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Delaware
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2015
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65-0918608
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(State or other Jurisdiction
of Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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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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Title of Each Class Of
Securities To Be Registered
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Amount To Be
Registered (1)
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Proposed Maximum
Offering Price
Per Security (2)
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Proposed Maximum
Aggregate
Offering Price
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Amount Of
Registration Fee
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||||
Common Stock, $.001 par value
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5,485,300
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$
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1.50
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$
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8,227,950
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$
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955.26
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Common Stock, $.001 par value issuable upon exercise of warrants
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1,142,396
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$
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4.00
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$
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4,569,584
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$
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530.53
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Total
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6,627,696
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$
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12,797,534
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$
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1,485.79
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(3)
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(1)
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Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon exercise of warrants held by the selling stockholders. In addition to the shares set forth in the table, the amount to be registered includes an indeterminate number of shares issuable upon exercise of the warrants, as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416. The number of shares of common stock registered hereunder represents a good faith estimate by us of the number of shares of common stock issuable upon exercise of the warrants. For purposes of estimating the number of shares of common stock to be included in this registration statement, we calculated a good faith estimate of the number of shares of our common stock that we believe will be issuable upon exercise of the warrants to account for market fluctuations, and antidilution and price protection adjustments, respectively. Should the conversion ratio result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary. In addition, should a decrease in the exercise price as a result of an issuance or sale of shares below the then current market price, result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.
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(2)
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Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-the-Counter Bulletin Board on April 20, 2011, which was $1.50 per share.
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(3)
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Previously paid.
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Page
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1
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2
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20
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21
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52
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56
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57
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61
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62
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63
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64
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66
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71
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72
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72
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73
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o
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Breeding Unit – breeds, hatches, and cultivates ducklings for resale and processing by Food Processing Unit
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o
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Feed Unit – produces duck feed for internal use and external sale
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o
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Food Processing Unit – processes ducklings into frozen raw food product for commercial resale.
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Common stock offered by the selling stockholders
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Up to 6,627,696 shares of common stock, including the following: | |
- 5,485,300 shares of common stock, and
- up to 1,142,396 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $4.00 per share (includes a good faith estimate of the shares underlying warrants to account for antidilution protection adjustments).
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Common stock to be outstanding after the offering
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Up to 11,582,429 shares. | |
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Use of proceeds
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We will not receive any proceeds from the sale of the common stock. However, we will receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. | |
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OTCBB symbol
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DUKS |
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Hire, train, integrate and manage additional qualified technicians and breeding farm directors and sales and marketing personnel;
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Implement additional, and improve existing, administrative, financial and operations systems, procedures and controls;
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Continue to enhance manufacturing and customer resource management systems;
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Continue to expand and upgrade our feed ingredient composition, poultry immunization system and breeding technology;
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Manage multiple relationships with distributors, suppliers and certain other third parties; and
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Manage our financial condition.
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revoking the business and operating licenses of our PRC consolidated entities;
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discontinuing or restricting the operations of our PRC consolidated entities;
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·
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imposing conditions or requirements with which we or our PRC consolidated entities may not be able to comply;
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·
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requiring us or our PRC consolidated entities to restructure the relevant ownership structure or operations;
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·
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restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or
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·
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imposing fines.
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·
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dilution caused by our issuance of additional shares of Common Stock and other forms of equity securities, which we expect to make in the Offering and in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;
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·
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quarterly variations in our revenues and operating expenses;
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·
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changes in the valuation of similarly situated companies, both in our industry and in other industries;
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·
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changes in analysts’ estimates affecting our company, our competitors and/or our industry;
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·
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changes in the accounting methods used in or otherwise affecting our industry;
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additions and departures of key personnel;
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announcements of technological innovations or new products available to the agricultural industry;
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·
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announcements by relevant governments pertaining to incentives for agricultural development programs;
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fluctuations in interest rates and the availability of capital in the capital markets; and
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·
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significant sales of our Common Stock, including sales by the investors following registration of the shares of Common Stock issued in this Offering and/or future investors in future offerings we expect to make to raise additional capital.
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● |
election of our board of directors;
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● |
removal of any of our directors;
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● |
amendment of our certificate of incorporation or bylaws; and
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● |
adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Fiscal Year 2010
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||||||||
High
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Low
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|||||||
First Quarter
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$ | 3.03 | $ | 1.20 | ||||
Second Quarter
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$ | 12.00 | $ | 2.50 | ||||
Third Quarter
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$ | 3.00 | $ | 0.77 | ||||
Fourth Quarter
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$ | 3.00 | $ | 0.70 |
Fiscal Year 2011
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High
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Low
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|||||||
First Quarter
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$ | 3.00 | $ | 1.50 | ||||
Second Quarter
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$ | 5.00 | $ | 1.50 | ||||
Third Quarter
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$ | 2.00 | $ | 1.50 | ||||
Fourth Quarter
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$ | 2.00 | $ | 0.75 |
Fiscal Year 2012
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High
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Low
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|||||||
First Quarter (1)
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$ | 1.35 | $ | 0.75 |
(1)
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As of January 9, 2012 .
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•
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discuss our future expectations;
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•
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contain projections of our future results of operations or of our financial condition; and
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•
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state other “forward-looking” information.
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·
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Breeding Unit – breeds, hatches, and cultivates ducklings for resale and processing by the Food Processing Unit;
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·
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Feed Unit – produces duck feed for internal use and external sale; and
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·
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Food Processing Unit – processes ducklings into frozen raw food product for commercial resale.
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2010
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2009
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Breeding Unit
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$
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12,592,738
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$
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7,704,942
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Feed Unit
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13,886,122
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50,592
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Food Unit
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15,206,128
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21,104,165
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$
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41,684,988
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$
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28,859,699
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Buying Unit
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Year Ended December 31, 2010
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Year Ended December 31, 2009
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Breeding
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Feed
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Food
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Breeding
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Feed
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Food
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Selling Unit
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Unit
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Unit
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Unit
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Unit
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Unit
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Unit
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Breeding Unit
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$
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—
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$
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—
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$
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218,016
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$
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—
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$
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—
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$
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—
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Feed Unit
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13,241,455
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—
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—
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12,387,362
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—
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—
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Food unit
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—
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8,681
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—
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51,137
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—
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—
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$
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13,241,455
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$
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8,681
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$
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218,016
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$
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12,438,499
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$
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—
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$
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—
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2010
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2009
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Interest income
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$ | (241,676 | ) | $ | (73,680 | ) | ||
Interest expense
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1,473,696 | 536,573 | ||||||
Bank fees
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137,175 | 77,598 | ||||||
Liquidated damages
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562,746 | — | ||||||
Amortization of debt discount
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108,786 | 9,291 | ||||||
Imputed interest expense
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273,290 | 5,142 | ||||||
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||||||||
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$ | 2,314,017 | $ | 554,924 |
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Nine months ended September 30,
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|||||||
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2011
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2010
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||||||
(unaudited)
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(unaudited)
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|||||||
Breeding Unit
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$ | 12,160,875 | $ | 7,731,349 | ||||
Feed Unit
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4,300,871 | 9,352,996 | ||||||
Food Unit
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6,759,979 | 13,672,392 | ||||||
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$ | 23,221,725 | $ | 30,756,737 |
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Buying Unit
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|||||||||||||||||||||||
Nine months ended September 30, 2011
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Nine months ended September 30, 2010
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Breeding
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Feed
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Food
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Breeding
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Feed
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Food
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|||||||||||||||||||
Selling Unit
|
Unit
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Unit
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Unit
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Unit
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Unit
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Unit
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||||||||||||||||||
Breeding Unit
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$ | — | $ | — | $ | 12,810 | $ | — | $ | — | $ | 201,645 | ||||||||||||
Feed Unit
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9,654,959 | — | — | 10,962,657 | — | — | ||||||||||||||||||
Food unit
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— | — | — | — | — | — | ||||||||||||||||||
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$ | 9,654,959 | $ | — | $ | 12,810 | $ | 10,962,657 | $ | — | $ | 201,645 |
Nine months ended September 30,
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||||||||
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2011
|
2010
|
||||||
(unaudited)
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(unaudited)
|
|||||||
Interest income
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$ | (212,370 | ) | $ | (2,721 | ) | ||
Interest expense
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1,186,918 | 1,174,398 | ||||||
Bank fees
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52,919 | 110,903 | ||||||
Amortization of debt discount
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14,235 | 104,455 | ||||||
Imputed interest expense
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— | 74,648 | ||||||
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$ | 1,041,702 | $ | 1,461,683 |
|
Three months ended September 30,
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|||||||
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2011
|
2010
|
||||||
(unaudited)
|
(unaudited)
|
|||||||
Breeding Unit
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$ | 3,498,117 | $ | 4,134,491 | ||||
Feed Unit
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1,455,962 | 4,470,162 | ||||||
Food Unit
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2,205,004 | 2,505,514 | ||||||
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$ | 7,159,083 | $ | 11,110,167 |
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Buying Unit
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|||||||||||||||||||||||
Three months ended September 30, 2011
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Three months ended September 30, 2010
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Breeding
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Feed
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Food
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Breeding
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Feed
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Food
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|||||||||||||||||||
Selling Unit
|
Unit
|
Unit
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Unit
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Unit
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Unit
|
Unit
|
||||||||||||||||||
Breeding Unit
|
$ | — | $ | — | $ | 85 | $ | — | $ | — | $ | 80,393 | ||||||||||||
Feed Unit
|
3,188,662 | — | — | 3,424,370 | — | — | ||||||||||||||||||
Food unit
|
— | — | — | — | — | — | ||||||||||||||||||
|
$ | 3,188,662 | $ | — | $ | 85 | $ | 3,424,370 | $ | — | $ | 80,393 |
|
Three months ended September 30,
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|||||||
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2011
|
2010
|
||||||
(unaudited)
|
(unaudited)
|
|||||||
Interest income
|
$ | (69,965 | ) | $ | (779 | ) | ||
Interest expense
|
415,398 | 456,123 | ||||||
Bank fees
|
(6,578 | ) | (5,338 | ) | ||||
Amortization of debt discount
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5,025 | 45,155 | ||||||
Imputed interest expense
|
— | 64,546 | ||||||
|
$ | 343,880 | $ | 559,707 |
|
September 30,
|
December 31,
|
December 31,
|
|||||||||
|
2011
|
2010
|
2009
|
|||||||||
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
Loans payable, current portion
|
$ | 13,461,689 | $ | 7,864,727 |
$
|
11,408,179
|
||||||
Loans payable, long term portion
|
8,284,931 | 11,016,050 |
2,249,997
|
|||||||||
|
||||||||||||
|
$ | 21,746,620 | $ | 18,880,777 |
$
|
13,658,176
|
October 1, 2011 to December 31, 2012
|
$ | 13,502,723 | ||
2013
|
5,514,295 | |||
2014
|
2,729,602 |
Nine months ended September 30,
|
Years ended December 31,
|
|||||||||||||||
2011
|
2010
|
2010
|
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(audited)
|
(audited)
|
|||||||||||||
Net cash generated from (used in) operating activities
|
$ | 588,289 | $ | (2,108,484 | ) | $ | 2,196,995 | $ | (6,734,624 | ) | ||||||
Net cash used in investing activities
|
(1,852,710 | ) | (4,547,570 | ) | (8,778,048 | ) | (2,705,553 | ) | ||||||||
Net cash provided by financing activities
|
1,850,900 | 6,744,348 | 7,951,559 | 9,350,833 | ||||||||||||
Effect of exchange rate difference on cash and cash equivalents
|
(79,140 | ) | 13,884 | (45,579 | ) | 1,673 | ||||||||||
Cash and cash equivalents, beginning of period
|
1,930,319 | 605,392 | 605,392 | 693,063 | ||||||||||||
Cash and cash equivalents, end of period
|
2,437,658 | 707,570 | 1,930,319 | 605,392 |
Total
|
< 1 year
|
1-3 years
|
3-4 Years
|
> 5 years
|
||||||||||||||||
September 30, 2011:
|
||||||||||||||||||||
Debt
|
$ | 21,746,620 | $ | 13,461,689 | $ | 8,284,931 | $ | — | $ | — | ||||||||||
Operating Leases (1)
|
— | — | — | — | — | |||||||||||||||
$ | 21,746,620 | $ | 13,461,689 | $ | 8,284,931 | $ | — | $ | — | |||||||||||
December 31, 2010:
|
||||||||||||||||||||
Debt
|
$ | 18,880,777 | $ | 7,864,727 | $ | 11,016,050 | $ | — | $ | — | ||||||||||
Operating Leases (1)
|
— | — | — | — | — | |||||||||||||||
$ | 18,880,777 | $ | 7,864,727 | $ | 11,016,050 | $ | — | $ | — | |||||||||||
December 31, 2009:
|
||||||||||||||||||||
Debt
|
$ | 13,658,176 | $ | 11,408,179 | $ | 2,223,874 | $ | 26,123 | $ | — | ||||||||||
Operating Leases (1)
|
— | — | — | — | — | |||||||||||||||
$ | 13,658,176 | $ | 11,408,179 | $ | 2,223,874 | $ | — | $ | — |
(1)
|
Taiyang leases certain of its facilities pursuant to non-cancellable lease agreements expiring at various times through 2037. The amount of rent on these facilities is not fixed, but is based on the government stipulated market price of grains multiplied by the grain yield per area. Because future rents on these facilities depend upon unknown future market and production factors, the amount of future commitment cannot be quantified.
|
|
|
Renminbi per U.S. Dollar Noon Buying Rate
|
|
|||||||||||||
|
|
Average(1)
|
|
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High
|
|
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Low
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|
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Period-End
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|
||||
Year ended December 31, 2009
|
|
|
6.8295
|
|
|
|
6.8470
|
|
|
|
6.8244
|
|
|
|
6.8259
|
|
Year ended December 31, 2010
|
|
|
6.7696
|
|
|
|
6.8330
|
|
|
|
6.6000
|
|
|
|
6.6000
|
|
Year ended December 31, 2011
|
|
|
6. 4725
|
|
|
|
6.6364
|
|
|
|
6. 2939
|
|
|
|
6. 2939
|
|
(1)
|
Annual averages are calculated from month-end rates. Monthly and interim period averages are calculated using the average of the daily rates during the relevant period.
|
Production equipment
|
3-10 years
|
Transportation equipment
|
5-10 years
|
Office furniture and equipment
|
5 years
|
Building and building improvements
|
10-20 years
|
·
|
Breeding Unit – breeds, hatches, and cultivates ducklings for resale and processing by food processing unit;
|
|
·
|
Feed Unit – produces duck feed for internal use and external sale; and
|
|
·
|
Food Processing Unit – processes ducklings into frozen raw food product for commercial resale.
|
|
2010
|
2009
|
||||||
Breeding Unit
|
$ | 12,592,738 | $ | 7,704,942 | ||||
Feed Unit
|
13,886,122 | 50,592 | ||||||
Food unit
|
15,206,128 | 21,104,165 | ||||||
|
$ | 41,684,988 | $ | 28,859,699 |
|
Buying Unit
|
|||||||||||||||||||||||
Year Ended December 31, 2010
|
Year Ended December 31, 2009
|
|||||||||||||||||||||||
Breeding
|
Feed
|
Food
|
Breeding
|
Feed
|
Food
|
|||||||||||||||||||
Selling Unit
|
Unit
|
Unit
|
Unit
|
Unit
|
Unit
|
Unit
|
||||||||||||||||||
Breeding Unit
|
$ | — | $ | — | $ | 218,016 | $ | — | $ | — | $ | — | ||||||||||||
Feed Unit
|
13,241,455 | — | — | 12,387,362 | — | — | ||||||||||||||||||
Food unit
|
— | 8,681 | — | 51,137 | — | — | ||||||||||||||||||
|
$ | 13,241,455 | $ | 8,681 | $ | 218,016 | $ | 12,438,499 | $ | — | $ | — |
· | Notice Relating to Taxes Applicable to Foreign Investment Enterprises / Foreign Enterprises and Foreign Nationals in Relation to Dividends and Gains obtained from Holding and Transferring of Shares promulgated by State Tax Bureau on July 21, 1993; | |
· | Amendments to the Income Tax Law Applicable to Individuals of the PRC promulgated by Standing Committee of the National People’s Congress (“NPC”) on October 31, 1993; | |
· | Notice on Relevant Policies Concerning Individual Income Tax issued by Ministry of Finance and the State Tax Bureau on May 13, 1994; | |
· | Notice on Reduction of Income Tax in Relation to Interests and Gains Derived by Foreign Enterprises from the PRC, promulgated by the State Council on November 18, 2000; and | |
· | Enterprise Income Tax Law of the PRC (“New EIT Law”) issued by NPC on March 16, 2007, which came into effect on January 1, 2008. |
·
|
According to the written certificate issued by the Development Zone Branch of State Taxation Bureau in Ningguo City on April 29, 2010, the feed products of Taiyang are exempted from value added tax; and
|
|
·
|
In accordance with the Provisional Regulations on value added tax, duck seedlings and duck eggs produced by Taiyang are classified as farm produce which are exempted from value added tax.
|
(a)
|
Procedures for establishment of a WFOE
|
|
The establishment of a WFOE will have to be approved by the MOFCOM (or its delegated authorities). If two or more foreign investors jointly apply for the establishment of a WFOE, a copy of the contract between the parties must also be submitted to the MOFCOM (or its delegated authorities) for its record. A WFOE must also obtain a business license from the SAIC before it can commence business.
|
(b)
|
Nature
|
|
A WFOE is a limited liability company under the Foreign Enterprises Law. It is a legal person which may independently assume civil obligations, enjoy civil rights and has the right to own, use and dispose of property. It is required to have a registered capital contributed by the foreign investor(s). The liability of the foreign investor(s) is limited to the amount of registered capital contributed. A foreign investor may make its contributions by installments and the registered capital must be contributed within the period as approved by the MOFCOM (or its delegated authorities) in accordance with relevant regulations.
|
||
(c)
|
Profit distribution
|
|
The Foreign Enterprise Law provides that after payment of taxes, a WFOE must make contributions to a reserve fund, an enterprise development fund and an employee bonus and welfare fund. The allocation ratio for the employee bonus and welfare fund may be determined by the enterprise. However, at least 10% of the after tax profits must be allocated to the reserve fund. If the cumulative total of allocated reserve funds reaches 50% of an enterprise’s registered capital, the enterprise will not be required to make any additional contribution. The reserve fund may be used by a WFOE to make up its losses and with the consent of the examination and approval authority, can also be used to expand its production operations and to increase its capital. The enterprise is prohibited from distributing dividends unless the losses (if any) of previous years have been made up. The development fund is used for expanding the capital base of the company by way of capitalization issues. The employee bonus and welfare fund can only be used for the collective benefit and facilities of the employees of the WFOE.
|
(i)
|
Encouraged Category. There are various incentives and preferential treatments for “encouraged” projects, mainly tax exemptions and rebates. Most foreign investment projects in the “encouraged” sector are allowed to take the form of WFOE;
|
|
(ii)
|
Permitted Category. Sectors not listed therein belong to the “permitted” category and they are determined by the rule of exception. Therefore, unless the items are transferred among the “encouraged”, “restricted” and “prohibited” categories, any addition to or deletion from the “encourage”, “restricted” and “prohibited” categories would consequently affect the scope of the “permitted” category. Like those in the “encouraged” sector, foreign investment projects in the “permitted” sector are allowed to take the form of WFOE. However, they are generally not eligible for extra incentives and preferential treatments;
|
|
(iii)
|
Restricted Category. There are stricter approvals or filing requirements for “restricted” projects. Furthermore, foreign investment projects in the “restricted” sectors may be required to take the form of Joint Venture. The foreign investors may only hold a minority interest in the investment projects; and
|
|
(iv)
|
Prohibited Category. Foreign investments are not allowed in these sectors.
|
Location
|
Principal Activities
|
Land Area (m2)
|
Land Use Rights
|
Lease
Expiration Date
|
||||
No. 88 Eastern Outer Ring Road, Ningguo City
|
|
Principal executive office and food processing plant
|
|
113,112
|
|
Direct
|
|
n/a
|
Bali Village
|
|
Feed plant
|
|
28,800
|
|
Direct
|
|
n/a
|
Bali Village
|
|
Incubation center
|
|
77,013
|
|
Direct
|
|
n/a
|
Nanshan Village
|
|
Breeding center #1
|
|
1,467
|
|
Leased
|
|
April 2017
|
No. 72 Industrial Road, Ningguo City
|
|
Original Breeding Center
|
|
24,437
|
|
Direct
|
|
n/a
|
Bali Village
|
|
Breeding center #1
|
|
18,251
|
|
Direct
|
|
n/a
|
Xia Village
|
|
Breeding center #3
|
|
18,386
|
|
Leased
|
|
May 2024
|
Jilin Village
|
|
Breeding center #4
|
|
35,153
|
|
Leased
|
|
June 2025
|
Xia Village
|
|
Breeding center #5
|
|
26,666
|
|
Leased
|
|
June 2037
|
Meilin Town Bridge Village
|
|
Breeding center #6
|
|
171,752
|
|
Leased
|
|
December 2028
|
Meilin Town Bridge Village
|
|
Breeding center #7
|
|
79,793
|
|
Leased
|
|
June 2029
|
Farm Village
|
|
Breeding center #8
|
|
166,665
|
|
Leased
|
|
September 2060
|
Bali Village
|
|
Grandparent Farm
|
|
10,384
|
|
Direct
|
|
n/a
|
Name
|
Age
|
Position
|
||
Wu Qiyou
|
43
|
Chief Executive Officer and Chairman of the Board of Directors
|
||
David Dodge
|
36
|
Chief Financial Officer
|
||
Chen Beihuang
|
42
|
Vice General Manager and Director
|
||
Han Jialiang
|
46
|
Financial Controller and Director
|
||
He Zhiwei
|
45
|
Director
|
||
James J. Keil
|
84
|
Director
|
1.
|
any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
|
|
2.
|
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
3.
|
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
|
|
4.
|
being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
|
5.
|
being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
6.
|
being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
Name & Principal Position
|
Year
|
Salary
|
Bonus
|
Stock Awards
|
Option Awards
|
Non-Equity Incentive Plan Compen- sation
|
Change in Pension Value and Non-Qualified Deferred Compen- sation Earnings
|
All Other Compen- sation
|
Total
|
|||||||||
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||
Wu Qiyou (a)
|
2010
|
13,749
|
—
|
—
|
—
|
—
|
—
|
—
|
13,749
|
|||||||||
|
2009
|
13,111
|
—
|
—
|
—
|
—
|
—
|
—
|
13,111
|
|||||||||
Richard B. Frost (b)
|
2010
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||
|
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(a)
|
Mr. Wu was appointed as CEO and Chairman of the Board of Directors on November 10, 2010.
|
|
(b)
|
Mr. Frost resigned as our Chief Executive Officer and President on November 10, 2010.
|
|
September 30,
|
December 31,
|
December 31,
|
|||||||||
|
2011
|
2010
|
2009
|
|||||||||
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
Due from Wu Qiyou
|
$ | — | $ | — | $ | 735,861 | ||||||
Due from Chen Beihuang
|
— | — | 585 | |||||||||
Due from Wu Qida
|
— | — | 29,252 | |||||||||
|
$ | — | $ | — | $ | 765,698 |
|
September 30,
|
December 31,
|
December 31,
|
|||||||||
|
2011
|
2010
|
2009
|
|||||||||
(unaudited)
|
(audited)
|
(audited)
|
||||||||||
Due to Wu Qiyou
|
$ | — | $ | 30,249 | $ | — | ||||||
Due to Taiyang Biological Corporation
|
— | — | 190,166 | |||||||||
|
||||||||||||
|
$ | — | $ | 30,249 | $ | 190,166 |
|
|
Chen
|
|
|
||||||||||||
|
Wu Qiyou
|
Beihuang
|
Wu Qida
|
Total
|
||||||||||||
Balance due (to) from as of December 31, 2008
|
$ | 613,802 | $ | 12,839 | $ | — | $ | 626,641 | ||||||||
Loans to related party
|
325,637 | 16,007 | 29,237 | 370,881 | ||||||||||||
Repayments from related party
|
(205,169 | ) | (28,286 | ) | — | (233,455 | ) | |||||||||
Currency translation difference
|
1,591 | 25 | 15 | 1,631 | ||||||||||||
|
||||||||||||||||
Balance due (to) from as of December 31, 2009
|
735,861 | 585 | 29,252 | 765,698 | ||||||||||||
|
||||||||||||||||
Loans to related party
|
1,734,976 | 140,365 | 708 | 1,876,049 | ||||||||||||
Repayments from related party
|
(2,506,692 | ) | (140,955 | ) | (30,212 | ) | (2,677,859 | ) | ||||||||
Currency translation difference
|
5,606 | 5 | 252 | 5,863 | ||||||||||||
|
||||||||||||||||
Balance due (to) from as of December 31, 2010
|
$ | (30,249 | ) | $ | — | $ | — | $ | (30,249 | ) |
|
Wu
|
Chen
|
Wu
|
|
||||||||||||
|
Qiyou
|
Beihuang
|
Qida
|
Total
|
||||||||||||
Balance due (to) from as of December 31, 2010
|
$ | (30,249 | ) | $ | — | $ | — | $ | (30,249 | ) | ||||||
Loans to related party
|
616,726 | 10,326 | — | 627,052 | ||||||||||||
Repayments from related party
|
(712,741 | ) | (10,326 | ) | — | (723,067 | ) | |||||||||
Currency translation difference
|
(2,559 | ) | — | — | (2,559 | ) | ||||||||||
|
||||||||||||||||
Balance due (to) from as of September 30, 2011
|
$ | (128,823 | ) | $ | — | $ | — | $ | (128,823 | ) | ||||||
Balance due (to) from as of December 31, 2009
|
$ | 735,861 | $ | 585 | $ | 29,252 | $ | 765,698 | ||||||||
Loans to related party
|
1,316,384 | 138,268 | 704 | 1,455,356 | ||||||||||||
Repayments from related party
|
(887,775 | ) | (138,855 | ) | — | (1,026,630 | ) | |||||||||
Currency translation difference
|
22,852 | 2 | (97 | ) | 22,757 | |||||||||||
|
||||||||||||||||
Balance due (to) from as of September 30, 2010
|
$ | 1,187,322 | $ | — | $ | 29,859 | $ | 1,217,181 |
●
|
each person who is known by us to beneficially own more than 5% of our common stock;
|
●
|
each of our named executive officers and directors; and
|
●
|
all of our officers and directors as a group.
|
NAME AND ADDRESS
OF OWNER (1)
|
TITLE OF
CLASS
|
NUMBER OF
SHARES OWNED (2)
|
PERCENTAGE OF CLASS PRIOR TO
OFFERING (3)
|
PERCENTAGE OF CLASS AFTER
OFFERING (4)
|
||||||||
|
|
|
|
|
||||||||
Wu Qiyou (5)
|
Common Stock
|
0 | * | * | ||||||||
|
||||||||||||
Chen Beihuang (5)
|
Common Stock
|
0 | * | * | ||||||||
|
||||||||||||
Han Jialiang
|
Common Stock
|
0 | * | * | ||||||||
|
|
|||||||||||
He Zhiwei
|
Common Stock
|
0 | * | * | ||||||||
|
|
|||||||||||
James J. Keil
|
Common Stock
|
0 | * | * | ||||||||
|
|
|||||||||||
David Dodge
|
Common Stock
|
0 | * | * | ||||||||
|
|
|||||||||||
All Officers and Directors as a Group (6 persons)
|
Common Stock
|
0 | * | * | ||||||||
Firm Success International, Ltd. (5)
|
Common Stock
|
4,686,990 | 44.89 | % | 40.47 | % | ||||||
Zhang Jingjie
|
Common Stock
|
560,726 | 5.37 | % | 4.84 | % |
·
|
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
·
|
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;
|
·
|
settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
|
·
|
in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;
|
·
|
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
|
·
|
a combination of any such methods of sale; or
|
·
|
any other method permitted pursuant to applicable law.
|
|
Beneficial Ownership Prior to this Offering (1)
|
|
|
|
Beneficial Ownership After this Offering (2)
|
|
|||||||
Selling Stockholder
|
Number of
Shares
|
Percent
of Class
|
|
Shares That May be Offered and Sold Hereby
|
|
Number of
Shares
|
|
Percent
of Class
|
|
||||
Roger Conan
|
25,000
|
*
|
25,000
|
(24)
|
0
|
0%
|
|
||||||
Michael & Sheila Carroll JTWROS
|
93,750
|
*
|
93,750
|
(24)
|
0
|
0%
|
|
||||||
Juan Aguilar
|
16,875
|
*
|
16,875
|
(24)
|
0
|
0%
|
|
||||||
Steven Kaye
|
10,000
|
*
|
10,000
|
(24)
|
0
|
0%
|
|
||||||
Pamela Chan TOD
|
20,000
|
*
|
20,000
|
(24)
|
0
|
0%
|
|
||||||
S. Alexi Gitter
|
20,000
|
*
|
20,000
|
(24)
|
0
|
0%
|
|
||||||
James & Joanne Shapland JTWROS
|
20,000
|
*
|
20,000
|
(24)
|
0
|
0%
|
|
||||||
Richard & Michelle Starkey JTWROS
|
20,000
|
*
|
20,000
|
(24)
|
0
|
0%
|
|
||||||
Nina M. Dougar Defined Benefit Plan, Nina M. Dougar TTEE
|
30,000
|
*
|
30,000
|
(24)
|
0
|
0%
|
|
||||||
Timothy and Annette Kane JTWROS
|
30,000
|
*
|
30,000
|
(24)
|
0
|
0%
|
|
||||||
Sterne Agee & Leach Inc C/F Ermina Curcio SEP IRA
|
20,000
|
*
|
20,000
|
(24)
|
0
|
0%
|
|
||||||
Michael Rieber
|
125,000
|
1.19%
|
125,000
|
(24)
|
0
|
0%
|
|
||||||
Sterne Agee & Leach Inc C/F Roger K. Cady R/O IRA
|
30,000
|
*
|
30,000
|
(24)
|
0
|
0%
|
|
||||||
Gross Foundation Inc. (3)
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
Claus Skrumsager
|
125,000
|
1.19%
|
125,000
|
(24)
|
0
|
0%
|
|
||||||
Bohdan Chaban
|
100,000
|
*
|
100,000
|
(24)
|
0
|
0%
|
|
||||||
Goodway Technologies Corp. (4)
|
30,000
|
*
|
30,000
|
(24)
|
0
|
0%
|
|
||||||
Chris Nicolaes
|
27,500
|
*
|
27,500
|
(24)
|
0
|
0%
|
|
||||||
Richard Levine
|
15,625
|
*
|
15,625
|
(24)
|
0
|
0%
|
|
||||||
Rama Subramaniam
|
62,500
|
*
|
62,500
|
(24)
|
0
|
0%
|
|
BWCI Pension Trustees Limited as Trustees of the Deferred Retirement Annuity Trust Scheme a/c BWCI 1123/055 (5)
|
187,500
|
1.79%
|
187,500
|
(24)
|
0
|
0%
|
|
||||||
Thomas & Suzanne Hansbauer TOD JTWROS
|
15,000
|
*
|
15,000
|
(24)
|
0
|
0%
|
|
||||||
Jordeline Inc. (6)
|
62,500
|
*
|
62,500
|
(24)
|
0
|
0%
|
|
||||||
Jeff Tarumianz
|
18,750
|
*
|
18,750
|
(24)
|
0
|
0%
|
|
||||||
Jeffrey Jakubiak Revocable Living Trust
|
125,000
|
1.19%
|
125,000
|
(24)
|
0
|
0%
|
|
||||||
The Squan LLC (7)
|
250,000
|
2.38%
|
250,000
|
(24)
|
0
|
0%
|
|
||||||
Scott Boggio
|
45,830
|
*
|
45,830
|
(25)
|
0
|
0%
|
|
||||||
Meltronics Resources Partners (8)
|
91,665
|
*
|
91,665
|
(26)
|
0
|
0%
|
|
||||||
Richard Cohen
|
137,500
|
1.32%
|
137,500
|
(27)
|
0
|
0%
|
|
||||||
Guy Billups
|
183,330
|
1.75%
|
183,330
|
(28)
|
0
|
0%
|
|
||||||
Roderic L. Prat
|
275,000
|
2.63%
|
275,000
|
(29)
|
0
|
0%
|
|
||||||
Walter Billups
|
91,665
|
*
|
91,665
|
(26)
|
0
|
0%
|
|
||||||
Michael Powell
|
156,250
|
1.49%
|
156,250
|
(24)
|
0
|
0%
|
|
||||||
Kathleen Kern
|
62,500
|
*
|
62,500
|
(24)
|
0
|
0%
|
|
||||||
Chestnut Ridge Partners, LP (9)
|
187,500
|
1.79%
|
187,500
|
(24)
|
0
|
0%
|
|
||||||
Andrew Black
|
46,875
|
*
|
46,875
|
(24)
|
0
|
0%
|
|
||||||
John & Kathleen Ullmann JTWROS
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
Paul Egeland
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
Mark J. Brosso
|
91,665
|
*
|
91,665
|
(26)
|
0
|
0%
|
|
||||||
Charles L. Weidner TTEE & Alice N. Barrett Weidner TTEE FBO The Weidner Family Revocable Trust DTD 8/13/7
|
15,625
|
*
|
15,625
|
(24)
|
0
|
0%
|
|
||||||
Paul Van de Ven
|
7,425
|
*
|
7,425
|
(24)
|
0
|
0%
|
|
||||||
Dale R. Broughton
|
4,800
|
*
|
4,800
|
(24)
|
0
|
0%
|
|
||||||
Tom Ayala
|
2,500
|
*
|
2,500
|
(24)
|
0
|
0%
|
|
||||||
Sterne Agee & Leach Inc C/F Dale R. Broughton IRA
|
2,475
|
*
|
2,475
|
(24)
|
0
|
0%
|
|
||||||
Neil T. Anderson
|
91,665
|
*
|
91,665
|
(26)
|
0
|
0%
|
|
||||||
Emmanuel Baud
|
3,695
|
*
|
3,695
|
(24)
|
0
|
0%
|
|
||||||
Paul E. Taboada
|
30,000
|
*
|
30,000
|
(24)
|
0
|
0%
|
|
||||||
Elsie S. Taboada
|
15,000
|
*
|
15,000
|
(24)
|
0
|
0%
|
|
||||||
Fortbenton Laboratories S.A. Inc. (10)
|
218,750
|
2.09%
|
218,750
|
(24)
|
0
|
0%
|
|
||||||
Mike Mackie
|
2,065
|
*
|
2,065
|
(24)
|
0
|
0%
|
|
||||||
Gavin Young
|
4,950
|
*
|
4,950
|
(24)
|
0
|
0%
|
|
||||||
Cranshire Capital LP (11)
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
Carl Azar
|
15,000
|
*
|
15,000
|
(24)
|
0
|
0%
|
|
||||||
Alpha Capital Anstalt (12)
|
368,750
|
3.52%
|
368,750
|
(24)
|
0
|
0%
|
|
||||||
Whalehaven Capital Fund Limited (13)
|
450,000
|
4.29%
|
450,000
|
(24)
|
0
|
0%
|
|
||||||
Osher Capital (14)
|
50,000
|
*
|
50,000
|
0
|
0%
|
|
|||||||
Ken Winfield
|
6,250
|
*
|
6,250
|
(24)
|
0
|
0%
|
|
||||||
Daniel T. Guilfoile
|
56,329
|
*
|
56,329
|
(30)
|
0
|
0%
|
|
||||||
Laidlaw & Company (UK) Ltd. (15)
|
157,776
|
1.50%
|
157,776
|
(31)
|
0
|
0%
|
|
||||||
Adventure Ventures LLC (16)
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
4246691 Canada Inc. (17)
|
15,610
|
*
|
15,610
|
(24)
|
0
|
0%
|
|
||||||
Lance Friedman
|
61,069
|
*
|
61,069
|
(32)
|
0
|
0%
|
|
||||||
Eric Van Hoof SPRL (18)
|
4,625
|
*
|
4,625
|
(24)
|
0
|
0%
|
|
||||||
Denis O’Brien
|
156,250
|
1.49%
|
156,250
|
(24)
|
0
|
0%
|
|
||||||
Carlos Castillo, Jr.
