PINX:YSYB Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

 

¨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 000-52127

 

YANGLIN SOYBEAN, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 20-4136884
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

 

99 Fan Rong Street, Jixian County, Heilongjiang 155900 P.R. China

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (86) 469-467-8077

 

(Former Name, Former Address And Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 x    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 definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer £
Non-accelerated filer ¨ Smaller Reporting Company x
(Do not check if a Smaller Reporting Company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of May 11, 2012, the Company had 20,865,119 shares of Common Stock, $0.001 par value per share, issued and outstanding.

 

 
 

 

Yanglin Soybean, Inc.

 

INDEX

 

    Page
Part I — Financial Information   3
         
  Item 1. Financial Statements   3
         
  (a) Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011   3
         
  (b) Consolidated Statements of Operations and Other Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited)   4
         
  (c) Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2012(unaudited)   5
         
  (d) Consolidated Statements of Cash Flows for the three months ended March 31, 2012and 2011(unaudited)   6
         
  (e) Notes to Consolidated Financial Statements (unaudited)   7
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   57
         
  Item 4 Controls and Procedures   57
         
Part II — Other Information   59
         
  Item 1 Legal Proceedings   59
         
  Item 1A. Risk Factors   59
         
  Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   59
         
  Item 3 Defaults upon Senior Securities   59
         
  Item 4 Mine Safety Disclosures   59
         
  Item 5 Other Information   59
         
  Item 6. Exhibits   60
         
  Signatures   61

 

2
 

 

PART 1-FINANCIAL INFORMATION

 

ITEM 1-FINANCIAL STATEMENTS

 

YANGLIN SOYBEAN, INC.

 

CONSOLIDATED BALANCE SHEETS

AS AT MARCH 31, 2012 (UNAUDITED), AND DECEMBER 31, 2011

(Stated in US Dollars)

   March 31, 2012
(unaudited)
   December 31,
2011
 
ASSETS          
Current assets          
Cash  $15,981,803   $16,882,123 
Cash-restricted   247,961    247,961 
Trade receivables, net   2,890,100    2,883,097 
Inventories   6,063,362    5,023,011 
Advances to suppliers   7,875,512    7,825,968 
Prepaid VAT and other taxes   10,957,602    9,863,838 
Other receivables and prepaid expenses   30,269    56,963 
           
Total current assets   44,046,609    42,782,961 
           
Property, plant and equipment, net   19,042,707    19,675,794 
Intangible assets, net   4,254,243    4,285,356 
           
TOTAL ASSETS  $67,343,559   $66,744,111 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Short-term bank loans  $25,481,839   $22,017,771 
Loans from related parties – current   43,265    42,187 
Accounts payable   184,479    11,203 
Other payables   42    37 
Customers deposits   1,000,089    1,073,348 
Accrued liabilities   645,324    570,197 
Current maturities of long-term debt   1,424,389    1,415,428 
Warrant liability   -    1,850,000 
Total current liabilities   28,779,427    26,980,171 
           
Long-term liabilities          
Long-term bank loan   2,848,777    2,830,856 
Loan from related parties – non-current   185,589    195,141 
           
TOTAL LIABILITIES   31,813,793    30,006,168 
           
STOCKHOLDERS' EQUITY          
Convertible preferred stock:          
50,000,000 shares designated as Series A $0.001 par value, 9,134,883 and 9,134,883 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively   9,135    9,135 
Common stock:          
$0.001 par value, 10,000,000,000 shares authorized; 20,865,119 and 20,865,119 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively   20,865    20,865 
Additional paid-in capital   27,932,842    27,932,842 
Statutory reserves   5,628,636    5,628,636 
Retained earnings (accumulated deficit)   (9,177,465)   (7,723,645)
Accumulated other comprehensive income   11,115,753    10,870,110 
           
Total stockholders’ equity   35,529,766    36,737,943 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $67,343,559   $66,744,111 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3
 

 

YANGLIN SOYBEAN, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME FOR

THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011(UNAUDITED)

(Stated in US Dollars)

 

   For the three months
ended March 31
 
   2012   2011 
Net sales  $47,656,839   $33,947,661 
Cost of sales   (49,966,038)   (34,165,621)
Gross (loss)   (2,309,199)   (217,960)
           
Operating Expenses          
Selling expenses   (62,220)   (65,570)
General and administrative expenses   (461,686)   (584,166)
           
Total operating expenses   (523,906)   (649,736)
           
(Loss) from operations   (2,833,105)   (867,696)
           
Interest expenses   (488,675)   (425,253)
Interest income   13,095    19,936 
Other income   4,865    1,720 
Changes in fair value of warrants   1,850,000    (4,029,661)
           
(Loss) income before income taxes   (1,453,820)   (5,300,954)
           
Income tax        - 
           
Net income (loss)   (1,453,820)   (5,300,954)
           
Foreign currency translation adjustment   245,643    473,494 
Comprehensive income (loss)  $(1,208,177)  $(4,827,460)
           
Earnings per share          
Basic  $(0.07)  $(0.26)
Diluted  $(0.07)  $(0.26)
           
Weighted average shares outstanding          
Basic   20,865,119    20,465,119 
Diluted   30,000,002    30,003,317 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

YANGLIN SOYBEAN, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2012 (UNAUDITED)

(Stated in US Dollars)

 

   Preferred stock                         
   Series A   Common stock           (Accumulated   Accumulated     
   Number
of
shares
   Amount   Number of
shares
   Amount   Additional
paid-in
capital
   Statutory
reserves
   deficit)
retained
earnings
   other
comprehensive
income
   Total 
Balance, December 31, 2011   9,134,883   $9,135    20,865,119   $20,865   $27,932,842   $5,628,636   $(7,723,645)  $10,870,110   $36,737,943 
Net income   -    -    -    -    -    -    (1,453,820)   -    (1,453,820)
Share-based compensation expense   -    -    -    -         -    -    -      
Foreign currency translation adjustment   -    -    -    -    -    -    -    245,643    245,643 
Balance, March 31, 2012   9,134,883   $9,135    20,865,119   $20,865   $27,932,842   $5,628,636   $(9,177,465)  $11,115,753   $35,529,766 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5
 

 

YANGLIN SOYBEAN, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)

(Stated in US Dollars)

   For the three months ended 
   March 31 
   2012   2011 
Cash flows from operating activities          
Net income  $(1,453,820)  $(5,300,954)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation   758,812    758,401 
Amortization   58,331    56,001 
Share-based compensation expense        3,379 
Bad debt recovery   543    313 
Change in fair value of warrants   (1,850,000)   4,029,661 
           
Changes in operating assets and liabilities:          
Trade receivable   11,267      
Inventories   (1,010,105)   2,300,982 
Advances to suppliers        2,721,221 
Prepaid VAT and other taxes   (1,032,905)   (46,497)
Other receivables   26,553    14,490 
Accounts payable   173,471    (37,183)
Other payables        - 
Customers deposits   (80,178)   66,427 
Accrued liabilities   72,142    (23,174)
           
Net cash provided by(used in) operating activities   (4,325,889)   4,543,067 
           
Cash flows from investing activities          
Purchase of property, plant and equipment   3    (2,294)
         - 
Net cash used in investing activities   3    (2,294)
           
Cash flows from financing activities          
Proceeds from bank loans        - 
Cash-restricted        - 
Principal payments for short-term bank loans   3,329,793    (760,884)
Principal payments for loans from related parties   (9,991)   (47,120)
           
Net cash flows provided by (used in) financing activities   3,319,802    (808,004)
           
Net increase in cash   (1,006,084)   3,732,769 
Effect of foreign currency translation on cash   105,764    238,660 
Cash- beginning of period   16,882,123    24,065,082 
Cash- end of period  $15,981,803   $28,036,511 
           
Supplementary cash flow information:          
Interest paid  $488,675   $425,253 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Yanglin Soybean, Inc (the “Company”) was incorporated in the State of Nevada on May 26, 1921. Prior to October 3, 2007, the Company had only nominal operations and assets. On October 3, 2007, the Company executed a reverse-merger with Faith Winner Investments Limited (“Faith Winner (BVI)”) by an exchange of shares and the Company issued 18,500,000 common shares at $0.001 par value in exchange for all Faith Winner (BVI) shares. As a result of the shares exchange, Faith Winner (BVI) became a wholly-owned subsidiary of the Company. The exchange transaction was accounted for as a reverse acquisition in accordance with Accounting Standards Codification 805 “Business Combinations”. The reverse-merger also included an equity financing of $21,500,000 by the issuance of 9,999,999 Series A Convertible Preferred Stock at $2.15 per share to ten accredited investors.

 

The Company is in the business of manufacturing, distributing, and selling of non-genetically modified soybean products, including soybean oil, salad oil and soybean meal throughout the Province of Heilongjiang and other parts of People's Republic of China ("PRC").  The Company conducts its operations through the following subsidiaries: (a) a wholly-owned subsidiary in the British Virgin Islands: Faith Winner (BVI), (b) a wholly-owned subsidiary of Faith Winner (BVI) located in the PRC: Faith Winner (Jixian) Agriculture Development Company (“WFOE”) and (c) an entity located in the PRC: Yanglin Soybean Group Co., Ltd. (“Yanglin”), which is controlled by the Company through contractual arrangements with WFOE, as if Yanglin were a wholly-owned subsidiary of the Company.

 

The Company, its subsidiaries and Yanglin are collectively referred to as “the Group”.

 

Faith Winner (BVI) and WFOE each have entered into a series of agreements with Yanglin and as a result of such agreements WFOE gained control of all of Yanglin’s assets, management and business as if Yanglin were a wholly-owned subsidiary of WFOE. These agreements included a loan agreement, a consigned management agreement, two consignment agreements of equity interests, an exclusive purchase option agreement, a registered trademark transfer contract and a trademark licensing agreement. The consignment agreements were entered into on September 1, 2007, and the other agreements were all signed on September 24, 2007. The exclusive purchase option agreement and the consigned management agreement were amended as of April 3, 2009.  As described by the amendment, the exercise price of the exclusive purchase option shall be $17,000,000, or such greater amount as required by the then applicable Chinese law and regulations.  If WFOE elects to purchase the Equity Interests held by Shulin Liu and Huanqin Ding (collectively “the Shareholders”), all of the consideration net tax (the “ Consideration of Equity Transfer ” ) obtained by the Shareholders shall be used to repay Yanglin.  If WFOE elects to purchase the assets of Yanglin, Yanglin shall use all of the consideration net tax (the “Consideration of Assets Transfer” ) to repay WFOE. To the extent that the Consideration of Equity Transfer or Assets Transfer is greater than $17,000,000 as required by the then applicable law or for any other reasons, the excess shall be paid by Yanglin to WFOE as interest on the loan made under the Loan Agreement dated September 24, 2007 between WFOE and Yanglin.

