Table of Contents

As filed with the Securities and Exchange Commission on March 17, 2010

Registration No. 333-                     

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TIANLI AGRITECH, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

British Virgin Islands   0200   Not applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

Suite F, 23rd Floor

Building B, Jiangjing Mansion

228 Yanjiang Ave.

Jiangan District, Wuhan City

Hubei Province, China 430010

(+86) 27 8274 0726

 

CT Corporation System

111 Eighth Avenue

New York, New York 10011

(800) 624-0909

(Address, including zip code, and telephone number, including

area code, of principal executive offices)

 

(Name, address, including zip code, and telephone

number, including area code, of agent for service)

 

 

Copies to:

Bradley A. Haneberg, Esq.

Anthony W. Basch, Esq.

Kaufman & Canoles, P.C.

Three James Center, 1051 East Cary Street, 12th Floor

Richmond, Virginia 23219

(804) 771-5700 – telephone

(804) 771-5777 – facsimile

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

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 “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   x

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


Table of Contents

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price (1)
  Amount of
Registration Fee

Common Shares (2)

  $12,000,000   $855.60

Common Shares (3)

  $1,462,500   104.28

Placement Agent’s Warrants (3)

  $200   $0.01

Common Shares Underlying Placement Agent’s Warrants (3)

  $1,440,000   $102.67

Total

  $14,902,700   $1,062.56 (4)
 
 
(1)

The registration fee for securities is based on an estimate of the proposed maximum offering price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(a).

(2)

In accordance with Rule 416(a), the Registrant is also registering an indeterminate number of additional common shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.

(3)

This registration statement also covers the resale under a separate resale prospectus by selling shareholders of up to 243,750 common shares previously issued to such selling shareholders named in the resale prospectus. The registrant will not receive any proceeds from the sale of these shares.

(3)

We have agreed to issue, on the closing date of this offering, warrants to our placement agent, Anderson & Strudwick, Incorporated (the “Placement Agent”), to purchase up to 10% of the aggregate number of common shares sold by the Registrant (the “Placement Agent’s Warrants”). The price to be paid by the Placement Agent for the Placement Agent’s Warrants is $0.001 per warrant. Each Placement Agent’s Warrant may be exercised to purchase one of our common shares. The closing date will be a date mutually acceptable to the Placement Agent and the Registrant after the minimum offering has been sold; provided, however, that the closing date will be on or before May 31, 2010. Assuming a maximum placement, on the closing date the Placement Agent would receive 200,000 Placement Agent’s Warrants at an aggregate purchase price of $200. The exercise price of the Placement Agent’s Warrants is equal to 120% of the price of the common shares offered hereby. Assuming a maximum placement and an exercise price of $7.20 per share, we would receive, in the aggregate, $1,440,000 upon exercise of the Placement Agent’s Warrants. The common shares underlying the Placement Agent’s Warrants are exercisable within one year of the date of this registration statement and are deemed to commence simultaneously with the Placement Agent’s Warrants.

(4)

Paid herewith.


Table of Contents

EXPLANATORY NOTE

This registration statement contains a prospectus to be used in connection with the initial public offering of up to 2,000,000 of the registrant’s common shares on a best-efforts, minimum/maximum basis through the placement agent named on the cover page of that prospectus (the “IPO Prospectus”). In addition, the registrant is registering on this registration statement the resale of up to 243,750 common shares (the “Registrable Securities”) held by selling shareholders. Consequently, this registration statement contains a second prospectus to cover these possible resales (the “Resale Prospectus”) by certain of the registrant’s shareholders named under the Resale Prospectus (the “selling shareholders”). The IPO Prospectus and the Resale Prospectus are substantively identical, except for the following principal points:

 

   

they contain different front and rear covers (including table of contents);

 

   

they contain different Offering sections in the Prospectus Summary section on page 7;

 

   

they contain different Use of Proceeds sections on page 36;

 

   

the Dilution section is deleted from the Resale Prospectus on page 39;

 

   

the Post-Offering Ownership section is deleted from the Resale Prospectus on page 40;

 

   

a Selling Shareholders section is included in the Resale Prospectus beginning on page 40;

 

   

references in the IPO Prospectus to the Resale Prospectus will be deleted from the Resale Prospectus; and

 

   

the Placement section from the IPO Prospectus on page 92 is deleted from the Resale Prospectus and a Plan of Distribution is inserted in its place.

The registrant has included in this Registration Statement, after the financial statements, alternate pages to reflect the foregoing differences.


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION,

DATED MARCH 17, 2010

Registration Statement No. 333-                     

LOGO

TIANLI AGRITECH, INC.

Minimum Offering: 1,667,000 Common Shares

Maximum Offering: 2,000,000 Common Shares

 

 

This is the initial public offering of Tianli Agritech, Inc., a British Virgin Islands company. We are offering a minimum of 1,667,000 and a maximum of 2,000,000 of our common shares. None of our officers, directors or affiliates may purchase shares in this offering.

We expect that the offering price will be between $5.00 and $7.00 per common share. No public market currently exists for our common shares. We have applied for approval for quotation on the NASDAQ Capital Market under the symbol “OINK” for the common shares we are offering. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the NASDAQ Capital Market.

Investing in these common shares involves significant risks. See “ Risk Factors ” beginning on page 11 of this prospectus.

 

     Per Common
Share
   Minimum
Offering
   Maximum
Offering

Assumed public offering price

   $ 6.00    $ 10,002,000    $ 12,000,000

Placement discount

   $ 0.42    $ 700,140    $ 840,000

Proceeds to us, before expenses

   $ 5.58    $ 9,301,860    $ 11,160,000

We expect our total cash expenses for this offering to be approximately $510,000, exclusive of the above commissions. In addition, we will pay the placement agent a non-accountable expense allowance of 1% of the amount of the offering, or $120,000 (maximum offering, exclusive of shares registered under Rule 462(b)) or $100,020 (minimum offering). The placement agent must sell the minimum number of securities offered (1,667,000 common shares) if any are sold. The placement agent is required to use only its best efforts to sell the securities offered. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our placement agent after which the minimum offering is sold or (ii) May 31, 2010. Until we sell at least 1,667,000 shares, all investor funds will be held in an escrow account at SunTrust Bank, Richmond, Virginia. If we do not sell at least 1,667,000 shares by May 31, 2010, all funds will be promptly returned to investors (within one business day) without interest or deduction. If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. If we complete this offering, then on the closing date, we will issue common shares to investors in the offering and placement agent warrants to our placement agent exercisable at a rate of one warrant per share to purchase up to 10% of the aggregate number of Common Shares sold in this offering.

These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Anderson & Strudwick,

Incorporated

Prospectus dated             , 2010


Table of Contents

Except where the context otherwise requires and for purposes of this prospectus only:

 

   

the terms “we,” “us,” “our company,” “our” and “Tianli” refer to Tianli Agritech, Inc. (“OINK” when referring solely to our British Virgin Islands listing company); our wholly-owned subsidiary, HC Shengyuan Limited, a Hong Kong limited liability company (“HCS”); HCS’ wholly-owned subsidiary, Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“WFOE”); and our affiliated entity, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“Fengze”), which WFOE controls by virtue of contractual arrangements.

 

   

“shares” and “common shares” refer to our common shares, $0.001 par value per share;

 

   

“China” and “PRC” refer to the People’s Republic of China, and for the purpose of this prospectus only, excluding Taiwan, Hong Kong and Macau; and

 

   

all references to “RMB,” “Renminbi” and “¥” are to the legal currency of China and all references to “USD,” “U.S. dollars,” “dollars,” and “$” are to the legal currency of the United States.

This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader unless otherwise noted, all translations made in this prospectus are based upon a rate of RMB 6.8372 to US$1.00, which was the exchange rate on December 31, 2009.

Unless otherwise stated, we have translated balance sheet amounts with the exception of equity at December 31, 2009 at ¥6.8372 to $1.00 as compared to ¥6.8542 to $1.00 at December 31, 2008. We have stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the year ended December 31, 2009 and the year ended December 31, 2008 were ¥6.84088 and ¥6.96225, respectively. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On March 15, 2010, the interbank rate was ¥6.8354 to $1.00. See “Risk Factors – Fluctuation of the Renminbi could materially affect our financial condition and results of operations” for discussions of the effects of fluctuating exchange rates on the value of our common shares. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

For the sake of clarity, this prospectus follows English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our chief executive officer will be presented as “Hanying Li”, even though, in Chinese, her name would be presented as “Li Hanying.”

Unless otherwise indicated, all information in this prospectus assumes:

 

   

no person will exercise any outstanding options;

 

   

the sale of 2,000,000 common shares, the maximum shares offered in this offering; and

 

   

an assumed initial public offering price of $6.00 per unit, the midpoint of the range set forth on the cover page of this prospectus.

We have relied on statistics provided by a variety publicly-available sources regarding China’s expectations of growth, China’s demand for pork products and China’s hog industry. We did not, directly or indirectly, sponsor or participate in the publication of such materials.

 

i


Table of Contents

P ROSPECTUS S UMMARY

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying common shares in this offering. This summary contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could,” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements.

Our Company

Our company is in the business of research and development, raising, breeding and selling hogs in the People’s Republic of China. Our efforts are focused on growing healthy, hearty hogs for sale for breeding and meat purposes. We believe our location in Hubei Province (“Hubei”) and our investment in breeding and farming technology position us well to reach these goals.

We entered the hog breeding and production business in 2005 when we built our first hog farm. In this business, we mainly produce hogs for slaughter and sell breeding stock. We currently own and operate eight commercial farms in Wuhan city (“Wuhan”). We are building a ninth farm in Wuhan, which is expected to begin operating in 2010. Our farms raise and sell hogs for both breeding and meat purposes. Our farms, in the aggregate, have an annual production capacity of approximately 110,000 hogs (approximately 130,000 hogs once we finish building our ninth farm).

We conduct genetic, breeding and nutrition research to improve our production capabilities. Our animal nutrition research consists of the research and development of biofeed premix (“premix”) for use in our hog farms. In coordination with a local institute, we have developed this product to improve our feed to meat conversion ratio, improve the health of our hogs and reduce our feeding costs

We currently derive substantially all of our revenues from hog farming. While we receive a nominal amount of revenue from the sale of hog waste products, it is not a current focus of our company. We anticipate in the future, however, that we may convert some waste products into other products such as manure and fish feed for sale. Finally, we are currently investigating the establishment of a vertically integrated chain culminating in retail locations to sell our pork products so that we may further benefit from our reputation for producing high-quality, low pollution and additive pork products. While we do not have any agreements or commitments to do so, we anticipate opening a number of retail stores in Wuhan, China to feature our products. To the extent we determine to develop this retail store concept, we expect that we may need to acquire, construct or enter into agreements with slaughterhouses and pork processing plants in order to ensure that we are able to maintain the quality of our pork products from our farms to our retail stores.

Industry and Market Background

China’s Demand for Pork

China is also the world’s largest hog producing and pork consuming country. China has accounted for nearly half of both the world’s pork production and consumption for more than five years. According to the U.S. Department of Agriculture, China is again expected to be the driving force behind global pork production in 2010. Not only does China consume a significant amount of pork in the aggregate; Chinese per-capita pork consumption is among the highest in the world, as pork is China’s most popular meat. China consumes over 600 million pigs a year.

 

 

1


Table of Contents

From 1990 through 2007, meat consumption in China doubled. In terms of meat consumption in China, beef accounts for approximately 9%, poultry for approximately 21% and pork for approximately 65% of total Chinese consumption, according to the National Statistics Bureau of China.

China’s 2010 projected per-capita pork consumption places it behind the European Union but ahead of the United States. China’s pork consumption has grown dramatically since 1981.

 

Year

 

Tons of Pork Produced

 

Year

 

Tons of Pork Produced

 

Year

 

Tons of Pork Produced

1981   11,884,000   1991   24,523,000   2001   40,517,100
1982   12,718,000   1992   26,353,000   2002   41,231,000
1983   13,161,000   1993   28,544,000   2003   42,386,400
1984   14,447,000   1994   32,048,000   2004   43,410,000
1985   16,547,000   1995   36,484,000   2005   45,553,300
1986   17,960,000   1996   40,377,000   2006   46,504,500
1987   18,349,000   1997   35,963,000   2007   42,878,000
1988   20,176,000   1998   38,837,000   2008   46,205,000
1989   21,228,000   1999   40,056,000   2009   48,500,000
1990   22,811,000   2000   39,659,900   2010 (estimate)   50,300,000

While the average price for pork has steadily increased, there have been several recent developments that affected both the supply of hogs and the price of pork. In particular, in 2007, tens of millions of pigs were killed in China as a result of Blue Ear disease, which resulted in significant inflation in pork prices, particularly as it followed 2006, when pork prices dropped significantly. The following chart, derived from U.S. Department of Agriculture statistics, shows the effective price of hogs in China, assuming a nominal 1984 price of $100.

 

Year

 

Price ($)

 

Year

 

Price ($)

 

Year

 

Price ($)

1984   100   1992   103   2000   85
1985   121   1993   122   2002   98
1986   126   1994   177   2003   101
1987   124   1995   179   2004   116
1988   179   1996   119   2005   110
1989   166   1997   113   2006   88
1990   103   1998   91   2007   132
1991   90   1999   71   2008   191

More recently, prices began to drop in 2009 to such a level that the central government implemented a policy designed to set a price floor for pork. This price drop occurred as a result of oversupply of hogs in 2008. In particular, the number of sows on hand reached approximately 48.6 million, well above the national macroeconomic target of 41 million. In order to curb this oversupply, on June 13, 2009, China’s Ministry of Commerce (“MOFCOM”), together with China’s Ministry of Finance and the National Development and Reform Commission (“NDRC”), started the purchase and reserve of the domestic frozen pork to set the processing enterprises and the purchase and reserve prices. This policy has resulted in the stabilization of pork prices; however, there is no guarantee that the policy will be maintained. We are unable to predict the effect on our industry if and when this policy terminates.

China’s Hog Industry

China supplies the vast majority of its pork demand from internal supplies, and imports from abroad are expected to fall by approximately 20% to 120,000 tons in 2010 (compared with Chinese production of an estimated 50 million tons in 2010). Imports have made up a negligible percentage of China’s pork supply. Indeed, most demand is met locally.

 

 

2


Table of Contents

China’s hog industry is in the midst of a transition from a large number of small household farms to larger, more commercial farms. Meat hog production in the PRC is currently dominated by backyard farms (those that sell 5-10 hogs annually) and small farms (those that sell less than 100 hogs annually). Farms that sell less than 100 hogs per year comprise approximately 75% of the hog farms in China and account for approximately one-third of the hogs sold annually in China. These farms sell their products to local rural markets. Farms that sell between 100 and 500 hogs a year account for 21% of China’s hog farms and approximately one-third of the hogs sold annually in China. Farms that sell between 500 and 3,000 hogs represent less than 3% of China’s hog farms but account for approximately 19% of the hogs sold in China. Those that sell more than 3,000 hogs annually account for less than one-half of a percent of all hog farms but sell more than 15% of China’s hogs annually.

Our Geographic Market

Our farms are located in Wuhan city, which is the capital of and largest city in Hubei.

Hubei Province

Hubei is a centrally located province with more than 60 million residents, giving it approximately the same population as Italy. Hubei houses thirteen prefecture-level cities that range in population from approximately 300,000 to over 8 million residents. Its 2008 gross domestic product (“GDP”) was approximately $163 billion dollars, slightly more than Hungary’s gross domestic product.

LOGO

The main pork-producing areas in China, with 80 percent of the country’s output, consist of the Yangtze River valley, Central China, Northeast China and the Guangxi/Guangdong area. Within these regions Sichuan province, Henan province, Hubei province and Shandong province specialize in hog production.

Due to its central location, Hubei is well-known in China for the adaptability of its breeder hogs. Breeder hogs from the southern part of China tend not to tolerate the cold weather in northern China; similarly, breeder hogs from the northern part of China tend not to tolerate the heat of southern China. We have found that breeder hogs raised in Hubei tend to adapt well to variations in both the north and south of China.

Wuhan City

Wuhan is the capital and largest city in Hubei. More than 9.7 million people live in Wuhan’s 13 districts, including more than 6.6 million in the urban center. Wuhan is one of China’s ten largest cities, and it is considered an important center for economy, trade, finance, transportation, information technology, and education in Central China. In 2008, the United States opened a Consulate General in Wuhan, its first new diplomatic post in China in more than 20 years, in recognition of the increasing economic, educational, political, cultural, and commercial importance of Central China.

 

 

3


Table of Contents

The world’s third largest river, the Yangtze, meets with the Hanshui River in Wuhan, providing a strategic location for the city. The geographical location has also contributed to the city’s role as the industrial, financial and commercial centre of inland China. Wuhan is located less than 800 miles from Shanghai, Beijing, Guangzhou, Tianjin, Chongqing and Xi’an, some of China’s largest cities. In addition, Wuhan is within 400 miles of several secondary cities such as Changsha (capital of Hunan province), Zhengzhou (capital of Henan province), Nanchang (capital of Jiangxi province), Luoyang and Jiujiang.

Wuhan’s GDP accounts for more than one-third of the total in Hubei. Compared nationally, both Hubei and Wuhan’s GDP growth rates have been higher than the national average. Wuhan’s per-capita disposable income rate has grown at an average rate of more than 10% per year from 1997 through 2008.

Wuhan’s government was one of the first local governments to provide economic incentives to hog farms that reached certain production levels. Farms located within Wuhan prefecture that reach an annual production capacity of 10,000 hogs are eligible for a one-time grant of RMB 1.5 million (approximately $219,388). When a farm reaches 20,000 hog capacity, it is eligible for a grant of RMB 3 million (approximately $438,776), including any previous grant it received when its capacity reached 10,000 hogs. These policies have resulted in the acquisitions and mergers of local farms and the construction of new, higher capacity farms in Wuhan.

Our Opportunity and Competitive Strengths

We believe our experience in operating commercial hog farms in Wuhan provides us an opportunity to compete as China continues to concentrate hog farming in larger commercial operations. We currently operate eight full-service hog farms that raise 10,000 or 20,000 hogs each, and we are building a ninth farm that will raise 20,000 hogs. We have received a variety of government incentives and recognitions for our operations to date and believe our understanding of the hog industry in Wuhan positions us well to continue to compete in our market.

We believe the following strengths differentiate us from our competitors in our market in China:

 

   

we are one of the largest commercial hog farming companies in Wuhan and Hubei;

 

   

we have invested heavily in technology designed to improve the health and quality of our hogs;

 

   

we have developed a premix in cooperation with a local research institute that we have used to improve our hogs’ health while decreasing our costs in raising our hogs and keeping them healthy;

 

   

we benefit from economies of scale as a result of operating multiple similarly-sized commercial farms;

 

   

our farms are separated from each other, reducing the likelihood of spreading an epidemic among our hogs at different farms;

 

   

we have attained several awards in recognition of our efforts to improve our hogs’ living conditions, reduce reliance on chemical feed additives and decrease pollution; and

 

   

we are dedicated to continuing to research ways to improve our operations, from nutrition to breeding and other farming methods.

Our Strategies

We plan to grow our position as Wuhan’s largest hog farming company. We intend to achieve this goal by implementing the following strategies:

 

   

increase hog production capacity by upgrading our genetic breeding base;

 

   

acquire and/or construct new purebred and crossbred hog farms;

 

   

develop a sow replacement program to continually replace less-productive sows with more productive ones;

 

   

leverage our research capabilities to breed superior breeding hogs that can be supplied to our farms and sold to other breeder farms;

 

   

develop revenue opportunities for our farms’ waste products;

 

   

continue to strengthen our brand image in order to position our company to command a premium for meat products if and when we open retail operations; and

 

   

investigate expansion into retail chains, slaughterhouses and meat processing plants.

 

 

4


Table of Contents

Our Challenges and Risks

We believe our primary challenges are:

 

   

we currently have a single industry focus;

 

   

there are uncertainties in our development, introduction and marketing of new pork products;

 

   

we must actively recruit, train and retain skilled technical and sales personnel;

 

   

we face significant competition from existing competitors and new market entrants;

 

   

we must protect our trade secrets and other valuable intellectual property regarding our premix;

 

   

we are subject to fluctuations in the prices of the raw materials we require for our premix;

 

   

we may be unable to capitalize on opportunities to acquire new facilities or pursue new business opportunities; and

 

   

we rely principally on dividends paid by our PRC operating subsidiary, WFOE, and our PRC affiliate, Fengze, to fund cash and financing requirements, and there are PRC laws restricting the ability of these entities from paying dividends or making other distributions to us.

In addition, we face risks and uncertainties that may materially affect our business, financial condition, results of operations and prospects. Thus, you should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our common shares.

Our Corporate Structure

Overview

We are a holding company incorporated in the British Virgin Islands that owns all of the outstanding capital stock of WFOE, our operating subsidiary based in Wuhan, China. WFOE has entered into control agreements with all of the owners of Fengze, which agreements allow WFOE to control Fengze. Through our ownership of HCS, HCS’ ownership of WFOE and WFOE’s agreements with Fengze, we control Fengze.

Corporate History – Fengze

Fengze was organized as a limited liability company in 2005 with a registered capital of RMB 1,160,000, when our chief executive officer, Ms. Hanying Li, began to build her first hog farm. Fengze finished building this farm and began to operate it in 2005. In 2006, Fengze acquired five additional hog farms in purchases from separate sellers. In 2008, Fengze built one additional hog farm and acquired one other farm. At present, Fengze operates three hog farms with an annual capacity of 20,000 hogs each and five hog farms with an annual capacity of 10,000 hogs. As Fengze has continued to grow, it has increased its registered capital to RMB 30,160,000.

Corporate History – WFOE, HCS and OINK

We formed WFOE, HCS and OINK in 2010, 2009 and 2009, respectively, in anticipation of registering the common shares of OINK in an initial public offering. In connection with the formation of OINK, HCS and WFOE, we caused WFOE to enter into certain control agreements with Fengze and its shareholders, pursuant to which we, by virtue of our ownership of HCS and HCS’ ownership of WFOE, control Fengze.

Control Agreements

The shareholders of Fengze entered into and caused Fengze to enter into an Entrusted Management Agreement, Exclusive Option Agreement, Shareholders’ Voting Proxy Agreement and Pledge of Equity Interest Agreement (collectively, the “Control Agreements”) with WFOE in return for ownership interests in OINK. Through the formation of OINK as a holding company, Fengze investors now own 93% of the common shares of OINK. The remaining 7% of OINK’s common shares belong to other investors. OINK, in turn owns 100% of the equity of WFOE.

WFOE, Fengze and each of the shareholders of Fengze entered into the Control Agreements. Through the Control Agreements, we can substantially influence Fengze’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As a result of these Control Agreements,

 

 

5


Table of Contents

which enable us to control Fengze, we are considered the primary beneficiary of Fengze. Accordingly, we consolidate Fengze’s operating results, assets and liabilities in our financial statements. For a description of these contractual arrangements, see “Our Corporate Structure—Contractual Arrangements with Fengze and Fengze’s Shareholders.”

Our current corporate structure is as follows:

LOGO

 

LOGO    Equity interest
LOGO    Contractual arrangements including Entrusted Management Agreement and Exclusive Option Agreement. For a description of these agreements, see “Corporate Structure— Contractual Arrangements with Fengze and Fengze’s Shareholders.”
LOGO    Contractual arrangements including Exclusive Option Agreement, Shareholders’ Voting Proxy Agreement and Pledge of Equity Interest Agreement. For a description of these agreements, see “Corporate Structure— Contractual Arrangements with Fengze and Fengze’s Shareholders.”

 

 

6


Table of Contents

The Offering

 

Shares Offered:  

Minimum: 1,667,000 common shares (1)

Maximum: 2,000,000 common shares (1)

Shares Outstanding Prior to Completion of Offering:   8,125,000 common shares
Shares to be Outstanding after Offering:  

Minimum: 9,792,000 common shares

Maximum: 10,125,000 common shares

Assumed Offering Price per Share:   $6.00
Gross Proceeds:  

Minimum: $10,002,000

Maximum: $12,000,000

Proposed NASDAQ Capital Market Symbol:   “OINK” (CUSIP No. G8883T 104)
Transfer Agent:  

Pacific Stock Transfer Company

4045 S. Spencer Street, Suite 403, Las Vegas, NV 89119

Risk Factors:   Investing in these securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section of this prospectus before deciding to invest in our common shares.
Closing of Offering:   The offering contemplated by this prospectus will terminate upon the earlier of: (i) a date mutually acceptable to us and our placement agent after the minimum offering is sold or (ii) May 31, 2010. If we complete this offering, net proceeds will be delivered to our company on the closing date (such closing date being the above mutually acceptable date on or before May 31, 2010, provided the minimum offering has been sold). We will not complete this offering unless our application to list on the NASDAQ Capital Market is approved. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. If we complete this offering, then on the closing date, we will issue shares to investors and placement agent warrants to our placement agent exercisable at a rate of one warrant per share to purchase up to 10% of the aggregate number of common shares sold in this offering.

 

(1)

We are also concurrently registering for resale under a separate prospectus up to 243,750 common shares held by the selling shareholders named under the prospectus. None of the shares is being offered by us and we will not receive any proceeds from the sale of the shares. In addition, none of the selling shareholders is an officer or director of our company, WFOE or Fengze.

 

 

7


Table of Contents

Placement

We have engaged Anderson & Strudwick, Incorporated to conduct this offering on a “best efforts, minimum/maximum” basis. The offering is being made without a firm commitment by the placement agent, which has no obligation or commitment to purchase any of our common shares. Our placement agent is required to use only its best efforts to sell the securities offered. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our placement agent after which at least 1,667,000 common shares are sold or (ii) May 31, 2010. Until we sell at least 1,667,000 common shares, all investor funds will be held in an escrow account at SunTrust Bank, Richmond, Virginia. If we do not sell at least 1,667,000 common shares by May 31, 2010, all funds will be promptly returned to investors (within one business day) without interest or deduction. If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. None of our officers, directors or affiliates may purchase shares in this offering. If we complete this offering, then on the closing date, we will issue shares to investors and placement agent warrants to our placement agent exercisable at a rate of one warrant per share to purchase up to 10% of the aggregate number of Common Shares Sold in this offering.

We have agreed with our placement agent to value our company based on a multiple of approximately 6.5 times our targeted after-tax earnings for the year ending December 31, 2010, subject to the terms of a Make-Good Escrow Agreement to be executed before effectiveness of this registration statement. Although we do not currently pay any taxes on our income, we refer to this amount as our targeted 2010 audited net after-tax income to reflect our and our placement agent’s intention that the targeted amount will be net of any taxes that may apply to our company during 2010. If we are unable to achieve these targeted after-tax earnings, then there is a risk that our company would be considered overvalued based on this multiple. In order to mitigate some of this risk, certain shareholders of our company, Hanying Li and Bihong Zhang, have agreed to place, on a prorated basis, that number of beneficially owned common shares into escrow that is equal to 50% of the maximum number of shares to be sold in this offering. Upon closing of this offering, the escrow agent will return any shares in excess of 50% of the actual number of shares sold in the offering. Such escrowed shares are referred to as the “Make-Good Shares.” The Make-Good Shares will remain in escrow with SunTrust Bank or another bank acceptable to our placement agent pending the filing of our company’s Form 10-K for the year ending December 31, 2010.

To the extent our audited after-tax earnings per share for the year ending December 31, 2010 are less than $0.7407, excluding any expenses associated with releasing the Make-Good Shares back to the original owners as described below, our company will redeem and cancel, pro rata, the Make-Good Shares without any additional consideration to the extent necessary to cause our audited after-tax earnings per share to be equal to $0.7407. We cannot guarantee that we will be able to redeem a sufficient number of Make-Good Shares to increase audited after-tax earnings per share to $0.7407 if our company either has low net income or any net losses in 2010.

Any remaining Make-Good Shares will be released from escrow to our initial shareholders upon the earlier of (i) one (1) business day after the termination of this offering without closing or (ii) thirty (30) calendar days after the filing of the Form 10-K for the year ending December 31, 2010 after redeeming any Make-Good Shares. Additionally, notwithstanding any other terms of the Make-Good Escrow, if our shares trade at or above 2.5 times the price of this offering for a period of five trading days within a ten day trading period, the Make-Good Escrow will terminate and the Make-Good Shares will be released to the initial shareholders. Any delay in redeeming the Make-Good Shares will delay the release of such remaining Make-Good Shares from escrow.

We believe the Make-Good Escrow arrangement benefits the shareholders of our company (other than those who may forfeit shares without consideration) because it is designed to increase the likelihood that our company will achieve the after-tax earnings per share upon which our valuation is based. To the extent Make-Good Shares are redeemed without cost, the after-tax per-share earnings will increase for all remaining outstanding shares. While we believe the Make-Good Escrow arrangement is a benefit to our shareholders, we may be unable to redeem enough Make-Good Shares to reach our targeted 2010 after-tax earnings per share. This could occur if we either have net losses or substantially lower than anticipated earnings. If this were to happen, our audited after-tax earnings after redemption of the Make-Good Shares could be less than $0.7407 per share. See “Risk Factors – A redemption of Make-Good Shares may be insufficient to cause our company to achieve targeted earnings and may reduce our management’s involvement and stake in our company.”

 

 

8


Table of Contents

Placement Agent’s Warrants

In connection with this offering, we will, for a nominal amount, sell our placement agent warrants exercisable at a rate of one warrant per share to purchase up to ten percent of the shares sold in the offering. These warrants are exercisable for a period of five years from the date of issuance at a price equal to 120% of the price of the shares in this offering. If we complete the maximum offering, then on the closing date we will issue 200,000 warrants to the placement agent to purchase one common share each. During the term of the warrants, the holders thereof will be given the opportunity to profit from a rise in the market price of our common shares, with a resulting dilution in the interest of our other shareholders. The terms on which we could obtain additional capital during the life of these warrants may be adversely affected because the holders of these warrants might be expected to exercise them when we are able to obtain any needed additional capital in a new offering of securities at a price greater than the exercise price of the warrants. If the placement agent exercises all of its warrants, we would have between 1.7% (minimum offering) and 1.98% (maximum offering) more shares outstanding after the placement agent’s warrant exercise than at the conclusion of the offering, assuming no other issuances (including any issuances under the share incentive plan). See “Placement.”