|
250,000
|
2.38%
|
250,000
|
(24)
|
0
|
0%
|
|
Scott J. Sokol
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
Oliver Takacs
|
62,500
|
*
|
62,500
|
(24)
|
0
|
0%
|
|
||||||
Bemasek Holdings Limited (20)
|
312,500
|
2.98%
|
312,500
|
(24)
|
0
|
0%
|
|
||||||
Joseph A. Cox, III
|
31,250
|
*
|
31,250
|
(24)
|
0
|
0%
|
|
||||||
John B. Burt
|
334
|
*
|
334
|
0
|
0%
|
|
|||||||
Richard T. Burt
|
5,001
|
*
|
5,001
|
0
|
0%
|
|
|||||||
Nathan W. Dean and Mary F. Dean, JTWROS
|
6,667
|
*
|
6,667
|
0
|
0%
|
|
|||||||
Rachel Frost
|
334
|
*
|
334
|
0
|
0%
|
|
|||||||
Richard B. Frost
|
68,334
|
*
|
68,334
|
0
|
0%
|
|
|||||||
Armen Guendjoian and Beth Guendjoianm, JTWROS
|
334
|
*
|
334
|
0
|
0%
|
|
|||||||
Bert L. Gusrae
|
35,000
|
*
|
35,000
|
0
|
0%
|
|
|||||||
Wendy Tand Gusrae
|
334
|
*
|
334
|
0
|
0%
|
|
|||||||
Dianne S. Kennedy
|
8,334
|
*
|
8,334
|
0
|
0%
|
|
|||||||
Teddy Klinghoffer and Sherri Klinghoffer, Ten Ent
|
667
|
*
|
667
|
0
|
0%
|
|
|||||||
Steven Lach
|
3,267
|
*
|
3,267
|
0
|
0%
|
|
|||||||
Alicia M. LaSala
|
51,670
|
*
|
51,670
|
0
|
0%
|
|
|||||||
Rebecca N. Lozano
|
8,334
|
*
|
8,334
|
0
|
0%
|
|
|||||||
Roslyn K. Malmaud
|
334
|
*
|
334
|
0
|
0%
|
|
|||||||
Frank Pellegrino
|
33,334
|
*
|
33,334
|
0
|
0%
|
|
|||||||
Mark Robson
|
334
|
*
|
334
|
0
|
0%
|
|
|||||||
Alan D. Sackrin
|
3,334
|
*
|
3,334
|
0
|
0%
|
|
|||||||
Alfred Schiffrin
|
50,000
|
*
|
50,000
|
0
|
0%
|
|
|||||||
C. Leo Smith
|
37,734
|
*
|
37,734
|
0
|
0%
|
|
|||||||
Lee V. Twyford
|
667
|
*
|
667
|
0
|
0%
|
|
|||||||
Buff Trust
|
32,453
|
*
|
32,453
|
(33)
|
0
|
0%
|
|
||||||
Garnet Trust
|
32,453
|
*
|
32,453
|
(33)
|
0
|
0%
|
|
||||||
Laidlaw Holdings Plc (21)
|
10,256
|
*
|
10,256
|
(33)
|
0
|
0%
|
|
||||||
Craig Bonn
|
263
|
*
|
263
|
(33)
|
0
|
0%
|
|
||||||
Robert N Rotunno
|
175
|
*
|
175
|
(33)
|
0
|
0%
|
|
||||||
Robert J Bonaventura
|
777
|
*
|
777
|
(33)
|
0
|
0%
|
|
||||||
Hugh J. Marasa Jr.
|
777
|
*
|
777
|
(33)
|
0
|
0%
|
|
||||||
Joseph Fedorko
|
3,360
|
*
|
3,360
|
(33)
|
0
|
0%
|
|
||||||
Stephen Hamilton
|
4,460
|
*
|
4,460
|
(33)
|
0
|
0%
|
|
||||||
Bruce Porter
|
1,050
|
*
|
1,050
|
(33)
|
0
|
0%
|
|
||||||
Peter Malone
|
333
|
*
|
333
|
(33)
|
0
|
0%
|
|
||||||
Evan Stern
|
332
|
*
|
332
|
(33)
|
0
|
0%
|
|
||||||
Francis R. Smith
|
3,500
|
*
|
3,500
|
(33)
|
0
|
0%
|
|
||||||
Ryan Turcotte
|
2,000
|
*
|
2,000
|
(33)
|
0
|
0%
|
|
||||||
Charles Morgan Securities, Inc. (22)
|
2,460
|
*
|
2,460
|
(33)
|
0
|
0%
|
|
||||||
Corinthian Partners, LLC (23)
|
7,000
|
*
|
7,000
|
(33)
|
0
|
0%
|
|
||||||
Brian Schantz
|
1,200
|
*
|
1,200
|
(33)
|
0
|
0%
|
|
||||||
Edward Flynn
|
1,200
|
*
|
1,200
|
(33)
|
0
|
0%
|
|
||||||
Lewis Mason
|
3,200
|
*
|
3,200
|
(33)
|
0
|
0%
|
|
||||||
Harvey Kohn
|
3,200
|
*
|
3,200
|
(33)
|
0
|
0%
|
|
||||||
Brian Frank
|
3,200
|
*
|
3,200
|
(33)
|
0
|
0%
|
|
||||||
Christopher K. Henderson
|
2,000
|
*
|
2,000
|
(33)
|
0
|
0%
|
|
||||||
Mitch Manoff
|
11,500
|
*
|
11,500
|
(33)
|
0
|
0%
|
|
||||||
Richard Calabrese
|
11,500
|
*
|
11,500
|
(33)
|
0
|
0%
|
|
Li Bogang
|
59,046
|
*
|
59,046
|
0
|
0%
|
|
|||||||
Xu Tie
|
1,869
|
*
|
1,869
|
0
|
0%
|
|
|||||||
Zhang Jingjie
|
560,726
|
5.37%
|
560,726
|
0
|
0%
|
|
|||||||
Yang Hao
|
9,460
|
*
|
9,460
|
0
|
0%
|
|
|||||||
Chang Yengfang
|
9,460
|
*
|
9,460
|
0
|
0%
|
|
|||||||
Mara Jacobs
|
25,000
|
*
|
25,000
|
0
|
0%
|
|
|||||||
Mark Sourian
|
25,000
|
*
|
25,000
|
0
|
0%
|
|
|||||||
Silvano Marchetto
|
50,000
|
*
|
50,000
|
0
|
0%
|
|
|||||||
TOTALS
|
6,627,696
|
57.22%
|
6,627,696
|
0
|
0%
|
|
* Less than 1%.
|
||
(1)
|
Percentage calculated on the basis of 10,440,033 shares of common stock outstanding on January 9, 2012 .
|
|
|
|
|
(2)
|
Percentage calculated on the basis of 11,582,429 shares of common stock outstanding upon the completion of this offering and assumes the sale of all shares of common stock registered pursuant to this prospectus, although the selling stockholders are under no obligations known to us to sell any shares of common stock at this time.
|
|
|
|
|
(3)
|
Chiam Gross has voting and investment control over shares held by this entity.
|
|
|
|
|
(4)
|
Timothy Kane has voting and investment control over shares held by this entity.
|
|
|
|
|
(5)
|
G. P. McGee and P. N. Hanna have voting and investment control over shares held by this entity.
|
|
|
|
|
(6)
|
Richard Pilosof has voting and investment control over shares held by this entity.
|
|
|
|
|
(7)
|
Jeffrey Jakubiak has voting and investment control over shares held by this entity.
|
|
|
|
|
(8)
|
Paul Melchiorne has voting and investment control over shares held by this entity.
|
|
|
|
|
(9)
|
Kenneth Pasternak has voting and investment control over shares held by this entity.
|
|
|
|
|
(10)
|
Laura E. Smith has voting and investment control over shares held by this entity.
|
|
|
|
|
(11)
|
Downsview Capital, Inc. (“Downsview”) is the general partner of Cranshire Capital, L.P. (“Cranshire”) and consequently has voting control and investment discretion over securities held by Cranshire. Mitchell P. Kopin (“Mr. Kopin”), President of Downsview, has voting control over Downsview. As a result of the foregoing, each of Mr. Kopin and Downsview may be deemed to have beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended) of the shares of common stock beneficially owned by Cranshire.
|
|
|
|
|
(12)
|
Konrad Ackerman has voting and investment control over shares held by this entity.
|
|
|
|
|
(13)
|
Eric Weisblum has voting and investment control over shares held by this entity.
|
|
(14)
|
Ari Kluger has voting and investment control over shares held by this entity.
|
|
|
|
|
(15)
|
Hugh Regan has voting and investment control over shares held by this entity.
|
|
|
|
|
(16)
|
Ari Kluger has voting and investment control over shares held by this entity.
|
|
|
|
|
(17)
|
Michael Quinn has voting and investment control over shares held by this entity.
|
|
|
|
|
(18)
|
Eric Van Hoof has voting and investment control over shares held by this entity.
|
|
|
|
|
(19)
|
[RESERVED]
|
|
|
|
|
(20)
|
Valeris Huxley has voting and investment control over shares held by this entity.
|
|
|
|
|
(21)
|
Hugh Regan has voting and investment control over shares held by this entity.
|
|
|
|
|
(22)
|
Paul E. Taboada has voting and investment control over shares held by this entity.
|
|
|
|
|
(23)
|
Richard Calabrese has voting and investment control over shares held by this entity.
|
|
|
|
|
(24)
|
20% of such total shares represent shares of common stock issuable upon exercise of warrants.
|
|
|
|
|
(25)
|
Includes 4,166 shares of common stock issuable upon exercise of warrants.
|
|
|
|
|
(26)
|
Includes 8,333 shares of common stock issuable upon exercise of warrants.
|
|
|
|
|
(27)
|
Includes 12,500 shares of common stock issuable upon exercise of warrants.
|
|
|
|
|
(28)
|
Includes 16,666 shares of common stock issuable upon exercise of warrants.
|
|
|
|
|
(29)
|
Includes 25,000 shares of common stock issuable upon exercise of warrants.
|
|
|
|
|
(30)
|
Includes 46,501 shares of common stock issuable upon exercise of warrants.
|
|
(31)
|
Includes 68,004 shares of common stock issuable upon exercise of warrants.
|
|
(32)
|
Includes 47,449 shares of common stock issuable upon exercise of warrants.
|
|
(33)
|
Represents shares of common stock issuable upon exercise of warrants.
|
For the Years Ended December 31, 2010 and 2009
|
|||
F-1
|
|||
F-2
|
|||
F-3
|
|||
F-4 to F-5
|
|||
F-6
|
|||
F-7 to F-51
|
|||
For the Three and Nine Months Ended September 30, 2011 and 2010
|
|||
F-52
|
|||
F-53
|
|||
F-54 to F-55
|
|||
F-56
|
|||
F-57 to F-98
|
/s/ SCHWARTZ LEVITSKY FELDMAN LLP
|
||
Toronto, Ontario, Canada
|
Chartered Accountants
|
|
April
14, 2011, except for notes 4, 14(b), 14(c), 22(b), 24, 25(b) and
|
Licensed Public Accountants
|
|
related
disclosures which is as of January 18, 2012
|
|
|
As of December 31,
|
|||||||
|
2010
|
2009
|
||||||
(Restated -
|
(Restated -
|
|||||||
|
see note 24)
|
see note 24)
|
||||||
ASSETS
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 1,930,319 | $ | 605,392 | ||||
Trade accounts receivable, net (note 3)
|
5,348,650 | 972,528 | ||||||
Loans receivable (note 4)
|
4,268,057 | 2,816,943 | ||||||
Inventories, net (note 5)
|
1,762,709 | 1,787,565 | ||||||
Prepaid and other current assets (note 6)
|
1,140,234 | 902,361 | ||||||
Proceeds receivable from sale of fertilizer plant (note 18)
|
889,174 | — | ||||||
Due from related parties (note 7)
|
— | 765,698 | ||||||
Total current assets
|
15,339,143 | 7,850,487 | ||||||
|
||||||||
Construction in progress (note 8)
|
5,634,476 | 5,605,197 | ||||||
Property, plant and equipment, net (note 8)
|
20,495,162 | 12,963,639 | ||||||
Land use rights (note 9)
|
10,660,988 | 10,545,893 | ||||||
Other long term assets (note 10)
|
1,808,384 | 654,680 | ||||||
Total assets
|
$ | 53,938,153 | $ | 37,619,896 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Current liabilities
|
||||||||
Trade accounts payable and accrued expenses (note 11)
|
$ | 3,413,393 | $ | 4,505,521 | ||||
Income tax payable (note 20)
|
703,098 | — | ||||||
Derivative financial instruments (note 12)
|
1,480,261 | — | ||||||
Other accounts payable (note 13)
|
4,542,855 | 4,551,145 | ||||||
Due to related parties (note 7)
|
30,249 | 190,166 | ||||||
Loans payable, current portion (note 14)
|
7,864,727 | 11,408,179 | ||||||
Total current liabilities
|
18,034,583 | 20,655,011 | ||||||
Loans payable, long term portion (note 14)
|
11,016,050 | 2,249,997 | ||||||
Total liabilities
|
29,050,633 | 22,905,008 | ||||||
Commitments and contingencies (note 22)
|
||||||||
Subsequent events (note 25)
|
||||||||
Stockholders’ equity
|
||||||||
Common stock, par value $0.001, 75,000,000 shares authorized, 9,865,033 and 510,423 shares issued and outstanding as of December 31, 2010 and 2009 respectively (note 16)
|
9,865 | 6,578 | ||||||
Additional paid-in capital
|
12,219,355 | 5,868,348 | ||||||
Appropriated retained earnings (note 21)
|
1,353,912 | 1,142,284 | ||||||
Unappropriated retained earnings
|
10,154,034 | 7,269,993 | ||||||
Accumulated other comprehensive income
|
1,150,354 | 427,685 | ||||||
Total equity
|
24,887,520 | 14,714,888 | ||||||
|
||||||||
Total liabilities and stockholders’ equity
|
$ | 53,938,153 | $ | 37,619,896 |
|
Years ended December 31,
|
|||||||
|
2010
|
2009
|
||||||
(Restated -
|
(Restated -
|
|||||||
see note 24)
|
see note 24)
|
|||||||
Revenues (note 19(b))
|
$ | 41,684,988 | $ | 28,859,699 | ||||
Cost of goods sold
|
32,521,474 | 24,670,485 | ||||||
|
||||||||
Gross Profit
|
9,163,514 | 4,189,214 | ||||||
|
||||||||
Sales and marketing expenses
|
45,919 | 55,425 | ||||||
General and administrative expenses
|
5,100,674 | 1,347,787 | ||||||
Operating profit
|
4,016,921 | 2,786,002 | ||||||
Loss on change in fair value of derivative financial instruments (note 12)
|
(287,868 | ) | — | |||||
Other income (expense) (note 18)
|
1,728,600 | (81,736 | ) | |||||
Subsidy income (note 15)
|
954,986 | 339,981 | ||||||
Interest expense, net (note 17)
|
(2,314,017 | ) | (554,924 | ) | ||||
|
||||||||
Income before income taxes
|
4,098,622 | 2,489,323 | ||||||
Income tax expense (note 20)
|
703,098 | — | ||||||
Net income for the year
|
$ | 3,395,524 | $ | 2,489,323 | ||||
Comprehensive income:
|
||||||||
Net income
|
$ | 3,395,524 | $ | 2,489,323 | ||||
Foreign currency translation adjustment
|
722,669 | 23,120 | ||||||
|
||||||||
Comprehensive income
|
$ | 4,118,193 | $ | 2,512,443 | ||||
Earnings per share:
|
||||||||
Basic and diluted (note 16)
|
$ | 0.45 | $ | 0.38 | ||||
Weighted average number of common shares outstanding:
|
||||||||
Basic and diluted (note 16)
|
7,480,698 | 6,577,551 |
|
Years ended December 31,
|
|||||||
|
2010
|
2009
|
||||||
(Restated -
|
(Restated -
|
|||||||
|
see note 24)
|
see note 24)
|
||||||
Cash provided (used for):
|
||||||||
Operating activities:
|
||||||||
Net income for the year
|
$ | 3,395,524 | $ | 2,489,323 | ||||
Items not affecting cash:
|
||||||||
Depreciation and amortization
|
1,217,812 | 741,845 | ||||||
Gain on sale of assets
|
(877,874 | ) | — | |||||
Amortization of debt discount
|
108,786 | 9,291 | ||||||
Imputed interest expense
|
273,290 | 5,142 | ||||||
Stock based compensation expense
|
2,081,122 | — | ||||||
Loss on change in fair value of derivative
|
287,868 | — | ||||||
Changes in non-cash working capital:
|
||||||||
Trade accounts receivable
|
(4,236,038 | ) | (919,760 | ) | ||||
Inventories
|
83,683 | 610,389 | ||||||
Prepaid and other current assets
|
(249,410 | ) | 1,323,222 | |||||
Due from related parties
|
772,306 | (137,425 | ) | |||||
Trade accounts payable and accrued expenses
|
(1,201,672 | ) | (10,137,301 | ) | ||||
Income tax payable
|
703,098 | — | ||||||
Due to related parties
|
(161,500 | ) | — | |||||
Deferred subsidy funds received
|
— | (719,350 | ) | |||||
Net cash provided by (used in) operating activities
|
2,196,995 | (6,734,624 | ) | |||||
|
||||||||
Investing activities:
|
||||||||
Cash proceeds from sale of fertilizer plant
|
3,051,256 | — | ||||||
Long term equity investment
|
(1,475,209 | ) | — | |||||
Deposits against equipment and land use rights
|
(585,529 | ) | — | |||||
Capitalized interest expense
|
(288,486 | ) | (321,981 | ) | ||||
Purchase of property and equipment
|
(9,480,080 | ) | (2,383,572 | ) | ||||
Net cash used in investing activities
|
(8,778,048 | ) | (2,705,553 | ) | ||||
|
||||||||
Financing activities:
|
||||||||
Advances under loans receivable
|
(1,321,719 | ) | (2,815,419 | ) | ||||
(Repayments) advances under loans payable
|
(160,218 | ) | 3,520,058 | |||||
Borrowings under bank loans payable
|
22,223,126 | 15,056,498 | ||||||
Repayments under bank loans payable
|
(17,554,988 | ) | (10,795,948 | ) | ||||
Borrowing under convertible loans payable
|
555,000 | — | ||||||
Repayments under convertible loans payable
|
(100,016 | ) | — | |||||
Repurchase treasury stock
|
(300,000 | ) | — | |||||
Capital investment, net of offering costs of $477,098 in 2010 and $Nil in 2009
|
4,610,374 | 4,385,644 | ||||||
Net cash provided by financing activities
|
7,951,559 | 9,350,833 | ||||||
Effect of exchange rate difference on cash and cash equivalents
|
(45,579 | ) | 1,673 | |||||
Net increase (decrease) in cash and cash equivalents
|
1,324,927 | (87,671 | ) | |||||
Cash and cash equivalents, beginning of period
|
605,392 | 693,063 | ||||||
Cash and cash equivalents, end of period
|
$ | 1,930,319 | $ | 605,392 |
|
Years ended December 31,
|
|||||||
|
2010
|
2009
|
||||||
Supplementary information:
|
||||||||
Interest and finance charges paid
|
$ | 3,015,599 | $ | 795,687 | ||||
Discount on convertible note payable
|
44,671 | — | ||||||
Value of shares issued to settle convertible debentures
|
549,984 | — | ||||||
Fair value of share allocated to warrant derivative at financing inception
|
1,192,393 | — |
|
|
|
Accumulated
|
|
||||||||||||||||||||||||
Additional
|
Appropriated
|
Unappropriated
|
Other
|
Total
|
||||||||||||||||||||||||
Common stock
|
Paid-in
|
Retained
|
Retained
|
Comprehensive
|
Stockholders’
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
|
Earnings
|
Income
|
Equity
|
||||||||||||||||||||||
Balance as at December 31, 2008
|
6,577,551 | $ | 6,578 | $ | 1,477,562 | $ | 680,702 | $ | 5,242,252 | $ | 404,565 | $ | 7,811,659 | |||||||||||||||
Capital contribution (note 16(f))
|
— | — | 4,385,644 | — | — | — | 4,385,644 | |||||||||||||||||||||
Imputed interest expense
|
— | — | 5,142 | — | — | — | 5,142 | |||||||||||||||||||||
Appropriation of statutory reserves (note 21)
|
— | — | — | 461,582 | (461,582 | ) | — | — | ||||||||||||||||||||
Net income for the year
|
— | — | — | — | 2,489,323 | — | 2,489,323 | |||||||||||||||||||||
Foreign currency translation adjustment for the year
|
— | — | — | — | — | 23,120 | 23,120 | |||||||||||||||||||||
Balance as at December 31, 2009
|
6,577,551 | 6,578 | 5,868,348 | 1,142,284 | 7,269,993 | 427,685 | 14,714,888 | |||||||||||||||||||||
Capital contribution (notes 1(a) and 12)
|
2,905,392 | 2,905 | 3,955,061 | — | — | — | 3,957,966 | |||||||||||||||||||||
Buy-back and retirement of treasury shares
|
(145,000 | ) | (145 | ) | — | — | (299,855 | ) | — | (300,000 | ) | |||||||||||||||||
Share issuance pursuant to recapitalization (note 1(a))
|
527,090 | 527 | (527 | ) | — | — | — | — | ||||||||||||||||||||
Discount on note payable (note 14(b))
|
— | — | 42,061 | — | — | — | 42,061 | |||||||||||||||||||||
Imputed interest expense
|
— | — | 273,290 | — | — | — | 273,290 | |||||||||||||||||||||
Stock based compensation expense (note 16(e))
|
— | — | 2,081,122 | — | — | — | 2,081,122 | |||||||||||||||||||||
Appropriation of statutory reserves (note 21)
|
— | — | — | 211,628 | (211,628 | ) | — | — | ||||||||||||||||||||
Net income for the year
|
— | — | — | — | 3,395,524 | — | 3,395,524 | |||||||||||||||||||||
Foreign currency translation adjustment for the year
|
— | — | — | — | — | 722,669 | 722,669 | |||||||||||||||||||||
Balance as at December 31, 2010
|
9,865,033 | $ | 9,865 | $ | 12,219,355 | $ | 1,353,912 | $ | 10,154,034 | $ | 1,150,354 | $ | 24,887,520 |
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
1.
|
Nature of Business Operations:
|
(a)
|
Business
|
The financial statements presented herein reflect the consolidated financial results as at December 31, 2010 and 2009 and for the years then ended of Anhui Taiyang Poultry Co., Inc. (“Parent” or the “Company”), its wholly owned subsidiaries Dynamic Ally Ltd. (“Dynamic Ally”) and Ningguo Taiyang Incubation Plant Co., Ltd. (“Ningguo”), and Anhui Taiyang Poultry Co., Ltd. (“Taiyang”), a variable interest entity controlled by the Company as a result of the agreements described below. All significant intercompany transactions and balances have been eliminated upon consolidation.
|
|
The Company was incorporated in the State of Delaware on April 7, 1999. Prior to January 20, 2011, the Company was called The Parkview Group, Inc. (“Parkview”). From inception through November 2010, the Company was in the business of providing management consulting services to corporate clients.
|
|
On November 10, 2010 (the “Closing Date” and the closing of the reverse merger transaction, the “Closing”), the Company executed and consummated a share exchange agreement by and among Dynamic Ally and the stockholders of 100% of Dynamic Ally’s common stock (the “Dynamic Ally Shareholders”), on the one hand, and the Company and certain holders of the Company’s issued and outstanding common stock (the “Representative Shareholders”) on the other hand (the “Share Exchange Agreement” and the transaction, the “Reverse Merger Transaction”).
|
|
In the Reverse Merger Transaction, Dynamic Ally’s shareholders exchanged all 10,000 issued and outstanding shares of Dynamic Ally for 6,577,551 newly issued shares of common stock of the Company. The exchange ratio used in the Reverse Merger Transaction was one share of Dynamic Ally for every 657.7551 shares of the Company. Upon completion of the Reverse Merger Transaction, Dynamic Ally became the Company’s wholly-owned subsidiary.
|
|
Dynamic Ally owns 100% of Ningguo, which is a wholly foreign owned enterprise (“WFOE”) under the laws of the People’s Republic of China (“China” or the “PRC”). On May 26, 2010, Ningguo entered into a series of contractual agreements with Taiyang, which effectively give Ningguo control over the operations of Taiyang. The agreements include (i) a Consulting Services Agreement whereby Ninnguo has the exclusive right to provide to Taiyang general services related to the current and proposed operations of Taiyang’s business, (ii) an Operating Agreement whereby Ninnguo provides guidance and instructions on Taiyang’s daily operations, financial management and employment issues, (iii) an Equity Pledge Agreement whereby the Taiyang shareholders pledged all of their equity interests in Taiyang to Ninnguo to guarantee Taiyang’s performance of its obligations under the Consulting Services Agreement, (iv) an Option Agreement, whereby the Taiyang shareholders irrevocably granted Ninnguo or its designated person an exclusive option to purchase, to the extent permitted under Chinese law, all or part of the equity interests in Taiyang for the cost of the initial contributions to the registered capital, which is the amount of capital registered with the PRC government (“Registered Capital”) or the minimum amount of consideration permitted by applicable Chinese law, and (v) a Voting Rights Proxy Agreement, whereby Taiyang shareholders agreed to entrust all the rights to exercise their voting power to designee(s) of Ninnguo.
|
|
Chinese laws and regulations concerning the validity of the contractual arrangements are uncertain, as many of these laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement by the Chinese government involves substantial uncertainty. Additionally, the contractual arrangement may not be as effective in providing control over Taiyang as direct ownership, which the Company is restricted from under current Chinese law. Due to such uncertainty, the Company may take such additional steps in the future as may be permitted by the then applicable laws and regulations in China to further strengthen its control over or toward actual ownership of Taiyang or its assets or business operations, which could include direct ownership of selected assets without jeopardizing any favorable government policies toward domestic owned enterprises. Because the Company relies on Taiyang for its revenue, any termination of or disruption to the contractual arrangement would detrimentally affect its business and financial condition.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
1.
|
Nature of Business Operations (continued):
|
|
(a)
|
Business (continued)
|
|
Other than the interests in the contractual arrangements, none of the Company, Dynamic Ally, nor Ningguo owns any equity interests in Taiyang. As a result of these contractual arrangements, which obligates Ningguo to absorb a majority of the risk of loss from Taiyang’s activities and enable Ningguo to receive a majority of its expected residual returns, Taiyang is a Variable Interest Entity (“VIE”), because the owners of Taiyang do not have the characteristics of a controlling financial interest and the Company should be considered the primary beneficiary of Taiyang. Accordingly, the Company consolidates Taiyang’s results, assets and liabilities in the accompanying consolidated financial statements.
|
||
Upon the completion of the Reverse Merger Transaction on November 10, 2010, the Company owned 100% of Dynamic Ally, which owned 100% of Ningguo, which controlled the operations of Taiyang through contractual arrangements. For financial reporting purposes, Reverse Merger Transaction is classified as a recapitalization of Dynamic Ally and the historical financial statements of Dynamic Ally, which are comprised principally of the operations of Taiyang, are reported as the Company’s historical financial statements.
|
||
Taiyang is a limited liability company organized in the PRC in June 1996. Taiyang holds the government licenses and approvals necessary to operate the duck farming and processing businesses in China.
|
||
As a result of the Reverse Merger Transaction, the Company acquired 100% of the capital stock of Dynamic Ally and consequently, control of the business and operations of Dynamic Ally, Ningguo, and Taiyang. Prior to the Reverse Merger Transaction, the Company was a public reporting company in the development stage. From and after the Closing Date of the Share Exchange Agreement, the Company’s primary operations consist of the business and operations of Taiyang, which are conducted in China, and controlled through contractual arrangements described herein.
|
||
Effective January 20, 2011, the Company changed its name from “The Parkview Group, Inc.” to “Anhui Taiyang Poultry Co., Inc.”
|
||
The Company, through its VIE arrangement with Taiyang, raises, processes and markets ducks and duck related food products through three business lines:
|
●
|
Breeding Unit – breeds, hatches, and cultivates ducklings for resale and for processing by the Food Unit
|
|
●
|
Feed Unit – produces duck feed for internal use and external sale
|
|
●
|
Food Unit – processes ducklings into frozen raw food product for commercial resale.
|
On March 1, 2010, the Company issued unsecured debentures in the aggregate principal amount of $650,000 to 11 investors. The Company received net proceeds of $555,000, which were designated to pay legal, accounting, and other costs associated with the Reverse Merger Transaction and related financing. The debentures bore interest at a rate of 15% per annum, and matured on September 30, 2010. The debentures were convertible, at the sole option of the holder, into shares of the Company at a price equal to a 25% discount to the price of any new financing. Each debenture holder was also to receive the equivalent of one share of the public entity for each dollar invested in the debenture. On November 10, 2010, in connection with the closing of the Reverse Merger Transaction, the notes were satisfied in full as follows: (i) principal in the amount of $549,984 was converted at the option of certain of the holders into 366,656 shares of common stock of the Company, (ii) principal in the amount of $100,016 was repaid in cash, and (iii) interest of $72,493 was paid in cash. Dynamic Ally also issued 988 additional ordinary shares to the holders as prescribed by the debentures prior to the closing of the Reverse Merger Transaction (see note 14(c)).
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
1.
|
Nature of Business Operations (continued):
|
|
(a)
|
Business (continued)
|
|
In connection with the consummation of the Reverse Merger Transaction, on November 10, 2010, the Company consummated a financing (the “First Financing”) for the sale of units (the “Units”) consisting of (i) four (4) shares of common stock and (ii) a warrant to purchase one (1) share of common stock at an exercise price of $4.00. Each Unit was priced at $8.00. Gross cash proceeds were $4,450,072, and the Company issued 2,225,036 shares of common stock and 556,259 warrants. The Company also exchanged $549,984 in previously issued debentures that were converted into Units at a price of $6.00 per Unit, for a total of 366,656 shares of common stock and 91,664 warrants. On November 16, 2010, the Company sold additional Units for gross cash proceeds of $657,400 pursuant to the same offering, and issued 328,700 shares and 82,175 warrants. In connection with the First Financing, the Company also issued 226,298 placement agent warrants with an exercise price of $4.00.
|
||
On March 7 and March 17, 2011, the Company completed an additional sale of an aggregate 575,000 shares of common stock to eight investors at a price of $2.00 per share for gross cash proceeds of $1,150,000. In connection this financing, the Company also issued to the investors warrants to purchase 143,750 shares of common stock at an exercise price of $4.00 per share and a contractual term of three years, as well as 46,000 placement agent warrants with an exercise price of $4.00 and a contractual term of five years (see note 24(b)).
|
||
(b)
|
Accounting Standards Codification
|
|
In June 2009, the Financial Accounting Standards Board (“FASB”) issued a statement establishing the FASB Accounting Standards Codification (the “FASB ASC” or the “Codification”). Effective for interim and annual periods ended after September 15, 2009, the Codification became the source of authoritative U.S. generally accepted accounting principles (“US GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. This statement did not change existing US GAAP, and as such, did not have an impact on the financial statements. Where applicable, the Company has updated its references to US GAAP, in order to reflect the Codification.
|
2.
|
Significant accounting policies:
|
|
(a)
|
Basis of presentation:
|
|
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. These financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of Parent and its wholly owned subsidiaries Dynamic Ally and Ningguo, as well as the accounts of Taiyang, the VIE controlled through the contractual arrangements described in note 1(a).
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(a)
|
Basis of presentation (continued):
|
|
Immediately prior to the Reverse Merger Transaction, Taiyang, Ningguo, and Dynamic Ally were deemed to be under common control. Accordingly, the combination of these entities has been accounted for as a reorganization of entities under common control, whereby the acquirer recognized the assets and liabilities of each subsidiary transferred at their carrying amounts, similar to the pooling of interest method with carry over basis. The reorganization of entities under common control was retrospectively applied to the financial statements of all prior periods when the financial statements are issued for a period that includes the date the transaction occurred.
|
||
The acquisition of Dynamic Ally by the Company was accounted for as a reverse merger, whereby Dynamic Ally is the continuing entity for financial reporting purposes and is deemed, for accounting purposes, to be the acquirer of the Company. In accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, Dynamic Ally is deemed to have undergone a recapitalization, whereby Dynamic Ally is deemed to have issued equity to the Company’s common stock holders. Accordingly, although the Company, as Dynamic Ally’s legal parent company, was deemed to have legally acquired Dynamic Ally, in accordance with the applicable accounting guidance for accounting for the transaction as a reverse merger and recapitalization, Dynamic Ally is the surviving entity for accounting purposes and its assets and liabilities are recorded at their historical carrying amounts with no goodwill or other intangible assets recorded as a result of the accounting merger with the Company.
|
||
All intercompany balances and transactions have been eliminated upon consolidation. The three operating entities of Taiyang all reside within the same legal entity, and are evaluated as separate units for management’s internal purposes.
|
||
The basis of accounting differs in certain material respects from that used for the preparation of the books and records of the Company, which are prepared in accordance with accounting principles and relevant financial regulations applicable to limited liability enterprises established in the PRC (“PRC GAAP”), the accounting standard used in the place of its domicile.
|
||
(b)
|
Use of estimates:
|
|
The preparation of financial statements in conformity with US GAAP requires management at the date of the financial statements 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. Significant areas requiring the use of estimates include estimating allowance for doubtful accounts, estimating the net realizable value of inventory, the future cash flows for assessing the net recoverable amount of long-lived assets, accrued liabilities, accrued completion of construction in progress projects, and inputs to estimate the fair value of equity transactions. Actual results may differ from those estimates.
|
||
(c)
|
Risks of doing business in China:
|
|
The Company is subject to the consideration and risks of operating in the PRC. These include risks associated with the political and economic environment, foreign currency exchange and the legal system in China.
|
||
The economy of China differs significantly from the economies of the “western” industrialized nations in such respects as structure, level of development, gross national product, growth rate, capital reinvestment, resource allocation, self-sufficiency, rate of inflation and balance of payments position, among others. Only recently has the China government encouraged substantial private economic activities. The Chinese economy has experienced significant growth in the past several years, but such growth has been uneven among various sectors of the economy and geographic regions. Actions by the PRC government to control inflation have significantly restrained economic expansion in the recent past.
|
||
Similar actions by the PRC government in the future could have a significant adverse effect on economic conditions in China.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(c)
|
Risks of doing business in China (continued):
|
|
Many laws and regulations dealing with economic matters in general and foreign investment in particular have been enacted in China. However, China still does not have a comprehensive system of laws, and enforcement of the existing laws may be uncertain and sporadic.
|
||
The Company’s operating assets and primary sources of income and cash flows originate in China. The China economy has, for many years, been a centrally planned economy, operating on the basis of annual, five-year and ten-year state plans adopted by central China governmental authorities, which set out national production and development targets. The China government has been pursuing economic reforms since it first adopted its “open-door” policy in 1978. There is no assurance that the China government will continue to pursue economic reforms or that there will not be any significant change in its economic or other policies, particularly in the event of any change in the political leadership of, or the political, economic or social conditions in China. There is also no assurance that the Company will not be adversely affected by any such change in governmental policies or any unfavourable change in the political, economic or social conditions, the laws or regulations, or the rate or method of taxation in China.
|
||
As many of the economic reforms, which have been or are being implemented by China government are unprecedented or experimental, they may be subject to adjustment or refinement, which may have adverse effects on the Company. Further, through state plans and other economic and fiscal measures, it remains possible for the China government to exert significant influence on the China economy.
|
||
(d)
|
Cash:
|
|
Cash includes bank deposits and cash on hand. Cash equivalents include short-term investments with a term to maturity when acquired of 90 days or less.
|
||
(e)
|
Allowance for doubtful accounts:
|
|
The Company reports accounts receivable and loans receivable at net realizable value. The Company’s terms of sale provide the basis for when accounts become delinquent or past due. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable.
|
||
(f)
|
Inventory:
|
|
Inventory is recorded at the lower of cost, determined using the weighted average costing method, and net realizable value. Cost includes purchased raw materials (primarily corn and other grains), breeding and incubation costs (primarily feed and contract grower pay), packaging supplies, labor, and manufacturing and production overhead which are related to the purchase and production of inventories. The weighted-average method includes invoice cost, duties and freight where applicable, plus direct labor applied to the product and an applicable share of manufacturing overhead. A provision for obsolescence for slow moving inventory items is estimated by management based on historical and expected future sales and is included in cost of goods sold.
|
||
(g)
|
Biological assets:
|
|
Biological assets are comprised of master breeding ducks that are treated as capitalized assets due to their ability to produce offspring that are also capable of breeding. These biological assets generally have a productive breeding period of approximately one year. The Company capitalizes these assets and amortizes their cost, which includes any cost to acquire the duck plus costs incurred for hatching and incubation, over a period of one year.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(h)
|
Property, plant and equipment:
|
|
Property, plant and equipment are carried at cost less allowance for accumulated depreciation. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets. The depreciable basis for property, plant and equipment is original cost less estimated residual value, which does not exceed 5% of the cost. Upon retirement or sale, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations. The cost of normal maintenance and repairs is charged to operations as incurred. Material expenditures, which increase the life of an asset, are capitalized and depreciated over the estimated remaining life of the asset. Costs incurred prior to a capital project’s completion are reflected as construction in progress and are not depreciated until the asset is placed into service. The estimated service lives of property and equipment are as follows:
|
Production equipment
|
3-10 years
|
|
Transportation equipment
|
5-10 years
|
|
Office furniture and equipment
|
5 years
|
|
Building and building improvements
|
10-20 years
|
Costs incurred prior to a capital project’s completion are reflected as construction in progress and are not depreciated until the asset is placed into service.
