were: (1) hiring of a Chief
Financial Officer within 90 days of the closing of the financing transaction
that met the approval of the investors and (2) appointment of a successor
auditor. If criteria (1) and criteria (2) had been met, $1,500,000
and $500,000 of funds would have been released to the Company,
respectively. The amount in excess of the total of the $2,000,000
million subject to the aforementioned criteria was comprised of unused funds
earmarked for the payment to a third party investor relation firm from a list
prescribed by the investors and any interest earned between December 31, 2007
and December 31, 2009. The amount earmarked for the investor
relations firm was approximately $170,000, and the balance of approximately
$6,000 was related to interest earned. The Company has also
classified these funds as restricted because they remain in the escrow account
which is subject to release by the investors. The criteria for
restriction of the funds have been modified in accordance to a settlement
agreement entered into by the Company and the investors in the financing
transaction in Note 19, on December 30, 2009. Refer to Note 20 for
further details on the settlement agreement that modifies the
restrictions. The Company believes that is has properly accounted for
the entire amount of $2,176,224 held in escrow as restricted as of December 31,
2009 for the following two reasons: (1) the Company was not able to freely
access those funds, and (1) the modification of the terms covered in the
settlement agreement were subject to events that would occur subsequent to the
December 31, 2009.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and
2008
Accounts Receivable at December 31,
consisted of the following: -
|
|
|
At
|
|
|
At
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accounts
Receivable – Trade
|
|
$
|
40,278,976
|
|
|
$
|
18,849,560
|
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(402,789
|
)
|
|
|
(188,495
|
)
|
|
Net
Accounts Receivable
|
|
$
|
39,876,187
|
|
|
$
|
18,661,065
|
|
|
|
|
At
|
|
|
At
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
Allowance for Bad
Debts
|
|
2009
|
|
|
2008
|
|
|
Beginning
Balance
|
|
$
|
(188,495
|
)
|
|
$
|
(84,723
|
)
|
|
Allowance
Provided
|
|
|
(214,294
|
)
|
|
|
(103,772
|
)
|
|
Charged
Against Allowance
|
|
|
-
|
|
|
|
-
|
|
|
Ending
Balance
|
|
$
|
(402,789
|
)
|
|
$
|
(188,495
|
)
|
During
the second quarter of the 2008 fiscal year, management revised the Company’s
credit policy. Based on management’s review, the Company began
extending more favorable credit terms to its top tier customers. Those customers
that qualified as top tier were extended approximately 45 to 60 days of
credit. As of December 31, 2009, the Company has not had any
receivables that were unrecoverable.
Accounts
receivable aging analysis at December 31: -
|
|
|
At
|
|
|
At
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
1-30
Days
|
|
$
|
17,757,223
|
|
|
$
|
10,478,579
|
|
|
30-60
Days
|
|
|
12,643,466
|
|
|
|
1,627,515
|
|
|
61-90
Days
|
|
|
5,004,370
|
|
|
|
168,045
|
|
|
91-120
Days
|
|
|
4,833,711
|
|
|
|
6,575,420
|
|
|
121-365
Days
|
|
|
40,206
|
|
|
|
-
|
|
|
Over 365
Days
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
40,278,976
|
|
|
$
|
18,849,560
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
5.
|
Related Party
Receivable and Payable
|
In the
normal course of business which includes the purchases of hogs and other raw
materials, sale of pork and pork products, the Company conducts transactions
with the following related parties: Dalian Chuming Group Co., Ltd (“Group”) and
the Group subsidiaries, that are not consolidated into Energroup Holdings or
Energroup’s subsidiary, Dalian Chuming Precious Sheen Investments Consulting Co.
Ltd. (Chuming): (1) Dalian Chuming Industrial Development Co., Ltd.,
(“Industrial Development Co.”) (2) Dalian Chuming Trading Co., Ltd, (“Trading
Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd., (“Mingxing”) (4) Dalian
Chuming Stockbreeding Combo Development Co., Ltd., (“Combo Development Co.”) (5)
Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”), and (6) Dalian Chuming
Biological Technology Co., Ltd., (“Biological Co.”) and (7) Dalian Huayu Seafood
Food Co., Ltd. (“Huayu”). The Company and the aforementioned related
parties share common beneficial ownership. All transactions with
related parties are generally performed at arm’s length.
In the
event that the Company has both receivables from, and payables to the Group it
will, in accordance with FIN 39 (FASB ASC 210-20), setoff the balances in order
to arrive at a single balance that is either due from, or due to the
Group. The Company’s net payable balance of $2,307,429
at December 31, 2009 is
shown in the following table.
|
Ref.
|
|
Su
bsidiary
Due to:
|
|
Nature of B
alan
ce
|
|
Related Party
|
|
B
alan
ce
|
|
Description of
Transaction
|
|
A
|
|
Food
|
|
Sale
of Products resulting in Trade Receivable from
|
|
Dalian
Huayu Seafood Food Co., Ltd.
|
|
$
|
235,278
|
|
Food
Co. sold cooked food to Huayu dating back to 1/2007.
|
|
|
|
|
|
Subtotal
of Related Party Sales
|
|
|
235,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B
|
|
Food
|
|
Loan
Receivable from
|
|
Dalian
Fodder Co., Ltd.
|
|
|
15,346
|
|
Food
Co. advanced prepayment to Fodder Co. for purchase of raw materials dating
back to 7/2009
|
|
C
|
|
Food
|
|
Loan
Receivable from
|
|
Dalian
Chuming Industrial Development Co., Ltd.
|
|
|
21,959,383
|
|
Food
Co. paid bank loan principal and interest on behalf of Industrial Co.
dating back to 1/2008
|
|
D
|
|
Food
|
|
Loan
Receivable from
|
|
Dalian
Chuming Group Co., Ltd.
|
|
|
785,296
|
|
Food
Co. paid bank loan principal and interest on behalf of Group dating back
to 9/2009
|
|
E
|
|
Meat
|
|
Loan
Receivable from
|
|
Dalian
Chuming Industrial Development Co., Ltd.
|
|
|
28,579,916
|
|
Meat
Co. paid bank loan principal and interest on behalf of Industrial Co.
dating back to 4/2009
|
|
F
|
|
Meat
|
|
Loan
Receivable from
|
|
Dalian
Chuming Fodder Co., Ltd.
