10-Q 1 v157406_10q.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10−Q
 
(Mark One)
 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2009
 
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to _____________
 
Commission File Number:   333-83125
 
YUHE INTERNATIONAL, INC.
(Exact name of Registrant as Specified in its Charter)
 
Nevada
 
33-0215298
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification. No.)
 
301 Hailong Street
Hanting District, Weifang, Shandong Province
The People’s Republic of China
(Address of principal executive offices)
 
86 536 736 3688
(Registrant’s Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       Yes ¨    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer ¨  Accelerated filer ¨   Non-accelerated filer  ¨
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  ¨   No  x
 
The number of shares outstanding of each of the issuer’s classes of common equity, as of June 30, 2009 is as follows:
 
Class of Securities
 
Shares Outstanding
Common Stock, $0.001 par value
 
15,722,180

 
 

 

TABLE OF CONTENTS
 
   
Page
 
PART I FINANCIAL INFORMATION
 
     
Item 1.
Condensed Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4T.
Controls and Procedures
25
     
 
PART II OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
27
Item 1A.
Risk Factors
27
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
27
Item 3.
Defaults Upon Senior Securities
28
Item 4.
Submission of Matters to a Vote of Securities Holders
28
Item 5.
Other Information
28
Item 6.
Index to Exhibits
29
Signatures
 
30
Certifications
   

 
2

 

PART I
FINANCIAL INFORMATION
 
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
 
Index to Financial Statements
 
   
Page
Financial Statements
 
 
     
Condensed Consolidated Financial Statements for the Period from January 1, 2008 to January 31, 2008 for Weifang Yuhe Poultry Co., Ltd.
 
F-1 - F-23
     
Condensed Consolidated Financial Statements for the Three and Six Months Ended June 30, 2009 and 2008 for Yuhe International, Inc.
 
F-24 - F-50
     
Unaudited Pro Forma Consolidated Financial Statements for Yuhe International, Inc.
 
F-51 - F-53

 
3

 

WEIFANG YUHE POULTRY CO., LTD
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated in US dollars)

 
F-1

 

WEIFANG YUHE POULTRY CO., LTD
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 FOR THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated in US dollars)
 
  
 
Page
     
Condensed Consolidated Balance Sheet - unaudited
 
F-3 to F-4
     
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - unaudited
 
F-5
     
Condensed Consolidated Statements of Changes in Stockholders’ Equity - unaudited
 
F-6
     
Condensed Consolidated Statements of Cash Flows - unaudited
 
F-7 to F-8
     
Notes to Condensed Consolidated Financial Statements - unaudited
 
F-9 to F-23

 
F-2

 

WEIFANG YUHE POULTRY CO., LTD
 
CONDENSED CONSOLIDATED BALANCE SHEET - unaudited
AS AT JANUARY 31, 2008
(Stated in US Dollars)
 
ASSETS
       
Current assets
       
Cash and cash equivalents
 
$
1,051,106
 
Accounts receivable
   
1,475
 
Inventories
   
4,624,425
 
Advances to suppliers
   
305,013
 
         
Total current assets
 
$
5,982,019
 
Deposits paid
   
1,084,265
 
Other receivables, net
   
3,001,699
 
Unlisted investments
   
279,738
 
Plant and equipment, net
   
15,323,245
 
Intangible assets, net
   
2,832,869
 
Due from related companies
   
3,775,469
 
Due from directors
   
233,037
 
Deferred expenses
   
602,918
 
Total assets
 
$
33,115,259
 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
       
         
Current liabilities
       
Accounts payable
 
$
4,800,664
 
Current portion of long-term loans
   
4,383,951
 
Loans payable
   
1,770,862
 
Payroll and payroll related liabilities
   
545,565
 
Accrued expenses
   
473,020
 
Advances from customers
   
209,694
 
Tax payables
   
125,645
 
Due to related companies
   
320,913
 
Total current liabilities
 
$
12,630,315
 
 
See accompanying notes to condensed consolidated financial statements

 
F-3

 

WEIFANG YUHE POULTRY CO., LTD
 
CONDENSED CONSOLIDATED BALANCE SHEET – unaudited (Continued)
AS AT JANUARY 31, 2008
(Stated in US Dollars)
 
Long-term liabilities
       
Long-term loans
 
$
6,165,365
 
Total liabilities
 
$
18,795,680
 
         
Commitments and contingencies
 
$
-
 
         
Minority interests
 
$
278,766
 
         
STOCKHOLDERS’ EQUITY
       
Registered capital
 
$
3,019,003
 
Additional paid-in capital
   
7,009,523
 
Retained earnings
   
3,058,878
 
Accumulated other comprehensive income
   
953,409
 
         
   
$
14,040,813
 
         
Total liabilities and stockholders’ equity
 
$
33,115,259
 
 
See accompanying notes to condensed consolidated financial statements

 
F-4

 

WEIFANG YUHE POULTRY CO., LTD
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) – unaudited
FOR THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated in US Dollars)
 
Net revenues
 
$
1,491,329
 
Cost of revenues
   
(1,337,438
)
         
Gross profit
 
$
153,891
 
Operating expenses:
       
Selling expenses
   
(28,997
)
General and administrative expenses
   
(122,695
)
Bad debts recovery
   
219,893
 
Total operating income
   
68,201
 
Income from operations
 
$
222,092
 
Other income
   
5,604
 
Interest income
   
5
 
Interest expenses
   
(86,167
)
         
Income before income taxes
 
$
(80,558
)
         
Income taxes
   
-
 
         
Net income before minority interests
 
$
141,534
 
         
Minority interests (earnings)
   
(73,398
)
         
