UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
For
the Fiscal Year Ended December 31, 2013
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 333-160476
DEYU AGRICULTURE CORP.
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(Exact name of registrant as specified in
its charter)
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Nevada
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80-0329825
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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Headquarters in China
Unit 1010, Block B, Huizhi Building,
No. 9 Xueqing Road,
Haidian District, Beijing, PRC
Zip Code: 10085
(Address, including zip code, of principal
executive offices)
In China:
86-10-8273-2870
(Registrants’
telephone number, including area code)
Securities Registered Under Section 12(b) of the
Exchange Act:
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None
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Name of exchange on which registered:
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None
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Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $0.001 per share
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Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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No
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
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Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was
required to submit and post such files). Yes
x
No
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Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K.
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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller Reporting Company
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Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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As of the end of the issuer’s most recently completed second fiscal quarter, the issuer’s
public float was approximately $2,841,789. As of the end of the issuer’s fiscal year ended December 31, 2013,
its net revenue was $246,279,626. The number of outstanding shares of the registrant’s Common Stock on March
31,
2014 was 11,015,029.
Documents Incorporated By Reference:
NONE
DEYU AGRICULTURE CORP.
FORM 10-K
INDEX
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Page
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PART I
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Item 1.
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Business.
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3
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Item 1A.
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Risk Factors.
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13
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Item 1B.
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Unresolved Staff Comments.
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13
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Item 2.
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Properties.
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13
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Item 3.
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Legal Proceedings.
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14
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Item 4.
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Mine Safety Disclosures.
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14
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
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14
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Item 6.
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Selected Financial Data.
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17
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
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17
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk.
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30
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Item 8.
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Financial Statements and Supplementary Data.
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30
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Item 9.
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Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
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30
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Item 9A.
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Controls and Procedures.
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30
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Item 9B.
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Other Information.
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31
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance.
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31
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Item 11.
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Executive Compensation.
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37
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
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40
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence.
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41
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Item 14.
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Principal Accountant Fees and Services.
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42
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Part IV
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Item 15.
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Exhibits, Financial Statement Schedules.
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42
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SIGNATURES
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46
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DEYU AGRICULTURE CORP.
PART I
ITEM 1. Business
Overview
In this Annual Report
on Form 10-K, unless otherwise indicated, the words “we”, “us” and “our” refer to Deyu Agriculture
Corp., a Nevada corporation and all entities owned or controlled by Deyu Agriculture Corp. All references to “Deyu”
or the “Company” in this Annual Report mean Deyu Agriculture Corp., and all entities owned or controlled by Deyu Agriculture
Corp., except where it is made clear that the term only means the parent or a subsidiary company. References in this Annual Report
to the “PRC” or “China” are to the People’s Republic of China and references to “SEC”
are to the U.S. Securities and Exchange Commission.
We are a vertically
integrated producer, processor, marketer and distributor of organic and other agricultural products made from corn and grains operating
in Shanxi Province in the People's Republic of China. We have a nationwide sales network covering manufacturers, grain traders,
wholesalers, distributors and retail stores. Our facilities include modern warehouses with storage capacity of over 100,000 tons
and sophisticated production lines with annual production capacity of over 105,000 and 700,000 tons for grain products and corn,
respectively.
Our business operations
are mainly conducted through our wholly-owned PRC subsidiaries, JinzhongDeyu Agriculture Trading Co. Limited (“JinzhongDeyu”),
JinzhongYuliang Agriculture Trading Co. Limited (“Yuliang”), Shanxi Taizihu Food Co. Ltd. (“Taizihu”)
and Shanxi Huichun Bean Products Co., Ltd (“Huichun”). Yuliang focus on processing and distributing our corn and corn
byproducts. Our grain processing, distribution and bulk trading business are mainly conducted through JinzhongDeyu, Taizihu and
Huichun.
A brief description
of our products is set forth below, by division:
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Corn Division
–acquires unprocessed
corn for value-added processing such as cleaning, drying packaging, etc. the main consumers for this division range from livestock
feed companies to corn oil/corn starch manufacturing companies as well as governmental procurement agencies in China.
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Grain Division
–acquires unprocessed grains
including millet, green bean, soy bean, black rice and many other varieties of grains traditionally grown and consumed in
China for value-added processing such as peeling, cleaning, grinding, packaging, etc. The Grain Division also produces and
distributes deep processed food products, such as bean based products, fruit vinegars and juices, noodles and other grain
products. We sell our processed grain products to wholesalers, distributors, institutional clients, etc.
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·
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Bulk Trading Division
–conducts bulk trading
through procuring and wholesales of rice, flour, wheat, kidney beans, green beans and other agricultural products. The majority
customers of this division include food manufacturers, grain trading companies, wholesalers and governmental procurement agencies
in China.
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Operating revenue
from continuing operations for the year ended December 31, 2013 was $246,350,104, representing a 3.0% decrease from $254,046,098
for the year ended December 31, 2012. Our net loss available to common stockholders for the year ended December 31, 2013
was $26,818,546, representing a 267.5% decrease from our net income of $16,008,670 for the year ended December 31, 2012.
Our principal office is located at Unit 1010, Block B, Huizhi Building, No. 9 Xueqing Road, Haidan District,
Beijing, PRC 100085. Our telephone number in China is +(8610)-8273-2870 and our fax number is +(8610)- 8273 2870 x 8518. Our corporate
website is
www.deyuagri.com
(information on our website is not made a part of this Annual Report).
Corporate History
2010 Share Exchange and Preferred Stock
Financings
On April 27, 2010,
Deyu (then known as Eco Building International, Inc.) completed the acquisition of City Zone Holdings Limited, an emerging organic
and non-organic agricultural products distributor in Shanxi Province, China, engaged in procuring, processing, marketing and distributing
various grain and corn products (“City Zone”), by means of a share exchange (the “Exchange”). As a result
of the Exchange, City Zone became a wholly-owned subsidiary of Deyu.
Simultaneously with
the acquisition, we completed a private placement offering in the aggregate amount of $8,211,166 of the sale of securities to
accredited investors at $4.40 per unit, with each “Unit” consisting of one share of our Series A convertible preferred
stock and one warrant to purchase 0.4 shares of our common stock with an exercise price of $5.06 per share. We executed a Securities
Purchase Agreement in connection with the offering, which is referenced as Exhibit 10.1 herein.
On May 10, 2010, we
closed on the second and final round of the private placement offering as disclosed in our Current Report on Form 8-K filed with
the SEC on May 3, 2010 through the sale of 589,689 Units comprised of 589,689 shares of our Series A convertible preferred stock
and 235,882 five-year warrants with an exercise price of $5.06 per share, to certain accredited investors for total aggregate
proceeds of $2,594,607. We raised an aggregate amount of $10,805,750 in the two rounds of offerings.
Pursuant to the private
placement we issued an aggregate 2,455,863 shares of Series A convertible preferred stock and warrants exercisable into 982,362
shares of common stock to certain investors (collectively, the “Investors”). Pursuant to its terms, the Series A convertible
preferred stock receive cumulative dividends at a rate of 5% per annum and can be converted into common stock on a 1:1 basis,
subject to applicable adjustments. Pursuant to its terms, the warrants can be converted into 982,362 shares of common stock at
an exercise price of $5.06 per share (the "Warrants"). The Warrants will expire on April 27, 2015.
In connection with
the private placement, we also entered into a registration rights agreement pursuant to which we agreed to file a registration
statement on Form S-1 (or other applicable Form) within 60 days of the close of such financing. We filed a Registration Statement
on Form S-1 with the SEC on June 15, 2010, and on October 21, 2010, the SEC declared the Form S-1 effective.
Additionally, as a
result of the Exchange, we changed our fiscal year end to December 31.
On May 19, 2010, we
filed with the Secretary of State for the State of Nevada a Certificate of Amendment to our Articles of Incorporation changing
our name from “Eco Building International, Inc.” to “Deyu Agriculture Corp.” FINRA declared the name change
effective on June 2, 2010.
Other Developments
Under the changes
in the economic environment and market conditions, as well as the negative impacts from some unexpected extreme weather conditions,
our business has faced great challenges in 2013.
The corn market experienced
a booming growth of demand exceeding supply in the past several years before 2013. Our selling price had an annual average increase
of 15.0% and 7.4% in 2011 and 2012, respectively. However, since the beginning of 2013, the corn market has been seeing a weakening
demand with an oversupply and the selling price of corn has been declining. The selling price of corn (including value added tax)
in our Corn Division decreased by 11% from $427/ton (RMB 2,611/ton) in January of 2013 to $380/ton (RMB 2,322/ton) in December
of 2013. In contrast, with the rising labor cost and inflation in China, the lowest price for purchasing corn from farmers, which
is guided by the government due to the protective farming policies in favor of farmers, continues to rise. The lowest guide price
(including value added tax) again increased by $10/ton (RMB 60/ton) to $365 (RMB 2,260) in July 2013. As a result, the gross margin
of our corn trading business decreased from 15.4% for the year ended December 31, 2012 to 8.1% for the year ended December 31,
2013.
Corn is mainly used
as raw material for livestock feeds and deep processed products such as corn starch and ethanol. The demand for corn from the
two downstream industries declined dramatically in 2013. First, livestock farming has been going through a very difficult time
in 2013. After a period of expansion, the pork market turned to be oversupplied. Pork prices decreased significantly after the
Spring Festival of 2013. Many farmers or companies in the industry started to reduce the livestock raising scale. Second, with
the economy slowing down, demand for the deep processed corn products was also very weak. The price of ethanol decreased to its
lowest level in the past three years. A lot of corn deep processing companies have been running under production capacity and
have not been profitable. However, corn production had a good harvest in 2012 and 2013. According to National Bureau of Statistics
of China, the output of corn increased 15 million tons, or 8% to 208 million tons in 2012 compared to 2011, and the output in
2013 was estimated to be 215 million. Increased supply over the demand caused the selling price of corn to decrease. In the same
period, there was an influx of low cost corns imported into the market in the south of China. Given that the demand of corn from
downstream industries will continue to be low, we anticipate the oversupply in the corn market will continue to impact our business
in the coming months.
For the business of
our Grain Division, the deteriorating efficiency of existing retail distribution channels curtailed our retail grain package sales
amidst the increasing competitiveness in the market. Consequently, we allocated more grain resources to bulk trading activity,
yet the slowdown in consumer market growth and competition in the market segment have had negative impacts on the grain bulk trading
business.
During 2013, we met some unexpected and extreme weather
in Shanxi Province, which caused serious damage to our inventories and affected our operations. In late April, an unexpected heavy
snow storm collapsed the warehouses located in Taiyuan, Shanxi Province which were leased by the Company’s Grain Division
and caused about $1.2 million in damage to our grain goods stored in those warehouses. Beginning in May 2013, Shanxi had unusually
frequent heavy rainfall which caused extreme humidity. As a result, we reinforced and waterproofed the warehouses and took measures
to prevent inventories from mildewing such as by transferring inventories from one warehouse to the other, or drying the inventories
by machines frequently. These measures reduced the efficiency of our operations and increased operational expenses. In the winter,
the weather became extremely warm. Some of our corn inventory mildewed, which damaged the quality of the inventory. We recorded
approximately $4.5 million as reserve of inventory valuation.
Considering the change
of the economic environment, we assessed the fair value of the land use rights of the farmlands we own in Yuci, Shanxi Province
and the ERP system used for retail sales in the Grain Division based on our current operation plan. We recorded an impairment loss
of $6.5 million for the intangible assets as of December 31, 2013. In the meantime, we decided to terminate the construction of
the factory facility in the subsidiary of Huichun due to the technical innovation and recorded an impairment loss of $0.8 million
on the uncompleted building as of December 31, 2013.
As a result of a material disagreement with the developer engaged to develop the Company’s digital
trading and agriculture service platform, our development contract with that developer was suspended on March 14, 2014. Management
is taking measures to urge the developer to revive and complete the development under the development contract.
Corporate Structure
The Company’s
current corporate structure is set forth below:
Competitive Advantages
Cultivation Base
Our corn and grains
are mainly grown in the hilly area near Taihang Mountain, at an altitude of between 5,000 to 8,000 feet above sea level. This
region has a wide temperature variation between night and day and a long daily exposure to sunlight. These geographic characteristics
produce grains that are rich in nutrients, especially minerals, rutin, cellulose, amino acids, chlorophyll, lecithin and linoleic
acid.
Partnership with Farmers
With the support of
our local government, we have adopted the operation mode of “Company + Farmers + Cultivation Base”. We have established
stable partnerships with over 60,000 farmers to grow crops on the farmland. We provide instruction to the farmers for planting
crops and technical support for seeding and cultivation. The scale cultivation ensures our stable supply of raw material with high
quality.
Advanced Production Lines
We have a modern processing
center for corn with five drying cylinders and six warehouses, the construction of which was completed in 2011. Our total capacity
of storage and annual turnover of corn has exceeded 100,000 tons and 700,000 tons, respectively. We are also equipped with fully
automatic and advanced production lines for grain processing with a total production capacity of over 105,000 tons. The advanced
production lines and production technologies help produce grain products with high quality by maintaining the nutritional components
of the products.
Warehousing and Logistics
We operate six self-owned
warehouses and some rental warehouses with total storage capacity of over 100,000 tons of food products and an annual turnover
of 700,000 tons. This capacity helps us to reach economies of scale with low cost of processing and storage. Our production bases
are located in Jinzhong and Quwo in Shanxi Province with convenient transportation. The Jinzhong facilities and warehouses are
in proximity to Shitai Railway and Provincial Road 317. The Quwo facilities are several kilometers away from Houma, a transportation
hub. We have exclusive lease agreements with three railway lines for freight transportation in Jinzhong: (a) Shanxi Cereal &
Oil Group, Mingli Reservation Depot; (b) Shanxi Yuci Cereal Reservation Depot; and (c) YuciDongzhao Railway Freight Station. These
advantageous geographical positions and exclusive agreements help us ensure speedy delivery of our products at a low cost.
Established Sales Network
We have cultivated
a national network for corn and bulk trading with customers including various livestock feed companies, food manufacturers, corn
oil/corn starch manufacturing companies, grain trading companies, wholesalers and governmental procurement agencies. Meanwhile,
we sell our processed grain products to wholesalers, distributors, institutional clients and retail stores. We also developed
export channel to Germany, Japan and other countries.
Our Current Products and Product Characteristics
Our products in our
Corn Division are simple processed corn. Our products in our Grain Division include packaged and unpackaged grains including millet,
soy bean, green bean, black rice, wheat, etc. Packaged products include: (1) simple processed grain products packaged under our
registered trademarks “Deyu” and “Shitie”; (2) bean based products under the brand name “Huichun”
including vegetarian products and instant noodles made from soybeans, black beans and green beans; and (3) fruit vinegars and
juices under the brand “Longquan Villa”. Our products in our Bulk Trading Division include rice, flour, wheat, kidney
beans, green beans and other agricultural products.
Our farmland
is located in the center of Shanxi Province, which has a relatively dry climate and which is ideal for grain cultivation. Grain
crop growth relies principally on the climate and rainfall, and is not dependent on the application of chemical fertilizers or
pesticides. Our simple and deep processing of grains maintain the grain’s original nutritional components. A portion of
JinzhongDeyu’s grain products are certified as “organic” by the Beijing ZhongluHuaxia Organic Food Certification
Centre, the chief organic food certification organization accredited and approved by the Certification and Accreditation Administration
of the PRC (CNCA).
We provide technological
guidance and support to our farmers regarding seed dissemination, cultivation methods, ecological fertilizer, irrigation, cultivation,
weeding and harvesting. We believe working closely with our farmers helps ensure that we receive high quality raw materials for
production. We also utilize an advanced product control system to help ensure high-quality finished products.
Key Customers
Our customers are mainly in China, composed mainly of (a) livestock feed companies, corn oil/corn starch
manufacturing companies and governmental procurement agencies in our Corn Division; (b) wholesalers distributors, institutional
clients and retail stores in our Grain Division; and (c) grain trading companies, wholesalers and governmental procurement agencies
in our Bulk Trading Division. Our OEM products made of beans are also sold through our export agencies to Japan, Germany
,
the United States and other countries.
No single customer
accounted for greater than 10% of the Company’s consolidated gross revenue for the years ended December 31, 2013 and 2012.
No single customer accounted for greater than 10% of the consolidated accounts receivable as of December 31, 2013, while Beijing
Suning Appliance Co., Ltd. (“Sunning”) accounted for 22.6% of the consolidated accounts receivable for the fiscal
year ended as at December 31, 2012.
For our Corn Division,
we developed large livestock feed companies as our customers, but our customer base are still diversified and no single customer
accounted for greater than 10% of the division’s gross revenue in 2013 or 2012.
For our Grain Division, we provided OEM products in 2013 and 2012, and developed commercial sales of our
grain products to large institutional customers in 2012. Deyufang Innovation Food (Beijing) Co., Ltd. (“Deyufang”)
accounted for 53.
3% of gross sales of the Grain Division for the fiscal
year ended December 31, 2013, and Deyufang and Suning accounted for 23.2% and 22.0% of gross sales of the Grain Division for the
fiscal year ended December 31, 2012, respectively.
For our Bulk Trading
Division, Shanxi Helifahua Trading Co., Ltd. and JinzhongKangshuaijianmin Food Trading Co., Ltd. accounted for 12.7% and 10.4%
of gross sales of the Bulk Trading Division, respectively for the fiscal year ended December 31, 2013, and Shanxi Zhengda Co.,
Ltd. and Shanxi Guchuan Food Co., Ltd. accounted for 27.3% and 23.6% of gross sales of the Bulk Trading Division for the fiscal
year ended December 31, 2012, respectively.
Sources of Raw Materials and Key Suppliers
We procure raw materials
at our cultivation base in Jinzhong, Shanxi Province, which produces grains rich in nutrients, especially minerals, rutin, cellulose,
amino acids, chlorophyll, lecithin and linoleic acid. Shanxi Province is located on the Loess Plateau in the western part of China.
The city of Jinzhong is located in the center of Shanxi Province. We believe the topography of the region creates optimal conditions
for growing grains. Favorable weather conditions, combined with our geographical conditions lead to high-quality products. There
has been no serious flood or drought in the region in the past 100 years. The temperature difference between day and night is
greater than 10 degrees Celsius. The weather is dry and cold. There are about 158 days without frost during the year and the growing
period is longer than 135 days. The weather conditions are especially favorable for growing corn and grains. Grains are highly
drought resistant. We rely on natural rainfall, and no irrigation is required throughout the year and no application of chemical
fertilizers or pesticides is needed. Irrigation by underground water is only required under exceptional circumstances.
The growing season
for our corn and grain in the Shanxi Province is 135+ days, which requires only one planting per year of the farmland. Our warehouses
have storage capacity of 100,000+ tons and a turnover capacity of 700,000+ tons. We believe that our storage capacity, combined
with our ability to expand our network of cooperative farmers and farmer’s agents, as well as the ability to expand our
purchasing into other geographical areas in Shanxi Province, reduces our risks which may be attributable to raw material seasonality.
We purchase most of
the raw materials directly from farmers and farmer’s agents by payment in advance or immediately after the procurement.
We also purchase raw materials from grain traders. We did not have any suppliers that accounted for 10% or more of total purchases
of raw materials during the fiscal years ended December 31, 2012 and 2013. We purchased raw materials from several suppliers.
Shanxi China Grain
Reserves Corporation Yangshou Directly-Subordinate Warehouse, Shanxi China Grain Reserves Corporation Taigu Directly-subordinate
Warehouse, State Grain Reserves Changzhi Directly-subordinate Warehouse and Shanxi China Grain Reserves Corporation Trading Company
accounted for 27.3%, 26%, 24.2% and 18.5% for the fiscal year ended December 31, 2013, respectively; and TaiguYonghe Grain Trading
Co., Ltd., Liaoning Jinchen Agriculture Development Co., Ltd. and Shanxi Yijiaren Grain and Oil Trading Co., Ltd. accounted for
51.3%, 12.4% and 12.3% of total trade payables as of December 31, 2012, respectively.
Market Opportunity
Corn and Corn Byproducts
Corn is primarily
used as raw feed material for pigs, cattle, chicken and other livestock. Corn byproducts, including corn stalks, are also used
as an important source of feed. Since 1997, feed production has maintained steady growth. China is now the world’s second
largest feed producer according to USDA.
In many developed
countries, corn is generally regarded as a “health food”. In the United States, it is believed that over 10% of health
foods are made with corn or corn byproducts. Corn oil squeezed from corn germ contains over 10 types of fatty acids, more than
50% of which are acids rich in vitamins A and E. Corn oil is low in cholesterol and is believed to have positive effects on high
blood pressure and heart disease. Corn oil is also widely used in the pharmaceutical and chemical industries. In recent years,
demand for corn for food products in international markets has grown.
Corn is also used
as raw material for highly processed industrial products. Corn can be used to produce ethanol as renewable fuels. Global energy
shortages make corn an attractive alternative energy source. With the requirement of environmental protection, the demand for
corn from ethanol producers has increased dramatically in recent years.
Grain Products
Grain products contain
high levels of vitamin B1, dietary fiber and trace elements. Coarse grains are believed to be beneficial to people with diabetes
or high blood pressure. The Chinese Nutrition Society, commissioned by the Ministry of Health in 2011 to formulate dietary guidelines,
recommends consumption of 250-400 grams per day of processed grain foods for adults. They also recommended that adults consume
50-100 grams per day of coarse grains and whole grain foods and consume 30-50 grams per day of bean or bean-based products. Over
70% of adults in China, amounting to approximately 665 million people, are urban residents. Based on these guidelines, the demand
for grain products by people in urban cities could reach 134 million tons per year.
As a result of the
economic growth and improved living standards in China, the dietary components of the Chinese population have changed dramatically.
In general, the population pays more attention to diet and nutrition. Management believes that the increased awareness of the
value and benefits of grain products has resulted in an increased demand for our grain products.
Competitive Landscape
In the corn market
and grain bulk trading industry, our current major competitors are smaller and local focus traders such as JinzhongDexinchang
Trading Co., Ltd., Jinjian Rice Industry Co., Ltd. and Beijing Guchuang Food Co., Ltd., which are mainly engaged in the corn and
grain bulk procurement and wholesale businesses.
In the grain consumption
marketplace, we primarily compete with smaller grain processers and food manufacturers, which are local in focus, have a single
production line, little brand recognition and limited distribution networks. The following table lists our competitors with their
main products:
Competitors
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Products of Competitors Produced
and /or sold by Competitors
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Shanxi Jin Wei Yuan Grains Company Limited
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packaged and unpackaged grain
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Shanxi Qinzhou Huang Millet Group Limited Company
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packaged and unpackaged millet, soybean
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HeshunXinma Grains Development Co., LTD
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packaged and unpackaged millet,beans, flour
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HebeiGaopaidianDouDou Food (Group) Co., Ltd.
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bean products
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Shandong Daogongfang Food Co., Ltd.
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bean products
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YantaiYiyuan Beverage Co., Ltd.
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fruit vinegars, especially apple vinegars
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Zhengzhou Luer Biotechnology Development Co., Ltd.
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fruit vinegars and fruit juices
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Sales Network
We have established
a nationwide and diversified customer base in China, including Shanxi, Hebei, Henan, Shandong, Anhui, Shaanxi, Sichuan, Hunan,
Hubei, Guangdong, Jiangsu, Liaoning and Chongqing with stable partnerships with various livestock feed companies, corn oil/corn
starch manufacturing companies and food manufacturers, grain trading companies, wholesalers and governmental procurement agencies.
We sell our grain products to wholesalers, distributors and retail stores in China. We develop commercial
sales of refined grain products to institutional clients. Our OEM products made of beans are also sold through our export agencies
to Japan, Germany,
the United States and other countries.
Processing and Warehousing Capacities
General
We maintain facilities
in central and southern Shanxi Province with total site coverage of approximately 1,780,000 square feet (approximately 165,000
square meters) and constructed area of 500,000 square feet (approximately 46,000 square meters). Our facilities are equipped with
advanced crop production, processing and packaging lines as well as modern equipment.
Corn Production Capacity
Our Corn Division’s
warehousing, processing and logistics center is located in Jinzhong with site coverage of 503,000 square feet (approximately 47,000
square meters) and constructed area of 144,000 square feet (approximately 13,000 square meters). The processing center has five
drying cylinders and six warehouses for the storage of 70,000 tons. We have a large rental cave-type warehouse named Shanxi 661
Warehouse with storage capacity of 30,000 tons. We also have contracts for temporary warehouses near railway stations which supplement
our storage capacity. Our total capacity of storage and annual turnover reach over 100,000 tons and 700,000 tons, respectively.
We process drying
and water removal treatments for corn before the corn is stored in our warehouses. The five drying cylinders are equipped with
the most advanced equipment for corn drying. After the drying process, the corn is packaged in bags and moved into warehouses.
Then, the products undergo insecticide and anti-bacterial treatments. After being sealed and air ventilated, the products are
then stored in enclosed warehouses.
Our six newly-constructed
warehouses are equipped with advanced detection and air ventilation devices to ensure cereals are being kept in good condition.
Ventilation ducts are installed on the ground level of the warehouses. Once moisture is detected, air ventilation driven by a
blower will help disseminate the overall heat on the cereals. Infrared temperature sensors and 360-degree high resolution cameras
have been installed in each warehouse to allow the control room to conduct 24-hour monitoring for real-time analysis of water,
moisture, mildew and pests so that we can quickly take corrective measures.
The cave-type warehouse
that we rent is fully enclosed and have thermostatic and moisture proof characteristics. The cave-type warehouse is built with
1.5 meter thick walls and moisture proof layers. They maintain a temperature of 10 degrees Celsius throughout the year, which
is well-suited for food storage. Since no air conditioning is required, the operating costs of these warehouses are low. These
warehouses are also equipped with infrared sensors that can accurately detect temperature changes and the presence of rodents,
insects and other pests.
Grain Production Capacity
We are equipped with
three fully automatic production lines for millet, grain and flour at our Jinzhong production base in the center of Shanxi Province,
with site coverage of approximately 199,000 square feet (approximately 18,000 square meters) and a constructed area of 119,000
square feet (approximately 11,000 square meters). These lines include various kinds of rice milling machines, filtering machines,
elevators, color selection machines, exhaust fans, automatic packing machines and other equipment. The production capacity of
grain is over 60,000 tons.
Another production
base in Quwo, in the southern part of Shanxi Province, has site coverage of over 1,076,000 square feet (approximately 100,000
square meters) and a constructed area of 238,000 square feet (approximately 22,000 square meters). This base is equipped with
three kinds of advanced production lines: (1) two production lines for bean-based products with an annual production capacity
of 15,000 tons; (2) two production lines for other grain products with an annual production capacity of over 26,000 tons; and
(3) two production lines for fruit vinegar and fruit juices with an annual production capacity of 4,000 tons. These production
lines are comprised of advanced grain milling, degreasing, automatic drying, packaging, inspection and testing equipment. At present,
less than one third of the land at this production base has been developed. We believe we can develop more production lines for
future demand without acquiring land use rights for more land.