|
|
|
188,553
|
|
Meat
Co. paid raw materials and utility fees for Fodder Co. dating back to
7/2008.
|
|
G
|
|
Meat
|
|
Loan
Receivable from
|
|
Dalian
Chuming Stockbreeding Combo Development Co., Ltd.
|
|
|
2,698,825
|
|
Prepayment
to Stockbreeding Combo for Purchase of hogs dating back to
7/2008.
|
|
H
|
|
Meat
|
|
Loan
Receivable from
|
|
Dalian
Chuming Group Co., Ltd.
|
|
|
20,316,353
|
|
Meat
Co. paid bank loan principal and interest on behalf of Group dating back
to 10/2009
|
|
I
|
|
Sales
|
|
Loan
Receivable from
|
|
Dalian
Huayu Seafood Co., Ltd.
|
|
|
2,715,858
|
|
Sales
Co. help Huayu purchase materials dating back to
9/2008.
|
|
J
|
|
Sales
|
|
Loan
Receivable from
|
|
Dalian
Chuming Group Co., Ltd.
|
|
|
4,910,256
|
|
Sales
Co. purchased hogs and paid general and administrative expenses on behalf
of Group dating back to 7/2008.
|
|
K
|
|
Sales
|
|
Loan
Receivable from
|
|
Dalian
Chuming Stockbreeding Combo Development Co., Ltd.
|
|
|
15,924,446
|
|
Sales
Co. paid for Stockbreeding to buy hogs from farmer dating back
7/2008
|
|
L
|
|
Sales
|
|
Loan
Receivable from
|
|
Dalian
Chuming Industrial Development Co., Ltd.
|
|
|
5,594,080
|
|
Sales
Co. purchased materials for Industrial Co. dating back to
7/2009
|
|
M
|
|
Sales
|
|
Loan
Receivable from
|
|
Dalian
Chuming Fodder Co., Ltd.
|
|
|
2,007,855
|
|
Sales
Co. purchased feeding materials for Fodder Co. dating back to
5/2009
|
|
|
|
|
|
Subtotal
loans to related parties
|
|
|
105,696,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
related party receivables
|
|
$
|
105,931,445
|
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
Ref.
|
|
Subsidiary Due from:
|
|
Nature of B
alan
ce
|
|
Related Party
|
|
B
alan
ce
|
|
D
escription
of Transaction
|
|
N
|
|
Meat
|
|
Purchase
of Raw Materials resulting in Trade Payable to
|
|
Dalian
Chuming Stockbreeding Combo Development Co., Ltd.
|
|
$
|
7,763,151
|
|
Meat
Co. purchased of hogs from Stockbreeding Combo Development Co. dating back
to 7/2009
|
|
O
|
|
Meat
|
|
Purchase
of Raw Materials resulting in Trade Payable to
|
|
Dalian
Chuming Group Co., Ltd.
|
|
|
69,975,745
|
|
Purchase
of hogs from Group dating back to 7/2008.
|
|
|
|
|
|
Subtotal
of Purchases from Related Parties
|
|
|
77,738,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P
|
|
Food
|
|
Loan
Payable to
|
|
Dalian
Chuming Group Co., Ltd.
|
|
|
583
|
|
Food
borrowed from Group to purchase materials dating back to
4/2009.
|
|
Q
|
|
Food
|
|
Loan
Payable to
|
|
Dalian
Chuming Stockbreeding Combo Development Co., Ltd.
|
|
|
2,047,622
|
|
Stockbreeding
Combo Development Co. bought raw materials for Food Co. dating back to
4/2009
|
|
R
|
|
Food
|
|
Loan
Payable to
|
|
Dalian
Mingxing Livestock Product Co., Ltd.
|
|
|
52,022
|
|
Food
Co. borrowed funds from Mingxing for operations purpose dating back to
12/2008
|
|
S
|
|
Food
|
|
Loan
Payable to
|
|
Dalian
Huayu Seafood Co., Ltd.
|
|
|
2,909,148
|
|
Food
Company collected customer deposits on behalf of Huayu Co. dating back to
7/2009
|
|
T
|
|
Meat
|
|
Loan
Payable to
|
|
Dalian
Chuming Group Co., Ltd.
|
|
|
7,312,935
|
|
Group
loaned to Meat Co. dating back to 4/2009
|
|
U
|
|
Meat
|
|
Loan
Payable to
|
|
Dalian
Huayu Seafood Co., Ltd.
|
|
|
2,950,503
|
|
Huayu
Co. loaned to Meat Co. dating back to 7/2009
|
|
V
|
|
Meat
|
|
Loan
Payable to
|
|
Dalian
Mingxing Livestock Product Co., Ltd.
|
|
|
610,618
|
|
Mingxing
Co. paid the operation expense on behalf of Meat Co., dating back to
7/2009
|
|
W
|
|
Sales
|
|
Loan
Payable to
|
|
Dalian
Mingxing Livestock Product Co. Ltd.,
|
|
|
842,176
|
|
Sales
Co. collected bank loans on behalf of Mingxing dating back to
8/2008
|
|
X
|
|
Sales
|
|
Loan
Payable to
|
|
Dalian
Chuming Fodder Co., Ltd.
|
|
|
3,259,502
|
|
Fodder
Co. bought materials on behalf of Sales Co. dating back to
4/2009
|
|
Y
|
|
WFOE
|
|
Loan
Payable to
|
|
Dalian
Chuming Group Co.
|
|
|
10,514,870
|
|
Group
loaned funds to WFOE (includes funds transferred from Meat for US
RTO.)
|
|
|
|
|
|
Subtotal
of Loans from Related Parties
|
|
|
30,499,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Related Party Payable
|
|
|
108,238,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Setoff Related Party
Payable
(Payables have been set-off
against receivables)
|
|
$
|
2,307,429
|
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
|
A.
|
The
Food Company sold USD 235 thousand (RMB 1.6 million) cooked food to
Mingxing Company on credit.
|
|
|
B.
|
Food
Company prepaid USD 15 thousand (RMB 104 thousand) to Fodder Company in
third quarter of 2009 for the purchase of raw
materials.
|
|
|
C.
|
Food
Company paid USD 21.96 million (RMB 150 million) bank loan principal and
interest on behalf of Industrial Development
Company.