Net income
 
$
68,136
 
         
Other comprehensive income
   
-
 
Foreign currency translation adjustment
   
201,390
 
         
Comprehensive income
 
$
269,526
 
 
See accompanying notes to condensed consolidated financial statements

 
F-5

 

WEIFANG YUHE POULTRY CO., LTD
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – unaudited
FOR THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated in US Dollars)
 
             
Accumulated
     
     
Additional
     
Other
     
 
Registered
 
paid-in
 
Retained
 
Comprehensive
     
 
capital
 
capital
 
earnings
 
Income
 
Total
 
           
Balance, January 1, 2008
  $ 482,713     $ 7,009,523     $ 2,990,742     $ 752,019     $ 11,243,997  
Net income
    -       -       68,136       -       68,136  
Injection of additional capital from Bright Stand (Note 12)
    2,536,290       -       -       -       2,536,290  
Foreign currency translation adjustment
    -       -       -       201,390       201,390  
                                         
Balance, January 31, 2008
  $ 3,019,003     $ 7,009,523     $ 3,058,878     $ 953,409     $ 14,040,813  
 
See accompanying notes to condensed consolidated financial statements

 
F-6

 
 
WEIFANG YUHE POULTRY CO., LTD
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008 – unaudited
(Stated in US Dollars)
 
Cash flows from operating activities
       
Net income
 
$
68,136
 
Adjustments to reconcile net income to net cash used in operating activities
       
Depreciation
   
121,213
 
Amortization
   
5,200
 
Minority interests
   
73,398
 
Change in assets and liabilities
       
Advances to suppliers
   
212,910
 
Prepaid expenses
   
64,556
 
Deposits paid
   
111,147
 
Inventories
   
(607,144
)
Deferred expenses
   
(41,232
)
Accounts payable
   
(768,683
)
Payroll and payroll related liabilities
   
(304,784
)
Accrued expenses
   
104,606
 
Advances from customers
   
15,465
 
Other tax payables
   
(9,266
)
         
Net cash used in operating activities
 
$
(954,478
)
         
Cash flows from investing activities
       
Deposits paid and acquisition of property, plant & equipment
 
$
(206,700
)
Decrease in other receivables
   
(238,310
)
Advances from related parties receivables
   
2,321,943
 
Net cash provided by investing activities
 
$
1,876,933
 

 
F-7

 

WEIFANG YUHE POULTRY CO., LTD
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – unaudited (Continued)
FOR THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated in US Dollars)
 
Cash flows from financing activities
       
Repayments of loan payables
 
$
(1,555,807
)
Proceeds from capital contributions
   
2,536,290
 
Repayment to related parties
   
(900,140
)
         
Net cash provided by financing activities
 
$
80,343
 
         
Effect of foreign currency translation on cash and cash equivalents
   
853
 
         
Increase in cash and cash equivalents
   
1,003,651
 
         
Cash and cash equivalents-beginning of period
   
47,455
 
         
Cash and cash equivalents-end of period
 
$
1,051,106
 
Supplementary cash flow information:
       
Interest paid in cash
 
$
180
 
 
See accompanying notes to condensed consolidated financial statements

 
F-8

 

WEIFANG YUHE POULTRY CO., LTD
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
1.      Organization and principal activities
 
Weifang Yuhe Poultry Co., Ltd, “the Company”, was established in Weifang, Shandong of the People’s Republic of China, the PRC, as a limited company on March 8, 1996. The Company currently operates through itself and one subsidiary located in Mainland China: Weifang Taihong Feed Co., Ltd., “Taihong”.
 
Taihong was established in Weifang, Shandong of the People’s Republic of China, the PRC, as a limited company on May 26, 2003. Pursuant to a group reorganization on September 14, 2007, the Company became the holding company of Taihong.
 
The Company and its subsidiary (hereinafter, collectively referred to as “the Group”) are engaged in the business of chick and feed production.
 
2.      Summary of significant accounting policies
 
         (a)     Method of Accounting
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars ($).
 
         (b)     Principles of consolidation
 
The consolidated financial statements are presented in US Dollars and include the accounts of the Company, Taihong, a subsidiary which the company has a 56.25% ownership. All significant inter-company balances and transactions are eliminated in consolidation.
 
The Company acquired its subsidiary on September 14, 2007 through a reorganization between entities under common control. Accordingly, the transaction was accounted for similar to a pooling of interests in accordance with SFAS 141 “Business Combination” Appendix D and is presented as if it had occurred at the beginning of the first period presented. The following table depicts the identity of the subsidiary:
 
Name of Company
Place & date of
Incorporation
 
Attributable Equity
Interest %
   
Registered
Capital
 
     
Weifang Taihong Feed Co., Ltd.
PRC/
May 26 2003
    56.25     $ 965,379  
(RMB8,000,000)
 
         (c)     Use of estimates
 
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

 
F-9

 

WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
2.      Summary of significant accounting policies (Continued)
 
         (d)     Economic and political risks
 
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
 
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
 
         (e)     Plant and equipment
 
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
 
Buildings
20 years
Machinery
10 years
Vehicle
5 years
Furniture and equipment
3 years
 
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
 
(f)      Intangible assets
 
Intangible assets represent land use rights in the PRC. Land use rights are carried at cost and amortized on a straight-line basis over the period of rights of 50 years commencing from the date of acquisition of equitable interest. According to the laws of the PRC, the government owns all of the land in the PRC. Companies or individual are authorized to possess and use the land only through land usage rights approved by the PRC government.

 
F-10

 

WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
         2.      Summary of significant accounting policies (Continued)
 
         (g)     Guarantee Expense
 
The Company accounts for its liability for product guaranteed in accordance with FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Under FIN 45, the aggregate changes in the liability for accruals related to product warranties issued during the reporting period must be charged to expense as incurred.
 