|
||
(i)
|
Construction in progress:
|
|
Construction in progress is stated at cost, which comprises direct costs of design, acquisition, and construction of buildings, building improvements and land improvements. The Company also capitalizes interest on loans related to construction projects. Upon completion, construction in progress is transferred to its respective asset classification and is amortized upon being put into use. At each balance sheet date, the Company makes an estimate with respect to the percentage of completion of each project.
|
||
(j)
|
Land use rights:
|
|
The Company accounts for land use rights as an asset in its financial statements. However, all lands in the PRC are owned by the PRC government. The PRC government, according the relevant PRC law, may sell the right to use the land for a specific period of time. Land use rights are recorded at cost less accumulated amortization. Land use rights are amortized over 50 years, which are the terms established by the PRC government. The purpose of the land use is restricted by the PRC government. In the event that the land is used for purposes outside the scope of the purpose for which they were granted, the government could revoke such rights.
|
||
(k)
|
Impairment of long-lived assets:
|
|
The Company monitors the recoverability of long-lived assets, based on estimates using factors such as expected future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets or to be realized on sale. The Company recognizes an impairment loss if the projected undiscounted future cash flows are less than the carrying amount, and the amount of the impairment charge is the excess of the carrying amount of the asset over the fair value of the asset.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(l)
|
Derivative financial instruments:
|
|
Derivative financial instruments, as defined in ASC Topic 815 (formerly FAS 133), Accounting for Derivative Financial Instruments and Hedging Activities (ASC Topic 815), consist of financial instruments or other contracts that contain a notional amount and one or more underlying, e.g. interest rate, security price or other variable, require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
|
||
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued warrant agreements that embody features that are not afforded equity classification because they may be net-cash settled by the counterparty. As required by ASC Topic 815 (formerly FAS 133), these instruments are required to be carried as derivative liabilities, at fair value, in the Company’s financial statements.
|
||
(m)
|
Revenue recognition:
|
|
The Company recognizes revenue when there is persuasive evidence of an arrangement, goods are shipped and title passes, collection is probable, and the fee is fixed or determinable. The Company records deferred revenue when cash is received in advance of the revenue recognition criteria being met.
|
||
(n)
|
Subsidy income:
|
|
From time to time, the Company receives subsidies from the PRC government. Certain of the subsidies are earmarked for particular capital improvement and other projects, and the completed projects must be approved by the government to ensure specifications were met. The Company defers amounts received pursuant to these types of subsidies until the projects are approved, at which time the deferred balances are recorded as subsidy income on the statement of operations.
|
||
Subsidies that are not subject to government approval are recognized as income in the period in which the benefit from the subsidy is realized by the Company. Subsidies that relate to depreciable property and equipment are recorded as an offset to the related capital accounts to which the subsidy relates.
|
||
(o)
|
Income and other taxes:
|
|
Taiyang is exempt from corporate income tax due to the nature of its business. Beginning 2006, the PRC government instituted a tax exemption policy for certain aspects of the agricultural industry. Taiyang’s business qualifies as tax exempt. The exemption relates to unprocessed agricultural products and is granted by the relevant taxing authority on a year-by-year basis. There is no stated expiration to the exemption, and while Taiyang expects to continue to receive favorable tax treatment, changes in government policy or the nature of Taiyang’s operations could result in Taiyang being required to pay income taxes.
|
||
Ningguo is subject to corporate income tax in the PRC at a rate of 10% as a non-resident enterprise, as well as business tax at a rate of 5% on service income. Under the laws of the BVI, Dynamic Ally is not subject to tax on its income or capital gains. Parent is subject to United States income tax at a rate of 35%.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(p)
|
Foreign currency translation and comprehensive income:
|
|
The Company’s functional or primary operating currency is the Chinese Renminbi (“RMB”). The Company’s financial statements are prepared in RMB before translating to the United States dollar (“USD”) for reporting purposes. The Company translates transactions in currencies other than the RMB at the exchange rate in effect on the transaction date. Monetary assets and liabilities denominated in a currency other than the RMB are translated at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in earnings.
|
||
Amounts transacted in RMB have been translated into USD as follows: assets and liabilities are translated at the rate of exchange in effect at the balance sheet date, equity items are translated at historical rates, and revenue and expense items are translated at the average rates for each period reported. Unrealized gains and losses resulting from the translation into the reporting currency are accumulated in accumulated other comprehensive income, a separate component of equity.
|
||
The Company applies SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
|
||
(q)
|
Statutory reserves:
|
|
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. The articles of association of Taiyang and Ningguo, which are based on PRC corporate laws, prescribe that these entities must appropriate, on an annual basis, 10% of their after tax income as reported in their financial statements, prepared in accordance with PRC GAAP, to the statutory common reserve fund until the fund reaches 50% of their respective Registered Capital.
|
||
(r)
|
Earnings per share:
|
|
Basic earnings per share is computed by dividing net income attributable to the common shareholder of the Company by the weighted average number of common shares outstanding during the year. Diluted earnings per share is determined by adjusting the net income attributable to the common shareholder and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares. Basic and diluted earnings per share are the same because the Company does not have any equity instruments that would impact the calculation of diluted earnings per share. The number of weighted average common shares outstanding has been retroactively restated to give effect to the shares issued in the Reverse Merger Transaction.
|
||
(s)
|
Employee welfare benefits:
|
|
Pursuant to PRC law, full-time employees of the Company are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance, and pension benefits through a PRC government-mandated multiemployer pension plan. The Company is required to contribute a portion of the employees’ salaries to the retirement benefit scheme to fund the benefits, which are charged to operations as incurred. The government reserves the right to change rates retroactively, which may result in a contingent liability being recorded for previous years. Amounts contributed to the retirement benefit scheme for the years ended December 31, 2010 and 2009 were $21,518 and $22,089, respectively.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
||
(t)
|
Fair value of financial assets and liabilities:
|
||
For certain of the Company’s financial instruments, including cash, restricted cash, accounts receivable, receivables on sales-type leases, other receivables, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
|
|||
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 820, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
●
|
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
||
●
|
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
||
●
|
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
|
|||
(u)
|
Segment reporting:
|
||
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (codified in FASB ASC Topic 280) requires use of the “management approach” model for segment reporting. The management approach model is based on the method a company’s management uses to organize segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. Management of the Company evaluates its operations based on three operating segments: Breeding Unit, Feed Unit, and Food Unit.
|
|||
(v)
|
Statement of cash flows:
|
||
In accordance with SFAS No. 95, “Statement of Cash Flows” (codified in FASB ASC Topic 230), cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(w)
|
Recently Adopted Accounting Standards:
|
|
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
|
||
In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this ASU did not have a material impact on the Company’s financial statements.
|
||
In August 2009, the FASB issued an ASU regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s financial statements.
|
||
On July 1, 2009, the Company adopted ASU No. 2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments based on Statement of Financial Accounting Standards No. 168 , “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” ASU No. 2009-01 re-defines authoritative GAAP for nongovernmental entities to be only comprised of the FASB ASC and, for SEC registrants, guidance issued by the SEC. The Codification is a reorganization and compilation of all then-existing authoritative GAAP for nongovernmental entities, except for guidance issued by the SEC. The Codification is amended to effect non-SEC changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the referencing convention of GAAP in notes to the financial statements.
|
||
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), codified as FASB ASC Topic 810-10, which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The adoption of this statement did not have a material impact on the Company’s financial statements.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(w)
|
Recently Adopted Accounting Standards (continued):
|
|
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 166”), codified as FASB Topic ASC 860, which requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe the adoption of SFAS 166 will have an impact on its financial condition, results of operations or cash flows.
|
||
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) codified in FASB ASC Topic 855-10-05, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. SFAS 165 required that public entities evaluate and disclose subsequent events through the date that the financial statements are issued.
|
||
ASU No. 2010-09, issued in February 2010, removes the requirement to disclose a date through which subsequent events have been reviewed in the financial statements.
|
||
In April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which is codified in FASB ASC Topic 825-10-50. This FSP essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the FSP requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. The Company has adopted these disclosure changes with its interim financial statements in fiscal 2010.
|
||
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which is codified in FASB ASC Topic 320-10. This FSP modifies the requirements for recognizing other-than-temporarily impaired debt securities and changes the existing impairment model for such securities. The FSP also requires additional disclosures for both annual and interim periods with respect to both debt and equity securities. Under the FSP, impairment of debt securities will be considered other-than-temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its cost, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). The FSP further indicates that, depending on which of the above factor(s) causes the impairment to be considered other-than-temporary, (1) the entire shortfall of the security’s fair value versus its amortized cost basis or (2) only the credit loss portion would be recognized in earnings while the remaining shortfall (if any) would be recorded in other comprehensive income. FSP 115-2 requires entities to initially apply the provisions of the standard to previously other-than-temporarily impaired debt securities existing as of the date of initial adoption by making a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The cumulative-effect adjustment potentially reclassifies the noncredit portion of a previously other-than-temporarily impaired debt security held as of the date of initial adoption from retained earnings to accumulate other comprehensive income. The Company adopted FSP No. SFAS 115-2 and SFAS 124-2 in fiscal 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(w)
|
Recently Adopted Accounting Standards (continued):
|
|
In April 2009, the FASB issued FSP No. SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and 820-10-50-2, provides additional guidance for estimating fair value and emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. The Company adopted FSP No. SFAS 157-4 in fiscal 2009. This FSP had no material impact on the Company’s financial position, results of operations or cash flows.
|
||
(x)
|
Recently Issued Accounting Standards:
|
|
In April 2010, the FASB issued an authoritative pronouncement regarding the milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement specifies criteria that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The criteria apply to milestones in arrangements within the scope of this pronouncement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement will be effective for fiscal years, an interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. This amendment is not expected to have a material impact on the Company’s financial statements.
|
||
In March 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trade and that currency is different from (1) the entity’s functional currency, (2) the functional currency of the foreign operation for which the employee provides services, and (3) the payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applies prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This amendment is not expected to have a material impact on the Company’s financial statements.
|
||
On March 5, 2010, the FASB issued authoritative guidance to clarify the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, only one form of embedded credit derivative qualifies for the exemption – one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. This guidance also has transition provisions, which permit entities to make a special one-time election to apply the fair value option to any investment in a beneficial interest in securitized financial assets, regardless of whether such investments contain embedded derivative features. This guidance is effective on the first day of the first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of any fiscal quarter beginning after March 5, 2010. This amendment is not expected to have a material impact on the Company’s financial statements.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
2.
|
Significant accounting policies (continued):
|
|
(x)
|
Recently Issued Accounting Standards (continued):
|
|
In December 2010, the FASB issued Accounting Standards Update 2010-28, “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2010-28 addresses questions about entities that have reporting units with zero or negative carrying amounts. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In addition, current GAAP will be improved by eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice. The provisions of ASC No. 2010-28 are effective for fiscal years, and interim periods within those years, beginning after Dec. 15, 2010. Early adoption is not permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
|
||
In December 2010, the FASB issued Accounting Standards Update 2010-29, “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU No. 2010-29 clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The amendments expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted.
|
3.
|
Trade accounts receivable:
|
|
Trade accounts receivable were comprised of the following as of December 31, 2010 and 2009: |
|
2010
|
2009
|
||||||
Trade accounts receivable
|
$ | 5,361,648 | $ | 985,097 | ||||
Allowance for doubtful accounts
|
(12,998 | ) | (12,569 | ) | ||||
|
$ | 5,348,650 | $ | 972,528 |
As of December 31, 2010 and 2009, $756,224 and $731,294 of the Company’s trade accounts receivable were pledged as collateral for loans outstanding. The loan in the amount of $731,294 securing trade accounts receivable at December 31, 2009 was repaid in July 2010. The loan in the amount of $756,224 securing trade accounts receivable at December 31, 2010 was repaid in March 2011.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
4.
|
Loans receivable:
|
As of December 31, 2010 and 2009, the Company had outstanding $4,268,057 and $2,816,943, respectively, of unsecured loans receivable from unrelated parties which bear interest at rates paid by the Company on similar third party loans payable, and have no stated maturity date. Loans receivable activity during the years ended December 31, 2010 and 2009 was:
|
|
2010
|
2009
|
||||||
Beginning balance
|
$ | 2,816,943 | $ | — | ||||
Amounts loaned to third parties
|
9,186,757 | 2,853,570 | ||||||
Amounts collected from third parties
|
(7,836,606 | ) | — | |||||
Change in allowance for doubtful accounts
|
4,932 | (36,627 | ) | |||||
Currency translation difference
|
96,031 | — | ||||||
Ending balance
|
$ | 4,268,057 | $ | 2,816,943 |
During 2009, the Company made a loan to an unrelated third party in the amount of $877,552, the balance of which was $907,468 and $877,552 as of December 31, 2010 and 2009, respectively. The third party pledged its assets to the bank as partial collateral for a bank loan in the amount of $1,492,961 borrowed by the Company. The loan receivable does not have a stated maturity date.
|
|
During December 2010, the Company made a loan in the amount of $907,468 to Jinyatai Agricultural Development Co., Ltd. (“Jinyatai”), a former subsidiary of Taiyang that was divested in 2005. As stipulated by the loan agreement, Jinyatai pledged its assets as partial collateral for a bank loan in the amount of $2,268,673 borrowed by the Company. The reason for the pledge of Jinyatai’s assets was to provide the Company security for the loan (in the event Jinyatai does not repay the loan, the Company could withhold payment on the bank loan secured by Jinyatai’s assets and allow the bank to foreclose on those assets), and to allow the Company to borrow additional funds from the bank using the value of Jinyatai’s assets. The loan receivable matured on January 7, 2011. Because the loan was not repaid by this date, the agreement between the Company and Jinyatai calls for Jinyatai to pay interest incurred by the Company on the bank loan. Through December 31, 2010, such interest amounted to $50,576. In connection with the issuance of its audited financial statements for years ended December 31, 2008 and 2009, which were issued on June 10, 2010, the Company made a reserve for the full amount off an account receivable in the amount of $895,430 for the sale price of Jinyatai. The charge to the statement of operations for this reserve was made to the opening balance of fiscal 2008. Between June 20-29, 2010, the Company collected this amount from the buyer and recognized a gain from the collection in this amount in the year ended December 31, 2010 (see note 18(b)). Additionally, the Company made sales of ducks to Luo Jiayun, the principal shareholder and legal representative of Jinyatai, in the amount of $3,263,568 and $1,646,397 during the years ended December 31, 2010 and 2009, respectively (see note 19(b)).
|
|
During 2010, the Company made a loan in the amount of $907,468 to an unrelated individual. The borrower pledged its assets as partial collateral for a bank loan in the amount of $3,327,384 borrowed by the Company. The loan receivable does not have a stated maturity date.
|
|
The estimated value of the guarantee provided through the pledged assets of the Company’s borrowers was estimated to be approximately $44,000.
|
|
The Company had additional unsecured loans receivable from unrelated parties totaling $1,545,722 and $1,939,391 outstanding at December 31, 2010 and 2009, respectively, which had no stated maturity date, and had no security. Subsequent to December 31, 2010 and through March 31, 2011, the Company has collected $1,512,447 of the outstanding balance of these loans (see note 24(d)).
|
|
The above loans constitute inter-enterprise lending that violate the PRC General Lending Rules. A fine in the amount of one to three times the income generated by the Company from such inter-enterprise loans may be imposed by the People’s Bank of China, at their discretion, if the Company were found to be in violation of the PRC General Lending Rules (see note 22(b)).
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
4.
|
Loans receivable (continued):
|
The above loans constitute inter-enterprise lending that violate the PRC General Lending Rules. A fine in the amount of one to three times the income generated by the Company from such inter-enterprise loans may be imposed by the People’s Bank of China, at their discretion, if the Company were found to be in violation of the PRC General Lending Rules (see note 22(b)).
|
|
The underlying business reason for the above loans receivable is that local prominent businesses in China often create an informal lending and borrowing arrangement amongst each other whereby short term working capital loans are made between parties in order to allow businesses to borrow in excess of what banks are willing to lend. The Company has historically both borrowed and loaned under such arrangements, without cash interest. Currently, the Company is a net lender with no borrowings.
|
5.
|
Inventories:
|
Inventories were comprised of the following as of December 31, 2010 and 2009:
|
|
2010
|
2009
|
||||||
Raw materials
|
$ | 1,142,773 | $ | 734,598 | ||||
Work in process
|
490,978 | 904,052 | ||||||
Finished goods
|
128,958 | 148,915 | ||||||
|
$ | 1,762,709 | $ | 1,787,565 |
The Company did not have any obsolete or slow-moving inventory as of December 31, 2010 or 2009.
|
6.
|
Prepaid and other current assets:
|
Prepaid and other current assets were comprised of the following as of December 31, 2010 and 2009:
|
|
2010
|
2009
|
||||||
VAT taxes receivable
|
$ | — | $ | 368,502 | ||||
Prepaid insurance
|
— | 70,389 | ||||||
Prepaid inventory purchases
|
224,187 | — | ||||||
Other prepaid expenses
|
623,527 | 300,235 | ||||||
Biological assets
|
292,520 | 163,235 | ||||||
|
$ | 1,140,234 | $ | 902,361 |
Biological assets are comprised of master breeding ducks that are treated as capitalized assets due to their ability to produce offspring that are also capable of breeding. These biological assets generally have a productive breeding period of approximately one year. The Company capitalizes these assets and amortizes their cost, which includes any cost to acquire the duck plus costs incurred for hatching and incubation, over a period of one year.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
7.
|
Related party transactions:
|
As of December 31, 2010 and 2009, amounts due from related parties were comprised of the following:
|
|
2010
|
2009
|
||||||
Due from Wu Qiyou
|
$ | — | $ | 735,861 | ||||
Due from Chen Beihuang
|
— | 585 | ||||||
Due from Wu Qida
|
— | 29,252 | ||||||
|
$ | — | $ | 765,698 |
As of December 31, 2010 and 2009, amounts due to related parties were comprised of the following:
|
|
2010
|
2009
|
||||||
Due to Wu Qiyou
|
$ | 30,249 | $ | — | ||||
Due to Taiyang Biological Corporation
|
— | 190,166 | ||||||
|
$ | 30,249 | $ | 190,166 |
Wu Qiyou is Taiyang’s founder and principal executive officer and was holder of 96% of the Company’s registered share capital prior to the Reverse Merger Transaction in November 2010 (see notes 1(a) and 24(a)). Mr. Wu was appointed as Chief Executive Officer and Chairman of the Board of Directors of the Company after the Reverse Merger Transaction. Wu Qiyou owns 49% of Taiyang Biological Corporation.
|
|
Wu Qida was the holder of 2% of Taiyang’s registered share capital prior to the Reverse Merger Transaction in November 2010, and is also the brother of Wu Qiyou. Wu Qida owns 31% of Taiyang Biological Corporation.
|
|
Chen Beihuang was the holder of 2% of Taiyang’s registered share capital prior to the Reverse Merger Transaction in November 2010. Ms. Chen was also appointed as a member of the Board of Directors of the Company after the Reverse Merger Transaction.
|
|
Taiyang Biological Corporation is a company owned 49% by Wu Qiyou and 31% by Wu Qida.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
7.
|
Related party transactions (continued):
|
The Company was involved in the following transactions with Wu Qiyou, Chen Beihuang and Wu Qida during the years ended December 31, 2010 and 2009:
|
|
|
Chen
|
|
|
||||||||||||
|
Wu Qiyou
|
Beihuang
|
Wu Qida
|
Total
|
||||||||||||
Balance due (to) from as of December 31, 2008
|
$ | 613,802 | $ | 12,839 | $ | — | $ | 626,641 | ||||||||
Loans to related party
|
325,637 | 16,007 | 29,237 | 370,881 | ||||||||||||
Repayments from related party
|
(205,169 | ) | (28,286 | ) | — | (233,455 | ) | |||||||||
Currency translation difference
|
1,591 | 25 | 15 | 1,631 | ||||||||||||
|
||||||||||||||||
Balance due (to) from as of December 31, 2009
|
735,861 | 585 | 29,252 | 765,698 | ||||||||||||
|
||||||||||||||||
Loans to related party
|
1,734,976 | 140,365 | 708 | 1,876,049 | ||||||||||||
Repayments from related party
|
(2,506,692 | ) | (140,955 | ) | (30,212 | ) | (2,677,859 | ) | ||||||||
Currency translation difference
|
5,606 | 5 | 252 | 5,863 | ||||||||||||
|
||||||||||||||||
Balance due (to) from as of December 31, 2010
|
$ | (30,249 | ) | $ | — | $ | — | $ | (30,249 | ) |
As of December 31, 2010, the Company had collected all loans due from its officers and directors, and discontinued the practice of lending funds to its officers and directors.
|
|
The Company was involved in the following additional related party transactions during the years ended December 31, 2010 and 2009:
|
|
During the years ended December 31, 2010 and 2009, the Company made purchases from Taiyang Biological Corporation in the amount of $118,978 and $52,961, respectively. As of December 31, 2010, the Company had unused deposits against inventory purchases with Taiyang Biological Corporation in the amount of $90,385.
|
|
At closing of the Reverse Merger Transaction, the Company acquired 145,000 shares of Company common stock from three of the Company’s previous stockholders and affiliates of the Company for retirement. The aggregate purchase price for the shares was $300,000. The selling shares were: Richard B. Frost, the Company’s President and Chief Executive Officer prior to the Reverse Merger Transaction (48,333 shares); Bert L. Gusrae, the Company’s Secretary, Treasurer and Director prior to the Reverse Merger Transaction (48,334 shares), and Alicia M. LaSala, the Company’s Chief Executive Officer through May 2008 (48,333 shares).
|
|
The Company currently engages Thornhill Capital LLC to perform certain accounting, language translation, and other professional services. The Company’s Chief Financial Officer, David Dodge, also performs contract work unrelated to the Company on behalf of Thornhill Capital LLC.
|
|
In August 2010, the Company purchased 7.81% of the equity of a local credit cooperative. As of December 31, 2010, the face value of long term loans payable to the credit cooperative were $190,856 and $90,388, respectively, and the carrying value was $126,428 and $56,117 respectively (see notes 10 and 14(b)).
|
|
Transactions during the period are reflected at the average exchange rates for the respective period, and balances as of December 31, 2010 and 2009 are reflected at closing exchange rates for the respective period (see note 19(c)). Accordingly, beginning balance plus period transactions may differ from ending balances due to exchange rate differences.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
8.
|
Property, plant and equipment:
|
|
(a)
|
Property, plant and equipment
|
|
As of December 31, 2010 and 2009, property, plant and equipment consisted of the following:
|
|
|
Accumulated
|
Net book
|
|||||||||
As of December 31, 2010
|
Cost
|
depreciation
|
Value
|
|||||||||
Production equipment
|
$ | 2,407,456 | $ | (661,651 | ) | $ | 1,745,805 | |||||
Transportation equipment
|
565,298 | (98,330 | ) | 466,968 | ||||||||
Office furniture and equipment
|
266,829 | (62,207 | ) | 204,622 | ||||||||
Building and building improvements
|
19,743,948 | (1,666,181 | ) | 18,077,767 | ||||||||
|
||||||||||||
|
$ | 22,983,531 | $ | (2,488,369 | ) | $ | 20,495,162 |
|
Accumulated
|
Net book
|
||||||||||
As of December 31, 2009
|
Cost
|
depreciation
|
Value
|
|||||||||
(Restated -
|
(Restated -
|
(Restated -
|
||||||||||
See note 24)
|
See note 24)
|
See note 24)
|
||||||||||
Production equipment
|
$ | 2,232,563 | $ | (432,438 | ) | $ | 1,800,125 | |||||
Transportation equipment
|
249,906 | (63,089 | ) | 186,817 | ||||||||
Office furniture and equipment
|
121,044 | (53,116 | ) | 67,928 | ||||||||
Building and building improvements
|
11,989,090 | (1,080,321 | ) | 10,908,769 | ||||||||
$ | 14,592,603 | $ | (1,628,964 | ) | $ | 12,963,639 |
Depreciation expense of production-related property, plant and equipment is recorded to production costs, which is allocated to inventory and reflected in cost of goods sold on the statement of operations. Depreciation expense of other property, plant and equipment is charged to general and administrative expense. For the years ended December 31, 2010 and 2009, depreciation expense was allocated as follows:
|
|
2010
|
2009
|
||||||
Depreciation expense charged to general and administrative expense
|
$ | 230,604 | $ | 88,461 | ||||
Depreciation expense charged to cost of goods sold
|
747,743 | 428,320 | ||||||
Total depreciation expense
|
$ | 978,347 | $ | 516,781 |
All of the Company’s building and building improvements, and certain of the Company’s production equipment, are pledged as collateral for bank loans payable as described in note 14.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
8.
|
Property, plant and equipment:
|
|
(b)
|
Construction in progress
|
|
The Company has various construction projects in process to expand its facilities. As of December 31, 2010 and 2009, construction in progress was comprised of the following:
|
|
2010
|
2009
|
||||||
Incubation center expansion
|
$ | 827,158 | $ | 3,624 | ||||
Company headquarters building
|
— | 2,068,778 | ||||||
Breeding facilities
|
4,521,791 | 319,411 | ||||||
Fertilizer plant
|
— | 2,258,987 | ||||||
Capitalized interest expense
|
66,393 | 589,087 | ||||||
Other projects
|
219,134 | 365,310 | ||||||
|
||||||||
|
$ | 5,634,476 | $ | 5,605,197 |
The Company’s headquarter building was placed into service in the first quarter of 2010.
|
||
The Company capitalizes interest on loans related to construction projects in progress. During the years ended December 31, 2010 and 2009, the Company capitalized interest expense in the amount of $288,486 and $321,981, respectively.
|
9.
|
Land Use Rights:
|
|
As of December 31, 2010 and 2009, land use rights consisted of the following: |
|
2010
|
2009
|
||||||
Cost
|
$ | 11,890,593 | $ | 11,491,843 | ||||
Less accumulated amortization
|
(1,229,605 | ) | (945,950 | ) | ||||
|
$ | 10,660,988 | $ | 10,545,893 |
Land use rights are amortized over the life of the rights, which is generally 50 years, and are charged to general and administrative expense on the statement of operations. Amortization expense of land use rights was $239,465 and $225,064 during the years ended December 31, 2010 and 2009, respectively.
|
|
Land use rights are owned by the PRC government, and are granted with restrictions on use. In the event that the land is used for purposes outside the scope of the Company’s current business, the government could revoke such rights. The Company does not have any plans to use land that is subject to land use rights for any purposes outside the scope of its current business, or for any purpose other than those pursuant to which the rights were granted.
|
|
All of the Company’s land use rights are pledged as collateral for bank loans payable as described in note 14, a portion of the proceeds of which were used to finance the acquisition of land use rights and related development of the land.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
10.
|
Other long term assets:
|
As of December 31, 2010 and 2009, other long term assets were comprised of the following:
|
|
2010
|
2009
|
||||||
Long term investment
|
$ | 1,512,447 | $ | — | ||||
Land use rights deposits
|
30,249 | 351,021 | ||||||
Equipment and construction project deposits
|
247,450 | 144,552 | ||||||
Other long term assets
|
18,238 | 159,107 | ||||||
|
$ | 1,808,384 | $ | 654,680 |
Long term investment is comprised of an investment in a local credit cooperative which the Company purchased in August 2010. As a shareholder in the credit cooperative, the Company has access to favorable borrowing terms, and pro rata dividends of credit cooperative profits, if declared. The Company owns 7.81% of the credit cooperative.
|
|
Land use rights deposits represents amounts advanced to an independent third party to be applied against the purchase of land use rights by the Company upon completion by the Company of its duck farm under construction.
|
11. | Trade accounts payable and accrued liabilities: |
As of December 31, 2010 and 2009, accounts payable and accrued liabilities were comprised of the following: |
|
2010
|
2009
|
||||||
(Restated – see note 24)
|
||||||||
Trade accounts payable
|
$ | 1,933,520 | $ | 2,510,425 | ||||
Accrued payroll
|
265,443 | 353,462 | ||||||
Accrued liquidated damages
|
562,746 | — | ||||||
Accrued interest expense
|
— | 66,822 | ||||||
Accrued costs for construction in progress
|
— | 1,366,062 | ||||||
Accrued professional services
|
55,564 | 208,750 | ||||||
Accrued taxes
|
596,120 | — | ||||||
|
$ | 3,413,393 | $ | 4,505,521 |
Pursuant to the terms of the registration rights agreements dated November 10, 2010 and November 16, 2010, entered into between the Company and the investors in the November 2010 financing, the Company was required to file a registration statement including the shares issued in the November 2010 financing no later than January 9, 2011 and have such registration declared effective no later than May 9, 2011. The Company failed to file such registration statement, and as a result must accrue liquidated damages in the amount of 1% of the aggregate subscription amount for the first 30 days after the filing deadline, and 2% for each 30-day period thereafter, with a maximum penalty of 10% of the aggregate subscription amount. As of December 31, 2010, such accrued liquidated damages amounted to $562,746 (see note 17).
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
12.
|
Derivative Financial Instruments and Financing:
|
In connection with the consummation of the Reverse Merger Transaction, on November 10, 2010, the Company consummated the First Financing for the sale of Units consisting of (i) four (4) shares of common stock and (ii) a warrant to purchase one (1) share of common stock at an exercise price of $4.00. Each Unit was priced at $8.00. Gross cash proceeds were $4,450,072, and the Company issued 2,225,036 shares of common stock and 556,259 warrants. The Company also exchanged $549,984 in previously issued debentures that were converted into Units at a price of $6.00 per Unit, for a total of 366,656 shares of common stock and 91,664 warrants. On November 16, 2010, the Company sold additional Units for gross cash proceeds of $657,400 pursuant to the same offering, and issued 328,700 shares and 82,175 warrants. In connection with the First Financing, the Company also issued 226,298 placement agent warrants with an exercise price of $4.00.
|
|
Gross and net proceeds to the company were as follows:
|
|
Nov. 10, 2010
|
Nov. 16, 2010
|
Total
|
|||||||||
Cash proceeds
|
$ | 4,450,072 | $ | 657,400 | $ | 5,107,472 | ||||||
Debentures converted into shares
|
549,984 | — | 549,984 | |||||||||
Commissions and direct offering costs
|
(424,506 | ) | (52,592 | ) | (477,098 | ) | ||||||
Net proceeds
|
$ | 4,575,550 | $ | 604,808 | $ | 5,180,358 |
The proceeds of the First Financing were allocated as follows:
|
|
Nov. 10, 2010
|
Nov. 16, 2010
|
Total
|
|||||||||
Common stock, par value $0.001
|
$ | 2,592 | $ | 329 | $ | 2,921 | ||||||
Additional paid in capital
|
3,546,844 | 438,200 | 3,985,044 | |||||||||
Derivative financial instruments
|
1,026,114 | 166,279 | 1,192,393 | |||||||||
|
$ | 4,575,550 | $ | 604,808 | $ | 5,180,358 |
The warrants issued in the transaction contain a provision that in the event the Company effects a merger or consolidation, a sale of all or substantially all of its assets, or if any tender offer or exchange offer is completed pursuant to which holders of the Company’s common stock are permitted to tender or exchange their shares for other securities, cash or property, and such transaction is (i) an all cash transaction, (ii) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, or (ii) a transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, then the Company or any successor entity shall pay at the warrant holder’s option, an amount of cash equal to the value of the warrant as determined in accordance with the Black Scholes option pricing model.
|
|
Because of this provision, the warrants do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each period.
|
|
General and administrative expenses represent the portion of commissions and direct offering costs allocated to derivative financial instrument based on the relative fair values of the equity and derivative instruments issued in the transaction.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
12.
|
Derivative Financial Instruments and Financing (continued):
|
The warrants are valued using the Black/Scholes pricing model because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used to value the warrants as of their inception included the following:
|
|
Nov. 10, 2010
|
Nov. 16, 2010
|
Dec. 31, 2010
|
|||||||||
Underlying share price
|
$ | 2.03 | $ | 2.50 | $ | 2.50 | ||||||
Exercise Price
|
$ | 4.00 | $ | 4.00 | $ | 4.00 | ||||||
Term (years)
|
3.00 | 3.00 | 2.86 | |||||||||
Volatility
|
120.08 | % | 120.80 | % | 120.61 | % | ||||||
Annual Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Discount Rate - Bond Equivalent Yield
|
0.63 | % | 0.79 | % | 1.02 | % |
Since the Company’s common stock has limited trading history, the Company estimated volatility using historical volatility of comparable companies in our industry. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants.
|
|
The change in fair value of the warrants is recognized in the statement of operations each period. During the year ended December 31, 2010, the change in fair value was as follows:
|
|
Nov. 10, 2010
|
Nov. 16, 2010
|
Total
|
|||||||||
Value at inception
|
$ | 1,026,114 | $ | 166,279 | $ | 1,192,393 | ||||||
Value at December 31, 2010
|
1,317,142 | 163,119 | 1,480,261 | |||||||||
|
||||||||||||
Gain (loss) on derivative financial instruments
|
$ | (291,028 | ) | $ | 3,160 | $ | (287,868 | ) |
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes.
|
|
In connection with each of the November 2010 financing and the March 2011 financing, the Company undertook to prepare and file with the SEC and maintain the effectiveness of a “resale” registration statement pursuant to Rule 415 under the Securities Act providing for the resale of (i) all of the shares of common stock (ii) all of the shares of common stock issuable upon exercise of the warrants, (iii) all of the shares of common stock issuable upon exercise of the warrants issued to the placement agent (iv) any additional shares issuable in connection with any anti-dilution provisions associated with such preferred stock and warrants, and (v) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
12.
|
Derivative Financial Instruments and Financing (continued):
|
Under the terms of the Registration Rights Agreement executed in connection with the November 2010 financing, the Company was required to have a registration statement filed with the SEC within 60 days after the first closing date (being January 9, 2011) and declared effective by the SEC not later than 180 days from the closing date in the event of a full review (being May 9, 2011) with respect to 2,905,392 shares of common stock and 952,646 shares of common stock underlying warrants issued pursuant to the November 2010 financing. Under the terms of the Registration Rights Agreement executed in connection with the March 2011 financing, the Company is required to have a registration statement filed with the SEC within 60 days after the closing date (being May 6, 2011) and declared effective by the SEC not later than 180 days from the closing date in the event of a full review (being September 3, 2011) with respect to 575,000 shares of common stock and 189,750 shares of common stock underlying warrants. The Company is required to pay liquidated damages to each purchaser in an amount equal to one percent of the purchaser’s purchase price paid for any registrable securities then held by the purchaser for the first thirty (30) calendar days past the relevant deadline that the registration statement is not filed or not declared effective, for any period that the Company fails to keep the registration statement effective. The liquidated damages increases to 2% of the purchaser’s purchase price for any registrable securities held after the first thirty (30) calendar day period thereafter. Through December 31, 2010, such accrued liquidated damages amounted to $562,746, all of which relate to the November 2010 financing (see notes 11 and 17). This amount was charged to interest expense on the accompanying statement of operations in the year ended December, 31, 2010. The maximum amount of the liquidated damages is $562,746 related to the November 2010 financing and $115,000 related to the March 2011 financing. No liability has been recorded related to the March 2011 financing since the registration statement including the shares issued in March 2011 was filed before the prescribed date, and the required effectiveness date has not yet passed.
|
13.
|
Other accounts payable:
|
As of December 31, 2010 and 2009, other accounts payable and accrued liabilities were comprised of the following:
|
|
2010
|
2009
|
||||||
Deposits from contract farmers - general
|
$ | 1,088,536 | $ | 913,541 | ||||
Deposits from contract farmers securing loans
|
2,769,291 | 2,348,915 | ||||||
Land use right payable
|
38,177 | 151,000 | ||||||
Construction project payable
|
351,642 | 466,833 | ||||||
Other payables and amounts due to unrelated parties
|
295,209 | 670,856 | ||||||
|
$ | 4,542,855 | $ | 4,551,145 |
Other payables and amounts due to unrelated parties are comprised of demand unsecured loans and other amounts payable to unrelated third parties not in the ordinary course of carrying out the Company’s principal business, on which imputed interest was charged in the amount of $107,859 and $5,142 in the years ended December 31, 2010 and 2009, respectively.
|
|
Deposits from contract farmers are comprised of advances from local farmers used by the Company feed raw materials and fund the incubation of new ducks that will be raised by the farmers on behalf of the Company. General deposits are made from the farmers’ working capital without any underlying loans. Deposits from contract farmers securing loans are advanced to the Company from the proceeds of loans taken by the farmers. These loans are guaranteed by the general credit of the Company. To ensure repayment of the loans, the Company requires that the farmers advance the amount of the loan to the Company to be held as a deposit against the loan. The deposits are then returned when the loans mature.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
14.
|
Loans payable:
|
|
(a)
|
Short term bank loans
|
|
As required, the Company borrows funds in the form of short term bank loans payable to fund its capital projects and supplement its working capital requirements. The carrying value of short term bank loans payable as of December 31, 2010 and 2009 is shown in the following table. The fair value of these bank loans payable approximates their carrying values.