|
|
|
D.
|
Food
Company paid USD 785 thousand (RMB 5.4 million) bank loan principal and
interest on behalf of Chuming
Group.
|
|
|
E.
|
Meat
Co. paid USD 28.6 million (RMB 195.4 million) bank loan principal and
interest on behalf Industrial Development
Company.
|
|
|
F.
|
Meat
Co. paid USD 189 thousand (RMB 1.3 million) raw materials and utility fees
for Fodder Company.
|
|
|
G.
|
The
prepayment of USD 2.7 million (RMB 18.4 million) from Meat Company to the
Stockbreeding Combo Development Company was for the purchase of
hogs.
|
|
|
H.
|
Meat
Company paid USD 20.3 million (RMB 138.9 million) bank loan principal and
interest on behalf of Group.
|
|
|
I.
|
Sales
Company bought USD 2.7 million (RMB 18.6 million) raw materials for Huayu
Seafood Company.
|
|
|
J.
|
The
balance of USD 4.9 million (RMB 33.6 million) receivable from Chuming
Group to Sales Company was for the payments of hogs and operation
expense.
|
|
|
K.
|
Sales
Company help the Combo Development Company to pay USD 15.9 million (RMB
109 million) to local farmers for the purchase of
hogs.
|
|
|
L.
|
Sales
Company purchased USD 5.6 million (RMB 38 million) materials for
Industrial Development Company.
|
|
|
M.
|
The
receivable of USD 2 million (RMB 13.7 million) due from Fodder Company to
Sales Company is primary for the purchase of feeding
materials.
|
|
|
N.
|
The
balance of USD 7.8 million (RMB 53 million) payment owed by the Meat
Company to Chuming Stockbreeding Combo Development Company was for the
purchase of hogs.
|
|
|
O.
|
The
Group sold hogs to Meat Co. for 70 million (RMB 478
million).
|
|
|
P.
|
Chuming
Group purchased USD 583 (RMB 4 thousand) materials for Food
Company
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and
2008
|
|
Q.
|
Stockbreeding
Combo Development Company purchased USD 2 million (RMB 14 million) for
Food Company.
|
|
|
R.
|
Mingxing
Livestock Company paid USD 52 thousand (RMB 356 thousand) daily operation
expenses on behalf of Food Company.
|
|
|
S.
|
Food
Company collected USD 2.9 million (RMB 19.9 million) customer deposits on
behalf of Huayu Seafood Company.
|
|
|
T.
|
Meat
Company borrowed USD 7.3 million (RMB 50 million) operation funds from
Chuming Group.
|
|
|
U.
|
Meat
Company borrowed USD 2.9 million (RMB 20 million) operation funds from
Huayu Seafood Company.
|
|
|
V.
|
Mingxing
Livestock Company paid USD 611 thousand (RMB 4.1 million) general and
administrative expenses for Meat
Company.
|
|
|
W.
|
Sales
Company collected USD 842 thousand (RMB 5.8 million) bank loans on behalf
of Mingxing Livestock Company.
|
|
|
X.
|
Fodder
Company bought USD 3.3 million (RMB 22.3 million) materials on behalf of
Sales Company.
|
|
|
Y.
|
The
outstanding payable balance of USD 10.5 million (RMB 70 million) due to
the Group has been transferred to the books of
Chuming.
|
The
related party payable balance detailed above, and the related transactions that
comprise that balance were integral and material to the Company’s
operations. The Company was reliant on transactions with the above
related parties in order to conduct its business normally. The
Company acknowledges that it has the responsibility to comply with paragraph c
of SFAS 57 (FASB ASC 850) which calls for the dollar amounts of transactions for
each of the periods for which income statements are presented and the effects of
any change in the method of establishing the terms from that used in the
preceding period. The Company’s accounting system in the past was manual and
accordingly is not able to, from a cost benefit perspective, summarize and
provide further detail on the related party transactions. Also, the Company’s
current accounting department does not have sufficient staff in order to perform
and exercise to further detail the related party payables and receivables beyond
what has been provided above; however the Company is taking steps to update its
accounting systems and methods to provide fuller detail regarding these
transactions for future periods. The Company does represent that the balances
disclosed above are both accurate and reliable within acceptable thresholds of
materiality.
The
Company’s related party receivables and payables in the period presented were in
the form of either short-term loans bearing no interest, or trade payables and
receivables relating to the purchase of raw materials, supplies or products for
which payment was due within a short period of time.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
|
|
At
|
|
|
At
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw
Materials
|
|
$
|
1,479,197
|
|
|
$
|
867,549
|
|
|
Work
in Progress
|
|
|
95,051
|
|
|
|
241,738
|
|
|
Finished
Goods
|
|
|
2,109,741
|
|
|
|
4,941,822
|
|
|
|
|
$
|
3,683,989
|
|
|
$
|
6,051,109
|
|
|
7.