Corporate Information

Our principal executive office is located at Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010. Our telephone number is (+86) 27 8274 0726. Fax (+86) 27 8274 0906. We do not maintain a corporate website at this time.

 

 

9


Table of Contents

Summary Financial Information

In the table below, we provide you with summary financial data of our company. This information is derived from our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period. When you read this historical selected financial data, it is important that you read it along with the historical statements and notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     For the Fiscal Year ended
December 31,
     2009    2008

Total Sales

   $ 12,550,533    $ 7,197,091

Income from Operations

     4,372,496      2,097,523

Other Income (Expense)

     153,467      189,580

Net Income attributable to OINK

     4,525,963      2,287,103

Other Comprehensive Income attributable to OINK

     22,314      261,381

Comprehensive Income attributable to OINK

     4,548,277      2,548,484

Basic and Diluted Earnings per Share (based on 8,125,000 OINK shares outstanding, on each of December 31, 2009 and 2008) (1)

     0.56      0.28

Pro forma Basic and Diluted Earnings per Share (based on 7,125,000 OINK shares outstanding, on each of December 31, 2009 and 2008) (2)

     0.64      0.32
     December 31,
     2009    2008

Total Assets

   $ 16,004,835    $ 10,890,561

Total Current Liabilities

     3,347,913      2,781,916

OINK Shareholders’ Equity

     12,656,922      8,108,645

Total Liabilities and Shareholders’ Equity

     16,004,835      10,890,561

 

(1)

We have presented earnings per share in OINK after giving retroactive effect to the reorganization of our company that was completed January 27, 2010.

(2)

We have presented these pro forma earnings per share after (a) giving retroactive effect to the reorganization of our company that was completed January 27, 2010 and (b) assuming the redemption of all shares placed into escrow as described in the section entitled “Related Party Transactions – Make-Good Shares Subject to Redemption.” The number of escrowed shares is based on 50% of an assumed maximum of 2,000,000 common shares.

 

 

10


Table of Contents

R ISK F ACTORS

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

Risks Related to Our Industry

If there are any interruptions to or a decline in the amount or quality of our live pigs or swine feed components, our production or sales could be materially and adversely affected.

Live pigs and swine feed components are the principal raw materials used in our production. We generally breed and raise our own pigs and infrequently purchase new breeding stock from third parties. We purchase all of swine feed components from a number of third-party suppliers. Our third-party suppliers may not continue to be able to supply our demand for live pigs and swine feed components to satisfy our present and future production needs. The supply of breeding stock may be affected by outbreaks of diseases or epidemics. Our suppliers may not be able to provide live pigs or swine feed components of sufficient quality to meet our stringent quality control requirements. Any interruptions to or decline in the amount or quality of our live pigs or swine feed component supply could materially disrupt our production and adversely affect our business. We are vulnerable to further increases in the price of raw materials (particularly of swine feed components and occasionally live hogs) and other operating costs, and we may not be able to entirely offset these increasing costs by increasing prices. If we are unable to entirely offset these increases by raising prices, our profit margins and financial condition could be adversely affected.

If the pork market in the PRC does not grow as we expect, our results of operations and financial condition may be adversely affected.

We believe pork products have strong growth potential in the PRC and, accordingly, we have continuously acquired new farms and increased our sales of breeding and meat hogs. However, the market for pork products in the PRC has grown in recent years due to the increased wealth of the average resident of China, which has been the result of double-digit annual growth in the Chinese economy. Due to the worldwide recession, the growth of the Chinese economy slowed in 2009. More recently, the Chinese government implemented a purchasing program to support the price of pork due to a supply in excess of demand. If the pork market in the PRC does not grow as we expect, our business may be harmed, we may need to adjust our growth strategy, and our results of operation may be adversely affected.

We may be unable to maintain our profitability in the face of a consolidating retail environment in the PRC.

We sell substantial amounts of our hogs to slaughterhouses, which sell both to smaller retailers and also to supermarkets and large retailers. The supermarket and food retail industry in the PRC has been, and is expected to continue, undergoing a trend of development and consolidation.

As the supermarket and food retail industry continue to consolidate and retail customers grow larger and become more sophisticated, they may demand lower pricing and increased promotional programs from our slaughterhouse customers, which may demand lower prices from us. If we fail to maintain good relationships with our slaughterhouse customers or if we lower our prices in response to pressure from our customers and are unable to increase the volume of our hogs sold, our profitability could decline.

Our failure to comply with increasingly stringent environmental regulations and related litigation could result in significant penalties, damages and adverse publicity for our business.

Our operations and properties are subject to extensive and increasingly stringent laws and regulations pertaining to, among other things, the discharge of materials into the environment and the handling and disposition

 

11


Table of Contents

of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Failure to comply with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal penalties, liability for damages and negative publicity.

We have incurred, and will continue to incur, significant capital and operating expenditures to comply with these laws and regulations. We cannot assure you that additional environmental issues will not require currently unanticipated investigations, assessments or expenditures, or that requirements applicable to us will not be altered in ways that will require us to incur significant additional costs.

The hog farming industry in the PRC is subject to extensive government regulation, which is still evolving and could adversely affect our ability to sell products in the PRC or could increase our production costs.

Our industry in the PRC is heavily regulated by a number of governmental agencies, including primarily the Ministry of Agriculture, the Ministry of Commerce, the Ministry of Health, the General Administration of Quality Supervision, Inspection and Quarantine and the State Environmental Protection Administration. These regulatory bodies have broad discretion and authority to regulate many aspects of the hog farming industry in the PRC, including, without limitation, setting hygiene and quality standards. In addition, the regulatory framework in the PRC is still in the process of being developed. If the relevant regulatory authorities set standards with which we are unable to comply or which increase our production costs and hence our prices so as to render our products non-competitive, our ability to sell products in the PRC may be limited.

The hog farming industry in the PRC may face increasing competition, as well as increasing industry consolidation, which may affect our market share and profit margin.

The hog farming industry in the PRC is highly competitive. Wuhan has 68 farms with an annual production of at least 10,000 hogs and 21 farms (not including the 68 previously mentioned farms) with an annual production of at least 20,000 hogs. Hubei as a whole (including the previously mentioned farms) has 435 hog farms with annual production of 10,000 or more hogs. In addition, the evolving government regulations in relation to the hog farming industry has driven a trend of mergers and acquisitions through the industry, with smaller farms unable to meet the increasing costs of regulatory compliance and ineligible for preferential government subsidies and therefore at a competitive disadvantage. We believe that our ability to maintain our market share and grow our operations within this landscape of changing and increasing competition is depends largely upon our ability to distinguish our hogs from our competitors’ hogs.

We cannot assure you that our current or potential competitors will not develop hog farming technology of a comparable or superior quality to ours, or adapt more quickly than we do to evolving consumer preferences or market trends. In addition, our competitors may merge or form alliances among farms to achieve a scale of operations which would make it difficult for us to compete. Increased competition may also lead to price wars, which may adversely affect our market share and profit margin. We cannot assure you that we will be able to compete effectively with our current or potential competitors.

The outbreak of animal diseases could adversely affect our operations.

An occurrence of serious animal diseases, such as foot-and-mouth disease, Blue Ear disease, or any outbreak of other epidemics in the PRC affecting animals might result in material disruptions to our operations, material disruptions to the operations of our customers or suppliers, a decline in our industry or slowdown in economic growth in the PRC and surrounding regions, any of which could have a material adverse effect on our operations and turnover. In 2007, tens of millions of pigs were killed in China as a result of Blue Ear disease, which resulted in significant inflation in pork prices and affected 25 of China’s 33 provinces. In early 2009, another outbreak of Blue Ear disease in Shanxi Province resulted in the death of over 1,000 hogs raised in 10 villages, as a result of poor outbreak management. China’s Ministry of Agriculture has warned that the risks of outbreaks may be increasing as a result of the emergence of new strains of diseases that affect livestock. While we take measures at each of our farms to prevent the spread of disease, there can be no assurance that our facilities or products will not be affected by an outbreak of this disease or similar ones in the future, or that the market for pork products in the PRC will not decline as a result of fear of disease. In either case, our business, results of operations and financial condition would be adversely and materially affected.

 

12


Table of Contents

Outbreaks of swine flu could adversely affect our business, results of operations and financial condition.

An occurrence of a serious animal disease, such as swine influenza or H1N1 virus, a respiratory disease of pigs caused by influenza viruses, or any outbreak of other epidemics in the PRC affecting animals or humans might result in material disruptions to our operations, material disruptions to the operations of our customers or suppliers, a decline in the supermarket or food retail industry or slowdown in economic growth in the PRC and surrounding regions, any of which could have a material adverse effect on our operations and turnover. There have recently been over 1,000 confirmed human deaths from the H1N1 virus in China. On June 11, 2009, the World Health Organization (WHO) raised its flu alert level to level 6, which indicates a pandemic, although the WHO maintains that the severity of the pandemic is moderate. According to the U.S. Centers for Disease Control and Prevention, the H1N1 virus cannot be contracted by humans through eating properly-handled and cooked pork or pork products. In addition, our facilities have not been affected by the H1N1 virus. However, there can be no assurance that our facilities or products will not be affected by the H1N1 virus or similar influenzas in the future, or that the market for pork products in the PRC will not decline as a result of fear of such disease. If either case should occur, our business, results of operations and financial condition would be adversely and materially affected.

Consumer concerns regarding the safety and quality of food products or health concerns could adversely affect sales of our products.

Our sales performance could be adversely affected if consumers lose confidence in the safety and quality of our products. Consumers in the PRC are increasingly conscious of food safety and nutrition. Consumer concerns about, for example, the safety of pork products could discourage them from buying pork products and cause our results of operations to suffer.

We may be subject to substantial liability should the consumption of any pork products made from our hogs cause personal injury or illness and, unlike most food companies in the United States, we do not maintain product liability insurance to cover our potential liabilities.

The sale of food products for human consumption involves an inherent risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties or product contamination or degeneration, including the presence of foreign contaminants, chemical substances or other agents or residues during the various stages of the production process. While we are subject to governmental inspections and regulations, we cannot assure you that consumption of our products will not cause a health-related illness in the future, or that we will not be subject to claims or lawsuits relating to such matters.

Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions that our products caused personal injury or illness could adversely affect our reputation with customers and our corporate and brand image. Unlike most food companies in the United States, but in line with industry practice in the PRC, we do not maintain product liability insurance. Furthermore, our products could potentially suffer from product tampering, contamination or degeneration or be mislabeled or otherwise damaged. Under certain circumstances, our products may be recalled. Even if a situation does not necessitate a recall, we cannot assure you that product liability claims will not be asserted against us as a result. A product liability judgment against us or a product recall could have a material adverse effect on our revenues, profitability and business reputation.

We purchase many commodities that we use for raw materials and packaging, and price changes for the commodities we depend on may adversely affect our profitability.

We enter into contracts for the purchase of raw materials at fixed prices, which are designed to protect us against raw material price increases during their term. However, when necessary, we attempt to recover our commodity cost increases by increasing hog prices and creating additional operating efficiencies. Nevertheless, the raw materials used in our premix are largely commodities that experience price fluctuations caused by external conditions and changes in governmental agricultural programs.

We may not be able to maintain the necessary hog farming licenses.

Each province in the PRC requires hog farmers to obtain a license for each hog farm owned and operated in that province. Currently, all of our hog farms are located in the city of Wuhan in Hubei province, and we have

 

13


Table of Contents

obtained a license to own and operate each of our hog farms. We need to maintain the licenses we have to operate our current hog farms. If we pursue acquisitions of other hog farms, we will need to obtain additional licenses to operate those farms. We have not yet applied for, nor have we obtained, all the licenses required to expand our hog farming and sales business throughout the PRC. Our future success in the hog farming industry depends on our ability to acquire such licenses and permits to expand our business.

Our hog farming business could be adversely affected by fluctuations in pork commodity prices.

The price at which we sell our hogs is directly affected by the supply and demand for pork products and other proteins in the PRC, all of which are determined by the constantly changing market forces of supply and demand as well as other factors over which we have little or no control. A downward fluctuation in the demand for pork may adversely impact our quarterly and annual results of operations for the hog farming business.

In 2005-2006 and again in 2009, the price of pork products fell due to depression in the market in the 2005-2006 and oversupply in 2009. While the price of pork increased dramatically in 2007 due to a disease epidemic that reduced the supply of hogs, the price in 2009 was only stabilized as a result of a new government program of purchasing pork products on the market to implement an effective floor price. The termination of such a program could cause fluctuations to resume. If pork returns to a position of oversupply in such circumstances, the price of pork could again decrease, adversely affecting our business.

Risks Related to Our Business

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

We have a limited operating history. Fengze was established in 2005. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets such as the growing market for pork products in the PRC. Some of these risks and uncertainties relate to our ability to:

 

   

offer additional food products to attract and retain a larger customer base;

 

   

attract additional customers and increased spending per customer;

 

   

increase awareness of our brand and continue to develop customer loyalty;

 

   

respond to competitive market conditions;

 

   

respond to changes in our regulatory environment;

 

   

manage risks associated with intellectual property rights;

 

   

maintain effective control of our costs and expenses;

 

   

raise sufficient capital to sustain and expand our business;

 

   

attract, retain and motivate qualified personnel; and

 

   

upgrade our technology to support additional research and development of new food products.

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.

We may need to obtain additional debt or equity financing to fund future capital expenditures. Additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:

 

   

limit our ability to pay dividends or require us to seek consent for the payment of dividends;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and

 

14


Table of Contents
   

limit our flexibility in planning for, or reacting to, changes in our business and our industry.

We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.

Potential disruptions in the capital and credit markets may adversely affect our business, including the availability and cost of short-term funds for liquidity requirements, which could adversely affect our results of operations, cash flows and financial condition.

In the last two years, the global economy has experienced a significant contraction, which has affected the availability of business and consumer credit. We may need to rely on the credit markets, particularly for short-term borrowings from banks in the PRC, as well as the capital markets, to meet our financial commitments and short-term liquidity needs if internal funds are not available from our operations. Disruptions in the credit and capital markets, as have been experienced since mid-2008, could adversely affect our ability to draw on such short-term bank facilities. Our access to funds under such credit facilities is dependent on the ability of the banks that are parties to those facilities to meet their funding commitments, which may be dependent on governmental economic policies in the PRC. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time.

Long-term disruptions in the credit and capital markets, similar to those that have been experienced since mid-2008, could result from uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions and could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures, and reducing or eliminating discretionary uses of cash.

Continued market disruptions could cause broader economic downturns, which may lead to lower demand for pork products and increased likelihood that our customers will be unable to pay for our products. Further, bankruptcies or similar events by customers may cause us to incur bad debt expense at levels higher than historically experienced. These events would adversely impact our results of operations, cash flows and financial position.

Our operations are cash intensive and our business could be adversely affected if we fail to maintain sufficient levels of working capital.

We expend a significant amount of cash in our operations, principally to fund our raw material procurement. Our suppliers typically require payment in full within 14 days after delivery, although some of our suppliers provide us with credit. In turn, we typically require our customers to make payment in full on sale. We do not deliver to our customers; instead, our customers arrange for the transportation of hogs from our farms after completion of the sale. We generally fund most of our working capital requirements out of cash flow generated from operations. If we fail to generate sufficient revenues from our sales, or if we experience difficulties collecting our accounts receivable, we may not have sufficient cash flow to fund our operating costs and our profitability could be adversely affected.

Our operating results may fluctuate from period to period.

Our operating results have fluctuated from period to period and are likely to continue to fluctuate as a result of a wide range of factors, including seasonal variations in live pig supply and pork consumption. For example, demand for pork in general is relatively high before the Chinese New Year in January or February each year and lower thereafter. Our production and sales are generally lower in the summer due to a slight drop in meat consumption during the hot summer months. Interim reports may not be indicative of our performance for the year or our future performance, and period-to-period comparisons may not be meaningful due to a number of reasons beyond our control.

 

15


Table of Contents

If WFOE is required to make a payment under its agreement to bear the losses of Fengze, our liquidity may be adversely affected, which could harm our financial condition and results of operations.

On December 1, 2009, WFOE entered into an Entrusted Management Agreement with Fengze. Pursuant to the Entrusted Management Agreement, WFOE agreed to bear the losses of Fengze. If Fengze suffers losses and WFOE is required to absorb all or a portion of such losses, WFOE will be required to seek reimbursement from Fengze. In such event, it is unlikely that Fengze will be able to make such reimbursement and WFOE may be unable to recoup the loss WFOE absorbed at such time, if ever. Further, under the Entrusted Management Agreement, WFOE may absorb the losses at a time when WFOE does not have sufficient cash to make such payment and at a time when we or WFOE may be unable to borrow such funds on terms that are acceptable, if at all. As a result, any losses absorbed under the Entrusted Management Agreement may have an adverse effect on our liquidity, financial condition and results of operations.

The loss of any of our significant customers could reduce our revenues and our profitability.

Our key customers are principally hog brokers, hog farmers and slaughterhouses in the PRC. For the years ended December 31, 2009 and 2008, sales to our five largest customers amounted in the aggregate to approximately $6,193,688 and $3,480,513, respectively, accounting for approximately 49.35% and 48.36%, respectively, of our total revenue. We have not entered into long-term supply contracts with any of these major customers. Therefore, there can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all.

During each of the years ended December 31, 2009 and 2008, respectively, we had three customers that accounted for more than ten percent of our revenues:

 

Purchaser Name

   Percentage of
Revenues in Year ended
December 31, 2009
    Percentage of
Revenues in Year ended
December 31, 2008
 

Wuhan Mingxiang Meat Factory Co., Ltd.

   11.98   12.15

Sanlian Wu (Purchasing Agent)

   11.89   11.37

Zhenshun Tian (Purchasing Agent)

   11.45   11.03

If we cannot maintain long-term relationships with our major customers, the loss of a significant portion of our sales to them could have an adverse effect on our business, financial condition and results of operations.

Our bank accounts are not insured or protected against loss.

We maintain our cash with various banks and trust companies located in the PRC. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we would lose the cash on deposit with that particular bank or trust company.

We are substantially dependent upon our senior management and key research and development personnel.

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new breeding, nutrition and farming technologies and the enhancement of our existing products and technologies. In particular, we rely substantially on our chief executive officer, Ms. Hanying Li, and our chief financial officer, Mr. Bihong Zhang, to manage our operations.

We also depend on our key research personnel, Ming Li, for the development of new technology and products. We do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement in connection with his employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

 

16


Table of Contents

We compete for qualified personnel with other agricultural companies and research institutions. Intense competition for these personnel could cause our compensation costs to increase significantly, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

We may not pay dividends.

We have not previously paid any cash dividends, and we do not anticipate paying any dividends on our common shares. Although we have achieved net profitability since 2006, we cannot assure you that our operations will continue to result in sufficient revenues to enable us to operate at profitable levels or to generate positive cash flows. Furthermore, there is no assurance our Board of Directors will declare dividends even if we are profitable. Dividend policy is subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors. If we determine to pay dividends on any of our common shares in the future, we will be dependent, in large part, on receipt of funds from Fengze. See “Dividend Policy.”

Our growth strategy may prove to be disruptive and divert management resources, which could adversely affect our existing businesses.

Over the last four years, we constructed or acquired seven new farms in Wuhan, which increased our capacity by an aggregate of approximately 90,000 hogs per year. Our growth strategy includes the continued expansion of our farming operations and may include acquisitions of additional farms. We do not have any understanding, commitment or agreement in place with regard to any such acquisitions at this time. The implementation of such strategy may involve large transactions and present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating personnel and financial and other systems, increased expenses, including compensation expenses resulting from newly-hired employees, assumption of unknown liabilities and potential disputes. We also could experience financial or other setbacks if any of our growth strategies incur problems of which we are not presently aware.

We expect to allocate a portion of the net proceeds from this offering to such acquisitions, but we have not yet located any potential targets, and we may be unable to do so. Further, even if we find a target we believe to be suitable, we may be unable to negotiate acquisition terms that are satisfactory to us. In the event we are unable to complete acquisitions, we have reserved the right to reallocate such funds to our working capital. If this happens, we would have broad discretion over the ultimate use of such funds, and we could use such funds in ways with which investors might disagree.

As part of our growth strategy, we have acquired various companies with operations in the PRC. If any of our acquisitions are reviewed by PRC regulatory agencies or found not to comply with applicable laws or regulations, we might be required to make filings or submissions to PRC regulators or amend the terms of such acquisitions to meet PRC regulatory requirements.

We are rapidly expanding our operations in the PRC and have completed several acquisitions since 2006. While we believe that each of our acquisitions has complied with all PRC laws and regulations applicable to such transactions, the regulatory environment that governs merger and acquisition transactions in the PRC has continued to evolve in recent years and remains subject to interpretation by the agencies that have responsibility for reviewing or approving such transactions. In particular, a new law became effective in September 2006 that has a broad scope applicable to certain merger and acquisition transactions involving companies organized outside of the PRC. If any of the acquisitions we completed were reviewed by a PRC regulator, it is possible that we may be required to demonstrate how the transaction under review complied with applicable PRC laws, including the law that took effect in September 2006. This could require us to expend company resources that would otherwise be used to manage our company. Further, if such regulators determine that any of our transactions did not comply with applicable regulations, we may be required to renegotiate or revise the terms of the acquisition with the counterparties to the affected transaction. If such a scenario were to occur, we cannot be sure that our efforts to meet the regulator’s requirements would be successful, or that such efforts would not have an adverse effect on our operations.

 

17


Table of Contents

Foreign Operational Risks

We are dependent on the state of the PRC’s economy as all of our business is conducted in the PRC.

Currently, all of our business operations are conducted in the PRC, and all of our customers are also located in the PRC. Accordingly, any significant slowdown in the PRC economy may cause our customers to reduce expenditures or delay the building of new facilities or projects. This may in turn lead to a decline in the demand for our products. That would have a material adverse effect on our business, financial condition and results of operations.

A general economic downturn, a recession or a sudden disruption in business conditions in the PRC may affect consumer purchases of discretionary items, including food products, which could adversely affect our business.

Consumer spending is generally affected by a number of factors, including general economic conditions, the level of unemployment, inflation, interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. In addition, sudden disruption in business conditions as a result of a terrorist attack, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters, pandemic situations or large scale power outages can have a short or, sometimes, long-term impact on consumer spending. A downturn in the economy in the PRC, including any recession or a sudden disruption of business conditions in those economies, could adversely affect our business, financial condition or results of operation.

Since our operations and significant assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers.

Our operations and significant assets are located in the PRC. In addition, most of our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons. See “Enforceability of Civil Liabilities.”

We must remit the offering proceeds to China before they may be used to benefit our business in China, and this process may take a number of months.

The proceeds of this offering must be sent back to the PRC, and the process for sending such proceeds back to the PRC may take several months after the closing of this offering. We may be unable to use these proceeds to grow our business until we receive such proceeds in the PRC. In order to remit the offering proceeds to China, we will take the following actions:

 

   

First, we will open a special foreign exchange account for capital account transactions. To open this account, we must submit to SAFE certain application forms, identity documents, transaction documents, form of foreign exchange registration of overseas investments of the domestic residents, and foreign exchange registration certificate of the invested company.

 

   

Second, we will remit the offering proceeds into this special foreign exchange account.

 

   

Third, we will apply for settlement of the foreign exchange. In order to do so, we must submit to SAFE certain application forms, identity documents, payment order to a designated person, and a tax certificate.

The timing of the process is difficult to estimate because the efficiencies of different SAFE branches can vary significantly. Ordinarily the process takes several months but is required to be accomplished within 180 days of application by law.

Although we do not import goods into or export goods out of the PRC, fluctuation of the Renminbi (RMB) may indirectly affect our financial condition by affecting the volume of cross-border money flow.

Although we use the United States dollar for financial reporting purposes, all of the transactions effected by WFOE and Fengze are denominated in the PRC’s currency, the RMB. The value of the RMB fluctuates and is subject to changes in the PRC’s political and economic conditions. We do not currently engage in hedging activities to protect against foreign currency risks. Even if we chose to engage in such hedging activates, we may not be able to do so effectively. Future movements in the exchange rate of the RMB could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China into the country or paying vendors for services performed outside of China.

 

18


Table of Contents

If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

If you are a United States holder, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

Based upon the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by the U.S. Internal Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, a U.S. investor will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes if either:

 

   

75% or more of our gross income in a taxable year is passive income; or

 

   

the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%.

The calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. We cannot assure you that we will not be a PFIC for any taxable year. See “Taxation – United States Federal Income Taxation—Passive Foreign Investment Company.”

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

Substantially all of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.

While the PRC economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

Introduction of new laws or changes to existing laws by the PRC government may adversely affect our business.

The PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions like the U.S., decided cases (which may be taken as reference) do not form part of the legal structure of the PRC and thus have no binding effect. Furthermore, in line with its transformation from a centrally planned economy to a more free market-oriented economy, the PRC government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or the interpretation of the same may be subject to further changes.

 

19


Table of Contents

We may be subject to foreign exchange controls in the PRC.

Our PRC subsidiary and affiliates are subject to PRC rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange (“SAFE”) regulates the conversion of the RMB into foreign currencies. Currently, foreign investment enterprises (“FIEs”) are required to apply to SAFE for “Foreign Exchange Registration Certificate for FIEs”. WFOE is a FIE. With such registration certifications (which need to be renewed annually), FIEs are allowed to open foreign currency accounts including the “recurrent account” and the “capital account”. Currently, conversion within the scope of the “recurrent account” can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.

We do not have business interruption, litigation or natural disaster insurance.

The insurance industry in China is still at an early state of development. In particular PRC insurance companies offer limited business products. As a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business interruption, litigation or natural disaster may result in our business incurring substantial costs and the diversion of resources.

WFOE’s contractual arrangements with Fengze may result in adverse tax consequences to us.

We could face material and adverse tax consequences if the PRC tax authorities determine that WFOE’s contractual arrangements with Fengze were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by Fengze, which could adversely affect us by increasing Fengze’s tax liability without reducing WFOE’s tax liability, which could further result in late payment fees and other penalties to Fengze for underpaid taxes.

WFOE’s contractual arrangements with Fengze may not be as effective in providing control over Fengze as direct ownership.

We conduct substantially all of our operations, and generate substantially all of our revenues, through contractual arrangements with Fengze that provide us, through our ownership of WFOE, with effective control over Fengze. We depend on Fengze to hold and maintain contracts with our customers. Fengze also own substantially all of our intellectual property, facilities and other assets relating to the operation of our business, and employ the personnel for substantially all of our business. Neither our company nor WFOE has any ownership interest in Fengze. Although we have been advised by Kai Tong Law Firm, our PRC legal counsel, that each contract under WFOE’s contractual arrangements with Fengze is valid, binding and enforceable under current PRC laws and regulations, these contractual arrangements may not be as effective in providing us with control over Fengze as direct ownership of Fengze would be. In addition, Fengze may breach the contractual arrangements. For example, Fengze may decide not to make contractual payments to WFOE, and consequently to our company, in accordance with the existing contractual arrangements. In the event of any such breach, we would have to rely on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system.

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of WFOE’s contractual arrangements with Fengze. OINK and WFOE are considered foreign persons or foreign invested enterprises under PRC law. As a result, OINK and WFOE are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

20


Table of Contents

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

The shareholders of Fengze have potential conflicts of interest with us, which may adversely affect our business.

Neither we nor WFOE owns any portion of the equity interests of Fengze. Instead, we rely on WFOE’s contractual obligations to enforce our interest in receiving payments from Fengze. Conflicts of interests may arise between Fengze’s shareholders and our company if, for example, their interests in receiving dividends from Fengze were to conflict with our interest requiring these companies to make contractually-obligated payments to WFOE. As a result, we have required Fengze and each of its shareholders to execute irrevocable powers of attorney to appoint the individual designated by us to be his attorney-in-fact to vote on their behalf on all matters requiring shareholder approval by Fengze and to require Fengze’s compliance with the terms of its contractual obligations. We cannot assure you, however, that when conflicts of interest arise, these companies’ shareholders will act completely in our interests or that conflicts of interests will be resolved in our favor. In addition, these shareholders could violate their agreements with us by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between us and Fengze’s shareholders, we would have to rely on legal proceedings, which could result in the disruption of our business.

Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiary, limit our subsidiary’s ability to increase its registered capital, distribute profits to us, or otherwise adversely affect us.

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past were required to complete the relevant registration procedures with the local SAFE branch by March 31, 2006.

We have requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under Notice 75 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Notice 75 or other related rules. The failure or inability of our PRC resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from this offering) WFOE or Fengze, limit their ability to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.

We rely on dividends paid by WFOE for our cash needs.

We rely primarily on dividends paid by WFOE for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. Regulations in

 

21


Table of Contents

the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from WFOE. See “Dividend Policy.”

Pursuant to the new PRC enterprise income tax law effective on January 1, 2008, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of up to 20%. At present, the Chinese tax authority has not issued any guidance on the application of the EIT Law and its implementing rules on non-Chinese enterprises or group enterprise controlled entities whose structures are like ours. In practice, the tax authorities typically impose the withholding tax rate of 10% rate, as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance is provided by relevant government authorities. As a result, we are unable to predict whether payments from WFOE to Tianli will be subject to withholding tax because it is unclear whether Tianli will be deemed to be a resident enterprise for Chinese tax purposes. If so, Tianli will be subject to an enterprise income tax rate of 25% on all of its income, including interest income on the proceeds from this offering on a worldwide basis. However, if Tianli is deemed to be a non-resident enterprise, then it will be subject to a withholding tax at the rate of 10% on any dividends paid by its Chinese subsidiaries to Tianli.

The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. WFOE is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its compulsory reserves fund until the accumulative amount of such reserves reaches 50% of its registered capital.

The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. For the years ended December 31, 2009 and 2008, respectively, the Company made no appropriations to surplus reserve.