 

7
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)

 

Pursuant to the above-mentioned agreements, WFOE made a loan (“the Loan”) of $17 million on October 10, 2007 and it was utilized by Yanglin for working capital needs. In return, the Company obtained management control and an exclusive right to acquire all of the equity of Yanglin. The rights of existing shareholders of Yanglin were assigned by the consignment of equity interests to Faith Winner (BVI). The exclusive purchase agreement and the loan agreement restrict both Yanglin and its shareholders from making any significant decisions, including but not limited to any amendments to the articles of association or rules of Yanglin, any change in registered capital, any transfer, mortgage or disposal of Yanglin’s assets or income in a way that would affect WFOE’s security interest, entering any material contract (exceeding RMB5 million in value) and distributing any dividends to the shareholders. Pursuant to the consigned management agreement between WFOE and Yanglin, Yanglin agreed to entrust the business operations of Yanglin and its management to WFOE until WFOE formally acquires all equity or substantially all the assets of Yanglin. Under the consigned management agreement as amended on April 3, 2009, WFOE will provide financial, technical and human resources management services to Yanglin which will enable WFOE to control Yanglin's operations, assets and cash flows. In turn, WFOE will be entitled to a management fee equal to 5% of Yanglin’s annual net sales on a yearly basis.

 

Under the Registered Trademark Transfer Agreement, Yanglin agreed to transfer to WFOE all of its rights in connection with the two trademarks, including without limitation the title of the trademarks and right to license (the “Transferred Trademark”) for a purchase price of $1,000,000, which is subject to a purchase price adjustment based on the minimum appraised value on intellectual property (“IP”) rights allowed under PRC laws and regulations for such transfer. Under the Trademark Licensing Agreement, WFOE agreed to grant an exclusive license to Yanglin, for a term of 10 years, to use the Transferred Trademark for an annual licensing fee equal to 1% of Yanglin’s net sales of that year. The license fee and the management fee aforesaid – a total of 6% of the annual net sales of Yanglin – entitled by WFOE are designed to approximate Yanglin’s annual net profit. If the licensing and management fees entitled by WFOE exceed the net income after tax of Yanglin, Yanglin should not be obligated to pay WFOE any shortfall. In the event that the net income after tax is greater than the licensing and management fees entitled by WFOE, Yanglin should maintain any excess on its books and should not distribute any of such excess as a dividend in any manner to its shareholders until WFOE exercises its exclusive purchase option pursuant to the Exclusive Purchase Option Agreement dated September 24, 2007 between Yanglin and WFOE and as amended on April 3, 2009.

 

According to the exclusive purchase option agreement, WFOE has the exclusive purchase option to purchase all or part of Yanglin’s shareholders’ equity interest in Yanglin when and as permitted under PRC laws and regulations and no other party has the right to purchase any equity from the shareholders of Yanglin. The agreement provides that, unless otherwise required under PRC laws and regulations, the consideration for the equity transfer or the asset transfer under the agreement will be $17 million or such greater amount as required by the then applicable PRC law and regulations (the “Option Price”). Under the loan agreement and the exclusive purchase option agreement, the money received as the Option Price by the shareholders of Yanglin upon execution of the option shall be used to satisfy the repayment of the Loan. Therefore, the actual consideration of the investment in Yanglin is exactly the amount of the Loan. Under such contractual arrangements, all of the assets and equity including any residual profits of Yanglin are totally controlled by WFOE and will be formally captured upon exercise of the exclusive purchase option.

 

The loan of $17 million to Yanglin is considered as an investment in Yanglin by the Company through a series of contractual arrangements by way of the Loan. As a result of entering into the aforementioned agreements, WFOE should be deemed to control Yanglin as a Variable Interest Entity.  The creditors of Yanglin do not have recourse to the Company’s other assets.

 

8
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL

 

(a)Basis of presentation

 

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America.

 

On September 30, 2009, the Company adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of GAAP.  These changes establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions (“FSP”), or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates (“ASUs”).  ASUs will not be authoritative in their own right as they will only serve to update the ASC.  These changes and the ASC itself do not change GAAP.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the Company’s consolidated financial statements.

 

(b)Principles of consolidation

 

The share exchange transaction has been accounted for as a recapitalization of Yanglin Soybean Inc. where the Company (the legal acquirer) is considered the accounting acquiree and Faith Winner (BVI) (the legal acquiree) is considered the accounting acquirer. As a result of this transaction, the Company is deemed to be a continuation of the business of Faith Winner (BVI).  The historical stockholders’ equity of the accounting acquirer prior to the share exchange has been retroactively restated as if the share exchange transaction occurred as of the beginning of the first period presented.

 

The consolidated financial statements include the accounts of the Company and the following subsidiaries, as well as Yanglin, a variable interest entity of which WFOE is the primary beneficiary as defined by ASC 810 “Consolidation of Variable Interest Entities.” All intercompany transactions and accounts have been eliminated in consolidation.

 

Name of Company   Place of
incorporation
  Attributable
interest
 
           
Faith Winner Investments Ltd   British Virgin Islands     100 %
             
Faith Winner (Jixian) Agriculture Development Company   PRC     100 %
             
Heilongjiang Yanglin Soybean Group Co. Ltd*   PRC     100 %

 

*Deemed variable interest entity

 

9
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.   Items subject to such estimates and assumptions include the carrying value and estimated useful lives of long-lived assets; valuation allowances for receivables; valuation of warrant liabilities; inventory and deferred tax assets. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates. Estimates and assumptions are reviewed periodically, and the effect of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

 

(d)Economic and political risks

 

The Group’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 Group’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 Group’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)Intangible assets

 

Intangible assets include land use rights and railway use rights.

 

Land use rights are stated at cost less accumulated amortization.  Amortization is provided over the respective useful lives, using the straight-line method.  Estimated useful lives range from 22 to 50 years.

 

Railway use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful life is 10 years.

 

10
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(f)Property, plant and equipment

 

Property, 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 property, plant and equipment are as follows:

 

Buildings 10 - 35 years
Machinery and equipment 3.5 - 30 years
Office equipment 4 - 20 years
Motor vehicles 6 - 10 years

 

The costs and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statement of operations and comprehensive (loss) income. The cost of maintenance and repairs is charged to operations when incurred, whereas significant renewals and betterments are capitalized.

 

(g)Accounting for the impairment of assets held for sale

 

The assets held for sale by the Group 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 changes in technologies or situation in the industry.  Determination of recoverability of assets to be held and used is done by comparing the carrying amount of an asset to the future net undiscounted cash flows to be generated by the asset.

 

If such assets are considered to be impaired, the impairment losses to be recognized are measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets held for sale are reported at the lower of the carrying amount or fair value less estimated costs of disposal.

 

(h)Inventories

 

Inventories consist of finished goods and raw materials, and are stated at the lower of cost or market value. The cost of inventories is measured using the weighted average method. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of production overheads.

 

11
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(i)Trade receivables

 

Trade receivables are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers after considering a variety of factors, including the length of time past due, significant one-time events and the company’s historical experience.

 

The Group writes off trade receivables against its allowance after reasonable collection efforts have been made and the accounts are deemed uncollectible.

 

(j)Customer Deposits

 

Customer deposits represents advance payments from customers prior to the delivery of goods.  The Company requires full payment from customers prior to delivery. Customer deposits are recognized in revenue upon delivery of goods.

 

(k)Foreign currency translation

 

The accompanying consolidated financial statements are presented in United States dollars.  The reporting currency of the Group is the U.S. dollar (USD). WFOE and Yanglin use its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Group because it has not engaged in any significant transactions that are subject to the restrictions.

 

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:

 

   March 31, 
2012
   December 31,
 2011
   March 31,
2011
 
The closing rate at RMB : USD exchange rate   6.3185    6.3585    6.5501 
Average three-months ended RMB : USD exchange rate   6.3088    -    6.5713 

 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  There is no assurance that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

 

12
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(l)Revenue recognition

 

Revenue is recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met: Persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collection is reasonably assured.

 

(m)Costs of sales

 

Cost of sales consists primarily of direct material costs, direct labor cost, and applicable overhead costs attributable to the production of products.  Permanent write-down of inventory to the lower of cost or market value is also reflected in the cost of revenues. For the three months ended March 31, 2012 and 2011, there were no write-downs of inventories.

 

(n)Advertising

 

The Group expenses all advertising expenses as incurred.  Advertising expenses included in selling expenses were both $0 for the three months ended March 31, 2012 and 2011, respectively.

 

(o)Shipping and handling

 

All shipping and handling costs are expensed as incurred and included in selling expense.  Total shipping and handling expenses were $20,339 and $14,833 for the three months ended March 31, 2012 and 2011, respectively.

 

(p)Stock-Based Compensation

 

The Company awards stock options and other equity-based instruments to its employees, directors and consultants. and (collectively “share-based payments”).  Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date and is recognized on a straight-line basis over the requisite service period, which generally equals the vesting period.  All of the Company’s stock-based compensation is based on grants of equity instruments and no liability awards have been granted.

 

(q)Pension and Employee Benefits

 

Full time employees in PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The PRC labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' salaries. Management believes full time employees who have passed the probation period are entitled to such benefits.  The total provisions for employee pension were $48,435 and $41,114 the three months ended March 31, 2012 and 2011, respectively.

 

13
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(r)Income taxes

 

The Group accounts for income tax 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 Group is able to realize their benefits, or the future realization is uncertain.

 

The Group applied the provisions of ASC 740.10, Accounting For Uncertainty In Income Taxes, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our consolidated financial statements. ASC 740.10 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740.10 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements.

 

The Group recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in our consolidated statements of operation. The Group’s policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense.

 

14
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(s)Statutory reserves

 

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, namely the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the Company's registered capital.  Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings.  The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.  Beginning from January 1, 2006, enterprises have no further requirements to make the appropriation to the statutory public welfare fund.  Discretionary surplus reserve is a prescribed percentage approved by the shareholder. The Group does not make appropriations to the discretionary surplus reserve fund.

 

As provided in WFOE’s and Yanglin’s respective organizational documents, WFOE’s and Yanglin’s net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 

(i)Making up cumulative prior years’ losses, if any;

 

(ii)Allocations to the “Statutory surplus reserve” of at least 10% of net income after taxation, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital, which is restricted for set off against losses, expansion of production and operation or increase in registered capital;

 

(iii)Allocations to the discretionary surplus reserve, if any.

 

The Company established a statutory surplus reserve as well as a statutory public welfare fund and commenced to appropriate 10% and 5%, respectively, of the PRC net income after taxation to these reserves. The amounts included in the statutory reserves consisted of surplus reserve of $3,752,424 and common welfare fund of $1,876,212 as of March 31, 2012 and December 31, 2011, respectively.

 

(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 Group’s current component of other comprehensive income is the foreign currency translation adjustment.

 

15
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(u)Earnings  per share

 

The Company reports earnings per share in accordance with the provisions of FASB ASC 260.10, "Earnings Per Share.” FASB ASC 260.10 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.

 

(v)Value-added tax (“VAT”)

 

Sales represent the involved value of goods, net of a VAT. All of Yanglin’s products that are sold in PRC are subject to a Chinese VAT on the gross sales price. VAT from sales may be offset by VAT paid on purchase of raw materials included in the cost of producing the finished goods.