|
Property, Plant &
Equipment
|
|
At
|
|
|
|
|
Accumulated
|
|
|
|
|
|
December
31, 2009:
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Buildings
|
|
$
|
21,661,732
|
|
|
$
|
(4,341,813
|
)
|
|
$
|
17,319,919
|
|
|
Manufacturing
Equipment
|
|
|
9,983,958
|
|
|
|
(4,227,442
|
)
|
|
|
5,756,516
|
|
|
Office
Equipment
|
|
|
473,623
|
|
|
|
(397,488
|
)
|
|
|
76,135
|
|
|
Vehicles
|
|
|
926,735
|
|
|
|
(664,628
|
)
|
|
|
262,107
|
|
|
Furniture
& Fixture
|
|
|
525,323
|
|
|
|
(212,516
|
)
|
|
|
312,807
|
|
|
|
|
$
|
33,571,371
|
|
|
$
|
(9,843,887
|
)
|
|
$
|
23,727,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
December
31, 2008:
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Buildings
|
|
$
|
21,604,325
|
|
|
$
|
(3,607,219
|
)
|
|
$
|
17,997,105
|
|
|
Manufacturing
Equipment
|
|
|
10,061,608
|
|
|
|
(3,132,725
|
)
|
|
|
6,928,883
|
|
|
Office
Equipment
|
|
|
195,577
|
|
|
|
(150,670
|
)
|
|
|
44,907
|
|
|
Vehicles
|
|
|
913,816
|
|
|
|
(477,265
|
)
|
|
|
436,551
|
|
|
Furniture
& Fixture
|
|
|
524,020
|
|
|
|
(137,317
|
)
|
|
|
386,704
|
|
|
|
|
$
|
33,299,346
|
|
|
$
|
(7,505,196
|
)
|
|
$
|
25,794,151
|
|
The
Company had the following intangible assets outstanding at December
31:
|
|
|
At
|
|
|
At
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
Use Rights, at Cost
|
|
$
|
14,735,150
|
|
|
$
|
14,407,503
|
|
|
Less
:
Accumulated Amortization
|
|
|
(1,559,591
|
)
|
|
|
(977,068
|
)
|
|
|
|
$
|
13,175,559
|
|
|
$
|
13,430,435
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
|
(A)
|
Short
Term Bank Loans
|
At
December 31 2009 and 2008, the Company had the following short-term loans
outstanding:
|
|
|
|
|
|
|
At
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
Bank
|
|
Interest
Rate
|
|
Due
Date
|
|
2009
|
|
|
Bank
of China - Liaoning Branch
|
|
|
5.841
|
%
|
11/11/2010
|
|
$
|
2,252,384
|
|
|
Bank
of China - Liaoning Branch
|
|
|
5.841
|
%
|
11/18/2010
|
|
|
2,135,377
|
|
|
Bank
of China - Liaoning Branch
|
|
|
5.841
|
%
|
10/27/2010
|
|
|
2,047,620
|
|
|
Agricultural
Bank of China - Wafangdian Branch
|
|
|
5.310
|
%
|
10/30/2010
|
|
|
2,925,174
|
|
|
Shanghai
Pudong Development Bank - Dalian Branch
|
|
|
5.841
|
%
|
7/16/2010
|
|
|
4,387,761
|
|
|
Bank
of East Asia - Dalian Branch
|
|
|
5.841
|
%
|
10/22/2010
|
|
|
2,193,881
|
|
|
|
|
|
|
|
|
|
$
|
15,942,197
|
|
|
|
|
|
|
|
|
At
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
Bank
|
|
Interest
Rate
|
|
Due
Date
|
|
2008
|
|
|
Bank
of China - Liaoning Branch
|
|
|
6.1586
|
%
|
10/26/2009
|
|
$
|
4,376,878
|
|
|
Bank
of China - Liaoning Branch
|
|
|
7.3260
|
%
|
10/17/2009
|
|
|
2,042,543
|
|
|
|
|
|
|
|
|
|
$
|
6,419,422
|
|
The loans
provided by the Bank of China are 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 Agricultural Bank and Shanghai Pudong
Development Bank loans have been guaranteed by the Dalian Chuming Group Co.,
Ltd. Both the CEO Mr. Shi huashan and Dalian Chuming Group Co., Ltd. have
guaranteed the loan from Bank of East Asia.
|
|
(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 Company repaid its debt, in its entirety to Dalian
Chuming Group Co. Ltd by setting off 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
19. 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.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
Notes
payable consisted of the followings as of December 31, 2009.
|
Notes
to
|
|
Due
Date
|
|
Amount
|
|
|
Shanghai
Pudong Development Bank - Liaoning Branch
|
|
5/18/2010
|
|
$
|
7,312,935
|
|
|
|
|
|
|
$
|
7,312,935
|
|
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
|
|
|
$
|
29,486,367
|
|
|
|
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
|
|
|
$
|
42,530,331
|
|
|
|
100.00
|
%
|
|
12.
|
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.
|
|
|
At
|
|
|
At
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
PRC
Registered Capital
|
|
|
15,566,849
|
|
|
|
15,566,849
|
|
|
|
|
|
|
|
|
|
|
|
-
Statutory Reserve Ceiling
based on 50% of Registered
Capital
|
|
|
7,783,424
|
|
|
|
7,783,424
|
|
|
|
|
|
|
|
|
|
|
|
Less
:
- Retained Earnings
appropriated to Statutory
Reserve
|
|
|
(2,077,488
|
)
|
|
|
(2,077,488
|
)
|
|
|
|
|
|
|
|
|
|
|
Reserve
Commitment
Outstanding
|
|
$
|
5,705,936
|
|
|
$
|
5,705,936
|
|
Advertising
expenses were $638,904 and $2,629,853 for the years ended December 31, 2009 and
2008, respectively.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and
2008
The
Company and its subsidiaries are subject to income tax under the jurisdictions
under which they operate. The following table details the Company and
its subsidiaries, and the statutory tax rates to which they are
subject:
|
Entity
|
|
Country of
Domicile
|
|
Income Tax
Rate
|
|
Energroup
Holdings Corporation
|
|
USA
|
|
15.00%
- 35.00%
|
|
Precious
Sheen Investments Limited
|
|
BVI
|
|
0.00%
|
|
Dalian
Chuming Precious Sheen Investment Consulting Co., Ltd.
|
|
PRC
|
|
25.00%
|
|
Dalian
Chuming Slaughtering & Pork Packaging Co. Ltd.
|
|
PRC
|
|
25.00%
|
|
Dalian
Chuming Processed Foods Co. Ltd.
|
|
PRC
|
|
25.00%
|
|
Dalian
Chuming Sales Co. Ltd.
|
|
PRC
|
|
25.00%
|
As shown
in the table above, Dalian Chuming Slaughtering & Pork Packaging Co. Ltd.,
Dalian Chuming Processed Foods Co. Ltd., Dalian Chuming Sales Co. Ltd., and
Dalian Chuming Precious Sheen Investment Consulting Co. operate in the
PRC. They generate substantially all of the profits for the
Company. The Company expects that these subsidiaries will only be
subject to PRC taxes in the foreseeable future, because the Company has not yet
established a plan to repatriate it earnings to the United States.
Although
the Companies PRC subsidiaries are subject to statutory income tax rates
detailed above, the individual effective tax rates for each subsidiary vary
significantly.
Dalian
Chuming Slaughtering & Pork Packaging Co. Ltd. has been given special
tax-free status by the PRC government because of the Company’s standing as
leader in its industry in Dalian. Accordingly, the Company has not
made a provision for income taxes in the PRC for the years December 31, 2009 and
2008.