|
|
Annual
|
|
|
||||||||
Interest
|
|||||||||||
Due Dates
|
Rates
|
2010
|
2009
|
||||||||
January 13, 2010 (5)
|
7.812 | % | $ | — | $ | 877,552 | |||||
March 10, 2010 (5)
|
6.372 | % | — | 497,280 | |||||||
March 17, 2010 (5)
|
6.372 | % | — | 936,056 | |||||||
April 8, 2010 (5)
|
5.310 | % | — | 731,294 | |||||||
May 7, 2010 (5)
|
5.310 | % | — | 1,755,104 | |||||||
May 7, 2010 (5)
|
5.310 | % | — | 1,462,587 | |||||||
May 7, 2010 (5)
|
5.310 | % | — | 1,462,587 | |||||||
June 16, 2010 (5)
|
5.310 | % | — | 453,402 | |||||||
July 20, 2010 (3)
|
5.841 | % | — | 731,294 | |||||||
July 20, 2010 (5)
|
5.310 | % | — | 438,776 | |||||||
August 4, 2010 (5)
|
4.860 | % | — | 438,776 | |||||||
August 4, 2010 (5)
|
4.860 | % | — | 438,776 | |||||||
September 20, 2010 (5)
|
5.841 | % | — | 292,517 | |||||||
September 24, 2010 (5)
|
5.841 | % | — | 599,661 | |||||||
October 13, 2010 (5)
|
7.992 | % | — | 292,517 | |||||||
January 25, 2011 (1)(4)
|
5.842 | % | 2,268,673 | — | |||||||
March 14, 2011 (4)(5)
|
5.310 | % | 1,482,198 | — | |||||||
March 28, 2011 (3)(4)
|
5.841 | % | 756,224 | — | |||||||
April 11, 2011 (5)
|
5.310 | % | 756,224 | — | |||||||
June 10, 2011 (5)
|
5.310 | % | 468,859 | — | |||||||
September 15, 2011 (2)(5)
|
5.841 | % | 907,468 | — | |||||||
October 13, 2011 (5)
|
5.841 | % | 302,489 | — | |||||||
October 15, 2011 (5)
|
5.310 | % | 620,103 | — | |||||||
November 4, 2011 (5)
|
5.841 | % | 302,489 | — | |||||||
|
$ | 7,864,727 | $ | 11,408,179 |
(1)
|
The assets of an unrelated third party are pledged as collateral for this loan (see note 4).
|
|
(2)
|
The assets of Jinyatai are pledged as collateral for this loan (see note 4).
|
|
(3)
|
These loans are secured by accounts receivable of the Company.
|
|
(4)
|
These loans were repaid on or before their respective due dates subsequent to December 31, 2010 (see note 24(e)).
|
|
(5)
|
These loans are secured by property and equipment of the Company
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
14.
|
Loans payable (continued):
|
|
(b)
|
Long term bank loans
|
|
The carrying value of long term bank loans payable as of December 31, 2010 and 2009 is shown in the following table. The fair value of these bank loans payable approximates their carrying values.
|
Due Dates
|
Annual
Interest |
2010
|
2009
|
||||||||
October 21, 2012 (4)
|
5.400 | % | $ | 1,777,129 | $ | 1,718,540 | |||||
November 30, 2012 (1)
|
0.000 | % | 35,694 | 29,994 | |||||||
December 10, 2012 (4)
|
5.400 | % | 491,545 | 475,340 | |||||||
August 8, 2013 (4)
|
5.400 | % | 1,512,447 | — | |||||||
August 8, 2013 (4)
|
5.400 | % | 453,734 | — | |||||||
September 12, 2013 (4)
|
5.400 | % | 907,468 | — | |||||||
October 9, 2013 (4)
|
5.400 | % | 1,512,447 | — | |||||||
October 14, 2013 (4)
|
5.400 | % | 907,468 | — | |||||||
November 30, 2013 (1)
|
0.000 | % | 31,069 | 26,123 | |||||||
April 20, 2014 (2)
|
0.000 | % | 59,665 | — | |||||||
December 31, 2014 (3)(4)
|
5.760 | % | 3,327,384 | — | |||||||
|
$ | 11,016,050 | $ | 2,249,997 |
(1)
|
The Company recognized a discount on the face value of the loans at inception to adjust the carrying value to the fair value. Fair value was calculated using the net present value of the loans, at an assumed interest rate of 14%, being the estimated cost of capital for the Company for unsecured borrowings. The amount of the discounts, being $40,865, was recorded as a reduction to the carrying value of the bank loan in a prior period. The discounts are being amortized over the life of the loans using the effective interest method, with interest expense being recorded as an expense in the related period. The Company recognized interest expense to amortize the discounts in the amount of $8,518 and $7,336 in the years ended December 31, 2010 and 2009, respectively. The carrying value of the loans as of December 31, 2010 and 2009 as shown in the table above was $66,763 and $56,117, respectively, comprised of face value of $93,469 and $90,388, respectively, net of unamortized discount of $26,706 and $34,271, respectively. These loans are unsecured.
|
|
(2)
|
This instrument is a non interest bearing loan from a local government authority. As such, the Company recognized a discount on the face value of the loans at inception to adjust the carrying value to the fair value. Fair value was calculated using the net present value of the loans, at an assumed interest rate of 14%. The amount of the discount, being $41,716, was recorded as a reduction to the carrying value of the bank loan in the year ended December 31, 2010. The discount is being amortized over the life of the loan using the effective interest method, with interest expense being recorded as an expense in the related period. The Company recognized interest expense to amortize the discount in the amount of $1,941 and $5,268 in the year ended December 31, 2010. The carrying value of the loan as of December 31, 2010 as shown in the table above was $59,665, comprised of face value of $97,387, net of unamortized discount of $37,722. These loans are unsecured.
|
|
(3)
|
The assets of an unrelated third party are pledged as collateral for this loan (see note 4)
|
|
(4)
|
These loans are secured by property and equipment of the Company
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
14.
|
Loans payable (continued):
|
|
(c)
|
Convertible loan
|
|
On March 1, 2010, the Company issued unsecured debentures in the aggregate principal amount of $650,000 to 11 investors. The Company received net proceeds of $555,000, which were designated to pay legal, accounting, and other costs associated with the Reverse Merger Transaction and the Financing. The debentures bore interest at a rate of 15% per annum, and matured on the earlier of September 30, 2010 or the completion of a financing of at least $10,000,000 by the Company. The debentures are not convertible at inception because the conversion price is based upon the offering price of subsequent financings. Once the subsequent financing occurs and the conversion price is known, the debenture is convertible into a fixed number of shares. The Company evaluated the conversion option embedded in the convertible debentures under the guidance of ASC 815, Derivatives and Hedging. The debentures met the definition of conventional convertible for purposes of applying the exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. In this case, there is a limitation on the number of shares issuable due to a fixed conversion price. Therefore, the debentures are conventional convertible and the conversion option does not require bifurcation and liability classification.
|
||
In connection with the Financing, the Company committed to issue an aggregate of 650,000 shares of the Company’s common stock, which was granted on a basis of one (1) share for one dollar ($1.00) of Debentures, upon completion of a public offering. Due to the governing laws of the Peoples Republic of China, foreign ownership in the operating company is not allowed. Accordingly, this commitment could not be fulfilled until the Company affected a transaction where the issuance of shares could be accomplished. As a result, no value was attributed to this commitment at inception. This commitment was reassessed at each reporting date until such time that it was more likely than not that a reverse merger transaction would occur and the fair value of the commitment could be measured.
|
||
At inception, the Company recorded the debentures at a value of $555,000, being the face value of $650,000, less commissions paid of $95,000. The commissions were amortized over the life of the debentures to interest expense. The Company recorded an expense to amortize the commissions in the amount of $95,000 in the year ended December 31, 2010.
|
||
Prior to closing of the Reverse Merger Transaction, the Company assessed the fair value of the commitment to issue 650,000 shares of the newly formed public entity. The commitment was satisfied through the issuance of 988 ordinary shares of Dynamic Ally immediately prior to completion of the Reverse Merger Transaction, which were then exchanged for 650,000 common shares of the Company on closing of the Reverse Merger Transaction, at which time the commitment was satisfied in full. The Company recorded a charge to interest expense in the amount of $165,431 in the fourth quarter of 2010 to reflect the estimated fair value of the shares. The estimated fair value of the shares was calculated using a Capitalization of Earnings methodology, which falls under the “income approach” methodology of valuing assets and liabilities. Fair value under the Capitalization of Earnings methodology is derived by discounting the expected future income streams of the business by the expected rate of return of the business. This discounted present value methodology evolves into a capitalization of earnings method when the expected future income streams are constant. The Company believes this methodology best estimates fair value of the shares because the shares encompassed substantially lesser rights than shares sold by the Company in the November 2010 and March 2011 offerings, most notably lack of registration rights penalties and attached warrants, and therefore could not be valued using pricing from those offerings.
|
||
The debentures matured unpaid on September 30, 2010. Because of the default on repayment of the loan, the debentures plus accrued interest became immediately due and payable in cash on September 30, 2010, and the interest rate from September 30, 2010 until repayment increased from 15% to 20% per annum, calculated on a daily basis. On November 10, 2010, in connection with the closing of the Reverse Merger Transaction and the Financing, the notes were satisfied in full as follows: (i) principal in the amount of $549,984 was converted at the option of certain of the holders into 366,656 shares of common stock of Parkview and was recorded at the value of the shares on the conversion date, (ii) principal in the amount of $100,016 was repaid in cash, and (iii) interest of $72,493 was paid in cash. No commitment remained as of December 31, 2010 related to the debentures.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
15.
|
Subsidy income:
|
From time to time, the Company receives subsidies from the PRC government. Subsidies used for current period expenditures are recognized as income in the period in which the benefit from the subsidy is realized by the Company. Certain of the subsidies are earmarked for particular capital improvement projects, and the completed projects must be approved by the government to ensure specifications were met. Subsidies that relate to depreciable property and equipment are recorded as an offset to the related capital accounts to which the subsidy relates.
|
|
During the years ended December 31, 2010 and 2009, the Company recognized subsidy income of $954,986 and $339,981, respectively. During the year ended December 31, 2009, the Company recorded capital subsidies in the amount of $1,853,557 which were offset against the cost of capital assets acquired with the subsidized funds. No capital subsidies were received in the year ended December 31, 2010.
|
16.
|
Share capital:
|
|
(a)
|
Common Stock
|
|
The Company was incorporated on April 7, 1999 (see note 1(a)). The Company is authorized to issue up to 75,000,000 shares of common stock, par value $0.001 per share.
|
||
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors. Holders of common stock representing a majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to the Company’s certificate of incorporation.
|
||
Holders of common stock are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata 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. The common stock has no pre-emptive, subscription or conversion rights and there are no redemption provisions applicable to the common stock.
|
||
(b)
|
Preferred Stock
|
|
The Company is authorized to issue 5,000,000 shares of preferred stock, par value $.001 per share, none of which are currently outstanding. The shares of preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the Board of Directors. The Board of Directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Delaware.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
16.
|
Share capital (continued):
|
|
(c)
|
Warrants
|
|
As of December 31, 2010, the Company had 952,646 warrants outstanding. These warrants were issued in connection with the First Financing for which closings were held on November 10, 2010 and November 16, 2010. Each warrant entitles the holder to purchase one (1) share of the Company’s common stock at an exercise price of $4.00 per share, have a term of 3-5 years, and are subject to a call provision if the closing bid price of the Company’s common stock equals or exceeds $8.00 per share for five consecutive trading days, subject to the Company’s common stock being traded on either the New York Stock Exchange, Nasdaq or NYSE Amex and there being an effective registration statement for the resale of the shares of common stock underlying the warrants. The warrants issued in the transaction do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each reporting period (see note 12)
|
||
(d)
|
Earnings per share
|
|
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated based on the treasury stock method, assuming the issuance of common shares, if dilutive, resulting from the exercise of outstanding warrants.
|
||
During the years ended December 31, 2010 and 2009, the warrants outstanding have not been included in the computation of diluted income per share, because all outstanding warrants were out of the money and such inclusion would have had an anti-dilutive effect.
|
||
(e)
|
Stock based compensation expense
|
|
Prior to closing of the Reverse Merger Transaction, Dynamic Ally entered into fee settlement agreements with seven separate service providers pursuant to which Dynamic Ally issued 1,581 shares to the service providers in exchange for services rendered in connection with the Reverse Merger Transaction. The Dynamic Ally shares were exchanged for 1,040,561 shares of the Company’s common stock pursuant to the Share Exchange Agreement. The fair value of the shares was calculated as $2,081,122, valued at the offering price of the underlying shares of the Company’s common stock in the concurrent financing of $2.00 per share. This amount is included in “General and administrative expense” on the accompanying statement of operations during the year ended December 31, 2010.
|
||
(f)
|
2009 capital contribution
|
|
Taiyang’s share capital is in the form of paid in capital, and is not issued in the form of unit shares, as is common in the PRC. During September 2009, a capital contribution in the amount of $4,385,644 was made as follows: Wu Qiyou contributed $4,210,218, Wu Qida contributed $87,713, and Chen Beihuang contributed $87,713.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
17.
|
Interest expense (net):
|
The Company earns interest income on cash balances and short term investments. The Company recognizes interest expense on loans payable, and for bank charges related to its cash accounts. Interest expense was as follows during the years ended December 31, 2010 and 2009:
|
|
2010
|
2009
|
||||||
(Restated – see note 24)
|
||||||||
Interest income
|
$ | (241,676 | ) | $ | (73,680 | ) | ||
Interest expense
|
1,473,696 | 536,573 | ||||||
Bank fees
|
137,175 | 77,598 | ||||||
Liquidated damages
|
562,746 | — | ||||||
Amortization of debt discount
|
108,786 | 9,291 | ||||||
Imputed interest expense
|
273,290 | 5,142 | ||||||
|
||||||||
|
$ | 2,314,017 | $ | 554,924 |
Pursuant to the terms of the registration rights agreements dated November 10, 2010 and November 16, 2010, entered into between the Company and the investors in the November 2010 financing, the Company was required to file a registration statement including the shares issued in the November 2010 financing no later than January 9, 2011 and have such registration declared effective no later than May 9, 2011. The Company failed to file such registration statement, and as a result must accrue liquidated damages in the amount of 1% of the aggregate subscription amount for the first 30 days after the filing deadline, and 2% for each 30-day period thereafter, with a maximum penalty of 10% of the aggregate subscription amount. As of December 31, 2010, such accrued liquidated damages amounted to $562,746 (see note 11).
|
|
The Company capitalizes interest on loans related to construction projects in progress. During the years ended December 31, 2010 and 2009, the Company capitalized interest expense in the amount of $288,486 and $321,981, respectively.
|
18.
|
Other income:
|
Other income was as follows during the years ended December 31, 2010 and 2009:
|
|
2010
|
2009
|
||||||
Gain on sale of fertilizer plant
|
$ | 877,874 | $ | — | ||||
Gain on collection of Jinyatai receivable written off in prior period
|
895,430 | — | ||||||
Investment and other income
|
18,510 | — | ||||||
Donations and other expenses
|
(63,214 | ) | (81,736 | ) | ||||
|
||||||||
|
$ | 1,728,600 | $ | (81,736 | ) |
(a)
|
Gain on sale of fertilizer plant:
|
|
In 2008, the Company began construction on an organic fertilizer manufacturing plant (the “Fertilizer Plant”) that the Company intended to complete in the second half of 2010. The Fertilizer Plant was to be used to process duck waste products into a saleable organic fertilizer product.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
18.
|
Other income (continued):
|
|
(a)
|
Gain on sale of assets (continued):
|
|
In May 2010, the Company entered into an Asset Transfer Agreement with an unrelated third party (the “Buyer”), whereby the buyer agreed to buy, and the Company agreed to sell, the Fertilizer Plant and related equipment, ground works, land rights, and intellectual property associated with the manufacturing process (collectively, the “Sold Assets”). The sale price for the Sold Assets (as valued using the exchange rate on the sale date) was $3,886,431, of which $2,048,371 was paid during June 2010, $1,010,851 (as valued using the exchange rate on the payment date) was paid during December 2010, and $889,174 (as valued using the exchange rate at December 31, 2010) is outstanding and due by May 31, 2011.
|
||
During the year ended December 31, 2010, the Company recognized a gain on the sale of the Sold Assets equal to the excess of the sale price over the carrying value of the Sold Assets on the date of the sale as follows:
|
Sale Price
|
$ | 3,886,431 | ||
Less: carrying value of assets at sale date
|
||||
Prepaid current assets
|
43,894 | |||
Construction in progress
|
2,302,441 | |||
Prepaid construction in progress
|
626,425 | |||
Prepaid land use rights
|
321,886 | |||
Property, plant and equipment
|
38,508 | |||
Accrued construction in progress
|
(324,597 | ) | ||
Net carrying value of asset group
|
3,008,557 | |||
Gain on disposal
|
$ | 877,874 |
Additionally, the Asset Sale is subject to the following material terms and conditions:
|
●
|
The Company must assist the Buyer in transferring all property rights and licenses
|
||
●
|
The Company will provide basic training on production methods, and will turn over all procedures and technology information to the Buyer.
|
||
●
|
The Buyer can market the product under the Company’s name for a period of two years
|
||
●
|
The land use rights transferred to the Buyer have been prepaid by the Company, but are not yet owned outright by the Company. The owner of the land use rights has agreed to transfer such rights to the Company upon completion of construction of the Fertilizer Plant, at which time the Company will transfer them to the Buyer.
|
No consideration was deferred because substantially all of the above conditions were met in 2010, and the remaining value as of December 31, 2010 was nominal.
|
||
The Company made the strategic decision to sell the Fertilizer Plant because the price of fertilizer products has decreased materially from the time the Company began building the Plant. In connection with its public listing, which was not contemplated at the time the Fertilizer Plant was begun, the Company determined that expected margins on fertilizer products would not be commensurate with margins on its core products, and that investors in the Company would prefer that the Company focus its financial and other resources on growing its food processing business.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
18.
|
Other income (continued):
|
||
(a)
|
Gain on sale of assets (continued):
|
||
Prior to the sale of the Sold Assets, the Company had pledged the Sold Assets as collateral for a short term bank loan. After the sale, with the permission of the Buyer, the Company continues to use the Sold Assets as collateral for this bank loan, which matured in January 2011 and was extended for a period of one year through January 2012.
|
|||
(b)
|
Collection of account previously written off:
|
||
In connection with the issuance of its audited financial statements for years ended December 31, 2008 and 2009, which were issued on June 10, 2010, the Company made a reserve for the full amount off an account receivable in the amount of $895,430 for the sale price of Jinyatai. The charge to the statement of operations for this reserve was made to the opening balance of fiscal 2008. Between June 20-29, 2010, the Company collected this amount from the buyer and recognized a gain from the collection in this amount in the year ended December 31, 2010 (see note 4).
|
|||
(c)
|
Other non-operational expense (net of other non-operational income):
|
||
During the years ended December 31, 2010 and 2009, the Company recognized other non-operational expense (net of other non-operational income in the amount of $44,704 and $81,736, respectively.
|
19.
|
Financial instruments:
|
||
(a)
|
Fair value of financial instruments:
|
||
The Company utilizes ASC Topic 820 fair value measurement accounting guidance, which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. This guidance also defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by this standard contains three levels as follows:
|
●
|
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
||
●
|
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
||
●
|
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company values certain loans payable at fair market value which do not have a stated interest rate using a discount of 14% on the face value of the loan at inception to adjust the carrying value to the fair value. Fair value is calculated using the net present value of the loan, and the amount of the discount is included on the statement of operations under the caption “Interest and other expense, net.” The discount is amortized over the life of the loan using the effective interest method, with interest expense being recorded as an expense in the related period. As of December 31, 2010 and 2009, the value of such instruments included in “Loans payable, long term portion” was $126,428 and $56,117, respectively.
|
|||
The Company’s financial instruments consist of cash, trade accounts receivable, loans receivable, other current assets, amounts due from/to related parties, trade accounts payable and accrued liabilities, other accounts payable, and current loans payable, all of which are valued using Level 1 of the valuation hierarchy. The fair values of these financial instruments approximate their carrying values due to the relatively short-term maturity of these instruments.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
19.
|
Financial instruments (continued):
|
|
(a)
|
Fair value of financial instruments (continued):
|
|
The Company also has a derivative liability related warrants issued in November 2010 (see note 12). This derivative liability is valued using Level 2 of the fair value hierarchy. The warrants are valued using the Black/Scholes pricing model because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used to value the warrants as of their inception included the following:
|
|
Nov. 10, 2010
|
Nov. 16, 2010
|
Dec. 31, 2010
|
|||||||||
Underlying share price
|
$ | 2.03 | $ | 2.50 | $ | 2.50 | ||||||
Exercise Price
|
$ | 4.00 | $ | 4.00 | $ | 4.00 | ||||||
Term (years)
|
3.00 | 3.00 | 2.86 | |||||||||
Volatility
|
120.08 | % | 120.80 | % | 120.61 | % | ||||||
Annual Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Discount Rate - Bond Equivalent Yield
|
0.63 | % | 0.79 | % | 1.02 | % |
Since the Company’s common stock has limited trading history, the Company estimated volatility using historical volatility of comparable companies in our industry. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants.
|
||
The change in fair value of the warrants is recognized in the statement of operations each period. During the year ended December 31, 2010, the change in fair value was as follows:
|
|
Nov. 10, 2010
|
Nov. 16, 2010
|
Total
|
|||||||||
Value at inception
|
$ | 1,026,114 | $ | 166,279 | $ | 1,192,393 | ||||||
Value at December 31, 2010
|
1,317,142 | 163,119 | 1,480,261 | |||||||||
|
||||||||||||
Gain (loss) on derivative financial instruments
|
$ | (291,028 | ) | $ | 3,160 | $ | (287,868 | ) |
The Company did not have any assets that were measured at fair value on a recurring basis. A summary of liabilities that were measured at fair value on a recurring basis is as follows:
|
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
December 31, 2010:
|
||||||||||||
Discounted loans payable
|
$ | — | $ | 126,428 | $ | — | ||||||
Derivative financial instruments
|
— | 1,480,261 | — | |||||||||
December 31, 2009:
|
||||||||||||
Discounted loans payable
|
$ | — | $ | 56,117 | $ | — | ||||||
Derivative financial instruments
|
— | — | — |
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
19.
|
Financial instruments (continued):
|
|
(a)
|
Fair value of financial instruments (continued):
|
|
Gains and losses from financial instruments are included in the statement of operations as follows:
|
|
2010
|
2009
|
||||||
Interest expense, net
|
$ | 13,786 | $ | 9,291 | ||||
Loss on derivative financial instruments
|
(287,868 | ) | — | |||||
|
||||||||
|
$ | (274,082 | ) | $ | 9,291 |
(b)
|
Interest rate and concentration of credit risks
|
|
Financial instruments that potentially subject the Company to concentrations of credit risks consist principally of cash and accounts and loans receivable. To minimize the interest rate and credit risk, the Company places cash with high credit quality financial institutions located in the PRC.
|
||
Credit risk from accounts receivable results from the risk of customer non-payment. Management, on an ongoing basis, monitors the level of accounts receivable attributable to each customer, and the length of time each account is outstanding. When necessary, management takes appropriate action to follow up on balances considered at risk.
|
||
During the years ended December 31, 2010 and 2009, the Company had the following concentrations of sales in each business unit:
|
|
2010
|
2009
|
||||||||||||||||||
|
Revenue
|
% of
Unit |
% of
Company |
Revenue
|
% of
Unit |
% of
Company |
||||||||||||||
Breeding Unit:
|
||||||||||||||||||||
Customer A
|
$ | 4,620,560 | 36.7 | % | 11.1 | % | $ | 2,410,867 | 31.3 | % | 8.4 | % | ||||||||
Customer B
(note 4) |
3,263,568 | 25.9 | % | 7.8 | % | 1,661,504 | 21.6 | % | 5.8 | % | ||||||||||
|
||||||||||||||||||||
Feed Unit:
|
||||||||||||||||||||
Customer C
|
13,817,915 | 99.5 | % | 33.1 | % | — | — | — | ||||||||||||
Food Unit:
|
||||||||||||||||||||
Customer D
|
5,980,083 | 39.3 | % | 14.3 | % | 12,052,336 | 57.1 | % | 41.8 | % | ||||||||||
Customer E
|
1,660,883 | 10.9 | % | 4.0 | % | — | — | — |
There is no guarantee that any of the customers mentioned above will continue to buy from the Company, and loss of any of these major customers would have a material adverse effect on the Company’s results of operations.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
19.
|
Financial instruments (continued):
|
|
(b)
|
Interest rate and concentration of credit risks (continued)
|
|
During the years ended December 31, 2010 and 2009, the Company had the following concentrations of purchases from suppliers in each business unit:
|
|
2010
|
2009
|
||||||||||||||||||
|
Purchases
|
% of
Unit |
% of
Company |
Purchases
|
% of
Unit |
% of
Company |
||||||||||||||
Supplier A
|
$ | 3,285,977 | 14.1 | % | 5.9 | % | $ | 3,835,633 | 37.2 | % | 8.1 | % | ||||||||
Supplier B
|
2,414,959 | 10.4 | % | 4.3 | % | 1,309,597 | 12.7 | % | 2.8 | % | ||||||||||
Supplier C
|
2,389,270 | 10.3 | % | 4.3 | % | 1,773,170 | 17.2 | % | 3.8 | % |
(c)
|
Foreign currency risk
|
|
The Company uses the US dollar as its reporting currency for these financial statements, while nearly all of the Company’s transactions are denominated in RMB. Revenues and expenses are translated into US dollars using average exchange rates for the period, and assets and liabilities are translated using the exchange rate at the end of the period. All resulting exchange differences arising from the translation are included as a separate component in accumulated other comprehensive income. Consequently, the Company’s unrealized exchange gain (loss) on translation of functional currency to reporting currency is subject to fluctuations in the exchange rate between the RMB and the US dollar in each reporting period. The Company does not hedge its exposure to currency fluctuations.
|
||
Additionally, capital raised in US dollars, and any future dividends or distributions paid outside of the PRC in US dollar, are subject to fluctuating exchange rates when converted from RMB to US dollars, and vice versa. The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading market.
|
||
The following exchange rates are applied for the Company’s financial statements for the periods presented herein:
|
|
2010
|
2009
|
||||||
RMB/USD
|
RMB/USD
|
|||||||
Period end rate
|
6.6118 | 6.8372 | ||||||
Period average rate
|
6.7787 | 6.8409 | ||||||
Period high rate
|
6.8436 | 6.8585 | ||||||
Period low rate
|
6.6118 | 6.8226 | ||||||
|
(d)
|
Liquidity Risk
|
|
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s objective to managing liquidity risk is to ensure that it has sufficient liquidity available to meet its liabilities when they become due. The Company uses cash to settle its financial obligations as they fall due. The ability to do this relies on the Company collecting its accounts receivables in a timely manner and by maintaining sufficient cash on hand through equity financing and bank loans.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
19.
|
Financial instruments (continued):
|
|
(e)
|
Commodity Risk
|
|
Profitability in the poultry industry is materially affected by the supply of parent breeding stocks and the commodity prices of ducklings, processing ducks, and feed ingredients, including corn, soybean cake, and other nutrition ingredients from numerous sources, mainly from wholesalers who collect the feed ingredients directly from farmers. As a result, the industry is subject to wide fluctuations and cycles. The Company does not currently use derivative financial or hedging instruments to reduce its exposure to various market risks related to commodity purchases
|
20.
|
Tax matters:
|
|
(a)
|
Income tax
|
|
The Company is subject to income, withholding, business and other taxes on income generated in the jurisdictions in which it does business.
|
||
Taiyang is exempt from corporate income tax due to the nature of its business. Beginning 2006, the PRC government instituted a tax exemption policy for certain aspects of the agricultural industry. Taiyang’s business qualifies as tax exempt. The exemption relates to unprocessed agricultural products and is granted by the relevant taxing authority on a year-by-year basis. There is no stated expiration to the exemption, and while Taiyang expects to continue to receive favorable tax treatment, changes in government policy or the nature of Taiyang’s operations could result in Taiyang being required to pay income taxes.
|
||
Ningguo is subject to corporate income tax in the PRC at a rate of 10% as a non-resident enterprise, as well as business tax at a rate of 5% on service income.
|
||
Under the laws of the BVI, Dynamic Ally is not subject to tax on its income or capital gains.
|
||
Parent is subject to United States income tax at a rate of 35%. No income tax expense was incurred in the United States in the years ended December 31, 2010 or 2009 as all income was generated in the PRC. Business activity in the United States consists primarily of professional service expenses related to the Company’s public listing and compliance.
|
||
Because all of the profits of Taiyang are owed to Ningguo pursuant to the Consulting Services Agreement between Taiyang and Ningguo, and all of the profits of Ningguo are in turn owed to Dynamic Ally pursuant to a similar agreement between Ningguo and Dynamic Ally, such income is subject to 5% business tax and 10% PRC non-resident income tax. The Company recognized business tax expense amounting to $265,509 and income tax expense amounting to $504,467 in the year ended December 31, 2010. No income tax or business tax expense was recognized in the year ended December 31, 2009 since the Company did not pay profits in the form of management fees during the 2009 reporting period.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
20.
|
Tax matters (continued):
|
|
(a)
|
Income tax (continued)
|
|
The reconciliation between taxes computed by applying the statutory income tax rate of 10% applicable for 2010 applicable to the Company’s operations to income tax expense is:
|
|
2010
|
2009
|
||||||
(Restated –
see note 24)
|
||||||||
Income before income taxes
|
$ | 4,098,622 | $ | 2,489,323 | ||||
Income tax at statutory rate of 10% in 2010 and 0% in 2009
|
409,862 | — | ||||||
Tax on income earned prior to contractual agreements between Taiyang and Ningguo
|
(238,179 | ) | — | |||||
Effect of increase in statutory rate to 25% subsequent to reverse merger
|
198,631 | |||||||
Non-deductible expenses
|
332,784 | — | ||||||
|
||||||||
Income tax expense
|
$ | 703,098 | $ | — |
Tax declarations, together with other legal compliance areas, such as customs and currency controls are subject to review and investigation by various agencies and authorities, who are enabled by law to impose very severe fines, penalties and interest charges. These facts create tax risks in China substantially more significant than typically found in countries with more developed tax systems and structures. Various tax authorities could take differing positions on interpretive issues and the effect could be significant. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from future review and assessment by tax authorities. If taxing authorities determine that there is an underpayment of taxes, they could impose a penalty between zero and five times the amount of taxes payable, at their discretion. Based on existing PRC tax regulations, the tax years of Taiyang and Ningguo for fiscal years 2006 through 2010 remain subject to examination by the tax authorities. Based on existing United States tax regulations, the tax years of parent for fiscal years 2003 through 2010 remain subject to examination by the tax authorities.
|
||
The Company has not adopted any uncertain tax positions during the periods presented.
|
||
(b)
|
Value added tax
|
|
The Company is subject to value added tax (“VAT”) on products that it sells within the PRC. VAT payable is netted against VAT paid on purchases. Certain of the Company’s products, including duck eggs, seedlings, and feed products, are exempted from VAT as a result of government agricultural incentives. If taxing authorities determine that payment is late or there is an underpayment of taxes, they could impose a penalty between zero and five times the amount of taxes payable, at their discretion.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
21.
|
Appropriated Retained Earnings:
|
According to PRC corporate law, the Company is required each year to appropriate 10% of its after tax income as reported in its financial statements, prepared in accordance with PRC GAAP, to the statutory common reserve fund until the fund reaches 50% of the Company’s Registered Capital. This fund can be used to make up for any losses incurred in the future or be converted into paid-in capital, provided that the fund does not fall below 50% of Registered Capital. Transfers to the Company’s appropriated retained earnings during the years ended December 31, 2010 and 2009 were as follows:
|
|
2010
|
2009
|
||||||
Balance, beginning of year
|
$ | 1,142,284 | $ | 680,702 | ||||
Appropriation of statutory reserve
|
211,628 | 461,582 | ||||||
Balance, end of year
|
$ | 1,353,912 | $ | 1,142,284 |
22.
|
Commitments and contingencies:
|
|
(a)
|
Commitments
|
|
The Company leases certain of its facilities pursuant to non-cancellable lease agreements expiring at various times through 2037. The amount of rent on these facilities is not fixed, but is based on the government stipulated market price of grains multiplied by the grain yield per area. Because future rents on these facilities depends upon unknown future market and production factors, the amount of future commitment cannot be quantified. Rent expense for the years ended December 31, 2010 and 2009 was $51,398 and $30,986, respectively.
|
||
(b)
|
Contingencies
|
|
In connection with the sale of the Fertilizer Plant, the Company paid a deposit in the amount of $321,886 to acquire land use rights for the location on which the Fertilizer Plant is being constructed. The owner of the land use rights has agreed to transfer such rights to the Company upon completion of construction of the Fertilizer Plant, at which time the Company will transfer them to the Buyer. The Company also agreed to allow the buyer of the Fertilizer Plant to use the Company’s name for marketing purposes for a period of two years from the sale date, and the buyer has allowed the Sold Assets to continue to be pledged as collateral for bank loans by the Company that are secured by the Sold Assets.
|
||
The Company regularly uses contract farmers to incubate ducks to be used for commercial processing. The Company pays the farmers a fixed fee per Duck when the duck has matured, which is after approximately 60 days. Fluctuations in the market price of ducks or duck meat could affect margins since these fees are fixed.
|
||
During 2009, the Company borrowed $1,492,961 from a banking institution, and subsequently made a loan to an unrelated third party, the balance of which was $907,468 and $877,552 as of December 31, 2010 and 2009, respectively. The third party pledged its assets to the bank as security for the loan. The loan receivable does not have a stated maturity date or interest rate.
|
||
During 2010, the Company made a loan in the amount of $907,468 to Jinyatai, a former subsidiary of Taiyang that was divested in 2005. Jinyatai pledged its assets as partial collateral for a bank loan in the amount of $2,268,673 borrowed by the Company. The loan receivable matured on January 7, 2011. Because the loan was not repaid by this date, the agreement between the Company and Jinyatai calls for Jinyatai to pay interest incurred by the Company on the bank loan. Through December 31, 2010, such interest amounted to $50,576.
|
||
During 2010, the Company made a loan in the amount of $907,468 to an unrelated individual. The borrower pledged its assets as partial collateral for a bank loan in the amount of $3,327,384 borrowed by the Company. The loan receivable does not have a stated maturity date or interest rate.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
22.
|
Commitments and contingencies (continued):
|
|
(b)
|
Contingencies (continued)
|
|
The Company had additional unsecured loans receivable from unrelated parties totaling $1,545,722 and $1,939,391 outstanding at December 31, 2010 and 2009, respectively, which bear interest at rates paid by the Company on similar third party loans payable, have no stated maturity date, and have no security.
|
||
As of December 31, 2010 and 2009, the Company had outstanding deposits from contract farmers securing loans guaranteed by the Company in the amount of $2,769,291 and $2,248,915. These amounts are advanced to the Company from the proceeds of loans taken by the farmers. The loans taken by the farmers are guaranteed by the general credit of the Company. To ensure repayment of the loans by the farmers, the Company requires that the farmers advance the amount of the loan to the Company to be held as a deposit against the loan. The deposits are then returned when the loans mature and are repaid by the farmer to the respective bank. The term of each guarantee varies with the length of the loans taken by the farmers directly from the bank, but generally the term is less than one year. The Company would be obligated to repay a loan to the bank if the farmer defaulted on their repayment. There are no available external credit reporting ratings relative to the local farmers, but based on the Company’s history the risk of non-performance by the farmers is minimal. The maximum potential amount of future payments by the Company pursuant to these loans was $2,769,291 and $2,348,915 as of December 31, 2010 and 2009, respectively, which is equal to their carrying value .
|
||
The Company does not maintain product liability insurance, and property and equipment insurance does not cover the full value of the property and equipment, which leaves the Company with exposure in the event of loss or damage to its properties or claims filed against the Company.
|
||
As of December 31, 2010 and 2009, $756,224 and $731,294 of the Company’s trade accounts receivable were pledged as collateral for bank loans outstanding. These bank loans contain a covenant that prohibit the past due accounts receivable balance from exceeding 5% of the total accounts receivable balance. The loan agreements do not specify a methodology for identifying what accounts are past due. The Company does not give defined standard payment terms to its customers. Accordingly, the Company cannot determine if it has breached this covenant. The Company believes that it is in compliance based on its interpretation of the covenant, but there is no guarantee that the lending bank would consider the Company compliant. The Company has not had any disputes with the lending bank regarding such covenants.