The Company guarantees a 98% survival rate of its product by delivering additional 2% of the product. The guarantee expires seven days after delivery. If the survival rate falls below 96%, the Company provides additional guarantee compensation to customers. Based on historical experience, the likelihood that survival rate falls below 96% is remote and therefore no accrued guarantee liability was recorded at period end. The Company records guarantee expense as incurred. There was no guarantee expense for the period from January 1, 2008 to January 31, 2008.
 
         (h)     Accounting for the impairment of long-lived assets
 
The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is done by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.
 
If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the reporting periods, there was no impairment loss.
 
         (i)      Inventories
 
Inventories consisting of raw materials, work in progress and finished goods are stated at lower of cost or net realizable value. The cost of inventories is determined using weighted average cost method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. At each balance sheet date, inventories that are worth less than cost are written down to their net realizable value, and the difference is charged to the cost of revenues of that period.
 
         (j)      Trade receivables
 
Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Management adopted an allowance policy which provides an allowance equivalent to 30% gross amount of accounts receivables due over 6 months and 60% of gross amount of accounts receivables due over 1 year. Full provision will be made for accounts receivables due over 2 years. Bad debts are written off as incurred. It is a common industry practice in the PRC that customers pay in advance before delivery of the products. As a result, the Company maintains a low level of trade receivables.

 
F-11

 
 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
2.      Summary of significant accounting policies (Continued)
 
         (k)     Cash and cash equivalents
 
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts only in the PRC. The Company does not maintain any bank accounts in the United States of America. Cash deposits in PRC banks are not insured by any government agency or entity.
 
         (l)      Revenue recognition
 
Revenue from sales of the Company's products is recognized when the significant risks and rewards of ownership have been transferred to the third-party distributor and larger producers at the time when the products are delivered to and accepted by them, the sales price is fixed or determinable as stated in the sales contract, and collection is reasonably assured.
 
         (m)    Cost of revenues
 
Cost of revenues consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. Write-down of inventory to lower of cost or market is also recorded in cost of revenues.
 
         (n)    Advertising
 
The Group expensed all advertising costs as incurred. There was no advertising expenses for the period from January 1, 2008 to January 31, 2008.
 
 (o)    Retirement benefit plans
 
The employees of the Group are members of a state-managed retirement benefit plan operated by the government of the PRC. The Group is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit plan is to make the specified contributions.
 
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred. The retirement benefit expenses for the period from January 1, 2008 to January 31, 2008 were $5,843.

 
F-12

 

WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
2.      Summary of significant accounting policies (Continued)
 
         (p)     Income tax
 
The Company accounts for income taxes using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.
 
The Company is operating in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 25%. However, the Company is a poultry company, and in accordance with the relevant regulations regarding the favorable tax treatment for an outstanding poultry company, the Company is entitled to a tax free treatment until January 31, 2008.
 
The corporate income tax for the subsidiary, Weifang Taihong Feed Co., Ltd is 25%.
 
         (q)     Shipping and handling fees
 
Shipping and handling fees are expensed when incurred. Shipping and handling charges included in the selling expenses for the period from January 1, 2008 to January 31, 2008 was $5,330.
 
         (r)      Minority interests
 
Minority interests refer to the 43.75% investment by third parties in the equity of Taihong and are not held by the Company.
 
         (s)     Foreign currency translation
 
The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
 
January 31, 2008
   
Balance sheet
RMB  7.20180 to US$1.00
Statement of income and comprehensive income
RMB  7.25883 to US$1.00
 
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

 
F-13

 
 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
2.      Summary of significant accounting policies (Continued)
 
         (t)      Comprehensive income
 
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of comprehensive income is the foreign currency translation adjustment.
 
         (u)     Fair value of financial instruments
 
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”) requires entities to disclose the fair values of financial instruments except when it is not practicable to do so. Under SFAS No. 107, it is not practicable to make this disclosure when the costs of formulating the estimated values exceed the benefit when considering how meaningful the information would be to financial statement users.
 
The fair values of all assets and liabilities do not differ materially from their carrying amounts. None of the financial instruments held are derivative financial instruments and none were acquired or held for trading purposes during the period for January 1, 2008 to January 31, 2008.
 
(v)              Recent accounting pronouncements
 
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The Company is currently evaluating the impact of adopting SFAS No. 141R on its consolidated financial statements.
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on or after December 15, 2008 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. The Company is currently evaluating the impact of adopting SFAS No. 160 on its consolidated financial statements.

 
F-14

 
 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
3.      Inventories
 
Inventories consist of the following:
 
Raw materials
 
$
706,405
 
Work in progress
   
3,870,136
 
Finished goods
   
47,884
 
   
$
4,624,425
 
 
4.      Other receivables, net
 
Other receivables, net consist of the following:
 
Loan receivables
 
$
3,234,413
 
Other receivables
   
230,459
 
Less: Allowances
   
(436,173
)
         
   
$
3,001,699
 
 
Other receivables are unsecured, interest free and have no fixed repayment date.
 
Recovery of bad debts of other receivable for the period ended January 31 2008 included in other income $61,368.
 
Allowance is made when collection of the full amount is no longer probable. Management reviews and adjusts this allowance periodically based on historical experience, current economic climate as well as its evaluation of the collectibility of outstanding accounts. The Group evaluates the credit risks of its customers utilizing historical data and estimates of future performance.

 
F-15

 
 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
5.      Unlisted investments
 
Unlisted investments at January 31, 2008 are the 3% investments in Hanting Rural Credit Cooperative, “Hanting”. It is stated at cost because the Group does not have significant influence or control over this investment. The management of the Company has reviewed the investment in Hanting for any impairment and determined there is no indication that the carrying amount of Hanting may not be recoverable.
 