Dalian
Chuming Processed Foods Co. Ltd has provided for income taxes in years 2009 and
2008 in the amounts of $1,914,069 and $508,844, respectively.
Dalian
Chuming Sales Co. Ltd. has not provided for income taxes in years 2009 and 2008
because it has incurred operating losses for those respective
years. The Company has chosen to derecognize its deferred tax assets
arising from net operating losses in prior periods by expensing the asset to the
income tax expense account. The amounts expense related to
de-recognition of deferred tax assets for the years ended December 31 2009 and
2008 were $176,191 and $11,246 respectively. Management made the
decisions of de-recognition based on new information such as changes in market
conditions and the further streamlining of the Company’s
business. Management does not believe that previously accrued
deferred tax assets will be used to reduce taxes payables at any point in the
foreseeable future. Management deemed the use of a valuation
allowance inappropriate based on the circumstances in accordance to guidance
provided under ASC 740-10-40.
Although
the Company is subject to United States income taxes, it is a holding company
with no operations or profits within the US borders. The Company
currently only incurs expenses in the United States that are associated with
being a public company.
After
accounting for special tax-free status and net operating loss of aforementioned
subsidiaries, the consolidated taxable earnings were determined, and the
consolidated tax expeneses were as follows: -
|
i.
|
2009
|
Tax
expense
|
(2,090,260)
|
|
ii.
|
2008
|
Tax
expense
|
(520,089)
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
It is
company policy to develop plant facilities based on availability of cash
resources without incurring capital commitments. Therefore, the Company did not
have any capital commitments existing at December 31, 2009 except for the
commitment to have the construction in progress finished.
On
December 19, 2007, the Company entered into a hog purchase agreement whereby the
Dalian Chuming Group Co., Ltd will provide at fair market price a minimum number
of hogs to the Company. At December 31, 2009, the Company expects
minimum quantities of hogs detailed in the following table:
|
Year
|
|
Hogs
|
|
|
Price
Per Hog
|
|
|
Amount
|
|
|
2010
|
|
|
800,000
|
|
|
$
|
205.84
|
|
|
|
164,674,737
|
|
The
Company believes that the fair market price of the hogs will increase by 10%
each year. The assumption of 10% reflects that Company expectations in regards
to inflation, and the rising costs of inputs in breeding livestock.
The
Company individually tracks the performance of its three operating subsidiaries
Meat Company, Food Company, and Sales 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 results of operations and financial position for
its operating subsidiaries at December 31, 2009 and 2008, and for the years then
ended. The Company has also provided reconciling adjustments with the
Company and its intermediate holding companies Dalian Chuming Precious Sheen
Investments Consulting Ltd. (“Chuming WFOE”) and Precious Sheen Investments Ltd
(PSI).
|
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
WFOE,
|
|
|
|
|
|
For
the year ended
|
|
Meat
|
|
|
Food
|
|
|
Sales
|
|
|
PSI,
&
|
|
|
|
|
|
December
31, 2009
|
|
Company
|
|
|
Company
|
|
|
Company
|
|
|
Eliminations
|
|
|
Total
|
|
|
Sales
|
|
$
|
199,433,432
|
|
|
$
|
33,238,046
|
|
|
$
|
30,122,999
|
|
|
$
|
(49,249,302
|
)
|
|
$
|
213,545,175
|
|
|
Cost
of Sales
|
|
|
176,364,424
|
|
|
|
24,571,961
|
|
|
|
31,704,407
|
|
|
|
(49,249,302
|
)
|
|
|
183,391,490
|
|
|
Gross
Profit
|
|
|
23,069,008
|
|
|
|
8,666,085
|
|
|
|
(1,581,408
|
)
|
|
|
-
|
|
|
|
30,153,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss)/Profit
|
|
|
21,642,004
|
|
|
|
7,802,315
|
|
|
|
(3,645,402
|
)
|
|
|
(304,908
|
)
|
|
|
25,494,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
(706,939
|
)
|
|
|
(146,038
|
)
|
|
|
(30,474
|
)
|
|
|
(16,465,856
|
)
|
|
|
(17,349,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
20,935,065
|
|
|
|
7,656,277
|
|
|
|
(3,675,876
|
)
|
|
|
(16,770,764
|
)
|
|
|
8,144,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income
Tax Expense)
|
|
|
-
|
|
|
|
(1,914,069
|
)
|
|
|
(176,191
|
)
|
|
|
-
|
|
|
|
(2,090,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
20,935,065
|
|
|
$
|
5,742,208
|
|
|
$
|
(3,852,067
|
)
|
|
$
|
(16,770,764
|
)
|
|
$
|
6,054,442
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and
2008
|
Eliminated
Intercompany Sales of Products Sold during
|
|
|
Year
ended December 31, 2009
|
|
|
Sold
From:
|
|
Sold
To:
|
|
Amount
|
|
|
Food
Company
|
|
Sales
Company
|
|
$
|
7,859,308
|
|
|
Meat
Company
|
|
Sales
Company
|
|
|
22,164,630
|
|
|
Meat
Company
|
|
Food
Company
|
|
|
19,225,364
|
|
|
|
|
|
|
$
|
49,249,302
|
|
|
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
WFOE,
|
|
|
|
|
|
For
the year ended
|
|
Meat
|
|
|
Food
|
|
|
Sales
|
|
|
PSI,
&
|
|
|
|
|
|
December
31, 2008
|
|
Company
|
|
|
Company
|
|
|
Company
|
|
|
Eliminations
|
|
|
Total
|
|
|
Sales
|
|
$
|
165,540,800
|
|
|
$
|
20,275,953
|
|
|
$
|
82,629,122
|
|
|
$
|
(92,085,862
|
)
|
|
$
|
176,360,013
|
|
|
Cost
of Sales
|
|
|
143,467,927
|
|
|
|
17,018,115
|
|
|
|
81,394,069
|
|
|
|
(92,085,862
|
)
|
|
|
149,794,249
|
|
|
Gross
Profit
|
|
|
