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 Jinzhong
Deyu Agriculture Trading Co., Ltd. (“Jinzhong Deyu”), Jinzhong Yuliang Agriculture Trading Co., Ltd. (“Jinzhong
Yuliang”), 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, Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang.
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 Jinzhong Deyu, Jinzhong Yuliang, and Jinzhong Yongcheng. The former shareholders and key
management of Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang became the ultimate controlling parties and key management
of City Zone. This restructuring has been accounted for as a recapitalization of Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong
Yuliang 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. Qinghe Xu, an individual, for 32.5% of Taizihu and $819,759 (RMB5,170,628)
in cash to Mr. Jinqing Xie, 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 Detian Yu
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
Jinzhong Deyu Agriculture Trading Co., Ltd. ("Jinzhong
Deyu")
|
|
The PRC, April 22, 2004
|
|
$
|
1,492,622
|
|
|
100%
|
|
Organic grains preliminary processing and wholesale
distribution.
|
|
|
|
|
|
|
|
|
|
|
|
Jinzhong Yongcheng Agriculture Trading Co., Ltd.
("Jinzhong Yongcheng")
|
|
The PRC, May 30, 2006
|
|
$
|
1,025,787
|
|
|
100%
|
|
Corns preliminary processing and wholesale
|
|
|
|
|
|
|
|
|
|
|
|
Jinzhong Yuliang Agriculture Trading Co., Ltd.
("Jinzhong Yuliang")
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
Hebei Yugu Grain Co., Ltd. ("Hebei Yugu")
|
|
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”)
|
|
The PRC, July 27, 2003
|
|
$
|
1,208,233
|
|
|
100%
|
|
Producing and selling fruit beverages and soybean
products.
|
|
|
|
|
|
|
|
|
|
|
|
Shanxi HuiChun Bean Products Co., Ltd. (“Huichun”)
|
|
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 unaudited 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 June 30, 2013, the balance of restricted cash included:
(a) $488,806 of cash restricted as a pledge for a bank loan of $1,303,484 (RMB8, 000,000) obtained from Dah Sing Bank (China) Co.
Ltd. on July 18, 2012; the loan was paid off on July 17, 2013; (b) $16,294 of cash restricted as a pledge for a bank loan of $14,664
(RMB90,000) obtained from Bank of Communications Gongzhufen Sub-branch obtained on December 12, 2012.
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. As of June 30, 2013 and December 31, 2012, the balances of accounts receivable greater than three months were 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 June 30, 2013 and December 31, 2012, slow moving or obsolete inventories identified by management were 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 additions,
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. There was no impairment of long-lived assets as of June 30, 2013
and December 31, 2012 or for the six months ended June 30, 2013 and 2012.
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 asset. There was no impairment of intangible assets as of June 30, 2013 and December 31, 2012 or for the six months
ended June 30, 2013 and 2012.
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 six months
ended June 30, 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 six months
ended June 30, 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 w
ere not material for the six
months ended June 30, 2013 and
$669,420
for the six months ended June 30, 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. For the six months ended June 30, 2013 and 2012, returns of our products 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 six months ended June 30, 2013 and 2012 were
$128,897 and $1,046,917, respectively.
Research and development
The Company expenses its research and development costs as incurred.
Research and development expenses for the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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.
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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accounts receivable
|
|
$
|
27,188,714
|
|
|
$
|
33,996,165
|
|
Less: Allowance for doubtful accounts
|
|
|
(4,950
|
)
|
|
|
(4,877
|
)
|
Accounts receivable, net
|
|
$
|
27,183,764
|
|
|
$
|
33,991,288
|
|
NOTE 5. INVENTORY
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw materials
|
|
$
|
2,549,002
|
|
|
$
|
7,730,831
|
|
Work in process
|
|
|
508,962
|
|
|
|
73,131
|
|
Finished goods
|
|
|
22,139,197
|
|
|
|
21,761,558
|
|
Supplies
|
|
|
749,974
|
|
|
|
756,671
|
|
Total Inventory
|
|
$
|
25,947,135
|
|
|
$
|
30,322,191
|
|
NOTE 6. PREPAID EXPENSES
Prepaid expenses consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deductible value-added taxes (VAT)
|
|
$
|
558,986
|
|
|
$
|
1,003,871
|
|
Prepaid rent
|
|
|
132,171
|
|
|
|
155,883
|
|
Prepaid expenses for investor relations
|
|
|
-
|
|
|
|
163,443
|
|
Prepaid other expenses
|
|
|
31,193
|
|
|
|
129,987
|
|
Total
|
|
$
|
722,350
|
|
|
$
|
1,453,184
|
|
NOTE 7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Automobiles
|
|
$
|
1,027,721
|
|
|
$
|
1,010,594
|
|
Buildings
|
|
|
16,960,828
|
|
|
|
16,534,542
|
|
Office equipment
|
|
|
1,060,461
|
|
|
|
467,739
|
|
Machinery and equipment
|
|
|
8,254,025
|
|
|
|
7,435,413
|
|
Furniture and fixtures
|
|
|
122,040
|
|
|
|
611,907
|
|
Total cost
|
|
|
27,425,075
|
|
|
|
26,060,195
|
|
Less: Accumulated depreciation
|
|
|
(7,710,444
|
)
|
|
|
(6,617,596
|
)
|
Property, plant, and equipment, net
|
|
$
|
19,714,631
|
|
|
$
|
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 June 30, 2013, $5.7 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 six months ended June 30, 2013
and 2012 were $994,846 and $964,161, respectively.
NOTE 8. CONSTRUCTION-IN-PROGRESS
Construction-in-progress amounted to $1,970,542 as of June 30,
2013 mainly represents payment on the construction of a new factory park and the partial cost of the land use right where the new
factory park occupies in Huichun.
NOTE 9. INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Land use rights
|
|
|
13,357,257
|
|
|
$
|
13,158,508
|
|
Software-ERP System and B2C platform
|
|
|
1,074,999
|
|
|
|
1,059,004
|
|
Less: Accumulated amortization
|
|
|
(1,053,615
|
)
|
|
|
(828,437
|
)
|
Total
|
|
$
|
13,378,641
|
|
|
$
|
13,389,075
|
|
According to government regulations of the PRC, the PRC Government
owns all land. The Company owns the land use rights of farmland and industrial lands. 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 Jinzhong Deyu'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 from the PRC Government in Quwo
County, Shanxi Province where the 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. Of the 100,000 square meters of land, approximately 26,000 square meters
amounting to $966,886 were used for the construction of a new factory park and were reclassified from intangible assets to
construction-in-progress and as reported on the consolidated balance sheets of the Company as of June 30, 2013 and December
31, 2012. The land use right used for the construction of the new factory park has been suspended for amortization since
January 2011 when the construction commenced.
As of June 30, 2013, $3,935,205 (RMB 24 million) of the land
use right owned by Taizihu Group was pledged as collateral for short-term bank loans, of which $981,490 (RMB 6.0 million) was reclassified
under construction-in-progress.
Amortization expense of the intangible assets for the six months ended June 30, 2013 and 2012 were $200,876 and $195,548, respectively.