6.      Plant and equipments, net
 
Plant and equipment consists of the following:
 
At cost
       
Buildings
 
$
9,849,070
 
Machinery
   
5,408,153
 
Motor vehicles
   
432,291
 
Furniture and equipment
   
276,570
 
   
$
15,966,084
 
Less: accumulated depreciation
   
(5,063,219
)
Construction in progress
   
4,420,380
 
   
$
15,323,245
 
 
Depreciation expenses included in the cost of sales during the period from January 1, 2008 to January 31, 2008 was $83,448, and included in the general and administrative expenses for the period ended January 31, 2008 was $37,765.
 
As of January 31, 2008, buildings and machinery of the Group were pledged as collateral under certain loan arrangements.
 
There was no interest capitalized for the construction in progress during the period from January 1, 2008 to January 31, 2008.

 
F-16

 
 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
7.      Intangible assets, net
 
Intangible assets consist of the following:
 
Land use rights, at cost
 
$
3,117,798
 
Less: accumulated amortization
   
284,929
 
   
$
2,832,869
 
 
As of January 31, 2008, land use rights of the Group were pledged as collateral under certain loan arrangements.
 
Amortization expense included in the cost of revenues during the period from January 1, 2008 to January 31, 2008 was $5,200.
 
8.      Due from related companies
 
Hefeng Green Agriculture Co., Ltd, “Hefeng Green ”  - Mr. Gao Zhentao, a director of the Company is also a director of Hefeng Green
 
$
72,263
 
Shandong Yuhe Food Group Co., Ltd, “Yuhe Group” - Mr. Gao Zhentao, a director of the Company is also a directorof Yuhe Group
   
3,653,930
 
Shandong Yuhe New Agriculture Academy of Sciences, “Shandong Yuhe” - Mr. Gao Zhentao, a director of the Company is also a director of Shandong Yuhe
   
49,251
 
Weifang Jiaweike Food Co., Ltd, “Weifang Jiaweike” - Mr. Gao Zhentao, a director of the Company is also a director of Weifang Jiaweike
   
25
 
   
$
3,775,469
 
 
The amounts due from related companies are unsecured, interest free and have no fixed repayment date.

 
F-17

 

 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
9.      Due from directors
 
Details of due from directors are as follows:
 
Mr. Tan Yi
 
$
79,491
 
Mr. Gao Zhenbo
   
78,091
 
Mr. Gao Zhentao
   
75,455
 
   
$
233,037
 
 
The amounts due from directors are unsecured, interest free and have no fixed repayment date.
 
10.    Loan payable
 
Loans payable are loans from unrelated companies for temporary fund for operation purposes. They are unsecured, interest free and have no fixed repayment date.
 
11.    Due to related companies
 
Weifang Hexing Breeding Co., Ltd, "Weifang Hexing" - Mr. Gao Zhentao, a director of the Company is also a director of Weifang Hexing
 
$
301,965
 
Shandong Yuhe Food Group Co., Ltd, "Yuhe Group" - Mr. Gao Zhentao, a director of the Company is also a director Yuhe Group
   
18,948
 
   
$
320,913
 
 
The amounts due to related companies are unsecured, interest free and have no fixed repayment date. These loans are used for working capital purposes.
 
Bright Stand is the legal and accounting acquirer of the Group. Bright Stand becomes the sole shareholder of the company after January 31, 2008 business combination.
 
F-18

 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
12.    Registered capital
 
As of January 31, 2008, capital contributions paid-up amounted to $3,019,003 (RMB 22,224,004).
 
Prior to the effective closing date of the acquisition transaction as discussed in Note 19, Bright Stand International Limited contributed $2,536,290 additional capital to the Company for working capital purposes.
 
13.    Long-term liabilities
 
The long-term liabilities are denominated in Chinese Renminbi and are presented in US dollars as follows:
 
Loans from Nansun Rural Credit, interest rate at 9.22% to 10.51% per annum, due from Nov 28, 08 to May 17, 10
 
$
8,350,383
 
         
Loans from Shuangyang Rural Credit, interest rate at 9.33% per annum, due on Oct 12, 08
   
904,625
 
         
Loans from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 9.22% to 13.31% per annum, due from Nov 28, 08 to Jan 10, 09
   
1,015,963
 
         
Loans from Hanting Rural Credit Cooperative, interest rate at 8.19% per annum, due from Nov 8, 09
   
278,345
 
         
     
10,549,316
 
Less: current portion of long-term  liabilities
   
(4,383,951
)
     
6,165,365
 
 
Future maturities of long-term loans as at January 31, 2008 are as follows:
 
Remainder of 2008
 
$
4,383,951
 
2009
   
2,686,040
 
2010
   
3,479,326
 
   
$
10,549,317
 
 
F-19

 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
14.    Income tax
 
The Company is operating in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 25%. However, the Company is an agricultural company, and in accordance with the relevant regulations regarding the tax exemption, the Company is tax-exempt as long as it is registered as an agricultural entity.
 
Taihong is operating in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 25%.
 
The Group uses the asset and liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. There are no material timing differences and therefore no deferred tax asset or liability at January 31, 2008
 
The provision for income taxes consists of the following:
 
Current tax
       
PRC
 
$
-
 
Deferral tax provision
   
-
 
   
$
-
 
 
All of the Group’s income (loss) before income taxes is from PRC sources. Actual income tax expenses reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 25% to income (loss) before income taxes during the period from January 1, 2008 to January 31, 2008 for the following reasons:
 
Income before income taxes
 
$
141,534
 
         
Computed “expected” income tax expense at 25%
 
$
35,384
 
Tax effect on net taxable temporary differences
   
(41,942
)
Effect of cumulative tax losses and tax holiday
   
6,558
 
         
   
$
-
 
 
F-20

 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
15.    Related parties transactions
 
The following material transactions with related parties during the years were in the opinion of the directors, carried out in the ordinary course of business and on normal commercial terms:
 
Sales of goods to a related company
 
$
695,851
 
 
Sales to Weifang Hexing Breeding Co., Ltd, a related company, during the period from January 1, 2008 to January 31, 2008.
 