 

(w)Warrant Liability 

 

Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, the outstanding warrants of the Company previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.

 

As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in October 2007.

 

The Company determined the fair values of these securities using a modified lattice valuation model.

 

16
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(x)Recent accounting pronouncements

 

In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”, which temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 is effective January 19, 2011 (date of issuance).

 

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.

 

17
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(x)Recent accounting pronouncements (Continued)

 

In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. However, it will impact the presentation of comprehensive income.

 

In July 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers. This ASU amends the FASB Accounting Standards CodificationTM (Codification) to provide guidance about how health insurers should recognize and classify in their income statements fees mandated by the "Patient Protection and Affordable Care Act," as amended by the "Health Care and Education Reconciliation Act." ASU 2011-06 represents a consensus of the EITF on Issue No. 10-H, “Fees Paid to the Federal Government by Health Insurers.” ASU 2011-06 requires that the liability for the fee be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2011-06 is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective.

 

In July 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The ASU represents a consensus of the EITF on Issue No. 09-H, “Health Care Entities: Presentation and Disclosure of Net Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts.” The amendments in this ASU require certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, the amendments in this ASU are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter, with early adoption permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. The disclosures required by the amendments in this ASU should be provided for the period of adoption and subsequent reporting periods.

 

18
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(x)Recent accounting pronouncements (Continued)

 

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

 

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. ASU 2011-09 is intended to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. Users of financial statements have requested additional disclosure to increase awareness of the commitments and risks involved with participating in multiemployer pension plans. The amendments in this ASU will require additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. For public entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. For nonpublic entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2012. Early adoption is permissible for both public and nonpublic entities. ASU 2011-09 should be applied retrospectively for all prior periods presented.

 

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. ASU No. 2011-10 is intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, ASU 2011-10 is effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted.

 

19
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

2.GENERAL (Continued)

 

(x)Recent accounting pronouncements (Continued)

 

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 is intended to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.

 

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-11 is intended to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.

 

20
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

3.FAIR VALUE

 

As defined in FASB ASC Topic No. 820 – 10 (formerly SFAS 157), fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820 – 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:

 

The levels of fair value hierarchy are as follows:

 

     Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

     Level 2 Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that La Cortez values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

 

     Level 3 Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). Yanglin’s valuation models are primarily industry standard models. Level 3 instruments include derivative warrant instruments. Yanglin does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.

 

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.  As of March 31, 2012, the carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, other receivables, short-term bank loans, accounts payable, and other payables, approximate their fair values because of the short maturity of these instruments and market rates of interest available to the Group.

 

21
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

4.CREDIT RISK AND CUSTOMERS AND SUPPLIERS CONCENTRATIONS

 

Financial instruments which potentially expose the Group to concentrations of credit risk, are cash and accounts receivable as of March 31, 2012 and December 31, 2011. The Group performs ongoing evaluations of its cash position and credit evaluations of customers to ensure sound collections and minimize credit losses exposure.

 

CASH- U.S. ACCOUNTS– (RESTRICTED)

 

As of March 31, 2012 and December 31, 2011, respectively, the Group’s restricted cash of $247,961 and $247,961 was kept in bank account in the U.S. Cash accounts at financial institutions in the U.S. may exceed the federal depository insurance coverage limits. In October 2008, the FDIC increased its insurance from $100,000 per depositor to $250,000 and to an unlimited amount for non-interest bearing accounts. The coverage increase, which is temporary, extends through December 31, 2013 and June 30, 2010, respectively. All of the cash held in the U.S. is fully insured. In addition, there is no unrestricted cash in U.S. accounts.

 

CASH- PRC ACCOUNTS– (RESTRICTED AND UN-RESTRICTED)

 

As of March 31, 2012 and December 31, 2011, respectively, the Group’s cash was with banks in the PRC where there is currently no rule or regulation mandated on obligatory insurance of bank accounts.

 

SALES AND VENDOR CONCENTRATIONS

 

For the three months ended March 31, 2012 and 2011 respectively, all of the Group’s sales were generated within the PRC. In addition, all accounts receivable as of March 31, 2012 and December 31, 2011 are from entities within the PRC.

 

For the three months ended March 31, 2012 and 2011 respectively, no customer accounted for 10% or more of the Group’s revenue.

 

For the three months ended March 31, 2012 and 2011 respectively, no vendor accounted for 10% or more of the Group’s purchases.

 

22
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

5.CASH-RESTRICTED

 

Cash-restricted consists of the following at:

 

   March 31,
2012
   December 31,
2011
 
    (unaudited)      
Bank deposits held as collateral for bank loan – PRC  $-   $- 
Bank deposits held in trust account – U.S.   247,961    247,961 
Balance at the end of period  $247,961   $247,961 

 

Cash-restricted maintained in a trust account in the United States is held for the purpose of payment for investor and public relations costs.

 

6.INVENTORIES

 

Inventories consist of the following:

 

   March 31,
2012
   December 31, 
2011
 
   (unaudited)     
Finished goods  $1,837,242   $1,429,425 
Raw materials   4,226,120    3,593,586 
Balance at the end of period  $6,063,362   $5,023,011 

 

23
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

7.OTHER RECEIVABLES AND PREPAID EXPENSES

 

Details of other receivables and prepaid expenses consist of the following:

 

   March 31,
2012
   December 31,
2011
 
   (unaudited)     
Advances for materials  $3,356   $3,334 
Prepayment for customers’ transportation costs   15,302    45,391 
Advances for travel   439    3,645 
Prepaid service fee         
Other   11,172    4,593 
Balance at the end of period  $30,269   $56,963 

 

8.PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   March 31,
2012
   December 31,
2011
 
   (unaudited)     
Building  $8,966,550   $8,910,142 
Machinery and equipment   23,696,843    23,547,772 
Office equipment   115,454    114,728 
Motor vehicles   1,454,516    1,445,366 
    34,233,363    34,018,008 
Less: accumulated depreciation   (15,190,656)   (14,323,2146)
           
Balance at the end of period  $19,042,707   $19,675,794 

 

As of March 31, 2012, machinery and equipment with net book value of $5,414,321 and buildings with net book value of $1,468,883 of the Company were pledged as collateral under certain loan arrangements. These loans were primarily obtained for general working capital.

 

24
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

8.PROPERTY, PLANT AND EQUIPMENT (Continued)

 

Temporarily Idle Assets

 

Included in the above balances of property, plant and equipment are assets deemed as temporarily idle by the management comprised of the following:

 

   March 31,
2012
   December 31,
2011
 
   (unaudited)     
Buildings  $955,241   $949,232 
Machinery and equipment   4,146,554    4,120,469 
    5,101,795    5,069,700 
Less: accumulated depreciation   (1,293,439)   (1,285,302)
Less: fixed asstes impairment   (3,808,356)   (3,784,398)
Net book value  $-   $- 

 

These assets belong to the powdered oil production line. They are temporarily idle because of technical issues in the formula. We are adjusting the formula and techniques used for powdered oil and expect to start formal production within a few months. If the production cannott be started as expected, we will consider disposal of these assets.

 

Depreciation expense is included in the consolidated statement of operations and comprehensive income as follows (unaudited):

 

   Three months ended
March 31,
 
   2012   2011 
Cost of sales and inventory  $565,274   $476,602 
General and administrative expenses   193,538    281,799 
Total depreciation expenses  $758,812   $758,401 

 

25
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

9.INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

Amortized intangible assets  January 1, 2012   Accumulated
amortization
   Foreign
currency
translation
difference
   March 31, 2012
(unaudited)
 
Land use rights  $4,306,011    (738,731)   27,259   $3,594,539 
Railway use rights   1,289,612    (638,072)   8,164    659,704 
Total amortized intangible assets  $5,595,623    (1,376,803)   35,423   $4,254,243 

 

As of March 31, 2012, land use rights with net book value of $1,300,662 were pledged as collateral for certain loans.

 

There were no additions or disposals during the three months ended March 31, 2012.

 

Amortization expenses are included in the consolidated statement of operations and comprehensive income as follows:

 

   Three months ended
March 31,
 
   2012   2011 
   (unaudited)   (unaudited) 
Selling expenses  $35,395   $33,981 
General and administrative expenses   22,936    22,020 
Total amortization expense  $58,331   $56,001 

 

The estimated aggregate amortization expenses for intangible assets for the five succeeding years are as follows:

 

March 31,     
2013   $232,968 
2014    232,968 
2015    232,968 
2016    232,968 
2017    232,968 
Thereafter    3,089,403 
     $4,254,243 

 

26
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

10. SHORT-TERM BANK LOANS

 

(A) Short-term bank loans consist of the following:

 

   March 31,
2012`
   December 31,
2011
   Collateral
   (unaudited)        
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due July 23, 2012   7,913,271    7,863,489    
              
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due August 10, 2012   6,330,616    6,290,792    
              
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due September 06, 2012   3,165,308    3,145,396    
              
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due September 14, 2012   3,165,308    3,145,396   Machinery and equipment and land use rights
              
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due October 12, 2012   1,582,654    1,572,698    
              
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due October 16, 2012   2,215,716         
              
Loans from Agricultural Development Bank of China, interest rates at 6.56% per annum, due January 16, 2013   1,108,966         
              
Balance at end of period  $25,481,839   $22,017,771    

 

These loans were obtained and used by Yanglin for working capital. Interest expense for the three months ended March 31, 2012 and 2011 were $421,726 and $317,335, respectively.

 

(B)Credit lines

 

The Group has a credit line facility with the availability to borrow up to $25.04million (equivalent to RMB 159million) with Agricultural Development Bank of China (the “Bank”).

 

27
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

11.OTHER PAYABLES

 

Other payables consist of the following:

 

   March 31, 
2012
   December 31,
2011
 
   (unaudited)     
Due for construction  $-   $- 
Others   42    37 
Balance at the end of period  $42   $37 

 

12.LONG-TERM BANK LOAN

 

Long-term bank loans consist of the following:

 

   March 31, 
2012
   December 31,
2011
   Collateral
   (unaudited)        
Loans from Agricultural Development Bank of China, interest rates at 5.76% per annum, due August 26, 2014  $4,273,166   $4,246,284   Building, machinery and equipment and land use rights
Current maturities of long-term debt   (1,424,389)   (1,415,428)   
Balance at the end of period  $2,848,777   $2,830,856    

 

These loans were obtained and used by Yanglin for upgrading its products and expanding storage facilities. Interest expense for the three months ended March 31, 2012 and 2011 was $61,628 and $102,263, respectively.

 

The future principal payments under the bank loans are as follows:

 

For the twelve months ended March 31,     
2012    1,424,388 
2013    1,424,389 
2014    1,424,389 
Total    4,273,166 
        

 

28
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

13.RELATED PARTIES TRANSACTIONS

 

(A)Loans from related parties consist of the following:

 

   March 31, 
2012
   December 31, 
2011
 
   (unaudited)     
Loans from certain employees, interest rates at 7.722% and 9.405% per annum respectively, with various installments, due October 28, 2016  $228,854   $237,328 
           
Current portion due within one year   (43,265)   (42,187)
   $185,589   $195,141 

 

These loans were obtained and used by Yanglin for working capital. Interest paid for the three months ended March 31, 2012 and 2011 was $5,321 and $5,655, respectively.

