Form 10-Q for ENERGROUP HOLDINGS CORP
--------------------------------------------------------------------------------
20-May-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q and other reports filed by Registrant from time to time with the Securities and Exchange Commission (collectively the "Filings") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Registrant's management as well as estimates and assumptions made by Registrant's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words "anticipate", "believe", "estimate", "expect", "future", "intend", "plan", or the negative of these terms and similar expressions as they relate to Registrant or Registrant's management identify forward-looking statements. Such statements reflect the current view of Registrant with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this report entitled "Risk Factors") relating to Registrant's industry, Registrant's operations and results of operations, and any businesses that Registrant may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although Registrant believes that the expectations reflected in the forward-looking statements are reasonable, Registrant cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.
In this Form 10-Q, references to "we", "our", "us", "our company", "Energroup" or the "Registrant" refer to Energroup Holdings Corporation, a Nevada corporation.
OVERVIEW
We are a meat processing company specializing in pork and pork products. We have a unique wholesale and retail distribution model and sell directly to over 7,600 retail outlets, including supermarkets and hypermarkets, across Northeast China.
Dalian Precious Sheen Investments Consulting Co., Ltd., or Chuming WFOE, is our holding company established in the People's Republic of China (the "PRC" or "China") for our three PRC operating subsidiaries, collectively referred to elsewhere in this report as the "Chuming Operating Subsidiaries":
1. Dalian Chuming Slaughter and Packaging Pork Company Ltd. (also referred to in this report as "Meat Company"), whose primary business activity is acquiring, slaughtering and packaging of pork and cattle;
2. Dalian Chuming Processed Foods Company Ltd. (also referred to in this report as "Food Company"), whose primary business activity is the processing of raw and cooked meat products; and
3. Dalian Chuming Sales Company Ltd. (also referred to in this report as "Sales Company"), which is responsible for our sales, marketing and distribution operations.
--------------------------------------------------------------------------------
The Chuming Operating Subsidiaries are spin-off constituents of a former parent company, Dalian Chuming Group Co., Ltd., or the "Group." Our primary business activities is the production and packing of fresh pork and production of processed meat products for distribution and sale to clients throughout the PRC. Chuming WFOE was incorporated in China as wholly foreign owned enterprise on in December 2007. Chuming WFOE's parent company is Precious Sheen Investments Limited ("PSI"), a holding company established in the British Virgin Islands in May 2007. We are headquartered in the City of Dalian, Liaoning Province of China.
Recent Events in 2007 - Reverse Acquisition and Financing Transaction
On December 31, 2007, Energroup acquired all of the outstanding shares of PSI in exchange for the issuance by Energroup of 16,850,000 restricted shares of our common stock to the shareholders of PSI, which represented approximately 97.55% of the then-issued and outstanding common stock of Energroup (excluding the shares issued in a concurrent financing transaction). As a result of this share exchange transaction, PSI became Energroup's wholly owned subsidiary, and Energroup acquired the business and operations of Chuming WFOE.
Concurrently with the closing of the share exchange transaction, on December 31, 2007, we raised $17,000,000 in a private placement by issuing 3,863,635 shares of our common stock to fifteen accredited investors at $4.40 per share.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management's discussion and analysis of our financial condition and results of operations are based on our combined financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our combined financial statements included in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Method of Accounting
We maintain our general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by us conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
--------------------------------------------------------------------------------
Principles of Consolidation
The consolidated financial statements, which include the Company and its subsidiaries, are compiled in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly owned subsidiaries.
Our three operating subsidiaries, the Meat Company, Food Company and Sales Company, were incorporated and have been in existence since December 2004. The Company also owns two intermediary holding companies. As of December 31, 2006, the detailed identities of the consolidating subsidiaries are as follows:
Attributable
Place of Equity
Name of Company Incorporation Interest Registered Capital
Precious Sheen Investments Limited BVI 100 % USD 10,000
Dalian Chuming Precious Sheen
Investment Consulting Co., Ltd. PRC 100 % RMB 29,400,682
Dalian Chuming Slaughtering & Pork
Packaging Co. Ltd. PRC 100 % RMB 10,000,000
Dalian Chuming Processed Foods Co. Ltd. PRC 100 % RMB 5,000,000
Dalian Chuming Sales Co. Ltd. PRC 100 % RMB 5,000,000
The consolidation of these operating subsidiaries into a newly formed holding company (i.e. the Company) is permitted by United States GAAP: ARB51 paragraph 22 and 23.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.