WFOE is also required to allocate a portion of its after-tax profits, as determined by its board of directors, to the general reserve, the staff welfare and bonus funds, and the enterprise expansion reserve, which may not be distributed to equity owners.

Pursuant to the Law of Chinese-Foreign Equity Joint Ventures, Chinese-foreign equity joint ventures are required to allocate a portion of their after-tax profits in accordance with their Articles of Association, to the general reserve, the staff welfare and bonus funds, and the enterprise expansion reserve. According to the Articles of Association of WFOE, the amount of each reserve is determined by WFOE’s board of directors. The general reserve is used to offset future extraordinary losses. The subsidiaries may, upon a resolution passed by the shareholders, convert the general reserve into capital. The employee welfare and bonus reserve is used for the collective welfare of the employees of the subsidiaries. The enterprise expansion reserve is used for the expansion of the subsidiaries’ operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of retained earnings determined according to PRC law.

As of the date of this prospectus, the amounts of these reserves have not yet been determined, and we have not committed to establishing such amounts at this time. Under current PRC laws, WFOE is required to set aside reserve amounts, but has not yet done so. WFOE has not done so because PRC authorities grant companies flexibility in making a determination. Chinese law requires such a determination to be made in accordance with the companies’ organizational documents and WFOE’s organizational documents do not require the determination to be made within a particular timeframe. Although we have not yet been required by PRC authorities to make such determinations or set aside such reserves, PRC authorities may require WFOE to rectify its noncompliance and we may be fined if we fail to do so after warning within the time period set in the warning.

 

22


Table of Contents

Additionally, PRC law requires that the after-tax profits of foreign invested companies be distributed after a portion of after-tax profits is allocated to the reserve, therefore if for any reason, the dividends from WFOE cannot be repatriated to us or not in time, then it may detrimentally affect our cash flow and even cause us to become insolvent.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive the majority of our revenues in Renminbi. Under our current corporate structure, our income is derived from payments from WFOE. Shortages in the availability of foreign currency may restrict the ability of WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at is discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders. See “Our Business – Regulations on Foreign Exchange.”

Fluctuation of the Renminbi could materially affect our financial condition and results of operations

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. Any significant revaluation of Renminbi may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in U.S. dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any new Renminbi denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes. See “Exchange Rate Information.”

Our business benefits from certain government incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.

The PRC government has provided significant tax incentives to domestic companies in our industry in order to encourage the development of agricultural businesses in China. We have received subsidies, business tax exemptions and government incentives in connection with our operation of hog farms in Wuhan.

In particular, under current Chinese law, we are exempt from corporate income tax in China for so long as we operate as a hog farming enterprise.

Further, we are eligible to receive a one-time payment from the city of Wuhan for each farm that achieves an annual production capacity of 10,000 or 20,000 hogs. When a farm reaches 10,000 hog capacity, it is eligible for a grant of RMB 1.5 million (approximately $219,388). When a farm reaches 20,000 hog capacity, it is eligible for a grant of RMB 3 million (approximately $438,776), including any previous grant it received when its capacity reached 10,000 hogs.

In order to support the breeding of hogs, the government also pays hog companies RMB 100 annually per breeder hog in inventory. The government has established a method for calculating the number of breeder hogs per farm based on annual hog production. In general, we receive credit for 600 breeder hogs for every 10,000 hogs we produce.

 

23


Table of Contents

Finally, the government underwrites a portion of the costs of hog insurance. We maintain RMB 1,000 in coverage for each of our hogs to cover our losses in the event of disease outbreaks and government-ordered culls to prevent such outbreaks. The cost per hog per year is approximately RMB 50, of which the government pays approximately RMB 38 and we pay RMB 12.

The PRC government authorities may reduce or eliminate these incentives through new legislation at any time in the future. In the event we are no longer exempt from income taxation, our applicable tax rate would increase from 0% to up to 25%, the standard business income tax rate in the PRC. In addition, the termination of one-time subsidies for hog farms that raise 10,000 or 20,000 head of hogs could increase the burden of constructing hog farms of such size in the future. Similarly, the termination of the government practice of partially subsidizing the cost of hog insurance could reduce our profits or cause such insurance to become more expensive as fewer farmers elected to purchase such insurance. The reduction or discontinuation of any of these economic incentives could negatively affect our company.

Recent changes in the PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production costs.

In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008. To clarify certain details in connection with the implementation of the Labor Contract Law, the PRC State Council promulgated the Implementing Rules for the Labor Contract Law on September 18, 2008, which came into effect immediately. The new legislation formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, this new law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the law requires an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of precedents for the enforcement of such a law, the standards and procedures set forth under the law in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in the PRC that such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the new law, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract not possible. To date, there has been very little guidance and precedents as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC are covered by the new law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.

We may be subject to fines and legal sanctions by SAFE or other PRC government authorities if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee stock options granted by offshore listed companies to PRC citizens.

On March 28, 2007, SAFE promulgated the Operating Procedures for Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Ownership Plans and Stock Option Plans of Offshore Listed Companies, or Circular 78. Under Circular 78, Chinese citizens who are granted share options by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with SAFE and complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject to Circular 78. Failure to comply with these regulations may subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other PRC government authorities and may prevent us from further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.

 

24


Table of Contents

Changes in China’s political and economic policies could harm our business.

China’s economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD. These differences include:

 

   

economic structure;

 

   

level of government involvement in the economy;

 

   

level of development;

 

   

level of capital reinvestment;

 

   

control of foreign exchange;

 

   

methods of allocating resources; and

 

   

balance of payments position.

As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries. See “Our Business – Market Background.”

Since 1979, the Chinese government has promulgated many new laws and regulations covering general economic matters. Despite these efforts to develop a legal system, China’s system of laws is not yet complete. Even where adequate law exists in China, enforcement of existing laws or contracts based on existing law may be uncertain or sporadic, and it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The relative inexperience of China’s judiciary, in many cases, creates additional uncertainty as to the outcome of any litigation. In addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Our activities in China will also be subject to administration review and approval by various national and local agencies of China’s government. Because of the changes occurring in China’s legal and regulatory structure, we may not be able to secure the requisite governmental approval for our activities. Although we have obtained all required governmental approval to operate our business as currently conducted, to the extent we are unable to obtain or maintain required governmental approvals, the Chinese government may, in its sole discretion, prohibit us from conducting our business. See “Our Business – Market Background.”

If relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital markets.

At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of our common shares and our ability to access U.S. capital markets.

The Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total loss of our investment in that country.

Our business is subject to significant political and economic uncertainties and may be adversely affected by political, economic and social developments in China. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice.

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our investment in China and in the total loss of your investment in us.

 

25


Table of Contents

Because our operations are located in China, information about our operations are not readily available from independent third-party sources.

Because Fengze and WFOE are based in China, our shareholders may have greater difficulty in obtaining information about them on a timely basis than would shareholders of a U.S.-based company. Their operations will continue to be conducted in China and shareholders may have difficulty in obtaining information about them from sources other than the companies themselves. Information available from newspapers, trade journals, or local, regional or national regulatory agencies such as issuance of construction permits and contract awards for development projects will not be readily available to shareholders and, where available, will likely be available only in Chinese. Shareholders will be dependent upon management for reports of their progress, development, activities and expenditure of proceeds.

Our failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) of the listing and trading of our common shares on a foreign stock exchange could significantly delay this offering or could have a material adverse effect upon our business, operating results, reputation and trading price of our common shares.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration of Taxation, the State Administration for Industry and Commerce, the CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rule”). The New M&A Rule became effective on September 8, 2006. This regulation contains provisions that purport to require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by PRC companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of overseas listings.

However, the application of the New M&A Rule remains unclear with no consensus currently existing among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement. Our PRC counsel, Kai Tong Law Firm, has advised us that, based upon their understanding of current PRC laws and regulations:

 

   

We currently control our Chinese affiliate, Fengze, by virtue of WFOE’s VIE agreements with Fengze, but not through equity interest or asset acquisition which are stipulated in the New M&A Rule; and

 

   

In spite of the lack of clarity on this issue, the CSRC has not issued any definitive rule or interpretation regarding whether offerings like the one contemplated by this Prospectus are subject to the New M&A Rule.

If the CSRC requires that we obtain its approval prior to the completion of this offering, the offering will be delayed until we obtain CSRC approval, which may take several months. There is also the possibility that we may not be able to obtain such approval. If prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory authorities. These authorities may impose fines and penalties upon our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to terminate this offering prior to closing.

Risks Associated with this Offering

There may not be an active, liquid trading market for our common shares.

Prior to this offering, there has been no public market for our common shares. An active trading market for our common shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and the placement agent based upon a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

26


Table of Contents

Investors risk loss of use of funds allocated for purchases, with no right of return, during the offering period.

We cannot assure you that all or any shares will be sold. Anderson & Strudwick, our placement agent, is offering our shares on a “best efforts, minimum-maximum basis.” We have no firm commitment from anyone to purchase all or any of the shares offered. If offers to purchase a minimum of 1,667,000 shares are not received on or before May 31, 2010, escrow provisions require that all funds received be promptly refunded. If refunded, investors will receive no interest on their funds. During the offering period, investors will not have any use or right to return of the funds. None of our officers, directors or affiliates may purchase shares in this offering.

The market price for our common shares may be volatile, which could result in substantial losses to investors.

The market price for our common shares is likely to be volatile and subject to wide fluctuations in response to factors including the following:

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in the Chinese economy;

 

   

announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

additions or departures of key personnel; or

 

   

potential litigation.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. As a result, to the extent shareholders sell our shares in negative market fluctuation, they may not receive a price per share that is based solely upon our business performance. We cannot guarantee that shareholders will not lose some of their entire investment in our common shares.

If our financial condition deteriorates, we may not meet initial objective listing standards related to net income on the NASDAQ Capital Market (or, if we are listed at such time, continued listing standards) and our shareholders could find it difficult to sell our shares.

We have applied to list our common shares for trading on the NASDAQ Capital Market. We have not yet been informed that our common shares will trade on the NASDAQ Capital Market and can provide no assurance that our NASDAQ Capital Market listing application will be approved. Additionally, we will not complete this offering unless our application to list on the NASDAQ Capital Market is approved. In order to qualify for initial listing on the NASDAQ Capital Market upon the completion of this offering, we must meet the following criteria:

 

   

(i) We must have been in operation for at least two years, must have shareholder equity of at least $5,000,000 and must have a market value for our publicly held securities of at least $15,000,000; or (ii) we must have shareholder equity of at least $4,000,000, must have a market value for our publicly held securities of at least $15,000,000 and must have a market value of our listed securities of at least $50,000,000; OR (iii) we must have net income from continuing operations in our last fiscal year (or two of the last three fiscal years) of at least $750,000, must have shareholder equity of at least $4,000,000 and must have a market value for our publicly held securities of at least $5,000,000; and

 

   

The market value of our shares held by non-affiliates must be at least $1,000,000;

 

   

The market value of our shares must be at least $5,000,000;

 

   

The minimum bid price for our shares must be at least $4.00 per share;

 

   

We must have at least 300 round-lot shareholders;

 

   

We must have at least 3 market makers; and

 

   

We must have adopted NASDAQ-mandated corporate governance measures, including a Board of Directors comprised of a majority of independent directors, an Audit Committee comprised solely of independent directors and the adoption of a code of ethics among other items.

As to the first objective listing requirement, we have applied for listing on the NASDAQ Capital Market in reliance on the third test (“net income from continuing operations in our last fiscal year (or two of the last three fiscal years) of at least $750,000, must have shareholder equity of at least $4,000,000 and must have a market value for our publicly held securities of at least $5,000,000”). While our net income for 2009 and 2008 satisfied this objective requirement, a deterioration in our financial status combined with a protracted registration and offering period could cause us to fail to meet this requirement.

 

27


Table of Contents

The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be listed. In order to qualify for continued listing on the NASDAQ Capital Market, we must meet the following criteria:

 

   

Our shareholders’ equity must be at least $2,500,000; or the market value of our listed securities must be at least $35,000,000; or our net income from continuing operations in our last fiscal year (or two of the last three fiscal years) must have been at least $500,000;

 

   

The market value of our shares held by non-affiliates must be at least $500,000;

 

   

The market value of our shares must be at least $1,000,000;

 

   

The minimum bid price for our shares must be at least $1.00 per share;

 

   

We must have at least 300 shareholders;

 

   

We must have at least 2 market makers; and

 

   

We must have adopted NASDAQ-mandated corporate governance measures, including a Board of Directors comprised of a majority of independent directors, an Audit Committee comprised solely of independent directors and the adoption of a code of ethics among other items.

Although we have applied to have our common shares trade on the NASDAQ Capital Market upon closing of this offering, investors should be aware that they will be required to commit their investment funds prior to the approval or disapproval of our listing application by the NASDAQ Capital Market. We will not close this offering unless our listing application is approved. If our shares are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares.

In addition, we have relied on an exemption to the blue sky registration requirements afforded to “covered securities”. Securities listed on the NASDAQ Capital Market are “covered securities.” If we were unable to meet the NASDAQ Capital Market’s listing standards, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this offering unless we meet the NASDAQ Capital Market’s listing requirements.

In addition, if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our common shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our common shares are not so listed or is delisted at some later date, our common shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common shares might decline. If our common shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or were to become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.

We will incur increased costs as a result of being a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to significantly increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements.

Our classified board structure may prevent a change in our control.

Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2010, 2011 and 2012. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the shareholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders. See “Management – Board of Directors and Board Committees.”

 

28


Table of Contents

Shares eligible for future sale may adversely affect the market price of our common shares, as the future sale of a substantial amount of outstanding common shares in the public marketplace could reduce the price of our common shares.

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common shares. An aggregate of 8,125,000 shares will be outstanding before the consummation of this offering and 10,125,000 shares will be outstanding immediately after this offering, if the maximum offering is raised. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. In addition, we have agreed to register the resale of a total of 243,750 shares of our common stock held by certain selling shareholders in connection with the offering. Upon registration, such shares will be freely transferable and will not be subject to any form of lock-up. See “Shares Eligible for Future Sale.”

You will experience immediate and substantial dilution.

The initial public offering price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our common shares. Therefore, assuming the completion of the maximum offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $3.73 or approximately 62% in the pro forma net tangible book value per share from the price per share that you pay for the common shares. Assuming the completion of the minimum offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $3.84 or approximately 64% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

We have not determined a specific use for a significant portion of the proceeds from this offering, and we may use the proceeds in ways with which you may not agree.

Our management will have considerable discretion in the application of the net proceeds received by us. In addition, in the event we are unable to locate favorable targets for acquisitions, we have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have significant discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value. See “Use of Proceeds.”

Entities controlled by our employees, officers and/or directors will control a majority of our common shares, decreasing your influence on shareholder decisions.

Assuming the sale of the maximum offering, entities controlled by our employees, officers and/or directors will, in the aggregate, beneficially own approximately 74.68% of our outstanding shares. Assuming the sale of the minimum offering, entities controlled by our employees, officers and/or directors will, in the aggregate, beneficially own approximately 77.22% of our outstanding common shares. As a result, our employees, officers and directors will possess substantial ability to impact our management and affairs and the outcome of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our common shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase shares in this offering. See “Principal Shareholders.”

 

29


Table of Contents

A redemption of shares held by our founders may be insufficient to cause our company to achieve targeted earnings and may reduce our founders’ involvement and stake in our company.

As described in greater detail in the sections entitled “Related Party Transactions – Make-Good Shares Subject to Redemption” and “Placement—Market and Pricing Considerations,” our founders have agreed to place, on a prorated basis, that number of common shares into escrow that is equal to 50% of the number of shares sold in this offering (such escrowed shares, the “Make-Good Shares”) pending determination of our audited net after-tax income for the year ending December 31, 2010. The Make-Good Shares will consist of a prorated allocation of shares beneficially owned by Hanying Li and Bihong Zhang. Our company will redeem and cancel these Make-Good Shares pro rata without consideration to the extent necessary to cause our earnings per share to be at least $0.7407, excluding any expenses associated with releasing the Make-Good Shares back to the original owners.

We cannot guarantee that we will be able to redeem a sufficient number of Make-Good Shares to increase audited after-tax earnings per share to $0.7407 if our company either has lower net income or any net losses in 2010. To the extent there are an insufficient number of Make-Good Shares available for such redemption, our per-share after tax earnings may be less than $0.7407 for 2010.

As noted above, the holders of the Make-Good Shares are integral to our company’s success. Prior to the commencement of this offering, they collectively own 93% of our issued and outstanding shares. Assuming a maximum offering, they would collectively hold approximately 74.68% of our shares upon completion of the offering. In the event all of the Make-Good Shares are redeemed, the founders of Fengze would collectively hold approximately 64.8% of our shares, assuming a maximum offering. See “Risk Factors—We are substantially dependent upon our key personnel.”

We will have an ongoing relationship with our placement agent that may impact our ability to obtain additional capital.

In connection with this offering, we will, for a nominal amount, sell our placement agent warrants exercisable at a rate of one warrant per share to purchase up to ten percent of the shares sold in the offering. These warrants are exercisable for a period of five years from the date of issuance at a price equal to 120% of the price of the shares in this offering. During the term of the warrants, the holders thereof will be given the opportunity to profit from a rise in the market price of our common shares, with a resulting dilution in the interest of our other shareholders. The term on which we could obtain additional capital during the life of these warrants may be adversely affected because the holders of these warrants might be expected to exercise them when we are able to obtain any needed additional capital in a new offering of securities at a price greater than the exercise price of the warrants. See “Placement.”

We will have an ongoing relationship with our placement agent that may impact our shareholders’ ability to impact decisions related to our operations.

In connection with this offering, we have agreed to allow our placement agent to designate two non-voting observers to our Board of Directors until the earlier of the date that:

 

  (i) the investors that purchase shares in this offering beneficially own less than ten percent (10%) of our outstanding shares; or

 

  (ii) the trading price per share is at least four (4) times the offering price for any consecutive 15 trading day period.

Although our placement agent’s observers will not be able to vote, they may nevertheless significantly influence the outcome of matters submitted to the Board of Directors for approval. We have agreed to reimburse the observers for their expenses for attending our Board meetings, subject to a maximum reimbursement of $6,000 per meeting and $12,000 annually, which amount is not more than the reimbursement payable to our directors. The observer will be required to certify that such travel expenses are not reimbursed by any other party. We will also pay observers the same amount as our independent directors receive. As of the date of this prospectus, Mr. L. McCarthy Downs III and Mr. Hayden Zou are serving as our placement agent’s observers to our Board of Directors. See “Management – Board of Directors Observer.”

 

30


Table of Contents

As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

Our corporate affairs will be governed by our fourth amended and restated memorandum and articles of association, the British Virgin Islands Business Companies Act, 2004 (the “BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.

As a result of all of the above, holders of our shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company. For a discussion of significant differences between the provisions of the BVI Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital – Differences in Corporate Law.”

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our fourth amended and restated memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the articles and memorandum.

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act

 

31


Table of Contents

complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

32


Table of Contents

F ORWARD -L OOKING S TATEMENTS

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Examples of forward-looking statements include:

 

   

the timing of the development of future products;

 

   

projections of revenue, earnings, capital structure and other financial items;

 

   

statements of our plans and objectives;

 

   

statements regarding the capabilities of our business operations;

 

   

statements of expected future economic performance

 

   

statements regarding competition in our market; and

 

   

assumptions underlying statements regarding us or our business.

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under the heading “Risk Factors” above. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

33


Table of Contents

O UR C ORPORATE S TRUCTURE

Overview

We are a holding company incorporated in the British Virgin Islands that owns all of the outstanding capital stock of WFOE, our operating subsidiary based in Wuhan, China. WFOE has entered into control agreements with all of the owners of Fengze, which agreements allow WFOE to control Fengze. Through our ownership of HCS, HCS’ ownership of WFOE and WFOE’s agreements with Fengze, we control Fengze.

Our current corporate structure is as follows:

LOGO

 

LOGO    Equity interest
LOGO    Contractual arrangements including Entrusted Management Agreement and Exclusive Option Agreement.
LOGO    Contractual arrangements including Exclusive Option Agreement, Shareholders’ Voting Proxy Agreement and Pledge of Equity Interest Agreement.

Corporate History – Fengze

Fengze was organized as a limited liability company in 2005 with a registered capital of RMB 1,160,000, when our chief executive officer, Ms. Hanying Li, began to build her first hog farm. Fengze finished building this farm and began to operate it in 2005. In 2006, Fengze acquired five additional hog farms in purchases from separate sellers. In 2008, Fengze built one additional hog farm and acquired one other farm. At present, Fengze operates three hog farms with an annual capacity of 20,000 hogs each and five hog farms with an annual capacity of 10,000 hogs. Fengze is in the process of building a ninth hog farm that will have an annual capacity of 20,000 hogs. When this ninth hog farm is put into operation, Fengze’s farms will have an annual hog capacity of 130,000 hogs. As Fengze has continued to grow, it has increased its registered capital to RMB 30,160,000.

 

34


Table of Contents

Corporate History – WFOE, HCS and OINK

We formed WFOE, HCS and OINK in 2010, 2009 and 2009, respectively, in anticipation of registering the common shares of OINK in an initial public offering. In connection with the formation of OINK, HCS and WFOE, we caused WFOE to enter into certain control agreements with Fengze and its shareholders, pursuant to which we, by virtue of our ownership of HCS and HCS’ ownership of WFOE, control Fengze.

Contractual Arrangements with Fengze and Its Shareholders

Our relationships with Fengze and each of its shareholders are governed by a series of contractual arrangements. Under PRC laws, each of WFOE and Fengze is an independent legal entity and neither of them is exposed to liabilities incurred by the other party. Other than pursuant to the contractual arrangements between WFOE and Fengze, Fengze does not transfer any other funds generated from its operations to WFOE. Effective December 1, 2009, WFOE entered into a functionally identical set of Control Agreements with Fengze, which agreements provide as follows.

Entrusted Management Agreement . Fengze and WFOE have entered into an Entrusted Management Agreement, which provides that WFOE will be fully and exclusively responsible for the management of Fengze. As consideration for such services, Fengze has agreed to pay the entrusted management fee during the term of this agreement. The entrusted management fee will be equal to Fengze’s estimated earnings. Also, WFOE will assume all operation risks related to the entrusted management of Fengze and bear all losses of Fengze. The term of this agreement will be from the effective date thereof to the earliest of the following: (1) the winding up of Fengze; (2) the termination date of the Entrusted Management Agreement, as agreed by the parties thereto; or (3) the date on which WFOE completes the acquisition of Fengze.

Exclusive Option Agreement. Fengze and each of Fengze’s shareholders have entered into an Exclusive Option Agreement with WFOE, which provides that WFOE will be entitled to acquire such shares from the current shareholders upon certain terms and conditions. In addition, WFOE is entitled to an irrevocable exclusive purchase option to purchase all or part of the assets and business of Fengze, if such a purchase is or becomes allowable under PRC laws and regulations and WFOE so elects. The Exclusive Option Agreement also prohibits Fengze and its shareholders from transferring any portion of the equity interests, business or assets of Fengze to anyone other than WFOE. WFOE has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such times as it may wish to do so.

Shareholders’ Voting Proxy Agreement. All the shareholders of Fengze have executed a Shareholders’ Voting Proxy Agreement to irrevocably appoint the persons designated by WFOE with the exclusive right to exercise, on their behalf, all of their Voting Rights in accordance with applicable law and Fengze’s Articles of Association, including but not limited to the rights to sell or transfer all or any of their equity interests in Fengze and to appoint and elect the directors and Chair as the authorized legal representative of Fengze. This agreement will be only terminated prior to the completion of acquisition of all of the equity interests in, or all assets or business of Fengze.

Pledge of Equity Agreement. WFOE and the shareholders of Fengze have entered in Pledge of Equity Agreement, pursuant to which all shareholder pledges all of their shares (100%) of Fengze, as appropriate, to WFOE. If Fengze or any of its respective shareholders breaches its respective contractual obligations in “Entrusted Management Agreement”, “Exclusive Option Agreement” and “Shareholders’ Voting Proxy Agreement”, WFOE as Pledgee, will be entitled to certain right to foreclose on the pledged equity interests. Such Fengze shareholders cannot dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest. This pledge has been recorded with applicable authorities in China to perfect WFOE’s security interest.

 

35


Table of Contents

U SE OF P ROCEEDS

After deducting the estimated placement discount and offering expenses payable by us, we expect to receive net proceeds of approximately $8,691,840 from this offering if the minimum offering is sold and $10,530,000 if the maximum offering is sold. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the funds in China until remittance is completed. See “Risk Factors – We must remit the offering proceeds to China before they may be used to benefit our business in China, and this process may take a number of months.”

We intend to use the net proceeds of this offering as follows after we complete the remittance process, and we have ordered the specific uses of proceeds in order of priority. We do not expect that our priorities for fund allocation would change if the amount we raise in this offering exceeds the size of the minimum offering but is less than the maximum offering.

 

Description of Use

   Percentage of
Net Proceeds
 

Construction and/or acquisition of hog farms to increase capacity by approximately 40,000 hogs in the aggregate

   58

Purchase/Import purebred hogs for breeding stock

   8 %

Establish retail shops in Wuhan city

   9 %

Working capital

   20 %

Sarbanes-Oxley compliance-related professional fees

   5 %

Total

   100

Please note that the increased capacity noted above does not take into consideration the completion of our ninth hog farm, which will increase our capacity by approximately 20,000 hogs.

In the event we do not locate any appropriate farm targets for acquisitions or property on which to construct new hog farms or are not able to negotiate such acquisitions or construction agreements on terms that are acceptable to us, we reserve the right to allocate such funds to our working capital purposes. There are no understandings, commitments or agreements with respect to any such transaction at this time.

Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our common shares. It is possible that we may become a passive foreign investment company for U.S. federal income taxpayers, which could result in negative tax consequences to you. These consequences are described in more detail in “Taxation.”

 

36


Table of Contents

D IVIDEND P OLICY

We have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

If we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt of funds from WFOE. Payments of dividends by WFOE to our company are subject to the requirement that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business. Further, such remittances would require WFOE to provide an application for remittance that includes, in addition to the application form, a foreign registration certificate, board resolution, capital verification report, audit report on profit and stock bonuses, and a tax certificate. There are no such similar foreign exchange restrictions in the British Virgin Islands.

E XCHANGE R ATE I NFORMATION

Our business is primarily conducted in China, and the financial records of WFOE and Fengze are maintained in RMB, their functional currency. However, we use the U.S. dollar as our reporting currency; therefore, periodic reports made to shareholders will include current period amounts translated into U.S. dollars using the then-current exchange rates, for the convenience of the readers. Our financial statements have been translated into U.S. dollars in accordance with Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” We have translated our asset and liability accounts using the exchange rate in effect at the balance sheet date. We translated our statements of operations using the average exchange rate for the period. We reported the resulting translation adjustments under other comprehensive income. Unless otherwise noted, we have translated balance sheet amounts with the exception of equity at December 31, 2009 at ¥6.8372 to $1.00 as compared to ¥6.8542 to $1.00 at December 31, 2008. The average translation rates applied to income statement accounts for the year ended December 31, 2009 and the year ended December 31, 2008 were ¥6.84088 and ¥6.96225, respectively.

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On March 15, 2010, the interbank rate was ¥6.8354 to $1.00. The Company does not currently engage in currency hedging transactions.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.

 

     Interbank Rate

Period

   Period-End    Average    High    Low
     (RMB per U.S. Dollar)

2004

   8.2865    8.2872    8.2870    8.2365

2005

   8.0734    8.2033    8.2666    8.0566

2006

   7.8175    7.9819    8.0715    7.7845

2007

   7.3141    7.6172    7.8062    7.2941

2008

   6.8542    6.9623    7.2941    6.7480

2009

   6.8372    6.8409    6.8430    6.7880

2010

           

January

   6.8369    6.8347    6.8295    6.7836

February

   6.8367    6.8377    6.8336    6.7941

March (through March 15, 2010)

   6.8354    6.8350    6.8268    6.8136

 

37


Table of Contents

C APITALIZATION

The following table sets forth our capitalization as of December 31, 2009 on a pro forma as adjusted basis giving effect to the sale of the minimum and maximum offering at an assumed public offering price of $6.00 per share and to reflect the application of the proceeds after deducting the estimated placement fees.

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Capital Stock.”

Maximum Offering (2,000,000 Common shares)

U.S. Dollars

December 31, 2009

 

     As Reported (1)    Pro Forma
Adjusted for IPO (2)
 

Common shares

     

Shares (3)

     8,125,000      10,125,000   

Amount

   $ 8,125    $ 10,125   

Additional Paid-In Capital

   $ 4,262,534    $ 16,260,534 (4)  

Statutory Reserves

   $ 670,280    $ 670,280   

Retained Earnings

   $ 7,286,633    $ 7,286,633   

Accumulated Other Comprehensive Income

   $ 429,350    $ 429,350   

Total

   $ 12,656,922    $ 24,656,922   

Minimum Offering (1,667,000 Common shares)

U.S. Dollars

December 31, 2009

 

     As Reported (1)    Pro Forma
Adjusted for IPO (2)
 

Common shares

     

Shares (3)

     8,125,000      9,792,000   

Amount

   $ 8,125    $ 9,792   

Additional Paid-In Capital

   $ 4,262,534    $ 14,262,867 (4)  

Statutory Reserves

   $ 670,280    $ 670,280   

Retained Earnings

   $ 7,286,633    $ 7,286,633   

Accumulated Other Comprehensive Income

   $ 429,350    $ 429,350   

Total

   $ 12,656,922    $ 22,658,922   

 

(1)

This column gives effect to the reorganization of our company that was completed on January 27, 2010.

(2)

Gives effect to the sale of the minimum offering and the maximum offering, as applicable, at an assumed public offering price of $6.00 per share and to reflect the application of the proceeds after deducting the estimated underwriting discounts and our estimated offering expenses.