22,072,873
|
|
|
|
3,257,838
|
|
|
|
1,235,053
|
|
|
|
-
|
|
|
|
26,565,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss)/Profit
|
|
|
19,835,123
|
|
|
|
2,038,279
|
|
|
|
(2,475,995
|
)
|
|
|
(654,670
|
)
|
|
|
18,742,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
(684,408
|
)
|
|
|
(95,144
|
)
|
|
|
(6,952
|
)
|
|
|
(10,598,879
|
)
|
|
|
(11,385,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
19,150,715
|
|
|
|
1,943,135
|
|
|
|
(2,482,947
|
)
|
|
|
(11,253,549
|
)
|
|
|
7,357,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income
Tax Expense)
|
|
|
-
|
|
|
|
(508,843
|
)
|
|
|
(11,246
|
)
|
|
|
-
|
|
|
|
(520,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
19,150,715
|
|
|
|
1,434,292
|
|
|
|
(2,494,193
|
)
|
|
|
(11,253,549
|
)
|
|
|
6,837,265
|
|
|
Eliminated
Intercompany Sales of Products Sold during
|
|
|
Year
ended December 31, 2008
|
|
|
Sold
From:
|
|
Sold
To:
|
|
Amount
|
|
|
Food
Company
|
|
Sales
Company
|
|
$
|
15,614,380
|
|
|
Meat
Company
|
|
Sales
Company
|
|
|
66,171,117
|
|
|
Meat
Company
|
|
Food
Company
|
|
|
10,300,365
|
|
|
|
|
|
|
$
|
92,085,862
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
|
WFOE,
|
|
|
|
|
|
At
|
|
Meat
|
|
|
Food
|
|
|
Sales
|
|
|
PSI,
&
|
|
|
|
|
|
December
31, 2009
|
|
Company
|
|
|
Company
|
|
|
Company
|
|
|
Eliminations
|
|
|
Total
|
|
|
Current
Assets
|
|
$
|
175,070,968
|
|
|
$
|
54,889,689
|
|
|
$
|
32,573,276
|
|
|
$
|
(172,646,851
|
)
|
|
$
|
89,887,082
|
|
|
Non
Current Assets
|
|
|
24,795,021
|
|
|
|
18,567,360
|
|
|
|
232,971
|
|
|
|
528
|
|
|
|
43,595,880
|
|
|
Total
Assets
|
|
|
199,865,989
|
|
|
|
73,457,049
|
|
|
|
32,806,247
|
|
|
|
(172,646,323
|
)
|
|
|
133,482,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
123,737,988
|
|
|
|
61,796,444
|
|
|
|
40,265,515
|
|
|
|
(183,541,236
|
)
|
|
|
42,258,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
123,737,988
|
|
|
|
61,796,444
|
|
|
|
40,265,515
|
|
|
|
(183,541,236
|
)
|
|
|
42,258,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
|
76,128,001
|
|
|
|
11,660,605
|
|
|
|
(7,459,268
|
)
|
|
|
10,894,913
|
|
|
|
91,224,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
&
Net Assets
|
|
$
|
199,865,989
|
|
|
$
|
73,457,049
|
|
|
$
|
32,806,247
|
|
|
$
|
(172,646,323
|
)
|
|
$
|
133,482,962
|
|
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
|
WFOE,
|
|
|
|
|
|
At
|
|
Meat
|
|
|
Food
|
|
|
Sales
|
|
|
PSI,
&
|
|
|
|
|
|
December
31, 2008
|
|
Company
|
|
|
Company
|
|
|
Company
|
|
|
Eliminations
|
|
|
Total
|
|
|
Current
Assets
|
|
|
74,713,236
|
|
|
|
21,126,826
|
|
|
|
41,826,291
|
|
|
|
(89,504,485
|
)
|
|
|
48,161,869
|
|
|
Non
Current Assets
|
|
|
22,624,643
|
|
|
|
19,570,329
|
|
|
|
325,480
|
|
|
|
1,088
|
|
|
|
42,521,539
|
|
|
Total
Assets
|
|
$
|
97,337,879
|
|
|
$
|
40,697,155
|
|
|
$
|
42,151,771
|
|
|
$
|
(89,503,397
|
)
|
|
$
|
90,683,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
42,293,135
|
|
|
|
34,796,536
|
|
|
|
45,747,947
|
|
|
|
(99,079,857
|
)
|
|
|
23,757,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
42,293,135
|
|
|
|
34,796,536
|
|
|
|
45,747,947
|
|
|
|
(99,079,857
|
)
|
|
|
23,757,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
|
55,044,744
|
|
|
|
5,900,619
|
|
|
|
(3,596,176
|
)
|
|
|
9,576,460
|
|
|
|
66,925,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
&
Net Assets
|
|
$
|
97,337,879
|
|
|
$
|
40,697,155
|
|
|
$
|
42,151,771
|
|
|
$
|
(89,503,397
|
)
|
|
$
|
90,683,408
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
Components
of basic and diluted earnings per share were as follows: -
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
year
ended
|
|
|
year
ended
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
Income (A)
|
|
$
|
6,054,442
|
|
|
$
|
6,837,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding (B)
|
|
|
17,272,756
|
|
|
|
17,272,756
|
|
|
Dilutive
Shares:
|
|
|
|
|
|
|
|
|
|
-
Addition
to Common Stock from Exercise of Placement Warrants
|
|
|
-
|
|
|
|
46,364
|
|
|
-
Addition
to Common Stock from Contingent Shares Held in Escrow (Please refer to
Note 19)
|
|
|
3,863,636
|
|
|
|
3,863,636
|
|
|
Diluted
Weighted Average Shares Outstanding: (C)
|
|
|
21,136,392
|
|
|
|
21,182,756
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
-
Basic
(A)/(B)
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
-
Diluted
(A)/(C)
|
|
$
|
0.29
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
17,272,756
|
|
|
|
17,272,756
|
|
|
-
Diluted
|
|
|
21,136,392
|
|
|
|
21,182,756
|
|
|
18.
|
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.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
|
19.
|
Financing
Transaction
|
On
December 31, 2007, the Company, a Nevada corporation (“Energroup” or the
“Company”), acquired Precious Sheen Investments Ltd. (“PSI”) in a reverse
take-over transaction, by executing a Share Exchange Agreement (“Exchange
Agreement”) by and among Energroup, PSI, and all of the shareholders of PSI’s
issued and outstanding share capital (the “PSI Shareholders”). PSI owned 100% of
the equity in Chuming WFOE. Chuming WFOE 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 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 3,863,636 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, 2009, the Company had adequate authorized
capital to issue common shares upon the exercise of the warrant.