 

29
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

13.RELATED PARTIES TRANSACTIONS (Continued)

 

These loans are between Yanglin, Mr. Shulin Liu, the Chief Executive Officer of Yanglin, and certain employees and officers of Yanglin. Mr. Shulin Liu gifted 12 houses to these employees and officers for their long-term services, and these employees and officers personally obtained mortgage loans from the Industrial and Commercial Bank of The PRC, using these houses as collateral. The employees simultaneously loaned the proceeds to Yanglin to be used as working capital. These employees and officers have been making principal and interest payments on the loans directly to the bank and Yanglin will reimburse them for the full amount at a later date.

 

The future principal payments under the bank loans are as follows:

 

For the twelve months ended March 31,    
2013   43,265 
2014   46,669 
2015   50,342 
2016   54,306 
2017   34,272 
Thereafter   0 
Total  $228,854 

 

(B)Heilongjiang Yanglin Group Seed Co. Ltd.

 

Heilongjiang Yanglin Group Seed Co. Ltd. “Yanglin Seed Co.”, which is wholly owned and managed by Mr. Shulin Liu, the Company’s chief executive officer, is an affiliate of the Company. Yanglin Seeds Co. supplies the farmers with “Yanglin” brand soybean seeds which provide higher oil yield. Pursuant to annual supply agreements with the Company, the farmers sell the harvested soybeans to Yanglin. Yanglin Seeds Co. extends favorable commercial terms to these farmers, such as competitive price, for them to purchase “Yanglin” soybean seeds. Meanwhile, Yanglin offers cash-upon-delivery payment terms to the farmers for purchases of the harvested soybeans grown from “Yanglin” soybean seeds. These arrangements ensure that we maintain good relations with our suppliers, and enjoy a stable supply of soybeans that meet our high quality standards. There was no related party transaction or commitment between Yanglin Seed Co. and the Group as of March 31, 2012 and for the three months ended March 31, 2012 and 2011, respectively.

 

30
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

13.RELATED PARTIES TRANSACTIONS (Continued)

 

(C)Stock exchange listing shares contributed by majority shareholder

 

In connection with the sale of the Series A Convertible Preferred Stock during October 2007, the Company committed to apply to list and have its shares of common stock traded on the Nasdaq Capital Market, the Nasdaq Global Select Market or the Nasdaq Global Market or any successor market thereto (collectively, “Nasdaq”), or the New York Stock Exchange or any successor market thereto (together with Nasdaq, each a “National Stock Exchange”), no later than December 31, 2008. As a result of failing to achieve such listing, the Company’s majority shareholder, Winner State Investments Limited, committed to transfer 1,000,000 shares of common stock in the Company to the purchasers of shares of Series A Convertible Preferred Stock. The Company has accounted for this as a contribution of capital by its majority stockholder and recorded a charge to operations in the amount of $4,480,000 for the year ended December 31, 2008 based on the closing market price of $4.48 per share on December 31, 2008.

 

14.CONVERTIBLE PREFERRED STOCK AND WARRANTS

 

SERIES A

 

On October 3, 2007, the Company sold 9,999,999 shares of Series A Preferred Stock and various stock purchase warrants for cash consideration totaling $21.5 million dollars. In addition, in connection with the sale of the Preferred Stock, certain advisors were provided warrants. The number of shares, exercise price and contractual terms eligible to be purchased with the warrants are summarized in the following table:

 

   Number of warrants            
Series of warrant  3/31/2012   12/31/2011   3/31/2011   Exercise
price
   Contractual
term
  Expiration Date
Series A   10,000,000    10,000,000    10,000,000   $2.75   5 years  October 2, 2012
Series B   5,000,000    5,000,000    5,000,000   $3.50   5 years  October 2, 2012
Series E   1,000,000    1,000,000    1,000,000   $2.58   5 years  October 2, 2012
Series F   500,000    500,000    500,000   $3.01   5 years  October 2, 2012
Total   16,500,000    16,500,000    16,500,000            

 

Series A Convertible Preferred Stock has liquidation rights senior to common stock and to any other class or series of stock issued by the Company not designated as ranking senior to or pari passu with Series A Convertible Preferred Stock.  In the event of a liquidation of the Company, holders of Series A Convertible Preferred Stock are entitled to receive a distribution equal to $2.15 per share prior to any distribution to the holders of common stock or any other stock that ranks junior to the Series A Convertible Preferred Shares. Series A Convertible Preferred Stock is entitled to non-cumulative dividends only upon declaration of dividends by the Company.  To date, no dividends have been declared or accrued.  Series A Convertible Preferred Stock will participate based on their respective “as-if” conversion rates if the Company declares any dividends.  Holders of Series A Convertible Preferred Stock also have voting rights required by applicable law and the relevant number of votes shall be equal to the number of shares of Common Stock issuable upon conversion of Series A Convertible Preferred Stock.

 

31
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

14.CONVERTIBLE PREFERRED STOCK AND WARRANTS (Continued)

 

The gross proceeds of the sale were $21.5 million. The proceeds from the sale were allocated to Series A Convertible Preferred Stock, warrants and beneficial conversion features based on the relative fair value of the securities.  The value of Series A Convertible Preferred Stock was determined by reference to the market price of the common stock into which it converts, and the fair value of the warrants was calculated using the Black-Scholes model with the following assumptions:  expected life of 5 year, expected dividend rate of 0%, volatility of 27% and an interest rate of 4.24%.

 

The Company recognized a beneficial conversion feature discount on Series A Convertible Preferred Stock at its intrinsic value, which was the fair value of the common stock at the commitment date for Series A Convertible Preferred Stock investment, less the effective conversion price but limited to the $21.5 million of proceeds received from the sale. The Company recognized the $8.0 million beneficial conversion feature as an increase in paid in capital in the accompanying consolidated balance sheet on the date of issuance of Series A Convertible Preferred Stocks since these shares were convertible at the issuance date.

 

Each share of Series A Convertible Preferred Shares is convertible into one share of Common Stock, subject to standard adjustment provisions as set forth in the Certificate of Designations for our Series A Convertible Preferred Shares,

 

No conversion was recorded during the three months ended March 31, 2012 and during the year ended December 31, 2011.

 

In connection to the Series A Convertible Preferred Stock as described above, on October 10, 2007, the Company also issued 1,000,000 Series E warrants at an exercise price of $2.58 per share and 500,000 Series F warrants at an exercise price of $3.01 per share to an investment banker and financial advisor, respectively.  These warrants each have a five year term.  The fair value of Series E warrants was $532,800 and Series F warrants was $205,452, and was recorded as offering cost of Series A Convertible Preferred Stock transaction.

 

The fair value of the Series E and F warrants was calculated using the Black-Scholes model with the following assumptions:  expected life of 5 year, expected dividend rate of 0%, volatility of 27% and an interest rate of 4.24%.

 

The agreement also provides that if the Company doesn’t file, or if the registration statements aren’t declared effective throughout the required period, or if the Company ceases to trade on certain exchanges as defined, the Company shall pay damages equal to 1.5% of the amount invested for each calendar month capped at a cumulative damage payment amount of 15%. In connection with the sale of the Series A Convertible Preferred Stock during October 2007, the Company committed to apply to list and have its shares of common stock traded on the Nasdaq Capital Market, the Nasdaq Global Select Market or the Nasdaq Global Market or any successor market thereto (collectively, “Nasdaq”), or the New York Stock Exchange or any successor market thereto (together with Nasdaq, each a “National Stock Exchange”), no later than December 31, 2008. As a result of failing to achieve such listing, the Company’s majority shareholder, Winner State Investments Limited, committed to transfer 1,000,000 shares of common stock in the Company to the purchasers of shares of Series A Convertible Preferred Stock of the Company. The Company has accounted for this as a contribution of capital by its majority stockholder and recorded a charge to operations in the amount of $4,480,000 for the year ended December 31, 2008. Such shares were valued based on the closing market price of $4.48 per share on December 31, 2008.

 

32
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

14.CONVERTIBLE PREFERRED STOCK AND WARRANTS (Continued)

 

Pursuant to the Registration Rights Agreement dated as of October 3, 2007 by and among the Company and certain holders (the Holders), the Company agreed to have a registration statement registering certain of the securities of the Holders declared effective with the Securities and Exchange Commission (“SEC”) on or prior to the Effectiveness Date defined in the Registration Rights Agreement, which was December 31, 2008, or pay the liquidated damages.

 

Although the registration statement was not declared effective as of December 31, 2008, pursuant to a Waiver and Release dated December 31, 2008, the Holders have waived their right to the liquidated damages for the Company’s failure to have the registration statement declared effective on or prior to the Effectiveness date under Registration Rights Agreement.

 

In exchange for the waiver and release of the liquidated damages, the Company entered into an Agreement dated December 31, 2008 (the Agreement). Under terms of the Agreement, the Company agreed to hire and engage, by February 28, 2009, three (3) independent directors as defined by NASDAQ Rule 4200(a)(15) and who are acceptable to the Holders. Further, the Company shall comply with all of the provisions of NASDAQ Rule 4350 by February 28, 2009. If these requirements are not met, the Company shall pay to each Holder five percent (5%) of its initial investment under the Securities Purchase Agreement by and among the Company and the Holders dated October 3, 2007. On February 27, 2009, the Company signed an addendum to the Agreement with the Holders, which extended the deadline for hiring and engaging three (3) independent directors to March 13, 2009. On March 9, 2009, the Company adopted a form of new Bylaws, appointed three (3) independent directors, established three (3) standing committees under the Board of Directors (audit committee, compensation committee and governance and nominating committee), and approved the articles of the three (3) above mentioned standing committees and the Code of Conduct and Ethics, and thus has been compliant with the provisions of NASDAQ Rule 4350. In addition, the Company agreed to effect and announce, no later than June 30, 2009, a change to the Company’s current independent audit firm and engage a new independent audit firm listed as a Top 10 audit firm according to Public Accounting Report’s 2008 Annual Audit Rankings to audit the 2009 financial statements and review the interim financial statements.  The Company has engaged UHY LLP, Inc. as its independent audit firm starting with the quarter ended June 30, 2009. 

 

If these requirements were not met, the Company had to pay to each Holder ten percent (10%) of its initial investment under the Securities Purchase Agreement. Furthermore, the Company and the Holders agreed to extend the required Effectiveness Date of the Company’s Registration Statement filed with the Securities and Exchange Commission to September 30, 2009. The Company has complied with these requirements as of September 30, 2009 and the Registration Statement was declared effective by the SEC on June 29, 2009.

 

33
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

14.CONVERTIBLE PREFERRED STOCK AND WARRANTS (Continued)

 

Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, warrants to purchase 34,503,170 of the Company's common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.