To ensure high quality,
we have installed fully automated production equipment at our facilities. Characteristics of our production lines and equipment
are as follows:
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·
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Production equipment for grain processing is fully automated.
We use elevators to move raw materials through the production process. The production process is fully enclosed for protection
against any pollution or contamination. We have installed equipment with advanced color selection technology for grains. We
believe the device is stable and reliable, and it features automatic temperature control, automatic removal of dust and impurities,
automatic air pressure detection, self injection and light testing. We have a cooling system that helps millet maintain its
nutritious components, color and appearance. Selective application of the polishing process helps maintain nutritional components.
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·
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Soybean food series production uses advanced technology of dry
heat extrusion equipment in oil extraction, oil purification filling, milling, squeezing and other equipment which undertake
processes of peeling, crushing, oil extraction, milling, forming, drying, shaping, sterilization, packaging and other processes
in the production of various soybean products while retaining most of the raw nutrients.
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|
·
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Production lines for our fruit vinegar
and fruit juice include water treatment equipment, sugar devices, dispensing equipment, homogenization equipment, sterilization
equipment and aseptic filling equipment. We use Ro water treatment equipment and remote infrared automatic filling equipment.
Sterilization technology adopts aseptic filling and high temperature sterilization processes to ensure high quality of products
and advanced, reliable, automatic and stable quality for the entire production line.
|
Our modern equipment
and technology, combined with advanced processing techniques, helps to ensure that grain production is high-quality, natural,
green and ecological. Additionally, a portion of our grains can be categorized as organic by the Beijing ZhongluHuaxia Organic
Food Certification Centre. We believe the careful management of breeding, cultivation, production, packaging and storage also
leads to high quality products.
We implement strict
quality control with each process in purchasing, storage, processing, packaging and distribution. We keep all items that are examined
in the course of quality control inspections for one year in accordance with National Technology Quality Supervision Bureau requirements.
We cooperate fully with the Bureau during their random testing and examination of our products.
Research and Development
Research and development
expenses were immaterial for the years ended December 31, 2013 and 2012.
Operating
Model
We have adopted the
operating model of “Company + Farmers + Cultivation Base” supplemented by advanced production, strong warehousing
capacity and exclusive logistics. We have established partnerships with over 60,000 farmers for the cultivation of high quality
grains and corn. Based on our supply base, we have developed the “Deyu” operating chain of breading, cultivating,
processing, warehousing and distributing our products.
In order to adapt
to the changing market for grain products sold to consumers, we are streamlining our operational structure. Our initiatives continue
to cultivate the entire value chain concept. With the implementation of new business strategies and resource consolidation/sharing,
we believe that we can compete effectively in the industry under the new emerging market conditions.
Government Regulation
Corn Purchase and Sale Business
We are engaged in
the purchase and sale of raw corn products. The supervising authority for the purchase and sale of raw corn products is the State
Administration of Grain in China. Pursuant to Regulation 6 of the Food Distribution Management Regulations announced by the State
Council of the PRC, the State Council Development and Reform Department and the National Food Administration Departments (the
commissions of the National Food Authority) are responsible for the mid and long-term planning of China’s overall balance
of food, regulation, restructuring of important food species and food distribution. The National Food Administration Department
is responsible for food distribution, guidance to the industry, oversight of the food distribution laws, regulations, policies
and implementation of rules and regulations. Pursuant to Regulation 9, food operators must obtain permits and register pursuant
to relevant registration regulations. We have obtained the necessary Food Products Purchase Permit and operate in compliance with
the relevant standards of food quality, storage, logistics and facilities.
Grain Production and Sales Business
Our production, purchases
and sales of grain food products are subject to the following rules and regulations in China:
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·
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“The Food Safety Law of the People’s
Republic of China” (the “Food Safety Law”)
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|
·
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“Regulations on the Implementation of the Food Safety
Law of the People’s Republic of China” (the “Regulations”)
|
|
·
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“Law of the People’s
Republic of China on Quality and Safety of Agricultural Products” and the “Food Distribution Management Ordinance”
|
We are engaged in
exporting grain food products in oversea markets and therefore our production, purchase and sales of grain food products are also
subject to the following rules or regulations as they pertain to the food products exporting business:
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·
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“Administrative Provisions on the Filing of
Export Food Manufacturers”
|
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·
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“Hygiene Requirements for Export Food Manufacturers”
|
|
·
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“List of Products Requiring HACCP Audit for Filing of
Export Food Manufacturers”
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·
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“List of Products Requiring HACCP Audit for Filing of
Export Food Manufacturers”
|
We are engaged in
the sale of packaged grain products. The supervising authority for such products is the Beijing Bureau of the Industry and Commerce.
Pursuant to Regulation 29 of the Food Safety Laws, entities engaging in food production, food distribution and food service, must
obtain a Food Production Permit, Food Distribution Permit and Food Service Permit. Those entities that have obtained the Food
Production Permit are authorized to operate a food production business and are not required to apply for a Food Distribution Permit.
However, we have also obtained the Food Distribution Permit from the Beijing Bureau of Industry and Commerce.
We are also engaged
in the production and sale of grain foods. The supervising authority for such production is the Technology Quality Supervision
Bureau of Shanxi Province. Pursuant to Food Safety Laws and ancillary regulations, China’s Head Office of the Technology
Quality Supervision Bureau supervises technology quality of enterprises which are engaged in food production. The Bureau issues
Food Production Permits, undertakes mandatory examinations of technology quality for entry into the industry and is responsible
for investigation of incidents regarding food safety. Pursuant to Regulation 29 of the Food Safety Laws, entities engaging in
food production, food distribution and food service, must obtain the Food Production Permit, Food Distribution Permit and Food
Service Permit. Those who have obtained the Food Production Permit are authorized to operate food production businesses and are
not required to apply for a Food Distribution Permit. Deyu has also obtained the nation’s Industrial Production Permit from
the Technology Quality Supervision Bureau (Cereals: QS140701040051 and Flour: QS140701016210). Our food labeling complies with
the Interim Measures for Labeling of Food Products of Enterprises in Shanxi Province and GB7718-1994 Standards for Food Products
Labeling and has obtained the relevant registration certificate (Record number SB/1407000-009-01).
Intellectual Property
With the exception
of our registered trademarks “Deyu”, “Shitie”, “Huichun”, “LongQuan Villa” and
“Fushite”, we do not own any patents, trademarks, licenses or franchises on our products or processes. We also own
the rights to the domain name
www.deyuagri.com
, which is currently in good standing.
Employees
We currently have
approximately 443 full time employees and varying numbers of part-time employees working on a seasonal basis.
ITEM 1A. Risk Factors
We are a “smaller
reporting company” and as such, are not required to provide this information.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our production facilities
are located in Jinzhong and Quwo of Shanxi Province with total site coverage of approximately 1,780,000 square feet (approximately
165,000 square meters) and constructed area of 482,000 square feet (approximately 45,000 square meters). We own a modern processing
center with five drying cylinders for corn and the six warehouses for storage of 70,000 tons and have a large rental warehouse
named the Shanxi 661 Warehouse with a storage capacity of 30,000 tons, of which the total capacity of annual turnover may reach
more than 700,000 tons. We have eight production lines for grain processing with total production capacity of over 105,000 tons.
Our facilities are equipped with advanced crop production, processing and packaging lines as well as modern equipment.
According to government
regulations of the PRC, the PRC Government owns all land. We own the following land use rights for farmland and/or industrial
lands: (1) land use rights of farmland in Jinzhong Shanxi consisting of 17,000 acres (approximately 70,000,000 square meters)
for the remaining average of 36 years; (2) land use right of the industrial land in Quwo, Shanxi consisting of 1,076,000 square
feet (approximately 100,000 square meters) for the remaining 43 years (3) land use right of the industrial land in Yuci District
of Jinzhong, Shanxi consisting of 504,000 square feet (approximately 47,000 square meters) for the remaining 47 years; (4) land
use right of the industrial land in Shanzhuangtou, JinzhongDeyu of 125,000 square feet (approximately 12,000 square meters) for
the remaining 24 years; (5) land use right of the industrial land in Shanzhuangtou, JinzhongDeyu of 73,000 square feet (approximately
6,800 square meters) for the remaining 48 years.
ITEM 3. Legal Proceedings
On February 12, 2012,
the Company’s former Chief Financial Officer alleged that the Company may have violated certain state and federal laws and
regulations and upon receipt of such allegations, the Company's Audit Committee retained counsel to conduct an inquiry into such
allegations. On March 27, 2012, the Company received a letter asserting a claim of wrongful termination in violation of public
policy wherein the former Chief Financial Officer claims that he was terminated in retaliation for reporting and/or refusing to
participate in such alleged violations. He also claims breach of employment contract and seeks payment of $250,000 plus the issuance
of 60,000 shares of common stock in settlement for the claimed damages therein. On July 23, 2012, the Company was provided a copy
of a complaint filed in the Superior Court of California, County of Orange, repeating the same allegations contained in the March
27, 2012 letter and also asserting claims for intentional and negligent infliction of emotional distress and failure to pay wages
due at the time of termination. The Company subsequently filed demurrers to the Complaint that resulted in the plaintiff filing
a First Amended Complaint on September 28, 2012 and a Second Amended Complaint on January 7, 2013, alleging essentially the same
claims. The Company's answer to the Second Amended Complaint, along with the Company's Cross-Complaint against the former Chief
Financial Officer, seeking the return of Company property, was filed on March 25, 2013 following the most recent demurrer hearing
that was held on March 14, 2013. The answer to the Cross-Complaint was filed on April 5, 2013.
The plaintiff's deposition
had been set for July 24, 2013. However, in order to avoid the time and expense of further litigation, the parties agreed to settle
the action prior to taking plaintiff’s deposition. On September 26, 2013, the court entered the dismissal, with prejudice,
of the entire action, including the Company’s cross-complaint against the plaintiff.
Except as set forth
above, to our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries,
threatened against or affecting us, our common stock, any of our subsidiaries or any of our companies or our companies’
subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse
effect.
ITEM 4. Mine Safety
Disclosures.
Not applicable.
PART II
ITEM 5.
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Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
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Market Information
Our common stock is
quoted on the OTCBB and the OTC Markets (OTCQB) under the symbol “DEYU”. There can be no assurance that a liquid market
for our securities will ever develop. Transfer of our common stock may also be restricted under the securities or blue sky laws
of various states and foreign jurisdictions. Consequently, investors may not be able to liquidate their investments and should
be prepared to hold the common stock for an indefinite period of time.
The following table
summarizes the high and low closing bid prices per share of the common stock for the periods indicated as reported provided by
the OTC Markets Group, Inc. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions, and
may not necessarily represent actual transactions.
Closing Bid Prices
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High ($)
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Low ($)
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Fiscal Year Ended December 31, 2012
|
|
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|
|
|
|
|
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1st Quarter (January 3 – March 31):
|
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1.75
|
|
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1.25
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|
|
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|
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|
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2rd Quarter (April 1 – June 30):
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1.61
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1.23
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3nd Quarter (July 1 – September 30):
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1.40
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0.80
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|
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4th Quarter (October 3 – December 30):
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1.17
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0.52
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Fiscal Year Ended December 31, 2013
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1st Quarter:
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1.05
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0.32
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2rd Quarter:
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0.60
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0.21
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3nd Quarter:
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0.43
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0.20
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4th Quarter:
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0.36
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0.20
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The following table presents certain information
with respect to our equity compensation plan as of December 31, 2013:
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Number of
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securities remaining
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Number of securities
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available for future
|
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to be issued
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Weighted-average
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issuance under equity
|
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upon exercise of
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exercise price of
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compensation plans
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outstanding options,
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outstanding options,
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(excluding securities
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warrants and rights
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warrants and rights
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reflected in column (a))
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Plan Category
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(a)
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(b)
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(c)
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Equity compensation plans approved
by security holders
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-
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$
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-
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-
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|
|
|
|
|
|
|
|
|
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Equity compensation plans not approved
by security holders(1)
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750,000
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3.14
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495,586
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Total
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750,000
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$
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3.14
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495,586
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(1) On November 4, 2010, the Company’s
Board of Directors approved the Company’s 2010 Share Incentive Plan. On November 8, 2010, a total of 931,000 non-qualified
incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent
directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock
shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share,
all of which have vested.
On March 8, 2012,
the Company’s Board of Directors increased the number of shares allocated to and authorized for use under the Plan from
1,000,000 shares to 1,245,586
shares,
the maximum number of shares
allowable pursuant to the terms of the Plan and granted 420,000 options under the Plan to independent directors, officers and
key employees of the Company, of which included some new options and those re-granted after such options were forfeited by other
former employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All
of the granted options have vested.
On November 23, 2012,
our Board of Directors allocated to and authorized to re-grant 150,000 options to a director of the Company after such options
were forfeited by other former employees as a result of their resignations from the Company in accordance with the terms of their
option agreements. All of the granted options vest as follows:
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33 1/3% of the option grants vested one (1) month
after the date of grant;
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33 1/3% of the option grants vested twelve (12) months after
the date of grant; and
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33 1/3% of the option grants shall vest twenty-four (24) months
after the date of grant.
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On November 5, 2011,
we filed a Registration Statement with the SEC on Form S-8 covering up to 1,000,000 shares underlying options which may be granted
under the Plan. As of March 31, 2014, none of the options granted pursuant to the Plan have been exercised.
Performance Graph
We are a “smaller
reporting company” and as such, are not required to provide this information.
Recent Sales of Unregistered Securities;
Use of Proceeds from Registered Securities
The Company did not
sell any securities during the period covered by this Report which were not registered under the Act and not previously reported
on a quarterly report on Form 10-Q or a current report on Form 8-K.
Holders of Common Equity
On March 31, 2014, we had
11,015,029 shares of common stock issued and outstanding to 27 holders of record, and the closing price of our common stock
as quoted on the OTCQB was $0.34 per share. The number of record holders does not include beneficial owners of
common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
Dividends
We have not paid cash
dividends on any class of common equity since formation.
In connection with
our private placement in May 2010, we issued an aggregate 2,455,863 shares of our Series A convertible preferred shares and warrants
exercisable into 982,362 shares of common stock to Investors. Pursuant to the terms of our Series A convertible preferred share
designations, the holders of our Series A convertible preferred shares are entitled to receive cumulative dividends at a rate
of 5% per annum, and such shares of Series A convertible preferred stock are convertible into shares of our common stock on a
1:1 basis, subject to applicable adjustments.
On July 29, 2011,
we issued 66,379 shares of Series A convertible preferred shares as a cumulative Series A convertible preferred share dividend
of $212,420 in aggregate, to such holders of Series A convertible preferred stock on a pro rata basis and on January 27, 2012,
we issued a Series A convertible preferred share dividend equal to $219,721, in the aggregate, to such holders of Series A convertible
preferred stock on a pro rata basis.
On July 26, 2012,
we issued 55,995 shares of Series A convertible preferred shares and $40,315.22 in cash as cumulative Series A convertible preferred
share dividend of $220,052 in aggregate, to such holders of Series A convertible preferred stock on a pro rata basis and on January
29, 2013, we issued 70,124 shares of Series A convertible preferred shares as a cumulative Series A convertible preferred share
dividend of $224,397 in aggregate, to such holders of Series A convertible preferred stock on a pro rata basis.
On July 26, 2013,
we issued 72,534 shares of Series A convertible preferred shares as a cumulative Series A convertible preferred share dividend
of $232,110 in aggregate, to such holders of Series A convertible preferred stock on a pro rata basis.
On January 23, 2014,
we issued 75,035 shares of Series A convertible preferred shares as a cumulative Series A convertible preferred share dividend
of $240,089 in aggregate, to such holders of Series A convertible preferred stock on a pro rata basis.
ITEM 6. Selected Financial Data
We are a “smaller
reporting company” and as such, are not required to provide this information.
ITEM 7.
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
In this Annual Report on Form 10-K, unless
otherwise indicated, the words “we”, “us”, “our”, “Deyu” or the “Company”)
refer to Deyu Agriculture Corp. and all entities owned or controlled by Deyu Agriculture Corp., except where it is made clear
that the term only means the parent or a subsidiary company. References in this report to the “PRC” or “China”
are to the People’s Republic of China.
This report contains forward-looking statements.
The words “anticipate”, “believe”, “expect”, “plan”, “intend”, “seek”,
“estimate”, “project,”, “could”, “may” and similar expressions are intended to
identify forward-looking statements. These statements include, among others, information regarding future operations, future capital
expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including, without limitation, the current economic downturn adversely
affecting demand for the our products; our reliance on our major customers for a large portion of our net sales; our ability to
develop and market new products; our ability to raise additional capital to fund our operations; our ability to accurately forecast
amounts of supplies needed to meet customer demand; market acceptance of our products; exposure to product liability and defect
claims; fluctuations in the availability of raw materials and components needed for our products; protection of our intellectual
property rights; changes in the laws of the PRC that affect our operations; inflation and fluctuations in foreign currency rates
and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or
should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated,
believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this report are qualified
by these cautionary statements and there can be no assurance of the actual results or developments.
The following discussion and analysis should
be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information
contained elsewhere in this Annual Report.
Summary of our Business
We are a vertically integrated producer,
processor, marketer and distributor of organic and other agricultural products made from corn and grains operating in Shanxi Province
in the People's Republic of China. We have a nationwide sales network covering manufacturers, grain traders, wholesalers, distributors
and retail stores. Our facilities include modern warehouses with storage capacity of over 100,000 tons and sophisticated production
lines with annual production capacity of over 105,000 and 700,000 tons for grain products and corn, respectively.
A brief description of our products is
set forth below, by division:
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·
|
Corn Division
– This division acquires unprocessed corn
for value-added processing such as cleaning and drying packaging. The main consumers for this division range from livestock
feed companies to corn oil/corn starch manufacturing companies as well as governmental procurement agencies in China.
|
|
|
|
|
·
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Grain Division
–This division acquires unprocessed grains including millet,
green bean, soy bean, black rice and many other varieties of grains traditionally grown and consumed in China for value-added
processing such as peeling, cleaning, grinding and packaging. The Grain Division also produces and distributes deep processed
food products, such as bean based products, fruit vinegars and juices, noodles and other grain products. We sell our processed
grain products to wholesalers, distributors, institutional clients, etc.
|
|
|
|
|
·
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Bulk Trading Division
–This division conducts bulk trading through procuring
and wholesales of rice, flour, wheat, kidney beans, green beans and other agricultural products. The majority of our customers
of this division include food manufacturers, grain trading companies, wholesalers and governmental procurement agencies in
China.
|
We have adopted the operation mode of “Company
+ Farmers + Cultivation Base”. We have established long term strategic partnerships with over 60,000 farmers to grow crops
on farmland. We provide extensive agricultural services to the farmers to plan and harvest crops. Services include technical know-how
and support, such as cultivation methods, seeding and logistics.
We are equipped with fully automatic and
advanced production lines for grain processing with a total production capacity of over 105,000 tons. The advanced production
lines and production technologies help produce grain products with high quality by maintaining the nutritional components of the
products. We operate six self-owned warehouses and some rental warehouses with total storage capacity of over 100,000 tons of
food products and an annual turnover of 700,000 tons. This capacity helps us to reach economies of scale with low cost of processing
and storage. Our production bases are located in Jinzhong and Quwo in Shanxi Province with convenient transportation. We have
exclusive lease agreements with three railway lines for freight transportation in Jinzhong: (a) Shanxi Cereal & Oil Group,
Mingli Reservation Depot; (b) Shanxi Yuci Cereal Reservation Depot; and (c) YuciDongzhao Railway Freight Station, which ensure
speedy delivery of our products at a low cost.
We have cultivated a national network for corn and bulk trading with customers including various livestock
feed companies, food manufacturers, corn oil/corn starch manufacturing companies, grain trading companies, wholesalers and governmental
procurement agencies. Meanwhile, our processed grain products are sold to wholesalers, distributors, institutional clients and
retail stores. We also sell OEM products made of grain through export agencies to
Japan,
Germany, the United States and other countries.
Operating revenue for the year ended December
31, 2013 was $246,350,104, representing a 3.0% decrease from $254,046,098 for the year ended December 31, 2012. Our net loss available
to common stockholders for the year ended December 31, 2013 was $26,818, 546 representing a 267.5% decrease from $16,008,670 of
net income for the year ended December 31, 2012.
Recent Developments
Under the changes in the economic environment
and market conditions, as well as the negative impacts from some unexpected extreme weather conditions, our business has faced
great challenges in 2013.
The corn market experienced a booming growth
of demand exceeding supply in the past several years before 2013. Our selling price had an annual average increase of 15.0% and
7.4% in 2011 and 2012, respectively. However, since the beginning of 2013, the corn market has been seeing a weakening demand
with an oversupply and the selling price of corn has been declining. The selling price of corn (including value added tax) in
our Corn Division decreased by more than 8.1% from $427/ton (RMB 2,611/ton) in January of 2013 to $380/ton (RMB 2,322/ton) in
December of 2013. In contrast, with the rising labor cost and inflation in China, the lowest price for purchasing corn from farmers,
which is guided by the government due to the protective farming policies in favor of farmers, continues to rise. The lowest guide
price (including value added tax) again increased by $10/ton (RMB 60/ton) to $365 (RMB 2,260) in July 2013. As a result, the gross
margin of our corn trading business decreased from 15.4% for the year ended December 31, 2012 to 8.1% for the year ended December
31, 2013.
Corn is mainly used as raw material for
livestock feeds and deep processed products such as corn starch and ethanol. The demand for corn from the two downstream industries
declined dramatically in 2013. First, livestock farming has been going through a very difficult time in 2013. After a period of
expansion, the pork market turned to be oversupplied. Pork prices decreased significantly after the Spring Festival of 2013. Many
farmers or companies in the industry started to reduce the livestock raising scale. Second, with the economy slowing down, demand
for the deep processed corn products was also very weak. The price of ethanol decreased to its lowest level in the past three
years. A lot of corn deep processing companies have been running under production capacity and have not been profitable. However,
corn production had a good harvest in 2012 and 2013. According to National Bureau of Statistics of China, the output of corn increased
15 million tons, or 8% to 208 million tons in 2012 compared to 2011, and the output in 2013 was estimated to be 215 million. Increased
supply over the demand caused the selling price of corn to decrease. In the same period, there was an influx of low cost corns
imported into the market in the south of China. Given that the demand of corn from downstream industries will continue to be low,
we anticipate the oversupply in the corn market will continue to impact our business in the coming months.
For the business of our Grain Division,
the deteriorating efficiency of existing retail distribution channels curtailed our retail grain package sales amidst the increasing
competitiveness in the market. Consequently, we allocated more grain resources to bulk trading activity, yet the slowdown in consumer
market growth and competition in the market segment have had negative impacts on the grain bulk trading business.
During 2013, we met some unexpected and
extreme weather in Shanxi Province, which caused serious damage to our inventories and affected our operations. In late April,
an unexpected heavy snow storm collapsed the warehouses located in Taiyuan, Shanxi Province which were leased by the Company’s
Grain Division and caused about $1.2 million in damage to our grain goods stored in those warehouses. Beginning in May 2013, Shanxi
had unusually frequent heavy rainfall which caused extreme humidity. As a result, we reinforced and waterproofed the warehouses
and took measures to prevent inventories from mildewing such as by transferring inventories from one warehouse to the other, or
drying the inventories by machines frequently. These measures reduced the efficiency of our operations and increased operational
expenses. In the winter, the weather became extremely warm. Some of our corn inventory mildewed, which damaged the quality
of the inventory. We recorded approximately $4.5 million as reserve of inventory valuation.
Considering the change of the economic
environment, we assessed the fair value of the land use rights of the farmlands we own in Yuci, Shanxi Province and the ERP system
used for retail sales in the Grain Division based on our current operation plan. We recorded an impairment loss of $ 6.5 million
for the intangible assets as of December 31, 2013. In the meantime, we decided to terminate the construction of the factory facility
in the subsidiary of Huichun due to the technical innovation and recorded an impairment loss of $0.8 million on the uncompleted
building as of December 31, 2013.
Plan of Operation
We believe that the evolving market conditions
in China present not only challenges, but opportunities. In order to adapt to the changing market for grain products sold to consumers,
we are streamlining our operational structure. Our initiatives continue to cultivate the entire value chain concept. With the
implementation of new business strategies and resource consolidation/sharing, we believe that we can compete effectively in the
industry under the new emerging market conditions.
As a result of a material disagreement with
the developer engaged to develop the Company’s digital trading and agriculture service platform, our development contract
with that developer was suspended on March 14, 2014. Management is taking measures to urge the developer to revive and complete
the development under the development contract.
In December 2013, Management has commenced
and conducted a cost-saving, internal control and efficiency assessment review of all of the Company’s subsidiaries and divisions,
with particular focus on reducing administrative costs. After the reviews, improved policies were introduced and implemented forthwith.
The Company intends to continue to conduct periodical reviews and take measures to further strengthen the Company’s, including
subsidiaries, resources sharing, strategic planning and management of funds.