At
December 31, 2009, 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
|
|
|
|
|
|
|
|
21,136,392
|
|
|
|
|
|
|
|
|
|
|
iii.
|
|
Common
shares issuable upon exercise of placement agent warrants
|
|
|
386,364
|
|
|
|
|
|
|
|
21,522,756
|
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
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
(FASB ASC 815-15). 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. The terms of
the financing transaction have been amended under a settlement agreement entered
into on December 30, 2009. Under the settlement agreement, if certain
requirements are met by the Company by prescribed dates, the liquidated damages
may be waived and the funds may be released to the Company. If the
Company does not meet the requirements by the prescribed dates, the Company may
still be required to pay the liquated damages from the escrow account that has
been classified as restricted cash on the Company’s balance
sheet. Refer to Note 20 for further detail regarding the settlement
agreement.
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
(FASB ASC
260), 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 17.
In
accordance with Topic 5.T of the Staff Accounting Bulletins (SAB 79), the
Company has recorded compensatory expense for shares to be released from escrow
by charging the Company’s earnings and recording a corresponding increase to the
Company’s contributed paid in capital. The Company recorded
$16,467,994 and $10,622,294 of expense for the years ended December 31, 2009 and
2008, respectively. The impacts to the Company’s earnings, on a per
share basis, using 17,272,756 and 17,272,756 basic weighted average shares
outstanding for the 2009 and 2008, respectively, were $0.95 and $0.61,
respectively. The company determined the expense based on a valuation
on the Company’s common stock derived from multiples of non-GAAP earnings for
2009 and 2008. The non-GAAP earnings reflect what net income would
have been if the expense related to the release of escrow shares were not
included in net income. The earnings multiples employed were 8.00 and
6.67, for 2009 and 2008, respectively. The Company believes that
these estimates were both reliable and conservative because the valuations
employed were higher than those indicated by the market during the 2009 and 2008
which leads to greater expenses charged to the Company’s earnings during those
periods. The terms and conditions related to the signatures required
to release the shares in escrow back to the Chairman and CEO have been modified
under the settlement agreement. Refer to Note 20.
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
On
December 30, 2009, the Company entered into a settlement agreement with certain
investors in its 2007 private placement of common stock, refer to Note 19.
Pursuant to the terms of settlement agreement, the Company has agreed with the
investors to appoint a new Chief Financial Officer, appoint independent
directors to serve on the Company’s board of directors, and have Registration
Statement effective by March 31, 2010 (these requirements are referred to as the
“Public Company Requirements”), except that the Company has the right to extend
the deadline to have the Registration Statement declared effective until May 15,
2010, if the reviewed financial statements at September 30, 2009 included in the
Registration Statement are no longer current and the audited financial
statements as of and for the year ended December 31, 2009 must be included in
the Registration Statement.
The
settlement agreement has characterized with respect to the release of the funds
currently held in escrow as follows:-
|
|
1)
|
Upon
execution of this settlement agreement, the investors shall order the
escrow agent to deliver the 2008 Make Good Escrow Shares to the pledgor
(i.e. founder of the Company).
|
|
|
2)
|
If
the Company complies with all of the Public Company Requirements by March
31, 2010, all of the funds currently held in the escrow account will be
released to the Company, and the liquidated damages in the amount of $1.7
million for not having the Registration Statement timely declared
effective will be waived.
|
|
|
3)
|
If
the requirement to have the S-1 declared effective is the only Public
Company Requirement not met by March 31, 2010, the investors will have the
funds in escrow, less the 1.7 million in liquidated damages, released to
the Company, and the $1.7 million shall remain in escrow and will be
released to the Company if the Company meets the May 15, 2010 extension
deadline. If the Company misses the extension deadline, then the $1.7
million will be distributed pro rata among the
investors.
|
|
|
4)
|
If
the Company fails to satisfy any of the Public Company requirements by
March 31, 2010, other than having the Registration Statement declared
effective if the extension to May 15, 2010 applies, then the investors
will have the funds in escrow, less the $1.7 million in liquidated damages
released to them, on a pro rata basis, and the $1.7 million remaining
shall remain in escrow and will be released to the Company if the Company
meets the May 15, 2010 deadline. If the Company misses the extension
deadline, then the $1.7 million will be distributed pro rata among the
investors.
|
|
|
5)
|
If
the Company fails to comply with any two of the Public Company
requirements, all of the funds in escrow will be released to the investors
on a pro rata basis.
|
|
|
6)
|
If
the Company satisfies all of the Public Company Requirements and achieves
the 2009 guaranteed after tax net income reported in 2009 Annual Report,
equal to or greater than $20,900,000 as set forth in the Make Good Escrow
Agreement, the investors’ right to countersign an escrow release notice
with respect to the release of the 2009 Make Good Escrow Shares shall be
automatically waived. The Company shall have the right, within five
calendar days from the date the Company files Form 10-K for the fiscal
year 2009, to order the escrow agent to deliver the 2009 Make Good Escrow
Shares to the founder of the Company. If the Company does not meet any one
of the Public Company Requirements and the 2009 guaranteed after tax net
income target, the Company’s right to countersign an escrow release notice
with respect to the release of the 2009 Make Good Escrow Shares shall be
automatically waived and the investors shall have the right to order
escrow agent to deliver the 2009 Make Good Escrow shares to the investors
within five days of the delivery of such
notice.
|
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2009 and 2008
The
Company believes it has satisfied all of the criteria set forth in the
settlement agreement described above except for its Form S-1 Registration
Statement that has yet to be declared effective by the US SEC by March 31,
2010. The Company believes it has satisfied the criteria because the
investors have released all of the shares held in escrow back to the Chairman
and CEO as a result of the Company meeting its after tax net income requirements
for both 2009 and 2008.
Chinese
National Pork Reserve
In 2009,
the PRC government established the Chinese National Pork Reserve with the
mission of: (1) avoiding the risk of a supply shortage of pork, and (2)
maintaining an orderly market for pork. The Chinese National Pork
Reserve will be comprised of facilities located in eleven different cities
nationwide. Dalian was selected as one of the eleven cities to host
a facility.