NOTE 10. SHORT-TERM LOAN
Short-term loan consisted of the following:
|
|
June 30,
|
|
|
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 rates as of June 30, 2013 and December 31, 2012 were 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.
|
|
$
|
2,444,032
|
|
|
$
|
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 rates as of June 30, 2013 and December 31, 2012 were 6.0%.
|
|
|
|
|
|
|
|
|
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.
|
|
|
1,466,419
|
|
|
|
1,444,599
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2013 and 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 Jinzhong Yongcheng and
|
|
|
|
|
|
|
|
|
guaranteed by Yuci Jinmao Food Processing Factory, a related party,
|
|
|
|
|
|
|
|
|
for a period of two years starting from August 30, 2013.
|
|
|
1,384,951
|
|
|
|
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 June 30, 2013 and 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 Jinzhong Yuliang and
|
|
|
|
|
|
|
|
|
guaranteed by Yuci Jinmao Food Processing Factory, a related party,
|
|
|
|
|
|
|
|
|
for a period of two years starting from August 30, 2013.
|
|
|
1,384,951
|
|
|
|
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 June 30, 2013 and 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 Mr Tian Wenjun for a period of one year starting from July 18, 2013.
|
|
|
1,303,484
|
|
|
|
1,284,088
|
|
The loan was paid off on July 17, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 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.
|
|
|
733,210
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
The bank loan of $162,935 (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 rates as of June 30, 2013 and December 31, 2012 were 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. Tian Wenjun for a period of one year.
|
|
|
|
|
|
|
|
|
On December 21, 2012 and June 21, 2013 the loan was repaid for total $81,468 (or RMB500,000).
|
|
|
|
|
|
|
|
|
As of June 30, 2013, the loan balance was $40,734 (or RMB250,000).
|
|
|
40,734
|
|
|
|
120,383
|
|
|
|
|
|
|
|
|
|
|
Loan payable to Hangzhou TianCi Investment Management Co.,
|
|
|
|
|
|
|
|
|
Ltd., an unrelated party. The loan was unsecured, bearing
|
|
|
59,797
|
|
|
|
58,910
|
|
no interest and no due date were specified. The loan was obtained by
JiRuHai
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to Bank of Communications Gongzhufen subbranch, 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 June 30, 2013 and December 31, 2012 were 6.310%.
|
|
|
|
|
|
|
|
|
The term of the loan started from December 12, 2012 with maturity
|
|
|
|
|
|
|
|
|
date on December 12, 2013. The loan was obtained by Detian Yu.
|
|
|
14,664
|
|
|
|
14,446
|
|
|
|
|
|
|
|
|
|
|
Bank loan payable to China Merchants Bank Beijing Dongzhimen subbranch, 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.
|
|
|
-
|
|
|
|
264,843
|
|
The loan was paid off on January 10, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,832,242
|
|
|
$
|
8,323,623
|
|
NOTE 11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accrued VAT and other taxes
|
|
$
|
465,819
|
|
|
$
|
428,552
|
|
Accrued payroll
|
|
|
214,765
|
|
|
|
288,584
|
|
Others
|
|
|
1,060,577
|
|
|
|
789,640
|
|
Total
|
|
$
|
1,741,161
|
|
|
$
|
1,506,776
|
|
NOTE 12. 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 six months ended June
30, 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 Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, 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 six months ended June 30, 2013 and 2012:
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Current income tax expense (benefit)
|
|
|
|
|
|
|
U.S.
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
525,553
|
|
|
|
500,436
|
|
Total current expense (benefit)
|
|
$
|
525,553
|
|
|
$
|
500,436
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
-
|
|
|
$
|
-
|
|
PRC
|
|
|
-
|
|
|
|
790,260
|
|
Income tax expense (benefit)
|
|
$
|
525,553
|
|
|
$
|
1,290,696
|
|
The following is a reconciliation of the statutory tax rate
to the effective tax rate for the six months ended June 30, 2013 and 2012:
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Expected U.S. income tax expense
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
|
-13.9
|
%
|
|
|
-31.6
|
%
|
Foreign tax differential
|
|
|
-55.8
|
%
|
|
|
-0.7
|
%
|
Change in valuation allowance
|
|
|
-452.6
|
%
|
|
|
11.2
|
%
|
Intercompany elimination
|
|
|
242.8
|
%
|
|
|
-1.7
|
%
|
Other
|
|
|
-1.2
|
%
|
|
|
1.1
|
%
|
Income tax expense
|
|
|
-246.7
|
%
|
|
|
12.3
|
%
|
Significant components of the Company’s net deferred tax
assets as of June 30, 2013 and December 31, 2012 are presented in the following table:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards (NOL)
|
|
$
|
4,104,197
|
|
|
$
|
3,430,118
|
|
Share-based compensation
|
|
|
405,972
|
|
|
|
391,339
|
|
Deferred tax assets acquired in business combination
|
|
|
89,541
|
|
|
|
88,208
|
|
Total
|
|
|
4,599,710
|
|
|
|
3,909,665
|
|
Less: Valuation allowance
|
|
|
(4,599,710
|
)
|
|
|
(3,909,665
|
)
|
Total deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
As of June 30, 2013, the Company accrued
a 100% valuation allowance on its deferred tax assets based on the assessment on the probability of future reversion.
NOTE 13. 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 Six Months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
stockholders - basic
|
|
$
|
(968,215
|
)
|
|
|
10,632,189
|
|
|
$
|
(0.09
|
)
|
Preferred dividends applicable to convertible preferred stocks
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Net income (loss) attributable to common stockholders – diluted
|
|
$
|
(968,215
|
)
|
|
|
10,632,189
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months ended June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
|
$
|
9,020,025
|
|
|
|
10,565,674
|
|
|
$
|
0.85
|
|
Preferred dividends applicable to convertible preferred stocks
|
|
|
220,052
|
|
|
|
2,012,905
|
|
|
|
|
|
Net income attributable to common stockholders - diluted
|
|
$
|
9,240,077
|
|
|
|
12,578,579
|
|
|
$
|
0.73
|
|
NOTE 14. 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 June 30, 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 June 30, 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 June 30, 2013, an aggregate of 538,267 shares of Series
A Preferred were converted into 538,267 shares of common stock and an aggregate of 192,498 shares of Series A Preferred were issued
as dividends to the shareholders of Series A Preferred. As of June 30, 2013, the total number of shares of Series A Preferred issued
and outstanding was 2,110,094 shares.
For the six months ended June 30, 2013 and 2012, the Company
recorded $233,423 and $220,052 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:
|
|
|
|
|
April 27, 2010
|
|
|
May 10, 2010
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2013:
Outstanding Warrants
|
Exercise Price
|
|
|
Number of Warrants
|
|
|
Average Remaining Contractual Life
|
$
|
5.06
|
|
|
|
982,362
|
|
|
1.82 years
|
$
|
4.84
|
|
|
|
171,911
|
|
|
1.82 years
|
|
Total
|
|
|
|
1,154,273
|
|
|
|
|
|
Number of Warrants
|
|
Outstanding as of January 1, 2013
|
|
|
1,154,273
|
|
Granted
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding as of June 30, 2013
|
|
|
1,154,273
|
|
NOTE 15.