Results of Operations for the year ended December 31, 2013
as Compared to the year ended December 31, 2012
|
|
For The Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
246,350,104
|
|
|
$
|
254,046,098
|
|
|
$
|
(7,695,994
|
)
|
|
|
-3.0
|
%
|
Cost of goods sold
|
|
|
(227,250,013
|
)
|
|
|
(209,325,445
|
)
|
|
|
(17,924,568
|
)
|
|
|
8.6
|
%
|
Loss on inventory valuation reserve
|
|
|
(4,478,174
|
)
|
|
|
-
|
|
|
|
(4,478,174
|
)
|
|
|
100.0
|
%
|
Gross Profit
|
|
|
14,621,917
|
|
|
|
44,720,653
|
|
|
|
(30,098,736
|
)
|
|
|
-67.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(17,447,531
|
)
|
|
|
(16,153,096
|
)
|
|
|
(1,294,435
|
)
|
|
|
8.0
|
%
|
General and administrative expenses
|
|
|
(13,195,537
|
)
|
|
|
(9,619,036
|
)
|
|
|
(3,576,501
|
)
|
|
|
37.2
|
%
|
Loss on impairment of asset valuation
|
|
|
(7,346,776
|
)
|
|
|
-
|
|
|
|
(7,346,776
|
)
|
|
|
100.0
|
%
|
Total Operating Expense
|
|
|
(37,989,844
|
)
|
|
|
(25,772,132
|
)
|
|
|
(12,217,712
|
)
|
|
|
47.4
|
%
|
Operating income (loss)
|
|
|
(23,367,927
|
)
|
|
|
18,948,521
|
|
|
|
(42,316,448
|
)
|
|
|
-223.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
35,193
|
|
|
|
37,846
|
|
|
|
(2,653
|
)
|
|
|
-7.0
|
%
|
Interest expense
|
|
|
(790,438
|
)
|
|
|
(1,477,304
|
)
|
|
|
686,866
|
|
|
|
-46.5
|
%
|
Non-operating income (loss)
|
|
|
(403,885
|
)
|
|
|
665,270
|
|
|
|
(1,069,155
|
)
|
|
|
-160.7
|
%
|
Total Other Expense
|
|
|
(1,159,130
|
)
|
|
|
(774,188
|
)
|
|
|
(384,942
|
)
|
|
|
49.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(24,527,057
|
)
|
|
|
18,174,333
|
|
|
|
(42,701,390
|
)
|
|
|
-235.0
|
%
|
Income taxes
|
|
|
(604,450
|
)
|
|
|
(1,765,514
|
)
|
|
|
1,161,064
|
|
|
|
-65.8
|
%
|
Income before extraordinary items
|
|
|
(25,131,507
|
)
|
|
|
16,408,819
|
|
|
|
(41,540,326
|
)
|
|
|
-253.2
|
%
|
Extraordinary loss (after taxes)
|
|
|
(1,212,430
|
)
|
|
|
-
|
|
|
|
(1,212,430
|
)
|
|
|
100.0
|
%
|
Net income (loss)
|
|
|
(26,343,937
|
)
|
|
|
16,408,819
|
|
|
|
(42,752,756
|
)
|
|
|
-260.5
|
%
|
Net Income (loss) attributable to noncontrolling interests
|
|
|
4,160
|
|
|
|
46,599
|
|
|
|
(42,439
|
)
|
|
|
-91.1
|
%
|
Net income (loss) attributable to Deyu Agriculture Corp.
|
|
|
(26,339,777
|
)
|
|
|
16,455,418
|
|
|
|
(42,795,195
|
)
|
|
|
-260.1
|
%
|
Preferred stock dividends
|
|
|
(478,769
|
)
|
|
|
(446,748
|
)
|
|
|
(32,021
|
)
|
|
|
7.2
|
%
|
Net income (loss) available to common stockholders
|
|
$
|
(26,818,546
|
)
|
|
$
|
16,008,670
|
|
|
$
|
(42,827,216
|
)
|
|
|
-267.5
|
%
|
Net Revenue
Our net revenue for the year ended December
31, 2013 was $246.3 million, a decrease of $7.7 million, or 3.0%, compared to $254.0 million for the year ended December 31, 2012.
This decrease was the combined result of a decrease of $8.5 million in corn sales, a decrease of $32.2 million in grain sales
and off-set by an increase of $33.0 million in bulk trading sales. Sales derived from our Corn Division, Grain Division and Bulk
Trading Division for the year ended December 31, 2013 were $142.6 million, $41.6 million and $62.2 million, respectively, accounting
for 57.9%, 16.9% and 25.2% of total net revenue, respectively.
The following table breaks down the distribution
of our sales volume and amount by division and as a percentage of gross sales:
|
|
For The Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Volume
(ton)
|
|
|
Net Revenue
|
|
|
% of
total
sales
|
|
|
Volume
(ton)
|
|
|
Net Revenue
|
|
|
% of total
sales
|
|
|
Changes
|
|
|
%
|
|
Corn Division
|
|
|
398,940
|
|
|
$
|
142,560,749
|
|
|
|
57.9
|
%
|
|
|
410,199
|
|
|
$
|
151,047,762
|
|
|
|
59.5
|
%
|
|
$
|
(8,487,013
|
)
|
|
|
-5.6
|
%
|
Grain Division
|
|
|
23,022
|
|
|
|
41,637,805
|
|
|
|
16.9
|
%
|
|
|
50,307
|
|
|
|
73,811,014
|
|
|
|
29.0
|
%
|
|
|
(32,173,209
|
)
|
|
|
-43.6
|
%
|
Bulk Trading Division
|
|
|
92,576
|
|
|
|
62,151,550
|
|
|
|
25.2
|
%
|
|
|
64,113
|
|
|
|
29,187,322
|
|
|
|
11.5
|
%
|
|
|
32,964,228
|
|
|
|
112.9
|
%
|
Total
|
|
|
514,538
|
|
|
$
|
$246,350,104
|
|
|
|
100.0
|
%
|
|
|
524,619
|
|
|
$
|
254,046,098
|
|
|
|
100.0
|
%
|
|
$
|
$(7,695,994
|
)
|
|
|
-3.0
|
%
|
Net revenue from our Corn Division for
the year ended December 31, 2013 was approximately $142.6 million, a decrease of $8.5 million, or approximately 5.6%, as compared
to $151.0 million for the year ended December 31, 2012. The decrease was mainly the combined result of a decrease of 2.7% in sales
volume and a decrease of 3.0% in the average annual selling price of corn. The decrease was primarily due to the weak demand with
the oversupply in the corn market starting in the beginning of 2013.
Net revenue from our Grain Division for
the year ended December 31, 2013 was approximately $41.6 million, a decrease of $32.2 million, or 43.6%, as compared to $73.8
million for the year ended December 31, 2012. The decrease was mainly attributable to the decline in commercial sales to institutional
clients and the decline in retail sales in supermarket and convenience stores, which was caused by the deteriorating efficiency
of traditional retail sales and our strategic shift from grain retail sales to wholesale or bulk trading.
Net revenue from our Bulk Trading Division
for the year ended December 31, 2013 was approximately $62.2 million, an increase of $33.0 million, or 112.9% as compared to $29.2
million for the year ended December 31, 2012. This increase was mainly attributable to our strategic shift from grain retail sales
to wholesale or bulk trading in 2013.
Cost of Goods Sold
Cost of goods sold mainly consisted of the cost of raw materials, labor, utilities, manufacturing costs,
manufacturing related depreciation and packaging costs. Our cost of goods sold was $22
7.3
million, an increase of $17.9 million, or 8.6%, as compared to $209.3 million for the year ended December 31, 2013. This increase
was primarily attributable to the increase in sales volume of our bulk trading business and the increase of cost of some raw materials
for grain products.
Gross Profit
The following table breaks down the gross
profit and gross margin by division:
|
|
For The Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross Profit
|
|
|
% of total
Gross Profit
|
|
|
Margin
|
|
|
Gross Profit
|
|
|
% of total
Gross Profit
|
|
|
Margin
|
|
Corn Division
|
|
$
|
11,493,696
|
|
|
|
78.6
|
%
|
|
|
8.1
|
%
|
|
$
|
23,244,126
|
|
|
|
52.0
|
%
|
|
|
15.4
|
%
|
Grain Division
|
|
|
5,489,331
|
|
|
|
37.5
|
%
|
|
|
13.2
|
%
|
|
|
19,714,466
|
|
|
|
44.1
|
%
|
|
|
26.7
|
%
|
Bulk Trading Division
|
|
|
2,117,064
|
|
|
|
14.5
|
%
|
|
|
3.4
|
%
|
|
|
1,762,061
|
|
|
|
3.9
|
%
|
|
|
6.0
|
%
|
Subt
otal
|
|
|
19,100,091
|
|
|
|
130.6
|
%
|
|
|
7.8
|
%
|
|
$
|
44,720,653
|
|
|
|
100.0
|
%
|
|
|
17.6
|
%
|
Loss on inventory valuation reserve
|
|
|
(4,478,174
|
)
|
|
|
-30.6
|
%
|
|
|
-1.8
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
14,621,917
|
|
|
|
100
|
%
|
|
|
6.0
|
%
|
|
$
|
44,720,653
|
|
|
|
100
|
%
|
|
|
17.6
|
%
|
Our gross profit for the year ended December 31, 2013 was $14.6 million, a decrease of $30.
1
million, or 67.3%, as compared to $44.7 million for the year ended December 31, 2012. The decrease was a combined result of an
increase in loss on inventory valuation reserve of $4.5 million, a decrease in gross profits of $11.8 million in the Corn Division
and a decrease of $14.2 million in the Grain Division, offset by an increase of $0.4 million in the Bulk Trading Division. Our
gross margin decreased from 17.6% for the year ended December 31, 2012 to 5.9% for the year ended December 31, 2013. The decrease
in gross margin was mainly the combined result of the increase of loss in loss on inventory valuation reserve, the simultaneous
decline of gross margin in each division, and the increased sales percentage of our bulk trading business, which had a relatively
lower gross margin.
Gross profit in the Corn Division was $11.5
million, contributing to 78.6% of total gross profit for the year ended December 31, 2013. Gross margin for our Corn Division
was 8.1% for the year ended December 31, 2013, down by 733 basis points from 15.4% for the year ended December 31, 2012. The decrease
in gross margin was mainly attributable to the weak demand from corn downstream industries including livestock feed companies
and deep processed corn product manufacturers, with the oversupply of corn by the two good harvests in 2012 and 2013. The average
market sales price of corn decreased 3.0% during the reporting period while the average purchase price of raw corn increased 9.8%
due to the government's protective farming policies in favor of farmers.
Gross profit in the Grain Division was
$5.5 million, contributing to 37.5 % of total gross profit for the year ended December 31, 2013. Gross margin for the Grain Division
was 13.2 % for the year ended December 31, 2013, which decreased by 1353 basis points from 26.7% for the year ended December 31,
2012. This decrease in gross margin was primarily due to the increasing cost of raw materials in addition to the strategic shift
from grain retail sales to wholesales, which yielded relatively lower gross margins but with fewer distribution expenses.
Gross profit in the Bulk Trading Division
was $2.1 million, contributing to 14.5% of total gross profit for the year ended December 31, 2013. Gross margin in the Bulk Trading
Division was relatively lower compared to our other Divisions as a result of its high turnover rate and relatively lower cost maintenance.
Gross margin for the Bulk Trading Division was 3.4% for the year ended December 31, 2013, a decrease of 263 basis points from 6.0%
for the year ended December 31, 2012. This decrease was mainly attributable to market fluctuations in 2013 during the current economic
slowdown.
Loss on inventory valuation reserve increased
$4.5 million for the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase was mainly attributable
to the quality deterioration of some of the corn inventories caused by extreme weather condition and obsolete grain products.
Selling Expenses
Selling expenses included expenses of freight,
warehousing, handling, distribution, advertising, farmer subsidies, payroll and other expenses. Selling expenses for the year
ended December 31, 2013 were $17.4 million, increased for $1.3 million, or 8.0% from the $16.2 million for the year ended December
31, 2012. The material fluctuations between the two periods included: (a) an increase of $2.9 million of freight and handling
expenses, due to an average increase of 13% in railway delivery prices which was announced by the Ministry of Railways of China
in February 2013, and the extreme humid weather conditions in the third quarter of 2013; and (b) a decrease of $2.0 million in
advertisement and payroll expenses incurred as a result of the reduction of retail sales.
General and Administrative Expenses
General and administrative expenses included
payroll, professional services, rental, travel, depreciation and amortization. General and administrative expenses for the year
ended December 31, 2013 was $1
3.2 million, an increase of $3.6 million
or 37.2% compared to the year ended December 31, 2012. This increase was primarily the combined result of (a) an increase of $1.9
million of allowance for bad debts of account receivables and other receivables; (b) an increase of $0.8 million for management
team enhancement, as well as business development; (c) an increase of $0.7 million in taxes related to inter-subsidiary fixed
assets transfers.
Loss on Impairment of Asset Valuation
Loss on impairment of asset
valuation was $7.3
million for the year ended December 31, 2013, which represented a $5.8 million impairment loss of the land use rights of farmland
located in Yuci, Shanxi Province, a $0.8 million loss resulted from the termination of the construction of an uncompleted building
in the subsidiary Huichun and a $0.7 million loss resulted from the idle ERP system for retail sales in the Grain Division.
Interest Expense
Interest expense for the year ended December
31, 2013 was $0.8 million compared to $1.5 million for the year ended December 31, 2012, a decrease of $0.7 million, or 46.5%.
This decrease was mainly due to the decrease in the balances on loans. We had a decrease in the average loan balance from $14.6
million for the year ended December 31, 2012 to $7.9 million for the year ended December 31, 2013.
Non-operating Income (Loss)
Non-operating loss for the year ended December
31, 2013 was $0.4 million, representing the donations to the local community. Non-operating income for the year ended December
31, 2012 mainly represented a gain on the bargain purchase prices in connection with the acquisitions of Taizihu and Huichun.
Provision for Income Taxes
Under the Enterprise Income Tax (“EIT”)
Law of the PRC, the standard EIT rate is 25%. Our PRC subsidiaries are subject to PRC income taxes on an entity basis on
income arising in or derived from the tax jurisdiction in which they operate. According to the Tax Pronouncement [2008] No.
149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled
to EIT exemption starting January 1, 2008. Three of the Company’s wholly-owned subsidiaries located in Shanxi Province,
namely JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang, are subject to the EIT exemption. All of our other subsidiaries
are subject to the 25% EIT rate.
Income tax expenses were $604,450 for the
year ended December 31, 2013, mainly representing the current income tax expenses derived from Taizihu and Huichun, both of which
were subject to the 25% EIT rate. Income tax expenses were $1,765,514 for the year ended December 31, 2012, which consisted of
$886,768 in current income tax expenses derived from Taizihu Group and $878,746 in deferred income tax expenses derived from Detian
Yu for valuation allowance for deferred tax assets generated in previous years due to its uncertainty of realization of net operating
losses carryover. The decrease in income taxes was mainly due to the decline of deferred tax expenses.
Extraordinary loss (after taxes)
Extraordinary loss (after taxes) for the
year ended December 31, 2013 represents $1.2 million in inventory loss due to the collapse of our warehouses under a heavy snow
storm in April 2013.
Net Income (Loss)
As a result of the above, we had net loss
available to common stockholders of $26.
8
million for the year
ended December 31, 2013 compared to a net income of $16.0 million for the year ended December 31, 2012, a decrease of $42.
8
million, or 267.5%.
Liquidity and Capital Resources
The following summarizes the key components
of our cash flows for the year ended December 31, 2013 and 2012:
|
|
For
the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
5,741,093
|
|
|
$
|
12,554,795
|
|
Net cash used in investing activities
|
|
|
(518,165
|
)
|
|
|
(6,542,938
|
)
|
Net cash used in financing activities
|
|
|
(9,268,200
|
)
|
|
|
(9,884,790
|
)
|
Effect of exchange rate change
on cash and cash equivalents
|
|
|
87,275
|
|
|
|
68,509
|
|
Net decrease
in cash and cash equivalents
|
|
$
|
(3,957,997
|
)
|
|
$
|
(3,804,424
|
)
|
Net cash provided by operating activities
totaled approximately $5.7 million for the year ended December 31, 2013 and $12.6 million for the year ended December 31, 2012,
a decrease of $6.8
million. This decrease was primarily attributable to
the decrease in net income. We incurred $26.8 million of net loss available to common stockholders for the year ended December
31, 2013, while we earned $16.0 million of net income available to common stockholders for the year ended December 31, 2012. We
reduced $11.2 million of inventory for the reduction of working capital for the year ended December 31, 2013, compared to an increase
of inventory of $8.4 million for the year ended December 31, 2012.
Net cash used in investing activities was
approximately $0.5 million for the year ended December 31, 2013, mainly for the construction of factories and the purchase of
equipment. Net cash used in investing activities was $6.5 million for the year ended December 31, 2012, which was mainly consisted
of $5.5 million of the payment for the acquisition of the Taizihu Group and $1.0 million of payment for the construction of factories
and the purchase of equipment.
Net cash used in financing activities for
the years ended December 31, 2013 and 2012 was approximately $9.3 million and $9.9 million, respectively. We repaid $9.1 million
of short-term loans from related parties, repaid $1.0 million of short-term bank loans and received $0.8 million of cash released
from restriction on a credit line of bank loans for the year ended December 31, 2013. We repaid $14.2 million of net proceeds
of short-term bank loans and short-term bank acceptance, and received $3.3 million of short-term loans from related parties for
the year ended December 31, 2012.
We believe that our current levels of cash,
cash flows from operations, and bank, related party and unrelated party borrowings will be sufficient to meet our anticipated
cash needs for at least the next 12 months. However, we may need additional cash resources in the future if we experience changed
business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue
opportunities for investment, acquisition, strategic cooperation or other similar actions. If we ever determine that our cash
requirements exceed our amounts of cash and cash equivalents on hand, we may seek to issue debt or equity securities or obtain
a credit facility. Any future issuance of equity securities could cause dilution to our shareholders. Any incurrence of indebtedness
could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants. It is
possible that, when we need additional cash resources, financing will only be available to us in amounts or on terms that would
not be acceptable to us, if at all.
Contractual Obligations
The following table presents the Company’s
material contractual obligations as of December 31, 2013:
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Loans
|
|
$
|
7,464,856
|
|
|
$
|
7,464,856
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating Lease Obligations
|
|
|
2,413,714
|
|
|
|
356,597
|
|
|
|
364,075
|
|
|
|
347,556
|
|
|
|
1,345,486
|
|
|
|
$
|
9,878,570
|
|
|
$
|
7,821,453
|
|
|
$
|
364,075
|
|
|
$
|
347,556
|
|
|
$
|
1,345,486
|
|
.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements,
financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.
Critical Accounting Policies and Estimates
This discussion and analysis of financial
condition and results of operations has been prepared by management based on our consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates our critical accounting policies and estimates, including those
related to revenue recognition, valuation of accounts receivable, inventory, property and equipment, long-lived assets, intangible
assets, derivative liabilities and contingencies. Estimates are based on historical experience and on various assumptions believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. These judgments and estimates affect the reported amounts
of assets and liabilities and the reported amounts of revenue and expenses during the reporting periods. We consider the following
accounting policies important in understanding our operating results and financial condition:
Basis of presentation
The audited consolidated financial statements include the financial
statements of Deyu Agriculture Corp. and its subsidiaries. All significant intercompany account balances and transactions have
been eliminated in consolidation. Results of operations of companies purchased are included from the dates of acquisition.
These accompanying consolidated financial statements have been
prepared in accordance with US GAAP. The Company’s functional currency is the Chinese Yuan, or Renminbi (“RMB”);
however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).
On April 27, 2010, as a result of the consummation of the Share
Exchange, we changed our fiscal year end from May 31 to December 31 to conform to the fiscal year end of City Zone.
Use of estimates
The preparation of the consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Management makes its estimates based on historical experience and
various other assumptions and information that are available and believed to be reasonable at the time the estimates are made.
Therefore, actual results could differ from those estimates under different assumptions and conditions.
Cash and cash equivalents
Cash and cash equivalents consist of cash
on hand, cash in banks and all highly liquid investments with original maturities of three months or less.
As of December 31, 2013, the balance of
restricted cash of $16,519 represents a pledge for a bank loan of $14,867 (RMB90,000) obtained from Bank of Communications Gongzhufen
Sub-branch obtained on December 15, 2013.
Accounts receivable
Accounts receivable are recorded at net
realizable value consisting of the carrying amount less allowance for doubtful accounts, as needed. We assess the collectability
of accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis,
as well as the customer’s payment history. Management reviews the composition of accounts receivable and analyzes historical
bad debts, customer concentrations, customer credit worthiness, current economic trends, and changes in customer payment patterns
to evaluate the adequacy of these reserves. While management uses the best information available upon which to base estimates,
future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used for
the purposes of analysis. As of December 31, 2013, the balance of allowance for doubtful accounts was $984,717. As of December
31, 2012, the balance of allowance for doubtful accounts was not material.
Inventories
The Company's inventories are stated at
lower of cost or market. Cost is determined on a moving-average basis. Costs of inventories include purchase and related costs
incurred in delivering products to their present location and condition. Market value is determined by reference to selling prices
after the balance sheet date or to management’s estimates based on prevailing market conditions. Management periodically
evaluates the composition of its inventories at least quarterly to identify slow-moving and obsolete inventories to determine
if a valuation allowance is required. As of December 31, 2013, the balance of reserve for inventory valuation was $4,603,929.
As of December 31, 2012, the balance of reserve for inventory valuation was not material.
Property, plant, and equipment
Property, plant, and equipment are stated
at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; in addition,
renewals and betterments are capitalized. When property, plant, and equipment are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.
Depreciation is computed using the straight-line
method over the estimated useful lives of the assets as follows:
|
|
Useful
Life
(in years)
|
|
Automobiles
|
|
5
|
|
Buildings
|
|
10-30
|
|
Office equipment
|
|
5
|
|
Machinery and equipment
|
|
5-10
|
|
Furniture & fixtures
|
|
5
|
|
Construction-in-progress
Construction-in-progress consists of amounts
expended for the construction of a new factory park, and the cost of the portion of the land use right that the new factory park
occupied. Construction-in-progress is not depreciated until such time as the assets are completed and put into service. Once factory
park construction is completed, the cost accumulated in construction-in-progress will be transferred to property, plant, and equipment.
Long-lived assets
The Company
applies the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with ASC 360, at least on an annual basis. ASC 360 requires the impairment losses to
be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based
on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to
be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
As of December 31, 2013, the Company recorded $773,874 of impairment loss of construction-in-progress.
As of December 31, 2012, there was no impairment of long-lived assets.
Intangible assets
For intangible assets subject to amortization,
an impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The
carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected
to result from the use of the assets. As of December 31, 2013, the Company recorded $5,832,800 of impairment loss of the land
use rights of the farmlands and $740,102 of impairment loss of the ERP system
for retail sales in the Grain Division
. As of December 31, 2012, there was no impairment of intangible assets.
Fair value
measurements
FASB ASC 820, “Fair Value Measurements”
(formerly SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at
fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires
that an entity measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize
the use of unobservable inputs to determine the exit price. It establishes a hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and
related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that
observable inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would
use in pricing the assets or liabilities based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs
into three broad levels based on the reliability of the inputs as follows:
|
⋅
|
Level 1 – Inputs are quoted prices in active
markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Valuation
of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets
that are readily and regularly available.
|
|
⋅
|
Level 2 – Inputs other than quoted prices
in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
⋅
|
Level 3 – Valuations based on inputs that
are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined
using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market
participant would use in pricing the asset or liability.
|
This guidance applies to other accounting
pronouncements that require or permit fair value measurements. On February 12, 2008, the FASB finalized FASB Staff Position (FSP)
No. 157-2, Effective Date of FASB Statement No. 157 (ASC 820). This Staff Position delays the effective date of SFAS No. 157 (ASC
820) for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results
of operations for the year ended December 31, 2013.
We also analyze all financial instruments
with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). We have determined ASC 480-10
(formerly SFAS 150) and ASC 815-40 (formerly EITF 00-19) had no material effect on our financial position or results of operations
for the year ended December 31, 2013.
Revenue recognition
The Company’s revenue recognition
policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”). The Company recognizes product
revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) our price to the customer is fixed or determinable and (iv)collection of the resulting accounts receivable is reasonably
assured. The Company recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or
contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer
acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. The Company
assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the
sales price is subject to refund or adjustment.
The Company’s revenue is recognized
net of value-added tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved
in the same period that the related revenue is recorded. The estimates are based on historical sales returns, analysis of credit
memo data and other factors known at the time. The sales discounts were not material for the year ended December 31, 2013 and
$819,544 for the year ended December 31, 2012.
We offer a right of exchange on our grain
products sold through our relationships with grocery store networks. The consumer who purchases the product may exchange it for
the same kind and quantity of product originally purchased. In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are
not considered returns for revenue recognition purposes. The returns of our products for the year ended December 31, 2013 and
2012 were not material.
Advertising costs
The Company expenses the cost of advertising
as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the year ended December 31,
2013 and 2012 were $298,040 and $1,813,049 respectively.
Research and development
The Company expenses its research and development
costs as incurred. Research and development expenses for the year ended December 31, 2013 and 2012 were not material.
Stock-based compensation
In December 2004, the Financial Accounting
Standard Board, or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”,
which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718,
“Compensation – Stock Compensation.” Under SFAS No. 123(R), companies are required to measure the compensation
costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements
over the period during which employees or independent contractors are required to provide services. Share-based compensation arrangements
include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share
purchase plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff
regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding
the valuation of share-based payment arrangements for public companies. SFAS No. 123(R) permits public companies to adopt its
requirements using one of two methods. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No.
123(R). Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application
under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required
for those periods under SFAS No. 123.
The Company has fully adopted the provisions
of FASB ASC 718 and related interpretations as provided by SAB 107. As such, compensation cost is measured on the date of grant
as the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods
of the option grant.
Income taxes
The Company accounts for income taxes in
accordance with FASB ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method
of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred
tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Under ASC 740, a tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit
is recorded. The adoption had no material effect on the Company’s consolidated financial statements for the year ended December
31, 2013.
Foreign currency translation and comprehensive income
U.S. GAAP requires that recognized revenue,
expenses, gains, and losses be included in net income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section
of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the
Company is RMB. The unit of RMB is in Yuan. Translation gains are classified as an item of other comprehensive income in the stockholders’
equity section of the consolidated balance sheet.
Statement of cash flows
In accordance with FASB ASC Topic 230,
“Statement of Cash Flows,” 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 consolidated statement of cash flows will not necessarily
agree with changes in the corresponding balances on the consolidated balance sheets.
Recent pronouncements
In July 2012, FASB issued an amendment
(ASU No. 2012-02) to Intangibles–Goodwill and Other (ASC Topic 350). In accordance with the amendments in this update, an
entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates
that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events
and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired,
then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine
the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value
with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment
for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An
entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.
The adoption of this guidance had no material impact on our consolidated financial position or results of operations for the year
ended December 31, 2013.
In February 2013, the FASB issued ASU 2013-02,
“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.”
This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements.
However, this guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive
income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented
or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in
the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail
about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December
15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013.
Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In July 2013, the FASB issued ASU 2013-11,
“Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar
Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit,
should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction
to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable
jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose,
the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred
tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred
tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.
For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. For nonpublic
entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position
and results of operations.
In December 2013, the FASB issued
ASU 2013-12, “Definition of a Public Business Entity”. The Board has decided that it should proactively determine
which entities would be within the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting
and Reporting for Private Companies (Guide). This will aim to minimize the inconsistency and complexity of having multiple definitions
of, or a diversity in practice as to what constitutes, a nonpublic entity and public entity within U.S. generally accepted accounting
principles (GAAP) on a going-forward basis. This Update addresses those issues by defining public business entity. The Accounting
Standards Codification includes multiple definitions of the terms nonpublic entity and public entity. The amendment in this Update
improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting
guidance. The amendment does not affect existing requirements. There is no actual effective date for the amendment in this Update.
However, the term public business entity will be used in Accounting Standards Updates which are the first Updates that will use
the term public business entity. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial position and results of operations.
Jumpstart Our Business Startups Act
of 2012 (the “JOBS Act”)
The JOBS Act permits
an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised
accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result,
we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended
transition period under the JOBS Act is irrevocable.
ITEM 7A. Quantitative and Qualitative
Disclosures About Market Risk
We are a “smaller
reporting company” and as such, are not required to provide this information.