During 2008, Weifang Jiaweike Food Co., Ltd. was disposed of to the Weifang Hexing Breeding Co., Ltd, a related company where Mr. Gao Zhentao, a director of the Company is also the director. (note 5)
 
16.    Significant concentrations and risk
 
(a)     Customer Concentrations
 
The Group has the following concentrations of business with each customer constituting greater than 10% of the Company’s gross sales:
 
Wang Jianbo
   
24.89
%
Wei Yunchao
   
22.10
%
Li Yubo
   
18.03
%
 
The Group has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties being experienced by its major customers.
 
The Group has the following concentrations of business with each supplier constituting greater than 10% of the Company’s gross purchases:
 
Ma Suping
   
15.94
%
Lu Xingzhong
   
10.20
%
 
(b)     Credit Risk
 
Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents. As of January 31, 2008, substantially all of the Group’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality.
 
F-21

 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
16.    Significant concentrations and risk (Continued)
 
(c)     Group’s operations are in China
 
All of the Group’s products are produced in China. The Group’s operations are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Group’s operations are subject to the risks of transfer of funds; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
 
17.    Business and geographical segments
 
The Company’s operations are classified into two principal reportable segments that provide different products or services.  Weifang is engaged in the business of chick while Taihong is engaged in the business of feed production, in which most of the product were used internally.  Separate management of each segment is required because each business unit is subject to different production and technology strategies.
 
Reportable Segments
 
   
Production
of chick
 
Production
of feeds
 
Total
 
               
External revenue
   
1,443,425
 
47,904
 
1,491,329
 
Intersegment revenue
       
737,602
 
737,602
 
Interest income
   
5
 
-
 
5
 
Interest expense
   
(34,819
)
(51,348
)
(86,167
)
Depreciation and amortization
   
116,071
 
10,342
 
126,413
 
Net profit (loss) after tax
   
(26,232
)
167,766
 
141,534
 
                 
Assets
               
Expenditures for long-lived assets
   
206,176
 
524
 
206,700
 
 
 Note: Intersegment revenue of $737,602 was eliminated in consolidation.

 
F-22

 
 
WEIFANG YUHE POULTRY CO., LTD
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated in US Dollars)
 
18.    Commitments and contingencies
 
Operating Leases - In the normal course of business, the Company leases the land for hen house under operating lease agreements. The Company rents land, primarily for the feeding of the chickens. The operating lease agreements generally contain renewal options that may be exercised at the Company's discretion after the completion of the base rental terms. The Company was obligated under operating leases requiring minimum rentals as follows:
 
Up to January 31,
       
         
2008
 
$
134,319
 
2009
   
146,530
 
2010
   
135,049
 
2011
   
77,648
 
2012
   
77,648
 
Thereafter
   
1,444,031
 
Total minimum lease payments
 
$
2,015,225
 
 
During the period for January 1, 2008 to January 31, 2008, rent expenses amounted to $22,432 was recorded as cost of sales.
 
19.    Subsequent Events
 
In January 31, 2008, Bright Stand International Limited, Bright Stand, a company incorporated in the British Virgin Islands, acquired 100% equity ownership of the Company and 43.75% equity ownership of Taihong for cash consideration equal to the appraised fair market value of the Company in the amount of $11,306,522, or RMB 81,450,000, and $312,530, or RMB 2,244,000. As a result, the Company and Taihong became wholly-owned subsidiaries of Bright Stand.

 
F-23

 

YUHE INTERNATIONAL, INC.
 
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008

 
F-24

 

YUHE INTERNATIONAL, INC.
 
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 
Index to condensed consolidated financial statements
 
   
Page
 
Condensed Consolidated Balance Sheets – unaudited
   
F-26
 
Condensed Consolidated Statements of Income and Comprehensive Income – unaudited
   
F-27
 
Condensed Consolidated Statements of Cash Flows – unaudited
   
F-28 - F-29
 
Notes to Unaudited Condensed Consolidated Financial Statements
   
F-30 - F-50
 

 
F-25

 
 
YUHE INTERNATIONAL, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(Stated in US Dollars)
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 17,289,486     $ 13,412,205  
Accounts receivable, net of allowances of $18,847 and $18,845
    978       902  
Inventories
    6,454,753       6,644,961  
Advances to suppliers
    1,138,701       661,138  
                 
Total current assets
    24,883,918       20,719,206  
                 
Plant and equipment, net
    26,831,096       27,112,276  
Deposits paid for acquisition of long term assets
    10,084,023       6,092,359  
Notes receivable, net and other receivable, net
    126,664       74,720  
Unlisted investments held for sale
    299,839       299,427  
Intangible assets, net
    2,880,997       2,909,752  
Due from related companies
    3,855,886       3,706,589  
Deferred expenses
    576,354       604,973  
                 
Total assets
  $ 69,538,777     $ 61,519,302  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 5,624,394     $ 4,606,055  
Current portion of long term loans
    8,327,489       1,356,832  
Other payables
    1,193,021       937,535  
Accrued expenses and payroll related liabilities
    2,472,085       2,125,587  
Advances from customers
    1,262,500       673,528  
Loan from director
    292,193       291,792  
Other liabilities
    294,609       285,132  
Due to related companies
    575,837       210,633  
                 