|
||
As of December 31, 2010 and 2009, the Company had outstanding $4,268,057 and $2,816,943, respectively, of unsecured loans receivable from unrelated parties which bear interest at rates paid by the Company on similar third party loans payable and have no stated maturity date (see note 4). These loans, and other loans made by the Company during the years ended December 31, 2009 and 2010 that were repaid prior to the end of the respective reporting period, constitute inter-enterprise lending that violate the PRC General Lending Rules. A fine in the amount of one to three times the income generated by the Company from such inter-enterprise loans may be imposed by the People’s Bank of China, at their discretion, if the Company were found to be in violation of the PRC General Lending Rules. The Company estimates the range of potential fines to be between approximately $340,000 and $1,015,000 based on the guidelines established by PRC General Lending Rules, but such fines are levied discretion of the People’s Bank of China. In the opinion of management and its legal counsel, the probability of the fine being imposed is low and accordingly no provision has been made in the consolidated financial statements.
|
||
For discussion of tax issues, see notes 20(a) and 20(b).
|
23.
|
Segmented and Geographical Information:
|
|
The Company is structured and evaluated by its board of directors and management into three distinct business lines:
|
||
●
|
Breeding Unit – breeds, hatches, and cultivates ducklings for resale and processing by the Food Unit
|
|
●
|
Feed Unit – produces duck feed for internal use and external sale
|
|
●
|
Food Processing Unit – processes ducklings into frozen raw food product for commercial resale.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
23.
|
Segmented and Geographical Information (continued):
|
Results of operations for the year ended December 31, 2010 by business unit were:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Shared
|
|||||||||||||||||
(Restated – see note 24)
|
Unit
|
Unit
|
Unit
|
Costs (2)
|
Consolidated
|
|||||||||||||||
Revenues (1)
|
$ | 12,592,738 | $ | 13,886,122 | $ | 15,206,128 | $ | — | $ | 41,684,988 | ||||||||||
Cost of goods sold (1)
|
8,932,591 | 11,074,257 | 12,514,626 | — | 32,521,474 | |||||||||||||||
|
||||||||||||||||||||
Gross Profit
|
3,660,147 | 2,811,865 | 2,691,502 | — | 9,163,514 | |||||||||||||||
|
||||||||||||||||||||
Sales and marketing expenses
|
45,919 | — | — | — | 45,919 | |||||||||||||||
General and administrative expenses (2)
|
1,878,920 | 42,110 | 137,457 | 3,042,187 | 5,100,674 | |||||||||||||||
Operating profit (loss)
|
$ | 1,735,308 | $ | 2,769,755 | $ | 2,554,045 | $ | (3,042,187 | ) | $ | 4,016,921 |
(1)
|
Revenues and cost of goods sold reflect only sales to external customers. During the year ended December 31, 2010, the Feed Unit made sales of duck feed product to the Breeding Unit totaling $13,241,455, the Breeding Unit made sales of ducks to the Food Unit totaling $218,016, and the Food Unit made sales of food products to the Feed Unit of $8,681. These amounts have been eliminated for purposes of these financial statements.
|
||
(2)
|
Includes $2,081,122 stock based expenses and $894,087 cash based expenses associated with the Reverse Merger Transaction, and $265,509 business taxes
|
||
Results of operations for the year ended December 31, 2009 by business unit were:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Shared
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Costs (2)
|
Consolidated
|
|||||||||||||||
Revenues (1)
|
$ | 7,704,942 | $ | 50,592 | $ | 21,104,165 | $ | — | $ | 28,859,699 | ||||||||||
Cost of goods sold (1)
|
5,487,042 | 174,854 | 19,008,589 | — | 24,670,485 | |||||||||||||||
|
||||||||||||||||||||
Gross Profit
|
2,217,900 | (124,262 | ) | 2,095,576 | — | 4,189,214 | ||||||||||||||
|
||||||||||||||||||||
Sales and marketing expenses
|
55,425 | — | — | — | 55,425 | |||||||||||||||
General and administrative expenses
|
1,098,660 | 54,252 | 46,125 | 148,750 | 1,347,787 | |||||||||||||||
Operating profit (loss)
|
$ | 1,063,930 | $ | (178,614 | ) | $ | 2,049,436 | $ | (148,750 | ) | $ | 2,786,002 |
(1)
|
Revenues and cost of goods sold reflect only sales to external customers. During the year ended December 31, 2009, the Feed Unit made sales of duck feed product to the Breeding Unit totaling $12,387,362, and the Food Unit made sales of food products to the Breeding Unit totaling $51,137. These amounts have been eliminated for purposes of these financial statements.
|
||
(2)
|
Includes $148,750 cash based expenses associated with the Reverse Merger Transaction
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
23.
|
Segmented and Geographical Information (continued):
|
Breeding Unit sales increased in 2010 compared with the same period of 2009, primarily as a result of higher demand and market prices for ducklings in China. Because the Company generates its own ducklings from its biological assets, the cost of producing new ducklings does not fluctuate with the market selling price for the ducklings. Accordingly, when the market price for ducklings increases, the Company can maximize its profits by selling internally generated ducklings directly into the market, as opposed to using them as inputs for Food Unit products, since the market price of packaged Food Unit products does not fluctuate readily with the market price of the input ducklings.
|
|
The Feed Unit realized minimal sales in 2009 as products were primarily sold internally to the Breeding Unit. However, in 2010 the Company has made significant sales of feed products to external customers through one distributor, while continuing to supply the Breed Unit at levels similar to 2009. The Company will continue to attempt to market its feed products to external customers, primarily through feed distributors, and expects that it will continue to realize sales revenue from such products. However, because distribution of these products is currently concentrated in one distributor, loss of that distributor would materially affect such sales.
|
|
The Food Unit began its operations in 2008, and showed a significant increase in sales in 2009 as sales and marketing efforts converted to increased sales. Food Unit sales were down in 2010 as compared with 2009 as a result of higher market prices for ducklings, as described above.
|
|
During the years ended December 31, 2010 and 2009, all of the Company’s sales were to customers located in the PRC.
|
|
All of the Company’s assets are located in the PRC. The Company’s identifiable assets by business unit as of December 31, 2010 and 2009 were as follows:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Corporate
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Assets
|
Consolidated
|
|||||||||||||||
(Restated -
|
(Restated -
|
(Restated -
|
(Restated -
|
(Restated -
|
||||||||||||||||
See note 24)
|
See note 24)
|
See note 24)
|
See note 24)
|
See note 24)
|
||||||||||||||||
As of December 31, 2010
|
$ | 30,358,495 | $ | 10,715,090 | $ | 7,537,818 | $ | 5,326,750 | $ | 53,938,153 | ||||||||||
As of December 31, 2009
|
23,155,434 | 2,251,135 | 11,622,561 | 590,766 | 37,619,896 |
Interest, depreciation expense, and amortization of land use rights for the years ended December 31, 2010 and 2009 by business unit were:
|
|
|
|
|
Food
|
|
|
||||||||||||||||
(Restated – |
Breeding
|
Feed
|
Processing
|
|||||||||||||||||||
see note 24)
|
Year
|
Unit
|
Unit
|
Unit
|
Corporate
|
Consolidated
|
||||||||||||||||
Interest expense
|
2010
|
$ | 1,157,912 | $ | 260,462 | $ | — | $ | 895,643 | $ | 2,314,017 | |||||||||||
2009
|
260,164 | 240,912 | 53,848 | — | 554,924 | |||||||||||||||||
Depreciation
|
2010
|
599,878 | 56,062 | 322,407 | — | 978,347 | ||||||||||||||||
expense
|
2009
|
218,166 | 61,166 | 237,449 | — | 516,781 | ||||||||||||||||
Amortization of
|
2010
|
107,731 | 26,695 | 105,039 | — | 239,465 | ||||||||||||||||
land use rights
|
2009
|
98,530 | 26,453 | 100,081 | — | 225,064 |
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
24.
|
Restatement of Financial Statements:
|
||
The Company has restated its financial statements as of December 31, 2010 and 2009, and for the years then ended, to account for certain areas as described below.
|
|||
The accompanying financial statements reflect the following corrections:
|
|||
a)
|
The Company incorrectly applied the provisions of ASC Topic 805-40, “Reverse Acquisitions” with respect to the following: (i) the combination, elimination, and restatement of the shareholders’ equity section of the Company’s balance sheet and the related statement of shareholders’ equity were not appropriately applied, and (ii) previously, the Company had reflected the operating results and financial positions of the Parent in periods prior to the Reverse Merger Transaction, whereas such results should not be reflected since Parent is the accounting acquiree.
|
||
b)
|
The Company recognizes discounts against certain bank loan instruments that do not bear interest and have a stated maturity date. The Company previously recognized these discounts as interest income on the statement of operations. The discounts, amounting to $42,785 in the year ended December 31, 2008 and $42,061 in the year ended December 31, 2010, have been reclassified from interest income to additional paid-in capital to reflect the appropriate accounting.
|
||
c)
|
In the year ended December 31, 2010, the Company has recorded a charge of $165,431 to interest expense, with an offsetting adjustment to additional paid in capital, to reflect the fair value of 988 ordinary shares of Dynamic Ally that were issued to holders of convertible loans issued in March 2010 (see note 14(c)). The convertible loans were issued by Taiyang to fund the costs associated with the Reverse Merger Transaction, and provided that the Company should issue the equivalent of one share of common stock of the public entity for each dollar invested in the convertible loans.
|
||
d)
|
Liquidated damages in the amount of $562,746 related to the November 2010 financing should have been accrued as a contingent liability in the year ended December 31, 2010. This amount has been recorded as a charge to interest expense, and a credit to trade accounts payable and accrued expenses.
|
||
e)
|
In the year ended December 31, 2010, the Company has reclassified $95,000 amortization of a discount on convertible loans from general and administrative expense to interest expense.
|
||
f)
|
In the year ended December 31, 2010, the Company has recorded additional income tax expense of $198,631 resulting from termination of operating agreements between Ninnguo and Dynamic Ally.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
24.
|
Restatement of Financial Statements (continued):
|
These corrections resulted in adjustments to the following financial statement line items as of and for the years ended December 31, 2010 and 2009:
|
|
As Previously Reported
|
Adjustments
|
As Restated
|
|||||||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
Consolidated Balance Sheets
|
||||||||||||||||||||||||
Cash and cash equivalents
|
1,930,319 | 611,635 | — | (6,243 | ) | 1,930,319 | 605,392 | |||||||||||||||||
Total current assets
|
15,339,143 | 7,856,730 | — | (6,243 | ) | 15,339,143 | 7,850,487 | |||||||||||||||||
Property, plant and equipment, net
|
20,495,162 | 12,964,713 | — | (1,074 | ) | 20,495,162 | 12,963,639 | |||||||||||||||||
Total assets
|
53,938,153 | 37,627,213 | — | (7,317 | ) | 53,938,153 | 37,619,896 | |||||||||||||||||
Trade accounts payable and accrued expenses
|
2,858,112 | 4,505,521 | 555,281 | — | 3,413,393 | 4,505,521 | ||||||||||||||||||
Income tax payable
|
504,467 | — | 198,631 | — | 703,098 | — | ||||||||||||||||||
Total current liabilities
|
17,280,671 | 20,655,011 | 753,912 | — | 18,034,583 | 20,655,011 | ||||||||||||||||||
Total liabilities
|
28,296,721 | 22,905,008 | 753,912 | — | 29,050,633 | 22,905,008 | ||||||||||||||||||
Common stock
|
9,865 | 510 | — | 6,068 | 9,865 | 6,578 | ||||||||||||||||||
Additional paid-in capital
|
4,119,015 | 145,550 | 8,100,340 | 5,722,798 | 12,219,355 | 5,868,348 | ||||||||||||||||||
Unappropriated retained earnings
|
19,007,402 | 13,006,176 | (8,853,368 | ) | (5,736,183 | ) | 10,154,034 | 7,269,993 | ||||||||||||||||
Cumulative translation adjustment
|
1,151,238 | 427,685 | (884 | ) | — | 1,150,354 | 427,685 | |||||||||||||||||
Total equity
|
25,641,432 | 14,722,205 | (753,912 | ) | (7,317 | ) | 24,887,520 | 14,714,888 | ||||||||||||||||
Total liabilities and stockholders’ equity
|
53,938,153 | 37,627,213 | — | (7,317 | ) | 53,938,153 | 37,619,896 | |||||||||||||||||
|
||||||||||||||||||||||||
Consolidated Statements of Operations and Comprehensive Income
|
||||||||||||||||||||||||
Revenues
|
41,688,738 | 28,859,699 | (3,750 | ) | — | 41,684,988 | 28,859,699 | |||||||||||||||||
Gross Profit
|
9,167,264 | 4,189,214 | (3,750 | ) | — | 9,163,514 | 4,189,214 | |||||||||||||||||
General and administrative expenses
|
5,249,205 | 1,347,787 | (148,531 | ) | — | 5,100,674 | 1,347,787 | |||||||||||||||||
Operating profit
|
3,872,140 | 2,786,002 | 144,781 | — | 4,016,921 | 2,786,002 | ||||||||||||||||||
Interest expense, net
|
(1,448,780 | ) | (554,924 | ) | (865,237 | ) | — | (2,314,017 | ) | (554,924 | ) | |||||||||||||
Income before income taxes
|
4,819,078 | 2,489,323 | (720,456 | ) | — | 4,098,622 | 2,489,323 | |||||||||||||||||
Income tax expense
|
504,467 | — | 198,631 | — | 703,098 | — | ||||||||||||||||||
Net income for the year
|
4,314,611 | 2,489,323 | (919,087 | ) | — | 3,395,524 | 2,489,323 | |||||||||||||||||
Earnings per share - basic and diluted
|
$ | 0.58 | $ | 0.35 | $ | (0.13 | ) | $ | 0.03 | $ | 0.45 | $ | 0.38 | |||||||||||
Weighted average number of common shares outstanding - basic and diluted
|
7,480,698 | 7,068,823 | — | (491,272 | ) | 7,480,698 | 6,577,551 | |||||||||||||||||
|
||||||||||||||||||||||||
Foreign currency translation adjustment
|
723,553 | 23,120 | (884 | ) | — | 722,669 | 23,120 | |||||||||||||||||
Comprehensive income
|
5,038,164 | 2,512,443 | (919,971 | ) | — | 4,118,193 | 2,512,443 | |||||||||||||||||
Consolidated Statements of Cash Flows
|
||||||||||||||||||||||||
Net income for the year
|
4,314,611 | 2,489,323 | (919,087 | ) | — | 3,395,524 | 2,489,323 | |||||||||||||||||
Depreciation and amortization
|
1,218,886 | 741,845 | (1,074 | ) | — | 1,217,812 | 741,845 | |||||||||||||||||
Interest expense allocated to debt
|
174,585 | 14,433 | (174,585 | ) | (14,433 | ) | — | — | ||||||||||||||||
Amortization of debt discount
|
— | — | 108,786 | 9,291 | 108,786 | 9,291 | ||||||||||||||||||
Imputed interest expense
|
— | — | 273,290 | 5,142 | 273,290 | 5,142 | ||||||||||||||||||
Trade accounts payable and accrued expenses
|
(1,746,954 | ) | (10,137,045 | ) | 545,282 | (256 | ) | (1,201,672 | ) | (10,137,301 | ) | |||||||||||||
Income tax payable
|
504,467 | — | 198,631 | — | 703,098 | — | ||||||||||||||||||
Net cash provided by (used in) operating activities
|
2,165,752 | (6,734,368 | ) | 31,243 | (256 | ) | 2,196,995 | (6,734,624 | ) | |||||||||||||||
Capital investment
|
4,635,374 | 4,385,388 | (25,000 | ) | 256 | 4,610,374 | 4,385,644 | |||||||||||||||||
Net cash provided by financing activities
|
7,976,559 | 9,350,577 | (25,000 | ) | 256 | 7,951,559 | 9,350,833 | |||||||||||||||||
Net increase in cash and cash equivalents
|
1,318,684 | (87,671 | ) | 6,243 | — | 1,324,927 | (87,671 | ) | ||||||||||||||||
Cash and cash equivalents, beginning of period
|
611,635 | 699,306 | (6,243 | ) | (6,243 | ) | 605,392 | 693,063 | ||||||||||||||||
Cash and cash equivalents, end of period
|
1,930,319 | 611,635 | — | (6,243 | ) | 1,930,319 | 605,392 |
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
24.
|
Restatement of Financial Statements (continued):
|
|
As Previously Reported
|
Adjustments
|
As Restated
|
|||||||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
Consolidated Statements of Shareholders’ Equity
|
||||||||||||||||||||||||
Number of Shares
|
|
|
|
|
|
|
||||||||||||||||||
Balance as at December 31, 2008
|
— | 473,756 | — | 6,103,795 | — | 6,577,551 | ||||||||||||||||||
Capital contribution
|
— | 36,667 | — | (36,667 | ) | — | — | |||||||||||||||||
Balance as at December 31, 2009
|
— | 510,423 | — | 6,067,128 | — | 6,577,551 | ||||||||||||||||||
Capital contribution
|
2,922,059 | — | (16,667 | ) | — | 2,905,392 | — | |||||||||||||||||
Stock issued in connection with recapitalization
|
6,577,551 | — | (6,050,461 | ) | — | 527,090 | — | |||||||||||||||||
|
||||||||||||||||||||||||
Common stock
|
||||||||||||||||||||||||
Balance as at December 31, 2008
|
— | 473 | — | 6,105 | — | 6,578 | ||||||||||||||||||
Capital contribution
|
— | 37 | — | (37 | ) | — | — | |||||||||||||||||
Balance as at December 31, 2009
|
— | 510 | — | 6,068 | — | 6,578 | ||||||||||||||||||
Capital contribution
|
2,922 | — | (17 | ) | — | 2,905 | — | |||||||||||||||||
Stock issued in connection with recapitalization
|
6,578 | — | (6,051 | ) | — | 527 | — | |||||||||||||||||
Additional paid-in capital
|
||||||||||||||||||||||||
Balance as at December 31, 2008
|
— | 90,587 | — | 1,386,975 | — | 1,477,562 | ||||||||||||||||||
Capital contribution
|
— | 54,963 | — | 4,330,681 | — | 4,385,644 | ||||||||||||||||||
Imputed interest expense
|
— | — | — | 5,142 | — | 5,142 | ||||||||||||||||||
Balance as at December 31, 2009
|
— | 145,550 | — | 5,722,798 | — | 5,868,348 | ||||||||||||||||||
Capital contribution
|
3,980,043 | — | (24,982 | ) | — | 3,955,061 | — | |||||||||||||||||
Stock issued in connection with recapitalization
|
(6,578 | ) | — | 6,051 | — | (527 | ) | — | ||||||||||||||||
Discount on note payable
|
— | — | 42,061 | — | 42,061 | — | ||||||||||||||||||
Imputed interest expense
|
— | — | 273,290 | — | 273,290 | — | ||||||||||||||||||
Stock based compensation expense
|
— | — | 2,081,122 | — | 2,081,122 | — | ||||||||||||||||||
Balance as at December 31, 2010
|
4,119,015 | — | 8,100,340 | — | 12,219,355 | — | ||||||||||||||||||
Unappropriated retained earnings
|
||||||||||||||||||||||||
Balance as at December 31, 2008
|
— | 10,978,435 | — | (5,736,183 | ) | — | 5,242,252 | |||||||||||||||||
Balance as at December 31, 2009
|
— | 13,006,176 | — | (5,736,183 | ) | — | 7,269,993 | |||||||||||||||||
Capital contribution of subsidiary
|
10,000 | — | (10,000 | ) | — | — | — | |||||||||||||||||
Imputed interest expense
|
106,976 | — | (106,976 | ) | — | — | — | |||||||||||||||||
Stock based compensation expense
|
2,081,122 | — | (2,081,122 | ) | — | — | — | |||||||||||||||||
Net income for the year
|
4,314,611 | — | (919,087 | ) | — | 3,395,524 | — | |||||||||||||||||
Balance as at December 31, 2010
|
19,007,402 | — | (8,853,368 | ) | — | 10,154,034 | — | |||||||||||||||||
|
||||||||||||||||||||||||
Cumulative translation adjustment
|
||||||||||||||||||||||||
Foreign currency translation adjustment for the year
|
723,553 | — | (884 | ) | — | 722,669 | — | |||||||||||||||||
Balance as at December 31, 2010
|
1,151,238 | — | (884 | ) | — | 1,150,354 | — | |||||||||||||||||
|
||||||||||||||||||||||||
Total equity
|
||||||||||||||||||||||||
Balance as at December 31, 2008
|
— | 12,154,762 | — | (4,343,103 | ) | — | 7,811,659 | |||||||||||||||||
Capital contribution
|
— | 55,000 | — | 4,330,644 | — | 4,385,644 | ||||||||||||||||||
Imputed interest expense
|
— | — | — | 5,142 | — | 5,142 | ||||||||||||||||||
Balance as at December 31, 2009
|
— | 14,722,205 | — | (7,317 | ) | — | 14,714,888 | |||||||||||||||||
Capital contribution
|
3,982,965 | — | (24,999 | ) | — | 3,957,966 | — | |||||||||||||||||
Capital contribution of subsidiary
|
10,000 | — | (10,000 | ) | — | — | — | |||||||||||||||||
Discount on note payable
|
— | — | 42,061 | — | 42,061 | — | ||||||||||||||||||
Imputed interest expense
|
106,976 | — | 166,314 | — | 273,290 | — | ||||||||||||||||||
Net income for the year
|
4,314,611 | — | (919,087 | ) | — | 3,395,524 | — | |||||||||||||||||
Foreign currency translation adjustment for the year
|
723,553 | — | (884 | ) | — | 722,669 | — | |||||||||||||||||
Balance as at December 31, 2010
|
25,641,432 | — | (753,912 | ) | — | 24,887,520 | — |
The cumulative effect of the prior period adjustments on the opening retained earnings for fiscal year ended December 31, 2009 was $42,785. The effect on prior period net income was also $42,785, all of which related to fiscal years ended prior to December 31, 2008.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
25.
|
Subsequent events:
|
|
(a)
|
Name Change
|
|
On January 20, 2011, the Company changed its name from “The Parkview Group, Inc.” to “Anhui Taiyang Poultry Co., Inc.” to reflect the change in business resulting from the Reverse Merger Transaction.
|
||
(b)
|
Financing
|
|
On March 7 and March 17, 2011, the Company completed the sale of an aggregate 575,000 shares of common stock to eight investors at a price of $2.00 per share for gross cash proceeds of $1,150,000. In connection with this financing, the Company also issued to the investors warrants to purchase 143,750 shares of common stock at an exercise price of $4.00 per share and a contractual term of three years, as well as 46,000 placement agent warrants with an exercise price of $4.00 and a contractual term of five years. The warrants have similar cash redemption features to the warrants issued in the Company’s November 2010 financing, and as such the warrants issued in March 2011 will be recorded as derivative liabilities at fair value. Changes in the fair value of the warrants will be charged or credited to income each period.
|
||
The Company also entered into a Registration Rights Agreement with the purchasers, under which the Company undertook to prepare and file with the SEC and maintain the effectiveness of a “resale” registration statement pursuant to Rule 415 under the Securities Act providing for the resale of (i) all of the shares of common stock (ii) all of the shares of common stock issuable upon exercise of the warrants, (iii) all of the shares of common stock issuable upon exercise of the warrants issued to the placement agent (iv) any additional shares issuable in connection with any anti-dilution provisions associated with such preferred stock and warrants, and (v) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.
|
||
Under the terms of the Registration Rights Agreement, the Company is required to have a registration statement filed with the SEC within 60 days after the closing date (being May 6, 2011) and declared effective by the SEC not later than 180 days from the closing date in the event of a full review (being September 3, 2011) with respect to 575,000 shares of common stock and 189,750 shares of common stock underlying warrants. The Company is required to pay liquidated damages to each purchaser in an amount equal to one percent of the purchaser’s purchase price paid for any registrable securities then held by the purchaser for the first thirty (30) calendar days past the relevant deadline that the registration statement is not filed or not declared effective, for any period that the Company fails to keep the registration statement effective. The liquidated damages increases to 2% of the purchaser’s purchase price for any registrable securities held after the first thirty (30) calendar day period thereafter. The maximum amount of the liquidated damages that could be incurred is $115,000 related to the March 2011 financing. No liability has been recorded related to the March 2011 as the amount and certainty of such penalties is not reasonably estimable as of the date hereof .
|
||
(c)
|
Liquidated Damages
|
|
Pursuant to the terms of the registration rights agreements dated November 10, 2010 and November 16, 2010, entered into between the Company and the investors in the First Financing, the Company was required to file a registration statement including the shares issued in the First Financing no later than January 9, 2011. The Company failed to file such registration statement, and as a result must accrue liquidated damages in the amount of 1% of the aggregate subscription amount for the first 30 days after the filing deadline, and 2% for each 30-day period thereafter, with a maximum penalty of 10% of the aggregate subscription amount. Through March 25, 2011, such accrued liquidated damages amounted to $562,746.
|
||
(d)
|
Collection of loans receivable
|
|
The Company had unsecured loans receivable from unrelated parties totaling $1,545,722 and $1,939,391 outstanding at December 31, 2010 and 2009, respectively. Subsequent to December 31, 2010 and through March 31, 2011, the Company has collected $1,512,447 of the outstanding balance.
|
Anhui Taiyang Poultry Co., Inc. (formerly The Parkview Group, Inc.)
|
Notes to the Consolidated Financial Statements
|
(Expressed in United States dollars)
|
Years Ended December 31, 2010 and 2009
|
25.
|
Subsequent events (continued):
|
|
(e)
|
Repayment of bank loans payable
|
|
Subsequent to December 31, 2010 and through March 31, 2011, the Company made repayment on bank loans payable totaling $4,507,093.
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
ASSETS
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 2,437,658 | $ | 1,930,319 | ||||
Trade accounts receivable, net (note 3)
|
5,057,154 | 5,348,650 | ||||||
Loans receivable (note 4)
|
3,404,577 | 4,268,057 | ||||||
Inventories, net (note 5)
|
2,448,059 | 1,762,709 | ||||||
Prepaid and other current assets (note 6)
|
3,601,087 | 1,140,234 | ||||||
Proceeds receivable from sale of fertilizer plant, net (note 22(b))
|
469,594 | 889,174 | ||||||
Total current assets
|
17,418,129 | 15,339,143 | ||||||
Construction in progress (note 8)
|
6,394,979 | 5,634,476 | ||||||
Property, plant and equipment, net (note 8)
|
20,340,479 | 20,495,162 | ||||||
Land use rights (note 9)
|
10,910,777 | 10,660,988 | ||||||
Other long term assets (note 10)
|
2,719,055 | 1,808,384 | ||||||
Total assets
|
$ | 57,783,419 | $ | 53,938,153 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Current liabilities
|
||||||||
Trade accounts payable and accrued expenses (note 11)
|
$ | 2,754,281 | $ | 3,413,393 | ||||
Income tax payable (note 20)
|
1,260,548 | 703,098 | ||||||
Derivative financial instruments (note 12)
|
1,330,490 | 1,480,261 | ||||||
Other accounts payable (note 13)
|
2,350,178 | 4,542,855 | ||||||
Due to related parties (note 7)
|
128,823 | 30,249 | ||||||
Loans payable, current portion (note 14)
|
13,461,689 | 7,864,727 | ||||||
Total current liabilities
|
21,286,009 | 18,034,583 | ||||||
Loans payable, long term portion (note 14)
|
8,284,931 | 11,016,050 | ||||||
Total liabilities
|
29,570,940 | 29,050,633 | ||||||
Commitments and contingencies (note 22)
|
||||||||
Subsequent events (note 25)
|
||||||||
|
||||||||
Stockholders’ equity
|
||||||||
Common stock, par value $0.001, 75,000,000 shares authorized, 10,440,033 and 9,865,033 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively (note 16)
|
10,440 | 9,865 | ||||||
Additional paid-in capital
|
12,914,779 | 12,219,355 | ||||||
Appropriated retained earnings (note 21)
|
1,353,912 | 1,353,912 | ||||||
Unappropriated retained earnings
|
11,899,515 | 10,154,034 | ||||||
Accumulated other comprehensive income
|
2,033,833 | 1,150,354 | ||||||
Total equity
|
28,212,479 | 24,887,520 | ||||||
|
||||||||
Total liabilities and stockholders’ equity
|
$ | 57,783,419 | $ | 53,938,153 |
|
Nine months ended September 30,
|
Three months ended September 30,
|
||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
(Restated - see note 24)
|
(Restated - see note 24)
|
|||||||||||||||
Revenues (note 19(b))
|
$ | 23,221,725 | $ | 30,756,737 | $ | 7,159,083 | $ | 11,110,167 | ||||||||
Cost of goods sold (note 7)
|
16,732,445 | 24,606,466 | 5,267,525 | 8,384,715 | ||||||||||||
|
||||||||||||||||
Gross Profit
|
6,489,280 | 6,150,271 | 1,891,558 | 2,725,452 | ||||||||||||
|
||||||||||||||||
Sales and marketing expenses
|
28,631 | 33,683 | 11,081 | 10,823 | ||||||||||||
General and administrative expenses
|
3,915,880 | 1,860,298 | 2,010,990 | 542,800 | ||||||||||||
Operating profit
|
2,544,769 | 4,256,290 | (130,513 | ) | 2,171,829 | |||||||||||
Gain on change in fair value of derivative financial instruments (note 12)
|
473,272 | — | 37,372 | — | ||||||||||||
Other income (expense) (note 18)
|
195,854 | 1,777,530 | (29,990 | ) | 5,409 | |||||||||||
Subsidy income (note 15)
|
130,738 | 108,835 | 8,257 | 292 | ||||||||||||
Interest expense, net (note 17)
|
(1,041,702 | ) | (1,461,683 | ) | (343,880 | ) | (559,707 | ) | ||||||||
|
||||||||||||||||
Income (loss) before income taxes
|
2,302,931 | 4,680,972 | (458,754 | ) | 1,617,823 | |||||||||||
Income tax expense (benefit) (note 20)
|
557,450 | 267,294 | (136,990 | ) | 169,738 | |||||||||||
Net income (loss)
|
$ | 1,745,481 | $ | 4,413,678 | $ | (321,764 | ) | $ | 1,448,085 | |||||||
Comprehensive income:
|
||||||||||||||||
Net income (loss)
|
$ | 1,745,481 | $ | 4,413,678 | $ | (321,764 | ) | $ | 1,448,085 | |||||||
Foreign currency translation adjustment
|
883,479 | 411,040 | 296,957 | 333,810 | ||||||||||||
|
||||||||||||||||
Comprehensive income (loss)
|
$ | 2,628,960 | $ | 4,824,718 | $ | (24,807 | ) | $ | 1,781,895 | |||||||
|
||||||||||||||||
Earnings (loss) per share:
|
||||||||||||||||
Basic and diluted (note 16)
|
$ | 0.17 | $ | 0.67 | $ | (0.03 | ) | $ | 0.22 | |||||||
Weighted average number of common shares outstanding:
|
||||||||||||||||
Basic and diluted (note 16)
|
10,300,015 | 6,577,551 | 10,440,033 | 6,577,551 |
|
Nine months ended September 30,
|
|||||||
|
2011
|
2010
|
||||||
(Restated - see note 24)
|
||||||||
Cash provided by (used for):
|
||||||||
Operating activities:
|
||||||||
Net income for the period
|
$ | 1,745,481 | $ | 4,413,678 | ||||
Items not affecting cash:
|
||||||||
Depreciation and amortization
|
1,135,924 | 765,777 | ||||||
Gain on sale of assets
|
(19,867 | ) | (880,231 | ) | ||||
Amortization of debt discount
|
14,235 | 104,455 | ||||||
Imputed interest expense
|
— | 74,648 | ||||||
Gain on change in fair value of derivative financial instruments
|
(473,272 | ) | — | |||||
Reserve against loans receivable
|
349,484 | — | ||||||
Reserve against fertilizer plant proceeds receivable
|
462,364 | — | ||||||
Changes in non-cash working capital:
|
||||||||
Trade accounts receivable
|
471,083 | (2,906,271 | ) | |||||
Inventories
|
(614,134 | ) | (723,952 | ) | ||||
Prepaid and other current assets
|
(2,386,256 | ) | (858,466 | ) | ||||
Due from related parties
|
— | (428,022 | ) | |||||
Trade accounts payable and accrued expenses
|
(750,218 | ) | (2,038,873 | ) | ||||
Income tax payable
|
557,450 | 267,294 | ||||||
Due to related parties
|
96,015 | 101,479 | ||||||
Net cash provided by (used for) operating activities
|
588,289 | (2,108,484 | ) | |||||
|
||||||||
Investing activities:
|
||||||||
Cash proceeds from sale of fertilizer plant
|
— | 2,053,870 | ||||||
Long term equity investment
|
— | (1,467,050 | ) | |||||
Deposits against equipment and land use rights
|
(886,043 | ) | (3,001,705 | ) | ||||
Capitalized interest expense
|
(281,573 | ) | (169,901 | ) | ||||
Purchase of property and equipment
|
(685,094 | ) | (1,962,784 | ) | ||||
Net cash used in investing activities
|
(1,852,710 | ) | (4,547,570 | ) | ||||
|
||||||||
Financing activities:
|
||||||||
Repayments received (net of advances made) pursuant to loans receivable
|
647,587 | (1,581,559 | ) | |||||
Advances received (net of repayments made) pursuant to loans payable
|
(1,973,884 | ) | 3,265,293 | |||||
Borrowings under bank loans payable
|
14,317,860 | 18,574,624 | ||||||
Repayments under bank loans payable
|
(12,160,163 | ) | (14,069,010 | ) | ||||
Borrowing under convertible loans payable
|
— | 555,000 | ||||||
Capital investment, net of offering costs of $130,500 in 2011 and $Nil in 2010
|
1,019,500 | — | ||||||
Net cash provided by financing activities
|
1,850,900 | 6,744,348 | ||||||
Effect of exchange rate difference on cash and cash equivalents
|
(79,140 | ) | 13,884 | |||||
Net increase in cash and cash equivalents
|
507,339 | 102,178 | ||||||
Cash and cash equivalents, beginning of period
|
1,930,319 | 605,392 | ||||||
Cash and cash equivalents, end of period
|
$ | 2,437,658 | $ | 707,570 |
|
Nine months ended September 30,
|
|||||||
|
2011
|
2010
|
||||||
(Restated - see note 24)
|
||||||||
Supplementary information:
|
|
|
||||||
Interest and finance charges paid
|
$ | 1,631,927 | $ | 923,556 | ||||
Discount on convertible note payable
|
— | 44,671 | ||||||
Fair value of shares allocated to warrant derivative at financing inception
|
323,501 | — |
|
|
|
|
|
|
Accu-
|
|
||||||||||||||
mulated
|
|||||||||||||||||||||
Addi-
|
Appro-
|
Unappro-
|
Other
|
Total
|
|||||||||||||||||
tional
|
priated
|
priated
|
Compre-
|
Stock-
|
|||||||||||||||||
Common stock
|
Paid-in
|
Retained
|
Retained
|
hensive
|
holders’
|
||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Earnings
|
Income
|
Equity
|
||||||||||||||
Balance as at December 31, 2010 (audited)
|
9,865,033 | $ | 9,865 | $ | 12,219,355 | $ | 1,353,912 | $ | 10,154,034 | $ | 1,150,354 | $ | 24,887,520 | ||||||||
Capital contribution (notes 1(a) and 12)
|
575,000 | 575 | 695,424 | — | — | — | 695,999 | ||||||||||||||
Net income for the period
|
— | — | — | — | 1,745,481 | — | 1,745,481 | ||||||||||||||
Foreign currency translation adjustment for the period
|
— | — | — | — | — | 883,479 | 883,479 | ||||||||||||||
|
|||||||||||||||||||||
Balance as at September 30, 2011 (unaudited)
|
10,440,033 | $ | 10,440 | $ | 12,914,779 | $ | 1,353,912 | $ | 11,899,515 | $ | 2,033,833 | $ | 28,212,479 |
1.
|
Nature of Business Operations:
|
(a)
|
Business
|
The financial statements presented herein reflect the consolidated financial results as at September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 of Anhui Taiyang Poultry Co., Inc. (“Parent” or the “Company”), its wholly owned subsidiaries Dynamic Ally Ltd. (“Dynamic Ally”) and Ningguo Taiyang Incubation Plant Co., Ltd. (“Ningguo”), and Anhui Taiyang Poultry Co., Ltd. (“Taiyang”), a variable interest entity controlled by the Company as a result of the agreements described below. All significant intercompany transactions and balances have been eliminated upon consolidation.
|
|
The Company was incorporated in the State of Delaware on April 7, 1999. Prior to January 20, 2011, the Company was called The Parkview Group, Inc. (“Parkview”). From inception through November 2010, the Company was in the business of providing management consulting services to corporate clients.
|
|
On November 10, 2010 (the “Closing Date” and the closing of the reverse merger transaction, the “Closing”), the Company executed and consummated a share exchange agreement by and among Dynamic Ally and the stockholders of 100% of Dynamic Ally’s common stock (the “Dynamic Ally Shareholders”), on the one hand, and the Company and certain holders of the Company’s issued and outstanding common stock (the “Representative Shareholders”) on the other hand (the “Share Exchange Agreement” and the transaction, the “Reverse Merger Transaction”).