(3)

Upon the closing of this Offering, we will cause Hanying Li and Bihong Zhang to place into escrow Make-Good Shares equal to 50% of the number of Shares we sell in this Offering. That amount will be between 833,500 and 1,000,000 Make-Good Shares, depending on whether we complete a minimum offering, a maximum offering or an offering between the minimum and maximum offering. These escrowed shares, which will be placed into escrow upon closing of this Offering, have not been removed from the Shares presented in the above Capitalization Tables. For further discussion of the escrow arrangement, please see “Summary – Placement”, “Risk Factors – A redemption of shares held by our founders may be insufficient to cause our company to achieve targeted earnings and may reduce our founders’ involvement and stake in our company”, “Related Party Transactions – Make-Good Shares Subject to Redemption.”

(4)

Pro forma adjusted for IPO additional paid in capital reflects the net proceeds we expect to receive, after deducting a 7% underwriting discount, a 1% non-accountable expense allowance and approximately $510,000 in expenses. In a maximum offering, we expect to receive net proceeds of $10,530,000 ($12,000,000 offering, less underwriting discount of $840,000, non-accountable expense allowance of $120,000 and offering expenses of $510,000). In a minimum offering, we expect to receive net proceeds of $8,691,840 ($10,002,000 offering, less underwriting discount of $700,140, non-accountable expense allowance of $100,020 and offering expenses of $510,000).

 

38


Table of Contents

D ILUTION

If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the pro forma net tangible book value per common share after the offering. Dilution results from the fact that the per common share offering price is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding common shares. Our net tangible book value attributable to shareholders at December 31, 2009 was $11,925,223 or approximately $1.47 per common share. Net tangible book value per common share as of December 31, 2009 represents the amount of total tangible assets less goodwill, acquired intangible assets net, and total liabilities, divided by the number of common shares outstanding.

If the minimum offering is sold, we will have 9,792,000 common shares outstanding upon completion of the offering. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after December 31, 2009, will be approximately $21,126,350 or $2.16 per common share. This would result in dilution to investors in this offering of approximately $3.84 per common share or approximately 64% from the assumed offering price of $6.00 per common share. Net tangible book value per common share would increase to the benefit of present stockholders by $0.69 per share attributable to the purchase of the common shares by investors in this offering.

If the maximum offering is sold, we will have 10,125,000 common shares outstanding upon completion of the offering. Our post offering pro forma net tangible book value, which gives effect to receipt of the net proceeds from the offering and issuance of additional shares in the offering, but does not take into consideration any other changes in our net tangible book value after December 31, 2009, will be approximately $22,964,367 or $2.27 per common share. This would result in dilution to investors in this offering of approximately $3.73 per common share or approximately 62% from the assumed offering price of $6.00 per common share. Net tangible book value per common share would increase to the benefit of present shareholders by $0.80 per share attributable to the purchase of the common shares by investors in this offering.

The following table sets forth the estimated net tangible book value per common share after the offering and the dilution to persons purchasing common shares based on the foregoing minimum and maximum offering assumptions.

 

     Minimum
Offering (1)
   Maximum
Offering (2)

Assumed offering price per common share

   $ 6.00    $ 6.00

Net tangible book value per common share before the offering

   $ 1.47    $ 1.47

Increase per common share attributable to payments by new investors

   $ 0.69    $ 0.80

Pro forma net tangible book value per common share after the offering

   $ 2.16    $ 2.27

Dilution per common share to new investors

   $ 3.84    $ 3.73

 

(1)

Assumes gross proceeds from offering of 1,667,000 common shares.

(2)

Assumes gross proceeds from offering of 2,000,000 common shares.

 

39


Table of Contents

P OST -O FFERING O WNERSHIP

The following charts illustrate our pro forma proportionate ownership, upon completion of the offering under alternative minimum and maximum offering assumptions, by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the assumed offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering and provide alternative scenarios depending on whether the Make-Good Shares are redeemed. See “Risk Factors – A redemption of Make-Good Shares may be insufficient to cause our company to achieve targeted earnings and may reduce our management’s involvement and stake in our company,” “Related Party Transactions – Make-Good Shares Subject to Redemption” and “Placement – Market and Pricing Considerations.”

Scenario 1: Pro forma presentation assuming no redemption of any Make-Good Shares

 

     Shares Purchased     Total Consideration     Average Price
Per Share
     Amount    Percent     Amount    Percent    

MINIMUM OFFERING

            

Existing shareholders

   8,125,000    82.98 %   $ 11,925,223    54.4 %   $ 1.47

New investors

   1,667,000    17.02 %   $ 10,002,000    45.6 %   $ 6.00

Total

   9,792,000    100.0 %   $ 21,927,223    100.0 %   $ 2.24
     Shares Purchased     Total Consideration     Average Price
Per Share
     Amount    Percent     Amount    Percent    

MAXIMUM OFFERING

            

Existing shareholders

   8,125,000    80.25 %   $ 11,925,223    49.8 %   $ 1.47

New investors

   2,000,000    19.75 %   $ 12,000,000    50.2 %   $ 6.00

Total

   10,125,000    100.0 %   $ 23,925,223    100.0 %   $ 2.36

Scenario 2: Pro forma presentation assuming redemption of all Make-Good Shares

 

     Shares Purchased     Total Consideration     Average Price
Per Share
     Amount    Percent     Amount    Percent    

MINIMUM OFFERING

            

Existing shareholders

   7,291,500    81.39 %   $ 11,925,223    54.4 %   $ 1.64

New investors

   1,667,000    18.61 %   $ 10,002,000    45.6 %   $ 6.00

Total

   8,958,500    100.0 %   $ 21,927,223    100.0 %   $ 2.45
     Shares Purchased     Total Consideration     Average Price
Per Share
     Amount    Percent     Amount    Percent    

MAXIMUM OFFERING

            

Existing shareholders

   7,125,000    78.08 %   $ 11,925,223    49.8 %   $ 1.67

New investors

   2,000,000    21.92 %   $ 12,000,000    50.2 %   $ 6.00

Total

   9,125,000    100.0 %   $ 23,925,223    100.0 %   $ 2.62

 

40


Table of Contents

M ANAGEMENT S D ISCUSSION AND A NALYSIS OF

F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited historical consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

Our company is in the business of research and development, raising, breeding and selling hogs in the People’s Republic of China. We mainly produce hogs for slaughter and sell breeding stock. We currently own and operate eight commercial farms in Wuhan. We are building a ninth farm in Wuhan, which is expected to begin operating in 2010. Our farms raise and sell hogs for both breeding and meat purposes. Our farms, in the aggregate, have an annual production capacity of approximately 110,000 hogs (approximately 130,000 hogs once we finish building our ninth farm).

We currently derive substantially all of our revenues from hog farming. While we receive a nominal amount of revenue from the sale of hog waste products, it is not a current focus of our company.

In the last two years, our business has grown rapidly as a result of China’s strengthening economy, our acquisition of new farms and a strong demand for our hogs.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Liquidity

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31, 2009 our working capital was $2,055,918 as compared to $7,980 at December 31, 2008.

Our cash balance at December 31, 2009 totaled $2,022,295, an increase of $1,811,984 over our balance at December 31 2008. During the fiscal year of 2009, we received cash from operating activities of $5,677,400, offset by investments in capital expenditures of $3,557,323 in new construction, plant and equipment, and biological assets made during 2009.

We have financed our operations over the two years ended December 31, 2009 primarily through cash from operating activities and new capital contributions from the shareholders. In 2008, we received new capital contributed from the shareholders of $2.7 million.

Net cash provided by (used in) operating activities was approximately $5.7 million and ($1.2) million in fiscal 2009 and 2008, respectively.

Other than the continued strength of China’s economy, the demand for our hogs and in Wuhan and government policies in place to maintain pork prices (all of which we believe may increase our liquidity if they continue), we are not aware of any trends or any demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way.

For 2010, we expect our main growth will be organic from existing operations. The demand for our hogs appears to be getting stronger, which we expect to generate more positive cash flow.

 

41


Table of Contents

Assuming we generate more positive cash flow from operation, we may begin to purchase purebred hogs from abroad. We anticipate spending approximately $1.4 million to purchase purebred hogs. If we were to make such purchases prior to the completion of this offering or if our cash flow were insufficient, such purchases could put pressure on our liquidity.

To the extent demand for our hogs increases, we may need to consider acquiring additional facilities to meet such increased demand. While we do not have any agreement, understanding or commitment to acquire such a facility, the average selling price for a hog farm with an annual capacity of 10,000 hogs is approximately $2 million. If we were to purchase such a farm prior to the completion of this offering or if our cash flow were insufficient, such a purchase could put pressure on our liquidity.

We are also investigating a plan to open retail shops to sell our pork products at a premium price so that we can further benefit from our reputation for producing high-quality, low-pollution and low-additive pork products. We expect that the total cost for opening such retail locations would be approximately $1 million. If this were to happen before we receive proceeds from IPO or if our cash flow were insufficient, we could face liquidity pressure.

Capital Resources

The following table provides certain selected balance sheets comparisons between years ended December 31, 2009 and 2008:

 

     December 31,    Increase/
(Decrease)
 
     2009    2008   

Cash

   $ 2,022,295    $ 210,311    $ 1,811,984   

Inventories

     3,272,438      2,556,651      715,787   

Advances to suppliers

     84,951      11,792      73,159   

Other current assets

     24,147      7,142      17,005   
                      

Total current assets

     5,403,831      2,785,896      2,617,935   

Plant and equipment

     7,780,342      4,815,590      2,964,752   

Construction in progress

     1,346,903      1,901,468      (554,565

Biological assets

     742,060      638,357      103,703   

Intangible assets

     731,699      749,250      (17,551
                      

Total assets

   $ 16,004,835    $ 10,890,561    $ 5,114,274   
                      

Short-term loan

   $ 658,164    $ 656,532    $ 1,632   

Accounts payable

     318,488      208,823      109,665   

Other payables

     1,793,921      1,024,424      769,497   

Accrued payroll

     13,034      20,525      (7,491

Due to related parties

     564,306      871,612      (307,306
                      

Total current liabilities

   $ 3,347,913    $ 2,781,916    $ 565,997   
                      

We maintain cash and cash equivalents in China. At December 31, 2009 and 2008, bank deposits were as follows:

 

     December 31,

Country

   2009    2008

China

   $ 2,022,295    $ 210,311
             

All of our cash balances at December 31, 2009 are in the form of RMB held in bank accounts at financial institutions located in the PRC. Cash held in banks in the PRC is not insured. The value of cash on deposit in China of approximately $2 million at December 31, 2009 has been converted based on the exchange rate as of December 31, 2009. In 1996, the Chinese government introduced regulations, which relaxed restrictions on the conversion of the RMB; however restrictions still remain, including but not limited to restrictions on foreign invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital

 

42


Table of Contents

account items, including direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly, cash on deposit in banks in the PRC is not readily deployable by us for purposes outside of China.

Current assets as of December 31, 2009 totaled $5,403,831, an increase of 94% compared to December 31, 2008. Current liabilities as of December 31, 2009 totaled $3,347,913, reflecting an increase of 20% from our December 31, 2008 balance.

Inventories as of December 31, 2009 were $3,272,438, an increase of $715,787 compared to December 31, 2008. This increase is due primarily to an expansion of hog farms.

At December 31, 2009, we had no commitments for capital expenditures. While we expect to spend approximately $960,000 to purchase purebred hogs to begin production at our ninth farm, we have no commitment to do so at this time. At present, we have substantially completed the first phase of construction at the farm, which will allow it to operate with an annual capacity of 10,000 hogs. We expect to begin the second phase, which will bring total annual capacity to 20,000 hogs, later in 2010 after completion of this offering. At present, however, we have no commitment for capital expenditures related to this second phase.

While we do not have any agreements, understandings or commitments at this time for such activities, we may purchase purebred hogs for approximately $1.4 million, open retail locations for approximately $1 million and may acquire one or more hog farms for approximately $2 million each. If we undertake any of these activities, we expect to do so without debt financing. Instead, we plan either to use our cash flow resources or proceeds of this offering to make such purchase. As such, any such expenditures would affect our available cash resources but would not affect any debt arrangements.

Principal Factors Affecting our Results of Operations

Revenues

We primarily derive our revenues from the sale of our hogs to brokers and slaughterhouses. We breed and raise hogs that are eventually sold as either breeder or meat hogs. Some of the hogs are bred and raised for the purpose of sale as meat hogs, while others become meat hogs because of our customers do not select them as breeder hogs. For example, very few boars are required for breeding purposes, compared with sows. As approximately half of a litter will be boars, that half will generally grow into meat hogs.

We also receive a lesser amount of money from government subsidies for operating our farms. Some of these subsidies are non-recurring, such as the payment we receive when we reach specified annual production capacities. Others, such as subsidies for hog insurance, are ongoing so long as we qualify.

Factors Affecting Revenues

The following factors affect the revenues we derive from our operations. For other factors affecting our revenues, see “Risk Factors—Risks Related to Our Business.”

Consumer demand for pork products. Consumer demand for pork products is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, lower consumer confidence and changes in consumer preferences for pork as compared with other meats can lower the revenues and profitability of our operations. As a result, changes in consumer demand and general business cycles can subject our revenues to significant volatility.

Government action in our industry. Because pork occupies such a central role in the Chinese economy, the government has occasionally taken action to prevent the price of pork from dropping below specified levels and has provided subsidies to companies engaged in hog farming. We benefit from this protection, and we could be harmed

 

43


Table of Contents

if the government terminated such practices. In addition, the government has taken actions to prevent the spread of diseases among livestock, including mandatory culls of affected animals. These actions have occasionally resulted in relative shortages, which tend to lead to higher prices for healthy animals.

Competition . While the hog farming industry in Hubei province and Wuhan city features a large number of farms, a significant number of those farms are smaller farms that sell few hogs per year. We believe the incentives being given to farms that reach specified annual production levels are likely to result in a consolidation of the industry. Our ability to qualify for these incentives for our operations allows us to receive non-recurrent revenue from the subsidies, as well as benefit from increased economies of scale in our operations.

Expansion . We believe we must continue to expand our production capacity to seize additional market share. Since 2006, we have acquired 7 hog farms, and we are currently building a ninth hog farm. If we fail to make acquisitions or expand our production capacity, our revenue growth could slow.

Epidemic outbreaks . The outbreak of animal diseases could adversely affect our revenues. An occurrence of serious animal diseases, such as foot-and-mouth disease, or any outbreak of other epidemics in the PRC affecting animals or humans might result in material disruptions to our sales.

Costs and Expenses

We primarily incur the following costs and expenses:

Costs of goods sold . In raising hogs for sale, we incur a number of costs that factor in to costs of goods sold. We must purchase hog feed, premix components, medicines and other supplies to grow our hogs and keep them healthy. In addition to these items, cost of good sold includes farm employee wages, water, electricity, equipment depreciation expense, maintenance expense, quarantine expense, office expenses, insurance expense, and sewage charges.

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting our corporate, professional fees (including consulting, audit and legal fees), travel and entertainment expenses, contractual performance obligations and office administrative and related expenses.

Factors Affecting Expenses

Supplies and commodity prices . The largest component of our expenses relates to the price of materials required to breed and raise our hogs for sale. Specifically, while we ordinarily breed our own hogs, we occasionally purchase breeding stock to continue to improve our genetic breeding pool. Similarly, the price of corn in China is important to our operations, because the primary component of our hog’s diet is corn. To the extent the prices of these materials varies, our cost of goods will fluctuate. For this reason, we may be affected by droughts, floods, crop diseases and the like, which tend to make feed more scarce and thus expensive.

Transition to public company . Once we complete this offering, we expect that our administrative costs will increase significantly, as we need to comply with detailed reporting requirements.

Number of customers. The more customers we have, the greater we expect our selling expenses, travel expenses and the like will be. At present, we are able to sell substantially all of our hogs within Wuhan, to a relatively small number of customers. We believe this concentration of customers has allowed us to focus our marketing and selling efforts in a relatively narrow area.

Number of farms we operate . We have acquired or constructed a number of hog farms in the last several years. As we operate more farms, our administrative expenses increase in dollars but decrease as a percentage of revenues.

Advertising expense . If and when we open any retail locations, we expect that we will face increases in our advertising expenses to establish our brand image and retail recognition.

 

44


Table of Contents

Results of Operations

 

     For the year ended
December 31, 2009
    For the year ended
December 31, 2008
 
     $    %     $    %  

Revenues

   $ 12,550,533    —        $ 7,197,091    —     

Cost of goods sold

     7,752,191    62     4,759,929    66

Gross profit

     4,798,342    38     2,437,162    34

Total operating expenses

     425,846    3     339,639    5
                  

Operating income

   $ 4,372,496    35   $ 2,097,523    29
                  

Our revenues increased by 74% from the year ended December 31, 2008 to the year ended December 31, 2009 as a result of growth in our hog breeding business and the expanding numbers of hog farms we own. Since 2006, we have acquired and constructed 7 hog farms. This has allowed us to sell more hogs. The greater number of hog sales, rather than any significant increase in hog prices, has been primarily responsible for the growth in our revenues. Notwithstanding the foregoing, the market price for hogs has increased during 2009 as a result of government initiatives to support the market.

Our gross profit margins increased to 38% in the fiscal year of 2009 from 34% in the same period of 2008 primarily as a result of the increased percentage of sales of breeder hogs (which sell for a higher profit margin than meat hogs), China’s implementation of a pork price stabilization policy and stable feeding costs of hogs. In 2009 we were able to expand our breeder hog sales and contain costs, we successfully maintained the gross profit margins.

General and administrative expenses increased $88,820 in the year ended December 31, 2009 compared to the year ended December 31, 2008 primarily as a result of the opening of two new breeder hog farms. Payroll expense at the hog farms was majority of the increase in general and administrative expenses.

Other income decreased from $189,580 in fiscal 2008 to $153,467 in fiscal 2009, which represented a decrease of $36,113 or approximately 19%. This decrease was primarily the result of a decrease of $26,064 in governmental subsidy income. This government subsidy income decreased because of a reduction in available sewage subsidies for our company.

Our net income for the years ended December 31, 2009 and 2008 were $4.53 million and $2.29 million, respectively. The increase in net income is primarily a result of efficient control and management of production costs, administrative expenses and animal diseases. By improving the health of our hogs with the use of our premix, we have been able to realize greater revenues due to decreased mortality (i.e., more hogs available for sale to the public), without being overly reliant on medicines.

We realized significant growth in our business due to (i) investment in hog farms since 2007, which increased our capacity and revenues, (ii) increases in the market price of breeder hogs, and (iii) increases in our sales of breeder hogs.

Consolidated Statement of Cash Flows

In the year ended December 31, 2009, our net increase in cash from operations totaled $1,810,487 and was comprised of $5,677,400 provided by operating activities, $3,557,323 used in investing activities, $309,590 used in financing activities, and the effect of prevailing exchange rates provided on our cash position of $1,497.

In the year ended December 31, 2008, our net decrease in cash from operations totaled $1,275,392 and consisted of $1,231,550 used in operating activities, $3,248,438 used in investing activities, $3,204,596 provided by financing activities, and the effect of prevailing exchange rates on our cash position of $367,607.

 

45


Table of Contents

Cash Used in Operating Activities

Net cash provided by operating activities in the year ended December 31, 2009 totaled $5,677,400. The activities were mainly comprised of our net income of $4,525,963, an increase in our inventories of $850,254 and advances to suppliers of $73,090, a decrease in accounts payable of $109,087 and other payables of $769,497, and reconciling non cash transactions comprised of the followings: (i) $1,033,355 in depreciation and amortization, and (ii) $190,319 in inventory shrinkage. Inventory shrinkage consists of hog mortality prior to sale.

In the year ended December 31, 2008, cash used in operations totaled $1,231,550. The activities mainly consisted of an increase in inventories of $329,794, a decrease in accounts payable of $120,341 and other payables of $4,237,324. These increases were partially offset by a decrease in other current assets of $477,509 and advances to suppliers of $16,225, an increase in accrued payroll of $20,206. Non-cash transactions comprised of (i) $594,173 in depreciation and amortization, and (ii) $60,693 in inventory shrinkage. Other payables decreased as a result of paying back the purchase price of one hog farm and the construction cost of another hog farm.

Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2009 totaled $3,557,323. The activities were primarily comprised of capital expenditures in construction in progress of $290,116, biological assets of $431,014, and plant and equipment of $2,836,193.

In the year ended December 31, 2008, our cash used in investing activities totaled $3,248,438. The activities were mainly comprised of purchases of $1,888,064 in construction in progress, $264,271 in biological assets, and $1,042,097 in plant and equipment.

Cash Provided by Financing Activities

For the year ended December 31, 2009, net cash used in financing activities was $309,590. The activities were mainly comprised of repayment of due to related parties of $309,590. In preparation for this offering, our company determined to repay such amounts so that no amounts were due to related parties by December 31, 2009.

For the year ended December 31, 2008, cash provided by financing activities was $3,204,596. The activities were comprised of $2,729,004 from capital contributions from our shareholders, and $475,592 in repayment of loans made by related parties.

Off Balance Sheet Items

Under SEC regulations, we are required to disclose our off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 

   

Any obligation under certain guarantee contracts,

 

   

Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,

 

   

Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in stockholder’s equity in our statement of financial position, and

 

   

Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

 

46


Table of Contents

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of significant accounting policies is included in this item are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this prospectus. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

Revenue Recognition

We follow the guidance of ASC 605, “Revenue Recognition,” and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104 and SAB Topic 13 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates. Significant estimates in the years ended December 31, 2009 and 2008 include the allowance for doubtful accounts of accounts receivable, the useful life of plant and equipment, intangible assets, and biological assets.

Fair Value of Financial Instruments

We follow ASC 820, “Fair Value Measurements and Disclosures,” (SFAS 157), as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157-2, on the effective date of FASB Statement No. 157. Those provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities. ASC 820 (SFAS 157) defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when available. We did not have financial instruments during the years ended December 31, 2009 and 2008.

Comprehensive Income

We follow ASC 205, “ Presentation of Financial Statements, ” and ASC 220 (SFAS 130), “ Reporting Comprehensive Income, ” to recognize the elements of comprehensive income. Comprehensive income is comprised

 

47


Table of Contents

of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for 2009 and 2008 included net income and foreign currency translation adjustments.

Impairment of Long-lived Assets

In accordance with ASC 360-10 (SFAS 144), “ Impairment or Disposal of Long-Lived Assets ”, we periodically review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset. We did not record any impairment charges during the years ended December 31, 2009 and 2008, respectively.

Recent Accounting Pronouncements

EITF Issue No. 07-5 (ASC 815) “Determining Whether an Instrument (or embedded Feature) is Indexed to an Entity’s Own Stock” (EITF 07-5) was issued in June 2008 to clarify how to determine whether certain instruments or features were indexed to an entity’s own stock under EITF Issue No. 01-6 (ASC 815), “The Meaning of “Indexed to a Company’s Own Stock” (EITF 01-6) (ASC 815). EITF 07-5 (ASC 815), applies to any freestanding financial instrument (or embedded feature) that has all of the characteristics of a derivative as defined in FAS 133 (ASC 815), for purposes of determining whether that instrument (or embedded feature) qualifies for the first part of the paragraph 11(a) scope exception. It is also applicable to any freestanding financial instrument (e.g., gross physically settled warrants) that is potentially settled in an entity’s own stock, regardless of whether it has all of the characteristics of a derivative as defined in FAS 133 (ASC 815), for purposes of determining whether to apply EITF 00-19 (ASC 815). EITF 07-5(ASC 815) does not apply to share-based payment awards within the scope of FAS 123(R), Share-Based Payment (FAS 123(R) (ASC 718)). However, an equity-linked financial instrument issued to investors to establish a market-based measure of the fair value of employee stock options is not within the scope of FAS 123(R) (ASC 718) and therefore is subject to EITF 07-5(ASC 815).

In January 2009, the FASB issued FSP EITF 99-20-1 (ASC 325), to amend the impairment guidance in EITF Issue No. 99-20 (ASC 325) in order to achieve more consistent determination of whether an other-than-temporary impairment has occurred. This FSP amended EITF 99-20 (ASC 325) to more closely align the other-than-temporary impairment guidance therein to the guidance in Statement No. 115 (ASC 320, 10-35-31). Retrospective application to a prior interim or annual period is prohibited.

On June 5, 2003, the United States Securities and Exchange Commission (“SEC”) adopted final rules under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), as amended by SEC Release No. 33-9072 on October 13, 2009. Commencing with its annual report for the year ending December 31, 2010, the Company will be required to include a report of management on its internal control over financial reporting. The internal control report must include a statement

 

   

Of management’s responsibility for establishing and maintaining adequate internal control over its financial reporting;

 

   

Of management’s assessment of the effectiveness of its internal control over financial reporting as of year end; and

 

   

Of the framework used by management to evaluate the effectiveness of the Company’s internal control over financial reporting.

Furthermore, it is required to file the auditor’s attestation report separately on the Company’s internal control over financial reporting on whether it believes that the Company has maintained, in all material respects, effective internal control over financial reporting.

In June 2009, the FASB approved the “FASB Accounting Standards Codification” (“ASC”) as the single source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009. ASC does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded

 

48


Table of Contents

and all other accounting literature not included in the Codification will be considered non-authoritative. ASC also includes all relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections within the Codification. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issue Task Force Abstracts, but instead will issue Accounting Standard Updates (“ASUs”). ASUs will not be considered “authoritative” in their own right as they serve only to update the Codification by providing the basis for conclusions on the change(s) in the Codification. ASC is effective for interim and annual periods ending after September 15, 2009, and the principle impact on our financial statements is limited to disclosures, as all references to authoritative accounting literature will now be referenced in accordance with the ASC Codification.

In August 2009, the FASB issued the FASB Accounting Standards Update (ASU) No. 2009-04 “Accounting for Redeemable Equity Instruments - Amendment to ASC 480-10-S99,” which represents an update to ASC Section 480-10-S99, distinguishing liabilities from equity, per EITF Topic D-98, Classification and Measurement of Redeemable Securities . The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

In August 2009, the FASB issued the FASB Accounting Standards Update (ASU) No. 2009-05 “Fair Value Measurement and Disclosures (ASC Topic 820) – Measuring Liabilities at Fair Value” , which provides amendments to ASC Subtopic 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. A valuation technique that uses: a. The quoted price of the identical liability when traded as an asset b. Quoted prices for similar liabilities or similar liabilities when traded as assets. 2. Another valuation technique that is consistent with the principles of ASC 820; two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

In September 2009, the FASB issued the FASB Accounting Standards Update (ASU) No. 2009-08 “Earnings Per Share – Amendments to Section 260-10-S99,” which represents technical corrections to ASC 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock . The Company does not expect the adoption of this update to have a material impact on its consolidated financial position, results of operations or cash flows.

In September 2009, the FASB issued the FASB Accounting Standards Update (ASU) No. 2009-09 “Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees” . This update represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee . Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

In September 2009, the FASB issued the FASB Accounting Standards Update (ASU) No. 2009-12 “Fair Value Measurements and Disclosures Topic 820 – Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent)” , which provides amendments to ASC Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this update on the basis of the

 

49


Table of Contents

net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of ASC Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with ASC Topic 820. The amendments in this update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this update, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be make by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph ASC 320-10-50-1B. The disclosures are required for all investments within the scope of the amendments in this update regardless of whether the fair value of the investment is measured using the practical expedient. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

 

50


Table of Contents

O UR B USINESS

Our Company

Our company is in the business of research and development, raising, breeding and selling hogs in the People’s Republic of China. Our efforts are focused on growing healthy, hearty hogs for sale for breeding and meat purposes. We believe our location in Hubei and our investment in breeding and farming technology position us well to reach these goals.

We entered the hog breeding and production business in 2005 when we built our first hog farm. In this business, we mainly produce hogs for slaughter and sell breeding stock. We currently own and operate eight commercial farms in Wuhan. We are building a ninth farm in Wuhan, which is expected to begin operating in 2010. Our farms raise and sell hogs for both breeding and meat purposes. Our farms, in the aggregate, have an annual production capacity of approximately 110,000 hogs (approximately 130,000 hogs once we finish building our ninth farm).

We conduct genetic, breeding and nutrition research to improve our production capabilities. Our animal nutrition research consists of the research and development of premix for use in our hog farms. In coordination with a local institute, we have developed this product to improve our premix to meat conversion ratio, improve the health of our hogs and reduce our feeding costs.

We currently derive substantially all of our revenues from hog farming. While we receive a nominal amount of revenue from the sale of hog waste products, it is not a current focus of our company. We anticipate in the future, however, that we may convert some waste products into other products such as manure and fish feed for sale. Finally, we are currently investigating the establishment of a vertically integrated chain culminating in retail locations to sell our pork products so that we may further benefit from our reputation for producing high-quality, low pollution and additive pork products. While we do not have any agreements or commitments to do so, we anticipate opening a number of retail stores in Wuhan, China to feature our products. To the extent we determine to develop this retail store concept, we expect that we may need to acquire, construct or enter into agreements with slaughterhouses and pork processing plants in order to ensure that we are able to maintain the quality of our pork products from our farms to our retail stores.

Industry and Market Background

China’s Demand for Pork

China is also the world’s largest hog producing and pork consuming country. China has accounted for nearly half of both the world’s pork production and consumption for more than five years. According to the U.S. Department of Agriculture, China is again expected to be the driving force behind global pork production in 2010. Not only does China consume a significant amount of pork in the aggregate; Chinese per-capita pork consumption is among the highest in the world, as pork is China’s most popular meat. China consumes over 600 million pigs a year.

From 1990 through 2007, meat consumption in China doubled. In terms of meat consumption in China, beef accounts for approximately 9%, poultry for approximately 21% and pork for approximately 65% of total Chinese consumption, according to the National Statistics Bureau of China.

China’s 2010 projected per-capita pork consumption places it behind the European Union but ahead of the United States. China’s pork consumption has grown dramatically since 1981.