 

As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in October 2007. On January 1, 2009, the Company recorded as a cumulative effect adjustment by decreasing additional paid-in capital amounting to $15,003,941 and decreasing beginning retained earnings amounting to $72,047,158 and recording $87,051,099 as a warrant liability to recognize the fair value of such warrants on January 1, 2009. The fair value of the warrants was $5,079,661 and $1,050,000 on March 31, 2011 and December 31, 2010 respectively. The Company recognized $1,850,000 and $(4,029,661) as income (loss) from the change in fair value of warrants for the three months ended March 31, 2012 and 2011.

 

As of March 31, 2012 and December 31, 2011, the Company adopted the lattice valuation method to improve the valuation of the existing warrants with early exercise rights and down ratchet exercise price reset provision. The change is accounted for as change in accounting estimates. As opposed to closed form model like Black Scholes which assumes warrants be exercised on expiry date, the lattice model assumes a low probability of early exercise due to declining stock prices and sample different price paths using Monte Carlo simulation.

 

The following assumptions provide information regarding the warrants as following:

 

   March 31, 2012   December 31, 2011 
Common stock issuable upon exercise of warrants   15,000,000    15,000,000 
Market value of common stock on measurement date (1)  $0.05   $0.64 
Adjusted Exercise price   $2.61-$3.30    $2.61-$3.30 
Risk free interest rate (2)   0.12%   0.12%
Warrant lives in years   0.51    0.77 
Expected volatility (3)   137%   143%
Expected dividend yield (4)   0%   0%
Assumed offering price range per unit over next two years   $0.25-$2.15    $0.25-$2.15 
Assumed number of units sold in the offering   500,000-10,000,000    500,000-10,000,000 

 

34
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

14.CONVERTIBLE PREFERRED STOCK AND WARRANTS (Continued)

 

(1)The market value of common stock are the stock price at the close of trading on the date of March 31, 2012 and December 31, 2011, respectively.

 

(2)The risk-free interest rate was determined by management using the 2 year Treasury Bill as of March 31, 2012 and December 31, 2011. 

 

(3)Expected volatility is based on average volatility of historical share trade information. The Company believes this method produces an estimate that is representative of the Company’s expectations of future volatility over the expected term of the warrants.

 

(4)Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.

 

 SERIES B

 

Series B Convertible Preferred Stock has par value of $0.001 per share and each share of the Series B Convertible Preferred Shares is convertible into one share of the Common Stock, subject to standard adjustment provisions in the Certificate of Designations for Series B Convertible Preferred Shares.

 

After the expiration of the Series J Warrants on April 3, 2009, all of the unissued Series B convertible Preferred Shares were cancelled and reverted to the status of authorized but unissued preferred stock, undesignated as to series and subject to reissuance as shares of preferred stock of any one or more series as permitted by the Articles of Incorporation. There were no issued and outstanding shares of Series B Convertible Preferred Shares as of March 31, 2012 and December 31, 2011.

 

The following table summarizes warrant activity for the three months ended March 31, 2012 and the year ended December 31, 2011:

 

   Warrants   Weighted-average
exercise price
   Aggregate Intrinsic
Value
 
             
Outstanding at December 31, 2011   16,500,000   $2.97   $- 
Issued   -    -      
Exercised   -    -      
Expired               
Outstanding at March 31, 2012   16,500,000   $2.97   $- 

 

35
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

14.CONVERTIBLE PREFERRED STOCK AND WARRANTS (Continued)

 

The terms of outstanding warrants as of March 31, 2012 are as follows:

 

   Warrants outstanding   Warrants exercisable 
Range of
exercise prices
  Number
outstanding
   Weighted
average
remaining
contractual life
(years)
   Weighted
average
exercise price
   Number
exercisable
   Weighted
average
exercise price
 
                          
$2.75-$3.50   16,500,000   $0.51   $2.97    16,500,000   $2.97 

 

Fair Value on a Recurring Basis

 

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012:

 

   Fair Value Measurements at March 31, 2012 
  Quoted
Prices
         
  In Active  Significant       Total 
  Markets for  Other   Significant   Carrying 
  Identical  Observable   Unobservable   Value as of 
  Assets  Inputs   Inputs   March 
Description  (Level 1)   (Level 2)    (Level 3)    31, 2012 
Derivative warrant instruments  $ -  $-   $0   $0 
Total  $ -  $-   $0   $0 

 

36
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

15.STOCK OPTIONS

 

At the time the Company appointed Mr. Michael Marks as an independent director, the Company agreed to grant Mr. Marks, as part of his compensation, 20,000 stock options annually. The stock options will be granted at the end of each quarter with the exercise price being the stock price at the last trading day of the quarter. During the three months ended March 31, 2012, the Company did not grant any stock option to its independent director due to his resignation from his position as an independent director of the Company in October 2011. The options have exercise price ranges from $0.30-$3.10 per share and are fully vested on the date of grant.

 

The Company valued the stock options by the Black Scholes model with the following assumptions:

 

Number of
Options Issued
   Expected
Term
   Expected
Volatility
   Dividend
Yield
   Risk Free
Interest Rate
   Grant Date
Fair Value
 
 5,000    5    105%   0%   2.54%  $11,292 
 5,000    5    105%   0%   2.31%  $11,646 
 5,000    5    105%   0%   2.69%  $11,117 
 5,000    5    105%   0%   2.55%  $10,126 
 5,000    5    105%   0%   1.79%  $8,603 
 5,000    5    105%   0%   1.27%  $3,761 
 5,000    5    105%   0%   2.01%  $1,123 
 5,000    5    105%   0%   2.24%  $3,567 
 5,000    5    105%   0%   1.76%  $1,309 
 5,000    5    105%   0%   0.96%  $4,605 
 50,000                       $67,149 

 

The following is a summary of the option activity:

  

  Options   Weighted-average
exercise price
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2011   50,000    1.79    - 
Issued             - 
Exercised   -    -    - 
Expired   -    -    - 
Outstanding at March 31, 2012   50,000    1.79    - 

 

Following is a summary of the status of options outstanding at March 31, 2012:

 

    Options outstanding  Options exercisable
Range of
exercise
prices
   Number
outstanding
  Weighted
average
remaining
contractual life 
(years)
   Weighted
average
exercise price
   Number
exercisable
  Weighted
average exercise
price
 
$    0.30-$3.10   50,000   3.63   $1.79   50,000  $1.79 
                             

For the both of the three months ended March 31, 2012 and 2011, the Company recognized $0 as compensation expense for the stock options granted to the independent director, respectively.

 

37
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

16.EARNINGS PER SHARE

 

The calculation of the basic and diluted earnings per share attributable to the common stockholders is based on the following data for the three months ended March 31 2012 and 2011 (unaudited):

 

   2012   2011 
Numerator        
Earnings:          
           
Earnings (loss) for the purpose of basic earnings per share  $(1,453,820)  $(5,300,954)
Effect of dilutive potential common stock   -    - 
Earnings (loss) for the purpose of dilutive earnings per share  $(1,453,820)  $(5,300,954)
           
Denominator          
Number of shares:          
           
Weighted average number of common stock for the purpose of basic earnings per share   20,865,119    20,465,119 
Effect of dilutive potential common stock - conversion of convertible preferred stock   9,134,883    9,534,883 
Effect of dilutive potential common stock - conversion of warrants and stock options   0    3,315 
Weighted average number of common stock for the purpose of dilutive earnings per share   30,000,002    30,003,317 

 

Because the Company reported a net loss for the three months ended March 31, 2012, common stock equivalents were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same.

 

38
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

17.INCOME TAXES

As of March 31, 2012, the Group had net operating tax losses carried forward of $45,880,359, which includes $82,088 of tax income and $45,962,447 of tax losses in the US and PRC, respectively. Those losses carried forward in the US and PRC will expire between years 2013 and 2029. The Group has established a full valuation allowance against its net deferred tax assets due to the Group’s history of pre-tax losses and the resulting likelihood that the deferred tax assets are not realizable.

 

The Group has not recorded any income tax provision for the three months ended March 31, 2012, since the Group has estimated that its estimated annual effective income tax rate will be zero.

 

The Group is not aware of any unrecorded tax liabilities which would impact the Group’s financial position or its results of operations as of March 31, 2012 and December 31, 2011.

 

18.VARIABLE INTEREST ENTITY

 

The Company, as a primary beneficiary of Yanglin, consolidates Yanglin, as a Variable Interest Entity (“VIE”), of which we are the primary beneficiary. The liabilities recognized as a result of consolidating a VIE do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIE. Conversely, assets recognized as a result of consolidating a VIE do not represent additional assets that could be used to satisfy claims against our general assets. Reflected in the March 31, 2012 and December 31, 2011 balance sheets are consolidated VIE assets of $67.1 and $66.5 million, respectively, which are comprised mainly of cash, inventory and property and equipment. VIE liabilities mainly consist of short term bank loans and payables for working capital.

 

39
 

 

YANGLIN SOYBEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED) (Stated in US Dollars)

 

19.PARENT-ONLY FINANCIAL STATEMENTS

 

As mentioned in note 1 to the consolidated financial statements, as a result of entering into the contractual agreements, WFOE is deemed to control Yanglin as a VIE. These agreements may have restrictions on the ability of Yanglin to transfer funds to the Company through inter-company loans, advances and cash dividends which consist of additional paid in capital, statutory reserves and retained earnings of $25,623,793 and $28,895,167 respectively as at March 31, 2012 and December 31, 2011.

 

The following tables present unconsolidated financial information of the Company only:

 

Balance Sheets as of March 31, 2012 and December 31, 2011

 

   2012
(unaudited)
   2011 
Cash – restricted  $247,961   $247,961 
Investments in subsidiaries   35,606,376    38,664,554 
           
Total assets  $35,854,337   $38,912,515 
           
Other current liabilities  $583,534   $476,656 
Warrant liabilities        1,850,000 
           
Total liabilities   583,534    2,326,656 
           
Total shareholders’ equity   35,270,803    36,585,859 
           
Total liabilities and shareholders’ equity  $35,854,337   $38,912,515 

 

Statements of Operations and Other Comprehensive Income for the three months ended March 31, 2012 AND 2011 (unaudited)

 

   2012   2011 
Investment loss - equity method  $(3,025,801)  $(782,420)
General and administrative expenses   (32,377)   (15,379)
Loss from operations before income taxes   (3,058,177)   (797,799)
Change in fair value of warrants   1,850,000    (4,029,661)
Income before income taxes   (1,208,177)   (4,827,460)
Income taxes          
Net income (loss)  $(1,208,177)  $(4,827,460)

 

40
 

 

ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements, and the related footnotes thereto, appearing elsewhere in this report, and in conjunction with management’s discussion and analysis and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

CAUTIONARY STATEMENT REGARDING FUTURE RESULTS,

FORWARD-LOOKING INFORMATION AND CERTAIN IMPORTANT FACTORS

 

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, as discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as other factors, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives.