|
|
In the Reverse Merger Transaction, Dynamic Ally’s shareholders exchanged all 10,000 issued and outstanding shares of Dynamic Ally for 6,577,551 newly issued shares of common stock of the Company. The exchange ratio used in the Reverse Merger Transaction was one share of Dynamic Ally for every 657.7551 shares of the Company. Upon completion of the Reverse Merger Transaction, Dynamic Ally became the Company’s wholly-owned subsidiary.
|
|
Dynamic Ally owns 100% of Ningguo, which is a wholly foreign owned enterprise (“WFOE”) under the laws of the People’s Republic of China (“China” or the “PRC”). On May 26, 2010, Ningguo entered into a series of contractual agreements with Taiyang, which effectively give Ningguo control over the operations of Taiyang. The agreements include (i) a Consulting Services Agreement whereby Ninnguo has the exclusive right to provide to Taiyang general services related to the current and proposed operations of Taiyang’s business, (ii) an Operating Agreement whereby Ninnguo provides guidance and instructions on Taiyang’s daily operations, financial management and employment issues, (iii) an Equity Pledge Agreement whereby the Taiyang shareholders pledged all of their equity interests in Taiyang to Ninnguo to guarantee Taiyang’s performance of its obligations under the Consulting Services Agreement, (iv) an Option Agreement, whereby the Taiyang shareholders irrevocably granted Ninnguo or its designated person an exclusive option to purchase, to the extent permitted under Chinese law, all or part of the equity interests in Taiyang for the cost of the initial contributions to the registered capital, which is the amount of capital registered with the PRC government (“Registered Capital”) or the minimum amount of consideration permitted by applicable Chinese law, and (v) a Voting Rights Proxy Agreement, whereby Taiyang shareholders agreed to entrust all the rights to exercise their voting power to designee(s) of Ninnguo.
|
|
Chinese laws and regulations concerning the validity of the contractual arrangements are uncertain, as many of these laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement by the Chinese government involves substantial uncertainty. Additionally, the contractual arrangement may not be as effective in providing control over Taiyang as direct ownership, which the Company is restricted from under current Chinese law. Due to such uncertainty, the Company may take such additional steps in the future as may be permitted by the then applicable laws and regulations in China to further strengthen its control over or toward actual ownership of Taiyang or its assets or business operations, which could include direct ownership of selected assets without jeopardizing any favorable government policies toward domestic owned enterprises. Because the Company relies on Taiyang for its revenue, any termination of or disruption to the contractual arrangement would detrimentally affect its business and financial condition.
|
1.
|
Nature of Business Operations (continued): | ||
(a)
|
Business (continued)
|
||
Other than the interests in the contractual arrangements, none of the Company, Dynamic Ally, nor Ningguo owns any equity interests in Taiyang. As a result of these contractual arrangements, which obligates Ningguo to absorb a majority of the risk of loss from Taiyang’s activities and enable Ningguo to receive a majority of its expected residual returns, Taiyang is a Variable Interest Entity (“VIE”), because the owners of Taiyang do not have the characteristics of a controlling financial interest and the Company should be considered the primary beneficiary of Taiyang. Accordingly, the Company consolidates Taiyang’s results, assets and liabilities in the accompanying consolidated financial statements.
|
|||
Upon the completion of the Reverse Merger Transaction on November 10, 2010, the Company owned 100% of Dynamic Ally, which owned 100% of Ningguo, which controlled the operations of Taiyang through contractual arrangements. For financial reporting purposes, Reverse Merger Transaction is classified as a recapitalization of Dynamic Ally and the historical financial statements of Dynamic Ally, which are comprised principally of the operations of Taiyang, are reported as the Company’s historical financial statements.
|
|||
Taiyang is a limited liability company organized in the PRC in June 1996. Taiyang holds the government licenses and approvals necessary to operate the duck farming and processing businesses in China.
|
|||
As a result of the Reverse Merger Transaction, the Company acquired 100% of the capital stock of Dynamic Ally and consequently, control of the business and operations of Dynamic Ally, Ningguo, and Taiyang. Prior to the Reverse Merger Transaction, the Company was a public reporting company in the development stage. From and after the Closing Date of the Share Exchange Agreement, the Company’s primary operations consist of the business and operations of Taiyang, which are conducted in China, and controlled through contractual arrangements described herein.
|
|||
Effective January 20, 2011, the Company changed its name from “The Parkview Group, Inc.” to “Anhui Taiyang Poultry Co., Inc.”
|
|||
The Company, through its VIE arrangement with Taiyang, raises, processes and markets ducks and duck related food products through three business lines:
|
|||
●
|
Breeding Unit – breeds, hatches, and cultivates ducklings for resale and for processing by the Food Unit
|
||
●
|
Feed Unit – produces duck feed for internal use and external sale
|
||
●
|
Food Unit – processes ducklings into frozen raw food product for commercial resale.
|
||
(b)
|
Accounting Standards Codification
|
||
In June 2009, the Financial Accounting Standards Board (“FASB”) issued a statement establishing the FASB Accounting Standards Codification (the “FASB ASC” or the “Codification”). Effective for interim and annual periods ended after September 15, 2009, the Codification became the source of authoritative U.S. generally accepted accounting principles (“US GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. This statement did not change existing US GAAP, and as such, did not have an impact on the financial statements. Where applicable, the Company has updated its references to US GAAP, in order to reflect the Codification.
|
2.
|
Significant accounting policies:
|
|
(a)
|
Basis of presentation:
|
|
The Company’s unaudited interim consolidated financial statements have been prepared in conformity with US GAAP and applicable provisions of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting using the same accounting principles that were used in the preparation of the company’s annual report on Form 10-K for the year ended December 31, 2010. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be reported for the full year. Certain information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K. The consolidated balance sheet as of December 31, 2010, included herein, was derived from the audited consolidated financial statements as of that date.
|
||
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. These financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of Parent and its wholly owned subsidiaries Dynamic Ally and Ningguo, as well as the accounts of Taiyang, the VIE controlled through the contractual arrangements described in note 1(a).
|
||
Immediately prior to the Reverse Merger Transaction, Taiyang, Ningguo, and Dynamic Ally were deemed to be under common control. Accordingly, the combination of these entities has been accounted for as a reorganization of entities under common control, whereby the acquirer recognized the assets and liabilities of each subsidiary transferred at their carrying amounts, similar to the pooling of interest method with carry over basis. The reorganization of entities under common control was retrospectively applied to the financial statements of all prior periods when the financial statements are issued for a period that includes the date the transaction occurred.
|
||
The acquisition of Dynamic Ally by the Company was accounted for as a reverse merger, whereby Dynamic Ally is the continuing entity for financial reporting purposes and is deemed, for accounting purposes, to be the acquirer of the Company. In accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, Dynamic Ally is deemed to have undergone a recapitalization, whereby Dynamic Ally is deemed to have issued equity to the Company’s common stock holders. Accordingly, although the Company, as Dynamic Ally’s legal parent company, was deemed to have legally acquired Dynamic Ally, in accordance with the applicable accounting guidance for accounting for the transaction as a reverse merger and recapitalization, Dynamic Ally is the surviving entity for accounting purposes and its assets and liabilities are recorded at their historical carrying amounts with no goodwill or other intangible assets recorded as a result of the accounting merger with the Company.
|
||
All intercompany balances and transactions have been eliminated upon consolidation. The three operating entities of Taiyang all reside within the same legal entity, and are evaluated as separate units for management’s internal purposes.
|
||
The basis of accounting differs in certain material respects from that used for the preparation of the books and records of the Company, which are prepared in accordance with accounting principles and relevant financial regulations applicable to limited liability enterprises established in the PRC (“PRC GAAP”), the accounting standard used in the place of its domicile.
|
2.
|
Significant accounting policies (continued):
|
|
(b)
|
Use of estimates:
|
|
The preparation of financial statements in conformity with US GAAP requires management at the date of the financial statements 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. Significant areas requiring the use of estimates include estimating allowance for doubtful accounts, estimating the net realizable value of inventory, the future cash flows for assessing the net recoverable amount of long-lived assets, accrued liabilities, accrued completion of construction in progress projects, and inputs to estimate the fair value of equity transactions. Actual results may differ from those estimates.
|
||
(c)
|
Risks of doing business in China:
|
|
The Company is subject to the consideration and risks of operating in the PRC. These include risks associated with the political and economic environment, foreign currency exchange and the legal system in China.
|
||
The economy of China differs significantly from the economies of the “western” industrialized nations in such respects as structure, level of development, gross national product, growth rate, capital reinvestment, resource allocation, self-sufficiency, rate of inflation and balance of payments position, among others. Only recently has the China government encouraged substantial private economic activities. The Chinese economy has experienced significant growth in the past several years, but such growth has been uneven among various sectors of the economy and geographic regions. Actions by the PRC government to control inflation have significantly restrained economic expansion in the recent past.
|
||
Similar actions by the PRC government in the future could have a significant adverse effect on economic conditions in China.
|
||
Many laws and regulations dealing with economic matters in general and foreign investment in particular have been enacted in China. However, China still does not have a comprehensive system of laws, and enforcement of the existing laws may be uncertain and sporadic.
|
||
The Company’s operating assets and primary sources of income and cash flows originate in China. The China economy has, for many years, been a centrally planned economy, operating on the basis of annual, five-year and ten-year state plans adopted by central China governmental authorities, which set out national production and development targets. The China government has been pursuing economic reforms since it first adopted its “open-door” policy in 1978. There is no assurance that the China government will continue to pursue economic reforms or that there will not be any significant change in its economic or other policies, particularly in the event of any change in the political leadership of, or the political, economic or social conditions in China. There is also no assurance that the Company will not be adversely affected by any such change in governmental policies or any unfavourable change in the political, economic or social conditions, the laws or regulations, or the rate or method of taxation in China.
|
||
As many of the economic reforms, which have been or are being implemented by China government are unprecedented or experimental, they may be subject to adjustment or refinement, which may have adverse effects on the Company. Further, through state plans and other economic and fiscal measures, it remains possible for the China government to exert significant influence on the China economy.
|
||
(d)
|
Cash:
|
|
Cash includes bank deposits and cash on hand. Cash equivalents include short-term investments with a term to maturity when acquired of 90 days or less.
|
2.
|
Significant accounting policies (continued):
|
|
(e)
|
Allowance for doubtful accounts:
|
|
The Company reports accounts receivable and loans receivable at net realizable value. The Company’s terms of sale provide the basis for when accounts become delinquent or past due. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable.
|
||
(f)
|
Inventory:
|
|
Inventory is recorded at the lower of cost, determined using the weighted average costing method, and net realizable value. Cost includes purchased raw materials (primarily corn and other grains), breeding and incubation costs (primarily feed and contract grower pay), packaging supplies, labor, and manufacturing and production overhead which are related to the purchase and production of inventories. The weighted-average method includes invoice cost, duties and freight where applicable, plus direct labor applied to the product and an applicable share of manufacturing overhead. A provision for obsolescence for slow moving inventory items is estimated by management based on historical and expected future sales and is included in cost of goods sold.
|
||
(g)
|
Biological assets:
|
|
Biological assets are comprised of master breeding ducks that are treated as capitalized assets due to their ability to produce offspring that are also capable of breeding. These biological assets generally have a productive breeding period of approximately one year. The Company capitalizes these assets and amortizes their cost, which includes any cost to acquire the duck plus costs incurred for hatching and incubation, over a period of one year.
|
||
(h)
|
Property, plant and equipment:
|
|
Property, plant and equipment are carried at cost less allowance for accumulated depreciation. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets. The depreciable basis for property, plant and equipment is original cost less estimated residual value, which does not exceed 5% of the cost. Upon retirement or sale, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations. The cost of normal maintenance and repairs is charged to operations as incurred. Material expenditures, which increase the life of an asset, are capitalized and depreciated over the estimated remaining life of the asset. Costs incurred prior to a capital project’s completion are reflected as construction in progress and are not depreciated until the asset is placed into service. The estimated service lives of property and equipment are as follows:
|
Production equipment
|
3-10 years
|
Transportation equipment
|
5-10 years
|
Office furniture and equipment
|
5 years
|
Building and building improvements
|
10-20 years
|
Costs incurred prior to a capital project’s completion are reflected as construction in progress and are not depreciated until the asset is placed into service.
|
||
(i)
|
Construction in progress:
|
|
Construction in progress is stated at cost, which comprises direct costs of design, acquisition, and construction of buildings, building improvements and land improvements. The Company also capitalizes interest on loans related to construction projects. Upon completion, construction in progress is transferred to its respective asset classification and is amortized upon being put into use. At each balance sheet date, the Company makes an estimate with respect to the percentage of completion of each project.
|
2.
|
Significant accounting policies (continued):
|
|
(j)
|
Land use rights:
|
|
The Company accounts for land use rights as an asset in its financial statements. However, all lands in the PRC are owned by the PRC government. The PRC government, according the relevant PRC law, may sell the right to use the land for a specific period of time. Land use rights are recorded at cost less accumulated amortization. Land use rights are amortized over 50 years, which are the terms established by the PRC government. The purpose of the land use is restricted by the PRC government. In the event that the land is used for purposes outside the scope of the purpose for which they were granted, the government could revoke such rights.
|
||
(k)
|
Impairment of long-lived assets:
|
|
The Company monitors the recoverability of long-lived assets, based on estimates using factors such as expected future asset utilization, business climate and future undiscounted cash flows expected to result from the use of the related assets or to be realized on sale. The Company recognizes an impairment loss if the projected undiscounted future cash flows are less than the carrying amount, and the amount of the impairment charge is the excess of the carrying amount of the asset over the fair value of the asset.
|
||
(l)
|
Derivative financial instruments:
|
|
Derivative financial instruments, as defined in ASC Topic 815 (formerly FAS 133), Accounting for Derivative Financial Instruments and Hedging Activities (ASC Topic 815), consist of financial instruments or other contracts that contain a notional amount and one or more underlying, e.g. interest rate, security price or other variable, require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
|
||
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued warrant agreements that embody features that are not afforded equity classification because they may be net-cash settled by the counterparty. As required by ASC Topic 815 (formerly FAS 133), these instruments are required to be carried as derivative liabilities, at fair value, in the Company’s financial statements.
|
||
(m)
|
Revenue recognition:
|
|
The Company recognizes revenue when there is persuasive evidence of an arrangement, goods are shipped and title passes, collection is probable, and the fee is fixed or determinable. The Company records deferred revenue when cash is received in advance of the revenue recognition criteria being met.
|
||
(n)
|
Subsidy income:
|
|
From time to time, the Company receives subsidies from the PRC government. Certain of the subsidies are earmarked for particular capital improvement and other projects, and the completed projects must be approved by the government to ensure specifications were met. The Company defers amounts received pursuant to these types of subsidies until the projects are approved, at which time the deferred balances are recorded as subsidy income on the statement of operations.
|
||
Subsidies that are not subject to government approval are recognized as income in the period in which the benefit from the subsidy is realized by the Company. Subsidies that relate to depreciable property and equipment are recorded as an offset to the related capital accounts to which the subsidy relates.
|
2.
|
Significant accounting policies (continued):
|
|
(o)
|
Income and other taxes:
|
|
Taiyang is exempt from corporate income tax due to the nature of its business. Beginning 2006, the PRC government instituted a tax exemption policy for certain aspects of the agricultural industry. Taiyang’s business qualifies as tax exempt. The exemption relates to unprocessed agricultural products and is granted by the relevant taxing authority on a year-by-year basis. There is no stated expiration to the exemption, and while Taiyang expects to continue to receive favorable tax treatment, changes in government policy or the nature of Taiyang’s operations could result in Taiyang being required to pay income taxes.
|
||
Ningguo is subject to corporate income tax in the PRC at a rate of 25% as a non-resident enterprise, as well as business tax at a rate of 5% on service income. Under the laws of the BVI, Dynamic Ally is not subject to tax on its income or capital gains. Parent is subject to United States income tax at a rate of 35%.
|
||
(p)
|
Foreign currency translation and comprehensive income:
|
|
The Company’s functional or primary operating currency is the Chinese Renminbi (“RMB”). The Company’s financial statements are prepared in RMB before translating to the United States dollar (“USD”) for reporting purposes. The Company translates transactions in currencies other than the RMB at the exchange rate in effect on the transaction date. Monetary assets and liabilities denominated in a currency other than the RMB are translated at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in earnings.
|
||
Amounts transacted in RMB have been translated into USD as follows: assets and liabilities are translated at the rate of exchange in effect at the balance sheet date, equity items are translated at historical rates, and revenue and expense items are translated at the average rates for each period reported. Unrealized gains and losses resulting from the translation into the reporting currency are accumulated in accumulated other comprehensive income, a separate component of equity.
|
||
The Company applies SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.
|
||
(q)
|
Statutory reserves:
|
|
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. The articles of association of Taiyang and Ningguo, which are based on PRC corporate laws, prescribe that these entities must appropriate, on an annual basis, 10% of their after tax income as reported in their financial statements, prepared in accordance with PRC GAAP, to the statutory common reserve fund until the fund reaches 50% of their respective Registered Capital.
|
||
(r)
|
Earnings per share:
|
|
Basic earnings per share is computed by dividing net income attributable to the common shareholder of the Company by the weighted average number of common shares outstanding during the year. Diluted earnings per share is determined by adjusting the net income attributable to the common shareholder and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares. Basic and diluted earnings per share are the same because the Company does not have any equity instruments that would impact the calculation of diluted earnings per share. The number of weighted average common shares outstanding has been retroactively restated to give effect to the shares issued in the Reverse Merger Transaction.
|
2.
|
Significant accounting policies (continued):
|
||
(s)
|
Employee welfare benefits:
|
||
Pursuant to PRC law, full-time employees of the Company are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance, and pension benefits through a PRC government-mandated multiemployer pension plan. The Company is required to contribute a portion of the employees’ salaries to the retirement benefit scheme to fund the benefits, which are charged to operations as incurred. The government reserves the right to change rates retroactively, which may result in a contingent liability being recorded for previous years. Amounts contributed to the retirement benefit scheme for the nine months ended September 30, 2011 and 2010 were $36,682 and $14,931, respectively.
|
|||
(t)
|
Fair value of financial assets and liabilities:
|
||
For certain of the Company’s financial instruments, including cash, accounts receivable, loans receivable, other amounts receivable, accounts payable, accrued liabilities, other payables, and short-term debt, the carrying amounts approximate their fair values due to their short maturities.
|
|||
ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 820, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
|||
●
|
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
||
●
|
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
||
●
|
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
||
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
|
|||
(u)
|
Segment reporting:
|
||
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (codified in FASB ASC Topic 280) requires use of the “management approach” model for segment reporting. The management approach model is based on the method a company’s management uses to organize segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. Management of the Company evaluates its operations based on three operating segments: Breeding Unit, Feed Unit, and Food Unit.
|
2.
|
Significant accounting policies (continued):
|
|
(v)
|
Statement of cash flows:
|
|
In accordance with SFAS No. 95, “Statement of Cash Flows” (codified in FASB ASC Topic 230), cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
|
||
(w)
|
Recently Adopted Accounting Standards:
|
|
In April 2010, the FASB issued an authoritative pronouncement regarding the milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement specifies criteria that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The criteria apply to milestones in arrangements within the scope of this pronouncement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement was adopted on January 1, 2011. This pronouncement did not have a material impact on the Company’s financial statements.
|
||
In March 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trade and that currency is different from (1) the entity’s functional currency, (2) the functional currency of the foreign operation for which the employee provides services, and (3) the payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement was adopted on January 1, 2011. This pronouncement did not have a material impact on the Company’s financial statements.
|
||
In December 2010, the FASB issued Accounting Standards Update 2010-28, “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2010-28 addresses questions about entities that have reporting units with zero or negative carrying amounts. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The provisions of ASC No. 2010-28 were adopted on January 1, 2011, and did not have a material impact on the Company’s financial statements.
|
||
In December 2010, the FASB issued Accounting Standards Update 2010-29, “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU No. 2010-29 clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The amendments expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 was adopted on January 1, 2011. This ASU did not have a material impact on the Company’s financial statements.
|
2.
|
Significant accounting policies (continued):
|
|
(x)
|
Recently Issued Accounting Standards:
|
|
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This ASU amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
|
||
In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The amendments are effective during interim and annual periods beginning after December 15, 2011. Other than requiring additional disclosures, the Company does not anticipate material impacts on its financial statements upon adoption.
|
||
3.
|
Trade accounts receivable:
|
|
Trade accounts receivable were comprised of the following as of September 30, 2011 and December 31, 2010: |
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Trade accounts receivable
|
$ | 5,233,149 | $ | 5,361,648 | ||||
Allowance for doubtful accounts
|
(175,995 | ) | (12,998 | ) | ||||
|
||||||||
|
$ | 5,057,154 | $ | 5,348,650 |
As of September 30, 2011 and December 31, 2010, $1,565,313 and $756,224, respectively, of the Company’s trade accounts receivable were pledged as collateral for loans outstanding. The loan in the amount of $756,224 securing trade accounts receivable at December 31, 2010 was repaid in March 2011.
|
4.
|
Loans receivable:
|
As of September 30, 2011 and December 31, 2010, the Company had outstanding $3,404,577 and $4,268,057, respectively, of unsecured loans receivable from unrelated parties which bear interest at rates paid by the Company on similar third party loans payable, and have no stated maturity date. Loans receivable activity during the nine months ended September 30, 2011 and 2010 was:
|
|
Nine months ended September 30,
|
|||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(unaudited)
|
|||||||
Beginning balance
|
$ | 4,268,057 | $ | 2,816,943 | ||||
Amounts loaned to third parties
|
10,426,181 | 8,816,129 | ||||||
Amounts collected from third parties
|
(11,073,768 | ) | (7,226,149 | ) | ||||
Change in allowance for doubtful accounts
|
(349,484 | ) | — | |||||
Currency translation difference
|
133,591 | 78,011 | ||||||
Ending balance
|
$ | 3,404,577 | $ | 4,484,934 |
During 2009, the Company made a loan to an unrelated third party, the balance of which was $939,188 and $907,468 as of September 30, 2011 and December 31, 2010, respectively. The third party pledged its assets to the bank as partial collateral for a bank loan in the amount of $1,492,961 borrowed by the Company. The loan receivable does not have a stated maturity date.
|
|
During December 2010, the Company made a loan to Jinyatai Agricultural Development Co., Ltd. (“Jinyatai”), a former subsidiary of Taiyang that was divested in 2005, the balance of which was $939,188 and $907,468 as of September 30, 2011 and December 31, 2010, respectively. As stipulated by the loan agreement, Jinyatai pledged its assets as partial collateral for a bank loan borrowed by the Company with a balance of $1,565,313 as of September 30, 2011. The reason for the pledge of Jinyatai’s assets was to provide the Company security for the loan (in the event Jinyatai does not repay the loan, the Company could withhold payment on the bank loan secured by Jinyatai’s assets and allow the bank to foreclose on those assets), and to allow the Company to borrow additional funds from the bank using the value of Jinyatai’s assets. The loan receivable matured on January 7, 2011. Because the loan was not repaid by this date, the agreement between the Company and Jinyatai calls for Jinyatai to pay interest incurred by the Company on the bank loan. Through September 30, 2011, such interest amounted to $94,703. In connection with the issuance of its audited financial statements for years ended December 31, 2008 and 2009, which were issued on June 10, 2010, the Company made a reserve for the full amount off an account receivable in the amount of $895,430 for the sale price of Jinyatai. The charge to the statement of operations for this reserve was made to the opening balance of fiscal 2008. Between June 20-29, 2010, the Company collected this amount from the buyer and recognized a gain from the collection in this amount in the six months ended June 30, 2010. Additionally, the Company made sales of ducks to Luo Jiayun, the principal shareholder and legal representative of Jinyatai, in the amount of $2,922,770 and $2,156,674 during the nine months ended September 30, 2011 and 2010, respectively (see note 22(b)).
|
|
The value of the guarantees provided through the pledged assets of the Company’s borrowers was estimated to be approximately $49,624 at September 30, 2011.
|
|
The Company had additional unsecured loans receivable from unrelated parties totaling $1,874,962 and $1,545,722 outstanding at September 30, 2011 and December 31, 2010, respectively, which had no stated maturity date, and had no security.
|
4.
|
Loans receivable (continued):
|
The above loans constitute inter-enterprise lending that violate the PRC General Lending Rules. A fine in the amount of one to three times the income generated by the Company from such inter-enterprise loans may be imposed by the People’s Bank of China, at their discretion, if the Company were found to be in violation of the PRC General Lending Rules (see note 22(b)). The Company estimates the range of potential fines to be between approximately $560,000 and $1,670,000 based on the guidelines established by PRC General Lending Rules, but such fines are levied discretion of the People’s Bank of China. Effective as of May 11, 2011, any new loans to directors, officers, or unrelated parties require pre-approval of the Company’s board of directors.
|
|
The underlying business reason for the above loans receivable is that local prominent businesses in China often create an informal lending and borrowing arrangement amongst each other whereby short term working capital loans are made between parties in order to allow businesses to borrow in excess of what banks are willing to lend. The Company has historically both borrowed and loaned under such arrangements, without cash interest. Currently, the Company is a net lender with no borrowings.
|
|
During the three months ended September 30, 2011, the Company recorded a reserve for estimated uncollectible loans receivable in the amount of $349,484. This amount is reflected in “General and administrative expense” on the accompanying consolidated statement of operations and comprehensive income.
|
|
5.
|
Inventories:
|
Inventories were comprised of the following as of September 30, 2011 and December 31, 2010:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Raw materials
|
$ | 1,153,613 | $ | 1,142,773 | ||||
Work in process
|
821,034 | 490,978 | ||||||
Finished goods
|
473,412 | 128,958 | ||||||
|
$ | 2,448,059 | $ | 1,762,709 |
The Company did not have any obsolete or slow-moving inventory as of September 30, 2011 or December 31, 2010.
|
|
6.
|
Prepaid and other current assets:
|
Prepaid and other current assets were comprised of the following as of September 30, 2011 and December 31, 2010:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Prepaid inventory purchases
|
$ | 2,572,285 | $ | 224,187 | ||||
Other prepaid expenses
|
853,761 | 623,527 | ||||||
Biological assets
|
175,041 | 292,520 | ||||||
|
$ | 3,601,087 | $ | 1,140,234 |
6.
|
Prepaid and other current assets (continued):
|
Biological assets are comprised of master breeding ducks that are treated as capitalized assets due to their ability to produce offspring that are also capable of breeding. These biological assets generally have a productive breeding period of approximately one year. The Company capitalizes these assets and amortizes their cost, which includes any cost to acquire the duck plus costs incurred for hatching and incubation, over a period of one year.
|
|
During the three months ended September 30, 2011, the Company recorded a reserve for estimated impaired prepayments in the amount of $273,346. This amount is reflected in “General and administrative expense” on the accompanying consolidated statement of operations and comprehensive income.
|
|
7.
|
Related party transactions:
|
As of September 30, 2011 and December 31, 2010, amounts due to related parties were comprised of $Nil and $30,249, respectively, due to Wu Qiyou. Wu Qiyou is Taiyang’s founder and principal executive officer and was holder of 96% of the Company’s registered share capital prior to the Reverse Merger Transaction in November 2010 (see note 1(a)). Mr. Wu was appointed as Chief Executive Officer and Chairman of the Board of Directors of the Company after the Reverse Merger Transaction. Wu Qiyou owns 49% of Taiyang Biological Corporation.
|
|
Wu Qida was the holder of 2% of Taiyang’s registered share capital prior to the Reverse Merger Transaction in November 2010, and is also the brother of Wu Qiyou. Wu Qida owns 31% of Taiyang Biological Corporation.
|
|
Chen Beihuang was the holder of 2% of Taiyang’s registered share capital prior to the Reverse Merger Transaction in November 2010. Ms. Chen was also appointed as a member of the Board of Directors of the Company after the Reverse Merger Transaction.
|
|
Taiyang Biological Corporation is a company owned 49% by Wu Qiyou and 31% by Wu Qida.
|
|
The Company was involved in the following transactions with Wu Qiyou, Chen Beihuang and Wu Qida during the nine months ended September 30, 2011 and 2010:
|
|
Wu
|
Chen
|
Wu
|
|
||||||||||||
|
Qiyou
|
Beihuang
|
Qida
|
Total
|
||||||||||||
Balance due (to) from as of December 31, 2010
|
$ | (30,249 | ) | $ | — | $ | — | $ | (30,249 | ) | ||||||
Loans to related party
|
616,726 | 10,326 | — | 627,052 | ||||||||||||
Repayments from related party
|
(712,741 | ) | (10,326 | ) | — | (723,067 | ) | |||||||||
Currency translation difference
|
(2,559 | ) | — | — | (2,559 | ) | ||||||||||
|
||||||||||||||||
Balance due (to) from as of September 30, 2011
|
$ | (128,823 | ) | $ | — | $ | — | $ | (128,823 | ) | ||||||
Balance due (to) from as of December 31, 2009
|
$ | 735,861 | $ | 585 | $ | 29,252 | $ | 765,698 | ||||||||
Loans to related party
|
1,316,384 | 138,268 | 704 | 1,455,356 | ||||||||||||
Repayments from related party
|
(887,775 | ) | (138,855 | ) | — | (1,026,630 | ) | |||||||||
Currency translation difference
|
22,852 | 2 | (97 | ) | 22,757 | |||||||||||
|
||||||||||||||||
Balance due (to) from as of September 30, 2010
|
$ | 1,187,322 | $ | — | $ | 29,859 | $ | 1,217,181 |
On May 11, 2011, the Company’s board of directors passed a resolution requiring board approval for all future loans to directors, officers, and any other related or unrelated parties.
|
7.
|
Related party transactions (continued):
|
|
The Company was involved in the following additional related party transactions during the nine months ended September 30, 2011 and 2010:
|
||
During the nine months ended September 30, 2011 and 2010, the Company made purchases from Taiyang Biological Corporation in the amount of $78,286 and $101,623, respectively. During the three months ended September 30, 2011 and 2010, the Company made purchases from Taiyang Biological Corporation in the amount of $21,041 and $70,993, respectively. As of September 30, 2011 and December 31, 2010, the Company had prepayments against inventory purchases with Taiyang Biological Corporation in the amount of $75,175 and $90,385, respectively.
|
||
The Company currently engages Thornhill Capital LLC to perform certain accounting, language translation, and other professional services. The Company’s Chief Financial Officer, David Dodge, also performs contract work unrelated to the Company on behalf of Thornhill Capital LLC.
|
||
In August 2010, the Company purchased 7.81% of the equity of a local credit cooperative. As of September 30, 2011 and December 31, 2010, the face value of long term loans payable to the credit cooperative were $197,527 and $190,856, respectively, and the carrying value was $145,306 and $126,428 respectively. The Company also had a short term loan payable to the credit cooperative in the amount of $1,565,313_ as of September 30, 2011 (see notes 10 and 14(a)).
|
||
Transactions during the period are reflected at the average exchange rates for the respective period, and balances as of September 30, 2011 and December 31, 2010 are reflected at closing exchange rates for the respective period (see note 19(c)). Accordingly, beginning balance plus period transactions may differ from ending balances due to exchange rate differences.
|
||
8.
|
Property, plant and equipment:
|
|
(a)
|
Property, plant and equipment
|
|
As of September 30, 2011 and December 31, 2010, property, plant and equipment consisted of the following:
|
|
|
Accumulated
|
Net book
|
|||||||||
As of September 30, 2011 (unaudited)
|
Cost
|
depreciation
|
Value
|
|||||||||
Production equipment
|
$ | 2,735,249 | $ | (827,432 | ) | $ | 1,907,817 | |||||
Transportation equipment
|
622,139 | (146,343 | ) | 475,796 | ||||||||
Office furniture and equipment
|
321,276 | (102,649 | ) | 218,627 | ||||||||
Building and building improvements
|
20,086,629 | (2,348,390 | ) | 17,738,239 | ||||||||
|
||||||||||||
|
$ | 23,765,293 | $ | (3,424,814 | ) | $ | 20,340,479 |
Accumulated
|
Net book
|
|||||||||||
As of December 31, 2010 (audited)
|
Cost
|
depreciation
|
Value
|
|||||||||
Production equipment
|
$ | 2,407,456 | $ | (661,651 | ) | $ | 1,745,805 | |||||
Transportation equipment
|
565,298 | (98,330 | ) | 466,968 | ||||||||
Office furniture and equipment
|
266,829 | (62,207 | ) | 204,622 | ||||||||
Building and building improvements
|
19,743,948 | (1,666,181 | ) | 18,077,767 | ||||||||
|
||||||||||||
|
$ | 22,983,531 | $ | (2,488,369 | ) | $ | 20,495,162 |
8.
|
Property, plant and equipment (continued):
|
|
(b)
|
Property, plant and equipment (continued)
|
|
Depreciation expense of production-related property, plant and equipment is recorded to production costs, which is allocated to inventory and reflected in cost of goods sold on the statement of operations. Depreciation expense of other property, plant and equipment is charged to general and administrative expense. For the three and nine months ended September 30, 2011 and 2010, depreciation expense was allocated as follows:
|
|
Nine months ended September 30,
|
Three months ended September 30,
|
||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Depreciation expense charged to general and administrative expense
|
$ | 223,023 | $ | 151,457 | $ | 97,963 | $ | 65,620 | ||||||||
Depreciation expense charged to cost of goods sold
|
740,312 | 470,563 | 226,077 | 176,072 | ||||||||||||
|
||||||||||||||||
Total depreciation expense
|
$ | 963,335 | $ | 622,020 | $ | 324,040 | $ | 241,692 |
All of the Company’s building and building improvements, and certain of the Company’s production equipment, are pledged as collateral for bank loans payable as described in note 14.
|
||
During the nine months ended September 30, 2011, the Company recognized a net gain on disposal of assets related to its Duck Farm #2 and other assets in the amount of $19,736 (see note 18(c)).
|
||
(c)
|
Construction in progress
|
|
The Company has various construction projects in process to expand its facilities. As of September 30, 2011 and December 31, 2010, construction in progress was comprised of the following:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Incubation center expansion
|
$ | 721,140 | $ | 827,158 | ||||
Breeding facilities
|
4,885,594 | 4,521,791 | ||||||
Capitalized interest expense
|
352,706 | 66,393 | ||||||
Other projects
|
435,539 | 219,134 | ||||||
|
||||||||
|
$ | 6,394,979 | $ | 5,634,476 |
The Company capitalizes interest on loans related to construction projects in progress. During the nine months ended September 30, 2011 and 2010, the Company capitalized interest expense in the amount of $281,572 and $169,901, respectively. During the three months ended September 30, 2011 and 2010, the Company capitalized interest expense in the amount of $110,577 and $48,725, respectively.
|
9.
|
Land Use Rights:
|
As of September 30, 2011 and December 31, 2010, land use rights consisted of the following:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Cost
|
$ | 12,358,649 | $ | 11,890,593 | ||||
Less accumulated amortization
|
(1,447,872 | ) | (1,229,605 | ) | ||||
|
||||||||
|
$ | 10,910,777 | $ | 10,660,988 |
Land use rights are amortized over the life of the rights, which is generally 50 years, and are charged to general and administrative expense on the statement of operations. Amortization expense of land use rights was $172,589 and $143,757 during the nine months ended September 30, 2011 and 2010, respectively, and $58,291 and $54,596 during the three months ended September 30, 2011 and 2010, respectively.
|
|
Land use rights are owned by the PRC government, and are granted with restrictions on use. In the event that the land is used for purposes outside the scope of the Company’s current business, the government could revoke such rights. The Company does not have any plans to use land that is subject to land use rights for any purposes outside the scope of its current business, or for any purpose other than those pursuant to which the rights were granted.
|
|
All of the Company’s land use rights are pledged as collateral for bank loans payable as described in note 14, a portion of the proceeds of which were used to finance the acquisition of land use rights and related development of the land.
|
|
10.
|
Other long term assets:
|
As of September 30, 2011 and December 31, 2010, other long term assets were comprised of the following:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Long term investment
|
$ | 1,565,313 | $ | 1,512,447 | ||||
Land deposits
|
31,306 | 30,249 | ||||||
Equipment and construction project deposits
|
998,489 | 247,450 | ||||||
Other long term assets
|
123,947 | 18,238 | ||||||
|
||||||||
|
$ | 2,719,055 | $ | 1,808,384 |
Long term investment is comprised of an investment in a local credit cooperative which the Company purchased in August 2010. As a shareholder in the credit cooperative, the Company has access to favorable borrowing terms, and pro rata dividends of credit cooperative profits, if declared. The Company owns 7.81% of the credit cooperative.
|
|
Land use rights deposits represents amounts advanced to an independent third party to be applied against the purchase of land use rights by the Company upon completion by the Company of its duck farm under construction.
|
11.