|
SHARE-BASED COMPENSATION
|
As of June 30, 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 $43,039 and $290,051 for the
six months ended June 30, 2013 and 2012, respectively. The related income tax benefit recognized was $14,633 and $98,617 for the
six months ended June 30, 2013 and 2012, respectively. A 100% valuation allowance was assessed against the deferred tax assets
derived from such tax benefit as of June 30, 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 (1,245,586) 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 June 30, 2013,
and changes during the six months ended June 30, 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
|
|
|
(95,000
|
)
|
|
$
|
4.40
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2013
|
|
|
1,029,000
|
|
|
$
|
3.20
|
|
|
3.99 years
|
|
$
|
1,062,814
|
|
Exercisable as of June 30, 2013
|
|
|
929,000
|
|
|
$
|
3.07
|
|
|
3.98 years
|
|
$
|
1,056,378
|
|
Vested and expected to vest (1)
|
|
|
1,029,000
|
|
|
$
|
3.20
|
|
|
3.99 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 June 30, 2013, and changes during the six months ended June 30, 2013 is presented below:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-
|
|
|
|
|
|
|
Date Fair
|
|
Unvested Shares
|
|
Shares
|
|
|
Value
|
|
Unvested as of January 1, 2012
|
|
|
310,000
|
|
|
$
|
131,974
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(210,000
|
)
|
|
|
(125,538
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested as of June 30, 2013
|
|
|
100,000
|
|
|
$
|
6,436
|
|
NOTE 16.
|
RELATED PARTY TRANSACTIONS
|
Transactions
|
|
For The Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Sales to Beijing Doukounianhua Biotechnology Co., Ltd.
|
|
$
|
-
|
|
|
$
|
9,506
|
|
Jianbin Zhou, the 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
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Due from Hao He
|
|
$
|
-
|
|
|
$
|
34,330
|
|
Due from Beijing Doukounianhua Biotechnology Co., Ltd.
|
|
|
43,834
|
|
|
|
43,182
|
|
Due form Jinshang International Finance Leasing Co., Ltd.
|
|
|
-
|
|
|
|
4,333
|
|
Due from Feng Liu
|
|
|
-
|
|
|
|
315,369
|
|
Total
|
|
$
|
43,834
|
|
|
$
|
397,214
|
|
Due to related parties
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Due to Dongsheng International Investment Co., Ltd.
|
|
|
9,415,225
|
|
|
$
|
6,007,929
|
|
Due to Mr. Feng Liu
|
|
|
57,027
|
|
|
|
-
|
|
Due to Mr. Wenjun Tian
|
|
|
-
|
|
|
|
2,660,623
|
|
Total
|
|
$
|
9,472,252
|
|
|
$
|
8,668,552
|
|
Mr. Wenjun Tian, the former President and Director of the Company,
is the President and Executive Director of Dongsheng International Investment Co., Ltd. Those loans as of June 30, 2013 and December
31, 2012 are unsecured, bear no interest and no due date is specified.
Mr. Feng Liu is the legal representative and a non-controlling
shareholder of Jilin Jinglong.
Guarantees
As of June 30, 2013, Mr. Wenjun Tian provided guarantees on
short-term loans obtained by Detian Yu. Yuci Jinmao Food Processing Factory, of which the legal representative is Junlian Zheng,
the wife of Junde Zhang, the Vice President of the Company, provided guarantees on short-term loans obtained by Jinzhong Yongcheng
and Jinzhong Yuliang.
NOTE 17.
|
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 six months ended
|
|
Corn
|
|
|
Grain
|
|
|
Bulk Trading
|
|
|
|
|
|
|
|
June 30, 2013
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
71,123,730
|
|
|
$
|
22,739,314
|
|
|
$
|
46,914,771
|
|
|
|
|
|
|
$
|
140,777,815
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest revenue
|
|
|
5,999
|
|
|
|
2,089
|
|
|
|
5,300
|
|
|
|
284
|
|
|
|
13,672
|
|
Interest expense
|
|
|
(209,503
|
)
|
|
|
(142,556
|
)
|
|
|
(51,222
|
)
|
|
|
-
|
|
|
|
(403,281
|
)
|
Net interest (expense) income
|
|
|
(203,504
|
)
|
|
|
(140,467
|
)
|
|
|
(45,922
|
)
|
|
|
284
|
|
|
|
(389,609
|
)
|
Depreciation and amortization
|
|
|
(259,086
|
)
|
|
|
(830,360
|
)
|
|
|
(1,856
|
)
|
|
|
(104,420
|
)
|
|
|
(1,195,722
|
)
|
Noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,804
|
|
|
|
3,804
|
|
Segment net profit (loss)
|
|
|
539,287
|
|
|
|
1,748,091
|
|
|
|
607,715
|
|
|
|
(3,633,689
|
)
|
|
|
(738,596
|
)
|
For the three months ended
|
|
Corn
|
|
|
Grain
|
|
|
Bulk Trading
|
|
|
|
|
|
|
|
June 30, 2013
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
35,697,746
|
|
|
$
|
10,378,212
|
|
|
$
|
17,534,143
|
|
|
$
|
-
|
|
|
$
|
63,610,101
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest revenue
|
|
|
2,225
|
|
|
|
1,354
|
|
|
|
1,939
|
|
|
|
54
|
|
|
|
5,572
|
|
Interest expense
|
|
|
(124,226
|
)
|
|
|
(78,198
|
)
|
|
|
(25,153
|
)
|
|
|
-
|
|
|
|
(227,577
|
)
|
Net interest (expense) income
|
|
|
(122,001
|
)
|
|
|
(76,844
|
)
|
|
|
(23,214
|
)
|
|
|
54
|
|
|
|
(222,005
|
)
|
Depreciation and amortization
|
|
|
(137,237
|
)
|
|
|
(395,211
|
)
|
|
|
(1,164
|
)
|
|
|
(62,695
|
)
|
|
|
(596,307
|
)
|
Noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
185
|
|
Segment net profit (loss)
|
|
|
(1,389,995
|
)
|
|
|
565,116
|
|
|
|
(357,732
|
)
|
|
|
(2,771,473
|
)
|
|
|
(3,954,084
|
)
|
For the six months ended
|
|
Corn
|
|
|
Grain
|
|
|
Bulk Trading
|
|
|
|
|
|
|
|
June 30, 2012
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
80,564,872
|
|
|
$
|
29,269,621
|
|
|
$
|
8,741,986
|
|
|
|
-
|
|
|
$
|
118,576,479
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest revenue
|
|
|
6,651
|
|
|
|
4,999
|
|
|
|
6,028
|
|
|
|
(2
|
)
|
|
|
17,676
|
|
Interest expense
|
|
|
(405,008
|
)
|
|
|
(382,393
|
)
|
|
|
(142,638
|
)
|
|
|
-
|
|
|
|
(930,039
|
)
|
Net interest (expense) income
|
|
|
(398,357
|
)
|
|
|
(377,394
|
)
|
|
|
(136,610
|
)
|
|
|
(2
|
)
|
|
|
(912,363
|
)
|
Depreciation and amortization
|
|
|
(274,801
|
)
|
|
|
(878,639
|
)
|
|
|
(180
|
)
|
|
|
(6,089
|
)
|
|
|
(1,159,709
|
)
|
Noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,869
|
|
|
|
40,869
|
|
Segment net profit (loss)
|
|
|
6,087,599
|
|
|
|
5,006,945
|
|
|
|
(386,344
|
)
|
|
|
(1,508,992
|
)
|
|
|
9,199,208
|
|
For the three months ended
|
|
Corn
|
|
|
Grain
|
|
|
Bulk Trading
|
|
|
|
|
|
|
|
June 30, 2012
|
|
Division
|
|
|
Division
|
|
|
Division
|
|
|
Others
|
|
|
Total
|
|
Revenues from external customers
|
|
$
|
37,357,786
|
|
|
$
|
14,618,976
|
|
|
$
|
3,860,248
|
|
|
$
|
-
|
|
|
$
|
55,837,010
|
|
Intersegment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest revenue
|
|
|
3,068
|
|
|
|
1,809
|
|
|
|
1,263
|
|
|
|
(2
|
)
|
|
|
6,138
|
|
Interest expense
|
|
|
(190,105
|
)
|
|
|
(174,961
|
)
|
|
|
(80,429
|
)
|
|
|
-
|
|
|
|
(445,495
|
)
|
Net interest (expense) income
|
|
|
(187,037
|
)
|
|
|
(173,152
|
)
|
|
|
(79,166
|
)
|
|
|
(2
|
)
|
|
|
(439,357
|
)
|
Depreciation and amortization
|
|
|
(82,842
|
)
|
|
|
(481,516
|
)
|
|
|
(90
|
)
|
|
|
10
|
|
|
|
(564,438
|
)
|
Noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,435
|
|
|
|
19,435
|
|
Segment net profit (loss)
|
|
|
2,572,577
|
|
|
|
2,290,282
|
|
|
|
(843,574
|
)
|
|
|
(1,116,778
|
)
|
|
|
2,902,507
|
|
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 Six Months Ended
|
|
|
|
June 30,
|
|
Corn Division :
|
|
2013
|
|
|
2012
|
|
Sichuan
Xinnong Scientific and Technical Feed Co.,
Ltd.