 

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. There are other factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

 

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

Company Overview

 

We are a leading, comprehensive non-genetically modified (non-GM) soybean processor in People’s Republic of China (“PRC”). We currently manufacture ordinary soybean oil, salad oil and soybean meal in bulk package, along with other products in smaller quantities, which are sold throughout the PRC directly to our customers or through distributors. Approximately 80% of our customers are located in Northern PRC.

 

Our operating facilities are located in Jixian County, a major soybean production area in Heilongjiang Province, which is the main soybean growing region in the PRC. We maintain healthy, long-term relationships with local farmers and soybean vendors which help to ensure the stability of our supply of raw materials. Farmers deliver soybeans directly to our factories, thus we enjoy savings in transportation and purchasing costs. Our relationship with customers (mostly distributors) are also well established so we are able to require them to pay the full amount in advance, minimizing accounts receivable and supplementing our working capital.

 

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The manufacturing process includes sifting, crushing, heating and pressing soybeans, extracting and separating oil from crushed soybeans, cleansing, hydrating and packaging of oil as well as drying and packaging soybean meal. Our main products include Grade IV soybean oil, salad oil, squeezed oil, soybean meal, and concentrated soy protein. We broadened our product line to include value-added products such as squeezed oil, low temperature soybean meal and concentrated soy protein, and we plan to produce powdered soy oil, textured protein and defatted soybean powder.  Production of squeezed oil has already begun. We are producing concentrated soy protein in small quantities of commercial grade product to customers in order to solicit feedback, so we can adjust the specifications of the product to satisfy the specific needs of the customers. Powdered soybean oil is still in trial production phase and we are now adjusting the formula and techniques according to customer requirements and feedback. Defatted soy powder and textured protein may be launched at a later date, depending on trends in the market and the specific product economics.

 

We sell our products under the “Yanglin” brand name to various regions of the PRC through our many distribution channels. In the three months ended March 31, 2012, we generated total revenue of approximately $47.65 million with a net loss of $3.3 million, exclusive of a non-cash gain of approximately $1.85 million resulting from the change in fair value of warrants, which was not related to our operations.

 

We are considering future expansion and acquisition opportunities, with the goal of significantly increasing our processing capacity and market share, but will only make a definite decision after the market and industrial environments improve materially.

 

We are also working to improve and strengthen our management and internal control over financial reporting. Our management has been conducting self assessment of the effectiveness of our internal control systems since 2008, and is continuously rectifying the weaknesses and deficiencies found in the process.

 

Current Business Environment and Future Outlook

 

Usually the price of soybean is determined by market mechanisms; however, government policy may have a significant impact. For example, the PRC government conducted a national strategic purchase two times from late 2008 to 2010 and effectively raised the purchase price of soybeans in the market by offering a price of approximately 10% higher than normal market prices to farmers. Such and similar actions of the government, such as granting various forms of subsidies to farmers, may materially increase our cost of sales.

 

There are several factors that may have adverse impact on our future, including: 

  · The harvest of genetically modified soybeans in US and South America may cause an increase in the volume of soybeans imported to the PRC at lower prices.

 

  · Possible further appreciation of Renminbi (RMB) against USD in the future may also reduce the import price of genetically modified soybeans.

 

  · The uncertainties in the subsidy and supporting policies of the PRC government regarding the domestic soybean industry.

 

In response, we will continue to lobby the PRC government to grant new supporting policies. Meanwhile, we will continue to take strict cost saving measures and maintain our production at a suitable level. We will actively observe the trends in our industry and in the general economy in order to capitalize on any opportunity for our products. Over the long-term, we believe that we are well positioned to benefit from the growth opportunities in the PRC and throughout the world.

 

42
 

 

Major Performance Factors

 

Revenue

 

We derive most of our revenue from the sales of our main products: soybean oil (IVth grade), salad oil and soybean meal, and a small portion of our revenue is created from the sales of other products, including concentrated soybean protein, squeezed oil and low temperature soybean meal. The revenue may be affected by the following factors:

 

  · Processing capacity of soybean;
     
  · Pricing of the products; and
     
  · Market demand.

 

Processing capacity of soybean. Our current annual processing capacity of soybean is 520,000 metric tons. We processed approximately258, 697 metric tons in 2010 and 84,495 metric tons in the first quarter of 2012, respectively. Based on these figures, it can be estimated that the current production capacity is sufficient for current demand.

 

Pricing of the products. In general, our products are priced consistently with market prices, with consideration for cost of sales. However, prices are affected by several factors, including but not limited to: the pricing trends for domestic soybeans, the cost and volume of imported soybeans, temporary sudden changes in supply-demand relationship, general economic factors and income level of consumers.

 

Market demand. Revenue growth potential depends on market demand for our products. We believe that high growth potential for our sales revenue exists due to several factors: 1) total market demand for our products exceeds current production levels; 2) our products are recognized as high quality; 3) we maintain excellent relationships with our customers; and, 4) we generally sell almost all of our production volume.

 

Cost of Sales

 

Cost of sales generally consists of four major parts: raw materials, labor, production overhead and manufacturing related depreciation. Raw materials refer mainly to soybeans and accounts for over 90% of the cost of sales. Labor cost are relatively low and comprise a very small portion of cost of sales. Production overhead includes auxiliary materials, utility expenses, machinery maintenance costs, inspection costs and other related expenses. Depreciation costs are applied to manufacturing facilities and equipment, such as production lines, steam generators, and factory buildings.

 

Cost of sales is determined primarily by the following factors, either directly or indirectly:

  · Availability and price of raw materials, especially soybeans;

 

43
 

 

  · Operating efficiency of production facilities; and
     
  · Government policy or direct purchase.

 

Availability and price of raw materials, especially soybeans. Raw materials costs account for more than 90% of cost of sales. Soybean is the only major raw material, so its price fluctuation will have a material impact on our cost. The price of soybeans may be affected by a series of factors, including the production volume of soybeans on national and international scale, weather, government policies and soybean transactions on commodity markets. Meanwhile, if there is a shortage in the supply of raw materials, our production facilities will have to operate at less than maximum efficiency. Our processing volume represents a relatively small portion of the total soybean supply of Heilongjiang Province; generally speaking the availability of raw materials is always high. Soybean price has a significant impact on our cost of sales.

 

Output ratio and operating efficiency of production facilities. Output ratio is the ratio between the input of raw materials (mostly soybeans) and the output of finished products. The more units of finished products we can produce using a single unit of raw material, the higher the output ratio. As labor, production overhead and manufacturing related depreciation expenses are mostly fixed, generally speaking, the more we produce, the lower the unit cost. Our output ratio and operating efficiency are continuously improving, due to the recent purchase and renovation of facilities and equipment, the enhanced competence and proficiency of our staff and the improvement of our management skills.

 

Government policy or direct purchase. Usually the price of soybean is determined by market mechanisms; however, government policy may have a significant impact. For example, the PRC government conducted a national strategic purchase two times from late 2008 to 2010 and effectively raised the purchase price of soybeans in the market by offering a price about 10% higher than normal market prices to farmers. Such and similar actions of the government, granting various forms of subsidies to farmers, may materially increase our cost of sales.

 

Gross Profit (Loss)

 

Gross profit (loss) is the result of the combined effects of the following factors: (a) the selling price of our products, (b) the sales volume and the individual profit margin of each product, and (c) the cost of sales. We are a middle stream processor, and the profit margin of middle stream processing is usually relatively stable. Under normal circumstances, our gross profit margin has been in the range of 7% to 9%, based on previous experience until 2008.

 

If exceptional circumstances exist, gross margin may be negatively affected. As mentioned above, a basic requirement for the domestic soybean processors to be entitled to the government subsidy announced in the end of 2010 is the purchase of soybeans from farmers at a government guided, higher than normal market price. The policy in effect made soybean prices increase from the end of 2010. Supported by the trend of increasing future prices of soybean in the global markets, the increased expectation of Chinese farmers on soybean prices helped maintain high price levels. However, prices of soybean products did not increase in line with that of soybeans. As a result, we suffered a gross loss in the first quarter of 2012.

 

Over the past few years, particularly from 2009 to 2011, the profitability of our products has been greatly influenced by a combination of the following factors: the large and cheaper imports of genetically-modified (GM) soybeans which offered a low cost alternative to soybean processors and suppressed the prices of soybean products in China’s market. At the same time, the cost of our major raw material, domestic soybeans, was usually higher than that of imported ones. Unfavorable weather conditions, especially excessive rain, caused the production volume of soybean to decrease and its price to increase. The Chinese government conducted a national purchase of soybean and issued other policies to support the price of domestic soybeans at a relatively high level. In the near future, we expect our profitability to be significantly influenced by, in addition to the above-mentioned factors, the following, including but not limited to: the expected increase in soybean output of the United States and South America which may result in additional soybean imports to the PRC; the possible appreciation of the RMB against the USD, which may cause imported soybean to be cheaper; and uncertainties in the policies of the Chinese government.

 

44
 

 

Operating Expenses

 

Operating expenses consist of selling expenses and general & administrative expenses. Operating expenses represent only a small portion of total costs and expenses.

 

Selling expenses generally include business development expenses, sales meeting expenses, loading and handling, advertising, sales-related staff salaries and welfare expenses, and travel expenses. They are usually relative to sales volume.

 

General and administrative expenses include the depreciation of office buildings and equipment, office expenses and supplies, and management and administrative salaries. These expenses are typically fixed. General and administrative expenses may increase, as we revise our organizational structure and improve our management systems and internal control system and processes.

 

Income Tax

 

We are incorporated in the State of Nevada and Faith Winner (BVI) is incorporated under the laws of the British Virgin Islands. We conduct all our operations under certain contractual arrangements with Yanglin, a PRC company.

 

Although we are subject to United States taxation, we do not anticipate incurring significant United States income tax liability for the foreseeable future because:

 

  · We do not conduct any material business or maintain any branch office in the United States;

 

  · The earnings generated from our non-U.S. operating companies are generally eligible for a deferral from United States taxation until such earnings are repatriated to the United States; and

 

  · We believe that we will not generate a significant amount of income inclusions under the income imputation rules applicable to a United States company that owns "controlled foreign corporations" for United States federal income tax purposes.

 

Therefore, we have made no provision for U.S. federal income taxes or tax benefits on the undistributed earnings and/or losses.

 

Yanglin, a PRC company, has income tax liabilities in the PRC. PRC enterprise income tax is calculated based on taxable income determined under PRC tax regulations. In accordance with Income Tax Law applicable to domestic companies, we are generally subject to an enterprise income tax rate of 25%.

 

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However, as Yanglin has been recognized as a Key Leading Enterprise in the Industrialization of Agriculture Industry by the PRC’s central government, Yanglin enjoyed a complete exemption from income taxes until 2009. Our status is reviewed every two years. The latest review of Yanglin’s status of National Key Leading Enterprise in Agriculture was finished by the government in March 2010, and the status was granted to the Company for the period from January 2010 to June 2012. The Company received this government approval on May 7, 2010. Other than the PRC's central government's award, a review by the local tax authority is also required in order to enjoy a 2010 tax exemption.