ITEM 8. Financial Statements and Supplementary
Data.
Reference is made
to the “F” pages herein comprising a portion of this Annual Report.
ITEM 9.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures
Under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e)
under the Exchange Act. Based on this evaluation, our management, including our principal executive officer and our principal
financial officer, concluded that our disclosure controls and procedures were effective as of the period covered by this
Annual Report, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange
Act (i) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms, and (ii) is accumulated
and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate
to allow appropriate decisions on a timely basis regarding required disclosure.
Management’s Annual Report on
Internal Control over Financial Reporting
Management is responsible
for establishing and maintaining adequate internal control structure and procedures over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f)) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control
over financial reporting as of the fiscal year ended December 31, 2013 based on the framework similarly set forth in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Internal control over
financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements
may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Based on that evaluation,
our principal executive officer and principal financial officer concluded that our internal control over financial reporting as
of December 31, 2013 was effective.
This Annual Report
does not include an attestation report of the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting
firm pursuant to the permanent exemption rules for smaller reporting companies, which require the Company to provide only management’s
report in this Annual Report.
Changes in
Internal Control over Financial Reporting
There were no changes in our internal control
over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. However, continuing to strengthening and improving the Company’s
internal and financial controls will remain one of the top priorities for our management.
In December 2013, Management had commenced
and conducted a cost-saving, internal control and efficiency assessment review of all of the Company’s subsidiaries and divisions,
with particular focus on reducing administrative costs. After the review, improved policies after the reviews were introduced and
implemented forthwith. The Company intends to continue to conduct periodical reviews and take measures to further strengthen the
Company’s, including subsidiaries, resources sharing, strategic planning and management of funds.
ITEM 9B. Other Information
Greg Chen resigned
from his positions as Chief Executive Officer and Director effective as of March 31, 2014 and April 1, 2014, respectively, for
the reasons set forth in the letters referenced herein as Exhibits 99.2 and 99.3. The Company disagrees with the assertions found
in the letters. The Board appointed Hong Wang to serve as Acting Chief Executive Officer until the next annual meeting of the Board
or until his successor is duly elected, qualified and seated, effective immediately as of April 1, 2014.
Effective as of March
31, 2014, Jan Poulsen resigned from his position as President of the Company. The Company intends to replace the vacancy created
by such resignation in the near future.
Effective as of March 31, 2014, the Company
closed its New York office. The Company does not intend to reopen this office at this time.
PART III
ITEM 10. Directors, Executive
Officers and Corporate Governance
Provided below is a list of the names,
ages and positions of all our directors and executive officers
as of the date of this
filing.
Name
|
|
Age
|
|
Position
|
Hong Wang
|
|
39
|
|
Acting Chief Executive Officer, Chairman of the Board of Directors.
|
Amy He
|
|
35
|
|
Chief Financial Officer
|
Emma Wan
|
|
45
|
|
Corporate Secretary
|
Al Carmona
|
|
55
|
|
Independent Director and member of Audit Committee
|
Timothy Stevens
|
|
62
|
|
Independent Director and Chairman of Audit Committee
|
Xinli Li
|
|
49
|
|
Independent Director and member of the Audit Committee
|
Provided below is a list of the names,
ages and positions of certain of our significant employees:
Name
|
|
Age
|
|
Position
|
YongqingRen
|
|
32
|
|
Vice President for the Corn Division
|
Yunlin Ding
|
|
41
|
|
Vice President
|
Family Relationships
There is no family
relationship between any of the officers, directors and significant employees of the Company.
Election of Directors and Officers
All directors hold
office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers
are elected by and serve at the discretion of the Board.
Our directors are
reimbursed for expenses incurred by them in connection with attending Board meetings, but they do not receive any other compensation
for serving on the Board.
Biographies of Officers and Directors
Mr.
Hong Wang, Acting Chief Executive Officer, Director and Chairman of the Board of Directors
Effective
as of March 31, 2014, the Company appointed Mr. Wang to serve as Acting Chief Executive Officer following the resignation of Greg
Chen as Chief Executive Officer. Mr. Wang was appointed to serve as a director and subsequently as Chairman of the Board of Directors
of the Company effective April 30, 2012 and August 16, 2013, respectively. Mr. Wang has served as Vice President of Detian Yu
since October 2009. Prior to that, Mr. Wang served as General Manager of Shanxi Dongsheng Guarantee Company Limited from February
2009 through October 2009. Prior to that, Mr. Wang worked for the Labor Bureau of Jinzhong in Shanxi Province from July 1996 through
January 2009. Mr. Wang received his bachelor's degree from the Chinese Agriculture University in 1996.
Ms. Amy He, Chief Financial Officer
Effective May 23,
2012, the Company appointed Ms. He to serve as the Company’s Chief Financial Officer. Ms. He, who is resident in the Company’s
headquarters in Beijing, has served as the Company’s Acting Chief Financial Officer since February 3, 2012 and prior to
that as Financial Controller since October 2011. Prior to that, Ms. He served as an audit manager for Deloitte Touche Tohmatsu
CPA Ltd. in China from July 2005 through September, 2011, where she served multinational corporations and Chinese corporate clients,
including private companies and public listed companies in the United States. Ms. He earned a Master’s Degree in Management
from the Chinese Academy of Sciences and a Bachelor’s Degree in Accounting from Tsinghua University in China. Ms. He is
also a Certified Public Accountant of China and Certified General Accountant of Canada.
Ms. Emma Wan, Corporate Secretary
Effective June 30,
2012, the Company appointed Ms. Wan to serve as the Company’s Corporate Secretary. Since July 2011, Ms. Wan has served as
Corporate Controller for the Company. From July 2009 through December 2010, Ms. Wan served as Associate Director of KTO Corporate
Finance Co. Ltd., a Hong Kong company. From August 2004 through June 2009, Ms. Wan served as M&A Transaction Service Manager
of Deloitte &Touche Financial Advisory Services Limited, Guangzhou Branch in China. From August 2003 through September 2004
Ms. Wan served as audit senior associate of Deloitte Touche Tohmatsu CPA Ltd., Shenzhen Branch in China. Ms. Wan is a fellow of
the Association of Chartered Certified Accountants and a member of The Chinese Institution of Certified Public Accountants.
Mr. Al Carmona, Independent Director
and Member of Audit Committee
Mr. Carmona is an
independent director of the Company effective August 19, 2010. During the last 25 years, Mr. Carmona has been with Mars &
Co, a high end international strategy consulting firm, during which he served as Executive Vice President and Senior Advisor and
has coordinated their Global Business Development Council. With the assistance of Mr. Carmona, Mars & Co. grew to over 250
professionals worldwide. Mr. Carmona has deep experience in a wide variety of areas including cost and supply chain optimization,
brand strategy, pricing and demand building optimization, competitive analysis, portfolio optimization, business unit turnarounds,
as well as acquisition and divestiture analysis. Mr. Carmona has a Bachelor of Science degree in Chemical Engineering from Princeton
University and a MBA degree from the Wharton Business School, University of Pennsylvania.
Mr. Timothy C. Stevens, Independent
Director and Chairman of Audit Committee
Mr. Stevens is an
independent director of the Company effective August 19, 2010. Mr. Stevens has over 30 years of executive leadership, management,
and client service experience with the world’s leading law, public accounting, and management consulting firms. Since January
2011 until recently, Mr. Stevens served as the Regional Chief Operating Officer, Asia of Simmons & Simmons, an international
law firm. Prior to that since 2004, Mr. Stevens served as the Executive Director of Saul Ewing LLP, a Philadelphia law firm where
he oversaw all aspects of its day to day business operations with a focus on improving the bottom line and supporting the Firm’s
growth strategy and other key objectives. From 1999 to 2003, he served as the Chief Operating Officer and a member of the Management
Committee in the Hong Kong and China offices of the international law firm Baker & McKenzie where he was responsible for all
operations (other than client service) for Baker & McKenzie’s large Hong Kong and China practice. From 1995 to 1998,
Mr. Stevens served in the Chairman’s office as the Finance and Administrative Partner of PricewaterhouseCoopers China, one
of the world’s largest auditing firms, where he supervised the business plans, office openings and expansions as well as
the financial management of the firm. Mr. Stevens graduated from Clifton College and Bristol University in the United Kingdom.
He received the ACA qualification from the UK Chartered Accountants’ Qualification Program in 1974. Mr. Stevens is a licensed
CPA in Massachusetts as well as being a Hong Kong FCPA.
Mr. Xinli Li, Independent Director
and Member of Audit Committee
Mr. Li is an independent
director of the Company effective August 16, 2013. Since September 2011, Mr. Li, age 48, has served as a researcher with the Culture
Industry Research Institute at Shenzhen University. Prior to such position, Mr. Li served as the Head of the Department of Advertising
and as Associate Professor, at Shenzhen University beginning in November 2004. Also, from June 1995 until October 2004, Mr. Li
served as Lecturer in the Department of Advertising at Shenzhen University. Mr. Li earned his Bachelor of Science degree from
Huazhong Normal University, and his Masters Degree in Tourism Economics from Nankai University.
Mr. YongqingRen, Vice President for
the Corn Division
Mr. Ren has been the
Vice President and General Manager of our Corn Division since April 2004. He was conferred the honorable title of Industrial Restructuring
Leader for two consecutive years and the prize of Top Ten Youth Career Development Contributor by the Yuci Municipal Government.
Mr. Ren is the holder of an undergraduate degree. He is well experienced in corn breeding, cultivation, processing, marketing
and management.
Mr. Yunlin Ding, Vice President
Effective February
3, 2012, the Company appointed Mr. Yunlin Ding to serve as Vice President of Company. Immediately prior to Mr. Ding’s appointment
as the Company’s Vice President, he served as Vice President of Detian Yu since July 2009. Mr. Ding also served as vice
general manager of the investment department of BeidaQingniao Group, a company organized under the laws of China and the holding
company for three companies listed in China and two companies listed in Hong Kong, from February 2002 to July 2009. Mr. Ding earned
a Bachelor’s Degree and a Master’s Degree in Economics from Nankai University in 1996 and 1999, respectively.
Director Qualifications and Experience
The Board considers
various characteristics, such as experience, qualifications, attributes and skills, in making its decision to appoint and nominate
directors to the Board.
Mr. Carmona has the
experience, qualifications, attributes and skills to qualify him to serve as a director. His past work experience working with
companies to optimize their operations and maximize profits gives us the confidence that he will be an asset to our Board of Directors.
Because of this experience, we expect that he will act in the best interest of the Company.
Mr. Li has the experience,
qualifications, attributes and skills to qualify him to serve as a director. His past experience in research and as the head of
the Department of Advertising at Shenzhen University will be an asset to the Company. Because of this experience, we expect that
he will act in the best interest of the Company.
Mr. Stevens has the
experience, qualifications, attributes and skills to qualify him to serve as a director. His past work experience overseeing the
world’s leading law, public accounting and management consulting firms will be an asset to us and he will be in a strong
position to oversee our operations and corporate governance. Mr. Stevens has financial management expertise, he is a certified
public accountant (Massachusetts) and he is a chartered accountant (England and Wales). Because of this experience, we expect
that he will act in the best interest of the Company.
Mr. Wang has the experience,
qualifications, attributes and skills to qualify him to serve as a director. His experience in agriculture business and industry
will be an asset to us and good for us in building public relationship with farmers, local governments and financial institution.
Because of this experience, we expect that he will act in the best interest of the Company.
Legal Proceedings
Unless otherwise indicated,
to the knowledge of the Company after reasonable inquiry, no current director or executive officer of the Company during the past
ten years, has (i) been convicted in a criminal proceeding (excluding traffic violations or other minor offenses), (ii) been a
party to any judicial or administrative proceeding (except for any matters that were dismissed without sanction or settlement)
that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject
to, U.S. federal or state securities laws, or a finding of any violation of U.S. federal or state securities laws, (iii) filed
a petition under federal bankruptcy laws or any state insolvency laws or has had a receiver appointed for the person’s property
or (iv) been subject to any judgment, decree or final order enjoining, suspending or otherwise limiting for more than 60 days,
the person from engaging in any type of business practice , acting as a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity
Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker
or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association
or insurance company, or engaging in or continuing any conduct or practice in connection with such activity or engaging in any
activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or
State securities laws or Federal commodities laws, (v) been found by a court of competent jurisdiction in a civil action or by
the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission
has not been subsequently reversed, suspended, or vacated, (vi) been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action
or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated, (vii) been the
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: (a) any Federal or State securities or commodities law or
regulation, (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to,
a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist
order, or removal or prohibition order, or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with
any business entity, or (viii) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended
or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any
registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
association, entity or organization that has disciplinary authority over its members or persons associated with a member.
There are no material
pending legal proceedings to which any of the individuals listed above is party adverse to us or any of our subsidiaries or has
a material interest adverse to us or any of our subsidiaries.
CORPORATE GOVERNANCE
Director Independence and Board Committees
Director Independence
Our stock is currently
quoted on the OTCBB and the OTC Markets (OTCQB). Neither the OTCBB nor the OTC Markets have rules regarding director independence.
Accordingly, although our audit committee charter states that each member shall meet the independence requirements set out by
the applicable listing standards of the securities exchange, securities association, SRO, or stock market on which the Company’s
securities are quoted or listed for trading, we determined that the NASDAQ Marketplace independence requirements were an appropriate
standard to determine independence because these requirements are stricter than the requirements of the OTCBB and the OTC Markets.
Additionally, we adopted these stricter standards to strengthen our corporate governance and improve internal controls.
Subject to certain
exceptions, under the listing standards of the NASDAQ Marketplace, a listed company’s board of directors must consist of
a majority of independent directors. Currently, our board of directors has determined that each of the non-management directors,
Al Carmona, Timothy Stevens and Xinli Li, are “independent” directors as defined by the listing standards of NASDAQ
currently in effect and approved by the U.S. Securities and Exchange Commission and all applicable rules and regulations. All members
of the Audit Committee satisfy the “independence” standards applicable to members of such committee. The board of directors
made this affirmative determination regarding these directors’ independence based on discussions with the directors and on
its review of the directors’ responses to a standard questionnaire regarding employment and compensation history; affiliations,
family and other relationships; and transactions with the Company. The board of directors considered relationships and transactions
between each director or any member of his immediate family and the Company and its subsidiaries and affiliates. The purpose of
the board of director’s review with respect to each director was to determine whether any such relationships or transactions
were inconsistent with a determination that the director is independent under the NASDAQ rules.
Audit Committee
On August 19, 2010,
we established our Audit Committee. The Audit Committee consists of Timothy Stevens, Al Carmona and Xinli Li, each of whom is
an independent director. Timothy Stevens, Chairman of the Audit Committee is each deemed an “audit committee financial expert”
as defined under Item 407(d) of Regulation S-K. The purpose of the Audit Committee is to represent and assist our board of directors
in its general oversight of our accounting and financial reporting processes, audits of the financial statements and internal
control and audit functions. The Audit Committee’s responsibilities include:
|
·
|
The
appointment, replacement, compensation, and oversight of work of the independent auditor,
including resolution of disagreements between management and the independent auditor
regarding financial reporting, for the purpose of preparing or issuing an audit report
or performing other audit, review or attest services; and
|
|
·
|
Reviewing
and discussing with management and the independent auditor various topics and events
that may have significant financial impact on our company or that are the subject of
discussions between management and the independent auditors.
|
The board of directors
has adopted a written charter for the Audit Committee. During the fiscal year ended December 31, 2013, the Audit Committee met
7 times.
Procedures for Determining Executive
Compensation
On August 19, 2010,
our Board of Directors approved the adoption of independent director oversight of executive officer compensation. Hereby all matters
regarding executive officer compensation shall be submitted for approval or recommendation by a majority of our independent directors.
Procedures for Selection of Director
Nominees
On August 19, 2010,
the Board of Directors of the Company approved the adoption of the procedures for the selection of director nominees. Hereby a
majority of our independent directors shall recommend and select director nominees.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the
Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities,
to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent shareholders
are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
To the Company’s
knowledge, based solely on a review of the copies of such reports furnished to the Company during its most recent fiscal year,
all reports under Section 16(a) required to be filed by its officers and directors and greater than 10% beneficial owners were
filed as of the date of this filing, except Greg Chen filed a late Form 3.
Code of Ethics
On August 19, 2010, our Board of Directors
adopted a Code of Conduct applicable to all directors, officers and employees. A copy of such Code of Conduct is referenced as
Exhibit 14.1 herein.
ITEM 11. Executive Compensation
The following table sets forth all cash
compensation paid by us, as well as certain other compensation paid or accrued, in 2012 and 2013, to each of the following named
executive officers:
Name and Principal Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock and
Option
Awards
number
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greg Chen (1)
|
|
2013
|
|
|
73,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,578
|
|
|
|
84,424
|
|
(Former Chief Executive Officer and Former President)
|
|
2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,266
|
|
|
|
14,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JianmingHao (2)
|
|
2013
|
|
|
10,410
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,703
|
|
|
|
90,11
3
|
|
(Former Chief Executive Officer and Former President)
|
|
2012
|
|
|
15,823
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
105,408
|
|
|
|
121,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amy He (3)
|
|
2013
|
|
|
15,615
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116,139
|
|
|
|
131,754
|
|
(Chief Financial Officer)
|
|
2012
|
|
|
15,654
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
92,569
|
|
|
|
108,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charlie Lin (3)
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Former Chief Financial Officer)
|
|
2012
|
|
|
27,803
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan Poulsen (4)
|
|
2013
|
|
|
73,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,003
|
|
|
|
76,849
|
|
(Former President)
|
|
2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WenjunTian (5)
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Former President)
|
|
2012
|
|
|
6,535
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,191
|
|
|
|
28,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jianbin Zhou (6)
|
|
2013
|
|
|
14,639
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,639
|
|
(Fomer Chief Operating Officer)
|
|
2012
|
|
|
57,669
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emma Wan (7)
|
|
2013
|
|
|
9,760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
97,596
|
|
|
|
107,35
6
|
|
(Corporate Secretary)
|
|
2012
|
|
|
10,117
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
90,350
|
|
|
|
100,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Han (7)
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Former Corporate Secretary)
|
|
2012
|
|
|
28,829
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junde Zhang (8)(11)
|
|
2013
|
|
|
6,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,832
|
|
(Vice President of the Grains Division)
|
|
2012
|
|
|
-
|
|
|
|
142,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
142,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YongqingRen (11)
|
|
2013
|
|
|
6,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,832
|
|
(Vice President of the Corn Division)
|
|
2012
|
|
|
6,657
|
|
|
|
158,509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yunling Ding (9)(11)
|
|
2013
|
|
|
1,952
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73,197
|
|
|
|
75,149
|
|
(Vice president)
|
|
2012
|
|
|
18,785
|
|
|
|
-
|
|
|
|
40,000
|
|
|
|
37,250
|
|
|
|
56
,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Li Ren (10)(11)
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Former Vice President of Branding and Marketing)
|
|
2012
|
|
|
9,603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,603
|
|
(1) Effective October 11, 2012, the Board
appointed Mr. Greg Chen to serve as the Company’s President. Effective April 15, 2013, the Board accepted the amicable resignation
of Mr. Chen as President and appointed him as Chief Executive Officer of the Company. Effective March 31, 2014, Mr. Chen resigned as Chief Executive Officer of the Company.
(2) Mr. Jia
nming
Hao
served as CEO from April 27, 2010 to April 15, 2013 and also served as President of the Company from April 30, 2012 through October
11, 2012.
(3) Effective February
3, 2012, Ms. Amy He was promoted to Acting Chief Financial Officer of the Company. Ms. He replaced Mr. Charlie Lin, whose employment
and employment agreement with the Company officially terminated on March 5, 2012 in accordance with the notification procedures
set forth in his employment agreement. Effective May 23, 2012, Ms. He was promoted to Chief Financial Officer.
(4) Effective April 15
,
2013, Mr. Jan Poulsen was appointed to serve as President of the Company. Effective March 31, 2014, Mr. Poulsen resigned
as President of the Company.
(5) Effective April 30, 2012, the Board accepted the amicable
resignation of WenjunTian as the Company’s President.
(6) Effective October 16, 2013, the Board
accepted the amicable resignation of Mr. Jianbin Zhou as Chief Operation Officer of the Company.
(7) Effective June 30, 2012, the Board
accepted the amicable resignation of Michael Han as the Company’s Corporate Secretary and appointed Emma Wan to serve as
Corporate Secretary.
(8) Effective February 28, 2014, Mr. Junde
Zhang resigned as the Company’s Vice President.
(9) Effective February 3, 2012, Mr. Yunlin Ding was appointed
to serve the Company’s Vice President.
(10) Effective February 3, 2012, Mr. Li
Ren resigned as the Company’s Vice President - Brand and Marketing.
(11) Based on the compensation received
by Mr. Junde Zhang, Mr. YongqingRen, Mr. Yunlin Ding and Mr. Li Ren, they are qualified as executive officers for purposes of
this table.
Outstanding Equity Awards at the End
of the Fiscal Year
The following table
summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2013:
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
|
|
|
Number of
Securities
Underlying
Unexercised Options (#)
|
|
|
Equity Incentive Plan
Awards:Number of
Securities Underlying
Unearned Options (#)
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
Number of
Shares or Units
of Stock That
Have Not
Vested (#)
|
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
|
|
|
Equity
Incentive Plan
Awards: Number
of Unearned
Shares, Units or
Other Rights That
Have Not Vested
(#)
|
|
|
Equity
Incentive Plan
Awards: Market
or Payout Value of
Unearned Shares,
Units or Other
Rights That Have
Not Vested ($)
|
|
Name
|
|
Batch
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amy He
|
|
#2
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.45
|
|
|
8-Mar-22
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Emma Wan
|
|
#2
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.45
|
|
|
8-Mar-22
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Junde Zhang (1)
|
|
#1
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.4
|
|
|
5-Nov-20
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
YongqingRen
|
|
#1
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.4
|
|
|
5-Nov-20
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yunling Ding
|
|
#1
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.4
|
|
|
5-Nov-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
#2
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.45
|
|
|
8-Mar-22
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Effective February 28, 2014, Mr. Junde Zhang resigned as the Company’s
Vice President. The options granted to Mr. Zhang will be forfeited if he doesn’t
exercise the options before May 28, 2014.
|
Option Exercises and Stock Vested
None.
Director Compensation
Our directors are reimbursed for expenses
incurred by them in connection with attending Board meetings. The following table presents compensation distributed to our directors
during the year ended December 31, 2013 and 2012 for serving on the Board of Directors:
|
|
Fees Earned
or Paid
in
Cash ($)
|
|
|
Option
Awards (1)
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Al Carmona
|
|
$
|
48,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,000
|
|
Hong Wang
|
|
|
19,519
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,519
|
|
Timothy Stevens
|
|
|
48,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,000
|
|
Xinli Li (1)
|
|
|
1,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,627
|
|
Jan Poulsen (2)
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
Longjiang Yuan (1)
|
|
|
8,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,133
|
|
|
|
$
|
145,279
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
145,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Al Carmona
|
|
$
|
48,000
|
|
|
$
|
35,667
|
|
|
$
|
-
|
|
|
$
|
83,667
|
|
Hong Wang
|
|
|
4,755
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,755
|
|
Jan Poulsen
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,000
|
|
Longjiang Yuan
|
|
|
7,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,925
|
|
Timothy Stevens
|
|
|
48,000
|
|
|
|
35,667
|
|
|
|
-
|
|
|
|
83,667
|
|
|
|
$
|
120,680
|
|
|
$
|
71,334
|
|
|
$
|
-
|
|
|
$
|
192,014
|
|
|
(1)
|
Mr. Xinli Li replaced Mr. Longjiang Yuan as independent director
of the Company on August 16, 2013.
|
|
(2)
|
Mr. Jan Poulsen resigned as director of the Company on April 15,
2013.
|
(3) The numbers for 2012 represents the aggregated fair value
to option awards granted to the directors as at the grant date of the options granted in March 8, 2012, which is determined in
accordance with ASC Topic 718. For information regarding the fair value of option awards as at the grant date of the options,
please refer to Note 19 of the Consolidated Financial Statements – Share-Based Compensation.
Bonuses and Deferred Compensation
We do not have any
bonus, deferred compensation or retirement plan.
All decisions regarding compensation are determined by our Board of Directors.
Options and Stock Appreciation Rights
On November 4, 2010,
the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan. On November 8, 2010, a total of
931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives,
key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000
non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an
exercise price of $4.40 per share, all of which have vested.
On March 8, 2012,
the Company’s Board of Directors increased the number of shares allocated to and authorized for use under the Plan from
1,000,000 shares to the maximum number of shares allowable pursuant to the terms of the Plan and granted 420,000 options under
the Plan to independent directors, officers and key employees of the Company, of which included some new options and those re-granted
after such options were forfeited by other former employees as a result of their resignations from the Company in accordance with
the terms of their option agreements. All of the granted options have vested.
On November 23, 2012,
our Board of Directors allocated to and authorized to re-grant 150,000 options to a director of the Company after such options
were forfeited by other former employees as a result of their resignations from the Company in accordance with the terms of their
option agreements. All of the granted options vest as follows:
33 1/3% of the option grants
vested one (1) month after the date of grant;
33 1/3% of the option grants
vested twelve (12) months after the date of grant; and
33 1/3% of the option grants
shall vest twenty-four (24) months after the date of grant.
On November 5, 2011,
we filed a Registration Statement with the SEC on Form S-8 covering up to 1,000,000 shares underlying options which may be granted
under the Plan. As of March 31, 2014, none of the options granted pursuant to the Plan have been exercised.
Payment of Post-Termination Compensation
We do not have change-in-control
agreements with any of our directors or executive officers, and we are not obligated to pay severance or other enhanced benefits
to executive officers upon termination of their employment.