Total current liabilities
    20,042,128       10,487,094  
                 
Non-current liabilities
               
Long-term loans
    2,454,418       9,410,289  
                 
Total liabilities
    22,496,546       19,897,383  
                 
Commitments and contingencies
               
                 
Stockholders' Equity
               
Common stock at $.001 par value; 500,000,000 shares authorized, 15,722,180 shares issued and outstanding
    15,722       15,722  
Additional paid-in capital
    30,305,437       29,944,016  
Retained earnings
    15,529,486       10,522,673  
Accumulated other comprehensive income
    1,191,586       1,139,508  
                 
Total stockholders’ equity
    47,042,231       41,621,919  
                 
Total liabilities and stockholders’ equity
  $ 69,538,777     $ 61,519,302  
 
See accompanying notes to unaudited condensed consolidated financial statements

 
F-26

 

YUHE INTERNATIONAL, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME- (UNAUDITED)
(Stated in US Dollars)
 
   
For The Six Months Ended
   
For The Three Months Ended
 
   
June 30
   
June 30
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net revenue
  $ 20,748,763     $ 6,708,482     $ 9,834,373     $ 5,604,931  
                                 
Cost of revenue
    (13,883,779 )     (4,643,247 )     (7,031,426 )     (3,768,540 )
                                 
Gross profit
    6,864,984       2,065,235       2,802,947       1,836,391  
                                 
Operating Expenses
                               
                                 
Selling expenses
    (201,596 )     (144,831 )     (108,656 )     (96,291 )
General and administrative expenses
    (1,379,237 )     (719,211 )     (635,247 )     (457,961 )
                                 
Total operating expenses
    (1,580,833 )     (864,042 )     (743,903 )     (554,252 )
                                 
Income from operations
    5,284,151       1,201,193       2,059,044       1,282,139  
                                 
Non-operating income (expenses)
                               
                                 
Bad debts recovery
    -       86,915       -       73,770  
Interest income
    141       4,455       45       4,297  
Other income
    5,126       5,900       5,126       -  
Gain on disposal of fixed assets
    27,778       87,588       27,778       87,588  
Investment income
    15,509       6,074       -       6,074  
Interest expenses
    (325,427 )     (443,120 )     -       (262,646 )
Other expenses
    (465 )     (56,342 )     -       (26,078 )
                                 
Total other (expenses)
    (277,338 )     (308,530 )     32,949       (116,995 )
                                 
Net income before income taxes
    5,006,813       892,663       2,091,993       1,165,144  
Income taxes
    -       -       -       -  
                                 
Net income
  $ 5,006,813     $ 892,663     $ 2,091,993     $ 1,165,144  
                                 
Other comprehensive income
                               
Foreign currency translation
    52,078       1,068,750       3,806       650,829  
Comprehensive income
  $ 5,058,891     $ 1,961,413     $ 2,095,799     $ 1,815,973  
                                 
Earnings per share
                               
Basic
  $ 0.32     $ 0.07     $ 0.13     $ 0.07  
Diluted
  $ 0.32     $ 0.07     $ 0.13     $ 0.07  
                                 
Weighted average shares outstanding
                               
Basic
    15,722,180       12,844,935       15,722,180       15,543,330  
Diluted
    15,722,180       13,039,395       15,722,180       15,868,739  

See accompanying notes to unaudited condensed consolidated financial statements

 
F-27

 
 
YUHE INTERNATIONAL, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(Stated in US Dollars)
 
   
For The Six Months Ended
 
   
June 30
 
   
2009
   
2008
 
Cash flows from operating activities
           
Net income
  $ 5,006,813     $ 892,663  
Adjustments to reconcile net income to net cash used in operating activities:
               
Stock based compensation
    361,421       33,946  
Depreciation
    1,027,465       621,912  
Amortization
    32,759       26,497  
Bad debts recovery
    -       (86,915 )
Gain on disposal of fixed assets
    (27,778 )     (87,588 )
Income from unlisted investment
    -       (6,074 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (75 )     (2,359 )
Advances to suppliers
    (526,528 )     (301,750 )
Inventories
    199,889       (4,350,914 )
Deferred expenses
    29,459       (37,339 )
Accounts payable
    1,011,712       (699,260 )
Other payable
    254,103       (370,416 )
Payroll and payroll related liabilities
    (32,432 )     10,926  
Accrued expenses
    376,532       (574,584 )
Advances from customers
    588,416       (29,814 )
Other taxes payable
    9,090       9,386  
                 
Net cash provided by (used in) operating activities
    8,310,846       (4,951,683 )
                 
Cash flows from investing activities
               
Deposit paid and acquisition of property, plant and equipment
    (4,673,695 )     (11,394,809 )
Advance to notes receivable
    (23,602 )     (3,432,604 )
Proceeds from disposal of fixed assets
    27,778       118,216  
Acquisition of subsidiaries
    -       (10,567,946 )
Advance to related companies
    (144,350 )     (34,185 )
                 
Net cash (used in) investing activities
    (4,813,869 )     (25,311,328 )
                 
Cash flows from financing activities
               
Proceeds from loan payable
    -       1,300,726  
Proceeds from related party payable
    360,094       1,106,240  
Capital contribution by shareholder
    -       12,149,750  
Proceeds from common stock sale - net of offering costs
    -       15,359,523  
                 
Net cash flows provided by financing activities:
    360,094       29,916,239  
                 
Effect of foreign currency translation on cash and cash equivalents
    20,210       142,169  
                 
Net increase (decrease) in cash
    3,877,281       (204,603 )
 
(Continued)
 
 
F-28

 

YUHE INTERNATIONAL, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(Stated in US Dollars)
 
(Continued)
 
Cash- beginning of period
    13,412,205       1,050,168  
                 
Cash- end of period
  $ 17,289,486     $ 845,565  
                 
Cash paid during the period for:
               
Interest paid
  $ 448,487     $ 885,005  
Income taxes paid
  $ -     $ -  
                 
Non-cash investing activities:
               
Transfer of construction in progress to fixed assets
  $ 1,831,131     $ -  
 
See accompanying notes to unaudited condensed consolidated financial statements

 
F-29

 

YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of presentation
 
The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2008 and notes thereto included in the Form 10K of Yuhe International, Inc. (Formerly known as First Growth Investors, Inc.) filed on March 31, 2009. The Company follows the same accounting policies in the preparation of interim reports.
 