|
|
|
6.1
|
%
|
|
|
2.6
|
%
|
Chen
gdu
Zhengda Co., Ltd.
|
|
|
4.3
|
%
|
|
|
4.3
|
%
|
Chen
gdu
Jindou Animal Nutrition and Food Co., Ltd.
|
|
|
4.2
|
%
|
|
|
0.0
|
%
|
Top Three Customers as % of Total Gross Sales:
|
|
|
14.6
|
%
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
Grain Division :
|
|
|
|
|
|
|
|
|
Deyufarm Innovation Food (Beijing) Co., Ltd.
|
|
|
48.3
|
%
|
|
|
24.3
|
%
|
Beijing Jinhan Weiye Trading Co., Ltd.
|
|
|
2.0
|
%
|
|
|
1.1
|
%
|
Hangzhou Tengguan Trading Co., Ltd.
|
|
|
1.7
|
%
|
|
|
0.0
|
%
|
Top Three Customers as % of Total Gross Sales
|
|
|
52.0
|
%
|
|
|
25.4
|
%
|
|
|
|
|
|
|
|
|
|
Bulk Trading Division :
|
|
|
|
|
|
|
|
|
Jinzhong Kangshuai Jianmin Grain and Oil Trading Co., Ltd.
|
|
|
12.5
|
%
|
|
|
0.0
|
%
|
Shanxi Helif
eihua
Trading Co., Ltd.
|
|
|
12.3
|
%
|
|
|
0.0
|
%
|
Shanxi Runpeng Trading Co., Ltd.
|
|
|
8.8
|
%
|
|
|
0.0
|
%
|
Top Three Customers as % of Total Gross Sales:
|
|
|
33.6
|
%
|
|
|
0.0
|
%
|
NOTE 18.
|
CONCENTRATION OF CREDIT RISK
|
As of June 30, 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 six months ended June 30, 2013 and 2012, all of the
Company’s sales were generated in the PRC. In addition, all accounts receivable as of June 30, 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 six months ended June 30, 2013 and 2012, or consolidated accounts receivable as of June 30,
2013 and December 31, 2012.
NOTE 19.
|
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 June 30,
|
|
Operating Leases
|
|
2013
|
|
$
|
315,859
|
|
2014
|
|
|
246,652
|
|
2015
|
|
|
177,926
|
|
2016
|
|
|
171,408
|
|
2017
|
|
|
171,408
|
|
Thereafter
|
|
|
1,290,965
|
|
|
|
$
|
2,374,218
|
|
Contingencies
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 Company believes that such allegations and claims are without
merit and intends to vigorously defend such allegations and claims. The Company will conduct formal discovery, including the taking
of plaintiff's deposition, and the Company intends to file a motion for summary judgment to be heard prior to the October Mandatory
Settlement Conference date.
Because the inquiry is in its initial stages, the Company is
not currently able to predict the probability of a favorable or unfavorable outcome, or the amount of any possible loss in the
event of an unfavorable outcome. Consequently, no material provision or liability has been recorded for such allegations and claims
as of June 30, 2013.
NOTE 20.
|
SUBSEQUENT EVENTS
|
The Company has evaluated events after the balance sheet date
of these consolidated financial statements through the date these consolidated financial statements were issued. There were no
material subsequent events as of that date.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
In this Quarterly Report on Form 10-Q, 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 “anticipated”, “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.
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 access to over 109,000 acres of farmland in Shanxi Province for breeding, cultivating,
processing, warehousing and distributing corn and grain products. 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:
|
·
|
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.
|
|
·
|
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 grain 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 and directly to consumers in retail stores.
|
|
|
|
|
·
|
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 a cultivation base of 109,000 acres in Jinzhong in Shanxi Province for the supply
of corn and grain after obtaining land use rights to 17,000 acres of farmland with an average remaining useful life of 36 years
and after signing agricultural co-operative agreements with the governments of counties and villages for the development of 92,000
acres for 18 years. 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, one rental warehouse and some temporary 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) Yuci Dongzhao 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, we sell our processed grain products
to wholesalers, distributors, institutional clients and retail stores.
Operating revenue from continuing operations
for the six months ended June 30, 2013 was $140,777,815, representing 18.7% increase
from $118,576,479 for the six months ended June 30, 2012. Our net loss available to common stockholders for the six months ended
June 30, 2013 was $968,215, representing a 110.7% decrease from $9,020,025 of net income for the six months ended June 30, 2012.
Recent Developments
Since its beginning, 2013 has been a very
challenging year for the Company. China’s on-going economic slowdown has imposed and continues to impose both challenges
and opportunities for us. In addition, extreme weather conditions throughout the northern part of China have added to an already
challenging situation.
For corn division in particular, the decrease
in pork prices and the spread of avian flu H7N9 has affected the livestock raising industry, which has greatly reduced the demand
for animal feeds, the major market of our corn products. In addition, a good corn harvest last year increased market supply. Oversupply
caused a decrease in market sales prices of corn while purchase prices from farmers didn’t decline consistently due to the
government's protective farming policies in favor of farmers. The gross margin of our corn trading business declined significantly,
especially in the second quarter. During the same period, a general slowdown in consumer market growth and competition in the market
segment have had a negative impact on the grain bulk trading business.
Conventional retail sales of grain products
in supermarkets and convenience stores became increasingly competitive. The deteriorating efficiency of existing retail distribution
channels has caused the Company to re-evaluate its overall sales approach for packaged grain products and to begin developing a
new marketing strategy. For the time being, we have begun shifting some of our available resources from grain retail sales to more
wholesale or bulk trading.
Extreme weather caused serious damage to our inventories and affected our operations. In late April, a
heavy snow storm collapsed warehouses located in Taiyuan, Shanxi Province which were leased by the Company’s Grain Division
and caused approximately $1.2 million in damage to our grain goods stored in those warehouses. Beginning in May 2013, Shanxi experienced
unusually frequent heavy rainfall which caused extreme humidity. As a result, we reinforced the warehouses and took measures to
prevent our inventories from mildewing, such as transferring inventories from one warehouse to the other and frequently drying
the grain goods with machines. These measures reduced the efficiency of our operations and increased operational expenses.