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management
The following table
sets forth certain information regarding beneficial ownership of our common stock as of, March 31, 2014: (i) by each of our
directors, (ii) by each of the named executive officers, (iii) by all of our executive officers and directors as a group, and
(iv) by each person or entity known by us to beneficially own more than 5% of any class of our outstanding shares. As of March
31, 2014, there were 11,015,029 shares of our common stock outstanding:
Title of Class
|
|
Beneficial Owner (1)(2)
|
|
Amount and Nature of
Beneficial Ownership
(number of shares)
|
|
|
Fully Diluted Percentage
of Outstanding Shares of
Common Stock (3)
|
|
Certain Beneficial Owners - Over 5% Ownership
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Hong Wang (4)
|
|
|
2,380,196
|
|
|
|
16.16
|
%
|
Common Stock
|
|
Junde Zhang (4)
|
|
|
1,116,284
|
|
|
|
7.58
|
%
|
Common Stock
|
|
Yongqin
gRen (4)
|
|
|
1,116,284
|
|
|
|
7.58
|
%
|
Common Stock
|
|
Yam Sheung Kwok (4)
|
|
|
1,068,656
|
|
|
|
7.25
|
%
|
Common Stock
|
|
Sure Glory Holdings Limited(5)
|
|
|
748,636
|
|
|
|
5.08
|
%
|
Directors and Executive Officers and Significant
Employees
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Greg Chen*
|
|
|
0
|
|
|
|
0.00
|
%
|
Common Stock
|
|
Amy He (6)
|
|
|
60,000
|
|
|
|
0.41
|
%
|
Common Stock
|
|
Jan Poulsen*
|
|
|
0
|
|
|
|
0.00
|
%
|
Common Stock
|
|
Emma Wan (7)
|
|
|
40,000
|
|
|
|
0.27
|
%
|
Common Stock
|
|
Junde Zhang (8)
|
|
|
1,116,284
|
|
|
|
7.58
|
%
|
Common Stock
|
|
Yongqin
gRen (9)
|
|
|
1,116,284
|
|
|
|
7.58
|
%
|
Common Stock
|
|
Yunlin Ding (10)
|
|
|
55,000
|
|
|
|
0.37
|
%
|
Common Stock
|
|
Hong Wang (11)
|
|
|
2,380,196
|
|
|
|
16.16
|
%
|
Common Stock
|
|
Al Carmona (12)
|
|
|
155,471
|
|
|
|
1.06
|
%
|
Common Stock
|
|
Timothy Stevens (13)
|
|
|
80,000
|
|
|
|
0.54
|
%
|
Common Stock
|
|
Xinli Li
|
|
|
0
|
|
|
|
0.00
|
%
|
Officers and Significant Employees and Directors as a Group (11 Persons)
|
|
|
5,003,235
|
|
|
|
33.97
|
%
|
|
*
|
Effective March 31,
2014, Greg Chen and Jan Poulsen resigned as Chief Executive Officer and President, respectively. Effective April 1, 2014,
Greg Chen resigned as Director of the Company. The Company appointed Hong Wang to serve as Acting Chief Executive Officer
effective immediately as of April 1, 2014.
|
|
(1)
|
Pursuant to Rule 13d-3 under the
Exchange Act, a person has beneficial ownership of any securities as to which such person,
directly or indirectly, through any contract, arrangement, undertaking, relationship
or otherwise has or shares voting power and/or investment power or as to which such person
has the right to acquire such voting and/or investment power within sixty (60) days of
March 31, 2014.
|
|
(2)
|
Unless otherwise stated, each beneficial
owner has sole power to vote and dispose of the shares.
|
|
(3)
|
Applicable percentage of ownership
is based on 11,015,029 shares of common stock outstanding as of March 31, 2014, together
with 1,860,900 shares of common stock issuable upon the conversion of convertible preferred
stock, 1,154,273 shares of common stock issuance upon the exercise of warrants, and 700,000
shares of common stock issuance upon the exercise of exercisable stock options within
sixty (60) days of March 31, 2014 for each beneficial owner.
|
|
(4)
|
Mr. Wang, Mr. Zhang, Mr. Ren and
Mr. Kwok hold the common stocks of the Company through Expert Venture Limited, which
registered address is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola,
British Virgin Islands. The fully diluted percentages of the Company’s outstanding
shares of common stock ultimately held by Mr. Wang, Mr. Zhang, Mr. Ren and Mr. Kwok are
16.16%, 7.58%, 7.58% and 7.25%, respectively.
|
|
(5)
|
The registered address of Sure Glory
Holdings Limited is P.O. Box 957, Offshore incorporation Centre, Road Town, Tortola,
British Virgin Islands. Mr. Yuan Xinlei is the sole and controlling person of Sure Glory
Holdings Limited, owning the sole share of Sure Glory Holdings Limited.
|
|
(6)
|
The Company has
granted to Ms. He options to purchase 60,000 shares of our common stock under the Plan,
which have vested.
|
|
(7)
|
The Company has
granted to Ms. Wan options to purchase 40,000 shares of our common stock under the Plan,
which have vested.
|
|
(8)
|
Mr. Zhang holds
20.0% of interests of Expert Venture Limited and accordingly, indirectly beneficially
owns 1,076,284 shares of our common stock. In addition, the Company has granted to Mr.
Zhang options to purchase 40,000 shares of our common stock under the Plan, which have
vested.
|
|
(9)
|
Mr. Ren holds 20.0%
of interests of Expert Venture Limited and accordingly, indirectly beneficially owns
1,076,284 shares of our common stock. In addition, the Company has granted to Mr. Ren
options to purchase 40,000 shares of our common stock under the Plan, which have vested.
|
|
(10)
|
The Company has
granted to Mr. Ding options to purchase 55,000 shares of our common stock under the Plan,
which have vested.
|
|
(11)
|
Mr. Wang holds
42.0% of the interests of Expert Venture Limited and accordingly, indirectly beneficially
owns 2,019,995 shares of our common stock. In addition, the Company has granted to Mr.
Wang options to purchase 170,000 shares of our common stock under the Plan, 120,000 of
which have vested.
|
|
(12)
|
Mr. Carmona was
an investor in the financing that closed immediately following the Exchange. As of March
31, 2014, Mr. Carmona owned 53,285 shares of Series A Convertible Preferred Shares,
9,186 shares of common stock and a warrant exercisable into 18,000 shares of common
stock at an exercise price of $5.06. In addition, the Company has granted to Mr. Carmona
options to purchase 75,000 shares of our common stock under the Plan, which have vested.
|
|
(13)
|
The Company has
granted to Mr. Stevens options to purchase 80,000 shares of our common stock under the
Plan, which have vested.
|
ITEM 13. Certain Relationships
and Related Transactions, and Director Independence
Due to Related Parties
Dongsheng International
Investment Co., Ltd. (“Dongsheng International”), one of the ultimate shareholders of which is WenjunTian, the Company's
former President and Director , loaned to the Company in the aggregate amount of $0 million and $3.1 million in 2013 and 2012,
respectively for purposes of working capital supplementation. Such loans are unsecured, bear no interest and no due date are specified.
As of December 31, 2013 and 2012, the amounts due to Dongsheng International were $0 million and $6.0 million under these loans,
respectively.
WenjunTian, the
former President and Director the Company, loaned in the aggregate amount of $0 million and $0.2 million to the Company in the
years ended December 31, 2013 and 2012 for purposes of working capital supplementation. Such loans are unsecured, bear no interest
and no due date are specified. As of December 31, 2013 and 2012, the amounts due to WenjunTian were $0 million and $2.7 million
under these loans, respectively.
Guarantee Transactions
On August 23,
2013, YuciJinmao Food Processing Factory, the legal representative of which is JunlianZheng, the wife of Junde Zhang, the Vice
President of the Company, provided a two-year guarantee on a $1.4 million short-term bank loan payable to Jinzhong City Yuci District
Rural Credit Union Co., Ltd. by JinzhongYongcheng, bearing interest at a fixed rate of prime rate plus 130% of prime rate, of
which prime rate was based on the six-month to one-year loan interest rate released by The People's Bank of China. The actual
interest rate as of December 31, 2013 was 15.084%. The maturity date is August 22, 2014. JinzhongYongcheng paid $0 towards principal
and $212,886 towards interest on the loan during the fiscal year ended December 31, 2013. $1.4 million was outstanding under the
loan as of December 31, 2013.
On August 23,
2013, YuciJinmao Food Processing Factory, the legal representative of which is JunlianZheng, the wife of Junde Zhang, the Vice
President of the Company, provided a two-year guarantee on a $1.4 million short-term bank loan payable to Jinzhong City Yuci District
Rural Credit Union Co., Ltd. by JinzhongYuliang, bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which
prime rate was based on the six-month to one-year loan interest rate released by The People's Bank of China. The actual interest
rate as of December 31, 2013 was 15.084%. The maturity date is August 22, 2014. JinzhongYuliang paid $0 towards principal and
$212,887 towards interest on the loan during the fiscal year ended December 31, 2013. $1.4 million was outstanding under the loan
as of December 31, 2013.
Promoters and Certain Control Persons
None.
Conflicts of Interest
We have certain potential
conflicts of interest that are inherent in the relationships between our officers and directors.
From time to time,
one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated
to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or
manage additional other businesses which may compete with ours with respect to operations, including financing and marketing,
management time and services and potential customers. These activities may give rise to conflicts between or among the interests
of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking
such activities, and neither we nor our shareholders will have any right to require participation in such other activities.
Further, because we
intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers,
directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these
related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those
available from unrelated third parties.
With respect to transactions
involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (a) the fact of
the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve
the transaction prior to such authorization or approval, (b) the transaction be approved by a majority of our disinterested outside
directors and (c) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
ITEM 14. Principal Accountant Fees and Services
Public Accounting Fees
The following chart
sets forth public accounting fees paid and payable to KCCW Accountancy Corp. (“KCCW”) during the years ended December
31, 2012 and 2013:
|
|
2012
|
|
|
2013
|
|
Audit Fees
|
|
$
|
400,000
|
|
|
$
|
220,000
|
|
Audit Related Fees
|
|
$
|
60,000
|
|
|
$
|
-
|
|
Tax Fees
|
|
$
|
25,000
|
|
|
$
|
10,000
|
|
All Other Fees
|
|
$
|
-
|
|
|
$
|
-
|
|
Audit fees were for
professional services rendered by KCCW for the audit of our annual financial statements and the review of the financial statements
included in our quarterly reports on Forms 10-Q, and services that are normally provided by KCCW in connection with statutory
and regulatory filings or engagements for that fiscal year.
Audit related fees
consist of services by KCCW that are reasonably related to the performance of the audit or review of our financial statements
and are not reported above under Audit Fees. This category includes accounting consultations on transaction and proposed transaction
related matters. We incurred these fees in connection with the acquisition transaction occurred during the year ended December
31, 2012.
Tax fees primarily
include tax compliance service fees, which relate to the preparation of U.S. tax returns.
The Company was not
billed by its independent registered public accounting firm for any other fees.
Pre-Approval of Services
The Audit Committee
appoints the independent accountant each year and pre-approves the audit services. The Audit Committee chair is authorized to
pre-approve specified non-audit services for fees not exceeding specified amounts, if he promptly advises the other Audit Committee
members of such approval.
Audit of Financial Statements
During the years ended December 31, 2012
and 2013, KCCW was our principal auditor and no work was performed by persons outside of KCCW.
PART IV
ITEM 15. Exhibits and Financial
Statement Schedules
(a) Financial Statements and Schedules
The financial statements
are set forth under the “F” pages of this Annual Report. Financial statement schedules have been omitted because they
are either not required, not applicable, or the information is otherwise included.
(b) Exhibits
2.1
|
Share Exchange Agreement Dated April 27, 2010 (1)
|
|
|
3.1
|
Articles of Incorporation of Deyu Agriculture Corp. (2)
|
|
|
3.2
|
Certificate of Amendment of Articles of Incorporation of Deyu
Agriculture Corp. (3)
|
|
|
3.3
|
Bylaws of Deyu Agriculture Corp. (2)
|
|
|
4.1
|
Certificate of Designation of Rights and Preferences
of Series A Convertible Preferred Stock (1)
|
|
|
4.2
|
Form of Series A Warrant (1)
|
|
|
10.1
|
Securities Purchase Agreement Dated April 27, 2010 (1)
|
|
|
10.2
|
Registration Rights Agreement Dated April 27, 2010 (1)
|
|
|
10.3
|
Form of Lock-Up Agreement Dated April 27, 2010 (1)
|
|
|
10.4
|
Securities Escrow Agreement Dated April 27, 2010 (1)
|
10.5
|
Placement Agent Agreement between the Company and
Maxim Group, LLC dated January 27, 2010(6)
|
|
|
10.6
|
Share Transfer Agreement between Hong Wang and Yam Sheung Kwok
dated April 26, 2010 (6)
|
|
|
10.7
|
Share Transfer Agreement between JianmingHao and Yam Sheung
Kwok dated April 26, 2010 (6)
|
|
|
10.8
|
Share Transfer Agreement between WenjunTian and Yam Sheung Kwok
dated April 26, 2010 (6)
|
|
|
10.9
|
Share Transfer Agreement between YongqingRen and Yam Sheung
Kwok dated April 26, 2010 (6)
|
|
|
10.10
|
Share Transfer Agreement between Junde Zhang and Yam Sheung
Kwok dated April 26, 2010 (6)
|
|
|
10.11
|
Employment Agreement between David Lethem, as Chief Financial
Officer, and the Company dated June 18, 2010 (4)
|
|
|
10.12
|
Certificate from China Organic Food Certification Center dated
December 21, 2009 (6)
|
|
|
10.13
|
Corn Purchase Letter of Intent between Shanghai Yihai Trading
Co., Ltd., Shanxi Office and JinzhongYuliang Agricultural Trading Co., Limited dated December 20, 2009 (6)
|
|
|
10.14
|
Warehouse Lease Agreement between Shanxi 661 Warehouse and JinzhongYongcheng
Agricultural Trading Co., Limited dated December 21, 2006 (6)
|
|
|
10.15
|
Warehouse Lease Agreement between Shanxi Means of Production
Company, Yuci Warehouse (formerly, the 671 Warehouse) and JinzhongYongcheng Agricultural Trading Co., Limited dated December
28, 2008 (6)
|
|
|
10.16
|
Railway Lease Agreement between Shanxi Cereal &
Oil Group, Mingli Reservation Depot and JinzhongYongcheng Agriculture Trading Co., Limited
dated December 21, 2006 (6)
|
|
10.17
|
Railway Lease Agreement between Shanxi Yuci Cereal Reservation
Depot and JinzhongYongcheng Agriculture Trading Co., Limited dated November 15, 2007 (6)
|
|
|
10.18
|
Railway Lease Agreement between YuciDongzhao Railway Freight
Station and JinzhongYongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)
|
|
|
10.19
|
Agricultural Technology Cooperation Agreement between JinzhongDeyu
Agriculture Trading Co., Ltd. and Millet Research Institute, Shanxi Academy of Agricultural Science dated October 2007 (6)
|
|
|
10.20
|
Agricultural Technology Cooperation Agreement between Sorghum
Institute, Shanxi Academy of Agricultural Sciences and JinzhongDeyu Agriculture Trading Co., Ltd. dated August 24, 2008 (6)
|
|
|
10.21
|
Certificate of Forest Rights for the Yuci Forest Right Certificate
(2005) No. 01518 dated August 11, 2006 (6)
|
|
|
10.22
|
Farmland Transfer Agreement between Detian Yu Biotechnology
(Beijing) Co. Ltd. and Shanxi Jinbei Plant Technology Co, Ltd. dated September 30, 2010 (6)
|
|
|
10.23
|
Land Use Rights Acquisition Contract Dated September 30, 2010
(5)
|
|
|
10.24
|
Deyu Agriculture Corp. 2010 Share Incentive Plan (7)
|
|
|
10.25
|
Exclusive Management and Consulting Service Agreement, dated
November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management
Co., Ltd. (English translated version) (8)
|
|
|
10.26
|
Exclusive Management and Consulting Service Agreement, dated
November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and JinzhongLongyue Investment Consulting
Co., Ltd. (English translated version) (8)
|
10.27
|
Business Cooperation Agreement, dated November 16,
2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd.
(English Translated Version) (8)
|
|
|
10.28
|
Business Operation Agreement, dated November 16, 2010, by and
among Detian Yu Biotechnology (Beijing) Co. Limited, Beijing Jundaqianyuan Investment Management Co., Ltd. and each of the
shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)
|
|
|
10.29
|
Business Operation Agreement, dated November 16, 2010, by and
among Detian Yu Biotechnology (Beijing) Co. Limited, JinzhongLongyue Investment Consulting Co., Ltd. and both of the shareholders
of JinzhongLongyue Investment Consulting Co., Ltd. (English translated version) (8)
|
|
|
10.30
|
Share Pledge Agreement, dated November 16, 2010, by and among
Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management
Co., Ltd.: TianWenjun, HaoJianming, Yang Jianhui, Zhou Jianbin, Ren Li, RenYongqing, Zhang Junde and Wang Tao (English translated
version) (8)
|
|
|
10.31
|
Share Pledge Agreement, dated November 16, 2010, by and among
Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of JinzhongLongyue Investment Consulting Co.,
Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)
|
|
|
10.32
|
Form of Power of Attorney (English translated version) (8)
|
|
|
10.33
|
Equity Acquisition Option Agreement, dated November 16, 2010, by
and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment
Management Co., Ltd.: TianWenjun, HaoJianming, Yang Jianhui, Zhou Jianbin, Ren Li, RenYongqing, Zhang Junde and Wang Tao (English
translated version) (8)
|
|
|
10.34
|
Equity Acquisition Option Agreement, dated November 16, 2010, by
and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of JinzhongLongyue Investment Consulting
Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)
|
|
10.35
|
Business Cooperation Agreement, dated November 16, 2010, by
and between Detian Yu Biotechnology (Beijing) Co. Limited and JinzhongLongyue Investment Consulting Co., Ltd. (English Translated
Version) (8)
|
|
|
10.36
|
Village Collective Farmland Transfer Agreement, dated December 20,
2010, by and between Detian Yu Biotechnology (Beijing) Co., Ltd. and Shanxi Jinbei Plant Technology Development Co., Ltd.
(English Translated and Mandarin Versions) (9)
|
|
|
10.37
|
Contract of Agreement, effective as of January 10,
2011, by and between Deyu Agriculture Corp. and Charlie Lin (10)
|
|
|
14.1
|
Code of Conduct (6)
|
|
|
16.1
|
Letter from Auditor (11)
|
|
|
21
|
List of Subsidiaries*
|
|
|
31.1
|
Certifications of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002*
|
|
|
31.2
|
Certifications of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002*
|
|
|
32.1
|
Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002**
|
32.2
|
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002**
|
|
|
99.1
|
Audit Committee Charter adopted August 19, 2010 (6)
|
|
|
99.2
|
Resignation Letter, dated March 31, 2014, submitted by Greg Chen as Chief Executive Officer and Jan Poulsen as President of the Company
|
|
|
99.3
|
Resignation Letter, dated April 1, 2014, submitted by Greg Chen as Director of the Company
|
|
|
101. INS
|
XBRL Instance Document*
|
|
|
101. CAL
|
XBRL Taxonomy Extension Calculation Link base Document*
|
|
|
101. DEF
|
XBRL Taxonomy Extension Definition Link base Document*
|
|
|
101. LAB
|
XBRL Taxonomy Label Link base Document*
|
|
|
101. PRE
|
XBRL Extension Presentation Link base Document*
|
|
|
101. SCH
|
XBRL Taxonomy Extension Scheme Document*
|
(1)
|
Incorporated by reference to our Form 8-K filed
on May 3, 2010.
|
(2)
|
Incorporated by reference to our Registration Statement on Form
S-1 filed on July 8, 2009.
|
(3)
|
Incorporated by reference to our Form 8-K filed on June 4, 2010.
|
(4)
|
Incorporated by reference to our Form 8-K filed on June 18,
2010.
|
(5)
|
Incorporated by reference to our Form 8-K filed on October 6,
2010.
|
(6)
|
Incorporated by reference to our Form S-1/A filed on October
21, 2010.
|
(7)
|
Incorporated by reference to our Form S-8 filed on November
5, 2010.
|
(8)
|
Incorporated by reference to our Form 8-K filed on November
17, 2010.
|
(9)
|
Incorporated by reference to our Form 8-K filed on December
21, 2010.
|
(10)
|
Incorporated by reference to our Form 8-K filed on January 10,
2011.
|
(11)
|
Incorporated by reference to our Form 8-K filed on May 3, 2010.
|
* Filed herewith.
** Furnished, not filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
DEYU AGRICULTURE CORP.
|
|
|
|
Date: April 4, 2014
|
|
|
|
|
|
|
By:
|
/s/ Hong Wang
|
|
|
Hong Wang, Principal Executive Officer, Acting Chief
Executive Officer and Director
|
In accordance with the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated
on the dates indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Hong Wang
|
|
|
|
|
Hong Wang
|
|
Director and Chairman of the Board, Principal Executive Officer and Acting Chief Executive
Officer
|
|
April 4, 2014
|
|
|
|
|
|
/s/ Amy He
|
|
|
|
|
Amy He
|
|
Principal Financial and Accounting Officer and Chief Financial Officer
|
|
April 4, 2014
|
|
|
|
|
|
/s/ Al Carmona
|
|
|
|
|
Al Carmona
|
|
Independent Director
|
|
April 4, 2014
|
|
|
|
|
|
/s/ Xinli Li
|
|
|
|
|
Xinli Li
|
|
Independent Director
|
|
April 4, 2014
|
|
|
|
|
|
/s/ Timothy Stevens
|
|
|
|
|
Timothy Stevens
|
|
Independent Director
|
|
April 4, 2014
|
DEYU AGRICULTURE
CORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2013
Report of Independent Registered Public Accounting Firm
|
|
46
|
Consolidated Financial Statements:
|
|
|
Consolidated Balance Sheets
|
|
47
|
Consolidated Statements of Income and Comprehensive Income
|
|
48
|
Consolidated Statements of Equity
|
|
49
|
Consolidated Statements of Cash Flows
|
|
50
|
Notes to Consolidated Financial Statements
|
|
51
|
|
|
A
udit
• T
ax
• C
onsulting
• F
inancial
A
dvisory
Registered with Public Company Accounting Oversight
Board (PCAOB)
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of:
Deyu Agriculture Corp.
We have audited the accompanying consolidated balance sheets
of Deyu Agriculture Corp. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated
statements of income and comprehensive income, equity, and cash flows for the years then ended. The Company’s
management is responsible for these consolidated financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Deyu Agriculture Corp. and Subsidiaries
as of December 31, 2013 and 2012 and the consolidated results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States of America.
/s/ KCCW Accountancy Corp.
Diamond Bar, California
April 4, 2014
KCCW Accountancy Corp.
22632 Golden Springs Dr. #230, Diamond Bar,
CA 91765, USA
Tel: +1 909 348 7228 • Fax: +1 626
529 1580 • info@kccwcpa.com
DEYU AGRICULTURE
CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
979,282
|
|
|
$
|
4,937,279
|
|
Restricted cash
|
|
|
16,519
|
|
|
|
815,348
|
|
Accounts receivable, net
|
|
|
32,326,897
|
|
|
|
33,991,288
|
|
Due from related parties
|
|
|
44,441
|
|
|
|
397,214
|
|
Inventory
|
|
|
15,318,224
|
|
|
|
30,322,191
|
|
Advance to supplier
|
|
|
4,363,298
|
|
|
|
6,145,840
|
|
Prepaid expenses
|
|
|
1,161,302
|
|
|
|
1,453,184
|
|
Other current assets
|
|
|
115,507
|
|
|
|
340,456
|
|
Total Current Assets
|
|
|
54,325,470
|
|
|
|
78,402,800
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
19,251,051
|
|
|
|
19,442,599
|
|
Construction-in-progress
|
|
|
-
|
|
|
|
2,614,491
|
|
Long-term Investment
|
|
|
60,129
|
|
|
|
58,426
|
|
Intangible assets, net
|
|
|
7,827,809
|
|
|
|
13,389,075
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
81,464,459
|
|
|
$
|
113,907,391
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
7,464,856
|
|
|
$
|
8,323,623
|
|
Accounts payable
|
|
|
8,538,544
|
|
|
|
5,179,729
|
|
Advance from customers
|
|
|
1,990,479
|
|
|
|
2,249,282
|
|
Accrued expenses
|
|
|
1,002,885
|
|
|
|
1,506,776
|
|
Tax payable
|
|
|
73,790
|
|
|
|
305,712
|
|
Preferred stock dividends payable
|
|
|
247,614
|
|
|
|
229,171
|
|
Due to related parties
|
|
|
14,306
|
|
|
|
8,668,552
|
|
Other current liabilities
|
|
|
282,179
|
|
|
|
986,153
|
|
Total Current Liabilities
|
|
|
19,614,653
|
|
|
|
27,448,998
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $.001 par value,
10,000,000 shares authorized, 2,182,628 and 2,039,970 shares outstanding, respectively
|
|
|
2,183
|
|
|
|
2,040
|
|
Common stock, $.001 par value; 75,000,000 shares authorized,
10,618,266 and 10,658,266 shares outstanding, respectively
|
|
|
10,618
|
|
|
|
10,658
|
|
Additional paid-in capital
|
|
|
21,225,146
|
|
|
|
20,781,439
|
|
Other comprehensive income
|
|
|
7,897,730
|
|
|
|
5,737,793
|
|
Retained earnings
|
|
|
32,681,588
|
|
|
|
59,500,134
|
|
Total Stockholders' Equity
|
|
|
61,817,265
|
|
|
|
86,032,064
|
|
Noncontrolling Interests
|
|
|
32,541
|
|
|
|
426,329
|
|
Total Equity
|
|
|
61,849,806
|
|
|
|
86,458,393
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
81,464,459
|
|
|
$
|
113,907,391
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DEYU AGRICULTURE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
|
|
For The The Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
246,350,104
|
|
|
$
|
254,046,098
|
|
Cost of goods sold
|
|
|
(227,250,013
|
)
|
|
|
(209,325,445
|
)
|
Loss on inventory valuation reserve
|
|
|
(4,478,174
|
)
|
|
|
-
|
|
Gross Profit
|
|
|
14,621,917
|
|
|
|
44,720,653
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(17,447,531
|
)
|
|
|
(16,153,096
|
)
|
General and administrative expenses
|
|
|
(13,195,537
|
)
|
|
|
(9,619,036
|
)
|
Loss o
n impairment of asset valuation
|
|
|
(7,346,776
|
)
|
|
|
-
|
|
Total Operating Expenses
|
|
|
(37,989,844
|
)
|
|
|
(25,772,132
|
)
|
Operating income (loss)
|
|
|
(23,367,927
|
)
|
|
|
18,948,521
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
35,193
|
|
|
|
37,846
|
|
Interest expense
|
|
|
(790,438
|
)
|
|
|
(1,477,304
|
)
|
Non-operating income (loss)
|
|
|
(403,885
|
)
|
|
|
665,270
|
|
Total Other Expenses
|
|
|
(1,159,130
|
)
|
|
|
(774,188
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(24,527,057
|
)
|
|
|
18,174,333
|
|
Income taxes
|
|
|
(604,450
|
)
|
|
|
(1,765,514
|
)
|
Income before extraordinary items
|
|
|
(25,131,507
|
)
|
|
|
16,408,819
|
|
Extraordinary loss (after taxes)
|
|
|
(1,212,430
|
)
|
|
|
-
|
|
Net income
|
|
|
(26,343,937
|
)
|
|
|
16,408,819
|
|
Net loss attributable to noncontrolling interests
|
|
|
4,160
|
|
|
|
46,599
|
|
Net income (loss) attributable to Deyu Agriculture Corp.