Results of operations for the interim periods are not indicative of annual results.
 
2.
Organization and Basis of Preparation of Financial Statements
 
Yuhe International, Inc.
 
Yuhe International, Inc., formerly known as First Growth Investors, Inc., “Yuhe” or “the Company” was originally organized under the laws of the State of Nevada on September 9, 1997. The Company was not presently engaged in any business activities and had no operations, income producing assets or significant operating capital. At December 31, 2007, the Company was at development stage until its business combination with Bright Stand on March 12, 2008.

 
F-30

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
2.
Organization and Basis of Preparation of Financial Statements - continued
 
On March 12, 2008, the Company completed a reverse acquisition transaction with Bright Stand International Limited, “Bright Stand”, and Kunio Yamamoto, a Japanese person and the sole former shareholder of Bright Stand.
 
This share exchange transaction resulted in Bright Stand’s former shareholder obtaining a majority voting interest in the Company. Generally accepted accounting principles require that the company whose shareholders retain the majority interest in a combined business be treated as the acquirer for accounting purposes, resulting in a reverse acquisition with Bright Stand as the accounting acquirer and Yuhe International Inc. as the acquired party. Accordingly, the share exchange transaction has been accounted for as a recapitalization of the Company. The equity section of the accompanying financial statements has been restated to reflect the recapitalization of the Company due to the reverse acquisition as of the first day of the first period presented. The assets and liabilities acquired that, for accounting purposes, were deemed to have been acquired by Bright Stand were not significant.
 
Bright Stand International Limited, “Bright Stand”
 
On August 3, 2007, Bright Stand International Limited, “Bright Stand” was incorporated with limited liability in the British Virgin Islands. On January 31, 2008, Bright Stand International Limited completed the acquisition (note 4) of 100% common stock of Weifang Yuhe Poultry Co., Limited “PRC Yuhe” and 43.75% of Weifang Taihong Feed Co., Ltd., “Taihong”. As a result, Bright Stand owned 100% of PRC Yuhe and owned 43.75% direct interest of Taihong and 56.25% indirect interest of Taihong through PRC Yuhe. PRC Yuhe and Taihong became the wholly-owned subsidiaries of Bright Stand.
 
Weifang Yuhe Poultry Co., Ltd., “PRC Yuhe”
 
Weifang Yuhe Poultry Co., Ltd., “PRC Yuhe”, was established in Weifang, Shandong of the People’s Republic of China, the “PRC”, as a limited company on March 8, 1996. PRC Yuhe is a supplier of day-old chickens raised for meat production, or broilers, in the People’s Republic of China.

 
F-31

 

YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
2.
Organization and Basis of Preparation of Financial Statements - continued
 
Weifang Taihong Feed Co., Ltd., “Taihong”
 
Weifang Taihong Feed Co., Ltd. was established in Weifang, Shandong of the People’s Republic of China, the “PRC”, as a limited company on May 26, 2003. Taihong is a feed stock company whose primary purpose is to supply feed stock for PRC Yuhe’s breeder chickens.
 
The Company’s operations are conducted through its subsidiaries in the People’s Republic of China, PRC Yuhe, and Taihong. The Company and its subsidiary, hereinafter, collectively referred to as “the Group”, are engaged in the business of chick and feed production.
 
3.
Principles of consolidation
 
The condensed consolidated financial statements, prepared in accordance with generally accepted accounting principles in the United States of America, include the assets, liabilities, revenues, expenses and cash flows of the Company and all its subsidiaries. This basis of accounting differs in certain material respects from that used for the preparation of the books and records of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC, “PRC GAAP”, the accounting standards used in the place of their domicile.  The accompanying condensed consolidated financial statements reflect necessary adjustments not recorded in the books and records of the Company’s subsidiaries to present them in conformity with generally accepted accounting principles in the United States of America.
 
The condensed consolidated financial statements of the Company include the accounts of Yuhe International, Inc, Bright Stand International Limited, Weifang Yuhe Poultry Co., Ltd and Weifang Taihong Feed Co., Ltd. after the date of acquisitions. All significant intercompany accounts, transactions and cash flows are eliminated on consolidation.
 
The accompanying financial statements are presented in United States dollars. The functional currency of the Company and Bright Stand is US$ and the functional currency of PRC Yuhe and Taihong is Renminbi (RMB).  The financial statements of PRC Yuhe and Taihong are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
 
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
 
 
F-32

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
4.
Basic and diluted earnings per share
 
The Company reports basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share are computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods.
 
Diluted earning per share is based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
 
Basic and diluted earnings per share are the same as there was no dilutive effect of the warrants and stock options for the three and six months ended June 30, 2009 and 2008.
 
5.
Recent accounting pronouncements
 
In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS No. 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted SFAS No. 165 during the second quarter of 2009, and its application had no impact on the Company’s condensed consolidated financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was August 13, 2009.
 
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No. 46(R),” which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. SFAS No. 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years.
 
Management is currently evaluating the requirements of SFAS No. 167 and the impact on the Company’s condensed consolidated financial statements.
 
No other new accounting pronouncements, applicable to the Company, have been issued.
 
6.
Reclassification
 
Certain reclassifications have been made to December 31, 2008 comparative consolidated balance sheet and the six and three months ended June 30, 2008 comparative condensed consolidated statements of income to conform to the current period presentation.
 