Plan of Operation
At this new stage of China's economic development, in which
innovation and resource consolidation will be the key to competing in the China and global marketplaces, we realize the urgent
need to develop a more sustainable growth strategy. We are currently developing new strategies and measures on several fronts,
including product line enhancements and expansion, marketing and sales strategies and the development of digital platforms which
are designed to go beyond conventional channels to meet market needs. We believe our new IT infrastructure, which is currently
under development, will become a crucial operational platform to provide high level resource integration, information access and
risk management. We expect that the platform will offer extended services to farmers in the co-ops and to clients alike, will build
strategic partnerships and serve Deyu's brand building strive. We believe the Company can compete more effectively with our new
digital operational approach to turn some key barriers imposed by conventional approaches into strategic advantages.
In the meantime, in order to adapt to the changing market for grain products sold to consumers, we are
streamlining our operational structure, introducing new product lines, exploring new venues and utilizing a brand-driven approach
to go beyond traditional distribution channels. Our new initiatives still continue to cultivate the whole value chain concept,
by offering agricultural services to secure strategic production resources, to offer efficient commercial orders and other value-added
services.
Results of Operations for the Three Months Ended June 30,
2013 as Compared to the Three Months Ended June 30, 2012
|
|
For The Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
63,610,101
|
|
|
$
|
55,837,010
|
|
|
$
|
7,773,091
|
|
|
|
13.9
|
%
|
Cost of goods sold
|
|
|
(57,999,849
|
)
|
|
|
(45,334,604
|
)
|
|
|
(12,665,245
|
)
|
|
|
27.9
|
%
|
Gross Profit
|
|
|
5,610,252
|
|
|
|
10,502,406
|
|
|
|
(4,892,154
|
)
|
|
|
-46.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(4,935,031
|
)
|
|
|
(3,973,047
|
)
|
|
|
(961,984
|
)
|
|
|
24.2
|
%
|
General and administrative expenses
|
|
|
(3,021,371
|
)
|
|
|
(2,106,397
|
)
|
|
|
(914,974
|
)
|
|
|
43.4
|
%
|
Total Operating Expense
|
|
|
(7,956,402
|
)
|
|
|
(6,079,444
|
)
|
|
|
(1,876,958
|
)
|
|
|
30.9
|
%
|
Operating income (loss)
|
|
|
(2,346,150
|
)
|
|
|
4,422,962
|
|
|
|
(6,769,112
|
)
|
|
|
-153.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,572
|
|
|
|
6,138
|
|
|
|
(566
|
)
|
|
|
-9.2
|
%
|
Interest expense
|
|
|
(227,577
|
)
|
|
|
(445,495
|
)
|
|
|
217,918
|
|
|
|
-48.9
|
%
|
Non-operating income (loss)
|
|
|
(1,200,809
|
)
|
|
|
8,304
|
|
|
|
(1,209,113
|
)
|
|
|
-14560.6
|
%
|
Total Other Expense
|
|
|
(1,422,814
|
)
|
|
|
(431,053
|
)
|
|
|
(991,761
|
)
|
|
|
230.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,768,964
|
)
|
|
|
3,991,909
|
|
|
|
(7,760,873
|
)
|
|
|
-194.4
|
%
|
Income taxes
|
|
|
(185,120
|
)
|
|
|
(1,089,402
|
)
|
|
|
904,282
|
|
|
|
-83.0
|
%
|
Net income (loss)
|
|
|
(3,954,084
|
)
|
|
|
2,902,507
|
|
|
|
(6,856,591
|
)
|
|
|
-236.2
|
%
|
Net Income (loss) attributable to noncontrolling interests
|
|
|
185
|
|
|
|
19,435
|
|
|
|
(19,250
|
)
|
|
|
-99.0
|
%
|
Net income (loss) attributable to Deyu Agriculture Corp.
|
|
|
(3,953,899
|
)
|
|
|
2,921,942
|
|
|
|
(6,875,841
|
)
|
|
|
-235.3
|
%
|
Preferred stock dividends
|
|
|
(117,368
|
)
|
|
|
(109,977
|
)
|
|
|
(7,391
|
)
|
|
|
6.7
|
%
|
Net income (loss) available to common stockholders
|
|
$
|
(4,071,267
|
)
|
|
$
|
2,811,965
|
|
|
$
|
(6,883,232
|
)
|
|
|
-244.8
|
%
|
Net Revenue
Net revenue for the three months ended June
30, 2013 was $63.6 million compared with $55.8 million for the three months ended June 30, 2012, an increase of $7.8 million, or
13.9%. This increase was the combined result of an increase of $13.7 million in bulk trading sales off-set by a decrease of $1.7
million in corn sales and a decrease of $4.2 million in grain sales. Sales derived from our Corn Division, Grain Division and Bulk
Trading Division for the three months ended June 30, 2013 were $35.7 million, $10.4 million and $17.5 million, respectively, accounting
for 56.1%, 16.3% and 27.6% 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 Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Volume
(ton)
|
|
|
Net
Revenue
|
|
|
%
of
total
sales
|
|
|
Volume
(ton)
|
|
|
Net
Revenue
|
|
|
%
of
total
sales
|
|
|
Changes
|
|
|
%
|
|
Corn Division
|
|
|
100,620
|
|
|
$
|
35,697,746
|
|
|
|
56.1
|
%
|
|
|
101,109
|
|
|
$
|
37,357,786
|
|
|
|
66.9
|
%
|
|
$
|
(1,660,040
|
)
|
|
|
-4.4
|
%
|
Grain Division
|
|
|
5,907
|
|
|
|
10,378,212
|
|
|
|
16.3
|
%
|
|
|
24,971
|
|
|
|
14,618,976
|
|
|
|
26.2
|
%
|
|
|
(4,240,764
|
)
|
|
|
-29.0
|
%
|
Bulk Trading Division
|
|
|
29,451
|
|
|
|
17,534,143
|
|
|
|
27.6
|
%
|
|
|
12,007
|
|
|
|
3,860,248
|
|
|
|
6.9
|
%
|
|
|
13,673,895
|
|
|
|
354.2
|
%
|
Total
|
|
|
135,978
|
|
|
$
|
63,610,101
|
|
|
|
100.0
|
%
|
|
|
138,087
|
|
|
$
|
55,837,010
|
|
|
|
100.0
|
%
|
|
$
|
7,773,091
|
|
|
|
13.9
|
%
|
Net revenue from our Corn Division for the
three months ended June 30, 2013 was approximately $35.7 million, a decrease of $1.7 million, or approximately 4.4%, as compared
to $37.4 million for the three months ended June 30, 2012. The decrease was mainly attributable to the weakening demand for corn
in the industry. The demand from livestock feeds factories weakened due to the decrease of pork prices and the spread of bird flu
H7N9 during the reporting period.
Net revenue from our Grain Division for the
three months ended June 30, 2013 was $10.4 million, a decrease of $4.2 million, or 29.0%, as compared to $14.6 million for the
three months ended June 30, 2012. The decrease was mainly attributable to the decline of retail sales in supermarket and convenience
stores, which was caused by 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 three months ended June 30, 2013 was $17.5 million, an increase of $13.7 million, or 354.2% as compared to $3.9 million
for the three months ended June 30, 2012. This increase was mainly attributable to our strategic shift from grain retail sales
to wholesale or bulk trading.