|
|
|
(26,339,777
|
)
|
|
|
16,455,418
|
|
Preferred stock dividends
|
|
|
(478,769
|
)
|
|
|
(446,748
|
)
|
Net income (loss) available to common stockholders
|
|
|
(26,818,546
|
)
|
|
|
16,008,670
|
|
Foreign currency translation gain
|
|
|
2,150,517
|
|
|
|
910,907
|
|
Comprehensive income (loss)
|
|
|
(24,668,029
|
)
|
|
|
16,919,577
|
|
Other comprehensive income (loss) attributable to noncontrolling interests
|
|
|
9,420
|
|
|
|
(4,467
|
)
|
Comprehensive income (loss) attributable to Deyu Agriculture Corp.
|
|
$
|
(24,658,609
|
)
|
|
$
|
16,915,110
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders per share - basic
|
|
$
|
(2.52
|
)
|
|
$
|
1.51
|
|
Net income (loss) attributable to common stockholders per share - diluted
|
|
$
|
(2.52
|
)
|
|
$
|
1.30
|
|
Weighted average number of common shares outstanding - basic
|
|
|
10,625,170
|
|
|
|
10,598,603
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
10,625,170
|
|
|
|
12,614,108
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
DEYU AGRICULTURE CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
|
|
Series A Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
1,997,467
|
|
|
$
|
1,997
|
|
|
|
10,564,774
|
|
|
$
|
10,565
|
|
|
$
|
20,367,138
|
|
|
$
|
4,831,353
|
|
|
$
|
43,491,465
|
|
|
$
|
436,940
|
|
|
$
|
69,139,458
|
|
Subsidiary capital injected by noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,521
|
|
|
|
31,521
|
|
Conversion of convertible preferred stocks to common stocks
|
|
|
(13,492
|
)
|
|
|
(13
|
)
|
|
|
13,492
|
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Covertible preferred stocks issued for payment of preferred stock dividends
|
|
|
55,995
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179,128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179,184
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,853
|
|
Common stocks issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
80
|
|
|
|
114,320
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114,400
|
|
Net changes in foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
906,440
|
|
|
|
|
|
|
|
4,467
|
|
|
|
910,907
|
|
Net earnings for the year ended December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,008,669
|
|
|
|
(46,599
|
)
|
|
|
15,962,070
|
|
Balance at December 31, 2012
|
|
|
2,039,970
|
|
|
|
2,040
|
|
|
|
10,658,266
|
|
|
|
10,658
|
|
|
|
20,781,439
|
|
|
|
5,737,793
|
|
|
|
59,500,134
|
|
|
|
426,329
|
|
|
|
86,458,393
|
|
Covertible preferred stocks issued for payment of preferred stock dividends
|
|
|
142,658
|
|
|
|
143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456,506
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,504
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,504
|
|
Common stocks retired for service contract termination
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
(40
|
)
|
|
|
(57,160
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57,200
|
)
|
Net changes in foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,159,937
|
|
|
|
-
|
|
|
|
(9,420
|
)
|
|
|
2,150,517
|
|
Subsidiary capital withdraw by noncontrolling interest at the liquidation of
HebeiYugu
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(469,147
|
)
|
|
|
(469,147
|
)
|
Loss assumed by Noncontrolling interest at the liquidation of HebeiYugu
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,939
|
|
|
|
88,939
|
|
Net earnings for the year ended December 31, 2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,818,546
|
)
|
|
|
(4,160
|
)
|
|
|
(26,822,706
|
)
|
Balance at December 31, 2013
|
|
|
2,182,628
|
|
|
|
2,183
|
|
|
|
10,618,266
|
|
|
|
10,618
|
|
|
|
21,225,146
|
|
|
|
7,897,730
|
|
|
|
32,681,588
|
|
|
|
32,541
|
|
|
|
61,849,806
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DEYU AGRICULTURE
CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For The Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
(26,818,546
|
)
|
|
$
|
16,008,670
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
2,366,220
|
|
|
|
2,297,082
|
|
Loss o
n impairment of asset valuation
|
|
|
7,346,776
|
|
|
|
-
|
|
Loss on disposal of fixed assets
|
|
|
-
|
|
|
|
577
|
|
Extraordinary loss
|
|
|
1,212,430
|
|
|
|
-
|
|
Provision for Inventory valuation
|
|
|
4,478,174
|
|
|
|
-
|
|
Allowance for doubtful accounts
|
|
|
1,925,357
|
|
|
|
-
|
|
Share-based compensation
|
|
|
44,504
|
|
|
|
120,853
|
|
Preferred stock dividends accrued
|
|
|
478,769
|
|
|
|
446,748
|
|
Common stocks issued for services
|
|
|
(57,200
|
)
|
|
|
114,400
|
|
Gain on bargain purchase
|
|
|
-
|
|
|
|
(499,079
|
)
|
Deferred income tax expense
|
|
|
-
|
|
|
|
878,746
|
|
Noncontrolling interests
|
|
|
(4,160
|
)
|
|
|
(46,599
|
)
|
Decrease (increase) in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,649,532
|
|
|
|
2,649,036
|
|
Related-parties trade receivable
|
|
|
358,771
|
|
|
|
226,755
|
|
Inventories
|
|
|
11,182,382
|
|
|
|
(8,383,187
|
)
|
Advance to suppliers
|
|
|
1,931,601
|
|
|
|
1,987,857
|
|
Prepaid expense and other current assets
|
|
|
(244,860
|
)
|
|
|
(40,331
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,841,803
|
|
|
|
2,967,217
|
|
Advance from customers
|
|
|
(319,381
|
)
|
|
|
(6,471,286
|
)
|
Accrued expense and other liabilities
|
|
|
(1,631,079
|
)
|
|
|
297,336
|
|
Net cash provided by operating activities
|
|
|
5,741,093
|
|
|
|
12,554,795
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of machinery and equipment
|
|
|
(518,165
|
)
|
|
|
(128,383
|
)
|
Construction and remodeling of factory and warehouses
|
|
|
-
|
|
|
|
(900,487
|
)
|
Consideration paid for acquisition
|
|
|
-
|
|
|
|
(5,501,046
|
)
|
Advances to related parties
|
|
|
-
|
|
|
|
(33,294
|
)
|
Cash held by the Taizihu Group at acquisition date
|
|
|
-
|
|
|
|
20,272
|
|
Net cash used in investing activities
|
|
|
(518,165
|
)
|
|
|
(6,542,938
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net proceeds (repayment) of short-term loans from related parties
|
|
|
(9,053,440
|
)
|
|
|
3,312,931
|
|
Net repayment from short-term loans from bank and others
|
|
|
(1,024,757
|
)
|
|
|
(12,658,509
|
)
|
Cash released from restriction for credit line of bank loans
|
|
|
809,997
|
|
|
|
1,281,894
|
|
Net repayments of short-term bank acceptance notes
|
|
|
-
|
|
|
|
(1,585,087
|
)
|
Payment of preferred dividends
|
|
|
-
|
|
|
|
(267,721
|
)
|
Proceeds from capital contributions
|
|
|
-
|
|
|
|
31,702
|
|
Net cash used in financing activities
|
|
|
(9,268,200
|
)
|
|
|
(9,884,790
|
)
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
|
|
|
87,275
|
|
|
|
68,509
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH & CASH EQUIVALENTS
|
|
|
(3,957,997
|
)
|
|
|
(3,804,424
|
)
|
CASH &CASH EQUIVALENTS, BEGINNING BALANCE
|
|
|
4,937,279
|
|
|
|
8,741,703
|
|
CASH & CASH EQUIVALENTS, ENDING BALANCE
|
|
$
|
979,282
|
|
|
$
|
4,937,279
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
841,593
|
|
|
$
|
678,420
|
|
Interest paid
|
|
$
|
743,653
|
|
|
$
|
1,815,269
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Construction completed and transferred to property, plant, and equipment
|
|
$
|
767,494
|
|
|
$
|
-
|
|
Construction transferred to land use rights
|
|
$
|
1,045,640
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DEYU AGRICULTURE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENT
PREPARATION
Deyu Agriculture Corp. (the “Company”), formerly
known as Eco Building International, Inc., was incorporated under the laws of the State of Nevada on December 23, 2008. We completed
the acquisition of City Zone Holdings Limited (“City Zone”), an agricultural products distributor in the Shanxi Province
of the People’s Republic of China (the “PRC”) engaged in procuring, processing, marketing, and distributing
various grain and corn products, by means of a share exchange effective April 27, 2010. As a result of the share exchange, City
Zone became our wholly-owned subsidiary. We currently conduct our business primarily through operating PRC subsidiaries, including
JinzhongDeyu Agriculture Trading Co., Ltd. (“JinzhongDeyu”), JinzhongYuliang Agriculture Trading Co., Ltd. (“JinzhongYuliang”),
JinzhongYongcheng Agriculture Trading Co., Ltd. (“JinzhongYongcheng”), Shanxi Taizihu Food Co., Ltd. (“Taizihu”),
Shanxi Huichun Bean Products Co., Ltd. (“Huichun” and together with Taizihu, the “Taizihu Group”) and
Detian Yu Biotechnology (Beijing) Co., Ltd. (“Detian Yu”) and Detian Yu’s subsidiaries.
On May 11, 2010, our Board of Directors adopted a resolution
to change our name to "Deyu Agriculture Corp." and FINRA declared the name change effective on June 2, 2010.
Reverse Acquisition
On April 27, 2010, we entered into a Share Exchange Agreement
(“Share Exchange”) pursuant to which we issued 8,736,932 shares of our common stock, par value $ 0.001 per share,
to Expert Venture Limited (“Expert Venture”), a company organized under the laws of the British Virgin Islands, and
the other shareholders of City Zone (the “City Zone Shareholders”). As a result of the Share Exchange, City Zone became
our wholly-owned subsidiary and City Zone Shareholders acquired a majority of our issued and outstanding shares of common stock.
As a result, the Share Exchange has been accounted for as a
reverse acquisition using the purchase method of accounting, whereby City Zone is deemed to be the accounting acquirer (the legal
acquiree) and we are to be the accounting acquiree (legal acquirer). The financial statements before the date of the Share Exchange
are those of City Zone with our results being consolidated from the date of the Share Exchange. The equity section and earnings
per share have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded.
City Zone was incorporated in the British Virgin Islands (“BVI”)
on July 27, 2009 under the BVI Business Companies Act of 2004. In November 2009, pursuant to the restructuring plan set out below,
City Zone became the holding company of a group of companies comprising Most Smart International Limited ("Most Smart"),
Redsun Technology (Shenzhen) Co. Limited (“Shenzhen Redsun”), Shenzhen JiRuHai Technology Co., Ltd. ("Shenzhen
JiRuHai"), Detian Yu, JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang.
Restructuring
In November 2009, pursuant to a restructuring plan intended
to ensure compliance with PRC rules and regulations, City Zone, through a series of acquisitions and wholly-owned subsidiaries,
acquired 100 % of the equity interests in JinzhongDeyu, JinzhongYuliang, and JinzhongYongcheng. The former shareholders and key
management of JinzhongDeyu, JinzhongYongcheng, and JinzhongYuliang became the ultimate controlling parties and key management
of City Zone. This restructuring has been accounted for as a recapitalization of JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang
with no adjustment to the historical basis of the assets and liabilities of these companies, while the historical financial positions
and results of operations are consolidated as if the restructuring occurred as of the beginning of the earliest period presented
in our accompanying consolidated financial statements. For the purpose of a consistent and comparable presentation, the consolidated
financial statements have been prepared as if City Zone had been in existence since the beginning of the earliest and throughout
the whole periods covered by these consolidated financial statements.
The Acquisition of the Taizihu Group
On February 2, 2012, Shenzhen Redsun, a company organized under
the laws of PRC and a wholly-owned subsidiary of the Company, entered into a Stock Equity Transfer Agreement (the “Agreement”)
whereby Shenzhen Redsun acquired 100 % of the issued and outstanding registered share capital of the Taizihu Group. In consideration
for the acquisition of Taizihu Group, Shenzhen Redsun paid $ 2,342,168 (RMB 14,773,222 ) in cash to Mr. Hao He, an individual,
for 50 % of Taizihu, $ 1,522,409 (RMB 9,602,594 ) in cash to Mr. QingheXu, an individual, for 32.5 % of Taizihu and $ 819,759
(RMB 5,170,628 ) in cash to Mr. JinqingXie, an individual, for the remaining 17.5 % of Taizihu. Immediately prior to the execution
of the Agreement, Taizihu owned 85 % of the issued and outstanding registered share capital of Huichun, and pursuant to the terms
of the Agreement, Shenzhen Redsun acquired the remaining 15 % of the share capital of Huichun from Beijing Kanggang Food Development
Co., Ltd. for $ 817,845 (RMB 5,158,556). The total amount of the consideration paid for the acquisition of the Taizihu Group was
$ 5,502,181 (RMB 34,705,000), and such consideration was determined pursuant to arm’s length negotiations between the parties.
As a result of the acquisition, the Company currently owns and controls 100 % of the Taizihu Group.
Consolidation Scope:
Details of our subsidiaries subject to consolidation are as
follows:
|
|
Domicile and
|
|
|
|
|
Percentage
|
|
|
|
|
|
Date of
|
|
Registered
|
|
|
of
|
|
|
|
Name of Subsidiary
|
|
Incorporation
|
|
Capital
|
|
|
Ownership
|
|
|
Principal Activities
|
|
|
|
|
|
|
|
|
|
|
|
City Zone Holdings Limited ("City Zone")
|
|
British Virgin Islands, July 27, 2009
|
|
$
|
20,283,581
|
|
|
|
100
|
%
|
|
Holding company of Most Smart
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most Smart International Limited ("Most Smart")
|
|
Hong Kong, March 11, 2009
|
|
$
|
1
|
|
|
|
100
|
%
|
|
Holding company of Shenzhen Redsun
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redsun Technology (Shenzhen) Co., Ltd. ("Shenzhen Redsun")
|
|
The PRC, August 20, 2009
|
|
$
|
30,000
|
|
|
|
100
|
%
|
|
Holding company of Shenzhen JiRuHai, Taizihu and Huichun
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenzhen JiRuHai Technology Co., Ltd.("Shenzhen JiRuHai")
|
|
The PRC, August 20, 2009
|
|
$
|
14,638
|
|
|
|
100
|
%
|
|
Holding company of Beijing DetianYu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Detian Yu Biotechnology (Beijing) Co., Ltd. ("Detian Yu")
|
|
The PRC, November 30, 2006
|
|
$
|
7,637,723
|
|
|
|
100
|
%
|
|
Wholesale distribution of simple-processed and deep-processed packaged
food products and staple food. Holding company of the following first five entities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JinzhongDeyu Agriculture Trading Co., Ltd. ("JinzhongDeyu")
|
|
The PRC, April 22, 2004
|
|
$
|
1,492,622
|
|
|
|
100
|
%
|
|
Organic grains preliminary processing and wholesale distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JinzhongYongcheng Agriculture Trading Co., Ltd. ("JinzhongYongcheng")
|
|
The PRC, May 30, 2006
|
|
$
|
1,025,787
|
|
|
|
100
|
%
|
|
Corns preliminary processing and wholesale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JinzhongYuliang Agriculture Trading Co., Ltd. ("JinzhongYuliang")
|
|
The PRC, March 17, 2008
|
|
$
|
13,963,243
|
|
|
|
100
|
%
|
|
Corns preliminary processing and wholesale distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin Guandu Food Co., Ltd. ("Tianjin Guandu")
|
|
The PRC, June 21, 2011
|
|
$
|
1,544,497
|
|
|
|
100
|
%
|
|
Wholesale distribution of simple-processed and deep-processed packaged
food products and staple food.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HebeiYugu Grain Co., Ltd. ("HebeiYugu")
|
|
The PRC, July 25, 2011
|
|
$
|
1,563,824
|
|
|
|
70
|
%
|
|
Wholesale distribution of grain products and operating or acting
as an agent of import & export business for grain products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanxi Taizihu Food Co., Ltd. (“Taizihu”) (1)
|
|
The PRC, July 27, 2003
|
|
$
|
1,208,233
|
|
|
|
100
|
%
|
|
Producing and selling fruit beverages and soybean products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanxi HuiChun Bean Products Co., Ltd. (“Huichun”) (1)
|
|
The PRC, September 2, 2007
|
|
$
|
2,636,192
|
|
|
|
100
|
%
|
|
Producing and selling fruit beverages and soybean products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jilin Jinglong Agriculture Development Limited (“Jinglong”)
|
|
The PRC, October 10, 2012
|
|
$
|
3,152,138
|
|
|
|
99
|
%
|
|
Procurement, storage and sales of corn and grain.
|
(1)Taizihu and Huichun became the wholly-owned subsidiaries
of the Company on February 2, 2012 through a business acquisition. They have been within the scope of consolidation since February
2, 2012.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The audited consolidated financial statements include the
financial statements of Deyu Agriculture Corp. and its subsidiaries. All significant intercompany account balances and transactions
have been eliminated in consolidation. Results of operations of companies purchased are included from the dates of acquisition.
These accompanying consolidated financial statements have been
prepared in accordance with US GAAP. The Company’s functional currency is the Chinese Yuan, or Renminbi (“RMB”);
however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).
On April 27, 2010, as a result of the consummation of the Share
Exchange, we changed our fiscal year end from May 31 to December 31 to conform to the fiscal year end of City Zone.
Use of estimates
The preparation of the consolidated financial statements in
conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Management makes its estimates based on historical experience and various other assumptions
and information that are available and believed to be reasonable at the time the estimates are made. Therefore, actual results
could differ from those estimates under different assumptions and conditions.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, cash in
banks and all highly liquid investments with original maturities of three months or less.
As of December 31, 2013, the balance of restricted cash of
$16,519 represents a pledge for a bank loan of $14,867 (RMB90,000) obtained from Bank of Communications Gongzhufen Sub-branch
obtained on December 15, 2013.
Accounts receivable
Accounts receivable are recorded at net realizable value consisting
of the carrying amount less allowance for doubtful accounts, as needed. We assess the collectability of accounts receivable based
primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s
payment history. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit worthiness, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these
reserves. While management uses the best information available upon which to base estimates, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the assumptions used for the purposes of analysis. As of December
31, 2013, the balance of allowance for doubtful accounts was $984,717. As of December 31, 2012, the balance of allowance for doubtful
accounts was not material.
Inventories
The Company's inventories are stated at lower of cost or market.
Cost is determined on a moving-average basis. Costs of inventories include purchase and related costs incurred in delivering products
to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date
or to management’s estimates based on prevailing market conditions. Management periodically evaluates the composition of
its inventories at least quarterly to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.
As of December 31, 2013, the balance of reserve for inventory valuation was $4,603,929. As of December 31, 2012, the balance of
reserve for inventory valuation was not material.
Property, plant, and equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; in addition, renewals and betterments
are capitalized. When property, plant, and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss is included in operations.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
|
Useful
Life
(in years)
|
Automobiles
|
5
|
Buildings
|
10-30
|
Office equipment
|
5
|
Machinery and equipment
|
5-10
|
Furniture & fixtures
|
5
|
Construction-in-progress
Construction-in-progress consists of amounts expended for the
construction of a new factory park, and the cost of the portion of the land use right that the new factory park occupied. Construction-in-progress
is not depreciated until such time as the assets are completed and put into service. Once factory park construction is completed,
the cost accumulated in construction-in-progress will be transferred to property, plant, and equipment.
Long-lived assets
The Company applies the provisions
of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets
to be held and used in accordance with ASC 360, at least on an annual basis. ASC 360 requires the impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to
be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount
by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
As
of December 31, 2013, the Company recorded $773,874 of impairment loss of construction-in-progress. As of December 31, 2012, there
was no impairment of long-lived assets.
Intangible assets
For intangible assets subject to amortization, an impairment
loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount
of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use of the assets. As of December 31, 2013, the Company recorded $5,832,800 of impairment loss of the land use rights
of the farmlands
and $740,102 of impairment loss of the ERP system for
retail sales in the Grain Division. As of December 31, 2012, there was no impairment of intangible assets.
Fair value measurements
FASB ASC 820, “Fair Value Measurements” (formerly
SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires that an entity
measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize the use
of unobservable inputs to determine the exit price. It establishes a hierarchy which prioritizes the inputs to valuation techniques
used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and related
disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable
inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would use in pricing
the assets or liabilities based on market data obtained from sources independent of the Company. Unobservable inputs are inputs
that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs into three broad
levels based on the reliability of the inputs as follows:
|
⋅
|
Level 1 – Inputs are quoted prices in active
markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Valuation
of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets
that are readily and regularly available.
|
|
⋅
|
Level 2 – Inputs other than quoted prices
in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
⋅
|
Level 3 – Valuations based on inputs that
are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined
using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market
participant would use in pricing the asset or liability.
|
This guidance applies to other accounting pronouncements that
require or permit fair value measurements. On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2, Effective
Date of FASB Statement No. 157 (ASC 820). This Staff Position delays the effective date of SFAS No. 157 (ASC 820) for nonfinancial
assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except
for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results of operations for the year
ended December 31, 2013.
We also analyze all financial instruments with features of
both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock”). We have determined ASC 480-10 (formerly SFAS 150)
and ASC 815-40 (formerly EITF 00-19) had no material effect on our financial position or results of operations for the year ended
December 31, 2013.
Revenue recognition
The Company’s revenue recognition policies are in compliance
with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”). The Company recognizes product revenue when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to
the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. The Company
recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally
used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements,
when applicable, are used to verify product delivery or that services have been rendered. The Company assesses whether a price
is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to
refund or adjustment.
The Company’s revenue is recognized net of value-added
tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved in the same period
that the related revenue is recorded. The estimates are based on historical sales returns, analysis of credit memo data and other
factors known at the time. The sales discounts were not material for the year ended December 31, 2013 and $819,544 for the year
ended December 31, 2012.
We offer a right of exchange on our grain products sold through
our relationships with grocery store networks. The consumer who purchases the product may exchange it for the same kind and quantity
of product originally purchased. In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for
revenue recognition purposes. The returns of our products for the year ended December 31, 2013 and 2012 were not material.
Advertising costs
The Company expenses the cost of advertising as incurred or,
as appropriate, the first time the advertising takes place. Advertising costs for the year ended December 31, 2013 and 2012 were
$246,128 and $1,813,049 respectively.
Research and development
The Company expenses its research and development costs as
incurred. Research and development expenses for the year ended December 31, 2013 and 2012 were not material.
Stock-based compensation
In December 2004, the Financial Accounting Standard Board,
or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”, which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation
– Stock Compensation.” Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period
during which employees or independent contractors are required to provide services. Share-based compensation arrangements include
stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase
plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff regarding
the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the
valuation of share-based payment arrangements for public companies. SFAS No. 123(R) permits public companies to adopt its requirements
using one of two methods. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No. 123(R). Companies
may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial
statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under
SFAS No. 123.
The Company has fully adopted the provisions of FASB ASC 718
and related interpretations as provided by SAB 107. As such, compensation cost is measured on the date of grant as the fair value
of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the option
grant.
Income taxes
The Company accounts for income taxes in accordance with FASB
ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for
income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Under ASC 740, a tax position is recognized as a benefit only
if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption
had no material effect on the Company’s consolidated financial statements for the year ended December 31, 2013.
Foreign currency translation and comprehensive income
U.S. GAAP requires that recognized revenue, expenses, gains,
and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities,
such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such
items, along with net income, are components of comprehensive income. The functional currency of the Company is RMB. The unit
of RMB is in Yuan. Translation gains are classified as an item of other comprehensive income in the stockholders’ equity
section of the consolidated balance sheet.
Statement of cash flows
In accordance with FASB ASC Topic 230, “Statement of
Cash Flows,” 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 consolidated statement of cash flows will not necessarily agree with
changes in the corresponding balances on the consolidated balance sheets.
Recent pronouncements
In July 2012, FASB issued an amendment (ASU No. 2012-02) to
Intangibles–Goodwill and Other (ASC Topic 350). In accordance with the amendments in this update, an entity has the option
first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely
than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances,
an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity
is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value
of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying
amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived
intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to
resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment
tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance
had no material impact on our consolidated financial position or results of operations for the year ended December 31, 2013.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive
Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” This ASU does not
change the current requirements for reporting net income or other comprehensive income in financial statements. However, this
guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income
by component. In addition, an entity is required to present, either on the face of the statement where net income is presented
or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in
the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail
about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December
15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013.
Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
In July 2013, the FASB issued ASU 2013-11, “Income Taxes
(Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented
in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction
to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable
jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose,
the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred
tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred
tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.
For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. For nonpublic
entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position
and results of operations.
In December 2013, the FASB issued ASU 2013-12, “Definition
of a Public Business Entity”. The Board has decided that it should proactively determine which entities would be within
the scope of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private
Companies (Guide). This will aim to minimize the inconsistency and complexity of having multiple definitions of, or a diversity
in practice as to what constitutes, a nonpublic entity and public entity within U.S. generally accepted accounting principles
(GAAP) on a going-forward basis. This Update addresses those issues by defining public business entity. The Accounting Standards
Codification includes multiple definitions of the terms nonpublic entity and public entity. The amendment in this Update improves
U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance.
The amendment does not affect existing requirements. There is no actual effective date for the amendment in this Update. However,
the term public business entity will be used in Accounting Standards Updates which are the first Updates that will use the term
public business entity. The adoption of this standard is not expected to have a material impact on the Company’s consolidated
financial position and results of operations.