Reclassification have been made to advances to suppliers and deposits paid for acquisition of long term assets in condensed consolidated balance sheet for December 31, 2008 to conform to the June 30, 2009 condensed consolidated balance sheet presentation.

 
F-33

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
7.
Acquisition of subsidiaries
 
On January 31, 2008, Bright Stand acquired 100% common stock of Weifang Yuhe Poultry Co., Limited for $11,306,522, (RMB 81,450,000) and 43.75% of Weifang Taihong Feed Co., Ltd for $312,530, (RMB 2,244,000) and total amount was $11,619,052.
 
The following table presents the unaudited results of operations of the Company as if the Yuhe acquisitions had been consummated as of January 1, 2008 and the results are shown for the six months ended June 30, 2008 includes certain pro forma adjustments, including depreciation and amortization on the assets acquired, and other adjustments.
 
   
For The Six Months
Ended June 30,
 
   
2008
 
   
(Pro forma)
 
       
Revenues
  $ 8,199,811  
Net income
  $ 1,034,197  
         
Earnings per share
       
Basic
  $ 0.08  
Diluted
  $ 0.08  
         
Weighted average shares outstanding
       
Basic
    12,126,379  
Diluted
    12,287,717  
 
 
F-34

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
8. 
Inventories
 
Inventories consist of the following:
 
   
June 30
   
December 31
 
   
2009
   
2008
 
   
(unaudited)
       
Raw materials
  $ 5,674,547     $ 5,281,429  
Work in progress
    724,147       1,272,217  
Finished goods
    56,059       91,315  
                 
    $ 6,454,753     $ 6,644,961  
 
9. 
Unlisted investments
 
Unlisted investments at June 30, 2009 represent the 3% investments in Hanting Rural Credit Cooperative, “Hanting” recorded at cost.  For the six months and three months period ended June 30, 2009, the Company recorded $15,509 and $0, respectively as income from unlisted investment for dividends received from Hanting.  For the six months and three months period ended June 30, 2008, the Company recorded $6,074 as income from unlisted investment for dividends received from Hanting.  Management of the Company has reviewed the investment in Hanting for impairment and determined there is no indication that the carrying amount of Hanting may not be recoverable.

 
F-35

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. 
Plant and equipment, net
 
Plant and equipment consists of the following:

   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
At cost
           
Buildings
  $ 16,220,155     $ 14,951,197  
Machinery
    5,783,622       5,064,593  
Motor vehicles
    119,951       119,786  
Furniture and equipment
    227,764       82,815  
                 
      22,351,492       20,218,391  
Less: accumulated depreciation
    (2,699,013 )     (1,678,071 )
                 
      19,652,479       18,540,320  
Construction in progress
  $ 7,178,617     $ 8,571,956  
                 
    $ 26,831,096     $ 27,112,276  
 
During the six months ended June 30, 2009, depreciation expenses amounted to $1,027,465 among which $924,404 and $103,061 were recorded as cost of sales and administrative expense, respectively.
 
During the six months ended June 30, 2008, depreciation expenses amounted to $621,912 among which $488,084 and $133,828 were recorded as cost of sales and administrative expense, respectively.
 
During the three months ended June 30, 2009, depreciation expenses amounted to $526,920 among which $480,070 and $46,850 were recorded as cost of sales and administrative expense, respectively.
 
During the three months ended June 30, 2008, depreciation expenses amounted to $377,448 among which $318,773 and $58,675 were recorded as cost of sales and administrative expense, respectively.
 
Capitalized interest expense included in construction in progress totaled $302,058 and $0 for the six and three months ended June 30, 2009, and $437,221 for the year ended December 31, 2008, respectively.
 
As of June 30, 2009, buildings and machinery of the Company with net book value of $10,598,855 were pledged as collateral under certain loan arrangements.

 
F-36

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. 
Intangible assets, net
 
Intangible assets consist of the following:
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
Land use rights, at cost
  $ 2,973,793     $ 2,969,714  
Less: accumulated amortization
    (92,796 )     (59,962 )
                 
    $ 2,880,997     $ 2,909,752  
 
As of June 30, 2009, land use rights of the Group were pledged as collateral under certain loan arrangements.
 
During the six months ended June 30, 2009 and 2008, amortization expenses included in the cost of sales were $32,759 and $26,497 respectively.
 
During the three months ended June 30, 2009 and 2008, amortization expenses included in the cost of sales were $16,387 and $16,083 respectively.
 
The estimated aggregate amortization expenses for the land use right for the five succeeding years are as follows:
 
Year
     
Remainder of 2009
  $ 32,752  
2010
    65,504  
2011
    65,504  
2012
    65,504  
2013
    65,504  
thereafter
    2,586,229  
         
    $ 2,880,997  
 
 
F-37

 
 
YUHE INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. 
Due to related companies
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
Weifang Hexing Breeding Co., Ltd. "Weifang Hexing" - Gao Zhentao, a director of the Company is also a director of Weifang Hexing
  $ 570,227     $ 185,885  
                 
Others
    5,610       24,748  
    $ 575,837     $ 210,633  
 
The amounts due to related companies are unsecured, interest free and have no fixed repayment date.  These loans are used for working capital purposes.
 
13. 
Due from related companies
 
   
June 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
             
Hexing Green Agriculture Co., Ltd., "Hexing Green", - Mr. Gao Zhentao, a director of the Company is also a director of Hexing Green
  $ -     $ 75,754  
                 
Shandong Yuhe Food Co., Ltd, "Yuhe Food"- Mr. Gao Zhentao, a director of the Company is also a director of Yuhe Food
    3,855,886       3,580,553  
                 
Shandong Yuhe New Agriculture of Sciences, "Shandong Yuhe"- Mr. Gao Zhentao, a director of the Company is also a director of Shandong Yuhe
    -       50,257