 

51


Table of Contents

Year

 

Tons of Pork Produced

 

Year

 

Tons of Pork Produced

 

Year

 

Tons of Pork Produced

1981   11,884,000   1991   24,523,000   2001   40,517,100
1982   12,718,000   1992   26,353,000   2002   41,231,000
1983   13,161,000   1993   28,544,000   2003   42,386,400
1984   14,447,000   1994   32,048,000   2004   43,410,000
1985   16,547,000   1995   36,484,000   2005   45,553,300
1986   17,960,000   1996   40,377,000   2006   46,504,500
1987   18,349,000   1997   35,963,000   2007   42,878,000
1988   20,176,000   1998   38,837,000   2008   46,205,000
1989   21,228,000   1999   40,056,000   2009   48,500,000
1990   22,811,000   2000   39,659,900   2010 (estimate)   50,300,000

While the average price for pork has steadily increased, there have been several recent developments that affected both the supply of hogs and the price of pork. In particular, in 2007, tens of millions of pigs were killed in China as a result of Blue Ear disease, which resulted in significant inflation in pork prices, particularly as it followed 2006, when pork prices dropped significantly. The following chart, derived from U.S. Department of Agriculture statistics, shows the effective price of hogs in China, assuming a nominal 1984 price of $100.

 

Year

  Price ($)   Year   Price ($)   Year   Price ($)
1984   100   1992   103   2000   85
1985   121   1993   122   2002   98
1986   126   1994   177   2003   101
1987   124   1995   179   2004   116
1988   179   1996   119   2005   110
1989   166   1997   113   2006   88
1990   103   1998   91   2007   132
1991   90   1999   71   2008   191

More recently, prices began to drop in 2009 to such a level that the central government implemented a policy designed to set a price floor for pork. This price drop occurred as a result of oversupply of hogs in 2008. In particular, the number of sows on hand reached approximately 48.6 million, well above the national macroeconomic target of 41 million. In order to curb this oversupply, on June 13, 2009, China’s Ministry of Commerce (“MOFCOM”), together with China’s Ministry of Finance and the National Development and Reform Commission (“NDRC”), started the purchase and reserve of the domestic frozen pork to set the processing enterprises and the purchase and reserve prices. This policy has resulted in the stabilization of pork prices; however, there is no guarantee that the policy will be maintained. We are unable to predict the effect on our industry if and when this policy terminates.

China’s Hog Industry

China supplies the vast majority of its pork demand from internal supplies, and imports from abroad are expected to fall by approximately 20% to 120,000 tons in 2010 (compared with Chinese production of an estimated 50 million tons in 2010). Imports have made up a negligible percentage of China’s pork supply. Indeed, most demand is met locally.

China’s hog industry is in the midst of a transition from a large number of small household farms to larger, more commercial farms. Meat hog production in the PRC is currently dominated by backyard farms (those that sell 5-10 hogs annually) and small farms (those that sell less than 100 hogs annually). Farms that sell less than 100 hogs per year comprise approximately 75% of the hog farms in China and account for approximately one-third of the hogs sold annually in China. These farms sell their products to local rural markets. Farms that sell between 100 and 500 head a year account for 21% of China’s hog farms and approximately one-third of the hogs sold annually in

 

52


Table of Contents

China. Farms that sell between 500 and 3,000 hogs represent less than 3% of China’s hog farms but account for approximately 19% of the hogs sold in China. Those that sell more than 3,000 hogs annually account for less than one-half of a percent of all hog farms but sell more than 15% of China’s hogs annually.

Our Geographic Market

Our farms are located in Wuhan, which is the capital of and largest city in Hubei.

Hubei Province

Hubei is a centrally located province with more than 60 million residents, giving it approximately the same population as Italy. Hubei houses thirteen prefecture-level cities that range in population from approximately 300,000 to over 8 million residents. Its 2008 gross domestic product (“GDP”) was approximately $163 billion dollars, slightly more than Hungary’s gross domestic product.

The main pork-producing areas in China, with 80 percent of the country’s output, consist of the Yangtze River valley, Central China, Northeast China and the Guangxi/Guangdong area. Within these regions Sichuan province, Henan province, Hubei province and Shandong province specialize in hog production.

Due to its central location, Hubei is well-known in China for the adaptability of its breeder hogs. Breeder hogs from the southern part of China tend not to tolerate the cold weather in northern China; similarly, breeder hogs from the northern part of China tend not to tolerate the heat of southern China. We have found that breeder hogs raised in Hubei tend to adapt well to variations in both the north and south of China.

Wuhan City

Wuhan is the capital and largest city in Hubei. More than 9.7 million people live in Wuhan’s 13 districts, including more than 6.6 million in the urban center. Wuhan is one of China’s ten largest cities, and it is considered an important center for economy, trade, finance, transportation, information technology, and education in Central China. In 2008, the United States opened a Consulate General in Wuhan, its first new diplomatic post in China in more than 20 years, in recognition of the increasing economic, educational, political, cultural, and commercial importance of Central China.

The world’s third largest river, the Yangtze, meets with the Hanshui River in Wuhan, providing a strategic location for the city. The geographical location has also contributed to the city’s role as the industrial, financial and commercial centre of inland China. Wuhan is located less than 800 miles from Shanghai, Beijing, Guangzhou, Tianjin, Chongqing and Xi’an, some of China’s largest cities. In addition, Wuhan is within 400 miles of several secondary cities such as Changsha (capital of Hunan province), Zhengzhou (capital of Henan province), Nanchang (capital of Jiangxi province), Luoyang and Jiujiang.

Wuhan’s GDP accounts for more than one-third of the total in Hubei. Compared nationally, both Hubei and Wuhan’s GDP growth rates have been higher than the national average. Wuhan’s per-capita disposable income rate has grown at an average rate of more than 10% per year from 1997 through 2008.

Wuhan’s government was one of the first local governments to provide economic incentives to hog farms that reached certain production levels. Farms located within Wuhan prefecture that reach an annual production capacity of 10,000 hogs are eligible for a one-time grant of RMB 1.5 million (approximately $219,388). When a farm reaches 20,000 hog capacity, it is eligible for a grant of RMB 3 million (approximately $438,776), including any previous grant it received when its capacity reached 10,000 hogs. These policies have resulted in the mergers and acquisitions of local farms and the construction of new, higher capacity farms in Wuhan.

Our Hogs

We raise a variety of hogs at our farms. The primary purebred varieties we raise are the Yorkshire, Landrace and Duroc. We raise both purebred and cross-bred hogs.

The Yorkshire originated in England in the late 1700s from crossing hogs from Canton, China with pigs from Yorkshire, England. Yorkshires are large-framed and late-maturing. While they tend to have poor ham development, they are valued for their ruggedness and ability to withstand a wide variety of climates. Yorkshire

 

53


Table of Contents

sows are noted for their reproductive capacity, leading to frequent use of Yorkshires as the maternal line in crossbreeding or hybrid programs. Yorkshire hogs are commonly crossed with Landrace hogs. Durocs are often used as the terminal sire in crossbreeding. Yorkshires are known for their rapid growth and high rate of lean meat. These factors result in more meat per hog and lower levels of fat, meeting current consumer preferences.

The Landrace was developed in Denmark by breeding native Danish hogs with Yorkshires. Landraces were not exported from Denmark until World War II. Landraces are noted for their early, rapid growth. Their weight at weaning tends to be higher than that of other hog breeds. Landraces are less prolific breeders than Yorkshires but are noted for their ability to farrow and raise large litters. Landraces are known for their bacon, ham and loin production and high rate of lean meat.

The Duroc originated in the United States in the 1800s. Durocs are large-framed, late-maturing hogs. While purebred Durocs produce relatively small litters and while Duroc sows are not favored for crosses, Duroc boars are well-regarded for cross-breeding purposes. In particular, crosses between Duroc boars and Landrace/Yorkshire cross sows are considered very suitable for bacon production. Durocs are recognized as superior genetic sources for improving eating qualities of pork. Due to their muscle quality advantages and their fast growth rate, Durocs are considered an outstanding terminal sire choice to produce meat hogs.

Meat Hogs and Breeder Hogs

We sell approximately 35% of our hogs as breeder hogs and approximately 65% of our hogs as meat hogs. Generally speaking, we prefer to sell hogs as breeder hogs when possible, since we are able to achieve a higher profit margin for sales of breeder hogs than we are able to achieve for sales of meat hogs. Breeder hogs are sold when they are younger and have consumed fewer of resources. Additionally, because they sell for a higher price per pound than meat hogs, we recognize approximately 60% of our profit from the sales of breeder hogs and approximately 40% of our profits from the sales of meat hogs.

Our breeder hogs consist of purebreds (Yorkshire and Landrace) and certain crossbreeds (Yorkshire/Landrace, Yorkshire/Landrace/Duroc that display favorable genetic breeding traits. We raise these breeder hogs both for use in our farms and for sale throughout China to other farms for use in their own reproduction programs. Our breeder sows are used to gestate and produce piglets for future sale for both breeder and meat hog purposes.

Our meat hogs consist of those hogs that do not meet breeder hog standards. As noted above, certain hog combinations are not valued for breeding purposes. For example, Duroc sows are not generally considered for breeder hog purposes, other than for use in breeding purebred Durocs. In addition, some of the hogs we would prefer to sell as breeder hogs are not selected by purchasers for that purpose. In either of these cases, we continue to raise the hogs for sale as meat hogs.

Our Breeding Efforts

A key element of breeding hogs is ensuring that a hog farm’s resources are devoted to using as breeding sows those sows most likely to give birth frequently to large healthy litters that display the attributes that our customers prefer. As a result, we devote efforts to genetically cataloguing our sows, so that we can identify our purebred and first-cross hogs so that we can maintain our purebred nucleus herd for fidelity to breed standards and develop the most favorable parent line sows for commercial market hog production. We earnotch and tag piglets shortly after birth so that we can easily identify them at weaning, when they are no longer kept with their mothers.

Once we have properly identified hogs, we are able to screen potential breeders for favorable qualities. Our trained employees mark obvious culls before an ultrasound scanning technician measures and records loin eye area and backfat depth. We also review such features as feet and leg soundness, skeletal structure, speed of growth, number of live births per sow, litter birth weight, number of piglets weaned and weaning weight. Our farrowing house manager is authorized to cull any hog with a temperament he believes is not suited to breeding.

We rely on a combination of performance data and visual appraisals of our breeder hogs for selection purposes. The performance data approach involves looking at key performance traits, from growth rates and backfat

 

54


Table of Contents

depth to pounds of lean carcass yield and milking ability, to calculate terminal sire, sow productivity and maternal line indices. We index our purebred sows monthly and select the top 20% to maintain our nucleus herd. Having established our baseline herd level, we then experiment with combinations of boars and sows to continue to improve the characteristics of our hogs. The visual approach recognizes that some hogs may have been bred ideally and still not be appropriate candidates for breeding due to physical problems. We visually evaluate the integrity of the key systems for breeder sows: reproductive systems, mammary systems and skeletal systems (in particular food and leg integrity). When sows display issues with these systems, we exclude them from our breeding pool.

This information about hog characteristics is used in combination with actual sire, dam and birth records to calculate a maternal index and rank the candidate gilts from best to worst. The number of gilts retained for breeding depends on the need for replacements. Normally, at least the bottom 20% of potential breeding sows are culled during this process.

In addition to selecting the most favorable breeding stock, we also consider replacing hogs that display the following characteristics:

 

  1. On average, each quality sow can give birth for 3 to 4 years, and can give birth 6 to 8.5 times during her life. Where a sow has given birth for more than 3 years, and typically gives birth to no more than 5 piglets each time, we consider replacing them.

 

  2. Where a sow displays continuous false pregnancy 3 times, we consider replacing them with more productive ones. Sows that display false pregnancies appear to be pregnant for 1 to 2 months although they are not actually pregnant.

 

  3. Approximately 10 days after weaning a litter of piglets, sows go into heat. This fertile period will last for 20 days (day 10 to day 30 after weaning). We consider replacing breeding sows that repeatedly fail to get pregnant during such fertile periods with more productive ones.

 

  4. We replace hogs with disease-related problems.

Our Premix

We believe one of the most challenging issues in the hog production industry is the growing variety and variability of swine diseases. Many hog farms manage these diseases through the use of antibiotic drugs. In addition to administering these antibiotics directly, many commercial hog farms in China also use antibiotics in premix feed, without regard to whether particular hogs require treatment. Heavy use of these drugs in China has resulted in pork with drug residues and excess levels of heavy metals.

We have sought to avoid the use of what we view as excessive amounts of antibiotics in our hogs. After years of research and development in cooperation with our consultant, Professor Ming Li of China Central Teachers University, we have developed our own premix, which we use instead of commercially available biofeed premixes. Our premix contains no antibiotics, and, according to testing by Hubei Province Import & Export Commodity Inspection and Quarantine Bureau, our pork products test negative for drug residues and fall within industry standards for heavy metals.

By developing our own premix, we have greatly reduced our feed costs. Without using our premix, we would expect our feed costs to mirror those typically found in our market. In Wuhan, feed costs currently account for approximately 61% and 27% of the total cost of meat and breeding hogs, respectively. For meat hogs sold at around 240 pounds, the current selling price is around RMB 1,300, and the feed expense is around RMB 800. For breeder hogs, the feed cost is lower both because they are typically sold at a younger age when they have consumed less feed. Breeder hogs are typically sold when they weigh approximately 120 pounds. The current selling price is also around RMB 1,300; however, the feed expense is only RMB 350.

Our premix adds live microbes to swine feed, resulting in better absorption of the feed and a generally healthier intestinal system in our hogs than they would have without the application of these beneficial bacteria. Greater absorption of feed results in lower waste and a reduction of between 10%-12% in feed costs. In addition, because we use these bacteria to improve our hogs’ health, we have seen savings on drug costs of approximately RMB 10 per hog before sale. Accordingly, we have seen the following savings in our hogs as a result of our premix.

 

55


Table of Contents
     Industry Typical
Feed Cost per Hog
Prior to Sale
   Premix Savings – Cost of
Feed Required Prior to
Sale
   Premix
Savings –
Drug Costs
   Premix Savings – Total    Our Typical Feed Cost
per Hog Prior to Sale

Meat Hogs

   RMB 800    RMB 80 – 96    RMB 10    RMB 90 – 106    RMB 694 – 710

Breeder Hogs

   RMB 350    RMB 35 – 42    RMB 10    RMB 45 – 52    RMB 298 – 305

Our Hog Farms

Each of our hog farms is designed to raise hogs from breeding through preparation for sale as breeder or meat hogs. While there are differences among our farms, they follow the same basic organizational model, with separate buildings dedicated to sow operations, nursery operations and finishing operations. In addition to these specific functional buildings, our hog farms also feature a limited amount of housing for farmers for the benefit of our operations.

Sow Operations

 

   

Our sow barns house our breeding, gestation and farrowing operations. These barns are linked to a computer network for continuous monitoring of building security and environment and support our employee administrative functions.

 

   

Our breeding barns exclusively use artificial insemination.

 

   

Pregnancy is checked with ultrasound technology.

 

   

Once pregnancy is confirmed, pregnant sows are moved to gestation barns where they are put on special diets for the 114-day gestation period.

 

   

After gestation, sows are then moved to our farrowing barns where they give birth to between 10 and 12 piglets. Sows nurse the piglets for about 3 to 4 weeks and are then returned to the breeding barns.

 

   

Approximately 7 days after weaning, sows are ready to begin another breeding cycle.

 

   

Our sows typically yield 17 weaned pigs per sow per year, meaning that between 550 and 600 sows give birth to approximately 10,000 pigs per year. Approximately 30 boars are required for the same number of births.

Nursery Operations

 

   

The 12-pound piglets are moved to nursery barns where they stay for seven weeks until they weigh approximately 45 pounds. From the nurseries, feeder pigs are transported to a growth and finishing farm.

Finishing Operations

 

   

Our growth and finishing units normally consist of 10 buildings.

 

   

A complex farm manager at each site is responsible for monitoring animal care, animal health and equipment.

 

   

Specialized crews trained in moving hogs assist with the loading, unloading, health care and sanitation for each unit.

 

   

In the finishing barn, our pigs gain 1.25-1.5 pounds a day for approximately 20 weeks until they reach a finished weight of approximately 240 pounds for meat hogs. Hogs selected to be breeder hogs are typically sold during this stage but before they reach the finished meat hog weight. The typical weight for our breeder hogs is approximately 120 pounds.

 

   

Purchasers come to our hog farms to purchase breeder and meat hogs. The ultimate purchasers of our breeder hogs consist of other hog farms, while the ultimate purchasers of our meat hogs consist largely of slaughterhouses. We sell the majority of our hogs, however, to brokers that work with these ultimate purchasers to procure hogs that meet the needs of the ultimate purchasers.

 

   

Purchasers are responsible for transporting hogs from our farms. We do not deliver hogs to our customers, and we consider the sale complete when the customer pays and loads a hog for transportation. In this way, we have been able to reduce the transportation costs and risks to our company that are associated with delivering hogs.

 

56


Table of Contents

Farmer Housing

 

   

For the benefit of our farming operations, we have provided on-location housing for some of our farmers. As a condition of working for our company, we require our breeder farm employees to live in facilities owned and maintained by our company.

 

   

While our hog farms are located in Wuhan prefecture-level city, Wuhan is quite large compared with the definition of a typical U.S. city and encompasses areas that would be considered countryside in the United States.

 

   

Many of our farmers live in the countryside or villages, where family backyard hog farms predominate.

 

   

Based on recent swine pandemics, we believe that there is a risk of cross-contamination among such smaller hog farms and have made efforts to reduce the likelihood of contamination from such smaller farms to our hog farms.

 

   

We have built on-location housing to reduce the contact between our farmers and such smaller farms and potential swine disease pathogens.

 

   

This arrangement has allowed us to decrease the likelihood of cross-contamination between the countryside and villages where such farmers would be likely to live in the absence of our housing and our farms. This arrangement also results in our farmers being on-site to attend to our hogs’ needs.

 

   

When such employees stop working for our company, they are required to leave the housing we provide.

Our Opportunity and Competitive Strengths

We believe our experience in operating commercial hog farms in Wuhan provides us an opportunity to compete as China continues to concentrate hog farming in larger commercial operations. We currently operate eight full-service hog farms that raise 10,000 or 20,000 hogs each, and we are building a ninth farm that will raise 20,000 hogs. We have received a variety of government incentives and recognitions for our operations to date and believe our understanding of the hog industry in Wuhan positions us well to continue to compete in our market.

We believe the following strengths differentiate us from our competitors in our market in China:

 

   

We are one of the largest commercial hog farming companies in Wuhan and Hubei. Due to the subsidies that are available for commercial hog farms that meet certain capacity targets, we are able to track the number of large commercial farms in Wuhan city and Hubei province. Wuhan has 68 farms with an annual production of at least 10,000 hogs and 21 farms (not including the 68 previously mentioned farms) with an annual production of at least 20,000 hogs. Hubei as a whole (including the previously mentioned farms) has 435 hog farms with annual production of 10,000 or more hogs. As noted, we are currently able to raise approximately 110,000 hogs annually among our eight active hog farms and will be able to raise approximately 130,000 hogs after completion of our ninth farm. One of our competitors in Wuhan, Tianzhong Company, received subsidies for reaching an annual production of 140,000 hogs. Our next largest competitors in Wuhan have annual capacities of 30,000 hogs or less.

 

57


Table of Contents
   

We have invested heavily in technology designed to improve the health and quality of our hogs. We have developed our farms to minimize the stress on our hogs, reducing the amount of travel among our various barns. We have been involved with the Wuhan Science and Technology Bureau’s industrialization project in Wuhan titled “Efficient, Safe and Green Research and Promotion of Hog Production,” which was aimed at improving the hog farming industry’s performance, from both outcomes-based and sustainability perspectives. We also completed a research project in Wuhan titled “Microcomputer Temperature Control Technology,” which focused on the use of computers to improve temperature control in hog farming to improve the comfort and productivity of our hogs. We have applied this technology in our farrowing and nursery barns, leading to an increase of 6-8% in our piglet rearing and reducing time to slaughter for our hogs of approximately 8 days. This time reduction, in turn, reduces our expenditures per hog by approximately RMB 25 per hog. In conjunction with COFCO and Huazhong Agricultural University, we completed a demonstration project in Wuhan titled “Key to Technology Integration and Industrialization of Quality Healthy Pork Production.” In Wuhan, we filed a report titled “Research and Promotion of Use of Microbial Agents on Large-Scale Pig Farm Effluent-Free Treatment and Utilization” with the Wuhan Municipal Science and Technology Agency.

 

   

We have developed a premix in cooperation with a local research institute that we have used to improve our hogs’ health while decreasing our costs in raising our hogs and keeping them healthy. After years of research and development in cooperation with our consultant, Professor Ming Li of China Central Teachers University, we have developed our own bio-premix, which we use instead of commercially available premix. By developing our own premix, we have greatly reduced our feed costs.

 

   

We benefit from economies of scale as a result of operating multiple similarly-sized commercial farms. Because we operate eight hog farms, we are able to purchase our supplies in bulk for all of our farms and receive discounts compared to the price eight separate hog farms would need to pay for similar supplies. We are also able to use our office headquarters, research efforts, and other relatively fixed-cost items to benefit multiple locations, effectively decreasing the cost per hog farm. Similarly, we can sell hogs from multiple farms to meet large orders if necessary.

 

   

Our farms are separated from each other, reducing the likelihood of spreading an epidemic among our hogs at different farms. We have implemented a variety of measures to reduce the likelihood of spreading diseases among our farms. We believe that a significant factor in the spread of swine diseases has been movement of pathogens between farms. Accordingly, we have taken steps to reduce cross-contamination by owning farms that are geographically distinct, ensuring that we do not concentrate too many hogs in a single location, housing many of our hog farmers on-site, not permitting our employees to visit more than one farm in a single day, and requiring the use of sterile, disposable clothing by individuals visiting our farms.

 

58


Table of Contents
   

We have attained several awards in recognition of our efforts to improve our hogs’ living conditions, reduce reliance on chemical feed additives and decrease pollution. We have been recognized with awards and certificates by a variety of government entities for our efforts in hog farming.

In 2006, we became a council member of “China Animal Husbandry and Veterinary Institute.”

In 2007, we received a “Certificate of Pollution-free Agricultural Product” from Hubei for our hog farm in recognition of our environmental friendliness. In order to receive this certificate, we were required to file detailed applications with Hubei’s Animal Husbandry and Veterinary Bureau and Agricultural Product Quality Safety Center. This certificate is only available for hog farms with annual capacity of at least 10,000 hogs. The process for approval is stringent and time-consuming and must be completed every three years. We are certified until 2013.

In 2008, Wuhan awarded us with the designation of “Wuhan City’s Most Important Leading Enterprise”, a certificate that is awarded to approximately 10% of Wuhan’s business enterprises in any year. Qualification for this certification requires a company to demonstrate sales of at least RMB 20 million and efforts to help improve the local economy through job creation.

In 2007, the Wuhan Science and Technology Bureau awarded our technology with a “Certificate of Scientific and Technological Achievement”, which also included a bonus of RMB 250,000.

In 2009, we were credentialed by the Wuhan Science and Technology Bureau as a “Key Project Implementation Unit.” This credential was granted in recognition of our assistance with a project titled “Technology Promotion of an Efficient, Safe Eco-technology in the Hog Industry.” This credential positions us for future cooperation with Wuhan’s local government in ways that may be beneficial to our company.

 

   

We are dedicated to continuing to research ways to improve our operations, from nutrition to breeding and other farming methods. Our company has invested heavily in technology designed to improve operations in the past and plans to continue to dedicate resources to doing so in the future. Several of the certifications we have received are in recognition of our past efforts in this regard and in anticipation of our continued efforts in the future.

Our Strategies

We plan to grow our position as Wuhan’s largest hog farming company. We intend to achieve this goal by implementing the following strategies:

 

   

We plan to increase hog production capacity by upgrading our genetic breeding base. We plan to use a portion of the proceeds from this offering to purchase and import purebred hogs to improve the genetic diversity of our breeding pool. We expect that doing so may allow us to selectively breed the most successful specimens to improve our breeding base.

 

   

We may acquire and/or construct new purebred and crossbred hog farms. We plan to increase our capacity by approximately 40,000 hogs with the proceeds of this offering. We expect that we may accomplish this growth by a combination of constructing new farms and acquiring existing farms; however, we do not have in place any agreements or understandings regarding any acquisitions of farms at present.

 

   

We intend to develop our sow replacement program to continually replace less-productive sows with more productive ones. Our sow replacement program requires a significant amount of effort to identify, track and measure attributes for our hogs. We have found that the more data we are able to incorporate into this program, the better our results of implementing our sow replacement strategies have been.

 

59


Table of Contents
   

We will leverage our research capabilities to breed superior breeding hogs that can be supplied to our farms and sold to other breeder farms. We obtain a significant amount of data about our hogs as a result of our performance data analysis. We use this information to leverage ideal breeding opportunities. We believe that the better our data is, the more useful it will be to our breeding operations. For this reason, we constantly seek opportunities to improve the quality of our research.

 

   

We intend to develop revenue opportunities for our farms’ waste products. As our hog capacity grows, the waste products from our farms also increase. We are currently investigating opportunities to sell this raw waste or to process the waste into other products for sale. Hog manure is used in several inventive ways, and we expect that more uses may be developed in the future. Biogas slurry and biogas residue can be used to produce organic fertilizer for farming purposes. The methane in hog manure can be used to generate electricity. In addition, by adding bacteria to manure and allowing the manure to ferment, hog manure can be sold to fish farms as fish feed and as fish fertilizer.

 

   

We will seek to continue strengthening our brand image in order to position our company to command a premium for meat products if and when we open retail operations. We have registered our trademark “Hanxi” for our swine products. As a result of the recognition we have received for our products in Wuhan, we believe this trademark is valuable and may be associated with a premium price for our products if and when we open retail operations.

 

   

We will investigate expansion into retail chains, slaughterhouses and meat processing plants. In connection with continuing to promote our brand, we are investigating the expansion of our brand into retail shops where pork from our hogs may be sold to the public. We are investigating whether we can sell our products at a premium to prevailing market prices in Wuhan by gaining control over more of the production chain, from slaughterhouses and processing plants through to retail stores. By gaining such control, we would seek to associate our products with our brand in an effort to sell the end pork products at a premium.

Principal Suppliers

We use the following principal suppliers for our operations. Our supplies consist primarily of raw materials for hog feed. We believe the materials provided by our suppliers are widely available and do not anticipate that we will be unable to obtain these materials from other suppliers in the event our principal suppliers are unable or unwilling to supply us.

 

Item

  

Supplier

Feed supplies (corn, beans, bran and other commodities)    Wuhan Zhu Brothers Feed Technology Co Ltd.
Veterinary Medicine Supplies    Wuhan Wuchang District Rixin Animal Protection Veterinary Medicine Co

Purchases from Wuhan Zhu Brothers Feed Technology Co Ltd. accounted for approximately 79.71% and 84.87% of our cost of goods sold in 2009 and 2008, respectively. We purchase these feed products pursuant to a standard sales contract that provides for delivery to our warehouses at each farm, requires payment within 10 days and objections to quality within 7 days and sets late delivery and payment fees each at 1% of the contract amount per day of delay. We are not subject to any long-term agreement. Purchases from Wuhan Wuchang District Rixin Animal Protection Veterinary Medicine Co accounted for approximately 1.66% and 2.37% of our cost of goods sold in 2009 and 2008, respectively.

Research and Development

We focus our research and development efforts on improving our development efficiency and the quality of our products and services. As of March 16, 2010, our research and development team consisted of 4 experienced researchers, engineers, developers and programmers. In addition, some of our support employees regularly participate in our research and development programs.

In the fiscal years ended December 31, 2009 and 2008, we spent $53,732.44 and $42,305.56, respectively, on research and development activities. The cost of such research and development activities is not borne directly by customers; instead, such amounts are an element of the cost of goods sold.

 

60


Table of Contents

Sales and Marketing

For the fiscal years ended December 31, 2009 and 2008, we spent $0 and $0, respectively, on advertising expenses and we spent $6,315.79 and $0, respectively, on marketing costs. In 2009 and 2008, we have not spent significant amounts on marketing or advertising because we have been able to sell substantially all of the hogs we have been able produce without further marketing or advertising efforts. To the extent we are able to grow our hog capacity or otherwise find ourselves unable to sell substantially all of the hogs we produce, we may in the future need to rely on advertising and marketing efforts to grow our business. Additionally, if we expand into the retail market, we expect that we will rely more heavily on marketing and advertising.

Competition

We believe our annual capacity of approximately 110,000 hogs makes us one of Wuhan’s largest hog farming companies. While some farms located outside Wuhan do sell their hogs in Wuhan, the vast majority of hogs sold in Wuhan are raised in Wuhan. As a result, we believe that our most significant competition consists of other farms located in Wuhan. We compete against these farms on the basis of quality and reputation. Our operations have been recognized by city and provincial authorities for our treatment of hogs, certification of pollution-free agricultural products, and promotion of efficient, safe eco-technology in the hog farming industry.

Due to the subsidies that are available for commercial hog farms that meet certain capacity targets, we are able to track the number of large commercial farms in Wuhan city and Hubei province. Wuhan has 68 farms with an annual production of at least 10,000 hogs and 21 farms (not including the 68 previously mentioned farms) with an annual production of at least 20,000 hogs. Hubei as a whole (including the previously mentioned farms) has 435 hog farms with annual production of 10,000 or more hogs. As noted, we are currently able to raise approximately 110,000 hogs annually among our eight active hog farms and will be able to raise approximately 130,000 hogs after completion of our ninth farm. One of our competitors in Wuhan, Tianzhong Company, received subsidies for reaching an annual production of 140,000 hogs. Our next largest competitors in Wuhan have annual capacities of 30,000 hogs or less.

The breeder hog industry in China is marked by a high level of loyalty between meat farms and breeder farms, which results in breeder farms frequently purchasing their stock for each farm from a limited number of breeder farms. This loyalty derives from a desire to avoid spreading illnesses among hogs. Once a meat farm begins to purchase breeder hogs from a source, it will ordinarily continue to purchase from that source. Consequently, a significant portion of our competition within this market focuses on establishing the initial relationship with our hog farm customers. In doing so, we highlight the awards and other recognition we have received in Wuhan for our operations and the efforts we have placed in research and development and maintenance of hygienic facilities.