NOTE 3. BUSINESS COMBINATION
On February 2, 2012, Shenzhen Redsun, a wholly-owned subsidiary
of the Company, acquired 100 % of the equity interests of the Taizihu Group for cash consideration of $ 5,502,181 (RMB 34,705,000). The
acquisition was accounted for as a business combination under the purchase method of accounting. The Taizihu Group’s
results of operations were included in Deyu’s results beginning February 2, 2012. The purchase price has been
allocated to the assets acquired and the liabilities assumed based on their fair value at the acquisition date as summarized in
the following:
Purchase price
|
|
$
|
5,502,181
|
|
|
|
|
|
|
Allocation of the purchase price:
|
|
|
|
|
Cash and cash equivalents
|
|
|
28,867
|
|
Restricted cash
|
|
|
240,474
|
|
Accounts receivable, net
|
|
|
133,863
|
|
Inventory
|
|
|
1,373,222
|
|
Advance to supplier
|
|
|
840,849
|
|
Prepaid expenses
|
|
|
5,412
|
|
Other current assets
|
|
|
445,287
|
|
Property, plant, and equipment, net
|
|
|
5,891,772
|
|
Construction-in-progress
|
|
|
1,673,997
|
|
Long-term Investment
|
|
|
57,705
|
|
Other assets
|
|
|
59,448
|
|
Intangible assets, net
|
|
|
2,823,087
|
|
Short-term loan
|
|
|
(6,499,683
|
)
|
Accounts payable
|
|
|
(319,077
|
)
|
Advance from customers
|
|
|
(225,819
|
)
|
Accrued expenses
|
|
|
(167,453
|
)
|
Tax Payable
|
|
|
(65,192
|
)
|
Due to related parties
|
|
|
(80,551
|
)
|
Other current liabilities
|
|
|
(214,948
|
)
|
Fair value of net assets acquired
|
|
|
6,001,260
|
|
|
|
|
|
|
Gain on bargain purchase
|
|
$
|
(499,079
|
)
|
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accounts receivable
|
|
$
|
33,311,614
|
|
|
$
|
33,996,165
|
|
Less: Allowance for doubtful accounts
|
|
|
(984,717
|
)
|
|
|
(4,877
|
)
|
Accounts receivable, net
|
|
$
|
32,326,897
|
|
|
$
|
33,991,288
|
|
NOTE 5. INVENTORY
Inventory consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw materials
|
|
$
|
1,020,486
|
|
|
$
|
7,730,831
|
|
Work in process
|
|
|
49,717
|
|
|
|
73,131
|
|
Finished goods
|
|
|
17,752,203
|
|
|
|
21,761,558
|
|
Supplies
|
|
|
1,099,747
|
|
|
|
756,671
|
|
Reserve for inventory valuation
|
|
|
(4,603,929
|
)
|
|
|
-
|
|
Total Inventory
|
|
$
|
15,318,224
|
|
|
$
|
30,322,191
|
|
The Company recorded $4,603,929 of reserve for inventory valuation
as of December 31, 2013, among which $4,517,335 was for the quality deterioration of some of the corn inventories caused by extreme
weather condition and $86,594 was for obsolete grain products. The reserve for inventory valuation was not material as of December
31, 2012.
NOTE 6. PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deductible value-added taxes (VAT)
|
|
$
|
356
,876
|
|
|
$
|
1,003,871
|
|
Prepaid rent
|
|
|
368,827
|
|
|
|
155,883
|
|
Prepaid expenses for investor relations
|
|
|
-
|
|
|
|
163,443
|
|
Prepaid other expenses
|
|
|
435
,599
|
|
|
|
129,987
|
|
Total
|
|
$
|
1,161,302
|
|
|
$
|
1,453,184
|
|
NOTE 7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Automobiles
|
|
$
|
1,046,542
|
|
|
$
|
1,010,594
|
|
Buildings
|
|
|
17,
480,188
|
|
|
|
16,534,542
|
|
Office equipment
|
|
|
1,0
12,007
|
|
|
|
467,739
|
|
Machinery and equipment
|
|
|
8,3
86,357
|
|
|
|
7,435,413
|
|
Furniture and fixtures
|
|
|
114
,398
|
|
|
|
611,907
|
|
Total cost
|
|
|
28,039,492
|
|
|
|
26,060,195
|
|
Less: Accumulated depreciation
|
|
|
(8,788,441
|
)
|
|
|
(6,617,596
|
)
|
Property, plant, and equipment, net
|
|
$
|
19,251,051
|
|
|
$
|
19,442,599
|
|
The buildings owned by the Company located in Jinzhong and
Quwo in Shanxi Province, China are used for production, warehousing and offices for our corn and grains business.
As of December 31, 2013, $ 5.8 million (RMB 35.2 million) of
buildings, machinery and equipment owned by the Taizihu Group were pledged as collateral for short-term bank loans.
Depreciation expense for the year ended December 31
,
2013 and 2012 were $ 1,983,394 and $1,890,960, respectively.
NOTE 8. CONSTRUCTION-IN-PROGRESS
As of December 31, 2013, the Company determined to terminate
the construction of the factory facility Huichun due to the technical innovation and assessed the fair value of the uncompleted
building is zero. The Company recorded an impairment loss of $697,360. The carrying amount of the construction of the building
was $697,360 and was written
down to zero.
The carrying amount of the land use right of the industrial
land allocated to the construction of the factory was $1,045,640 and was reclassified to intangible assets.
Construction-in-progress amounted to $38,324 as of December
31, 2013 mainly represents payment on the renovation of the staff canteen in Huichun.
NOTE 9. INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Land use rights
|
|
$
|
14,698,916
|
|
|
$
|
13,158,508
|
|
Software-ERP System and B2C platform
|
|
|
1,081,531
|
|
|
|
1,059,004
|
|
Less: Accumulated amortization
|
|
|
(1,277,565
|
)
|
|
|
(828,437
|
)
|
Impairment loss
|
|
|
(6,675,073
|
)
|
|
|
-
|
|
Total
|
|
$
|
7,827,809
|
|
|
$
|
13,389,075
|
|
According to government regulations of the PRC, the PRC Government
owns all lands. The Company owns the land use rights of farmland s and industrial lands.
JingzhongDeyu, one of the Company owned land use rights of
the 17,000 acres of farmlands in Jinzhong, Shanxi Province. There is no active market for trading of land use rights of those
farmlands and the Company couldn’t assess the fair value of the land use rights based on quoted prices in active markets.
The Company assessed the fair value of the land use rights based on discounted cash flow and determined that it was less than
the carrying value. An impairment loss in the amount of $5,832,800 was recorded for the year ended December 31, 2013. The carrying
value of the land use rights of the farmlands was $7,893,006 and was written down to $1,969,540. The Company used unobservable
inputs based on its experience and knowledge of the market, as such, the Company classifies the fair value of this asset within
Level 3.
The Company assessed the ERP system and B2C platform owned
by JingzhongDeyu for retail sales of the Grain Division was not applicable for the current business operation due to the reduction
of retail sales, and determined to write down its carrying value of $740,102 to zero. An impairment loss in the amount of $740,102
was recorded for the ERP system and B2C platform for the year ended December 31, 2013.
The Company leases and has obtained a certificate of right of use on 11,667 square meters with the
PRC Government in Jinzhong, Shanxi Province where JinzhongDeyu's buildings and production facility are located. The term of the
right is four to five years and is automatically renewed upon expiration. The right was fully amortized as of December 31, 2010
using the straight-line method. On June 18, 2012, the Company received the extended land use right certificate and the term of
the right has been extended to March 14, 2037.
Huichun leases and has obtained a certificate of right to use
on 100,000 square meters of industrial land with the PRC Government in Quwo County, Shanxi Province where Taizihu Group’s
buildings and production facility are located. The term of the right is 50 years from October 28, 2008 to October 27, 2058. The
amortization of the land use right was commenced in October 2008 using the straight-line method over 50 years.
As of December 31, 2013, $3,989,615 (RMB 24 million) of the
land use right owned by Taizihu Group was pledged as collateral for short-term bank loans.
Amortization expense of the intangible assets for the year ended December 31
,
2013 and 2012 were $382,826 and $406,122, respectively.
NOTE 10. SHORT-TERM LOANS
Short-term loans consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Bank loan payable to Agriculture Development Bank of China, bearing
interest at the prime rate based on six-month to one-year loan interest rate released by The People's Bank of China.
|
|
|
|
|
|
|
|
|
The actual interest rate
during the contract period
as of December 31, 2013 was 6.00% and the pass-due interest rate was 7.8%. The actual interest rate during contract period as of
December 31, 2012 was 6.00%
|
|
|
|
|
|
|
|
|
The term of the loan started from August 14, 2012 with maturity
date on August 13, 2013. The loan was obtained by Taizihu and pledged by its buildings and land use right.
|
|
|
|
|
|
|
|
|
On July 31, 2013 the loan was repaid for $6
6,075
(or RMB400,000).
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the loan balance was $2,411,748 (or RMB14,600,000.00).
|
|
|
|
|
|
|
|
|
As of the date of this filing, the Company has been
in negotiation with the lender on renewal of the loan. The Company is not currently able to predict the probability of the
success on the renewal and will repay the loan immediately if the loan cannot be renewed.
|
|
$
|
2,411,748
|
|
|
$
|
2,407,666
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Agriculture Development Bank of China, bearing
interest at the prime rate, based on six-month to one-year loan interest rate released by The People's Bank of China.
|
|
|
|
|
|
|
|
|
The actual interest rate
during the contract period
as of December 31, 2013 was 6.00% and the pass-due interest rate was 7.8%. The actual interest rate during contract period as of
December 31, 2012 was 6.00%
|
|
|
|
|
|
|
|
|
The term of the loan started from September 18, 2012 with maturity
date on September 17, 2013. The loan was obtained by Taizihu and pledged by its buildings and land use right.
|
|
|
|
|
|
|
|
|
As of the date of this filing, the Company has been in negotiation
with the lender on renewal of the loan. The Company is not currently able to predict the probability of the success on the
renewal and will repay the loan immediately if the loan cannot be renewed.
|
|
|
1,486,694
|
|
|
|
1,444,
600
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Jinzhong City Yuci District Rural Credit Union
Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on
six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of
December 31, 2013 were 15.084%.
|
|
|
|
|
|
|
|
|
The term of the loan started from September 6, 2013 with maturity
date on August 22, 2014. The loan was obtained by JinzhongYongcheng and guaranteed by YuciJinmao Food Processing
Factory, a related party, for a period of two years starting from August 23, 2014.
|
|
|
1,404,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Jinzhong City Yuci District Rural Credit Union
Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on
six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of
December 31, 2013 were 15.084%.
|
|
|
|
|
|
|
|
|
The term of the loan started from September 6, 2013 with maturity
date on August 22, 2014. The loan was obtained by JinzhongYuliang and guaranteed by YuciJinmao Food Processing
Factory, a related party, for a period of two years starting from August 23, 2014.
|
|
|
1,404,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Agriculture Development Bank of China, bearing
interest at the prime rate, based on six-month to one-year loan interest rate released by The People's Bank of China.
|
|
|
|
|
|
|
|
|
The actual interest rate as of December 31, 2013 was 6.0%.
|
|
|
|
|
|
|
|
|
The term of the loan started from January 4, 2013 with maturity
date on January 3, 2014. The loan was obtained by Taizihu and pledged by its buildings and land use right.
|
|
|
|
|
|
|
|
|
As of the date of this filing, the Company has been in negotiation
with the lender on renewal of the loan. The Company is not currently able to predict the probability of the success on the
renewal and will repay the loan immediately if the loan cannot be renewed.
|
|
|
743,347
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Bank of Communications Gongzhufensubbranch,
bearing interest at a fix rate of prime rate, of which prime rate was based on one-year loan interest rate released by The
People's Bank of China. The actual interest rate as of December 31, 2013 was 6.0%.
|
|
|
|
|
|
|
|
|
The term of the loan started from December 15, 2013 with maturity
date on December 16, 2014. The loan was obtained by Detian Yu.
|
|
|
14,867
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Bank of Communications Gongzhufensubbranch,
bearing interest at a fix rate of prime rate, of which prime rate was based on one-year loan interest rate released by The
People's Bank of China. The actual interest rate as of December 31, 2012 were 6.0%.
|
|
|
|
|
|
|
|
|
The term of the loan started from December 12, 2012 with maturity
date on December 12, 2013. The loan was obtained by Detian Yu and was paid off on December 12, 2013.
|
|
|
-
|
|
|
|
14,446
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Jinzhong City Yuci District Rural Credit Union
Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on
six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of
December 31, 2012 were 15.084%.
|
|
|
|
|
|
|
|
|
The term of the loan started from August 31, 2012 with maturity
date on August 29, 2013. The loan was obtained by JinzhongYongcheng and guaranteed by YuciJinmao Food Processing
Factory, a related party, for a period of two years starting from August 30, 2013.
|
|
|
|
|
|
|
|
|
The loan was paid off on September 5, 2013.
|
|
|
-
|
|
|
|
1,364,344
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Jinzhong City Yuci District Rural Credit Union
Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on
six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of
December 31, 2012 were 15.084%.
|
|
|
|
|
|
|
|
|
The term of the loan started from August 31, 2012 with maturity
date on August 29, 2013. The loan was obtained by JinzhongYuliang and guaranteed by YuciJinmao Food Processing
Factory, a related party, for a period of two years starting from August 30, 2013.
|
|
|
|
|
|
|
|
|
The loan was paid off on September 5, 2013.
|
|
|
-
|
|
|
|
1,364,344
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Dah Sing Bank (China) Co., Ltd, bearing interest
at a fixed rate of prime rate plus 20% of prime rate, of which prime rate was based on six-month to one-year loan interest
rate released by The People's Bank of China. The actual interest rates as of December 31, 2012 were 7.2%.
|
|
|
|
|
|
|
|
|
The term of the loan started from July 18, 2012 with maturity date
on July 17, 2013. The loan was obtained by Detian Yu and guaranteed by MrTianWenjun for a period of one year starting
from July 18, 2013.
|
|
|
|
|
|
|
|
|
The loan was paid off on July 17, 2013.
|
|
|
-
|
|
|
|
1,284,08
9
|
|
|
|
|
|
|
|
|
|
|
The bank loan of $16
0,511
(or RMB1,000,000) payable to Bank of Beijing Haidian Branch, bearing interest at a fixed rate of prime rate plus
50% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank
of China. The actual interest rate as of December 31, 2012 w
as 9%.
|
|
|
|
|
|
|
|
|
The term of the loan started from September 28, 2012 with maturity
date on September 27, 2013. The loan was obtained by Detian Yu and guaranteed by Mr. TianWenjun for a period of
one year.
|
|
|
|
|
|
|
|
|
On September 27, 2013 the loan was paid off.
|
|
|
-
|
|
|
|
120,383
|
|
|
|
|
|
|
|
|
|
|
Loan payable to Hangzhou TianCi Investment Management Co., Ltd.,
an unrelated party. The loan was unsecured, bearing no interest and no due date were specified. The loan was obtained
by Jiruhai.
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the balance of loan was transferred to
other income.
|
|
|
-
|
|
|
|
58,910
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to China Merchants Bank Beijing Dongzhimensubbranch,
bearing interest at a floating rate of prime rate plus 20% of prime rate, of which prime rate was based on one-year loan interest
rate released by The People's Bank of China. The actual interest rates as of December 31, 2012 were 7.20%.
|
|
|
|
|
|
|
|
|
The term of the loan started from January 11, 2012 with maturity
date on January 10, 2013. The loan was obtained by Detain Yu and guaranteed by Beijing Agriculture Guarantee Ltd.
|
|
|
|
|
|
|
|
|
for a period of one year starting from November 30, 2011.
|
|
|
|
|
|
|
|
|
The loan was paid off on January 10, 2013.
|
|
|
-
|
|
|
|
264,843
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,464,856
|
|
|
$
|
8,323,623
|
|
NOTE 11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accrued VAT and other taxes
|
|
$
|
261,714
|
|
|
$
|
428,552
|
|
Accrued payroll
|
|
|
167,046
|
|
|
|
288,584
|
|
Others
|
|
|
574,125
|
|
|
|
789,640
|
|
Total
|
|
$
|
1,002,885
|
|
|
$
|
1,506,776
|
|
NOTE 12. LOSS ON INVENTORY VALUATION RESERVE
Loss on inventory valuation reserve for the year ended December
31, 2013 represents $4,391,580 of loss on inventory valuation reserve due to the quality deterioration of some of the corn inventories
caused by extreme weather condition and $86,594 of loss on inventory valuation reserve for obsolete grain products.
NOTE 13. LOSS ON IMPAIRMENT OF ASSET VALUATION
Loss on impairment of asset
valuation was $7,346,776
for the year ended December 31, 2013, which represents $5,832,800 impairment loss of the land use rights of farmland located in
Jinzhong, Shanxi Province, $773,874 loss resulted from the termination of the construction of an uncompleted building in the subsidiary
Huichun, and $740,102 loss resulted from the idle ERP system for retail sales in the Grain Division.
NOTE 14. INCOME TAXES
United States
Deyu Agriculture Corp. is incorporated in the State of Nevada
in the United States of America and is subject to the U.S. federal and state taxation. No provision for income taxes have been
made as the Company has no taxable income in the U.S. The applicable income tax rate for the Company for the year ended December
31, 2013 and 2012 was 34 %. No tax benefit has been realized since a 100 % valuation allowance has offset deferred tax asset resulting
from the net operating losses.
British Virgin Islands
City Zone, a wholly-owned subsidiary of the Company, is incorporated
in the BVI and, under the current laws of the BVI, is not subject to income taxes.
Hong Kong
Most Smart, a wholly-owned subsidiary of the Company, is incorporated
in Hong Kong. Most Smart is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived
from Hong Kong. No provision for income taxes have been made as Most Smart has no taxable income in Hong Kong.
People’s Republic of China
Under the Enterprise Income Tax (“EIT”) Law of
the PRC, the standard EIT rate is 25 %. The PRC subsidiaries of the Company are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate. According to the Tax Pronouncement [2008] No.
149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled
to EIT exemption starting January 1, 2008. Three of the Company’s wholly-owned subsidiaries located in the Shanxi Province,
China, including JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang, are subject to the EIT exemption. All other subsidiaries
and consolidated variable interest entities are subject to the 25% EIT rate.
The provision for income taxes on income consists of the following
for the year ended December 31
, 2013 and 2012:
|
|
For The Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Current income tax expense (benefit)
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
604,450
|
|
|
|
886,768
|
|
Total current expense (benefit)
|
|
$
|
604,450
|
|
|
$
|
886,768
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
-
|
|
|
|
878,746
|
|
Income tax expense (benefit)
|
|
$
|
604,450
|
|
|
$
|
1,765,514
|
|
The following is a reconciliation of the statutory tax rate
to the effective tax rate for the year ended December 31, 2013 and 2012:
|
|
For The Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Expected U.S. income tax expense
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
|
-28.1
|
%
|
|
|
-33.6
|
%
|
Foreign tax differential
|
|
|
-1.8
|
%
|
|
|
-0.2
|
%
|
Change in valuation allowance
|
|
|
-8.5
|
%
|
|
|
10.0
|
%
|
Intercompany elimination
|
|
|
2.0
|
%
|
|
|
-0.9
|
%
|
Other
|
|
|
0.1
|
%
|
|
|
0.4
|
%
|
Income tax expense
|
|
|
-2.3
|
%
|
|
|
9.7
|
%
|
Significant components of the Company’s net deferred
tax assets as of December 31, 2013 and December 31, 2012 are presented in the following table:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards (NOL)
|
|
$
|
5,090,602
|
|
|
$
|
3,430,118
|
|
Share-based compensation
|
|
|
435,844
|
|
|
|
391,339
|
|
Others
|
|
|
440,331
|
|
|
|
88,208
|
|
Total
|
|
|
5,966,777
|
|
|
|
3,909,665
|
|
Less: Valuation allowance
|
|
|
(5,966,777
|
)
|
|
|
(3,909,665
|
)
|
Total deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2013, the Company accrued a 100% valuation
allowance on its deferred tax assets based on the assessment on the probability of future reversion.
NOTE 15. EXTRAORDINARY LOSS (AFTER TAXES)
O
n April 19, 2013
, an unexpected heavy snow storm collapsed the warehouses
located in Taiyuan, Shanxi Province which were leased by the Company’s Grain Division and caused about $1,212,430 in damage
to our grain goods stored in those warehouses.
NOTE 16. NET INCOME (LOSS) PER SHARE
Reconciliation of the basic and diluted net income (loss) per
share was as follows:
|
|
Amounts
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
For the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
stockholders - basic
|
|
$
|
(26,818,546
|
)
|
|
|
10,625,170
|
|
|
$
|
(2.52
|
)
|
Preferred dividends applicable to convertible preferred
stocks
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
- diluted
|
|
$
|
(26,818,546
|
)
|
|
|
10,625,170
|
|
|
$
|
(2.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
|
$
|
16,008,670
|
|
|
|
10,598,603
|
|
|
$
|
1.51
|
|
Preferred dividends applicable to convertible preferred
stocks
|
|
|
446,748
|
|
|
|
2,015,505
|
|
|
|
|
|
Net income attributable to common stockholders - diluted
|
|
$
|
16,455,418
|
|
|
|
12,614,108
|
|
|
$
|
1.30
|
|
NOTE 17. SHAREHOLDERS’ EQUITY
Reverse Acquisition and Private Placement
On April 27, 2010, we completed the acquisition of City Zone
by means of a Share Exchange with (i) City Zone, (ii) the City Zone Shareholders and (iii) our principal shareholders (see NOTE
1). Pursuant to the terms of the Share Exchange, Expert Venture and the other City Zone Shareholders transferred to us all of
the shares of City Zone in exchange for the issuance of 8,736,932 shares of our common stock so that Expert Venture and the other
minority shareholders of City Zone shall own at least a majority of our outstanding shares.
Our directors approved the Share Exchange and the transactions
contemplated thereby. The directors of City Zone also approved the Share Exchange and the transactions contemplated thereby.
As a result of the Share Exchange, we acquired 100 % of the
equity interests of City Zone, the business and operations of which now constitute our primary business and operations through
its wholly-owned PRC subsidiaries. Specifically, as a result of the Share Exchange:
|
·
|
We issued 8,736,932 shares of our common stock to the City Zone Shareholders;
|
|
·
|
The ownership position of our shareholders who were holders of common stock immediately
prior to the Share Exchange changed from 100 % to 9.5 % (fully diluted) of our outstanding shares; and
|
|
·
|
City Zone Shareholders were issued our common stock constituting approximately 65.71 % of
our fully diluted outstanding shares.
|
Immediately after the Share Exchange, we entered into a securities
purchase agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”) for
the issuance and sale in a private placement of 1,866,174 Units at $ 4.40 per Unit, with each Unit consisting of one share of
Series A convertible preferred stock, par value $ 0.001 per share (the “Investor Shares”) and a warrant to purchase
0.4 shares of our common stock with an exercise price of $ 5.06 per share (the “Warrants”). We initially received
gross proceeds from the sale of the 1,866,174 Investor Shares and Warrants to purchase up to 746,479 shares of our common stock
of $ 8,211,166 (the “Private Placement”).
In connection with the Private Placement, we also entered into
a registration rights agreement (the “Registration Rights Agreement”) with the Investors, in which we agreed to file
a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”)
to register for resale the Investor Shares, within 60 calendar days of April 27, 2010, and use our best efforts to have the Registration
Statement declared effective within 180 calendar days of April 27, 2010. We agreed to pay monthly liquidated damages in cash to
each Investor equal to 0.5 % of the dollar amount of the purchase price of the Investor Shares, on a pro rata basis, for each
30 day period the Registration Statement is not declared effective, up to a maximum of 8 % of the purchase price, however on October
21, 2010, the SEC declared the Registration Statement effective and no liquidated damages were incurred.
In connection with the Private Placement, Maxim Group, LLC
acted as our financial advisor and placement agent (the “Placement Agent” or “Maxim”). The Placement Agent
received a cash fee equal to 7 % of the gross proceeds of the Private Placement. Maxim also received warrants to purchase 171,911
shares of our common stock at a price per share of $ 4.84 (the “Placement Agent Warrants”). Pursuant to the original
placement agreement entered into by and between Detian Yu and the Placement Agent on January 27, 2010 (the “Original Placement
Agreement”), we engaged the Placement Agent to act as the exclusive agent to sell the Units in this offering on a “commercially
reasonable efforts basis.” The Placement Agent also received a cash corporate finance fee equally to 1 % of our gross proceeds
raised in the offering, payable at the time of each closing; five ( 5 ) year warrants to purchase that number of shares of Series
A convertible preferred stock equal to 5 % of the aggregate number of shares of Series A convertible preferred stock underlying
the Units issued pursuant to the offering; and a non-refundable cash retainer of $ 25,000 payable upon the execution of the retainer
agreement. We also agreed to pay for all of the reasonable expenses the Placement Agent incurred in connection with the offering.
On May 10, 2010, we closed on the second and final round of
the private placement offering for the issuance and sale of 589,689 Units, consisting of 589,689 shares of Series A convertible
preferred stock and 235,883 five-year Series A Warrants with an exercise price of $ 5.06 per share, to certain Investors for total
gross proceeds of $ 2,594,607 .
We raised an aggregate amount of $ 10,805,750 in the offering
in two closing events. As of the final closing, we had 9,999,999 shares of common stock issued and outstanding. In connection
with the offering, we issued a total of 2,455,863 shares of Series A convertible preferred shares and 982,362 Series A Warrants
to the investors. Additionally, the Placement Agent received 171,911 warrants.
Common Stock
As of the final closing of the Private Placement, we had 9,999,999
shares of common stock issued and outstanding. Between the final closing of the Private Placement and December 31, 2013, an aggregate
of 538,267 shares of Series A convertible preferred stock were converted into 538,267 shares of common stock and an aggregate
of 80,000 shares of common stock were issued. As of December 31, 2013, the total number of shares of common stock issued and outstanding
was 10,618,266 shares.
Series A Convertible Preferred Stock
Holders of Series A convertible preferred stock (“Series
A Preferred”) are entitled to receive cumulative dividends in preference to the holders of our common stock at an annual
rate of 5 % of the applicable per Series A Preferred original purchase price (the “Dividend Preference” and the “Dividends”).
If, after the Dividend Preference has been fully paid or declared and set apart, the Company shall make any additional distributions,
then the holders of Series A Preferred shall participate with the holders of common stock on an as-converted basis with respect
to such distributions. Dividends are payable in cash or shares of Series A Preferred, at the Company’s option.
Upon any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred will be entitled to receive, out of the assets of the Company available for distribution to
its shareholders, an amount equal to $ 4.40 per share (the “Liquidation Preference Amount”), before any payment shall
be made or any assets distributed to the holders of the common stock (the “Liquidation Preference”).
Each holder of Series A Preferred will have the right, at the
option of the holder at any time on or after the issuance of the Series A Preferred, without the payment of additional consideration,
to convert the Series A Preferred into a number of fully paid and nonassessable shares of common stock equal to: (i) the Liquidation
Preference Amount of such share divided by (ii) the Conversion Price in effect as of the date of the conversion in accordance
with the Certificate of Designations of the Series A Preferred.
For a period of two (2) years following the issuance of the
Series A Preferred, the conversion price of Series A Preferred was subject to adjustment for issuances of common stock (or securities
convertible or exchangeable into shares of common stock) at a purchase price less than the conversion price of the Series A Preferred.
The Series A Preferred Stock does not contain any repurchase or redemption rights.
Current accounting standards require that we evaluate the terms
and conditions of convertible preferred stock to determine (i) if the nature of the hybrid financial instrument, based upon its
economic risks, is more akin to an equity contract or a debt contract for purposes of establishing classification of the embedded
conversion feature and (ii) the classification of the host or hybrid financial instrument. Based upon a review of the terms and
conditions of the Series A Preferred, the Company has concluded that the financial instrument is more akin to an equity financial
instrument. The major consideration underlying this conclusion is that the Series A Preferred is a perpetual financial instrument
with no stated maturity or redemption date, or other redemption that is not within the Company’s control. Other considerations
in support of the equity conclusion included the voting rights and conversion feature into common shares. While the cumulative
dividend feature may, in some instances, be likened to a debt-type coupon, the absence of a stated maturity date was determined
to establish the cumulative dividend as a residual return, which does not obviate the equity nature of the financial instrument.