On June
15, 2009, the Company’s operating subsidiary, Meat Company, after passing a
qualification process, was selected to be a supplier to the Chinese National
Pork Reserve; accordingly, the Company signed a long-term supplier agreement
with the Chinese National Pork Reserve. Under the terms of the
agreement, the Company is to supply 30,000,000 kg of fresh pork to the Chinese
National Pork Reserve, annually. The agreement provides guidelines
whereby the facility must use up and replenish 10,000,000 kg of fresh meat
(approximately 150,000 hogs) every four months. The Company’s 2009 annual sales
was $213,545,175 of which $5,669,348 (RMB 36,742,481), representing 2.66% of
total sales, consisted of fresh pork sold to the Chinese National Pork
Reserve.
Subsidy
The
Company’s operating subsidiary, Meat Company, received from the Dalian City
government, grants of $141,867 and $1,422,830 for 2009 and 2008,
respectively. The subsidy was given to the Company because it has
earned positions of leadership in its industry and in the
community.
Prospectus
dated ________, 2010
ENERGROUP
HOLDINGS CORPORATION
Shares
Common
Stock
Until
_______________ 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.
|
Securities
and Exchange Commission 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. These shares were issued because processing of a reverse stock
split was inadvertently omitted for a share certificate representing 5,750
shares of common stock, which after proper adjustment, should have been reverse
split to 288 shares (a difference of 5,462 shares). Bona fide purchasers bought
the shares without knowledge that the shares were subject to a reverse stock
split. Under Utah law (the jurisdiction in which the Company was then
incorporated), “protected purchasers” are persons who acquire securities for
value without notice of any adverse claim and who obtain control of a
certificated or uncertificated security. In order to reconcile its share
register, Energroup treated the error as the resale of 288 shares, plus the
issuance of an additional 5,462 shares to the bona fide purchasers. Energroup
relied upon Section 4(2) of the Securities Act, as the reconciliation shares
issued in order to correct the error were issued in a transaction by the issuer
not involving a public offering. The Company notes that no monetary
consideration was received by the Company in connection with the issuance of
these reconciliation shares.
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
See
“Exhibit Index” below which follows the signature pages to this registration
statement.
ITEM
17. UNDERTAKINGS
Undertaking
Required by Item 512 of Regulation S-K.
(a) The
undersigned registrant will:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i)
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
reflect in the prospectus any facts or events arising after the effective date
of this registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information in the registration statement; and notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee”table in the effective
registration statement; and
(iii)
include any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(b) For
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities, the registrant
undertakes that in a primary offering of securities of the registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the registrant relating to the offering
required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(iv) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such 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 such
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 such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this Amendment No. 5 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dalian, People ’ s Republic of China on the 10th day of May,
2010.
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ENERGROUP
HOLDINGS CORPORATION
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By:
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/s/ Shi Huashan
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Shi
Huashan
President and
Chief Executive Officer
(Principal
Executive Officer)
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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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Signature
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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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May
10, 2010
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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/ Sharon Tang
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Chief
Financial Officer
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Sharon
(Xiaorong) Tang
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(Principal
Accounting
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and Financial
Officer)
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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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/s/ Joseph Levinson
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Director
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Joseph
Levinson
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/s/ Wenbing (Christopher)
Wang
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Director
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Wenbing
(Christopher) Wang
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EXHIBIT INDEX
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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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Executive
Employment Agreement dated September 2008 between Energroup and Mr. Yizhao
Zhang (5)
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10.6
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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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10.7
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Trademark
License Contract (Chuming) dated December 2007 (English translation)
(1)
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10.8
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Trademark
License Contract (Huayu) dated December 2007 (English translation)
(1)
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10.9
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Securities
Purchase Agreement dated December 2007 among Energroup, PSI, Chuming, and
the investors signatory thereto (1)
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10.10
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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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10.11
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Holdback
Escrow Agreement dated December 2007 among Energroup, Escrow Agent and the
investors signatory thereto (1)
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10.12
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Loan
Agreement between Dalian Chuming Food Co. Ltd and Bank of China dated
November 2008 (6)
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10.13
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Loan
Agreement between Dalian Chuming Meat Co. Ltd. and Bank of China dated
November 2008 (6)
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10.14
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Settlement
agreement by and among Energroup, the investors signatory thereto, Shine
Gold Holdings Limited and U.S. Bank National Association dated December
30, 2009 (7)
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10.15
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Loan
Agreement between Dalian Chuming Food Co., Ltd. and Bank of China dated
October 28, 2009. (9)
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10.16
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Loan
Agreement between Dalian Chuming Meat Co., Ltd. and Bank of China dated
November 11, 2009. (9)
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10.17
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Loan
Agreement between Dalian Chuming Meat Co., Ltd. and Bank of China dated
November 19, 2009. (9)
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10.18
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Loan
Agreement between Dalian Chuming Meat Co., Ltd. and Agricultural
Development Bank of China dated October 30, 2009. (9)
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10.19
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Loan
Agreement between Dalian Chuming Food Co., Ltd. and Bank of East Asia
(China) dated October 22, 2009. (9)
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10.20
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Loan
Agreement between Dalian Chuming Meat Co., Ltd. and Shanghai Pudong
Development Bank dated July 16, 2009. (9)
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10.21
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Independent
Director Agreement by and between the Company and Wenbing Christopher Wang
dated March 23, 2010 (10)
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10.22
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Independent
Director Agreement by and between the Company and Joseph
Levinson dated March 23, 2010 (10)
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10.23
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Employment
Agreement by and between the Company and Sharon Tang dated March 23, 2010
(8)
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14.1
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Code
of Ethics (6)
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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 (4)
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(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.
(5)
Previously filed with our Current Report on Form 8-K on September 23, 2008 and
incorporated herein by reference.
(6)
Previously filed with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and incorporated by reference.
(7)
Previously filed with our Registration Statement on Form S-1, Amendment No.
3 filed on December 31, 2009 and incorporated by reference.
(8)
Previously filed with our Current Report on Form 8-K filed
on March 31, 2010 and incorporated by reference.
(9)
Previously filed with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2009 and incorporated by reference.
(10)
Previously filed with our Current Report on Form 8-K filed on March
26, 2010 and incorporated by reference.
Energroup (PK) (USOTC:ENHD)
過去 株価チャート
から 11 2024 まで 12 2024
Energroup (PK) (USOTC:ENHD)
過去 株価チャート
から 12 2023 まで 12 2024