|
Trade accounts payable and accrued liabilities:
|
As of September 30, 2011 and December 31, 2010, accounts payable and accrued liabilities were comprised of the following:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Trade accounts payable
|
$ | 1,152,545 | $ | 1,933,520 | ||||
Accrued payroll
|
214,983 | 265,443 | ||||||
Accrued liquidated damages
|
562,746 | 562,746 | ||||||
Accrued professional services
|
41,865 | 55,564 | ||||||
Accrued taxes
|
782,142 | 596,120 | ||||||
|
$ | 2,754,281 | $ | 3,413,393 |
Pursuant to the terms of the registration rights agreements dated November 10, 2010 and November 16, 2010, entered into between the Company and the investors in the November 2010 financing, the Company was required to file a registration statement including the shares issued in the November 2010 financing no later than January 9, 2011 and have such registration statement declared effective no later than May 9, 2011. The Company failed to file such registration statement, and as a result must accrue liquidated damages in the amount of 1% of the aggregate subscription amount for the first 30 days after the filing deadline, and 2% for each 30-day period thereafter, with a maximum penalty of 10% of the aggregate subscription amount. As of September 30, 2011 and December 31, 2010, such accrued liquidated damages amounted to $562,746 (see note 17).
|
|
12.
|
Derivative Financial Instruments and Financing:
|
On March 7 and March 17, 2011, the Company completed the sale of an aggregate 575,000 shares of common stock to eight investors at a price of $2.00 per share for gross cash proceeds of $1,150,000. In connection this financing, the Company also issued to the investors warrants to purchase 143,750 shares of common stock at an exercise price of $4.00 per share and a contractual term of three years, as well as 46,000 placement agent warrants with an exercise price of $4.00 and a contractual term of five years (see note 1(a)).
|
|
Gross and net proceeds to the Company were as follows:
|
|
Mar. 7, 2011
|
Mar. 17, 2011
|
Total
|
|||||||||
Cash proceeds
|
$ | 1,100,000 | $ | 50,000 | $ | 1,150,000 | ||||||
Commissions and direct offering costs
|
(126,500 | ) | (4,000 | ) | (130,500 | ) | ||||||
|
||||||||||||
Net proceeds
|
$ | 973,500 | $ | 46,000 | $ | 1,019,500 |
The proceeds of the financing were allocated as follows:
|
|
Mar. 7, 2011
|
Mar. 17, 2011
|
Total
|
|||||||||
Common stock, par value $0.001
|
$ | 550 | $ | 25 | $ | 575 | ||||||
Additional paid in capital
|
664,418 | 31,006 | 695,424 | |||||||||
Derivative financial instruments
|
308,532 | 14,969 | 323,501 | |||||||||
|
$ | 973,500 | $ | 46,000 | $ | 1,019,500 |
12.
|
Derivative Financial Instruments and Financing (continued):
|
Additionally, during November 2010, the Company completed a financing pursuant to which it sold 2,905,392 shares and issued 952,646 warrants with terms similar to those issued in the March 2011 financing.
|
|
The warrants issued in the above transactions contain a provision that in the event the Company effects a merger or consolidation, a sale of all or substantially all of its assets, or if any tender offer or exchange offer is completed pursuant to which holders of the Company’s common stock are permitted to tender or exchange their shares for other securities, cash or property, and such transaction is (i) an all cash transaction, (ii) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Securities Exchange Act of 1934, or (ii) a transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, then the Company or any successor entity shall pay at the warrant holder’s option, an amount of cash equal to the value of the warrant as determined in accordance with the Black Scholes option pricing model.
|
|
Because of this provision, the warrants do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each period.
|
|
The warrants are valued using the Black/Scholes pricing model because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used to value the warrants as of their inception date, and as of September 30, 2011 for purposes of recognizing changes in fair value, included the following:
|
|
Mar. 7, 2011
|
Mar. 17, 2011
|
Sep. 30, 2011
|
|||||||||
Underlying Stock Price
|
$ | 2.80 | $ | 2.80 | $ | 2.00 | ||||||
Exercise Price
|
$ | 4.00 | $ | 4.00 | $ | 4.00 | ||||||
Term (years)
|
3.00 | 3.00 | 2.44 - 2.46 | |||||||||
Volatility
|
110.83 | % | 119.39 | % | 139.19 | % | ||||||
Annual Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Discount Rate - Bond Equivalent Yield
|
1.22 | % | 1.05 | % | 0.42 | % |
Since the Company’s common stock has limited trading history, the Company estimated volatility using historical volatility of comparable companies in the industry. For the risk-free rates of return, the Company used the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants.
|
12.
|
Derivative Financial Instruments and Financing (continued):
|
The change in fair value of the warrants is recognized in the statement of operations each period. During the three and nine months ended September 30, 2011, the change in fair value was as follows:
|
|
Issuance Date
|
|
||||||||||
|
Mar. 2011
|
Nov. 2010
|
Total
|
|||||||||
Three months ended September 30, 2011:
|
||||||||||||
Value at June 30, 2011
|
$ | 239,582 | $ | 1,128,280 | $ | 1,367,862 | ||||||
Less: value at September 30, 2011
|
(235,407 | ) | (1,095,083 | ) | (1,330,490 | ) | ||||||
|
||||||||||||
Loss on derivative financial instruments
|
$ | 4,175 | $ | 33,197 | $ | 37,372 | ||||||
|
||||||||||||
Nine months ended September 30, 2011:
|
||||||||||||
Value at December 31, 2010
|
$ | — | $ | 1,480,261 | $ | 1,480,261 | ||||||
Plus: inception value of March 2011 warrants
|
323,501 | — | 323,501 | |||||||||
Less: value at September 30, 2011
|
(235,407 | ) | (1,095,083 | ) | (1,330,490 | ) | ||||||
Gain on derivative financial instruments
|
$ | 88,094 | $ | 385,178 | $ | 473,272 |
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimate and assumption changes.
|
|
In connection with each of the November 2010 financing and the March 2011 financing, the Company undertook to prepare and file with the SEC and maintain the effectiveness of a “resale” registration statement pursuant to Rule 415 under the Securities Act providing for the resale of (i) all of the shares of common stock (ii) all of the shares of common stock issuable upon exercise of the warrants, (iii) all of the shares of common stock issuable upon exercise of the warrants issued to the placement agent (iv) any additional shares issuable in connection with any anti-dilution provisions associated with such preferred stock and warrants, and (v) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.
|
|
Under the terms of the Registration Rights Agreement executed in connection with the November 2010 financing, the Company was required to have a registration statement filed with the SEC within 60 days after the first closing date (being January 9, 2011) and declared effective by the SEC not later than 180 days from the closing date in the event of a full review (being May 9, 2011) with respect to 2,905,392 shares of common stock and 952,646 shares of common stock underlying warrants issued pursuant to the November 2010 financing. Under the terms of the Registration Rights Agreement executed in connection with the March 2011 financing, the Company is required to have a registration statement filed with the SEC within 60 days after the closing date (being May 6, 2011) and declared effective by the SEC not later than 180 days from the closing date in the event of a full review (being September 3, 2011) with respect to 575,000 shares of common stock and 189,750 shares of common stock underlying warrants. The Company is required to pay liquidated damages to each purchaser in an amount equal to one percent of the purchaser’s purchase price paid for any registrable securities then held by the purchaser for the first thirty (30) calendar days past the relevant deadline that the registration statement is not filed or not declared effective, for any period that the Company fails to keep the registration statement effective. The liquidated damages increases to 2% of the purchaser’s purchase price for any registrable securities held after the first thirty (30) calendar day period thereafter. Through June 30, 2011 and December 31, 2010, such accrued liquidated damages amounted to $562,746, all of which relate to the November 2010 financing (see note 11). This amount was charged to interest expense on the statement of operations in the year ended December, 31, 2010. The maximum amount of the liquidated damages is $562,746 related to the November 2010 financing and $115,000 related to the March 2011 financing. No liability has been recorded related to the March 2011 financing since the registration statement including the shares issued in March 2011 as the amount and certainty of such penalties is not reasonably estimable as of the date hereof.
|
13.
|
Other accounts payable:
|
As of September 30, 2011 and December 31, 2010, other accounts payable and accrued liabilities were comprised of the following:
|
|
September 30,
|
December 31,
|
||||||
|
2011
|
2010
|
||||||
(unaudited)
|
(audited)
|
|||||||
Deposits from contract farmers - general
|
$ | 980,369 | $ | 1,088,536 | ||||
Deposits from contract farmers securing loans
|
907,883 | 2,769,291 | ||||||
Land use right payable
|
39,511 | 38,177 | ||||||
Construction project payable
|
17,218 | 351,642 | ||||||
Other payables and amounts due to unrelated parties
|
405,197 | 295,209 | ||||||
|
$ | 2,350,178 | $ | 4,542,855 |
Other payables and amounts due to unrelated parties are comprised of demand unsecured loans and other amounts payable to unrelated third parties not in the ordinary course of carrying out the Company’s principal business, on which imputed interest was charged in the amount of $Nil and $74,648 in the nine months ended September 30, 2011 and 2010, respectively, and $Nil and $64,766 in the three months ended September 30, 2011 and 2010, respectively.
|
|
Deposits from contract farmers are comprised of advances from local farmers used by the Company to acquire feed raw materials and fund the incubation of new ducks that will be raised by the farmers on behalf of the Company. General deposits are made from the farmers’ working capital without any underlying loans. Deposits from contract farmers securing loans are advanced to the Company from the proceeds of loans taken by the farmers. These loans are guaranteed by the general credit of the Company. To ensure repayment of the loans, the Company requires that the farmers advance the amount of the loan to the Company to be held as a deposit against the loan. The deposits are then returned when the loans mature.
|
14.
|
Loans payable:
|
|
(a)
|
Short term bank loans
|
|
As needed, the Company borrows funds in the form of short term bank loans payable to fund its capital projects and supplement its working capital requirements. The carrying value of short term bank loans payable as of September 30, 2011 and December 31, 2010 is shown in the following table. The fair value of these bank loans payable approximates their carrying values.
|
|
Annual
|
|
|
||||||||
Interest
|
September 30,
|
December 31,
|
|||||||||
Due Dates
|
Rates
|
2011
|
2010
|
||||||||
(unaudited)
|
(audited)
|
||||||||||
January 25, 2011 (1)
|
5.842 | % | $ | — | $ | 2,268,673 | |||||
March 14, 2011 (4)
|
5.310 | % | — | 1,482,198 | |||||||
March 28, 2011 (3)
|
5.841 | % | — | 756,224 | |||||||
April 11, 2011 (4)
|
0.000 | % | — | 756,224 | |||||||
June 10, 2011 (4)
|
0.000 | % | — | 468,859 | |||||||
September 15, 2011 (2)(4)
|
0.000 | % | — | 907,468 | |||||||
October 13, 2011 (4)
|
5.841 | % | 313,063 | 302,489 | |||||||
October 15, 2011 (4)
|
5.310 | % | 641,778 | 620,103 | |||||||
November 4, 2011 (4)
|
5.841 | % | 313,063 | 302,489 | |||||||
January 8, 2012 (4)
|
7.320 | % | 2,347,969 | — | |||||||
January 17, 2012 (5)
|
8.715 | % | 1,565,313 | — | |||||||
February 26, 2012 (4)
|
6.060 | % | 1,534,006 | — | |||||||
March 16, 2012 (3)
|
6.363 | % | 782,656 | — | |||||||
May 17, 2012 (4)
|
6.060 | % | 782,656 | — | |||||||
June 9, 2012 (4)
|
6.363 | % | 485,247 | — | |||||||
August 22, 2012 (4)
|
7.216 | % | 2,347,969 | — | |||||||
September 13, 2012 (3)
|
7.216 | % | 782,656 | — | |||||||
September 22, 2012 (4)
|
7.872 | % | 1,565,313 | — | |||||||
|
|||||||||||
|
$ | 13,461,689 | $ | 7,864,727 |
|
||
(1)
|
The assets of an unrelated third party are pledged as collateral for this loan (see note 4).
|
|
(2)
|
The assets of Jinyatai are pledged as collateral for this loan (see note 4).
|
|
(3)
|
These loans are secured by accounts receivable of the Company.
|
|
(4)
|
These loans are secured by property and equipment of the Company
|
|
(5)
|
This loan is payable to a local credit cooperative of which the Company owns 7.81% (see note 7).
|
14.
|
Loans payable (continued):
|
|
(b)
|
Long term bank loans
|
|
The carrying value of long term bank loans payable as of September 30, 2011 and December 31, 2010 is shown in the following table. The fair value of these bank loans payable approximates their carrying values.
|
|
Annual
|
|
|
||||||||
Interest
|
September 30,
|
December 31,
|
|||||||||
Due Dates
|
Rates
|
2011
|
2010
|
||||||||
(unaudited)
|
(audited)
|
||||||||||
October 21, 2012 (4)
|
5.400 | % | $ | — | $ | 1,777,129 | |||||
November 30, 2012 (1)
|
0.000 | % | 41,034 | 35,694 | |||||||
December 10, 2012 (4)
|
5.400 | % | — | 491,545 | |||||||
August 8, 2013 (4)
|
5.400 | % | 1,565,313 | 1,512,447 | |||||||
August 8, 2013 (4)
|
5.400 | % | 469,594 | 453,734 | |||||||
September 12, 2013 (4)
|
5.400 | % | 939,188 | 907,468 | |||||||
October 9, 2013 (4)
|
5.400 | % | 1,565,310 | 1,512,447 | |||||||
October 14, 2013 (4)
|
5.400 | % | 939,188 | 907,468 | |||||||
November 30, 2013 (1)
|
0.000 | % | 35,702 | 31,069 | |||||||
April 20, 2014 (2)
|
0.000 | % | 68,570 | 59,665 | |||||||
December 31, 2014 (3)(4)
|
5.760 | % | 2,661,032 | 3,327,384 | |||||||
|
$ | 8,284,931 | $ | 11,016,050 |
|
||
(1)
|
The Company recognized a discount on the face value of the loans at inception to adjust the carrying value to the fair value. Fair value was calculated using the net present value of the loans, at an assumed interest rate of 14%, being the estimated cost of capital for the Company for unsecured borrowings. The amount of the discounts, being $40,865, was recorded as a reduction to the carrying value of the bank loan in a prior period. The discounts are being amortized over the life of the loans using the effective interest method, with interest expense being recorded as an expense in the related period. The Company recognized interest expense to amortize the discounts in the amount of $7,521 and $6,223 in the nine months ended September 30, 2011 and 2010, respectively, and $2,655 and $2,181 in the three months ended September 30, 2011 and 2010, respectively. The carrying value of the loans as of September 30, 2011 and December 31, 2010 as shown in the table above was $76,735 and $66,763, respectively, comprised of face value of $96,736 and $93,469, respectively, net of unamortized discount of $20,001 and $26,706, respectively. These loans are unsecured.
|
|
(2)
|
This instrument is a non interest bearing loan from a local government authority. As such, the Company recognized a discount on the face value of the loans at inception to adjust the carrying value to the fair value. Fair value was calculated using the net present value of the loans, at an assumed interest rate of 14%. The amount of the discount, being $41,716, was recorded as a reduction to the carrying value of the bank in the year ended December 31, 2010. The discount is being amortized over the life of the loan using the effective interest method, with interest expense being recorded as an expense in the related period. The Company recognized interest expense to amortize the discount in the amount of $6,714 and $3,232 the nine months ended September 30, 2011 and 2010, respectively, and $2,370 and $1,941 in the three months ended September 30, 2011 and 2010, respectively. The carrying value of the loan as of September 30, 2011 and December 31, 2010 as shown in the table above was $68,570 and $59,665, respectively, comprised of face value of $100,791 and $97,387, respectively, net of unamortized discount of $32,221 and $37,722, respectively. The loan is unsecured.
|
|
(3)
|
The assets of an unrelated third party are pledged as collateral for this loan (see note 4)
|
|
(4)
|
These loans are secured by property and equipment of the Company
|
14.
|
Loans payable (continued):
|
|
(c)
|
Convertible loan
|
|
On March 1, 2010, the Company issued unsecured debentures in the aggregate principal amount of $650,000 to 11 investors. The Company received net proceeds of $555,000, which were designated to pay legal, accounting, and other costs associated with the Reverse Merger Transaction and the Financing. The debentures bore interest at a rate of 15% per annum, and matured on the earlier of September 30, 2010 or the completion of a financing of at least $10,000,000 by the Company. The debentures are not convertible at inception because the conversion price is based upon the offering price of subsequent financings. Once the subsequent financing occurs and the conversion price is known, the debenture is convertible into a fixed number of shares. The Company evaluated the conversion option embedded in the convertible debentures under the guidance of ASC 815, Derivatives and Hedging. The debentures met the definition of conventional convertible for purposes of applying the exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. In this case, there is a limitation on the number of shares issuable due to a fixed conversion price. Therefore, the debentures are conventional convertible and the conversion option does not require bifurcation and liability classification.
|
||
In connection with the Financing, the Company committed to issue an aggregate of 650,000 shares of the Company’s common stock, which was granted on a basis of one (1) share for one dollar ($1.00) of Debentures, upon completion of a public offering. Due to the governing laws of the Peoples Republic of China, foreign ownership in the operating company is not allowed. Accordingly, this commitment could not be fulfilled until the Company affected a transaction where the issuance of shares could be accomplished. As a result, no value was attributed to this commitment at inception. This commitment was reassessed at each reporting date until such time that it was more likely than not that a reverse merger transaction would occur and the fair value of the commitment could be measured.
|
||
At inception, the Company recorded the debentures at a value of $555,000, being the face value of $650,000, less commissions paid of $95,000. The commissions were amortized over the life of the debentures to interest expense. The Company recorded an expense to amortize the commissions in the amount of $95,000 in the nine months ended September 30, 2010.
|
||
Prior to closing of the Reverse Merger Transaction, the Company assessed the fair value of the commitment to issue 650,000 shares of the newly formed public entity. The commitment was satisfied through the issuance of 988 ordinary shares of Dynamic Ally immediately prior to completion of the Reverse Merger Transaction, which were then exchanged for 650,000 common shares of the Company on closing of the Reverse Merger Transaction, at which time the commitment was satisfied in full. The Company recorded a charge to interest expense in the amount of $165,431 in the fourth quarter of 2010 to reflect the estimated fair value of the shares. The estimated fair value of the shares was calculated using a Capitalization of Earnings methodology, which falls under the “income approach” methodology of valuing assets and liabilities. Fair value under the Capitalization of Earnings methodology is derived by discounting the expected future income streams of the business by the expected rate of return of the business. This discounted present value methodology evolves into a capitalization of earnings method when the expected future income streams are constant. The Company believes this methodology best estimates fair value of the shares because the shares encompassed substantially lesser rights than shares sold by the Company in the November 2010 and March 2011 offerings, most notably lack of registration rights penalties and attached warrants, and therefore could not be valued using pricing from those offerings.
|
14.
|
Loans payable (continued):
|
|
(c)
|
Convertible loan (continued)
|
|
The debentures matured unpaid on September 30, 2010. Because of the default on repayment of the loan, the debentures plus accrued interest became immediately due and payable in cash on September 30, 2010, and the interest rate from September 30, 2010 until repayment increased from 15% to 20% per annum, calculated on a daily basis. On November 10, 2010, in connection with the closing of the Reverse Merger Transaction and the Financing, the notes were satisfied in full as follows: (i) principal in the amount of $549,984 was converted at the option of certain of the holders into 366,656 shares of common stock of Parkview and was recorded at the value of the shares on the conversion date, (ii) principal in the amount of $100,016 was repaid in cash, and (iii) interest of $72,493 was paid in cash. No commitment remained as of June 03, 2011 or December 31, 2010 related to the debentures.
|
||
15.
|
Subsidy income:
|
|
From time to time, the Company receives subsidies from the PRC government. Subsidies used for current period expenditures are recognized as income in the period in which the benefit from the subsidy is realized by the Company. Certain of the subsidies are earmarked for particular capital improvement projects, and the completed projects must be approved by the government to ensure specifications were met. Subsidies that relate to depreciable property and equipment are recorded as an offset to the related capital accounts to which the subsidy relates. | ||
During the nine months ended September 30, 2011 and 2010, the Company recognized subsidy income of $130,738 and $108,835, respectively. During the three months ended June 30, 2011 and 2010, the Company recognized subsidy income of $8,257 and $292, respectively. | ||
16.
|
Share capital:
|
|
(a)
|
Common Stock
|
|
The Company was incorporated on April 7, 1999 (see note 1(a)). The Company is authorized to issue up to 75,000,000 shares of common stock, par value $0.001 per share.
|
||
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors. Holders of common stock representing a majority of the voting power of the Company’s capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders. A vote by the holders of a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to the Company’s certificate of incorporation.
|
||
Holders of common stock are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata 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. The common stock has no pre-emptive, subscription or conversion rights and there are no redemption provisions applicable to the common stock.
|
16.
|
Share capital (continued):
|
|
(b)
|
Preferred Stock
|
|
The Company is authorized to issue 5,000,000 shares of preferred stock, par value $.001 per share, none of which are currently outstanding. The shares of preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the Board of Directors. The Board of Directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Delaware.
|
||
(c)
|
Warrants
|
|
As of September 30, 2011, the Company had 1,142,396 warrants outstanding. Each warrant entitles the holder to purchase one (1) share of the Company’s common stock at an exercise price of $4.00 per share, have a term of 3-5 years, and are subject to a call provision if the closing bid price of the Company’s common stock equals or exceeds $8.00 per share for five consecutive trading days, subject to the Company’s common stock being traded on either the New York Stock Exchange, Nasdaq or NYSE Amex and there being an effective registration statement for the resale of the shares of common stock underlying the warrants. The warrants issued in the transaction do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each reporting period (see note 12)
|
||
(d)
|
Earnings per share
|
|
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated based on the treasury stock method, assuming the issuance of common shares, if dilutive, resulting from the exercise of outstanding warrants.
|
||
During the three and nine months ended September 30, 2011 and 2010, the warrants outstanding have not been included in the computation of diluted income per share, because all outstanding warrants were out of the money and such inclusion would have had an anti-dilutive effect. The number of weighted average common shares outstanding has been retroactively restated to give effect to the shares issued in the Reverse Merger Transaction.
|
||
(e)
|
Financing transaction
|
|
On March 7 and March 17, 2011, the Company completed the sale of an aggregate 575,000 shares of common stock to eight investors at a price of $2.00 per share for gross cash proceeds of $1,150,000. In connection with this financing, the Company also issued to the investors warrants to purchase 143,750 shares of common stock at an exercise price of $4.00 per share and a contractual term of three years, as well as 46,000 placement agent warrants with an exercise price of $4.00 and a contractual term of five years.
|
||
The Company also entered into a Registration Rights Agreement with the purchasers, under which the Company undertook to prepare and file with the SEC and maintain the effectiveness of a “resale” registration statement pursuant to Rule 415 under the Securities Act providing for the resale of (i) all of the shares of common stock (ii) all of the shares of common stock issuable upon exercise of the warrants, (iii) all of the shares of common stock issuable upon exercise of the warrants issued to the placement agent (iv) any additional shares issuable in connection with any anti-dilution provisions associated with such preferred stock and warrants, and (v) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing.
|
16.
|
Share capital (continued):
|
|
(e)
|
Financing transaction (continued)
|
|
Under the terms of the Registration Rights Agreement, the Company is required to have a registration statement filed with the SEC within 60 days after the first closing date (being May 6, 2011 with respect to all 575,000 shares), and declared effective by the SEC not later than 180 days from the closing date (being September 3, 2011). The Company is required to pay liquidated damages to each purchaser in an amount equal to one percent of the purchaser’s purchase price paid for any registrable securities then held by the purchaser for the first thirty (30) calendar days past the relevant deadline that the registration statement is not filed or not declared effective, for any period that the Company fails to keep the registration statement effective. The liquidated damages increases to 2% of the purchaser’s purchase price for any registrable securities held after the first thirty (30) calendar day period thereafter.
|
||
17.
|
Interest expense (net):
|
|
The Company earns interest income on cash balances and short term investments. The Company recognizes interest expense on loans payable, and for bank charges related to its cash accounts. Interest expense was as follows during the three and nine months ended September 30, 2011 and 2010: |
|
Nine months ended September 30,
|
Three months ended September 30,
|
||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Interest income
|
$ | (212,370 | ) | $ | (2,721 | ) | $ | (69,965 | ) | $ | (779 | ) | ||||
Interest expense
|
1,186,918 | 1,174,398 | 415,398 | 456,123 | ||||||||||||
Bank fees
|
52,919 | 110,903 | (6,578 | ) | (5,338 | ) | ||||||||||
Amortization of debt discount
|
14,235 | 104,455 | 5,025 | 45,155 | ||||||||||||
Imputed interest expense
|
— | 74,648 | — | 64,546 | ||||||||||||
|
$ | 1,041,702 | $ | 1,461,683 | $ | 343,880 | $ | 559,707 |
The Company capitalizes interest on loans related to construction projects in progress. During the nine months ended September 30, 2011 and 2010, the Company capitalized interest expense in the amount of $281,572_ and $169,901, respectively. During the three months ended September 30, 2011 and 2010, the Company capitalized interest expense in the amount of $110,577 and $48,725, respectively. |
18.
|
Other income:
|
Other income was as follows during the three and nine months ended September 30, 2011 and 2010:
|
|
Nine months ended September 30, |
Three months ended September 30,
|
||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Gain on sale of fertilizer plant
|
$ | — | $ | 877,874 | $ | — | $ | — | ||||||||
Gain on collection of Jinyatai receivable written off in prior period
|
— | 895,430 | — | — | ||||||||||||
Gain on disposal of assets
|
19,735 | — | — | — | ||||||||||||
Dividend income from long term investment
|
185,533 | — | 1,274 | — | ||||||||||||
Other non-operating income (expense), net
|
(9,414 | ) | 4,226 | (31,264 | ) | 5,409 | ||||||||||
|
$ | 195,854 | $ | 1,777,530 | $ | (29,990 | ) | $ | 5,409 |
(a)
|
Gain on sale of fertilizer plant:
|
|
In 2008, the Company began construction on an organic fertilizer manufacturing plant (the “Fertilizer Plant”) that the Company intended to complete in the second half of 2010. The Fertilizer Plant was to be used to process duck waste products into a saleable organic fertilizer product.
|
||
In May 2010, the Company entered into an Asset Transfer Agreement with an unrelated third party (the “Buyer”), whereby the buyer agreed to buy, and the Company agreed to sell, the Fertilizer Plant and related equipment, ground works, land rights, and intellectual property associated with the manufacturing process (collectively, the “Sold Assets”). The sale price for the Sold Assets (as valued using the exchange rate on the sale date) was $3,886,431, of which $2,048,371 was paid during June 2010, $1,010,851 (as valued using the exchange rate on the payment date) was paid during December 2010, and $939,188 remains outstanding. This final balance was due by May 31, 2011 but has not yet been collected. Accordingly, during the three months ended September 30, 2011, the Company recorded a reserve against the remaining balance receivable of $462,364 (using the average exchange rate for the period), leaving a net carrying value of $469,594 as of September 30, 2011.
|
||
The Company believes that the estimated remaining balance is recoverable for the following reasons: (i) the Buyer has indicated to the Company that the fertilizer plant is operational and generating ongoing sales and income, (ii) the Buyer has acknowledged the liability and confirmed willingness to pay the outstanding balance, (iii) the assets of the fertilizer plant are pledged as collateral for a bank loan taken by the Company with a balance of $2,347,969 as of September 30, 2011, while the value of the fertilizer plant assets assigned by the lending bank for collateral purposes is approximately $5.4 million. Because the lending bank could foreclose on the Fertilizer Plant assets in the event the loan taken by the Company is not repaid, the Company believes this provides incentive to the Buyer to pay the remaining balance of the sale price receivable.
|
18.
|
Other income (continued):
|
||
(a)
|
Gain on sale of fertilizer plant (continued):
|
||
During the nine months ended September 30, 2010, the Company recognized a gain on the sale of the Sold Assets equal to the excess of the sale price over the carrying value of the Sold Assets on the date of the sale as follows:
|
Sale Price
|
$ | 3,886,431 | ||
Less: carrying value of assets at sale date
|
||||
Prepaid current assets
|
43,894 | |||
Construction in progress
|
2,302,441 | |||
Prepaid construction in progress
|
626,425 | |||
Prepaid land use rights
|
321,886 | |||
Property, plant and equipment
|
38,508 | |||
Accrued construction in progress
|
(324,597 | ) | ||
Net carrying value of asset group
|
3,008,557 | |||
Gain on disposal
|
$ | 877,874 |
Additionally, the Asset Sale is subject to the following material terms and conditions:
|
|||
●
|
The Company must assist the Buyer in transferring all property rights and licenses
|
||
●
|
The Company will provide basic training on production methods, and will turn over all procedures and technology information to the Buyer.
|
||
●
|
The Buyer can market the product under the Company’s name for a period of two years
|
||
●
|
The land use rights transferred to the Buyer have been prepaid by the Company, but are not yet owned outright by the Company. The owner of the land use rights has agreed to transfer such rights to the Company upon completion of construction of the Fertilizer Plant, at which time the Company will transfer them to the Buyer.
|
||
No consideration was deferred because substantially all of the above conditions were met in 2010, and the remaining value as of December 31, 2010 was nominal.
|
|||
The Company made the strategic decision to sell the Fertilizer Plant because the price of fertilizer products has decreased materially from the time the Company began building the Plant. In connection with its public listing, which was not contemplated at the time the Fertilizer Plant was begun, the Company determined that expected margins on fertilizer products would not be commensurate with margins on its core products, and that investors in the Company would prefer that the Company focus its financial and other resources on growing its food processing business.
|
|||
Prior to the sale of the Sold Assets, the Company had pledged the Sold Assets as collateral for a short term bank loan. After the sale, with the permission of the Buyer, the Company continues to use the Sold Assets as collateral for this bank loan, which matured in January 2011 and was extended for a period of one year through January 2012.
|
|||
(b)
|
Collection of account previously written off:
|
||
In connection with the issuance of its audited financial statements for years ended December 31, 2008 and 2009, which were issued on June 10, 2010, the Company made a reserve for the full amount off an account receivable in the amount of $895,430 for the sale price of Jinyatai. The charge to the statement of operations for this reserve was made to the opening balance of fiscal 2008. Between June 20-29, 2010, the Company collected this amount from the buyer and recognized a gain from the collection in this amount in the nine months ended September 30, 2010 (see note 4).
|
18.
|
Other income (continued):
|
|
(c)
|
Gain on disposal of assets:
|
|
During the nine months ended June 30, 2011, the PRC government reclaimed certain land that it was leasing to the Company on which the Company’s Breeding Center #2 was located. The lease was original set to expire on December 31, 2011. The Company owned certain buildings located on this land which were appropriated by the government since relocation of the buildings would not have been cost effective. The government paid the Company remuneration in the amount of $339,118 as compensation of the appropriation. The gain on disposal of the buildings associated with Duck Farm #2 and other assets disposed during the period was calculated as follows:
|
Remuneration received from PRC government
|
$ | 339,118 | ||
Less: estimated cost to demolish buildings
|
(15,310 | ) | ||
Less: carrying value of assets
|
(303,276 | ) | ||
Gain on sale of Duck Farm #2
|
20,532 | |||
Less: loss on disposal of other fixed assets
|
(796 | ) | ||
Net gain on disposal of assets
|
$ | 19,736 |
19.
|
Financial instruments:
|
||
(a)
|
Fair value of financial instruments:
|
||
The Company utilizes ASC Topic 820 fair value measurement accounting guidance, which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. This guidance also defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by this standard contains three levels as follows:
|
|||
●
|
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
||
●
|
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
||
●
|
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
||
The Company values certain loans payable at fair market value which do not have a stated interest rate using a discount of 14% on the face value of the loan at inception to adjust the carrying value to the fair value. Fair value is calculated using the net present value of the loan, and the amount of the discount is included on the statement of operations under the caption “Interest and other expense, net.” The discount is amortized over the life of the loan using the effective interest method, with interest expense being recorded as an expense in the related period. As of September 30, 2011 and December 31, 2010, the carrying value of such instruments included in “Loans payable, long term portion” was $145,305 and $126,428, respectively.
|
|||
The Company’s financial instruments consist of cash, trade accounts receivable, loans receivable, prepaid and other current assets, proceeds receivable from the sale of the Company’s fertilizer plant, amounts due from/to related parties, trade accounts payable and accrued liabilities, other accounts payable, and current loans payable, all of which are valued using Level 1 of the valuation hierarchy. The fair values of these financial instruments approximate their carrying values due to the relatively short-term maturity of these instruments.
|
19.
|
Financial instruments (continued):
|
|
(a)
|
Fair value of financial instruments (continued):
|
|
The Company also has a derivative liability related warrants issued in March 2011 and November 2010 (see note 12). This derivative liability is valued using Level 2 of the fair value hierarchy. The warrants are valued using the Black/Scholes pricing model because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used to value the warrants as of their inception included the following:
|
|
Mar. 7, 2011
|
Mar. 17, 2011
|
Sep. 30, 2011
|
|||||||||
Underlying Stock Price
|
$ | 2.80 | $ | 2.80 | $ | 2.00 | ||||||
Exercise Price
|
$ | 4.00 | $ | 4.00 | $ | 4.00 | ||||||
Term (years)
|
3.00 | 3.00 | 2.44 - 2.46 | |||||||||
Volatility
|
110.83 | % | 119.39 | % | 139.19 | % | ||||||
Annual Rate of Quarterly Dividends
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Discount Rate - Bond Equivalent Yield
|
1.22 | % | 1.05 | % | 0.42 | % |
Since the Company’s common stock has limited trading history, the Company estimated volatility using historical volatility of comparable companies in our industry. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants.
|
||
The change in fair value of the warrants is recognized in the statement of operations each period. During the three and nine months ended September 30, 2011, the change in fair value was as follows:
|
|
Issuance Date
|
|
||||||||||
|
Mar. 2011
|
Nov. 2010
|
Total
|
|||||||||
Three months ended September 30, 2011:
|
||||||||||||
Value at June 30, 2011
|
$ | 239,582 | $ | 1,128,280 | $ | 1,367,862 | ||||||
Less: value at September 30, 2011
|
(235,407 | ) | (1,095,083 | ) | (1,330,490 | ) | ||||||
|
||||||||||||
Loss on derivative financial instruments
|
$ | 4,175 | $ | 33,197 | $ | 37,372 | ||||||
|
||||||||||||
Nine months ended September 30, 2011:
|
||||||||||||
Value at December 31, 2010
|
$ | — | $ | 1,480,261 | $ | 1,480,261 | ||||||
Plus: inception value of March 2011 warrants
|
323,501 | — | 323,501 | |||||||||
Less: value at September 30, 2011
|
(235,407 | ) | (1,095,083 | ) | (1,330,490 | ) | ||||||
Gain on derivative financial instruments
|
$ | 88,094 | $ | 385,178 | $ | 473,272 |
19.
|
Financial instruments (continued):
|
|
(a)
|
Fair value of financial instruments (continued):
|
|
The Company did not have any assets that were measured at fair value on a recurring basis. A summary of liabilities that were measured at fair value on a recurring basis is as follows:
|
|
Level 1
|
Level 2
|
Level 3
|
|||||||||
September 30, 2011:
|
||||||||||||
Discounted loans payable
|
$ | — | $ | 145,305 | $ | — | ||||||
Derivative financial instruments
|
— | 1,330,490 | — | |||||||||
December 31, 2010:
|
||||||||||||
Discounted loans payable
|
$ | — | $ | 126,428 | $ | — | ||||||
Derivative financial instruments
|
— | 1,480,261 | — |
Gains and losses from financial instruments are included in the statement of operations as follows:
|
|
Nine Months
|
Three Months
|
||||||
Ended
|
Ended
|
|||||||
|
September 30, 2011
|
September 30, 2011
|
||||||
Interest expense, net
|
$ | 14,235 | $ | 5,025 | ||||
Gain (loss) on derivative financial instruments
|
473,272 | 37,372 | ||||||
|
||||||||
|
$ | 487,507 | $ | 42,397 |
(b)
|
Interest rate and concentration of credit risks
|
|
Financial instruments that potentially subject the Company to concentrations of credit risks consist principally of cash and accounts and loans receivable. To minimize the interest rate and credit risk, the Company places cash with high credit quality financial institutions located in the PRC.
|
||
Credit risk from accounts receivable results from the risk of customer non-payment. Management, on an ongoing basis, monitors the level of accounts receivable attributable to each customer, and the length of time each account is outstanding. When necessary, management takes appropriate action to follow up on balances considered at risk.
|
19.