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 increased by $12.7 million, or 27.9%, from $45.3 million for the three months ended June 30, 2012 to $58.0 million
for the three months ended 31, 2013. This increase was primarily attributable to the increase in sales volume of our bulk trading
business and the increase of the 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 Three Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross Profit
|
|
|
% of total
Gross Profit
|
|
|
Margin
|
|
|
Gross Profit
|
|
|
% of total
Gross Profit
|
|
|
Margin
|
|
Corn Division
|
|
$
|
3,366,590
|
|
|
|
60.0
|
%
|
|
|
9.4
|
%
|
|
$
|
5,808,143
|
|
|
|
55.3
|
%
|
|
|
15.5
|
%
|
Grain Division
|
|
|
1,793,061
|
|
|
|
32.0
|
%
|
|
|
17.3
|
%
|
|
|
4,386,915
|
|
|
|
41.8
|
%
|
|
|
30.0
|
%
|
Bulk Trading Division
|
|
|
450,601
|
|
|
|
8.0
|
%
|
|
|
2.6
|
%
|
|
|
307,348
|
|
|
|
2.9
|
%
|
|
|
8.0
|
%
|
Total
|
|
$
|
5,610,252
|
|
|
|
100
|
%
|
|
|
8.8
|
%
|
|
$
|
10,502,406
|
|
|
|
100
|
%
|
|
|
18.8
|
%
|
Our gross profit decreased by $4.9 million,
or 46.6%, from $10.5 million for the three months ended June 30, 2012 to $5.6 million for the three months ended June 30, 2013.
The decrease was a combined result of a decrease in gross profits of $2.4 million in the Corn Division, a decrease of $2.6 million
in the Grain Division and a decrease of $0.1 million in the Bulk Trading Division. Our gross margin decreased from 18.8% for the
three months ended June 30, 2012 to 8.8% for the three months ended June 30, 2013. The decrease in gross margin was mainly the
combined result of the simultaneous decline of gross margin in each division and the increased sales percentage of the bulk trading
business, which had a relatively lower gross margin.
Gross profit in the Corn Division was $3.4
million, contributing to 60.0% of total gross profit for the three months ended June 30, 2013. Gross margin for our Corn Division
was 9.4% for the three months ended June 30, 2013, down by 610 basis points from 15.5% for the three months ended June 30, 2012.
The decrease in gross margin was mainly attributable to the weakening demand in the corn industry with an oversupply of corn
after a good harvest in 2012. The corn demand from livestock feeds factories weakened due to the decrease of pork prices and the
spread of bird flu H7N9 in this year. The market sales prices of corn decreased while the purchase prices from farmers didn’t
decline consistently due to the government's protective farming policies in favor of farmers.
Gross profit in the Grain Division was
$1.8 million, contributing to 32.0% of total gross profit for the three months ended June 30, 2013. Gross margin for the Grain
Division was 17.3% for the three months ended June 30, 2013, which decrease
d by 1270 basis
points from 30.0% for the three months ended June 30, 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
has relatively lower gross margins but with fewer distribution expenses.
Gross profit in the Bulk Trading Division
was $0.5 million, contributing to
8.0% of total gross profit for the three months ended
June 30, 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 2.6% for the three months
ended June 30, 2013, a decrease of 540 basis points fro
m 8.0% for the three months ended June 30, 2012. This decrease was
mainly attributable to severe market fluctuations of grains in May 2013, which caused negative margin for some transactions.
Selling Expenses
Selling
expenses included expenses of freight, warehousing, handling, distribution, advertising, farmer subsidies, payroll and other expenses.
Selling expenses increased by $
1.0 million, or 24.2%, to $4.9 million for
the three months ended June 30, 2013 as compared to $4.0 million for the three months ended June 30, 2012. This increase was primarily
the combined result of (a) an increase of $0.8 million of the expenses of handling, warehousing and freight, caused by extreme
weather condition in
recent months; and (b) an increase of
$0.8 million of farmer seeding subsidies, of which parts were paid in the first quarter of 2012; offset by (c) a decrease of $0.8
million of advertisement and distribution expenses incurred as a result of the reduction of retail sales.
General and Administrative Expenses
General and administrative
expenses included payroll, professional services, rental, travels, depreciation and amortization. General and administrative
expenses for the three months ended June 30, 2013 was $3.0 million, an increase of 0.9 million, or 43.4% compared to $2.1
million for the three months ended June 30, 2012. This increase was primarily
due to
(a)
an increase of $0.5 million for the management team enhancement, as well as the business developments at the corporate level
and
(b)
an increase of $0.4 million of professional service fees, mainly spent on financing consulting, internal control
consulting, legal fees and other services related to capital markets
.
Interest Expense
Interest expense for the three months ended
June 30, 2013 was $0.2 million compared to $0.4 million for the three months ended June 30, 2012, a decrease of $0.2 million, or
48.9%. This decrease was mainly due to the decrease in the balances on loans. We had a decrease in the average loan balance from
$15.8 million for the three months ended June 30, 2012 to $8.6 million for the three months ended June 30, 2013.
Non-operating income (loss)
Non-operating
loss for the three months ended June 30, 2013 was $1.2 million, mainly representing inventory loss due to the collapse of warehouses
under a heavy snow storm. On April 19, 2013, an unexpected heavy snow storm collapsed the warehouses
located
in Taiyuan, Shanxi Province leased by the Company’s Grain Division and
caused approximately $1.2 million in
damage to our grain goods stored in those warehouses. Non-operating income for the three months ended June 30, 2012 was not material.
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 Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, are subject to the EIT exemption. All of our other subsidiaries
are subject to the 25% EIT rate.
Income tax expenses were $1
85,120 for the three
months ended June 30, 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 $1,089,402 for the three months ended June
30, 2012, which consisted of $329,409 of current income tax expenses derived from Taizihu Group and $759,993 of deferred income
tax expenses primarily derived from Detian Yu for additional valuation allowance for deferred tax assets generated in previous
years due to uncertainty of realization of net operating losses carryover.
The decrease of income taxes was mainly due to
the decline of deferred tax expenses.
Net Income (loss)
As a result of the above, we had net loss
available to common shareholders of $4.1 million for the three months ended June 30, 2013 compared to a net income of $2.8 million
for the three months ended June 30, 2012, a decrease of $6.9 million, or 244.8%.