Customers

Our 5 largest customers collectively represented approximately 49.35% and 48.36% of the Company’s sales for the years ended December 31, 2009 and December 31, 2008, respectively.

In each of 2008 and 2009, the same three customers accounted for more than 10% of our revenues and thus constitute major customers.

 

Purchaser Name

   Percentage of
Revenues in Year ended
December 31, 2008
    Percentage of
Revenues in Year ended
December 31, 2009
 

Wuhan Mingxiang Meat Factory Co., Ltd.

   12.15   11.98

Sanlian Wu (Purchasing Agent)

   11.37   11.89

Zhenshun Tian (Purchasing Agent)

   11.03   11.45

Wuhan Mingxiang Meat Factory Co., Ltd. is a slaughterhouse with an annual processing capacity of 300,000 hogs. Our meat hogs are sold to this company for processing before finally reaching end customers. We do not have any written or oral agreement with Wuhan Mingxiang Meat Factory Co., Ltd. Instead, they choose to purchase from our company as they require hogs for their operations, and they pay the prevailing rates for hogs at the time of such purchases. Accordingly, they could determine to stop purchasing from our company at any time without penalty, and we could choose to stop selling to Wuhan Mingxiang Meat Factory Co., Ltd. without penalty to our company at any time.

 

61


Table of Contents

Mr. Wu and Mr. Tian are purchasing agents for our breeder pigs. They serve hundreds hog farms throughout China. They buy breeder pigs from us for resale to their commercial farm clients. Once a pig farm purchases breeder pigs from a particular source, it is uncommon for the pig farm to change its source, for fear of spreading disease. We do not have any written or oral agreement with Mr. Wu or Mr. Tian. Instead, they choose to purchase from our company as they are able to resell hogs to their customers, and they pay the prevailing rates for hogs at the time of such purchases. Accordingly, they could determine to stop purchasing from our company at any time without penalty, and we could choose to stop selling to Mr. Wu or Mr. Tian without penalty to our company at any time. Mr. Wu and Mr. Tian purchase hogs from a number of other pig farms in China, and we do not have any exclusive arrangement with them.

Wuhan Mingxiang Meat Factory Co., Ltd., Mr. Wu and Mr. Tian are considered major customers, on whom we are dependent. Notwithstanding the foregoing, we do not offer any material discounts on purchase price to these customers, as we are currently able to sell substantially all of hogs we produce.

Employees

As of March 16, 2010, we had approximately 230 employees, of whom 181 were full-time employees. All of our employees are based in China. Of the total, 30 were in management, 6 were in technical support, 4 were in research and development, 2 were engaged in sales and marketing, 9 were in financial affairs and administration, and 179 were in farming. We believe that our relations with our employees are good. We have never had a work stoppage, and our employees are not subject to a collective bargaining agreement.

 

62


Table of Contents

D ESCRIPTION OF P ROPERTY

We currently operate eight hog farms in five regions of Wuhan. We also maintain a separate headquarters office in Wuhan. We have two farms that are less than 9 acres each, and we are building a farm that will be almost 80 acres. Our largest hog farm currently operating is more than 40 acres and has an annual capacity of 20,000 hogs.

Our farms are generally located on lands that we lease from farming associations. Under Chinese law, the traditional farmers, represented by farming authorities, are deemed to own the land and are able to lease this land to us to develop for agricultural purposes. Our commercial leases are held for periods of between 20 and 50 years, depending on the local farming authority.

At the conclusion of the current leases, we will have the ability to renew the leases on substantially the same terms.

 

Property

 

Address

 

Rental Term

 

Space

Wuhan

(headquarters)

  Suite F, 23rd Floor Building B, Jiangjing Mansion 228 Yanjiang Ave Jiangan District, Wuhan City, Hubei Province, China 430010   Company Owned   2,800 square feet

Farm 1-Nanyan

(annual capacity 10,000 hogs)

  Nanyan Village, Wangjiahe Town, Huangpi District, Wuhan, Hubei  

25 years

(January 1, 2007 -

December 30, 2032)

  14.17 acres

Farm 2-Tianjian

(annual capacity 10,000 hogs)

  Qunyi Village, Wangjiahe Town, Huangpi District, Wuhan, Hubei  

30 years

(January 1, 2009 –

January 31, 2039)

  15.82 acres

Farm 3-Mingxiang

(annual capacity 10,000 hogs)

  Rongzhai Village, Liji Town, Huangpi District, Wuhan, Hubei  

30 years

(December 30, 2006 –

December 30, 2036)

  8.24 acres

Farm 4-Qingsonggang

(annual capacity 20,000 hogs)

  Rongzhai Village, Liji Town, Huangpi District, Wuhan, Hubei  

Company Owned

  9.88 acres

Farm 5-Huajian A

(annual capacity 10,000 hogs)

  Sanxingyuan Village, Hanchuan City, Hubei  

20 years

(January 1, 2007 -

December 30, 2026)

  11.53 acres

Farm 6-Huajian B

(annual capacity 10,000 hogs)

  Sanxingyuan Village, Hanchuan City, Hubei  

20 years

(January 1, 2007 -

December 30, 2026)

  13.18 acres

Farm 7-Jinmu

(annual capacity 20,000 hogs)

  Qianjin Village, Yuxian Town, Caidian District, Wuhan, Hubei  

50 years

(January 18, 2009 -

January 31, 2059)

  13.18 acres

Farm 8-Fengze

(annual capacity 20,000 hogs)

  Qigang Village, Huangpi District, Wuhan  

30 years

(May 30, 2005 -

May 29, 2035)

  40.46 acres

Farm 9-Zhulin

(not yet open)

  Zhulin Village, Yaoji Town, Huangpi District, Wuhan, Hubei  

50 years

(February 1, 2008 -

January 31, 2058)

  79.07 acres

 

63


Table of Contents

R EGULATION

Restriction on Foreign Ownership

The principal regulation governing foreign ownership of agricultural businesses in the PRC is the Foreign Investment Industrial Guidance Catalogue, effective as of December 11, 2007 (the “Catalogue”). The Catalogue classifies the various industries into four categories: encouraged, permitted, restricted and prohibited. As confirmed by the government authorities, Fengze is engaged in an encouraged industry. Such a designation offers businesses distinct advantages. For example, businesses engaged in encouraged industries:

 

   

are not subject to restrictions on foreign investment, and, as such, foreign can own a majority in Sino-foreign joint ventures or establish wholly-owned foreign enterprises in the PRC;

 

   

provided such company has total investment of less than $100 million, the company is subject to regional (not central) government examination and approval which are generally more efficient and less time-consuming; and

 

   

may import certain equipment while enjoying a tariff and import-stage value-added tax exemption.

The National Development and Reform Commission and the Ministry of Commerce periodically jointly revise the Foreign Investment Industrial Guidance Catalogue. As such, there is a possibility that our company’s business may fall outside the scope of the definition of an encouraged industry in the future. Should this occur, we would no longer benefit from such designation.

Regulation of Foreign Currency Exchange and Dividend Distribution

Foreign Currency Exchange.   The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (1996), as amended, and the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996). Under these regulations, Renminbi are freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for most capital account items, such as direct investment, loan, repatriation of investment and investment in securities outside China, unless the prior approval of SAFE or its local counterparts is obtained. In addition, any loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total investment and registered capital must be approved by the PRC Ministry of Commerce or its local counterpart. We may not be able to obtain these government approvals or registrations on a timely basis, if at all, which could result in a delay in the process of making these loans.

The dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.

Dividend Distribution. The principal regulations governing the distribution of dividends by foreign holding companies include the Foreign Investment Enterprise Law (1986), as amended, and the Administrative Rules under the Foreign Investment Enterprise Law (2001).

Under these regulations, foreign investment enterprises in China may pay dividends only out of their retained profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.

 

64


Table of Contents

Notice 75.  On October 21, 2005, SAFE issued Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore company.

Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the PRC in the past are required to complete the relevant registration procedures with the local SAFE branch. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.

PRC residents who control our company are required to register with SAFE in connection with their investments in us. Such individuals began this registration process on March 8, 2010. If we use our equity interest to purchase the assets or equity interest of a PRC company owned by PRC residents in the future, such PRC residents will be subject to the registration procedures described in Notice 75.

New M&A Regulations and Overseas Listings

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. This New M&A Rule, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.

On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process. The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.

Our PRC counsel, Kai Tong Law Firm, has advised us that, based on their understanding of the current PRC laws and regulations:

 

   

We currently control our Chinese affiliate, Fengze, by virtue of WFOE’s VIE agreements with Fengze but not through equity interest acquisition nor asset acquisition which are stipulated in the New M&A Rule; and

 

   

In spite of the above, CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this new procedure.

Intellectual Property Rights

Trademark

The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory to all of the world’s major intellectual property conventions, including:

 

   

Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);

 

65


Table of Contents
   

Paris Convention for the Protection of Industrial Property (March 19, 1985);

 

   

Patent Cooperation Treaty (January 1, 1994); and

 

   

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).

The PRC Trademark Law, adopted in 1982 and revised in 2001, with its implementation rules adopted in 2002, protects registered trademarks. The Trademark Office of the State Administration of Industry and Commerce (“SAIC”), handles trademark registrations and grants trademark registrations for a term of ten years.

Fengze has used “Hanxi” for years on its well-known swine products. In 2009, Fengze applied for and registered “Hanxi” as a trademark with China’s SAIC Trademark Office, in Class No. 31, which relates to live animals, live poultry, live fish, trees, cereals, plants, fresh fruits, fresh vegetables, fodder and crustaceans. The registration is valid from April 21, 2009 to April 20, 2019. As a registered trademark “Hanxi” is exclusively owned by Fengze for products within the range limited by Class No. 31; any identical or similar trademark may not be used on commodities involved in Class No. 31. Fengze does not currently own any trademark on “Hanxi” outside of Class No. 31. In the event of trademark infringement, the SAIC has the authority to fine the infringer and to confiscate or destroy the infringing products. In addition to actions taken by SAIC, Fengze would be entitled to sue an infringer for compensation.

Business Secrets

We have not applied for any patent protection for our premix; however, we rely on Chinese business secret laws to protect our interest in this premix.

Article 10 of China’s Anti-Unfair Competition Law defines business secrets as “technical information and operational information which is not known to the public, which is capable of bringing economic benefits to the owners of the rights, which has practical applicability and which the owners of the rights have taken measures to keep secret.”

Our premix was developed in conjunction with Professor Ming Li of China Central Teachers University. In return for providing financial and other support to Professor Li’s research, Professor Li assigned the rights to the results of his research and development (specifically, the premix) to Fengze. In connection with this assignment, Professor Li has agreed to protect the secrecy of our premix formula and to indemnify us against any damages caused if he discloses that information to third parties.

In addition to the terms under which we obtained rights to the premix, we have taken a number of measures to maintain the premix as a business secret under Chinese law:

 

   

We have established corporate policies regarding its business secret documents and have assigned security levels to various documents that establish, among other things, which employees have access to particular documents. We have assigned the documents and archives related to the premix to our highest business secret priority level. All materials related to the premix business secrets are maintained in our corporate headquarters.

 

   

We restrict staff who are allowed access to information about our premix to a need-to-know basis. All staff who have access to information about our premix are required to sign confidentiality and non-competition agreements to protect our interest in the premix and to prevent them from using information about the premix to benefit our competitors.

 

   

We conduct background checks on all staff who will have access to confidential information before providing any such access.

 

   

We review all information to be disseminated publicly to ensure that we do not disclose our business secrets.

Notwithstanding these measures, if we are required to sue to protect our rights in the premix, the ultimate determination of whether the premix constitutes a business secret protected under Chinese law will be made on the facts of the case itself. We cannot guarantee that we will be found to have a business secret or that any court will protect our rights in the premix formula.

 

66


Table of Contents

Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries

An offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change of Registered Capital of Foreign-Invested Enterprises.

Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC and SAFE.

Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purpose, which is subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.

Under these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to the governmental approval.

M ANAGEMENT

Executive Officers and Directors

The following table sets forth our executive officers and directors, their ages and the positions held by them:

 

Name

   Age   

Role

   Since
Hanying Li (1)(7)    58    Chair of the Board, Chief Executive Officer and Director    2005
Guoping Wang (1)(7)    57    Director    2010
Bihong Zhang (1)    34    Chief Financial Officer and Director    2010
Changxin Wu (1)(2)(3)(4)(6)    74    Director    2010
Jishan Hu (1)(2)(3)(4)( 5 )    63    Director    2010
Benyan Li (1)(2)(3)(4)(5)    60    Director    2010
Youhang Peng (1)(2)(3)(4)( 6 )    48    Director    2010

 

(1)

The individual’s business address is c/o Tianli Agritech, Inc., Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010.

(2)

Member of audit committee.

(3)

Member of compensation committee.

(4)

Member of nominating committee.

(5)

Class I director whose term expires in 2010.

(6)

Class II director whose term expires in 2011.

(7)

Class III director whose term expires in 2012.

Ms. Hanying Li . Ms. Li has served as our Chair since January 2010. Ms. Li founded our company in 2005. From 1979 through 2004, Ms. Li was deputy director of Wuhan City Prosecutor Office. Ms. Li received her bachelor degree in law from Hubei Finance & Economic University. Ms. Li was nominated as a director for her experience operating hog farms and leadership of our company.

 

67


Table of Contents

Mr. Guoping Wang . Mr. Wang has served as director since January 2010. Between 1999 and 2009, Mr. Wang was president of the real estate division of state owned China Construction International Corporation. Mr. Wang holds a bachelor degree from Wuhan University in language study. Mr. Wang was nominated as a director because of his operating and management experience.

Mr. Bihong Zhang . Mr. Zhang has served as director and CFO since January 2010. From 2008 through 2009, Mr. Zhang was partner of accounting firm Zhong Cheng Xin (Beijing). From 2005 through 2008, Mr. Zhang was senior manager of accounting firm Li An Da. From 1995 through 2005, Mr. Zhang was senior project manager of accounting firm Zhong Tian Hua Zheng (Inner Mongolia). Mr. Zhang is a licensed Certified Public Accountant in China. Mr. Zhang received his diploma from Inner Mongolia Forestry College of Economics and Management. Mr. Zhang was nominated as a director because of his familiarity and experience with the accounting issues that affect commercial hog farms in China.

Mr. Changxin Wu . Mr. Wu has served as an independent Director since January 2010. Mr. Wu is currently the Chairman of World Poultry Science Association (China Division), an executive member of Science and Technology Committee of China Ministry of Agriculture, a fellow of China Science Institute, and professor of China Agricultural University. Professor Wu has spent his entire career in animal breeding, husbandry, and generic studies. He was President and Dean of College of Animal Science and Technology between 1993 and 2004. Professor Wu has 20 articles discussed in 17 international meetings, has won 8 national awards, 6 provincial awards, and has received a 2001 USA patent in “Hogs Fertility DNA Marks”. His outstanding achievement in animal science has won him a position in the payroll list of “Special Recognized Outstanding Achiever” by China’s Department of State. Mr. Wu graduated from Beijing Agriculture University in 1957 with major in animal husbandry study. Mr. Wu was nominated as a director because of his experience and reputation in the animal husbandry industry.

Mr. Jishan Hu . Mr. Hu has served as an independent Director since January 2010. Mr. Hu has been senior economic advisor to China National Petroleum Corporation (CNPC) since 2006, and president of CNPC between 1993 and 2006. Mr. Hu was nominated as a director because management and corporate governance experience.

Mr. Benyan Li . Mr. Li has served as an independent Director since January 2010. Mr. Li was the head Congressman of Qiaokou District People’s Congress between 2006 and 2009, chief prosecutor of Qiaokou District between 2001 and 2006, and chief prosecutor of Huangpi District between 1999 and 2001. Mr. Li received his diploma from College of Central South Politics and Law. Mr. Li was nominated as a director because familiarity with applicable laws and agencies in Wuhan.

Mr. Youhang Peng . Mr. Peng has served as an independent Director since January 2010. Since 2004, Mr. Peng has been the Senior Managing Director of Caybridge International. Mr. Peng holds a bachelor degree from Tsinghua University and a master degree from University of California at Davis. Mr. Peng serves as our Audit Committee financial expert. Mr. Peng was nominated as a director because of his experience in capital markets and accounting.

Executive Compensation

The following table shows the annual compensation paid by us for the years ended December 31, 2008 and 2009 to Hanying Li, our principal executive officer. No officer had a salary during either of the previous two years of more than $100,000.

Summary Compensation Table – Named Executive Officer

 

Name and principal position

   Year    Salary    Bonus    All Other Compensation    Total

Hanying Li,
principal executive officer

   2009    $ 6,894.33    $ 14,608.00    $ 0    $ 21,502.33
   2008    $ 6,894.33    $ 12,208.70    $ 0    $ 19,103.03

 

68


Table of Contents

Employment Agreements

Generally

Under Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal one month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty to our company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material adverse effect to us.

Our employment agreements with our executive officers generally provide for a term of three years, extendable for an additional two years, and a salary to be paid monthly. The agreements also provide that executive officers are to work an average of forty hours per week and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations and our internal work policies. Under such agreements, our executive officers can be terminated for cause without further compensation. The employment agreements also provide that we will pay for all mandatory social security programs for our executive officers in accordance with PRC regulations. During the agreement and for three (3) years afterward, our executive officers are subject to keep trade secrets confidential. In addition, our employment agreements with our executive officers prevent them from rendering services for our competitors for a period of two (2) years after termination of employment.

Hanying Li

We entered into an employment agreement with our president and chief executive officer, Ms. Hanying Li effective December 1, 2009. Under the terms of that employment agreement, Ms. Li is entitled to the following:

 

   

Base compensation of $50,000, payable in 12 equal monthly installments of $4,167 each.

 

   

Year-end bonus of $96,000, payable in the event our annual audited profits increase by at least 150% of the previous year’s audited profits.

 

   

Reimbursement of reasonable expenses incurred by Ms. Li.

Ms. Li’s employment agreement commenced on December 1, 2009 and is scheduled to expire on November 30, 2012. Ms. Li’s employment agreement is subject to automatic renewal through November 30, 2014 unless terminated prior to such renewal.

Ms. Li has agreed during the term of the agreement and for 36 months afterwards to:

 

   

keep confidential and not disclose the information;

 

   

take and implement all appropriate measures to protect the confidentiality of the information;

 

   

not disclose, transmit, exploit or otherwise use for its own account or for others, elements of information;

Ms. Li has also agreed not to compete with our company directly or indirectly during her employment and for a period of 24 months afterwards.

Ms. Li’s agreement may be terminated at any time by either party upon presentation of 60 days’ prior notice.

Bihong Zhang

We entered into an employment agreement with our chief financial officer, Mr. Bihong Zhang effective December 1, 2009. Under the terms of that employment agreement, Mr. Zhang is entitled to the following:

 

   

Base compensation of $40,800, payable in 12 equal monthly installments of $3,400 each.

 

   

Year-end bonus of $47,000, payable in the event our annual audited profits increase by at least 150% of the previous year’s audited profits.

 

   

Reimbursement of reasonable expenses incurred by Mr. Zhang.

 

69


Table of Contents

Mr. Zhang’s employment agreement commenced on December 1, 2009 and is scheduled to expire on November 30, 2012. Mr. Zhang’s employment agreement is subject to automatic renewal through November 30, 2014 unless terminated prior to such renewal.

Mr. Zhang has agreed during the term of the agreement and for 36 months afterwards to:

 

   

keep confidential and not disclose the information;

 

   

take and implement all appropriate measures to protect the confidentiality of the information;

 

   

not disclose, transmit, exploit or otherwise use for its own account or for others, elements of information;

Mr. Zhang has also agreed not to compete with our company directly or indirectly during his employment and for a period of 24 months afterwards.

Mr. Zhang’s agreement may be terminated at any time by either party upon presentation of 60 days’ prior notice.

Stock Option Pool

We intend to establish a pool for share options for our employees following the completion of this offering. This pool will contain options to purchase our common shares equal to ten percent (10%) of the number of common shares outstanding at the conclusion of this offering, not including any shares underlying placement agent’s warrants. This pool will contain options to purchase up to 1,012,500 of our common shares subject to outstanding share options or reserved for issuance under our share incentive plan, assuming a maximum offering. The options will vest at a rate of 20% per year for five years and have a per share exercise price equal to the fair market value of one of our common shares on the date of grant. Other than those granted under this pool, we will not grant any shares or options to our employees prior to the second anniversary of the closing of this offering. We expect to grant options under this pool to certain employees as of the closing of this offering. Any options granted as of the closing of this offering will have an exercise price per common share equal to the offering price. We have not yet determined the recipients of any such grants.

Board of Directors and Board Committees

Our board of directors currently consists of 7 directors. We expect that all current directors will continue to serve after this offering. There are no family relationships between any of our executive officers and directors.

The directors will be divided into three classes, as nearly equal in number as the then total number of directors permits. Class I directors shall face re-election at our annual general meeting of shareholders in 2010 and every three years thereafter. Class II directors shall face re-election at our annual general meeting of shareholders in 2011 and every three years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders in 2012 and every three years thereafter.

If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third parties to gain control of our company by making it difficult to replace members of the Board of Directors.

A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.

 

70


Table of Contents

There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting.

The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Listing Rule 5605(a)(15). Changxin Wu, Jishan Hu, Benyan Li and Youhang Peng are our independent directors.

There are no other arrangements or understandings pursuant to which our directors are selected or nominated.

Ms. Hanying Li currently holds both the positions of Chief Executive Officer and Chair of the Board. These two positions have not been consolidated into one position; Ms. Li simply holds both positions at this time. We do not have a lead independent director because of the foregoing reason and also because we believe our independent directors are encouraged to freely voice their opinions on a relatively small company board. We believe this leadership structure is appropriate because we are a smaller reporting company in the process of listing on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Ms. Li as both our principal executive officer and Chair of the Board.

Our Board of Directors plays a significant role in our risk oversight. The Board of Directors makes all relevant Company decisions. As such, it is important for us to have both our Chief Executive Officer and Chief Financial Officer serve on the Board as they play key roles in the risk oversight or the Company. As a smaller reporting company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our directors in risk oversight matters.

Board Committees

Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominating committee. The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of the financial statements of our company, including the appointment, compensation and oversight of the work of our independent auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based plans (but our board retains the authority to interpret those plans). The nominating committee of the board of directors is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience when nominating directors.

Board of Directors Observer

In connection with this offering, we have agreed to allow our placement agent to designate two non-voting observers to our Board of Directors until the earlier of the date that:

 

   

the investors that purchase common shares in this offering beneficially own less than ten percent (10%) of our outstanding common shares; or

 

   

the average closing price per common share equals or exceeds four (4) times the offering price for a period of 15 consecutive trading days.

Although our placement agent’s observers will not be able to vote, they may nevertheless significantly influence the outcome of matters submitted to the Board of Directors for approval. We have agreed to reimburse the observers for their expenses for attending our Board meetings, subject to a maximum reimbursement of $6,000 per meeting and $12,000 annually, which amount is not more than the reimbursement payable to our directors. The observer will be required to certify that such travel expenses are not reimbursed by any other party. We will also pay observers the same amount as our independent directors receive. As of the date of this prospectus, Mr. L. McCarthy Downs III and Mr. Hayden Zou are serving as our placement agent’s observers to our Board of Directors.

 

71


Table of Contents

Duties of Directors

Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. See “Description of Share Capital—Differences in Corporate Law” for additional information on our directors’ fiduciary duties under British Virgin Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with our fourth amended and restated memorandum and articles of association. We have the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our board of directors include, among others:

 

   

appointing officers and determining the term of office of the officers;

 

   

authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;

 

   

exercising the borrowing powers of the company and mortgaging the property of the company;

 

   

executing checks, promissory notes and other negotiable instruments on behalf of the company; and

 

   

maintaining or registering a register of mortgages, charges or other encumbrances of the company.

Interested Transactions

A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.

Remuneration and Borrowing

The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.

Qualification

A director is not required to hold shares as a qualification to office.

Limitation on Liability and Other Indemnification Matters

British Virgin Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

Under our memorandum and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.

 

72


Table of Contents

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Director Compensation

All directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been duly elected and qualified. There are no family relationships among our directors or executive officers. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Non-employee directors are entitled to receive $10,000 per year for serving as directors and may receive option grants from our company. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended.

Summary Compensation Table FY 2009 – Directors

 

Name

   Director Fees earned
or paid in cash
   Total (1)

Hanying Li (2)

   $ 0    $ 0

Guoping Wang (3)

   $ 0    $ 0

Bihong Zhang (2)

   $ 0    $ 0

Changxin Wu (3)

   $ 0    $ 0

Jishan Hu (3)

   $ 0    $ 0

Benyan Li (3)

   $ 0    $ 0

Youhang Peng (3)

   $ 0    $ 0

 

(1)

None of the directors received any common share awards, option awards, nonqualified deferred compensation earnings or non-equity incentive plan compensation in fiscal year 2009.

(2)

Ms. Li and Mr. Zhang received payment in their capacities as officers of our company and/or subsidiaries/affiliates but did not receive any compensation for serving as directors of our company.

(3)

Messers. Wang, Wu, Hu, Li and Peng did not become directors until 2010 and did not receive any payment in 2009.

Limitation of Director and Officer Liability

Under British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Our memorandum and articles of association provide that, to the fullest extent permitted by British Virgin Islands law or any other applicable laws, our directors will not be personally liable to us or our shareholders for any acts or omissions in the performance of their duties. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.

We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the

 

73


Table of Contents

director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.

We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our fourth amended and restated memorandum and articles of association.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers or persons controlling our company under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

R ELATED P ARTY T RANSACTIONS

Payables to Related Parties

At December 31, 2009 and 2008, Fengze had aggregate payables to related parties of approximately $564,306 and $871,612, respectively. Such amounts were due to Ms. Hanying Li, our founder and chief executive officer. Ms. Li advanced funds to Fengze for its business expenses related to the construction of our ninth farm, which we expect to complete and put into service in 2010. These amounts are due upon demand and without interest.

Contractual Arrangements with Domestic Companies and their Shareholders

We operate our business in China through a series of contractual arrangements with Fengze and its shareholders, who are related parties. For a description of these contractual arrangements, see “Our Corporate Structure – Contractual Arrangements with Domestic Companies and their Shareholders.”

Make-Good Shares Subject to Redemption

As described in more detail in the section entitled “Placement – Market and Pricing Consideration” our company had been valued on a forward-looking basis for purposes of this offering. We and our placement agent agreed to value our company at a multiple of approximately 6.5 times our targeted 2010 audited net after-tax income. Based on a target 2010 audited net after-tax income of $7,500,000, we have been valued at approximately $48,750,000. Our targeted 2010 net after-tax income is not a projection but instead represents a negotiated target between our company and our placement agent. Although we do not currently pay any taxes on our income, we refer to this amount as our targeted 2010 audited net after-tax income to reflect our and our placement agent’s intention that the targeted amount will be net of any taxes that may apply to our company during 2010. Based on the above valuation of our company, our earnings per share would be approximately $0.7407. This amount is calculated by dividing $7,500,000 by 10,125,000 shares outstanding upon completion of a maximum offering, not including any shares in the incentive plan or the exercise of any placement agent warrants.

Valuing a company on a forward-looking basis is subject to a number of risks, including the possibility that the company will not achieve the targeted income levels and that world markets may not maintain the same valuation for companies in general in the future. In order to mitigate some of this risk, certain key members of the management of our company have agreed to place, on a prorated basis, that number of common shares into escrow that is equal to 50% of the maximum number of shares to be sold in this offering. Upon closing of this offering, the escrow agent will return any shares in excess of 50% of the actual number of shares sold in the offering. Such escrowed shares are referred to as the “Make-Good Shares”). The Make-Good Shares will remain in escrow with SunTrust Bank or another bank acceptable to our placement agent pending the filing of our company’s Form 10-K for the year ending December 31, 2010.

To the extent our audited after-tax earnings per share for the year ending December 31, 2010 are less than $0.7407, excluding any expenses associated with releasing the Make-Good Shares back to the original owners, our

 

74


Table of Contents

company will redeem and cancel, pro rata, the Make-Good Shares without any consideration to the extent necessary to cause our audited after-tax earnings to be equal to $0.7407. We cannot guarantee that we will be able to redeem a sufficient number of Make-Good Shares to increase audited after-tax earnings per share to $0.7407 if our company either has low net income or any net losses in 2010. Any remaining Make-Good Shares will be released from escrow to Hanying Li and Bihong Zhang upon the earlier of (i) one (1) business day after the termination of this offering without closing or (ii) thirty (30) calendar days after the filing of the Form 10-K for the year ending December 31, 2010 after redeeming any Make-Good Shares. Additionally, notwithstanding any other terms of the Make-Good Escrow, if our shares trade at or above 2.5 times the price of this offering for a period of five trading days within a ten day trading period, the Make-Good Escrow will terminate and the Make-Good Shares will be released to the initial shareholders. Any delay in redeeming the Make-Good Shares will delay the release of such remaining Make-Good Shares from escrow. See “Risk Factors – A redemption of Make-Good Shares may be insufficient to cause our company to achieve targeted earnings and may reduce our management’s involvement and stake in our company.”

Because the Make-Good Shares have been escrowed as a condition of completing the initial public offering and will be released to the holders thereof without regard to such holders’ continued employment if Tianli meets the foregoing criteria, we have determined that no compensatory arrangement exists. Accordingly, we account for the Make-Good Shares as an element of the overall transaction and we do not recognize any compensation expense upon the return of such Make-Good Shares to the holders. If our company does not meet the criteria for releasing the Make-Good Shares, then we will redeem the Make-Good Shares without payment, resulting in the reduction of Tianli common shares outstanding.

 

75


Table of Contents

P RINCIPAL S HAREHOLDERS

The following table sets forth information with respect to beneficial ownership of our common shares as of March 16, 2010 by:

 

   

Each person who is known by us to beneficially own more than 5% of our outstanding common shares;

 

   

Each of our directors and named executive officers; and

 

   

All directors and named executive officers as a group.