|
Financial instruments (continued):
|
|
(b)
|
Interest rate and concentration of credit risks (continued)
|
|
During the nine months ended September 30, 2011 and 2010, the following customers accounted for more than 10% of the Company’s total sales:
|
|
Nine months ended September 30,
|
|||||||||||||||||
2011
|
2010
|
|||||||||||||||||
% of
|
% of
|
% of
|
% of
|
|||||||||||||||
Unit
|
Company
|
Unit
|
Company
|
|||||||||||||||
|
Revenue
|
Total
|
Total
|
Revenue
|
Total
|
Total
|
||||||||||||
Breeding Unit:
|
||||||||||||||||||
Customer A
|
$ | 3,093,909 | 25.4 | % | 13.3 | % | $ | 3,234,282 | 41.8 | % | 10.5 | % | ||||||
Customer B
|
2,922,770 | 24.0 | % | 12.6 | % | 2,156,674 | 27.9 | % | 7.0 | % | ||||||||
|
||||||||||||||||||
Feed Unit:
|
||||||||||||||||||
Customer C
|
4,291,659 | 99.8 | % | 18.5 | % | 9,285,327 | 99.3 | % | 30.2 | % | ||||||||
Food Unit:
|
||||||||||||||||||
Customer D
|
797,323 | 11.8 | % | 3.4 | % | 5,947,008 | 43.5 | % | 19.3 | % |
There is no guarantee that any of the customers mentioned above will continue to buy from the Company, and loss of any of these major customers would have a material adverse effect on the Company’s results of operations.
|
||
During the nine months ended September 30, 2011 and 2010, the following suppliers accounted for more than 10% of the Company’s total purchases:
|
|
Nine months ended September 30,
|
|||||||||||||||||
2011
|
2010
|
|||||||||||||||||
% of
|
% of
|
% of
|
% of
|
|||||||||||||||
Unit
|
Company
|
Unit
|
Company
|
|||||||||||||||
|
Purchases
|
Total
|
Total
|
Purchases
|
Total
|
Total
|
||||||||||||
Supplier A
|
$ | 2,857,882 | 22.0 | % | 19.2 | % | $ | 2,474,084 | 14.3 | % | 10.8 | % | ||||||
Supplier B
|
2,170,690 | 16.7 | % | 14.6 | % | 2,091,367 | 12.1 | % | 9.2 | % | ||||||||
Supplier C
|
1,890,868 | 14.5 | % | 12.7 | % | 1,888,412 | 10.9 | % | 8.3 | % |
(c)
|
Foreign currency risk
|
|
The Company uses the US dollar as its reporting currency for these financial statements, while nearly all of the Company’s transactions are denominated in RMB. Revenues and expenses are translated into US dollars using average exchange rates for the period, and assets and liabilities are translated using the exchange rate at the end of the period. All resulting exchange differences arising from the translation are included as a separate component in accumulated other comprehensive income. Consequently, the Company’s unrealized exchange gain (loss) on translation of functional currency to reporting currency is subject to fluctuations in the exchange rate between the RMB and the US dollar in each reporting period. The Company does not hedge its exposure to currency fluctuations.
|
19.
|
Financial instruments (continued):
|
|
(c)
|
Foreign currency risk (continued)
|
|
Additionally, capital raised in US dollars, and any future dividends or distributions paid outside of the PRC in US dollar, are subject to fluctuating exchange rates when converted from RMB to US dollars, and vice versa. The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the PRC foreign exchange trading market.
|
||
The following exchange rates are applied for the Company’s financial statements for the periods presented herein:
|
|
Nine months ended September 30,
|
|||||||
|
2011
|
2010
|
||||||
Period end rate
|
6.3885 | 6.6981 | ||||||
Period average rate
|
6.4884 | 6.8164 | ||||||
Period high rate
|
6.6286 | 6.8436 | ||||||
Period low rate
|
6.3435 | 6.6981 |
(d)
|
Liquidity Risk
|
|
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s objective to managing liquidity risk is to ensure that it has sufficient liquidity available to meet its liabilities when they become due. The Company uses cash to settle its financial obligations as they fall due. The ability to do this relies on the Company collecting its accounts receivables in a timely manner and by maintaining sufficient cash on hand through equity financing and bank loans.
|
||
(e)
|
Commodity Risk
|
|
Profitability in the poultry industry is materially affected by the supply of parent breeding stocks and the commodity prices of ducklings, processing ducks, and feed ingredients, including corn, soybean cake, and other nutrition ingredients from numerous sources, mainly from wholesalers who collect the feed ingredients directly from farmers. As a result, the industry is subject to wide fluctuations and cycles. The Company does not currently use derivative financial or hedging instruments to reduce its exposure to various market risks related to commodity purchases
|
||
20.
|
Tax matters:
|
|
(a)
|
Income tax
|
|
The Company is subject to income, withholding, business and other taxes on income generated in the jurisdictions in which it does business.
|
||
Taiyang is exempt from corporate income tax due to the nature of its business. Beginning 2006, the PRC government instituted a tax exemption policy for certain aspects of the agricultural industry. Taiyang’s business qualifies as tax exempt. The exemption relates to unprocessed agricultural products and is granted by the relevant taxing authority on a year-by-year basis. There is no stated expiration to the exemption, and while Taiyang expects to continue to receive favorable tax treatment, changes in government policy or the nature of Taiyang’s operations could result in Taiyang being required to pay income taxes.
|
20.
|
Tax matters (continued):
|
|
(a)
|
Income tax (continued)
|
|
Ningguo is subject to corporate income tax in the PRC at a rate of 25% as a non-resident enterprise, as well as business tax at a rate of 5% on service income.
|
||
Under the laws of the BVI, Dynamic Ally is not subject to tax on its income or capital gains.
|
||
Parent is subject to United States income tax at a rate of 35%. No income tax expense was incurred in the United States in the nine months ended September 30, 2011 or 2010 as all income was generated in the PRC. Business activity in the United States consists primarily of professional service expenses related to the Company’s public listing and compliance.
|
||
Pursuant to the Consulting Services Agreement between Taiyang and Ningguo, Taiyang pays a consulting service fee to Ninnguo that is equal to all of Taiyang’s net income. According to the applicable PRC Enterprises Tax Law, such income is subject to business tax at a rate of 5% and enterprise income tax at a rate of 25%. We recognized income tax expense amounting to $853,192 and $267,294 in the nine months ended September 30, 2011 and 2010, respectively, and $158,752 and $169,738 in the three months ended September 30, 2011 and 2010, respectively.
|
||
The reconciliation between taxes computed by applying the statutory income tax rate of 25% applicable to the Company’s operations to income tax expense is:
|
|
2011
|
2010
|
||||||
Income before income taxes
|
$ | 2,302,931 | $ | 4,858,790 | ||||
Income tax at statutory rate of 25% in 2011 and 10% in 2010
|
575,733 | 468,097 | ||||||
Tax on income earned prior to contractual agreements between Taiyang and Ningguo
|
— | (225,606 | ) | |||||
Non—taxable gain on derivative financial instruments
|
(118,318 | ) | — | |||||
Non-deductible expenses
|
100,035 | 24,803 | ||||||
|
||||||||
Income tax expense
|
$ | 557,450 | $ | 267,294 |
Tax declarations, together with other legal compliance areas, such as customs and currency controls are subject to review and investigation by various agencies and authorities, who are enabled by law to impose very severe fines, penalties and interest charges. These facts create tax risks in China substantially more significant than typically found in countries with more developed tax systems and structures. Various tax authorities could take differing positions on interpretive issues and the effect could be significant. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from future review and assessment by tax authorities. If taxing authorities determine that there is an underpayment of taxes, they could impose a penalty between zero and five times the amount of taxes payable, at their discretion. Based on existing PRC tax regulations, the tax years of Taiyang and Ningguo for fiscal years 2006 through 2010 remain subject to examination by the tax authorities. Based on existing United States tax regulations, the tax years of parent for fiscal years 2003 through 2010 remain subject to examination by the tax authorities. The Company has not adopted any uncertain tax positions during the periods presented.
|
20.
|
Tax matters (continued):
|
|
(b)
|
Value added tax
|
|
The Company is subject to value added tax (“VAT”) on products that it sells within the PRC. VAT payable is netted against VAT paid on purchases. Certain of the Company’s products, including duck eggs, seedlings, and feed products, are exempted from VAT as a result of government agricultural incentives. If taxing authorities determine that payment is late or there is an underpayment of taxes, they could impose a penalty between zero and five times the amount of taxes payable, at their discretion.
|
||
21.
|
Appropriated Retained Earnings:
|
|
According to PRC corporate law, the Company is required each year to appropriate 10% of its after tax income as reported in its financial statements, prepared in accordance with PRC GAAP, to the statutory common reserve fund until the fund reaches 50% of the Company’s Registered Capital. This fund can be used to make up for any losses incurred in the future or be converted into paid-in capital, provided that the fund does not fall below 50% of Registered Capital. The Company did not make any transfers to the statutory common reserve fund during the three or nine months ended September 30, 2011 or 2010.
|
||
22.
|
Commitments and contingencies:
|
|
(a)
|
Commitments
|
|
The Company leases certain of its facilities pursuant to non-cancellable lease agreements expiring at various times through 2037. The amount of rent on these facilities is not fixed, but is based on the government stipulated market price of grains multiplied by the grain yield per area. Because future rents on these facilities depend upon unknown future market and production factors, the amount of future commitment cannot be quantified. Rent expense for the nine months ended September 30, 2011 and 2010 was $39,629 and $34,375, respectively. Rent expense for the three months ended September 30, 2011 and 2010 was $13,050 and $11,654, respectively.
|
||
(b)
|
Contingencies
|
|
In connection with the sale in June 2010 of a fertilizer plant partially constructed by the Company, the Company paid a deposit in the amount of $321,886 to acquire land use rights for the location on which the fertilizer plant is being constructed. The owner of the land use rights has agreed to transfer such rights to the Company upon completion of construction of the fertilizer plant, at which time the Company will transfer them to the buyer. The Company also agreed to allow the buyer of the fertilizer plant to use the Company’s name for marketing purposes for a period of two years from the sale date, and the buyer has allowed the assets comprising the fertilizer plant to continue to be pledged as collateral for bank loans by the Company that are secured by these assets.
|
||
The Company regularly uses contract farmers to incubate ducks to be used for commercial processing. The Company pays the farmers a fixed fee per Duck when the duck has matured, which is after approximately 60 days. Fluctuations in the market price of ducks or duck meat could affect margins since these fees are fixed.
|
||
During 2009, the Company made a loan to an unrelated third party, the balance of which was $939,188 and $907,468 as of September 30, 2011 and December 31, 2010, respectively. The third party pledged its assets to the bank as partial collateral for a bank loan in the amount of $1,492,961 borrowed by the Company. The loan receivable does not have a stated maturity date.
|
22.
|
Commitments and contingencies (continued):
|
|
(b)
|
Contingencies (continued)
|
|
During December 2010, the Company made a loan to Jinyatai Agricultural Development Co., Ltd. (“Jinyatai”), a former subsidiary of Taiyang that was divested in 2005, the balance of which was $939,188 and $907,468 as of September 30, 2011 and December 31, 2010, respectively. Jinyatai pledged its assets as partial collateral for a bank loan borrowed by the Company with a balance of $1,565,313 as of September 30, 2011. The loan receivable matured on January 7, 2011. Because the loan was not repaid by this date, the agreement between the Company and Jinyatai calls for Jinyatai to pay interest incurred by the Company on the bank loan. Through September 30, 2011, such interest amounted to $94,703.
|
||
The Company had additional unsecured loans receivable from unrelated parties totaling $1,874,962 and $1,545,722 outstanding at September 30, 2011 and December 31, 2010, respectively, which had no stated maturity date, and had no security.
|
||
As of September 30, 2011 and December 31, 2010, the Company had outstanding deposits from contract farmers securing loans in the amount of $707,523 and $2,769,291, respectively. These amounts are advanced to the Company from the proceeds of loans taken by the farmers. The loans taken by the farmers are guaranteed by the general credit of the Company. To ensure repayment of the loans by the farmers, the Company requires that the farmers advance the amount of the loan to the Company to be held as a deposit against the loan. The deposits are then returned when the loans matureand are repaid by the farmer to the respective bank. The term of each guarantee varies with the length of the loans taken by the farmers directly from the bank, but generally the term is less than one year. The Company would be obligated to repay a loan to the bank if the farmer defaulted on their repayment. There are no available external credit reporting ratings relative to the local farmers, but based on the Company’s history the risk of non-performance by the farmers is minimal. The maximum potential amount of future payments by the Company pursuant to these loans was $ 907,883 and $2,769,291as of September 30, 2011 and December 31, 2010, respectively, which is equal to their carrying value .
|
||
The Company does not maintain product liability insurance, and property and equipment insurance does not cover the full value of the property and equipment, which leaves the Company with exposure in the event of loss or damage to its properties or claims filed against the Company.
|
||
As of September 30, 2011 and December 31, 2010, $1,565,313 and $756,224 of the Company’s trade accounts receivable were pledged as collateral for bank loans outstanding. These bank loans contain a covenant that prohibit the past due accounts receivable balance from exceeding 5% of the total accounts receivable balance. The loan agreements do not specify a methodology for identifying what accounts are past due. The Company does not give defined standard payment terms to its customers. Accordingly, the Company cannot determine if it has breached this covenant. The Company believes that it is in compliance based on its interpretation of the covenant, but there is no guarantee that the lending bank would consider the Company compliant. The Company has not had any disputes with the lending bank regarding such covenants.
|
||
As of September 30, 2011 and December 31, 2010, the Company had outstanding $3,404,577 and $4,268,057, respectively, of unsecured loans receivable from unrelated parties which bear interest at rates paid by the Company on similar third party loans payable and have no stated maturity date (see note 4). These loans, and other loans made by the Company during previous reporting periods, constitute inter-enterprise lending that violate the PRC General Lending Rules. A fine in the amount of one to three times the income generated by the Company from such inter-enterprise loans may be imposed by the People’s Bank of China, at their discretion, if the Company were found to be in violation of the PRC General Lending Rules. The Company estimates the range of potential fines to be between approximately $560,000 and $1,670,000 based on the guidelines established by PRC General Lending Rules, but such fines are levied discretion of the People’s Bank of China. In the opinion of management and its legal counsel, the probability of the fine being imposed is low and accordingly no provision has been made in the consolidated financial statements. During the three months ended September 30, 2011, the Company recorded a reserve for estimated uncollectible loans receivable in the amount of $349,484. This amount is reflected in “General and administrative expense” on the accompanying consolidated statement of operations and comprehensive income.
|
||
For discussion of tax issues, see notes 20(a) and 20(b).
|
23.
|
Segmented and Geographical Information:
|
||
The Company is structured and evaluated by its board of directors and management into three distinct business lines:
|
|||
●
|
Breeding Unit – breeds, hatches, and cultivates ducklings for resale and processing by the Food Unit
|
||
●
|
Feed Unit – produces duck feed for internal use and external sale
|
||
●
|
Food Processing Unit – processes ducklings into frozen raw food product for commercial resale.
|
||
Results of operations for the nine months ended September 30, 2011 by business unit were:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Shared
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Costs (2)
|
Consolidated
|
|||||||||||||||
Revenues (1)
|
$ | 12,160,875 | $ | 4,300,871 | $ | 6,759,979 | $ | — | $ | 23,221,725 | ||||||||||
Cost of goods sold (1)
|
7,316,990 | 3,808,967 | 5,606,488 | — | 16,732,445 | |||||||||||||||
|
||||||||||||||||||||
Gross Profit
|
4,843,885 | 491,904 | 1,153,491 | — | 6,489,280 | |||||||||||||||
|
||||||||||||||||||||
Sales and marketing expenses
|
28,631 | — | — | — | 28,631 | |||||||||||||||
General and administrative expenses (2)
|
2,958,871 | 56,872 | 148,008 | 752,129 | 3,915,880 | |||||||||||||||
Operating profit (loss)
|
$ | 1,856,383 | $ | 435,032 | $ | 1,005,483 | $ | (752,129 | ) | $ | 2,544,769 |
(1)
|
Revenues and cost of goods sold reflect only sales to external customers. During the nine months ended September 30, 2011, the Feed Unit made sales of duck feed product to the Breeding Unit totaling $9,654,959, and the Breeding Unit made sales of ducks to the Food Unit totaling $12,810. These amounts have been eliminated for purposes of these financial statements.
|
||
(2)
|
Reflects legal, accounting, and other compliance costs shared amongst the business units
|
||
Results of operations for the nine months ended September 30, 2010 by business unit were:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Shared
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Costs (2)
|
Consolidated
|
|||||||||||||||
Revenues (1)
|
$ | 7,731,349 | $ | 9,352,996 | $ | 13,672,392 | $ | — | $ | 30,756,737 | ||||||||||
Cost of goods sold (1)
|
6,004,082 | 7,545,699 | 11,056,685 | — | 24,606,466 | |||||||||||||||
|
||||||||||||||||||||
Gross Profit
|
1,727,267 | 1,807,297 | 2,615,707 | — | 6,150,271 | |||||||||||||||
|
||||||||||||||||||||
Sales and marketing expenses
|
33,683 | — | — | — | 33,683 | |||||||||||||||
General and administrative expenses (2)
|
973,329 | 34,134 | 88,328 | 764,507 | 1,860,298 | |||||||||||||||
Operating profit (loss)
|
$ | 720,255 | $ | 1,773,163 | $ | 2,527,379 | $ | (764,507 | ) | $ | 4,256,290 |
(1)
|
Revenues and cost of goods sold reflect only sales to external customers. During the nine months ended September 30, 2010, the Feed Unit made sales of duck feed product to the Breeding Unit totaling $10,962,657, and the Breeding Unit made sales of ducks to the Food Unit totaling $201,645. These amounts have been eliminated for purposes of these financial statements.
|
|
(2)
|
Reflects legal, accounting, and other compliance costs shared amongst the business units
|
23.
|
Segmented and Geographical Information (continued):
|
Results of operations for the three months ended September 30, 2011 by business unit were:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Shared
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Costs (2)
|
Consolidated
|
|||||||||||||||
Revenues (1)
|
$ | 3,498,117 | $ | 1,455,962 | $ | 2,205,004 | $ | — | $ | 7,159,083 | ||||||||||
Cost of goods sold (1)
|
2,126,167 | 1,308,655 | 1,832,703 | — | 5,267,525 | |||||||||||||||
|
||||||||||||||||||||
Gross Profit
|
1,371,950 | 147,307 | 372,301 | — | 1,891,558 | |||||||||||||||
|
||||||||||||||||||||
Sales and marketing expenses
|
11,081 | — | — | — | 11,081 | |||||||||||||||
General and administrative expenses (2)
|
1,847,198 | 36,194 | (12,457 | ) | 140,055 | 2,010,990 | ||||||||||||||
Operating profit (loss)
|
$ | (486,329 | ) | $ | 111,113 | $ | 384,758 | $ | (140,055 | ) | $ | (130,513 | ) |
(1)
|
Revenues and cost of goods sold reflect only sales to external customers. During the three months ended September 30, 2011, the Feed Unit made sales of duck feed product to the Breeding Unit totaling $3,188,662, and the Breeding Unit made sales of ducks to the Food Unit totaling $85. These amounts have been eliminated for purposes of these financial statements.
|
||
(2)
|
Reflects legal, accounting, and other compliance costs shared amongst the business units
|
||
Results of operations for the three months ended September 30, 2010 by business unit were:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Shared
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Costs (2)
|
Consolidated
|
|||||||||||||||
Revenues (1)
|
$ | 4,134,491 | $ | 4,470,162 | $ | 2,505,514 | $ | — | $ | 11,110,167 | ||||||||||
Cost of goods sold (1)
|
2,971,088 | 3,604,591 | 1,809,036 | — | 8,384,715 | |||||||||||||||
|
||||||||||||||||||||
Gross Profit
|
1,163,403 | 865,571 | 696,478 | — | 2,725,452 | |||||||||||||||
|
||||||||||||||||||||
Sales and marketing expenses
|
10,823 | — | — | — | 10,823 | |||||||||||||||
General and administrative expenses (2)
|
326,327 | 10,956 | 32,503 | 173,014 | 542,800 | |||||||||||||||
Operating profit (loss)
|
$ | 826,253 | $ | 854,615 | $ | 663,975 | $ | (173,014 | ) | $ | 2,171,829 |
(1)
|
Revenues and cost of goods sold reflect only sales to external customers. During the three months ended September 30, 2010, the Feed Unit made sales of duck feed product to the Breeding Unit totaling $3,424,370, and the Breeding Unit made sales of ducks to the Food Unit totaling $80,393. These amounts have been eliminated for purposes of these financial statements.
|
||
(2)
|
Reflects legal, accounting, and other compliance costs shared amongst the business units
|
23.
|
Segmented and Geographical Information (continued):
|
Breeding Unit sales increased in the nine months ended September 30, 2011 compared with the same period of 2010, primarily as a result of higher demand and market prices for ducklings in China. Because the Company generates its own ducklings from its biological assets, the cost of producing new ducklings does not fluctuate with the market selling price for the ducklings. Accordingly, when the market price for ducklings increases, the Company can maximize its profits by selling internally generated ducklings directly into the market, as opposed to using them as inputs for Food Unit products, since the market price of packaged Food Unit products does not fluctuate readily with the market price of the input ducklings.
|
|
Feed Unit sales decreased in the nine months ended September 30, 2011 compared with the same period of 2010. In the last three fiscal quarters of 2010, the Company made significant sales of feed products through one distributor, while also continuing to supply the Breed Unit. The Company did not make any sales to this distributor in the first fiscal quarter of 2011, then resumed sales in the second quarter of 2011. The Company will continue to attempt to market its feed products to external customers, primarily through feed distributors, and expects that it will continue to realize sales revenue from such products. However, because distribution of these products is currently concentrated in one distributor, sales are volatile, and the permanent loss of that distributor would materially adversely affect such sales.
|
|
Food Unit sales were down in the nine months ended September 30, 2011 as compared with nine months ended September 30, 2010, as a result of higher market prices for ducklings, which resulted in more ducklings being sold to the market rather than being used internally for Food Unit products.
|
|
During the three and nine months ended September 30, 2011 and 2010, all of the Company’s sales were to customers located in the PRC.
|
|
All of the Company’s assets are located in the PRC. The Company’s identifiable assets by business unit as of September 30, 2011 and December 31, 2010:
|
|
|
|
Food
|
|
|
|||||||||||||||
Breeding
|
Feed
|
Processing
|
Corporate
|
|||||||||||||||||
|
Unit
|
Unit
|
Unit
|
Assets
|
Consolidated
|
|||||||||||||||
As of June 30, 2011 (unaudited)
|
$ | 31,265,934 | $ | 11,102,369 | $ | 8,899,485 | $ | 6,515,631 | $ | 57,783,419 | ||||||||||
As of December 31, 2010 (audited)
|
30,358,495 | $ | 10,715,090 | $ | 7,537,818 | $ | 5,326,750 | 53,938,153 |
23.
|
Segmented and Geographical Information (continued):
|
Interest, depreciation expense, and amortization of land use rights for the three and nine months ended September 30, 2011 and 2010 by business unit were:
|
|
|
|
|
Food
|
|
|
||||||||||||
Breeding
|
Feed
|
Processing
|
||||||||||||||||
|
Year
|
Unit
|
Unit
|
Unit
|
Corporate
|
Consolidated
|
||||||||||||
Nine months ended September 30:
|
||||||||||||||||||
Interest expense
|
2011
|
$ | 795,568 | $ | 245,520 | $ | — | $ | 614 | $ | 1,041,702 | |||||||
2010
|
1,212,244 | 192,542 | — | 56,897 | 1,461,683 | |||||||||||||
Depreciation
|
2011
|
652,369 | 43,362 | 267,604 | — | 963,335 | ||||||||||||
expense
|
2010
|
354,084 | 43,730 | 224,206 | — | 622,020 | ||||||||||||
Amortization of
|
2011
|
85,687 | 7,763 | 79,139 | — | 172,589 | ||||||||||||
land use rights
|
2010
|
80,351 | 22,947 | 40,459 | — | 143,757 | ||||||||||||
Three months ended September 30:
|
||||||||||||||||||
Interest expense
|
2011
|
$ | 254,675 | $ | 89,117 | $ | — | $ | 88 | $ | 343,880 | |||||||
2010
|
472,393 | 62,738 | — | 24,576 | 559,707 | |||||||||||||
Depreciation
|
2011
|
221,228 | 15,570 | 87,242 | — | 324,040 | ||||||||||||
expense
|
2010
|
146,463 | 14,687 | 80,542 | — | 241,692 | ||||||||||||
Amortization of
|
2011
|
28,940 | 2,622 | 26,729 | — | 58,291 | ||||||||||||
land use rights
|
2010
|
25,309 | 13,871 | 15,416 | — | 54,596 |
24.
|
Restatement of Financial Statements:
|
||
The Company has restated its prior period financial statements for the three and nine month periods ended September 30, 2010 to account for certain areas as described below.
|
|||
The accompanying financial statements reflect the following corrections:
|
|||
a)
|
The Company has reclassified $95,000 in the nine months ended September 30, 2010 and $41,033 in the three months ended September 30, 2010 from general and administrative expense to interest expense to properly reflect the amortization of a discount on convertible loans entered into in March 2010.
|
||
b)
|
The Company recognizes discounts against certain bank loan instruments that do not bear interest and have a stated maturity date. The Company previously recognized these discounts as interest income on the statement of operations. The discounts, amounting to $42,785 in the year ended December 31, 2008 and $42,061 in the nine months ended September 30, 2010, were reclassified from interest income to additional paid-in capital in prior periods to reflect the appropriate accounting.
|
||
c)
|
Prior to the time that Taiyang and Ningguo entered into operational agreements on May 26, 2010, the Company was exempt from corporate income tax as a producer of unprocessed agricultural products. After May 26, 2010, the management fees paid from Taiyang to Ninnguo are subject to business tax at a rate of 5% of revenue, and 25% of taxable income. In the restated financial statements for the nine months ended September 30, 2010, business tax in the amount of $139,784 has been recorded to general and administrative expense, and income tax expense in the amount of $267,294 has been recorded. In the restated financial statements for the three months ended September 30, 2010, business tax in the amount of $88,439 has been recorded to general and administrative expense, and income tax expense in the amount of $169,738 has been recorded.
|
24.
|
Restatement of Financial Statements (continued):
|
||
d)
|
A correction of general and administrative expense in the amount of ($4,027) related to Dynamic Ally was recorded in the nine months ended September 30, 2010.
|
||
e)
|
On the statement of cash flows, changes in loans receivable and other accounts payable were reclassified from cash flow from operating activities to cash flow from financing activities, and “Proceeds from issuance of convertible debentures” was presented separately from “Borrowing under bank loans payable.”
|
||
These corrections resulted in adjustments to the following financial statement line items for the three and nine month periods ended September 30, 2010:
|
|
Nine months ended September 30, 2010
|
|||||||||||
As
|
Adjust-
|
As
|
||||||||||
|
Reported
|
ments
|
Restated
|
|||||||||
Consolidated Statements of Operations and Comprehensive Income
|
||||||||||||
General and administrative expenses
|
$ | 1,819,541 | $ | 40,757 | $ | 1,860,298 | ||||||
Operating profit
|
4,297,047 | (40,757 | ) | 4,256,290 | ||||||||
Interest expense, net
|
(1,324,622 | ) | (137,061 | ) | (1,461,683 | ) | ||||||
Income before income taxes
|
4,858,790 | (177,818 | ) | 4,680,972 | ||||||||
Income tax expense
|
— | 267,294 | 267,294 | |||||||||
Net income
|
4,858,790 | (445,112 | ) | 4,413,678 | ||||||||
Comprehensive income
|
5,269,830 | (445,112 | ) | 4,824,718 |
|
Three months ended September 30, 2010
|
|||||||||||
As
|
Adjust—
|
As
|
||||||||||
|
Reported
|
ments
|
Restated
|
|||||||||
Consolidated Statements of Operations and Comprehensive Income
|
||||||||||||
General and administrative expenses
|
$ | 495,394 | $ | 47,406 | $ | 542,800 | ||||||
Operating profit
|
2,219,235 | (47,406 | ) | 2,171,829 | ||||||||
Interest expense, net
|
(518,674 | ) | (41,033 | ) | (559,707 | ) | ||||||
Income before income taxes
|
1,706,262 | (88,439 | ) | 1,617,823 | ||||||||
Income tax expense
|
— | 169,738 | 169,738 | |||||||||
Net income
|
1,706,262 | (258,177 | ) | 1,448,085 | ||||||||
Comprehensive income
|
2,040,072 | (258,177 | ) | 1,781,895 |
24.
|
Restatement of Financial Statements (continued):
|
|
Nine months ended September 30, 2010
|
|||||||||||
As
|
Adjust-
|
As
|
||||||||||
|
Reported
|
ments
|
Restated
|
|||||||||
Consolidated Statements of Cash Flows
|
||||||||||||
Net income for the period
|
$ | 4,858,790 | $ | (445,112 | ) | $ | 4,413,678 | |||||
Interest expense allocated to debt
|
137,275 | (137,275 | ) | — | ||||||||
Amortization of debt discount
|
— | 104,455 | 104,455 | |||||||||
Imputed interest expense
|
— | 74,648 | 74,648 | |||||||||
Other accounts receivable
|
(1,581,559 | ) | 1,581,559 | — | ||||||||
Trade accounts payable and accrued expenses
|
(2,178,890 | ) | 140,017 | (2,038,873 | ) | |||||||
Other accounts payable
|
3,265,293 | (3,265,293 | ) | — | ||||||||
Income tax payable
|
— | 267,294 | 267,294 | |||||||||
Net cash provided by (used in) operating activities
|
(428,777 | ) | (1,679,707 | ) | (2,108,484 | ) | ||||||
Repayments received (net of advances made) pursuant to loans receivable
|
— | (1,581,559 | ) | (1,581,559 | ) | |||||||
Advances received (net of repayments made) pursuant to loans payable
|
— | 3,265,293 | 3,265,293 | |||||||||
Borrowings under bank loans payable
|
19,119,624 | (545,000 | ) | 18,574,624 | ||||||||
Borrowing under convertible loans payable
|
— | 555,000 | 555,000 | |||||||||
Net cash provided by financing activities
|
5,050,614 | 1,693,734 | 6,744,348 | |||||||||
Net increase (decrease) in cash and cash equivalents
|
88,151 | 14,027 | 102,178 | |||||||||
Cash and cash equivalents, end of period
|
693,543 | 14,027 | 707,570 |
The cumulative effect of the prior period adjustments on the opening retained earnings as of December 31, 2010 was $1,011,654. The effect on prior period net income was also $1,011,654, of which $42,875 related to fiscal years ended prior to December 31, 2008, and $968,869 related to the year ended December 31, 2010.
|
25.
|
Subsequent events:
|
SEC registration fee
|
|
$
|
1,486
|
|
Legal fees and expenses
|
|
$
|
50,000
|
|
Accounting fees and expenses
|
|
$
|
30,000
|
|
Miscellaneous expenses
|
|
$
|
5,000
|
|
Total
|
|
$
|
86,486
|
|
Exhibit
|
|
|
Number
|
Reference
|
Exhibit Description
|
3.01
|
(a)
|
Certificate of Incorporation.
|
3.02
|
(b)
|
Articles of Amendment to the Certificate of Incorporation.
|
3.03
|
(a)
|
Bylaws.
|
3.04
|
(c)
|
Specimen of Common Stock certificate.
|
4.01
|
(d)
|
Form of Warrant, dated November 10, 2010.
|
4.02
|
(d)
|
Form of Subscription Agreement dated November 10, 2010.
|
4.03
|
(d)
|
Form of Registration Rights Agreement dated November 10, 2010, by and among the Company and the Purchasers.
|
4.04
|
(e)
|
Form of Warrant, dated March 7, 2011.
|
4.05
|
(e)
|
Form of Subscription Agreement dated March 7, 2011.
|
4.06
|
(e)
|
Form of Registration Rights Agreement dated March 7, 2011, by and among the Company and the Purchasers.
|
5.01
|
(h)
|
Opinion of Sichenzia Ross Friedman Ference LLP.
|
10.01
|
(d)
|
Share Exchange Agreement, dated as of November 10, 2010 between the Company, the controlling stockholders of the Company, the stockholders of the Company, Dynamic Ally, Limited. and the stockholders of Dynamic Ally Limited.
|
10.02
|
(d)
|
Performance Milestone Shares Escrow Agreement, dated as of November 10, 2010, by and among The Parkview Group, Inc., Laidlaw & Co. (UK) Ltd. on behalf of the Investors identified in the Subscription Agreement, Gersten Savage LLP, as escrow agent, and Firm Success International, Ltd.
|
10.03
|
(d)
|
Guarantee dated November 10, 2010, by and between the Laidlaw & Company (UK) Ltd., as representative for the Purchasers and Firm Success International Ltd.
|
10.04
|
(d)
|
Consulting Services Agreement, dated as of May 26, 2010, by and between Ningguo Taiyang Incubation Plant Co., Ltd. and Anhui Taiyang Poultry Co., Ltd.
|
10.05
|
(d)
|
Operating Agreement, dated as of May 26, 2010, by and among Ningguo Taiyang Incubation Plant Co., Ltd., Anhui Taiyang Poultry Co., Ltd., Wu Qiyou, Chen Beihuang and Wu Qida.
|
10.06
|
(d)
|
Equity Pledge Agreement, dated as of May 26, 2010, by and among Ningguo Taiyang Incubation Plant Co., Ltd., Anhui Taiyang Poultry Co., Ltd., Wu Qiyou, Chen Beihuang and Wu Qida.
|
10.07
|
(d)
|
Option Agreement, dated as of May 26, 2010, by and among Ningguo Taiyang Incubation Plant Co., Ltd., Anhui Taiyang Poultry Co., Ltd., Wu Qiyou, Chen Beihuang and Wu Qida.
|
10.08
|
(d)
|
Voting Rights Proxy Agreement, dated as of May 26, 2010, by and among Ningguo Taiyang Incubation Plant Co., Ltd., Anhui Taiyang Poultry Co., Ltd., Wu Qiyou, Chen Beihuang and Wu Qida.
|
10.09
|
(d)
|
Consulting Agreement between Anhui Taiyang Poultry Co., Ltd. and David Dodge dated February 10, 2010.
|
10.10
|
(h)
|
Consulting Services Agreement, dated as of May 26, 2010, by and between Dynamic Ally Limited and Ningguo Taiyang Incubation Plant Co., Ltd.
|
10.11
|
(h)
|
Operating Agreement, dated as of May 26, 2010, by and between Dynamic Ally Limited and Ningguo Taiyang Incubation Plant Co., Ltd.
|
10.12
|
(h)
|
Termination Agreement on Operating Agreement, dated as of October 10, 2010, by and between Dynamic Ally Limited and Ningguo Taiyang Incubation Plant Co., Ltd.
|
10.13
|
(h)
|
Termination Agreement on Consulting Services Agreement, dated as of October 10, 2010, by and between Dynamic Ally Limited and Ningguo Taiyang Incubation Plant Co., Ltd.
|
14.01
|
(f)
|
Code of Conduct.
|
21.01
|
(d)
|
List of Subsidiaries.
|
23.01
|
Consent of Schwartz Levitsky Feldman llp.
|
|
24.01
|
(g)
|
Power of Attorney (included on signature page to the registration statement).
|
(a)
|
Incorporated by reference to our Registration Statement on Form 10-12G/A filed with the SEC on November 11, 2008.
|
|
(b)
|
Incorporated by reference to our Form 8-K filed with the SEC on June 2, 2010.
|
|
(c)
|
Incorporated by reference to our Registration Statement on Form 10-12G/A filed with the SEC on January 14, 2009.
|
|
(d)
|
Incorporated by reference to our Form 8-K filed with the SEC on November 15, 2010.
|
|
(e)
|
Incorporated by reference to our Form 8-K filed with the SEC on March 8, 2011.
|
|
(f)
|
Incorporated by reference to our Form 10-K filed with the SEC on April 15, 2011.
|
|
(g)
|
Incorporated by reference to our Registration Statement on Form S-1 filed with the SEC on April 25, 2011.
|
|
(h)
|
Incorporated by reference to our Registration Statement on Form S-1/A filed with the SEC on July 18, 2011.
|
ANHUI TAIYANG POULTRY CO., INC. | ||
Date: January 18, 2012
|
By: |
/s/ WU QIYOU
|
Wu Qiyou | ||
Chief Executive Officer (Principal Executive Officer) and Director | ||
Date: January 18, 2012
|
By: |
/s/ DAVID DODGE
|
David Dodge | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director |
Signature
|
|
Title
|
|
Date
|
*
|
|
Chief Executive Officer (Principal Executive Officer) and Director
|
|
January 18, 2012
|
Wu Qiyou
|
||||
*
|
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
|
January 18, 2012
|
David Dodge
|
||||
*
|
|
Director
|
|
January 18, 2012
|
Chen Beihuang
|
||||
*
|
|
Director
|
|
January 18, 2012
|
Han Jialiang
|
||||
*
|
|
Director
|
|
January 18, 2012
|
He Zhiwei
|
||||
*
|
Director
|
January 18, 2012
|
||
James J. Keil
|
*By: /s/ DAVID DODGE
|
|
David Dodge
|
|
Attorney-in-fact
|
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