Results of Operations for the Six Months Ended June 30, 2013
as Compared to the Six Months Ended June 30, 2012
|
|
For The Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
140,777,815
|
|
|
$
|
118,576,479
|
|
|
$
|
22,201,336
|
|
|
|
18.7
|
%
|
Cost of goods sold
|
|
|
(126,363,389
|
)
|
|
|
(95,654,272
|
)
|
|
|
(30,709,117
|
)
|
|
|
32.1
|
%
|
Gross Profit
|
|
|
14,414,426
|
|
|
|
22,922,207
|
|
|
|
(8,507,781
|
)
|
|
|
-37.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
(8,133,626
|
)
|
|
|
(8,131,419
|
)
|
|
|
(2,207
|
)
|
|
|
0.0
|
%
|
General and administrative expenses
|
|
|
(4,904,238
|
)
|
|
|
(3,965,171
|
)
|
|
|
(939,067
|
)
|
|
|
23.7
|
%
|
Total Operating Expense
|
|
|
(13,037,864
|
)
|
|
|
(12,096,590
|
)
|
|
|
(941,274
|
)
|
|
|
7.8
|
%
|
Operating income
|
|
|
1,376,562
|
|
|
|
10,825,617
|
|
|
|
(9,449,055
|
)
|
|
|
-87.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,672
|
|
|
|
17,676
|
|
|
|
(4,004
|
)
|
|
|
-22.7
|
%
|
Interest expense
|
|
|
(403,281
|
)
|
|
|
(930,039
|
)
|
|
|
526,758
|
|
|
|
-56.6
|
%
|
Non-operating income (loss)
|
|
|
(1,199,996
|
)
|
|
|
576,650
|
|
|
|
(1,776,646
|
)
|
|
|
-308.1
|
%
|
Total Other Expense
|
|
|
(1,589,605
|
)
|
|
|
(335,713
|
)
|
|
|
(1,253,892
|
)
|
|
|
373.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(213,043
|
)
|
|
|
10,489,904
|
|
|
|
(10,702,947
|
)
|
|
|
-102.0
|
%
|
Income taxes
|
|
|
(525,553
|
)
|
|
|
(1,290,696
|
)
|
|
|
765,143
|
|
|
|
-59.3
|
%
|
Net income (loss)
|
|
|
(738,596
|
)
|
|
|
9,199,208
|
|
|
|
(9,937,804
|
)
|
|
|
-108.0
|
%
|
Net Income (loss) attributable to noncontrolling interests
|
|
|
3,804
|
|
|
|
40,869
|
|
|
|
(37,065
|
)
|
|
|
-90.7
|
%
|
Net income (loss) attributable to Deyu Agriculture Corp.
|
|
|
(734,792
|
)
|
|
|
9,240,077
|
|
|
|
(9,974,869
|
)
|
|
|
-108.0
|
%
|
Preferred stock dividends
|
|
|
(233,423
|
)
|
|
|
(220,052
|
)
|
|
|
(13,371
|
)
|
|
|
6.1
|
%
|
Net income (loss) available to common stockholders
|
|
$
|
(968,215
|
)
|
|
$
|
9,020,025
|
|
|
$
|
(9,988,240
|
)
|
|
|
-110.7
|
%
|
Net Revenue
Our net revenue for the six months ended June 30, 2013 was $140.8 million compared with $118.6 million
for the six months ended June 30, 2012, an increase of $22.2 million, or 18.7%. This increase was the combined result of an increase
of $38.
2 million in bulk trading sales off-set by a decrease of $9.4 million
in corn sales and a decrease of $6.5 million in grain sales. Sales derived from our Corn Division, Grain Division and Bulk Trading
Division for the six months ended June 30, 2013 were $71.2 million, $22.7 million and $46.9 million, respectively, accounting for
50.5%, 16.2% and 33.3% 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 Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Volume
(ton)
|
|
|
Net Revenue
|
|
|
% of
total
sales
|
|
|
Volume
(ton)
|
|
|
Net Revenue
|
|
|
% of
total
sales
|
|
|
Changes
|
|
|
%
|
|
Corn Division
|
|
|
196,620
|
|
|
$
|
71,123,730
|
|
|
|
50.5
|
%
|
|
|
221,437
|
|
|
$
|
80,564,872
|
|
|
|
67.9
|
%
|
|
$
|
(9,441,142
|
)
|
|
|
-11.7
|
%
|
Grain Division
|
|
|
14,699
|
|
|
|
22,739,314
|
|
|
|
16.2
|
%
|
|
|
34,670
|
|
|
|
29,269,621
|
|
|
|
24.7
|
%
|
|
|
(6,530,307
|
)
|
|
|
-22.3
|
%
|
Bulk Trading Division
|
|
|
77,198
|
|
|
|
46,914,771
|
|
|
|
33.3
|
%
|
|
|
23,675
|
|
|
|
8,741,986
|
|
|
|
7.4
|
%
|
|
|
38,172,785
|
|
|
|
436.7
|
%
|
Total
|
|
|
288,517
|
|
|
$
|
140,777,815
|
|
|
|
100.0
|
%
|
|
|
279,782
|
|
|
$
|
118,576,479
|
|
|
|
100.0
|
%
|
|
$
|
22,201,336
|
|
|
|
18.7
|
%
|
Net revenue from our Corn Division for the
six months ended June 30, 2013 was approximately $71.1 million, a decrease of $9.4 million, or approximately 11.7%, as compared
to $80.6 million for the six months ended June 30, 2012. The decrease was mainly attributable to the weakening demand for corn
in the corn industry. The demand from livestock feeds factories weakened due to the decrease of pork prices and the spread of bird
flu H7N9 during the reporting period.
Net revenue from our Grain Division for the
six months ended June 30, 2013 was $22.7 million, a decrease of $6.5 million, or 22.3%, as compared to $29.3 million for the six
months ended June 30, 2012. The decrease was mainly attributable to the decline of retail sales in supermarket and convenience
stores, which was caused by 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 six months ended June 30, 2013 was $46.9 million, an increase of $38.2 million, or 436.7% as compared to $8.7 million for
the six months ended June 30, 2012. This increase was mainly attributable to our strategic shift from grain retail sales to wholesale
or bulk trading.
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 increased by $
30.7
million, or 32.1%, from $95.7 million for the six months ended June 30, 2012 to $126.4 million for the six months ended June 30,
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 Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross Profit
|
|
|
% of total
Gross Profit
|
|
|
Margin
|
|
|
Gross Profit
|
|
|
% of total
Gross Profit
|
|
|
Margin
|
|
Corn Division
|
|
$
|
8,144,399
|
|
|
|
56.5
|
%
|
|
|
11.5
|
%
|
|
$
|
12,926,022
|
|
|
|
56.4
|
%
|
|
|
16.0
|
%
|
Grain Division
|
|
|
4,391,386
|
|
|
|
30.5
|
%
|
|
|
19.3
|
%
|
|
|
9,119,667
|
|
|
|
39.8
|
%
|
|
|
31.2
|
%
|
Bulk Trading Division
|
|
|
1,878,641
|
|
|
|
13.0
|
%
|
|
|
4.0
|
%
|
|
|
876,518
|
|
|
|
3.8
|
%
|
|
|
10.0
|
%
|
Total
|
|
$
|
14,414,426
|
|
|
|
100
|
%
|
|
|
10.2
|
%
|
|
$
|
22,922,207
|
|
|
|
100
|
%
|
|
|
19.3
|
%
|
Our gross profit decreased by $8.5 million,
or 37.1%, from $22.9 million for the six months ended June 30, 2012 to $14.4 million for the six months ended June 30, 2013. The
decrease was a combined result of a decrease in gross profits of $4.8 million in the Corn Division and a decrease of $4.7 million
in the Grain Division, offset by an increase of $1.0 million in the Bulk Trading Division. Our gross margin decreased from 19.3%
for the six months ended June 30, 2012 to 10.2% for the six months ended June 30, 2013. The decrease in gross margin was mainly
the combined result of 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 $8.1
million, contributing to 56.5% of total gross profit for the six months ended June 30, 2013. Gross margin for our Corn Division
was 11.5% for the six months ended June 30, 2013, down by 450 basis points from 16.0% for the six months ended June 30, 2012. The
decrease in gross margin was mainly attributable to the weakening demand in the corn industry with an oversupply of corn after
a good harvest in 2012. The corn demand from livestock feed factories weakened due to the decrease of pork prices and the spread
of bird flu H7N9 during the reporting period. The market sales prices of corn decreased while purchase prices from farmers didn’t
decline consistently due to the government's protective farming policies in favor of farmers.