The number and percentage of common shares beneficially owned before the offering are based on 8,125,000 common shares outstanding as of March 16, 2010. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of common shares beneficially owned by a person listed below and the percentage ownership of such person, common shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of March 16, 2010 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all common shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of Tianli Agritech, Inc., Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010. As of the date of the Prospectus, we had 23 shareholders of record.

 

Named Executive

Officers and Directors

   Amount of
Beneficial Ownership (1)
    Percentage
Ownership (2)
 

Hanying Li, Principal Executive Officer and Director

   3,050,000 (3)     37.54 %

Guoping Wang, Director

   350,000      4.31 %

Bihong Zhang, Director

   111,000      1.37 %

Changxin Wu, Director

   0      *   

Jishan Hu, Director

   0      *   

Benyan Li, Director

   0      *   

Youhang Peng, Director

   0      *   

All Directors and Executive Officers as a Group (7 people)

   3,511,000      43.21
5% Shareholders Not Mentioned Above             

Hua Zhang

   3,050,000 (4)     37.54 %

 

* Less than 1%.
(1)

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common shares.

(2)

The number of our common shares outstanding used in calculating the percentage for each listed person excludes the common shares underlying options held by such person.

( 3 )

Includes 450,000 shares owned by Ms. Li’s spouse, Hua Zhang.

(4)

Includes 2,600,000 shares owned by Mr. Zhang’s spouse, Hanying Li.

 

76


Table of Contents

D ESCRIPTION OF S HARE C APITAL

We were incorporated as an international business company under the International Business Companies Act, 1984, in the British Virgin Islands on November 9, 2009 under the name “Tianli Agritech Inc.” As of the date of this prospectus, we have authorized 50,000,000 common shares, of $0.001 par value.

The following are summaries of the material provisions of our amended and restated memorandum and articles of association that will be in force at the time of the closing of this offering and the BVI Act, insofar as they relate to the material terms of our common shares. The forms of our amended and restated memorandum and articles of association are filed as exhibits to the registration statement of which this prospectus is a part.

Common Shares

General

All of our issued common shares are fully paid and non-assessable. Certificates representing the common shares are issued in registered form. Our shareholders who are non-residents of the British Virgin Islands may freely hold and vote their common shares.

Distributions

The holders of our common shares are entitled to such dividends as may be declared by our board of directors subject to the BVI Act.

Voting rights

Any action required or permitted to be taken by the shareholders must be effected at a duly called annual or special meeting of the shareholders entitled to vote on such action and may not be effected by a resolution in writing. At each general meeting, each shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) will have one vote for each common share which such shareholder holds.

Election of directors

Delaware law permits cumulative voting for the election of directors only if expressly authorized in the certificate of incorporation. The laws of the British Virgin Islands, however, do not specifically prohibit or restrict the creation of cumulative voting rights for the election of our directors. Cumulative voting is not a concept that is accepted as a common practice in the British Virgin Islands, and we have made no provisions in our memorandum and articles of association to allow cumulative voting for elections of directors.

Meetings

We must provide written notice of all meetings of shareholders, stating the time, place and, in the case of a special meeting of shareholders, the purpose or purposes thereof, at least 10 days before the date of the proposed meeting to those persons whose names appear as shareholders in the register of members on the date of the notice and are entitled to vote at the meeting. Our board of directors shall call a special meeting upon the written request of shareholders holding at least 30% of our outstanding voting shares. In addition, our board of directors may call a special meeting of shareholders on its own motion. A meeting of shareholders may be called on short notice: (a) if it is so agreed by shareholders holding not less than 90% of the common shares entitled to vote on the matters to be considered at the meeting, or 90% of the common shares of each class or series entitled to vote together as a class or series, together with not less than 90% of the remaining votes; or (b) if all shareholders holding common shares entitled to vote on the matters to be considered at the meeting have waived notice of the meeting, and presence at the meeting shall be deemed to constitute waiver for this purpose.

At any meeting of shareholders, a quorum will be present if there are shareholders present in person or by proxy representing not less than 50% of the issued common shares entitled to vote on the resolutions to be considered at the meeting. Such quorum may be represented by only a single shareholder or proxy. If no quorum is present within two hours of the start time of the meeting, the meeting shall be dissolved if it was requested by shareholders. In any other case, the meeting shall be adjourned to the next business day, and if shareholders

 

77


Table of Contents

representing not less than one-third of the votes of the common shares or each class of shares entitled to vote on the matters to be considered at the meeting are present within one hour of the start time of the adjourned meeting, a quorum will be present. If not, the meeting will be dissolved. No business may be transacted at any general meeting unless a quorum is present at the commencement of business. If present, the chair of our board of directors shall be the chair presiding at any meeting of the shareholders.

A corporation that is a shareholder shall be deemed for the purpose of our memorandum and articles of association to be present in person if represented by its duly authorized representative. This duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were our individual shareholder.

Protection of minority shareholders

We would normally expect British Virgin Islands courts to follow English case law precedents, which permit a minority shareholder to commence a representative action, or derivative actions in our name, to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority by parties in control of us, (3) the act complained of constitutes an infringement of individual rights of shareholders, such as the right to vote and pre-emptive rights and (4) an irregularity in the passing of a resolution which requires a special or extraordinary majority of the shareholders.

Pre-emptive rights

There are no pre-emptive rights applicable to the issue by us of new common shares under either British Virgin Islands law or our memorandum and articles of association.

Transfer of common shares

Subject to the restrictions in our memorandum and articles of association, the lock-up agreements with our placement agent described in “Shares Eligible for Future Sale— Lock-Up Agreements” and applicable securities laws, any of our shareholders may transfer all or any of his or her common shares by written instrument of transfer signed by the transferor and containing the name and address of the transferee. Our board of directors may resolve by resolution to refuse or delay the registration of the transfer of any common share. If our board of directors resolves to refuse or delay any transfer, it shall specify the reasons for such refusal in the resolution. Our directors may not resolve or refuse or delay the transfer of a common share unless: (a) the person transferring the shares has failed to pay any amount due in respect of any of those shares; or (b) such refusal or delay is deemed necessary or advisable in our view or that of our legal counsel in order to avoid violation of, or in order to ensure compliance with, any applicable, corporate, securities and other laws and regulations.

Liquidation

If we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay all amounts paid to us on account of the issue of shares immediately prior to the winding up, the excess shall be distributable pari passu among those shareholders in proportion to the amount paid up immediately prior to the winding up on the shares held by them, respectively. If we are wound up and the assets available for distribution among the shareholders as such are insufficient to repay the whole of the amounts paid to us on account of the issue of shares, those assets shall be distributed so that, to the greatest extent possible, the losses shall be borne by the shareholders in proportion to the amounts paid up immediately prior to the winding up on the shares held by them, respectively. If we are wound up, the liquidator appointed by us may, in accordance with the BVI Act, divide among our shareholders in specie or kind the whole or any part of our assets (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders.

Calls on common shares and forfeiture of common shares

Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their common shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The common shares that have been called upon and remain unpaid are subject to forfeiture.

 

78


Table of Contents

Redemption of common shares

Subject to the provisions of the BVI Act, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by our memorandum and articles of association and subject to any applicable requirements imposed from time to time by, the BVI Act, the SEC, the NASDAQ Capital Market, or by any recognized stock exchange on which our securities are listed.

Modifications of rights

All or any of the special rights attached to any class of shares may, subject to the provisions of the BVI Act, be amended only pursuant to a resolution passed at a meeting by a majority of the votes cast by those entitled to vote at a meeting of the holders of the shares of that class.

Changes in the number of shares we are authorized to issue and those in issue

We may from time to time by resolution of our board of directors:

 

   

amend our memorandum of association to increase or decrease the maximum number of shares we are authorized to issue;

 

   

subject to our memorandum, divide our authorized and issued shares into a larger number of shares; and

 

   

subject to our memorandum, combine our authorized and issued shares into a smaller number of shares.

Untraceable shareholders

We are entitled to sell any shares of a shareholder who is untraceable, provided that:

 

   

all checks or warrants in respect of dividends of these shares, not being less than three in number, for any sums payable in cash to the holder of such shares have remained uncashed for a period of twelve years prior to the publication of the notice and during the three months referred to in the third bullet point below;

 

   

we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled to these shares by death, bankruptcy or operation of law; and

 

   

we have caused a notice to be published in newspapers in the manner stipulated by our memorandum and articles of association, giving notice of our intention to sell these shares, and a period of three months has elapsed since such notice.

The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to the net proceeds.

Inspection of books and records

Under British Virgin Islands Law, holders of our common shares are entitled, upon giving written notice to us, to inspect (i) our memorandum and articles of association, (ii) the register of members, (iii) the register of directors and (iv) minutes of meetings and resolutions of members, and to make copies and take extracts from the documents and records. However, our directors can refuse access if they are satisfied that to allow such access would be contrary to our interests. See “Where You Can Find Additional Information.”

Rights of non-resident or foreign shareholders

There are no limitations imposed by our memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.

Issuance of additional common shares

Our memorandum and articles of association authorizes our board of directors to issue additional common shares from authorized but unissued shares, to the extent available, from time to time as our board of directors shall determine.

 

79


Table of Contents

Differences in Corporate Law

The BVI Act and the laws of the British Virgin Islands affecting British Virgin Islands companies like us and our shareholders differ from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the laws of the British Virgin Islands applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

Mergers and similar arrangements

Under the laws of the British Virgin Islands, two or more companies may merge or consolidate in accordance with Section 170 of the BVI Act. A merger means the merging of two or more constituent companies into one of the constituent companies and a consolidation means the uniting of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation, which must be authorized by a resolution of shareholders.

While a director may vote on the plan of merger or consolidation even if he has a financial interest in the plan, the interested director must disclose the interest to all other directors of the company promptly upon becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the company.

A transaction entered into by our company in respect of which a director is interested (including a merger or consolidation) is voidable by us unless the director’s interest was (a) disclosed to the board prior to the transaction or (b) the transaction is (i) between the director and the company and (ii) the transaction is in the ordinary course of the company’s business and on usual terms and conditions.

Notwithstanding the above, a transaction entered into by the company is not voidable if the material facts of the interest are known to the shareholders and they approve or ratify it or the company received fair value for the transaction.

Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting to approve the plan of merger or consolidation.

The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive debt obligations or other securities of the surviving or consolidated company, other assets, or a combination thereof. Further, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset. As such, not all the shares of a class or series must receive the same kind of consideration.

After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the British Virgin Islands.

A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) or a consolidation. A shareholder properly exercising his dissent rights is entitled to a cash payment equal to the fair value of his shares.

A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the shareholders, the company must give notice of this fact to each shareholder within 20 days who gave written objection. These shareholders then have 20 days to give to the company their written election in the form specified by the BVI Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.

 

80


Table of Contents

Upon giving notice of his election to dissent, a shareholder ceases to have any shareholder rights except the right to be paid the fair value of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding his dissent.

Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, the company must make a written offer to each dissenting shareholder to purchase his shares at a specified price per share that the company determines to be the fair value of the shares. The company and the shareholder then have 30 days to agree upon the price. If the company and a shareholder fail to agree on the price within the 30 days, then the company and the shareholder shall, within 20 days immediately following the expiration of the 30-day period, each designate an appraiser and these two appraisers shall designate a third appraiser. These three appraisers shall fix the fair value of the shares as of the close of business on the day prior to the shareholders’ approval of the transaction without taking into account any change in value as a result of the transaction.

Shareholders’ suits

There are both statutory and common law remedies available to our shareholders as a matter of British Virgin Islands law. These are summarized below:

Prejudiced members

A shareholder who considers that the affairs of the company have been, are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him in that capacity, can apply to the court under Section 184I of the BVI Act, inter alia, for an order that his shares be acquired, that he be provided compensation, that the Court regulate the future conduct of the company, or that any decision of the company which contravenes the BVI Act or our memorandum and articles of association be set aside.

Derivative actions

Section 184C of the BVI Act provides that a shareholder of a company may, with the leave of the Court, bring an action in the name of the company to redress any wrong done to it.

Just and equitable winding up

In addition to the statutory remedies outlined above, shareholders can also petition for the winding up of a company on the grounds that it is just and equitable for the court to so order. Save in exceptional circumstances, this remedy is only available where the company has been operated as a quasi partnership and trust and confidence between the partners has broken down.

Indemnification of directors and executive officers and limitation of liability

British Virgin Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any provision providing indemnification may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.

Under our memorandum and articles of association, we indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings for any person who:

 

   

is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was our director; or

 

   

is or was, at our request, serving as a director or officer of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise.

 

81


Table of Contents

These indemnities only apply if the person acted honestly and in good faith with a view to our best interests and, in the case of criminal proceedings, the person had no reasonable cause to believe that his conduct was unlawful.

This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Anti-takeover provisions in our memorandum and articles of association

Some provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that provide for a staggered board of directors and prevent shareholders from taking an action by written consent in lieu of a meeting. However, under British Virgin Islands law, our directors may only exercise the rights and powers granted to them under our memorandum and articles of association, as amended and restated from time to time, as they believe in good faith to be in the best interests of our company.

Directors’ fiduciary duties

Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation.

Under British Virgin Islands law, our directors owe the company certain statutory and fiduciary duties including, among others, a duty to act honestly, in good faith, for a proper purpose and with a view to what the directors believe to be in the best interests of the company. Our directors are also required, when exercising powers or performing duties as a director, to exercise the care, diligence and skill that a reasonable director would exercise in comparable circumstances, taking into account without limitation, the nature of the company, the nature of the decision and the position of the director and the nature of the responsibilities undertaken. In the exercise of their powers, our directors must ensure neither they nor the company acts in a manner which contravenes the BVI Act or our memorandum and articles of association, as amended and re-stated from time to time. A shareholder has the right to seek damages for breaches of duties owed to us by our directors.

Shareholder action by written consent

Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. British Virgin Islands law provides that shareholders may approve corporate matters by way of a written resolution without a meeting signed by or on behalf of shareholders sufficient to constitute the requisite majority of shareholders who would have been entitled to vote on such matter at a general meeting; provided that if the consent is less than unanimous, notice must be given to all non-consenting shareholders. However, our memorandum and articles of association do not permit shareholders to act by written consent.

Shareholder proposals

Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A

 

82


Table of Contents

special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our memorandum and articles of association allow our shareholders holding not less than 30% of the votes of the outstanding voting shares to requisition a shareholders’ meeting. We are not obliged by law to call shareholders’ annual general meetings, but our memorandum and articles of association do permit the directors to call such a meeting. The location of any shareholders’ meeting can be determined by the board of directors and can be held anywhere in the world.

Cumulative voting

Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under British Virgin Islands law, our memorandum and articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.

Removal of directors

Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our memorandum and articles of association, directors can be removed from office, with cause, by a resolution of shareholders or by a resolution of directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal of the director.

Transactions with interested shareholders

The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or group who or which owns or owned 15% or more of the target’s outstanding voting shares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors. British Virgin Islands law has no comparable statute. However, our memorandum and articles of association expressly provide for the same protection afforded by the Delaware business combination statute.

Dissolution; Winding Up

Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the BVI Act and our memorandum and articles of association, we may appoint a voluntary liquidator by a resolution of the shareholders or by resolution of directors.

Variation of rights of shares

Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our memorandum and articles of association, if at any time our shares are divided into different classes of shares, the rights attached to any class may only be varied, whether or not our company is in liquidation, by a resolution passed at a meeting by a majority of the votes cast by those entitled to vote at a meeting of the holders of the issued shares in that class.

 

83


Table of Contents

Amendment of governing documents

Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, our memorandum and articles of association may be amended by a resolution of shareholders and, subject to certain exceptions, by a resolution of directors. Any amendment is effective from the date it is registered at the Registry of Corporate Affairs in the British Virgin Islands.

S HARES E LIGIBLE FOR F UTURE S ALE

Prior to this offering, there has been no market for our common shares, and a liquid trading market for our common shares may not develop or be sustained after this offering. Future sales of substantial amounts of common shares, including common shares issued upon exercise of outstanding options and exercise of the warrants offered in this prospectus in the public market after this offering or the anticipation of those sales could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities.

Upon the completion of the offering, we will have outstanding 10,125,000 common shares, assuming no exercise of outstanding options, the closing of the maximum offering and not including any shares underlying the underwriter warrants. Of these common shares, the 2,000,000 common shares sold in this offering and the 243,750 shares sold by the selling shareholders described above will be freely tradable without restriction under the Securities Act, except that any shares purchased by our “affiliates,” as that term is defined in Rule 144 of the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining approximately 7,881,250 common shares outstanding will be restricted shares held by existing shareholders that could be sold pursuant to Rule 144. We have not agreed to register these restricted shares. We have not issued any warrants to purchase our common shares or other securities convertible into our common shares.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person (or persons whose shares are aggregated) who is deemed to be an affiliate of our company at the time of sale, or at any time during the preceding three months, and who has beneficially owned restricted shares for at least six months, would be entitled to sell within any three-month period a number of our common shares that does not exceed the greater of 1% of the then outstanding common shares or the average weekly trading volume of common shares during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to certain manner of sale provisions, notice requirements and the availability of current public information about our company. In addition, sales by our affiliates may be subject to the terms of lock-up agreements and Make-Good Escrow agreements. See “Shares Eligible for Future Sale – Lock-Up Agreements” and “Related Party Transactions –Make-Good Shares Subject to Redemption.”

A person who has not been our affiliate at any time during the three months preceding a sale, and who has beneficially owned his or her common shares for at least six months, would be entitled under Rule 144 to sell such shares without regard to any manner of sale, notice provisions or volume limitations described above. Any such sales must comply with the public information provision of Rule 144 until our common shares have been held for one year.

Rule 701

Securities issued in reliance on Rule 701 are also restricted and may be sold by shareholders other than affiliates of our company subject only to manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its six-month holding period requirement.

Registration on Form S-8

We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable after the closing of this offering to register up to 1,012,500 of our common shares subject to outstanding stock options or

 

84


Table of Contents

reserved for issuance under our stock incentive plan, such amount being equal to ten percent (10%) of the number of common shares issued and outstanding after the closing of the offering, assuming a maximum offering. This registration will permit the resale of these common shares by nonaffiliates in the public market without restriction under the Securities Act, upon the completion of the lock-up period described below. Common shares registered pursuant to the Form S-8 held by affiliates will be subject to Rule 144 volume limitations. As of the date of this Prospectus, we have not issued any options to purchase our common shares.

Lock-Up Agreements

Each of our executive officers, directors and individuals who on the effective date of the registration statement of which this prospectus is a part are the beneficial owners of more than 5% of our common shares, has agreed not to register, offer, sell, contract to sell or grant any of our common shares or any securities convertible into or exercisable or exchangeable for our common shares or any warrants to purchase our common shares (including, without limitation, securities of our company which may be deemed to be beneficially owned by such individuals in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon the exercise of a stock option or warrant) for a period of (a) as to one-half (  1 / 2 ) of the common shares now or in the future beneficially owned by such individual, ninety (90) days after the date of effectiveness or commencement of sales of this public offering and (b) as to the other one-half of such common shares now or in the future beneficially owned by such individual, one hundred ninety (190) days after the date of effectiveness or commencement of sales of this public offering. Upon the expiration of these lock-up agreements, additional common shares will be available for sale in the public market.

Registration

We are concurrently registering for resale under a separate prospectus up to 243,750 shares of our common stock held by the selling shareholders named in the prospectus. We are not offering any of these shares, and we will not receive any proceeds from the sale of the shares.

 

85


Table of Contents

Summary of Shares Available for Future Sale

The following table summarizes the total shares potentially available for future sale. To the extent we sell a number of common shares between the minimum and maximum offering, the below tables will be adjusted proportionately as to numbers of shares available for sale (as to option pool and placement agent shares) and dates on which such shares may be sold (as to currently outstanding shares).

Minimum Offering

 

Shares

  

Date Available for Sale

Currently Outstanding Common Shares: 8,125,000

243,750

   After the date of this prospectus, the shares will have been registered upon a separate resale prospectus and will be freely tradable by certain selling shareholders listed in the resale prospectus.

5,709,000

   After 90 days from the date of effectiveness or commencement of sales of the public offering

1,338,750

   After 190 days from the date of effectiveness or commencement of sales of the public offering

833,500

   After 30 days after filing of Form 10-K for the year ending December 31, 2010, assuming no redemption of Make-Good Shares; any delay in redemption will also delay the release of these shares
Common Shares in Option Pool: 979,200    From vesting dates through expiration of grants

Common Shares Underlying Placement

Agent’s Warrants: 166,700

   After 180 days from the date of effectiveness or commencement of sales of the public offering
Shares Offered in this Offering: 1,667,000    After the date of this prospectus, these shares will be freely tradable.
Maximum Offering

Shares

  

Date Available for Sale

Currently Outstanding Common Shares: 8,125,000

243,750

   After the date of this prospectus, the shares will have been registered upon a separate resale prospectus and will be freely tradable by certain selling shareholders listed in the resale prospectus.

5,625.750

   After 90 days from the date of effectiveness or commencement of sales of the public offering

1,255,500

   After 190 days from the date of effectiveness or commencement of sales of the public offering

1,000,000

   After 30 days after filing of Form 10-K for the year ending December 31, 2010, assuming no redemption of Make-Good Shares; any delay in redemption will also delay the release of these shares
Common Shares in Option Pool: 1,012,500    From vesting dates through expiration of grants

Common Shares Underlying Placement

Agent’s Warrants: 200,000

   After 180 days from the date of effectiveness or commencement of sales of the public offering
Shares Offered in this Offering: 2,000,000    After the date of this prospectus, these shares will be freely tradable.

 

86


Table of Contents

T AX M ATTERS A PPLICABLE TO U.S. H OLDERS OF O UR C OMMON S HARES

The following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax matters related to an investment in our common shares. It is directed to U.S. Holders (as defined below) of our common shares and is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This description does not deal with all possible tax consequences relating to an investment in our common shares, such as the tax consequences under state, local and other tax laws.

The following brief description applies only to U.S. Holders (defined below) that hold common shares as capital assets and that have the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as of the date of this prospectus and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this prospectus, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and you are, for U.S. federal income tax purposes,

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia;

 

   

an estate whose income is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

WE URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.

People’s Republic of China Enterprise Taxation

The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.” Our company is not subject to value added taxes or enterprise income taxes by virtue of qualifying as an entity engaged in agriculture. Our exemption from value added taxes derives from State Council Order No. 538, which exempts from value added taxes self-produced agricultural products sold by agricultural producers. Our exemption from enterprise income tax derives from State Council Order No. 512, which exempts from enterprise income tax income from enterprises engaged in agriculture. If these exemptions were to be terminated or we were to fail to qualify to receive these exemptions, we would be subject to taxation at the standard rates of 17% for value added taxes and 25% for enterprise income taxes, unless we were otherwise to qualify for a decreased tax rate.

British Virgin Islands Taxation

Under the BVI Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.

 

87


Table of Contents

There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.

United States Federal Income Taxation

The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:

 

   

banks;

 

   

financial institutions;

 

   

insurance companies;

 

   

regulated investment companies;

 

   

real estate investment trusts;

 

   

broker-dealers;

 

   

traders that elect to mark-to-market;

 

   

U.S. expatriates;

 

   

tax-exempt entities;

 

   

persons liable for alternative minimum tax;

 

   

persons holding our common shares as part of a straddle, hedging, conversion or integrated transaction;

 

   

persons that actually or constructively own 10% or more of our voting shares;

 

   

persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as consideration; or

 

   

persons holding our common shares through partnerships or other pass-through entities.

Prospective purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common shares.

Taxation of dividends and other distributions on our common shares

Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

With respect to non-corporate U.S. Holders, including individual U.S. Holders, for taxable years beginning before January 1, 2011, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the common shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, common shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the NASDAQ Capital Market. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our common shares, including the effects of any change in law after the date of this prospectus.

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend,

 

88


Table of Contents

multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our common shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

Taxation of Dispositions of Common Shares

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the common shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the common shares for more than one year, you will be eligible for reduced tax rates of 0% (for individuals in the 10% or 15% tax brackets) or 15% for all other individuals, assuming the renewal of current capital gains rates prior to their scheduled expiration at the end of 2010. If capital gains preferential rates are not renewed, such gains would be taxable at the personal income rates then in place. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.

Passive Foreign Investment Company

Based on our current and anticipated operations and the composition of our assets, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2010. Our actual PFIC status for the current taxable year ending December 31, 2010 will not be determinable until the close of such taxable year and, accordingly, there is no guarantee that we will not be a PFIC for the current taxable year. Because PFIC status is a factual determination for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for any taxable year if either:

 

   

at least 75% of its gross income is passive income; or

 

   

at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.

We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our common shares, our PFIC status will depend in large part on the market price of our common shares. Accordingly, fluctuations in the market price of the common shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. If we are a PFIC for any year during which you hold common shares, we will continue to be treated as a PFIC for all succeeding years during which you hold common shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the common shares.

If we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the common shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the common shares will be treated as an excess distribution. Under these special tax rules:

 

   

the excess distribution or gain will be allocated ratably over your holding period for the common shares;

 

89


Table of Contents
   

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and

 

   

the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the common shares cannot be treated as capital, even if you hold the common shares as capital assets.

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the common shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close of your taxable year over your adjusted basis in such common shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the common shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. Your basis in the common shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “—Taxation of Dividends and Other Distributions on our Common shares” generally would not apply.

The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including the NASDAQ Capital Market. If the common shares are regularly traded on the NASDAQ Capital Market and if you are a holder of common shares, the mark-to-market election would be available to you were we to be or become a PFIC.

Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold common shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions received on the common shares and any gain realized on the disposition of the common shares.

You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and the elections discussed above.

Information Reporting and Backup Withholding

Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to

 

90


Table of Contents

establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information.

E NFORCEABILITY OF C IVIL L IABILITIES

We are incorporated under the laws of the British Virgin Islands with limited liability. We are incorporated in the British Virgin Islands because of certain benefits associated with being a British Virgin Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, British Virgin Islands companies may not have standing to sue before the federal courts of the United States.

Substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such persons or to enforce against them or against us, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.

We have appointed CT Corporation System as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any State of the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Kai Tong Law Firm, our counsel as to Chinese law, has advised us that there is uncertainty as to whether the courts of China would (1) recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or (2) be competent to hear original actions brought in each respective jurisdiction, against us or such persons predicated upon the securities laws of the United States or any state thereof.

Kai Tong Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the Chinese Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the British Virgin Islands or the United States that provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of these two jurisdictions.

We have been advised by Kaufman & Canoles, our counsel as to British Virgin Islands law, that the United States and the British Virgin Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of courts of the United States in civil and commercial matters and that a final judgment for the payment of money rendered by any general or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, is unlikely to be enforceable in the British Virgin Islands. We have also been advised by Kaufman & Canoles that a final and conclusive judgment obtained in U.S. federal or state courts under which a sum of money is payable as compensatory damages (i.e., not being a sum claimed by a revenue authority for taxes or other charges of a similar nature by a governmental authority, or in respect of a fine or penalty or multiple or punitive damages) may be the subject of an action on a debt in the court of the British Virgin Islands under the common law doctrine of obligation.

 

91


Table of Contents

P LACEMENT

We have engaged Anderson & Strudwick, Incorporated to conduct this offering on a “best efforts, minimum/maximum” basis. The offering is being made without a firm commitment by the placement agent, which has no obligation or commitment to purchase any of our shares. None of our officers, directors or affiliates may purchase shares in this offering.

Unless sooner withdrawn or canceled by either us or the placement agent, the offering will continue until the earlier of (i) a date mutually acceptable to us and our placement agent after which the minimum offering is sold or (ii) May 31, 2010 (the “Offering Termination Date”). The Placement Agent has agreed in accordance with the provisions of SEC Rule 15c2-4 to cause all funds received by the Placement Agent for the sale of the common shares to be promptly deposited in an escrow account maintained by SunTrust Bank, N.A. (the “Escrow Agent”) as escrow agent for the investors in the offering. The Escrow Agent will exercise signature control on the escrow account and will act based on joint instructions from our company and the placement agent. On the closing date for the offering, net proceeds in the escrow account maintained by the Escrow Agent will be delivered to our company. We will not be able to use such proceeds in China, however, until we complete certain remittance procedures in China. If we do not complete this offering before the Offering Termination Date, all amounts will be promptly returned as described below. If we complete this offering, then on the closing date, we will issue shares to investors and placement agent warrants to our placement agent exercisable at a rate of one warrant per share to purchase up to 10% of the aggregate number of common shares sold in This offering. In the event of any dispute between our company and the placement, including about whether the minimum offering has been sold and whether and how funds are to be reimbursed, the escrow agent is entitled to petition a court of competent jurisdiction to resolve any such dispute.

Investors must pay in full for all common shares at the time of investment. Payment for the units may be made (i) by check, bank draft or money order made payable to “SunTrust Bank” and delivered to the Placement Agent no less than four business days before the date of closing, or (ii) by authorization of withdrawal from securities accounts maintained with the Placement Agent. If payment is made by authorization of withdrawal from securities accounts, the funds authorized to be withdrawn from a securities account will continue to accrue interest, if any interest is to accrue on such amounts, at the contractual rates until closing or termination of the offering, but a hold will be placed on such funds, thereby making them unavailable to the purchaser until closing or termination of the offering. If a purchaser authorizes the Placement Agent to withdraw the amount of the purchase price from a securities account, such Placement Agent will do so as of the date of closing. The Placement Agents will inform prospective purchasers of the anticipated date of closing. If payment is made by check, investors should make all checks payable to the Escrow Agent.

Proceeds deposited in escrow with the Escrow Agent may not be withdrawn by investors prior to the earlier of the closing of the offering or the Offering Termination Date. If the offering is withdrawn or canceled or if the 1,667,000 share minimum offering is not reached and proceeds therefrom are not received by us on or prior to the Offering Termination Date, all proceeds will be promptly returned by the Escrow Agent without interest or deduction to the persons from which they are received (within one business day) in accordance with applicable securities laws. All such proceeds will be placed in a non-interest bearing account pending such time.