 

Warrant Liability

 

Effective January 1, 2009, we adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, warrants to purchase the Company's common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.

 

Results of Operations

 

The Three Months Ended March 31, 2011 Compared with the Three Months Ended March 31, 2012

   The three
months
   The three
months
 
Consolidated Statement of Operations and  Ended
March 31,
2012
   Ended
March 31,
2011
 
Comprehensive (Loss) Income  ($)   ($) 
         
Net Sales  $47,656,839   $33,947,661 
Cost of sales   (49,966,038)   (34,165,621)
Gross loss   (2,309,199)   (217,960)
Selling expenses   (62,220)   (65,570)
General and administrative expenses   (461,686)   (584,166)
Impairment loss of assets held for sale   0    - 
Loss from operations   (2,833,105)   (867,696)
Interest income   13,095    19,936 
Interest expense   (488,675)   (425,253)
Other expense   4,865    1,720 
Changes in fair value of warrants   1,850,000    (4,029,661)
Income from operations before income tax   (1,453,820)   (5,300,954)
Income tax   -    - 
Net income   (1,453,820)   (5,300,954)
Foreign currency translation adjustment   245,643    473,494 
Comprehensive income (loss)  $(1,208,177)  $(4,827,460)

 

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Net Sales

 

   For The Three Months
Ended March 31,
   Period to Period Change 
   2012   2011         
Item  Amount ($)   Amount ($)   Amount ($)   % 
Soybean meal  $24,934,695   $16,301,166   $8,633,529    52.96%
Soybean oil   14,913,982    10,655,613    4,258,369    39.96%
Salad oil   3,311,688    2,068,397    1,243,291    60.11%
Squeezed oil   388,315    359,301    29,014    8.08%
Soy protein concentrates   1,112,143    1,012,996    99,147    9.79%
Low temperature soy meal   2,996,015    3,550,186    (554,171)   (15.61)%
Total Net Sales  $47,656,839   $33,947,661   $13,709,179    40.38%

 

Our net sales for the three months ended March 31, 2012 increased by $13,709,179 or 40.38% over the three months ended March 31, 2011. The sharp increase in sales revenue was mainly the result of adjustment of sale policy that distributors were allowed average three month payment period without any interest or surcharges.

 

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The increase in sales revenue was mainly caused by the increases in production and sales volume of our major products, even though the average selling prices of these products increased over the period.

 

In the first quarter of 2012, as in the fourth quarter of 2011, we were using soybeans harvested in October 2011 as raw materials. In the first quarter of 2011, the local farmers were eager to sell the soybeans because the soybean processors must purchase them at a government guided price, which was higher than normal market price, if they intended to qualify for the subsidy announced by the government in the end of 2011. As a result, we had to reduce our purchase volume and hence production and sales volume.

 

In the three months ended March 31, 2012, we purchased 85,955 tons of soybean and produced 59,248 tons of soybean meal, 11,265 tons of soybean oil, 2,308 tons of salad oil, 295 tons of squeezed oil, 784 tons of soy protein concentrates, and 5,915 tons of low-temperature soybean meal, as compared to 59,764 tons of soybean purchased, and 40,323 tons of soybean meal, 8,499 tons of soybean oil, 1,542 tons of salad oil, 295 tons of squeezed oil, 784 tons of soy protein concentrates and 7,610 tons of low-temperature soybean meal produced respectively, in the three months ended March 31, 2011. Consequently, in the first quarter of 2012, we sold 58,428 tons of soybean meal, 11,058 tons of soybean oil, 2,368 tons of salad oil, 271 tons of squeezed oil, 887 tons of soy protein concentrates, and 4,846 tons of low-temperature soy meal, representing growth rates of 40.25%, 27.43%, 44.16%, -3.62%, 5.72% and -22.35%, respectively over the first quarter of 2011, when we sold 41,662 tons of soybean meal, 8,678 tons of soybean oil, 1,643 tons of salad oil, 281 tons of squeezed oil, 839 tons of soy protein concentrates, and 6,241 tons of low-temperature soy meal. Though the average sales prices of the products, namely soybean meal, soybean oil, salad oil, squeezed oil, soy protein concentrates, and low-temperature soy meal, experienced growth rates of 4.71%, 5.45%, 6.63%, 7.66%, 0% and 4.33% in the first quarter of 2012 over those in the first quarter of 2011, such increases couldn’t fully compensate for the decrease in sales volume, resulting in a decline in total sales revenue.

 

Cost of Sales and Gross (Loss) Profit

 

   For The Three Months Ended March 31,   Period to Period Change 
               %         
   2012   % of Sales   2011   of Sales         
Cost of Sales:  Amount ($)   Revenue   Amount ($)   Revenue   Amount ($)   % 
Soybean meal  $(26,193,062)   105.05%  $(16,828,364)   103.23%  $(9,364,698)   55,65%
Soybean oil   (15,610,643)   104.67%   (10,437,382)   97.95%   (5,173,261)   49.56%
Salad oil   (3,476,944)   104.99%   (2,042,200)   98.73%   (1,434,744)   70.25%
Squeezed oil   (416,173)   107.17%   (365,440)   101.71%   (50,733)   13.88%
Soy protein concentrates   (1,163,685)   104.63%   (991,772)   97.90%   (171,913)   17.33%
Low-temp soy meal   (3,105,532)   103.66%   (3,500,462)   98.60%   394,930    (11.28)%
Total Cost of Sales  $(49,966,038)   104.85%  $(34,165,621)   100.64%  $(15,800,417)   46.25%
Gross (Loss) Profit:                         
Soybean meal  $(1,258,367)   (5.05)%  $(527,198)   (3.23)%  $(731,169)   138.69%
Soybean oil   (696,660)   (4.67)%   218,231    2.05)%   (914,891)   (419.23)%
Salad Oil   (165,256)   (4.99)%   26,197    1.27%   (191,453)   (730.82)%
Squeezed oil   (27,858)   (7.17)%   (6,139)   (1.71)%   (21,719)   (353.78)%
Soy protein concentrates   (51,542)   (4.63)%   21,224    2.10%   (72,766)   342.85%
Low-temp soy meal   (109,517)   (3.66)%   49,724    1.40%   (159,241)   320.25%
Total Gross Profit (Loss)  $(2,309,199)   (4.85)%  $(217,960)   (0.64)%  $(2,091,239)   (959.46)%

 

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Our cost of sales for the three months ended March 31, 2012 decreased by $15,800,417 or 46.25% over the three months ended March 31, 2011, while the ratio of cost as a percentage to net sales value increased from100.64% to 104.85% over the period. The increase in cost of sales was mainly caused by the increase in average purchase price of soybeans. We recorded a gross loss of $2,309,199 in the three months ended March 31, 2012, in comparison to a gross loss of $217,960 in the three months ended March 31, 2011. Our gross loss margin further decreased from negative 0.64% to negative 4.85% over the same period. The main reasons for the gross loss in the first quarter of 2012 were the impact of the large imports of soybeans and the high price levels of soybeans. The main reason for the changes in gross profit was the increase in the raw material prices of certain of our soybean products.

 

During the first quarter of 2012, the market prices of our products remained high. The average selling prices were higher than those in the first three months of 2011 (please refer to the section “Net Sales” above for details). Traditionally, the demand for soybean products is strong during the first quarter of the year, especially during the Chinese New Year holiday. Though still lower than that of domestic non-GM soybean, the price of imported soybeans has remained at a relatively high level from late 2011 until the first quarter of 2012, as compared to historical data. The above factors supported higher selling prices of our products and as a result has contributed to improved gross margin.

 

The PRC has long been importing large volumes of genetically-modified (GM) soybeans from US and South America, and such imports reached new peaks from the end of 2009 through 2011. The General Administration of Customs of the People’s Republic of China announced that the aggregate import volume reached 55million tons in 2010, an increase of 28.8% over that of 2009. During the year the imported beans were usually sold at prices lower than that of domestically produced soybeans, representing a low cost alternative for domestic processors which previously used domestic beans as raw materials. Importation of GM soybeans significantly influenced price levels in the PRC’s domestic market for soybean products.

 

49
 

 

Operating Expenses

 

   For The Three Months Ended March 31,     
                   Period to Period 
   2012   % of Sales   2011   % of Sales   Change 
   Amount ($)   Revenue   Amount ($)   Revenue   Amount ($)   % 
Selling Expenses  $(62,220)   0.13%  $(65,570)   0.19%  $3,350    (5.11)%
General & Administrative Expenses   (461,686)   0.97%   (584,166)   1.72%   122,480    (20.97)%
Total Operating Expenses  $(523,906)   1.10%  $(649,736)   1.91%  $125,830    (19.37)%

 

Selling expenses for the three months ended March 31, 2012 decreased by 5.11% as compared to the three months ended March 31, 2011.

 

General and administrative expenses for the three months ended March 31, 2012 decreased by 20.97% over the three months ended March 31, 2011. This was mainly caused by the material reduction in the expenses related to public company affairs, including professional fees paid to legal counsel and consulting fee for non-executive directors. As a percentage of net sales, general and administrative expenses decreased from 1.72% for the first quarter of 2011 to 0.97% for the first quarter of 2012.

 

As compared to the first quarter of 2011, total operating expenses decreased by 19.37% in the first quarter of 2012, and the percentage of net sales decreased from 1.91% to 1.10%.

 

Net Income

 

   For The Three Months Ended March 31,   Period to Period 
   2012   % of Sales   2011   %of Sales   Change 
   Amount ($)   Revenue   Amount ($)   Revenue   Amount ($)   % 
Loss from operations  $(2,833,105)   (5.94)%  $(867,696)   (2.56)%  $(1,965,409)   226.51%
Interest expenses   (488,675)   (1.03)%   (425,253)   (1.25)%   (63,422)   14.91%
Interest income   13,095    0.03%   19,936    0.06%   (6,841)   (34.31)%
Other (expense) income   4,865    0.01%   1,720    0.01%   3145    182.85%
Changes in fair value of warrants   1,850,000    3.88%   (4,029,661)   (11.87)%   5,879,661    (145.91)%
Income tax   -        -             
Net income  $(1,453,820)   (3.05)%  $(5,300,954)   (15.62)%  $3,847,134    (72.57)%

 

50
 

 

Loss from operations was primarily due to the reasons described in the sections titled “Net Sales” and “Cost of Sales and Gross Profit” above. For the first quarter of 2012, we generated a gross loss and a loss after deducting selling and general and administrative expenses. Operating margin decreased from negative 2.56% to negative 5.94% from the first quarter of 2011 to the first quarter of 2012.

 

Interest expenses increased by 14.91% from the three months ended March 31, 2011, to the three months ended March 31, 2012. As a percentage of net sales, interest expense was 1.03% for the first quarter of 2012, as compared to 1.25% for the same period in 2011. The changes were mainly caused by increased sale volume. Interest income decreased by34.31% over the same period.