Accounts Receivable
We extend unsecured, non interest bearing credit to our customers; accordingly, we carry an allowance for doubtful accounts, which is an estimate, made by management. Management makes its estimate based on prior experience rates and assessment of specific outstanding customer balances. Management must approve credit extended to new customers who have met the criteria of our credit policy. It is typically the case that new customers must make payments in advance before we sell our products to them. For our premier customers such as supermarkets, we do typically extend 30-45 days of terms to them.
In order for us to minimize bad debt, we exercise control over both the length of the receivables, and the quantity of products shipped to our customers to whom we have extended credit, such as those who pay on a monthly basis. In exercising control over order quantities, on a product by product basis, we set maximum limits that will be shipped to those customers. If in the event, the customer is near their maximum and has an outstanding balance, we will request payment even if it is outside of the normal payment cycles of our customers.
Inventory Carrying Value
Inventory, consisting of raw materials in the form of livestock, work in progress, and finished products, is stated at the lower of cost or market value. Finished products are comprised of direct materials, direct labor and an appropriate proportion of overhead. Periodic evaluation is made by management to identify if inventory needs to be written down because of damage, or spoilage. Cost is computed using the weighted average method.
We observe and evaluate the value of inventory on a product by product basis. For our fresh meat products which are typically sold as carcasses (hogs sliced in half), we typically carry zero inventory as these products are sold immediately. We use a just in time model for fresh meat products. Our customers require fresh meat so we do not carry any excess inventory beyond the hogs that we slaughter each day. Current market conditions have also influenced our inventory across the board. For our products that we require additional processing such as hams and sausages we typically, carry two days' worth of inventory. For meat that has been separated into smaller packaged portion, we typically carry one weeks' worth of inventory. The PRC is currently facing a pork shortage, so as a result, presently we are able to sell all the fresh pork that we slaughter. Accordingly, we have not been required to write down inventory for spoilage. Also, if the hogs do not meet our requirements for quality they are disposed of, and charged off immediately to our cost of sales, and they will not enter our inventory.
--------------------------------------------------------------------------------
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized.
Construction in progress represents the direct costs of design, acquisition, and construction of buildings, building improvements and land improvements. Capitalization of these costs ceases when substantially all activities necessary to prepare the assets for their intended use are completed. At such point, construction in progress is transferred to its respective asset classification. No depreciation is provided until it is completed and ready for intended use.
Property and equipment are depreciated using the straight-line method over their estimated useful life with a 5% salvage value. Their useful lives are as follows:
Fixed Asset Classification Useful Life
Land Improvements 10 years
Buildings 20 years
Building Improvements 10 years
Manufacturing Machinery & Equipment 10 years
Office Equipment 5 years
Furniture & Fixtures 5 years
Vehicles 5 years
Land Use Rights
We believe our estimation of useful life of our fixed assets has significant bearing on our cost of sales. The related depreciation is a factor of cost that cannot be ignored in assessing our profits. We believe we have used a conservative approach to assessing their useful lives. In our determination of useful life and depreciation methodology we coincidentally adhere to PRC GAAP standards in addition to U.S. GAAP. PRC GAAP standards provide a valuable and reasonable basis for determining useful life because the PRC government documents and records all forms of manufacturing equipment and provides guidance on what is considerable acceptable in terms of depreciation expense. We do also believe based on the quality and nature of the maintenance we regularly perform on our equipment, it is possible that our equipment could significantly outlive their stated estimated useful lives.
Customer Deposits
Customer deposits represents money we have received in advance for purchases of pork and pork products. We consider customer deposits as a liability until products have been shipped and sales revenue is earned.
--------------------------------------------------------------------------------
Statutory Reserve
Statutory reserve refers to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and, are to be used to expand production or operations. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, from its earnings, an amount to the statutory reserve to be used for future company development. Such an appropriation is made until the reserve reaches a maximum equaling 50% of the enterprise's capital.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares during the years. During the years ended 2004, 2005, and 2006, no dilutive potential ordinary shares were issued.
We compute earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per share" ("SFAS No. 128"), and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
In connection with our reverse acquisition completed on December 31, 2007, a total of 3,863,636 shares of our common stock held by a trust, the beneficiaries of which include our CEO Mr. Shi Huashan and his family, were deposited into a make good escrow account. See "Strategic Financing" beginning on page 4. We accounted for this deposit of escrow shares as "contingent shares," and accordingly reduced the number of shares deemed outstanding for accounting purposes from 21,136,392 to 17,272,756 . Accordingly, our "basic" weighted average shares outstanding is 17,272,756 and our "diluted" weighted average shares outstanding after giving effect for potential dilution from warrants outstanding is 21,182,756. If and when the make good escrow shares are released to their original owners or to investors, our "basic" weighted average shares outstanding will be increased accordingly. The effect of this accounting treatment of the make good escrow shares, is that our reported basic net income per share will be higher than our diluted net income per share, during the period in which the make-good shares are held in escrow.
Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal year beginning after November 15, 2007, and interim periods within those fiscal years.
--------------------------------------------------------------------------------
In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company's financial statements and the related financial statement disclosures. SAB No.108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS 115 (SFAS No. 159), which allows for the option to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The objective of SFAS 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on our consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, (''SFAS 141(R)''). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations, but also provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired and liabilities assumed arising from contingencies, the capitalization of in-process research and development at fair value, and the expensing of acquisition-related costs as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. In the event that the Company completes acquisitions subsequent to its adoption of SFAS 141 (R), the application of its provisions will likely have a material impact on the Company's results of operations, although the Company is not currently able to estimate that impact.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent (previously referred to as minority interests), and the amount of consolidated net income, be clearly identified, labeled and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners as components of equity. It is effective for fiscal years beginning after December 15, 2008, and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements are applied prospectively. The Company does not expect the adoption of SFAS 160 to have a material impact on its financial condition or results of operations.
We do not anticipate that the adoption of the above standards will have a material impact on our consolidated financial statements.
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 2008 and March 31, 2007.
The following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Quarter Ending Quarter Ending
March 31, % of March 31, % of
2008 Sales 2007 Sales
Sales $ 43,507,098 100.00 % $ 23,187,994 100.00 %
Cost of Sales (36,474,424 ) 83.84 % (19,025,632 ) 82.05 %
Gross Profit 7,032,674 16.16 % 4,162,362 17.95 %
Selling Expenses 1,825,277 4.20 % 229,419 0.99 %
General & Administrative Expenses
492,973 1.13 % 305,136 1.32 %
Total Operating Expense 2,318,250 5.33 % 534,555 2.31 %
Operating Income / (Loss) 4,714,423 10.84 % 3,627,807 15.65 %
Other Income (Expense) (306,465 ) 0.70 % (618,423 ) 2.67 %
Earnings Before Tax 4,407,562 10.13 % 3,009,384 12.98 %
(Income Tax Expense) / Deferred
Tax Benefit (166,345 ) 0.38 % - 0.72 %
Net Income $ 4,241,217 9.75 % $ 3,009,384 12.98 %
Earnings Per Share
Basic 0.25 0.22
Diluted 0.20 0.17
Weighted Average Shares
Outstanding
Basic 17,272,756 13,409,120
Diluted 21,182,756 17,272,756
Sales. Our sales include revenues from sales of our fresh pork, frozen pork, and processed food products. During the quarter ended March 31, 2008, we had sales of $43,507,098 as compared to sales of $23,187,994 for the quarter ended March 31, 2007, an increase of approximately 88%. Our sales for our various product categories in the first quarter of 2008 are summarized as follows:
% of increase
Sales by product category, First Quarter % of First Quarter % of from
in dollars: 2008 (amount) Total Sales 2007 Total Sales 2007 to 2008
Fresh Pork $ 36,384,986 83.63 % $ 17,653,019 76.13 % 106.11 %
Frozen Pork 2,358,085 5.42 % 1,595,334 6.88 % 47.81 %
Processed Food Products
4,764,027 10.95 % 3,939,640 16.99 % 20.92 %
Total Sales $ 43,507,098 100 % $ 23,187,994 100 % 87.63 %
--------------------------------------------------------------------------------
Sales by product category, First Quarter First Quarter % of change
by weight of product 2008 % of 2007 % of from
(metric tons): (Weight in tons) Total Sales (Weight in tons) Total Sales 2007 to 2008
Fresh Pork 13,997 79.92 % 10,306 73.75 % 35.81 %
Frozen Pork 1,086 6.20 % 878 6.28 % 23.69 %
Processed Food Products
2,430 13.88 % 2,791 19.97 % -12.93 %
Total Sales 17,513 100 % $ 13,975 100 % 25.32 %
. . .
Add ENHD.OB to Portfolio Set Alert Email to a Friend
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ENHD.OB - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now
--------------------------------------------------------------------------------
Copyright © 2008 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service - Copyright/IP Policy - Send Feedback
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.