Further, there are no cash redemption features that are not within the control of our management. As a result, classification
in shareholders’ equity is appropriate for the Series A Preferred.
As of December 31, 2013, an aggregate of 538,267 shares of
Series A Preferred were converted into 538,267 shares of common stock and an aggregate of 265,032 shares of Series A Preferred
were issued as dividends to the shareholders of Series A Preferred. As of December 31, 2013, the total number of shares of Series
A Preferred issued and outstanding was 2,182,628 shares.
For the year ended December 31, 2013 and 2012, the Company
recorded $478,769 and $446,748 preferred dividend expenses, respectively.
Series A Warrants
We issued Series A Warrants to the Investors and the Placement
Agent having strike prices of $ 5.06 and $ 4.84 , respectively, and they expire five (5) years from the original date of issuance.
The strike prices are subject to adjustment only for changes in our capital structure, but allow for cashless exercise under a
formula that limits the aggregate issuable common shares. There are no redemption features embodied in the warrants and they have
met the conditions provided in current accounting standards for equity classification.
There were 982,362 Series A Warrants sold together with the
Series A Preferred to the Investors, each of which:
|
(a)
|
entitles
the holder to purchase one (1) share of common stock;
|
|
(b)
|
are
exercisable at any time after consummation of the transactions contemplated by the Purchase
Agreement and shall expire on the date that is five years following the original issuance
date of the Series A Warrants;
|
|
(c)
|
are
exercisable, in whole or in part, at an exercise price of $5.06 per share of common stock;
and
|
|
(d)
|
are
exercisable only for cash (except that there will be a cashless exercise option if, after
twelve months from the Issue Date, (i) the Per Share Market Value of one share of common
stock is greater than the Warrant Price (at the date of calculation) and (ii) a registration
statement under the Securities Act providing for the resale of the common stock issuable
upon exercise of Warrant Shares is not in effect, in lieu of exercising the Series A
Warrant by payment of cash).
|
Aggregate gross proceeds from the two (2) closing events amounted
to $ 10,805,750. Direct financing costs totaled $ 1,742,993, of which $ 1,555,627 was paid in cash and the balance of $ 187,366
represents the fair value of warrants linked to 171,911 shares of our common stock that were issued to Maxim. The proceeds and
the related direct financing costs were allocated to the Series A Preferred and the Series A Warrants (classified in paid-in capital)
based upon their relative fair values. The following table summarizes the components of the allocation:
|
|
|
|
|
Paid-in
|
|
|
|
|
|
|
Series A
|
|
|
Capital
|
|
|
|
|
|
|
Preferred
|
|
|
Warrants
|
|
|
Total
|
|
Fair values of financial instruments
|
|
$
|
10,248,092
|
|
|
$
|
1,039,978
|
|
|
$
|
11,288,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
9,810,227
|
|
|
$
|
995,523
|
|
|
$
|
10,805,750
|
|
Direct financing costs
|
|
|
(1,581,550
|
)
|
|
|
(161,443
|
)
|
|
|
(1,742,993
|
)
|
Fair value of placement agent warrants
|
|
|
-
|
|
|
|
187,366
|
|
|
|
187,366
|
|
|
|
$
|
8,228,677
|
|
|
$
|
1,021,446
|
|
|
$
|
9,250,123
|
|
Fair value considerations:
Our accounting for the sale of Series A Preferred and Series
A Warrants, and the issuance of the Series A Warrants to Maxim required the estimation of fair values of the financial instruments
on the financing inception date. The development of fair values of financial instruments requires the selection of appropriate
methodologies and the estimation of often subjective assumptions. We selected the valuation techniques based upon consideration
of the types of assumptions that market participants would likely consider in exchanging the financial instruments in market transactions.
The Series A Preferred was valued based upon a common stock equivalent method, enhanced by the cumulative dividend feature. The
dividend feature was valued as the estimated cash flows of the dividends discounted to present value using an estimated weighted
average cost of capital. The warrants were valued using a Black-Scholes-Merton Valuation Technique because it embodies all of
the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments.
These fair values were necessary to develop relative fair value
calculation for allocations of certain elements of the financing arrangement, principally proceeds and the related direct financing
costs. The following tables reflect assumptions used to determine the fair value of the Series A Preferred:
|
|
|
|
|
Series A
|
|
|
Series A
|
|
|
|
Fair Value
|
|
|
Preferred
|
|
|
Preferred
|
|
|
|
Hierarchy
|
|
|
April 27,
|
|
|
May 10,
|
|
|
|
Level
|
|
|
2010
|
|
|
2010
|
|
Indexed common shares
|
|
|
|
|
|
|
1,866,174
|
|
|
|
589,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalent value
|
|
|
|
|
|
$
|
6,631,403
|
|
|
$
|
2,083,094
|
|
Dividend feature
|
|
|
|
|
|
|
659,821
|
|
|
|
209,439
|
|
|
|
|
|
|
|
$
|
7,291,224
|
|
|
$
|
2,292,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price
|
|
|
3
|
|
|
|
3.55
|
|
|
|
3.53
|
|
Horizon for dividend cash flow projection
|
|
|
3
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Weighted average cost of capital ("WACC")
|
|
|
3
|
|
|
|
15.91
|
%
|
|
|
15.55
|
%
|
Fair value hierarchy of the above assumptions can be categorized
as follows:
|
(1)
|
Level 1 inputs are quoted prices in active markets for identical assets
and liabilities, or derived there from. There were no level 1 inputs.
|
|
|
|
|
(2)
|
Level 2 inputs are significant other observable inputs. There were no level 2 inputs.
|
|
|
|
|
(3)
|
Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are
classified as level 3 in their entirety.
|
|
·
|
Stock price- Given that management did not believe our trading market
price was indicative of the fair value of our common stock at the measurement date, the common stock price value was derived
implicitly from an iterative process based upon the assumption that the consideration of the Private Placement was the result
of an arm’s length transaction. The Private Placement was composed of shares of Series A Preferred and Series A Warrants
which were both indexed to our common stock; accordingly, we used an iterative process to determine the value of our common
stock in order for the fair value of the Series A Preferred and Series A Warrants to equal the amount of consideration received
in the Private Placement.
|
|
·
|
Dividend horizon- We estimated the horizon for dividend payment at 2
years.
|
|
·
|
WACC- The rates utilized to discount the cumulative dividend cash flows to their present
values were based on a weighted average cost of capital of 18.94 % and 18.60 %, as of April 27, 2010 and May 10, 2010, respectively.
This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors
would require in an investment in companies similar in size and operating in similar markets as Deyu Agriculture Corp. The
cost of equity was determined using a build-up method which begins with a risk free rate and adds expected risk premiums designed
to reflect the additional risk of the investment. Additional premiums or discounts related specifically to us and the industry
are also added or subtracted to arrive at the final cost of equity rate. The cost of debt was determined based upon available
financing terms.
|
|
·
|
Significant inputs and assumptions underlying the model calculations related to the warrant
valuations are as follows:
|
The following tables reflect assumptions used to determine
the fair value of the Series A Warrants:
|
|
Fair
Value
|
|
|
April 27, 2010
|
|
|
May 10, 2010
|
|
|
|
Hierarchy
|
|
|
Investor
|
|
|
Agent
|
|
|
Investor
|
|
|
Agent
|
|
|
|
Level
|
|
|
warrants
|
|
|
warrants
|
|
|
warrants
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed shares
|
|
|
|
|
|
|
746,479
|
|
|
|
130,632
|
|
|
|
235,883
|
|
|
|
41,279
|
|
Exercise price
|
|
|
|
|
|
|
5.06
|
|
|
|
4.84
|
|
|
|
5.06
|
|
|
|
4.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock price
|
|
|
3
|
|
|
|
3.55
|
|
|
|
3.55
|
|
|
|
3.53
|
|
|
|
3.53
|
|
Remaining term
|
|
|
3
|
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Risk free rate
|
|
|
2
|
|
|
|
2.39
|
%
|
|
|
2.39
|
%
|
|
|
2.24
|
%
|
|
|
2.24
|
%
|
Expected volatility
|
|
|
2
|
|
|
|
45.25
|
%
|
|
|
45.25
|
%
|
|
|
45.47
|
%
|
|
|
45.47
|
%
|
Fair value hierarchy of the above assumptions can be categorized
as follows:
|
(1)
|
There were no Level 1 inputs.
|
|
(2)
|
Level 2 inputs include:
|
|
•
|
Risk-free rate- This rate is based on publicly-available yields on zero-coupon
U.S. Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the Series A Warrants.
|
|
•
|
Expected volatility- We did not have a historical trading history sufficient to develop
an internal volatility rate for use in the model. As a result, we have used a peer approach wherein the historical trading
volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used
as an estimate of our volatility. In developing this model, no one company was weighted more heavily.
|
|
(3)
|
Level 3 inputs include:
|
|
•
|
Stock price- Given that management did not believe our trading market
price was indicative of the fair value of our common stock at the measurement date, the stock price was determined implicitly
from an iterative process based upon the assumption that the consideration of the Private Placement was the result of an arm’s
length transaction.
|
|
•
|
Remaining term- We do not have a history to develop the expected term for our warrants.
Accordingly, we have used the contractual remaining term in our calculations.
|
The following is a summary of the status and activity of warrants
outstanding As of December 31, 2013:
Outstanding Warrants
|
Exercise Price
|
|
Number of Warrants
|
|
|
Average Remaining Contractual Life
|
$5.06
|
|
|
982,362
|
|
|
1.32 years
|
$4.84
|
|
|
171,911
|
|
|
1.32 years
|
Total
|
|
|
1,154,273
|
|
|
|
|
|
Number of Warrants
|
|
Outstanding as of January 1, 2013
|
|
|
1,154,273
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding as of December 31, 2013
|
|
|
1,154,273
|
|
NOTE
18. SHARE-BASED COMPENSATION
As of December 31, 2013, the Company had one share-based compensation
plan as described below. The compensation cost that had been charged against income for the plan was $ 4
4,504
and $ 120,853 for the year ended December 31, 2013 and 2012, respectively. The related income tax benefit recognized was $ 15,131
and $ 40,136 for the year ended December 31, 2013 and 2012, respectively. A 100 % valuation allowance was assessed against the
deferred tax assets derived from such tax benefit as of December 31, 2013 and 2012.
On November 4, 2010, the Company’s Board of Directors
approved the Company’s 2010 Share Incentive Plan. On November 8, 2010, a total of 931,000 non-qualified incentive stock
options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors,
and consultants at an exercise price of $ 4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares
were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $ 4.40 per share, of
which shall vest as follows:
|
33 1/3% of the option grants vested one (1) month after the date of grant;
|
|
33 1/3% of the option grants vested twelve (12) months after the date of grant; and
|
|
33 1/3% of the option grants vested twenty-four (24) months after the date of grant.
|
On March 8, 2012, the Company’s Board of Directors increased
the number of shares allocated to and authorized for use under the Plan from 1,000,000 shares to the maximum number of shares
allowable pursuant to the terms of the Plan and granted 420,000 options under the Plan to independent directors, officers and
key employees of the Company, of which included some new options and those re-granted after such options were forfeited by other
former employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All
of the granted options vest as follows:
|
50 % of the options granted vested six (6) months after the date of the
grant; and
|
|
50 % of the options granted vested twelve (12) months after the date of the grant.
|
On November 23, 2012, our Board of Directors allocated to and
authorized to re-grant 150,000 options to a director of the Company after such options were forfeited by other former employees
as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the granted
options vest as follows:
|
33 1/3% of the option grants vested one (1) month after the date of grant;
|
|
33 1/3% of the option grants will vest twelve (12) months after the date of grant; and
|
|
33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.
|
The fair value of each option award was estimated on the date
of grant using a Black-Scholes option pricing model that uses the assumptions noted in the following table. The model is based
on the assumption that it is possible to set up a perfectly hedged position consisting of owning the shares of stock and selling
a call option on the stock. Any movement in the price of the underlying stock will be offset by an opposite movement in the options
value, resulting in no risk to the investor. This perfect hedge is riskless and, therefore, should yield the riskless rate of
return. As the Black-Scholes option pricing model applies to stocks that do not pay dividends, we made an adjustment developed
by Robert Merton to approximate the option value of a dividend-paying stock. Under this adjustment method, it is assumed that
the Company’s stock will generate a constant dividend yield during the remaining life of the options.
The following tables reflect assumptions used to determine
the fair value of the option award:
Options granted on November 8, 2010:
Exercisable Period
|
|
12/8/2010 - 11/8/2020
|
|
|
11/8/2011 - 11/8/2020
|
|
|
11/8/2012 - 11/8/2020
|
|
Risk-free Rate (%)
|
|
|
1.12
|
|
|
|
1.27
|
|
|
|
1.46
|
|
Expected Lives (years)
|
|
|
5.04
|
|
|
|
5.50
|
|
|
|
6.00
|
|
Expected Volatility (%)
|
|
|
46.10
|
|
|
|
44.49
|
|
|
|
43.04
|
|
Expected forfeitures per year (%)
|
|
|
0.00-55.00
|
|
|
|
0.00-55.00
|
|
|
|
0.00-55.00
|
|
Dividend Yield (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Options granted on December 15, 2010:
Exercisable Period
|
|
1/15/2011 -
12/15/2020
|
|
|
12/15/2011 -
12/15/2020
|
|
|
12/15/2012 -
12/15/2020
|
|
Risk-free Rate (%)
|
|
|
2.15
|
|
|
|
2.32
|
|
|
|
2.50
|
|
Expected Lives (years)
|
|
|
5.04
|
|
|
|
5.50
|
|
|
|
6.00
|
|
Expected Volatility (%)
|
|
|
46.15
|
|
|
|
44.52
|
|
|
|
43.09
|
|
Expected forfeitures per year (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Dividend Yield (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Options granted on March 8, 2012:
Exercisable Period
|
|
09/08/2012 -
03/08/2020
|
|
|
03/08/2013 -
03/08/2020
|
|
Risk-free Rate (%)
|
|
|
0.94
|
|
|
|
1.00
|
|
Expected Lives (years)
|
|
|
5.25
|
|
|
|
5.49
|
|
Expected Volatility (%)
|
|
|
45.91
|
|
|
|
45.22
|
|
Expected forfeitures per year (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
Dividend Yield (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
Options granted on November 23, 2012:
Exercisable Period
|
|
12/23/2012 -
11/8/2020
|
|
|
11/23/2013 -
11/8/2020
|
|
|
11/23/2014 -
11/8/2020
|
|
Risk-free Rate (%)
|
|
|
0.53
|
|
|
|
0.60
|
|
|
|
0.68
|
|
Expected Lives (years)
|
|
|
4.02
|
|
|
|
4.48
|
|
|
|
4.98
|
|
Expected Volatility (%)
|
|
|
37.43
|
|
|
|
46.48
|
|
|
|
46.45
|
|
Expected forfeitures per year (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Dividend Yield (%)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Fair value hierarchy of the above assumptions can be categorized
as follows:
|
(1)
|
There were no Level 1 inputs.
|
|
(2)
|
Level 2 inputs include:
|
|
·
|
Risk-free rate- This rate is based on continuous compounding of publicly-available
yields on U.S. Treasury securities with remaining terms to maturity consistent with the expected term of the options at the
dates of grant.
|
|
·
|
Expected volatility- We did not have a historical trading history sufficient
to develop an internal volatility rate for use in the model. As a result, we have used a peer approach wherein the historical
trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were
used as an estimate of our volatility. In developing this model, no one company was weighted more heavily.
|
|
(3)
|
Level 3 inputs include:
|
|
·
|
Expected lives- The expected lives of options granted were derived from
the output of the option valuation model and represented the period of time that options granted are expected to be outstanding.
|
|
|
|
|
·
|
Expected forfeitures per year- The expected forfeitures are estimated at the dates of grant
and will be revised in subsequent periods pursuant to actual forfeitures, if significantly different from the previous estimates.
|
The estimates of fair value from the model are theoretical
values of stock options and changes in the assumptions used in the model could result in materially different fair value estimates.
The actual value of the stock options will depend on the market value of the Company’s common stock when the stock options
are exercised.
A summary of option activity under the Plan as of December
31, 2013, and changes during the year ended December 31, 2013 is presented below:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
|
Term
|
|
|
Value
|
|
Outstanding as of January 1, 2013
|
|
|
1,124,000
|
|
|
$
|
3.30
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(374,000
|
)
|
|
$
|
4.40
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
|
|
|
750,000
|
|
|
$
|
3.14
|
|
|
|
3.52
years
|
|
|
$
|
678,329
|
|
Exercisable as of December 31, 2013
|
|
|
700,000
|
|
|
$
|
3.05
|
|
|
|
3.73
years
|
|
|
$
|
674,756
|
|
Vested and expected to vest (1)
|
|
|
750,000
|
|
|
$
|
3.14
|
|
|
|
3.74
years
|
|
|
|
|
|
(1) Includes vested shares and unvested shares after a forfeiture
rate is applied.
A summary of the status of the Company’s unvested shares
as of December 31, 2013, and changes during the year ended December 31, 2013 is presented below:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-
|
|
|
|
|
|
|
Date Fair
|
|
Unvested Shares
|
|
Shares
|
|
|
Value
|
|
Unvested as of January 1, 2013
|
|
|
310,000
|
|
|
$
|
131,974
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(210,000
|
)
|
|
|
(98,511
|
)
|
Forfeited
|
|
|
(50,000
|
)
|
|
|
(29,890
|
)
|
Unvested as of December 31, 2013
|
|
|
50,000
|
|
|
$
|
3,573
|
|
NOTE
19. RELATED PARTY TRANSACTIONS
Transactions
|
|
For The Year Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Sales to Beijing Doukounianhua Biotechnology Co., Ltd.
|
|
$
|
-
|
|
|
$
|
8,427
|
|
Jianbin Zhou, the former Chief Operating Officer of the Company,
is the legal representative of Beijing Doukounianhua Biotechnology Co., Ltd. The prices in the transactions with related parties
were determined according to the market price sold to or purchased from third parties.
Due from related parties
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Due from Beijing Doukounianhua Biotechnology Co., Ltd.
|
|
$
|
44,441
|
|
|
$
|
43,182
|
|
Due from Hao He
|
|
|
-
|
|
|
|
34,330
|
|
Due form Jinshang International Finance Leasing Co., Ltd.
|
|
|
-
|
|
|
|
4,333
|
|
Due from Feng Liu
|
|
|
-
|
|
|
|
315,369
|
|
Total
|
|
$
|
44,441
|
|
|
$
|
397,214
|
|
Mr. Hao He is the former shareholder of Huichun and Taizihu.
Mr. WenjunTian, the former President and Director of the Company is the Executive Director of Jinshang International Finance Leasing
Co., Ltd. Mr. Feng Liu is the legal representative and the non-controlling shareholder of Jilin Jinglong.
Due to related parties
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Due to Mr. He Hao
|
|
$
|
14,306
|
|
|
$
|
-
|
|
Due to Dongsheng International Investment Co., Ltd.
|
|
|
-
|
|
|
|
6,007,929
|
|
Due to Mr. WenjunTian
|
|
|
-
|
|
|
|
2,660,623
|
|
Total
|
|
$
|
14,306
|
|
|
$
|
8,668,552
|
|
Mr. WenjunTian, the former President and Director of the Company,
is the President and Executive Director of Dongsheng International Investment Co., Ltd. Those loans as of December 31, 2012 are
unsecured, bear no interest and no due date is specified.
Guarantees
As of December 31, 2013, YuciJinmao Food Processing Factory,
of which the legal representative is JunlianZheng, the wife of Junde Zhang, the Vice President of the Company, provided guarantees
on short-term loans obtained by JinzhongYongcheng and JinzhongYuliang.
As of December 31, 2012, Mr. WenjunTian provided guarantees
on short-term loans obtained by Detian Yu. YuciJinmao Food Processing Factory, of which the legal representative is JunlianZheng,
the wife of Junde Zhang, Vice President of the Company, provided guarantees on short-term loans obtained by JinzhongYongcheng
and JinzhongYuliang.
NOTE
20. SEGMENT REPORTING
The Company defined reportable segments according to ASC Topic
280. The segments, including corn division, grain division and bulk trading division, are identified primarily based on the structure
of allocating resources and assessing performance of the group.
The corn division is in the business of purchasing corn from
farmers, simple processing and distributing to agricultural product trading companies through wholesale. The business of the grain
division is conducted by processing and distributing grains and other products. The business of the bulk trading division is conducted
by bulk purchasing and the sale of raw grain.
For the year ended
|
|
Corn
|
|
|
Grain
|
|
|
Bulk Trading
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
142,560,749
|
|
|
$
|
41,637,805
|
|
|
$
|
62,151,550
|
|
|
$
|
-
|
|
|
$
|
246,350,104
|
|
Loss on inventory valuation reserve
|
|
|
(4,391,580
|
)
|
|
|
(86,594
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,478,174
|
)
|
Intersegment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest revenue
|
|
|
8,774
|
|
|
|
2,844
|
|
|
|
6,869
|
|
|
|
16,707
|
|
|
|
35,193
|
|
Interest expense
|
|
|
(425,773
|
)
|
|
|
(316,831
|
)
|
|
|
(47,834
|
)
|
|
|
-
|
|
|
|
(790,438
|
)
|
Net interest (expense) income
|
|
|
(417,000
|
)
|
|
|
(313,987
|
)
|
|
|
(40,965
|
)
|
|
|
16,707
|
|
|
|
(755,245
|
)
|
Depreciation and amortization
|
|
|
(533,709
|
)
|
|
|
(1,718,252
|
)
|
|
|
(4,202
|
)
|
|
|
(110,058
|
)
|
|
|
(2,366,221
|
)
|
Noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,160
|
|
|
|
4,160
|
|
Segment net profit (loss)
|
|
|
(11,316,324
|
)
|
|
|
(2,614,032
|
)
|
|
|
(64,083
|
)
|
|
|
(12,349,498
|
)
|
|
|
(26,343,937
|
)
|
For the year ended
|
|
Corn
|
|
|
Grain
|
|
|
Bulk Trading
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
151,047,762
|
|
|
$
|
73,811,014
|
|
|
$
|
29,187,322
|
|
|
$
|
-
|
|
|
$
|
254,046,098
|
|
Loss on inventory valuation reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Intersegment revenues
|
|
|
61,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,720
|
|
Interest revenue
|
|
|
17,224
|
|
|
|
11,799
|
|
|
|
8,803
|
|
|
|
20
|
|
|
|
37,846
|
|
Interest expense
|
|
|
(610,087
|
)
|
|
|
(607,362
|
)
|
|
|
(259,855
|
)
|
|
|
-
|
|
|
|
(1,477,304
|
)
|
Net interest (expense) income
|
|
|
(592,863
|
)
|
|
|
(595,563
|
)
|
|
|
(251,052
|
)
|
|
|
20
|
|
|
|
(1,439,458
|
)
|
Depreciation and amortization
|
|
|
(577,814
|
)
|
|
|
(1,691,300
|
)
|
|
|
(364
|
)
|
|
|
(27,604
|
)
|
|
|
(2,297,082
|
)
|
Noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,599
|
|
|
|
46,599
|
|
Segment net profit (loss)
|
|
|
10,149,332
|
|
|
|
9,611,166
|
|
|
|
26,505
|
|
|
|
(3,378,184
|
)
|
|
|
16,408,819
|
|
All of our revenues were generated from customers in China.
Sales to exporting agencies were denominated in RMB, the Company’s functional currency and were accounted for as domestic
sales. All long-lived assets are located in China. The following tables set forth our three major customers in each segment:
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
Corn Division:
|
|
2013
|
|
|
2012
|
|
Sichuan Xinnong Scientific and Technical Feed Co., Ltd.
|
|
|
4.1
|
%
|
|
|
2.2
|
%
|
MeishanUni-president Enterprise Co., Ltd.
|
|
|
3.5
|
%
|
|
|
1.9
|
%
|
ChenduJindou Animal Nutrition Food Co., Ltd.
|
|
|
3.3
|
%
|
|
|
1.0
|
%
|
Top Three Customers as % of Total Gross Sales:
|
|
|
10.9
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
Grain Division:
|
|
|
|
|
|
|
|
|
Deyufa
ng Innovation
Food (Beijing) Co., Ltd.
|
|
|
53.3
|
%
|
|
|
23.2
|
%
|
Beijing Tianhuajingyu Trading Co., Ltd.
|
|
|
2.3
|
%
|
|
|
1.5
|
%
|
Tianjin Qianna Trading Co., Ltd.
|
|
|
2.0
|
%
|
|
|
0.4
|
%
|
Top Three Customers as % of Total Gross Sales
|
|
|
57.6
|
%
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
Bulk Trading Division:
|
|
|
|
|
|
|
|
|
Shanxi Helifahua Trading Co., Ltd.
|
|
|
12.7
|
%
|
|
|
7.7
|
%
|
JinzhongKangshuaijianmin Food Trading Co., Ltd.
|
|
|
10.4
|
%
|
|
|
0.5
|
%
|
Shandong Runpeng Trading Co., Ltd.
|
|
|
8.5
|
%
|
|
|
0.0
|
%
|
Top Three Customers as % of Total Gross Sales:
|
|
|
31.6
|
%
|
|
|
8.2
|
%
|
NOTE
21. CONCENTRATION OF CREDIT RISK
As of December 31, 2013 and December 31, 2012, all of the Company’s
cash balances in banks were maintained within the PRC where no rule or regulation currently in place to provide obligatory insurance
for bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes
it is not exposed to such risks on its cash balances in banks.
For the year ended December 31, 2013 and 2012, all of the Company’s
sales were generated in the PRC. In addition, all accounts receivable as of December 31, 2013 and December 31, 2012 were due from
customers located in the PRC.
No single customer accounted for greater than 10% of the Company’s
consolidated gross revenue for the year ended December 31, 2013 and 2012, or consolidated accounts receivable as of December 31,
2013 and December 31, 2012.
NOTE
22. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases railroad lines, warehouses and offices under
operating leases. Future minimum lease payments under operating leases with initial or remaining terms of one year or more are
as follows:
As of December 31,
|
|
Operating Leases
|
|
2014
|
|
$
|
356,597
|
|
2015
|
|
|
190,297
|
|
2016
|
|
|
173,778
|
|
2017
|
|
|
173,778
|
|
2018
|
|
|
173,778
|
|
Thereafter
|
|
|
1,345,486
|
|
|
|
$
|
2,413,714
|
|
NOTE
23. SUBSEQUENT EVENTS
Management has considered all events occurring through March
25, 2014, the date which the financial statements were available to be issued. All subsequent events requiring recognition as
of December 31, 2013 have been incorporated into the accompanying consolidated and combined financial statements, and those requiring
disclosure have been fully disclosed in accordance with FASB ASC Topic 855, “Subsequent Events”.
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