Gross
profit in the Grain Division was $4.4 million, contributing to 30.5% of total gross profit for the six months ended June 30, 2013.
Gross margin for the Grain Division was 19.3% for the six months ended June 30, 2013, which decreased by 1190 basis points from
31.2% for the six months ended June 30, 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 has relatively lower gross margins but with fewer distribution expenses.
Gross profit in the Bulk Trading Division was $1.
9
million, contributing to 13.0% of total gross profit for the six months ended June 30, 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 4.0% for the six months ended June 30, 2013, a decrease of 600 basis
points from10.0% for the six months ended June 30, 2012. This decrease
was mainly attributable to severe market fluctuation of grains in May 2013, which caused negative margin for some transactions.
Selling Expenses
Selling expenses included expenses of freight, warehousing, handling, distribution, advertising, farmer
subsidies, payroll and other expenses. Selling expenses for the six months ended June 30, 2013 were $8.1 million, which was approximately
the same for the six months ended June 30, 2012. The material fluctuations between the two periods included: (a)
an
increase of $0.8 million of the expenses of handling, warehousing and freight, caused by frequent heavy rainfall in recent months;
and (b) a decrease of $1.1 million of advertisement and distribution 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 six months ended June 30, 2013 was $4.9 million, an increase of $0.9 million compared to the six months ended June
30, 2012. This increase was primarily the combined result of (a) an increase of $0.7 million for the management team
enhancement, as well as the business developments at the corporate level
;
and
(b)
an increase of $0.4 million of professional service fees, mainly spent on financing consulting, internal control consulting,
legal fees and other services related to capital markets; offset by
(c)
a
decrease of
$0.2
million of payroll related expenses
and
other expenses.
Interest Expense
Interest expense for the six months ended
June 30, 2013 was $0.4 million compared to $0.9 million for the six months ended June 30, 2012, a decrease of $0.5 million, or
56.6%. This decrease was mainly due to the decrease in the balances on loans. We had a decrease in the average loan balance from
$19.0 million for the six months ended June 30, 2012 to $8.6 million for the six months ended June 30, 2013.
Non-operating income (loss)
Non-operating loss for the three months
ended June 30, 2013 was $1.2 million, mainly representing the inventory loss due to the collapse of our warehouses under a heavy
snow storm. On April 19, 2013, an unexpected heavy snow storm collapsed our warehouses
located
in Taiyuan, Shanxi Province leased by the Company’s Grain Division and
caused approximately $1.2 million in damage
to our grain goods stored in those warehouses. Non-operating income for the three months ended June 30, 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 Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, are subject to the EIT exemption. All of our other subsidiaries
are subject to the 25% EIT rate.
Income tax expenses were $525,553 for the
six months ended June 30, 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 $1,290,696 for the six months ended June
30, 2012, which consisted of $500,436 of current income tax expenses derived from Taizihu Group and $790,260 of 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 of income taxes was mainly due to the decline of deferred
tax expenses.
Net Income (loss)
As a result of the above, we had net loss
available to common shareholders of $1.0 million for the six months ended June 30, 2013 compared to a net income of $9.0 million
for the six months ended June 30, 2012, a decrease of $10.0 million, or 110.7%.
Liquidity and Capital Resources
The following summarizes the key components
of our cash flows for the six months ended June 30, 2013 and 2012:
|
|
For the Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
2,219,493
|
|
|
$
|
10,699,003
|
|
Net cash used in investing activities
|
|
|
(285,476
|
)
|
|
|
(5,437,793
|
)
|
Net cash provided by (used in) financing
activities
|
|
|
1,043,320
|
|
|
|
(7,546,524
|
)
|
Effect of exchange rate change on cash
and cash equivalents
|
|
|
99,071
|
|
|
|
18,372
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
$
|
3,076,408
|
|
|
$
|
(2,266,942
|
)
|
Net cash provided by operating activities
totaled approximately $2.2 million for the six months ended June 30, 2013 and $10.7 million for the six months ended June 30, 2012,
a decrease of $8.5 million. This decrease was primarily attributable to our decrease of net income. We incurred $1.0 million of
net loss available to common stockholders for the six months ended June 30, 2013, while we earned $9.0 million of net income available
to common stockholders for the six months ended June 30, 2012.
Net cash used in investing activities was approximately $0.
3
million for the six months ended June 30, 2013, mainly for the construction of factories and the purchase of equipment, while net
cash used in investing activities was $5.4 million for the six months ended June 30, 2012 and mainly consisted of the payment for
the acquisition of the Taizihu Group.
Net cash provided by financing
activities was approximately $1.0 million for the six months ended June 30, 2013 as compared to net cash used of $7.5 million
for the six months ended June 30, 2012. We obtained an aggregate of $0.3 million of short-term loans from related parties, received
$0.4 million of net proceeds of short-term bank loans and $0.3 million of cash released from restriction on a credit line of bank
loans for the six months ended June 30, 2013, while we repaid $7.6 million of net repayment of short-term bank loans, received
$0.3 million of net proceeds of short-term bank loans from related parties and paid $0.2 million in preferred dividends for the
six months ended June 30, 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 June 30, 2013:
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Loans
|
|
$
|
8,832,242
|
|
|
$
|
8,832,242
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating Lease Obligations
|
|
|
2,374,218
|
|
|
|
315,859
|
|
|
|
424,578
|
|
|
|
342,816
|
|
|
|
1,290,965
|
|
|
|
$
|
11,206,460
|
|
|
$
|
9,148,101
|
|
|
$
|
424,578
|
|
|
$
|
342,816
|
|
|
$
|
1,290,965
|
|
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, 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:
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 June 30, 2013, the balance of restricted cash included:
(a) $488,806 of cash restricted as a pledge for a bank loan of $1,303,484 (RMB8, 000,000) obtained from Dah Sing Bank (China) Co.
Ltd. on July 18, 2012; the loan was paid off on July 17, 2013; and (b) $16,294 of cash restricted as a pledge for a bank loan of
$14,664 (RMB90,000) obtained from Bank of Communications Gongzhufen Sub-branch obtained on December 12, 2012.
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. As of June 30, 2013 and December 31, 2012, the balances of accounts receivable greater than three months were 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 June 30, 2013 and December 31, 2012, slow moving or obsolete inventories identified by management were 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 additions,
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. There was no impairment of long-lived assets as of June 30, 2013
and December 31, 2012 or for the six months ended June 30, 2013 and 2012.
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 asset. There was no impairment of intangible assets as of June 30, 2013 and December 31, 2012 or for the six months
ended June 30, 2013 and 2012.
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 material effect on the Company's financial position or results of operations for
the six months ended June 30, 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 six months
ended June 30, 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 six months ended June 30, 2013 and
$669,420
for the six months ended June 30, 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. For the six months ended June 30, 2013 and 2012, returns of our products 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 six months ended June 30, 2013 and 2012 were
$128,897 and $1,046,917, respectively.
Research and development
The Company expenses its research and development costs as incurred.
Research and development expenses for the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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.
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.