 

Effective January 1, 2009, we adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815"). As a result of adopting ASC 815, we recorded non-cash income of $(4,029,661) for the first quarter of 2011, and $ 1,850,000 for the first quarter of 2012, resulting from the change in fair value of warrants issued to investors in conjunction with the Company’s Series A Convertible Preferred Stock in October 2007. The accounting treatment of the warrants resulted from an anti-dilution provision to the warrant holders.

 

Since Yanglin has been recognized as a “Key Leading Enterprise” in the industrialization of the agriculture industry by the Chinese government, Yanglin has qualified for a complete exemption from income taxes through 2009. This status is usually reviewed every two years, according to a government order. The latest review of Yanglin’s status of National Key Leading Enterprise in Agriculture was finished by the government in March 2010, and the status was granted to the Company for the period from January 2010 to June 2012. The Company received government approval on May 7, 2010. Other than the PRC's central government's award, a review by the local tax authority is also required in order to enjoy a 2012 tax exemption.

 

Net income, after including the above mentioned non-cash income from the change in fair value of warrants, decreased by 72.57% from the three months ended March 31, 2011, to the three months ended March 31, 2012. During the same period, net profit margin improved from a negative 15.62% to negative 3.05%

 

Earnings Per Share

 

   For The Three Months
Ended March 31,
 
   2012   2011 
   Unaudited   Unaudited 
Net Income (Loss) for Basic Earnings Per Share  $(1,453,820)  $(5,300,954)
Basic Weighted Average Number of Shares   20,865,119    20,465,119 
Net Income (Loss) per Share – Basic  $(0.07)  $(0.26)
Net Income (Loss) for Diluted Earnings Per Share  $(1,453,820)  $(5,300,954)
Diluted Weighted Average Number of Shares   30,000,002    30,003,317 
Net Income (Loss) per Share – Diluted  $0.07   $(0.26)

 

51
 

 

Basic and diluted earnings per share (EPS) for the quarter ended March 31, 2011, were $(0.07) and $(0.07), compared to $(0.26) and $(0.26) for the same quarter last year, as restated.

 

Liquidity and Capital Resources

 

Generally, we finance our business with cash flow from operations and short-term bank loans. Working capital is current assets less current liabilities, and our operational cash demand consists mainly of raw materials purchases, salaries, production overhead (such as auxiliary materials, utilities) and financing expenses, of which raw materials (soybean) purchases comprise the majority.

 

Because we usually pay cash to our suppliers upon purchase of soybeans, there is a higher than normal need for cash around harvest season. Under normal circumstances, our pattern of operations is as follows: (i) we will keep a large cash reserve until early October, the harvest time, and take short-term loans from banks at that time, (ii) we will build up a substantial inventory of soybeans so that for the period through the end of the year and for the following quarter or even the following half year, we will have sufficient raw materials to maintain operations and convert finished products to cash, and (iii) we will repay the short-term loans by the end of June or July the following year.

 

The Group had a credit line facility with the ability to borrow up to $75.2 million (equivalent to RMB 492.9 million), with Agricultural Development Bank of China (the “Bank”).

 

Our operational cash requirements may be influenced by many factors, including the fluctuation of raw material prices, cash flow, competition, relationships with suppliers or customers, availability of credit facilities and financing alternatives. Under the current operational level, we can satisfy this demand with short-term loans from the Bank and our own cash reserve, within the next twelve months.

 

Cash Flows for the Three Months Ended March 31, 2012 Compared with the Three Months Ended March 31, 2011

 

Operating Activities

 

Cash used in operating activities for the three months ended March 31, 2012 was $4,325,889, while cash provided by operating activities for the three months ended March 31, 2011, was $4,543,067. The difference was primarily due to the increases in the inventory with the balance of $6,063,362 at the March 31 2012, compared to the $5,023,011 at the March 31 2011. The second reason for this is increases in the balance of the prepaid tax from $9,863,838 in 2011 to $10,957,602 in 2012.

 

52
 

 

Investing Activities

 

Net cash provided by investing activities for the three months ended March 31, 2012 was $3, compared to net cash used in investing activities of $2,294 for the three months ended March 31, 2011. The net cash provided was mainly from the disposal of the non-current assets,

 

Financing Activities

 

Net cash used in financing activities was $3,319,802 for the three months ended March 31, 2012, compared to net cash used in financing activities was $808,004 for the three months ended March 31, 2011. Net cash provided in the three months ended March 31, 2012 included increases of the principals of both the short-term loan from banks . During the three months ended March 31, 2012, we made principal borrow for short-term bank loans of $3,329,793.

 

Loans

 

We had short-term bank loans of $25,481,839 on March 31, 2012, as compared to $22,017,771 on December 31, 2011. These loans are used to satisfy working capital needs. We have fully repaid all due loans on time. The loan outstanding as at March 31, 2012 is due in installments from August to December, 2012.

 

We had long-term bank loans, including the portion payable within one year, of approximately of $4,273,166 on March 31, 2012, as compared to $4,246,284 on December 31, 2011. These loans are used to upgrade our oil products and expand our storage facility. The loan outstanding as at March 31, 2012 is due on August 26, 2014.

 

The balance of our long-term bank loan from related parties, including the portion payable within one year, was approximately $228,845 on March 31, 2012, compared to $237,328 on December 31, 2011. The change was caused by repayment of the principal, and we did not borrow any additional funds during the three months ended March 31, 2012.

 

Commitments and Contingencies

 

We have no future cash commitments or contingent liabilities as of March 31, 2012.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to the Company’s Critical Accounting Policies and Assumption filed in the Company’s 2011 Annual Report on Form 10-K.

 

Economic and Political Risks

 

The Group’s operations are conducted in the PRC. Accordingly, the Group’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, so the Group’s operations 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 Group’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.

 

53
 

 

Recent Accounting Pronouncements

 

In January 2011, the FASB issued ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”, which temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in ASU 2011-01 is effective January 19, 2011 (date of issuance).

 

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU 2010-20. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s financial condition or results of operations.

 

In April 2011, the FASB issued ASU 2011-03, Consideration of Effective Control on Repurchase Agreements, which deals with the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 changes the rules for determining when these transactions should be accounted for as financings, as opposed to sales. The guidance in ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 is not expected to have a material impact on the Company’s financial condition or results of operation.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and IFRS, and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material effect on its operating results or financial position.

 

In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position. However, it will impact the presentation of comprehensive income.

 

54
 

 

In July 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-06, Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers. This ASU amends the FASB Accounting Standards CodificationTM (Codification) to provide guidance about how health insurers should recognize and classify in their income statements fees mandated by the "Patient Protection and Affordable Care Act," as amended by the "Health Care and Education Reconciliation Act." ASU 2011-06 represents a consensus of the EITF on Issue No. 10-H, “Fees Paid to the Federal Government by Health Insurers.” ASU 2011-06 requires that the liability for the fee be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2011-06 is effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective.

 

In July 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The ASU represents a consensus of the EITF on Issue No. 09-H, “Health Care Entities: Presentation and Disclosure of Net Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts.” The amendments in this ASU require certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, the amendments in this ASU are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter, with early adoption permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. The disclosures required by the amendments in this ASU should be provided for the period of adoption and subsequent reporting periods.

 

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

 

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. ASU 2011-09 is intended to address concerns from various users of financial statements on the lack of transparency about an employer’s participation in a multiemployer pension plan. Users of financial statements have requested additional disclosure to increase awareness of the commitments and risks involved with participating in multiemployer pension plans. The amendments in this ASU will require additional disclosures about an employer’s participation in a multiemployer pension plan. Previously, disclosures were limited primarily to the historical contributions made to the plans. ASU 2011-09 applies to nongovernmental entities that participate in multiemployer plans. For public entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011. For nonpublic entities, ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2012. Early adoption is permissible for both public and nonpublic entities. ASU 2011-09 should be applied retrospectively for all prior periods presented.

 

55
 

 

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. ASU No. 2011-10 is intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, ASU 2011-10 is effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted.

 

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 is intended to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.

 

In December 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-11 is intended to supersede certain pending paragraphs in Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

56
 

 

The following tables summarize our contractual obligations as of March 31, 2012, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

    Payments due by period  

Contractual

obligations

  Total    

Less

than 1 year

    1-3 years     3-5 years    

More

than 5 years

 
Long-Term Debt Obligations   $ 4,502,020   $ 1,467,653 $ 2,945,789 $ 88,578 $ 0  
Capital Lease Obligations     -       -       -       -       -  
Operating Lease Obligations     -       -       -       -       -  
Purchase Obligations     -       -       -       -       -  

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

ITEM 4—CONTROLS AND PROCEDURES

 

a. Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. 

 

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures. Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2012, our disclosure controls and procedures were not effective due to the material weaknesses and significant deficiencies in our internal control over financial reporting described below.

 

57
 

 

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2012, our disclosure controls and procedures were not effective due to the material weaknesses and significant deficiencies in our internal control over financial reporting described below.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company’s internal control system over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).   Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2012.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.  Based on our evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2012, our internal control over financial reporting was not effective due to the identification of the following material weaknesses:

 

  A. No mechanism had been established for directors and management of the Company to make declarations in relation to related parties and any conflicts of interest regarding the Company's operations that they may have.

 

  B. There was no internal audit exercises performed, nor did the Company have formal policies and plan for regular internal audit exercise.

 

  C. The Company did not maintain personnel with a sufficient level of accounting knowledge, experience and training in the application of US GAAP and SEC requirements.

 

Both control deficiencies could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, the management has determined that these control deficiencies constitute material weaknesses.

 

58
 

 

Remediation Initiative and Progress

 

We have engaged an accounting consulting firm to help with the preparation of our consolidated financial statements and deliver training to our own accounting staff on the selection and application of US GAAP and related SEC disclosure requirements. In addition, we have engaged a consulting firm to draft an accounting manual based on US GAAP. The draft accounting manual has been prepared and is currently being reviewed by our management, and it will be released upon approval of the management and the audit committee.

 

b. Changes in Internal Controls over Financial Reporting

 

During the quarter ended March 31, 2012, there was no other change in our internal controls over financial reporting, except as described above, that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process. 

 

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not currently a party to any material legal proceedings. From time to time, however, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.

 

ITEM 1A—RISK FACTORS

 

As a smaller reporting company, we are not required to provide the information required by this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

59
 

 

ITEM 6. EXHIBITS

 

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed Herewith.

 

60
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Yanglin Soybean, Inc.  
       
Date: May 15, 2012 By:

/s/ Shulin Liu

 
    Shulin Liu  
   

Chief Executive Officer

(Principal Executive Officer)

 
     
  Yanglin Soybean, Inc.  
       
Date: May 15, 2012 By:

/s/ Yang Nan

 
    Yang Nan  
   

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

61

PINX:YSYB Yanglin Soybean Inc Quarterly Report 10-Q Filling

Yanglin Soybean Inc PINX:YSYB Stock - Get Quarterly Report SEC Filing of Yanglin Soybean Inc PINX:YSYB stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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PINX:YSYB Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |  Symbol |  Interest |  Popularity

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