Pursuant to that certain placement agreement by and between the placement agent and us, the obligations of the placement agent to solicit offers to purchase the shares and of investors solicited by the placement agent to purchase our common shares are subject to approval of certain legal matters by counsel to the placement agent. The placement agent’s ability to complete this “best efforts minimum/maximum” transaction is dependent upon the existence of stable U.S. trading markets. As such, the placement agent’s obligations under the placement agreement are also subject to various conditions which are customary in transactions of this type, including that, as of the closing of the offering, there shall not have occurred (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the publication of quotations on the NASDAQ Stock Market (National Market System or Capital Market); (ii) a general moratorium on commercial banking activities in the State of New York or China; (iii) the engagement by the United States or China in hostilities which have resulted in the declaration of a national emergency or war if any such event would have a material adverse effect, in the placement agent’s reasonable judgment, as to make it impracticable or inadvisable to proceed with the solicitation of offers to consummate the offering with respect to investors solicited by the placement agent on the terms and conditions contemplated herein.

 

92


Table of Contents

We have agreed to indemnify the placement agent against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the placement agent may be required to make in respect of those liabilities.

The placement agent is offering the common shares, subject to prior sale, when, as and if issued to and accepted by it, subject to conditions contained in the placement agreement, such as the receipt by the placement agent of officers’ certificates and legal opinions. The placement agent reserves the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part in the event (i) our representations or warranties are incorrect or misleading or we fail to fulfill our agreements with the placement agent; (ii) a material adverse change occurs affecting our business, management, property, assets, results of operations, condition or prospects; (iii) trading is suspended on any national securities exchange; (iv) war is declared; (v) a banking moratorium is declared in Virginia, New York or the U.S.; or (vi) any laws, regulations, court or administrative order or other governmental or agency act causes the placement agent to believe that our business or the U.S. securities markets will be materially adversely affected. The placement agent’s discretion in this regard is broad.

The placement agent intends to offer our common shares to its retail customers only in states in which we are permitted to offer our common shares. We have relied on an exemption to the blue sky registration requirements afforded to “covered securities”. Securities listed on the NASDAQ Capital Market are “covered securities.” If we were unable to meet the NASDAQ Capital Market’s listing standards, then we would be unable to rely on the covered securities exemption to blue sky registration requirements and we would need to register the offering in each state in which we planned to sell shares. Consequently, we will not complete this offering unless we meet the NASDAQ Capital Market’s listing requirements.

In connection with this offering, the placement agent or certain of the securities dealers may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering.

Foreign Regulatory Restrictions on Purchase of our Shares

We have not taken any action to permit a public offering of our shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. People outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of our shares and the distribution of this prospectus outside the United States.

Commissions and Discounts

The placement agent has advised us that it proposes to offer the common shares to the public at the initial public offering price on the cover page of this prospectus. The following table shows the public offering price, placement agent fee to be paid by us to the placement agent and the proceeds, before expenses, to us.

 

     Per Common Share    Minimum Offering    Maximum Offering

Assumed public offering price

   $ 6.00    $ 10,002,000    $ 12,000,000

Placement discount

   $ 0.42    $ 700,140    $ 840,000

Proceeds to us, before expenses

   $ 5.58    $ 9,301,860    $ 11,160,000

We expect our total cash expenses for this offering to be approximately $510,000, exclusive of the above commissions. In addition, we will pay the placement agent a non-accountable expense allowance of 1% of the amount of the offering, or $120,000 (maximum offering, exclusive of shares registered under Rule 462(b)) or $100,020 (minimum offering). The placement agent must sell the minimum number of securities offered (1,667,000 common shares) if any are sold. The placement agent is required to use only its best efforts to sell the securities offered. The offering will terminate upon the earlier of: (i) a date mutually acceptable to us and our placement agent after which the minimum offering is sold or (ii) May 31, 2010. Until we sell at least 1,667,000 shares, all investor

 

93


Table of Contents

funds will be held in an escrow account at SunTrust Bank, Richmond, Virginia. If we do not sell at least 1,667,000 shares by May 31, 2010, all funds will be promptly returned to investors (within one business day) without interest or deduction. If we complete this offering, then on the closing date, we will issue shares to investors and placement agent warrants to our placement agent.

Placement Agent’s Warrants

We have agreed to sell to the placement agent, on the closing date of this offering, at a price of $0.001 per warrant, placement agent’s warrants exercisable at a rate of one warrant per share to purchase 10% of the number of common shares issued by us in connection with the offering. We will issue between 166,700 and 200,000 placement agent’s warrants in connection with this offering, depending on the number of common shares sold in this offering. Each placement agent’s warrant will be exercisable to purchase one common share. The placement agent’s warrants will be exercisable at 120% the offering price per common share for a period of five years after issuance on the closing date of this offering. The placement agent’s warrants may not be exercised, sold, transferred, pledged, assigned or hypothecated for a period of 180 days after the date of effectiveness or commencement of sales of the public offering, except to officers or partners and shareholders of the placement agent. This restriction is imposed pursuant to the requirements of FINRA Rule 5110(g)(1). If we do not complete this offering by selling at least the minimum number of common shares, we will not issue any placement agent’s warrants to our placement agent.

For the life of the placement agent’s warrants, the holders thereof are given, at nominal costs, the opportunity to profit from a rise in the market price of our common shares with a resulting dilution in the interest of other shareholders. Further, the holders may be expected to exercise the placement agent’s warrant at a time when we would, in all likelihood, be able to obtain equity capital on terms more favorable than those provided in the placement agent’s warrants.

We are required for the life of the placement agent’s warrants to reserve sufficient common shares to deliver upon exercise of the warrants and to take all necessary actions to ensure that we may validly and legally issue fully paid and non-assessable shares on exercise of the warrants.

The placement agent has a right to demand registration of the common shares in the event registered common shares are not available at the time of exercise and an exemption from such registration is not otherwise available. If this happens, we will be required to file the registration statement within ninety (90) days after demand and to pay the costs associated with the registration other than the placement agent’s counsel fees and any underwriting or selling commissions. We are required to seek the listing of the shares on the same exchange on which our common shares trade, if any.

To the extent we are unable to register the shares, the placement agent may exercise the warrant with a cashless exercise, which is designed to give the placement agent the economic benefit of exercising the placement agent’s warrants. A cashless exercise, however, would not result in the payment of any exercise price to us.

The placement agent’s warrants also contain anti-dilution provisions, consistent with applicable FINRA rules, to adjust the terms of the placement agent’s warrants as necessary to protect against dilution in the event we reorganize, consolidate, merge or subdivide our shares.

Market and Pricing Considerations

There is not an established market for our common shares. We negotiated with our placement agent to determine the offering price of our common shares in this offering using a multiple of approximately 6.5 times our targeted after-tax net income for the fiscal year ending December 31, 2010. Noting past offerings completed by our placement agent, we believe that this multiple approximates the valuation multiples utilized in similar offerings for similarly-sized companies.

In addition to prevailing market conditions, the factors considered in determining the applicable multiples were:

 

   

The history of, and the prospects for, our company and the industry in which we compete;

 

   

An assessment of our management, its past and present operation, and the prospects for, and timing of, our future revenues;

 

94


Table of Contents
   

The present state of our development; and

 

   

The factors listed above in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

Based on a target 2010 audited net after-tax income of $7,500,000, we have been valued at approximately $48,750,000. Our targeted 2010 net after-tax income is not a projection but instead represents a negotiated target between our company and our placement agent. Although we do not currently pay any taxes on our income, we refer to this amount as our targeted 2010 audited net after-tax income to reflect our and our placement agent’s intention that the targeted amount will be net of any taxes that may apply to our company during 2010. Because we have 8,125,000 shares outstanding prior to the commencement of this offering, each such share has been valued at $6.00 per share, the assumed offering price in this offering.

If we are unable to achieve the targeted after-tax earnings upon which our valuation is based, then there is a risk that our company would be considered overvalued based on this multiple. In order to mitigate some of this risk, each of Hanying Li and Bihong Zhang has agreed to place, on a prorated basis, that number of beneficially owned common shares into escrow that is equal to 50% of the maximum number of shares to be sold in this offering. See “Related Party Transactions - Make-Good Shares Subject to Redemption.”

An active trading market for our common shares may not develop. It is possible that after this offering the common shares will not trade in the public market at or above the initial offering price.

The exercise price for the placement agent’s warrants issued to our placement agent in connection with, and conditional on the closing of, this offering has been negotiated between our company and the placement agent. The exercise price (120% of the offering price of common shares in this offering), along with the length of time the placement agent must wait before exercise (at least 180 days after the closing of this offering) are influenced by the valuation attributed by FINRA in its calculation of the acceptability of aggregate placement consideration.

Discretionary Shares

The placement agent will not sell any shares in this offering to accounts over which it exercises discretionary authority, without first receiving written consent from those accounts.

Application for Listing on the NASDAQ Capital Market

We have applied to list our common shares on the NASDAQ Capital Market under the symbol “OINK.” As this offering is a best-efforts offering, the NASDAQ Capital Market has indicated that it is unable to admit our common shares for listing until the completion of the offering and, consequently, the satisfaction of NASDAQ Capital Market listing standards. If so admitted, we expect our common shares to begin trading on the NASDAQ Capital Market on the day following the closing of this offering. If our common shares are eventually listed on the NASDAQ Capital Market, we will be subject to continued listing requirements and corporate governance standards. We expect these new rules and regulations to significantly increase our legal, accounting and financial compliance costs.

Price Stabilization, Short Positions and Penalty Bids

In order to facilitate the offering of the common shares, the placement agent may engage in transactions that stabilize, maintain or otherwise affect the price of the common shares. In order to facilitate the offering, the placement agent may, but is not required to, bid for, and purchase, common shares in the open market to stabilize the price of the common shares. These activities may raise or maintain the market price of the common shares above independent market levels or prevent or retard a decline in the market price of the common shares. The placement agent is not required to engage in these activities, and may end any of these activities at any time. We and the placement agent have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

We and the placement agent have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

 

95


Table of Contents

L EGAL M ATTERS

Certain matters as to Virginia law and U.S. federal law in connection with this offering will be passed upon for us and for the placement agent by Kaufman & Canoles, P.C. The validity of the shares and certain legal matters relating to the offering as to British Virgin Islands law will be passed upon for us by Kaufman & Canoles, P.C. Certain legal matters relating to the offering as to Chinese law will be passed upon for us by Kai Tong Law Firm, People’s Republic of China. Kaufman & Canoles, P.C. may rely upon Kai Tong Law Firm with respect to matters governed by PRC law.

E XPERTS

Financial statements as of December 31, 2009 and 2008, and for the years then ended appearing in this prospectus, have been included herein and in the registration statement in reliance upon the report of Sherb & Co., LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of that firm as experts in accounting and auditing.

I NTERESTS OF E XPERTS AND C OUNSEL

Attorneys with Kaufman and Canoles, P.C., representing our company with respect to this offering beneficially own 121,875 common shares of our company as of the date of this prospectus.

W HERE Y OU C AN F IND M ORE I NFORMATION

We have filed with the SEC under the Securities Act a registration statement on Form S-1 relating to the common shares we and the selling stockholders are offering by this prospectus. This prospectus, which constitutes part of the registration statement filed with the SEC, does not contain all the information included in the registration statement and the exhibits and schedules thereto. For further information with respect to us and our common shares, you should refer to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement or other document are not necessarily complete, and, where the contract, agreement or other document is an exhibit to the registration statement, any statement with respect to such contract, agreement or document is qualified by the provisions of such exhibit. You may examine and copy the registration statement, including the exhibits, at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can obtain a copy of all or a portion of the registration statement by mail from the Public Reference Section of the SEC at the same address, upon payment of prescribed fees. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains periodic reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is http://www.sec.gov .

As a result of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC.

 

96


Table of Contents

Tianli Agritech, Inc., Subsidiaries and Affiliate

Consolidated Financial Statements

December 31, 2009 and 2008

Index

 

     Page

Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets

   F-3

Consolidated Statements of Operations

   F-4

Consolidated Statements of Cash Flows

   F-5

Consolidated Statements of the Stockholders’ Equity

   F-6

Notes to Consolidated Financial Statements

   F-7

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors

Tianli Agritech, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Tianli Agritech, Inc. and its Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tianli Agritech, Inc. as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States.

 

/s/ Sherb & Co., LLP
Certified Public Accountants
New York, New York
February 7, 2010

 

F-2


Table of Contents

TIANLI AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     December 31,
     2009    2008
ASSETS      

Current Assets:

     

Cash and cash equivalents

   $ 2,022,295    $ 210,311

Inventories

     3,272,438      2,556,651

Advances to suppliers

     84,951      11,792

Other current assets

     24,147      7,142
             

Total Current Assets

     5,403,831      2,785,896

Plant and equipment, net of accumulated depreciation of $1,331,840 and $595,852 at December 31, 2009 and 2008, respectively

     7,780,342      4,815,590

Construction in progress

     1,346,903      1,901,468

Biological assets, net of accumulated amortization of $607,319 and $367,608 at December 31, 2009 and 2008, respectively

     742,060      638,357

Intangible asset, net

     731,699      749,250
             

Total Assets

   $ 16,004,835    $ 10,890,561
             
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current Liabilities:

     

Short-term loans

   $ 658,164    $ 656,532

Accounts payable

     318,488      208,823

Other payables

     1,793,921      1,024,424

Accrued payroll

     13,034      20,525

Due to related parties

     564,306      871,612
             

Total Current Liabilities

     3,347,913      2,781,916

Stockholders’ Equity:

     

Common stock ($0.001 par value, 50,000,000 shares authorized, 8,125,000 issued and outstanding)

     8,125      8,125

Additional paid in capital

     4,262,534      4,262,534

Statutory surplus reserves

     670,280      228,710

Retained earnings

     7,286,633      3,202,240

Accumulated other comprehensive income

     429,350      407,036
             

Total Stockholders’ Equity

     12,656,922      8,108,645
             

Total Liabilities and Stockholders’ Equity

   $ 16,004,835    $ 10,890,561
             

See notes to audited consolidated financial statements

 

F-3


Table of Contents

TIANLI AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Year Ended December 31,  
     2009     2008  

Sales

   $ 12,550,533      $ 7,197,091   

Cost of goods sold

     7,752,191        4,759,929   
                

Gross profit

     4,798,342        2,437,162   
                

Operating expenses:

    

General and administrative expenses

     418,800        329,980   

Selling expenses

     7,046        9,659   
                

Total operating expenses

     425,846        339,639   
                

Income from operations

     4,372,496        2,097,523   
                

Other income (expense):

    

Interest expense

     (61,005     (55,798

Subsidy income

     214,519        240,583   

Other (expense) income

     (47     4,795   
                

Total other income (expenses)

     153,467        189,580   

Income before income taxes

     4,525,963        2,287,103   

Income taxes

     —          —     
                

Net income

     4,525,963        2,287,103   

Other comprehensive income:

    

Unrealized foreign currency translation adjustment

     22,314        261,381   
                

Comprehensive income

   $ 4,548,277      $ 2,548,484   
                

See notes to audited consolidated financial statements

 

F-4


Table of Contents

TIANLI AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Year Ended December 31,  
     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 4,525,963      $ 2,287,103   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     1,033,355        594,173   

Inventory shrinkage

     190,319        60,693   

Changes in operating assets and liabilities:

    

Advances to suppliers

     (73,090     16,225   

Inventories

     (850,254     (329,794

Other current assets

     (16,979     477,509   

Accounts payables

     109,087        (120,341

Other payables

     766,537        (4,237,324

Accrued payroll

     (7,538     20,206   
                

Total adjustments

     1,151,437        (3,518,653
                

Net cash provided by (used in) operating activities

     5,677,400        (1,231,550
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchase of construction in progress

     (290,116     (1,888,064

Purchase of intangible assets

     —          (54,006

Purchase of biological assets

     (431,014     (264,271

Purchase of plant and equipment

     (2,836,193     (1,042,097
                

Net cash used in investing activities

     (3,557,323     (3,248,438
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Capital contribution

     —          2,729,004   

Due to related parties

     (309,590     475,592   
                

Net cash (used in) provided by financing activities

     (309,590     3,204,596   
                

NET INCREASE (DECREASE) IN CASH

     1,810,487        (1,275,392

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     1,497        367,607   

CASH, BEGINNING OF YEAR

     210,311        1,118,096   
                

CASH, END OF YEAR

   $ 2,022,295      $ 210,311   
                

SUPPLEMENTAL DISCLOSURES:

    

Cash paid during the period for:

    

Interest paid

   $ 62,567      $ 56,898   
                

Income tax paid

   $ —        $ —     
                

See notes to audited consolidated financial statements

 

F-5


Table of Contents

TIANLI AGRITECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF THE STOCKHOLDERS’ EQUITY

 

     Common Stock    Additional
Paid-in Capital
   Statutory
Surplus

Reserves
   Retained
Earnings
    Accumulated Other
Comprehensive Income
   Total
     Shares    Amount              

Balance, December 31, 2007

   8,125,000    $ 8,125    $ 1,533,530    $ —      $ 1,143,847      $ 145,655    $ 2,831,157

Capital contribution

   —        —        2,729,004      —        —          —        2,729,004

Appropriation to statutory surplus reserves

   —        —        —        228,710      (228,710     —        —  

Comprehensive income:

                   

Net income

   —        —        —        —        2,287,103        —        2,287,103

Unrealized foreign currency translation adjustment

   —        —        —        —        —          261,381      261,381
                       

Subtotal

                      2,548,484
                                               

Balance, December 31, 2008

   8,125,000      8,125      4,262,534      228,710      3,202,240        407,036      8,108,645

Appropriation to statutory surplus reserves

   —        —        —        441,570      (441,570     —        —  

Comprehensive income:

                   

Net income

   —        —        —        —        4,525,963        —        4,525,963

Unrealized foreign currency translation adjustment

   —        —        —        —        —          22,314      22,314
                       

Subtotal

                      4,548,277
                                               

Balance, December 31, 2009

   8,125,000    $ 8,125    $ 4,262,534    $ 670,280    $ 7,286,633      $ 429,350    $ 12,656,922
                                               

See notes to audited consolidated financial statements

 

F-6


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2009 and 2008

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

The consolidated financial statements include the financial statements of Tianli Agritech, Inc. (referred to herein as “Tianli” or the “Company”), its wholly-owned subsidiary, HC Shengyuan Limited, a Hong Kong limited liability company (“HCS”) and HCS’ wholly-owned subsidiary, Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“WFOE”; HCS and WFOE are sometimes referred to as the “subsidiaries”), and Tianli’s variable interest entity, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“Fengze” or the “VIE”), where Tianli is deemed the primary beneficiary. Tianli, its consolidated subsidiaries and Fengze are collectively referred to herein as the “Company”, “we” and “us”.

Tianli Agritech, Inc. (“Tianli”) was incorporated in British Virgin Islands on November 9, 2009 as a limited liability company. The Company is engaged in the business of raising, breeding and selling hogs for use in China’s pork production and hog breeding markets. Its wholly owned subsidiary, HCS was incorporated in Hong Kong on November 24, 2009 as a limited liability company. Other than the equity interest in HCS, the Company does not own any assets or conduct any operations.

WFOE was incorporated in Wuhan, People’s Republic of China (“PRC”) on June 2, 2005. On November 26 2009, HCS entered into a stock purchase agreement with WFOE where HCS will acquire 100% equity interest of WFOE. On January 19, 2010, Wuhan Municipal Commission of Commerce approved the ownership change. On January 27, 2010, the ownership change was declared effective by Wuhan Administrator for Industry & Commerce. HCS acquired WFOE and became the holder of 100% equity interest of WFOE. Therefore, WFOE became the wholly-owned subsidiary of the Company. Other than the equity interest in WFOE, HCS does not own any assets or conduct any operations.

WFOE conducts its business through Fengze, which is consolidated as a variable interest entity.

Chinese laws and regulations currently do not prohibit or restrict foreign ownership in hog breeding businesses. However, Chinese laws and regulations do prevent direct foreign investment in certain industries. On December 1, 2009, to protect the Company’s shareholders from possible future foreign ownership restrictions, Fengze and all of the shareholders of Fengze entered into an entrusted management agreement with WFOE, which provides that WFOE will be entitled to the full guarantee for the performance of such contracts, agreements or transactions entered into by Fengze. WFOE is also entitled to receive the residual return of Fengze. As a result of the agreement, WFOE will absorb 100% of the expected losses and gains of Fengze, which results in WFOE being the primary beneficiary of Fengze.

WFOE also entered into a pledge of equity agreement with the Principal Shareholders, who pledged all their equity interest in these entities to WFOE. The pledge of equity agreement, which were entered into by each Principal Shareholder, pledged each of the Principal Shareholders’ equity interest in WFOE as a guarantee for the entrustment payment under the Entrusted Management Agreement.

In addition, WFOE entered into an option agreement to acquire the Principal Shareholders’ equity interest in these entities if or when permitted by the PRC laws.

Based on these exclusive agreements, the Company consolidates the variable interest entity (“VIE”), Fengze, as required by generally accepted accounting principles in the United States (“US GAAP”), because the Company is the primary beneficiary of the VIE. The profits and losses of the Company are allocated based upon the Entrusted Management Agreement.

 

F-7


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

The Company is engaged in the research and development, raising, breeding and selling hogs for use in China’s pork production and hog breeding markets. The Company operates production plants in Wuhan City, Hubei Province, PRC. The Company sells to distributors and large-scale swine farms.

The followings are brief description of contracts entered between WFOE and Fengze:

(1) Entrusted Management Agreement. The domestic companies, Fengze and WFOE, have entered into an Entrusted Management Agreement, which provides that WFOE will be fully and exclusively responsible for the management of Fengze. As consideration for such services, Fengze has agreed to pay WFOE the management fee during the term of this agreement and the management fee shall equal to Fengze’s estimated earnings before tax. Also, WFOE will assume all operating risks related to this entrusted management service to Fengze and bear all losses of Fengze. The term of this agreement will be from the effective date thereof to the earlier of the following: (1) the winding up of Fengze, or (2) the termination date of this Agreement to be determined by the parties hereto, or (3) the date on which WFOE completes the acquisition of Fengze.

(2) Exclusive Option Agreement. All the shareholders of Fengze as well as Fengze has entered into an Exclusive Option Agreement with WFOE, which provides that WFOE will be entitled to acquire such shares form the current shareholders upon certain terms and conditions, meanwhile WFOE will be entitled an irrevocable exclusive purchase option to purchase all or part of the assets and business of Fengze, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Option Agreement also prohibits the current shareholders of Fengze as well as Fengze from transferring any portion of their equity interests, business or assets to anyone other than WFOE. WFOE has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such times as it may wish to do so.

(3) Shareholders’ Voting Proxy Agreement. All the shareholders of Fengze has executed a Shareholders’ Voting Proxy Agreement to irrevocably appoint the persons designated by WFOE with the exclusive right to exercise, on their behalf, all of their Voting Rights in accordance with the laws and Fengze’s Articles of Association, including but not limited to the rights to sell or transfer all or any of their equity interests of Fengze, and to appoint and elect the directors and Chairman as the authorized legal representative of Fengze. This agreement will be only terminated prior to the completion of acquisition of all of the equity interests in, or all assets or business of Fengze.

(4) Pledge of Equity Agreement. WFOE and the shareholders of Fengze have entered into a Pledge of Equity Agreement, pursuant to which all shareholder pledges all of their shares (100%) of Fengze, as appropriate, to WFOE. If Fengze or any of its respective shareholders breaches its respective contractual obligations in the “Entrusted Management Agreement”, “Exclusive Option Agreement” and “Shareholders’ Voting Proxy Agreement”, WFOE as Pledge, will be entitled to certain rights to foreclose on the pledged equity interests. Such Fengze shareholders cannot dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest

Except for the disclosed above, there are no arrangements that could require the Company to provide financial support to the variable interest entities, including events or circumstances that could expose the Company to a loss. As stated in the disclosure of various agreements between the Company and its VIE, the Company has rights to acquire any portion of the equity interests of the VIE. Also the Company may allocate its available funds to its VIE for business purpose. There are no fixed terms of such arrangements.

 

F-8


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

The following are major categories of the Assets and Liabilities of the VIE:

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

 

     December 31,
     2009    2008

Current assets

   $ 5,403,831    $ 2,785,896

Plant and equipment, net

   $ 7,780,342    $ 4,815,590

Construction in progress

   $ 1,346,903    $ 1,901,468

Biological assets, net

   $ 742,060    $ 638,357

Intangible assets

   $ 731,699    $ 749,250

Total liabilities

   $ 3,347,913    $ 2,781,916

Total stockholders’ equity

   $ 12,656,922    $ 8,108,645

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant inter-company transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

Certain of the Company’s accounting policies require higher degrees of judgment than others in their application. Management evaluates all of its estimates and judgments on an on-going basis.

Principles of Consolidation

Pursuant to US GAAP, Fengze is the VIE of the Company and the Company is the primary beneficiary of the VIE. Accordingly, the VIE has been consolidated in the Company’s financial statements.

Based on various VIE agreements, the Company is able to excise control over the VIE; and obtain the financial interests such as obtaining periodic income of the VIE through technical and consulting service arrangements and obtaining the net assets of VIE through purchase of their equities at essentially no cost basis. The Company therefore concluded that its interest in the VIE is not a noncontrolling interest and therefore is not classified as so. The amount of noncontrolling interest of the original shareholders of Fengze holding shares of the VIE for the Company is zero. They exercise no controls over the VIE and no financial interests of ownership are due to them either for periodic income or the net assets.

 

F-9


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are composed primarily of time deposits and investments in money market accounts and are stated at cost which approximates fair value.

Inventories

Inventories are stated at the lower of cost, as determined by the weighted-average method, or the market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower. Costs of raised animals include proportionate costs of breeding, including depreciation of the breeding herd, plus the costs of maintenance through the balance sheet date. Purchased hogs are carried at purchase cost plus costs of maintenance through the balance sheet date.

Plant and Equipment

The Company states plant and equipment at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When plant and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. In accordance with US GAAP, the Company examines the possibility of decreases in the value of plant and equipment when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets with the residual value of 5% of plant and equipment. The depreciation expense for the years ended December 31, 2009 and 2008 amounted to $734,111 and $307,836, respectively.

Estimated useful lives of the Company’s assets are as follows:

 

     Useful Life

Buildings

   40 years

Vehicles

   5 years

Office equipment

   5 years

Production equipment

   5 years

Construction in Process

Construction in process consists of amounts expended for building construction and for growing breeder hogs. Once building construction is completed and the breeder hogs are grown, the cost accumulated in construction in process is transferred to property and equipment.

Biological Assets

Biological assets consist primarily of hogs for breeding and farrowing, which produce the piglets growing faster and better quality carcasses with a high percentage of meat and a small quantity of fat. The costs to purchase and cultivate these hogs and the expenditures related to labor and materials to feed during the pregnancy stage and

 

F-10


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

the early stage of the hogs’ growth. These costs are capitalized until the hogs become commercially productive, at which time annual amortization is recognized using the straight-line method over the economic useful life of the hogs, which is estimated to be 3 years, with a residual value of $73 (RMB 500). Amortization expense pertaining to the biological assets aggregated to $279,840 and $255,898 for the years ended December 31, 2009 and 2008, respectively, and are included in inventory costs and ultimately become a component of cost of goods sold.

Intangible Assets

Intangible assets include the land use rights. According to the laws of PRC, the government owns all the land in PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over their lease terms.

The Company states intangible assets at cost less accumulated amortization. In accordance with US GAAP, the Company examines the possibility of decreases in the value of land use rights when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes amortization using the straight-line method over the approved lives of the land use rights. The amortization expense for the years ended December 31, 2009 and 2008 amounted to $19,404 and $30,439, respectively

Impairment of Long-lived Assets

In accordance with US GAAP, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the assets estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the years ended December 31, 2009 and 2008.

Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements and Disclosure (“ASC 820”) for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

 

F-11


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

Cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.

In addition, the Company did not elect the fair value options for any of its qualifying financial instruments.

Revenue Recognition

The Company generates revenues from the business of raising, breeding and selling hogs for use in Chinese pork production and hog breeding markets.

The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. The Company is not subject to value-added tax (“VAT”) withholdings.

Income Taxes

The Company provides for deferred income taxes using the asset and liability method. Under this method, the Company recognizes deferred income taxes for tax credits and net operating losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

Income taxes are accounted for under the Statement of Financial Accounting Standards (“FASB”) ASC 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry forwards. Any deferred tax assets and liabilities would be measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company is not subject to the Income Tax Law of the People’s Republic of China. According to the Income Tax Law of the People’s Republic of China, engaging in the agricultural business is exempt from the 25% enterprise income tax. The Company is engaged in business of research and development, raising, breeding and selling hogs for use in Chinese pork production and hog breeding markets, which is exempt from the Chinese income tax.

In addition, the Company is not subject to the 17% VAT tax for hog sales or the 5% business tax levied on the incomes from the services rendered. According to the PRC tax regulations, companies engaging in the agricultural business are exempt from the 17% VAT tax and 5% business tax.

 

F-12


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

Accumulated Other Comprehensive Income

As of December 31, 2009, the accounts of Tianli were maintained and its financial statements were expressed in Chinese Renminbi (RMB). Such financial statements were translated into United States Dollars (USD) in accordance with US GAAP, with the RMB as the functional currency. All balance sheet items, assets and liabilities, are translated at the current exchange rates of the balance sheet dates, shareholders’ equity is translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with US GAAP as a component of shareholders’ equity.

During the years ended December 31, 2009 and 2008, the transactions of Tianli were denominated and recorded in RMB at the rates of exchange in effect when the transactions occur. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Accumulated other comprehensive income consisted of unrealized gains or losses resulting from the translation of financial statements from RMB to US dollars. For the fiscal years ended December 31, 2009 and 2008, the unrealized foreign currency translation adjustments were a gain of $22,314 and $261,381, respectively.

Risks and Uncertainties

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC’s economy. The Company’s business may be influenced by changes in PRC governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

 

F-13


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

Recent Accounting Pronouncements

Accounting Standards Codification: In July 2009, the Financial Accounting Standards Board (“FASB”) issued standards that established the FASB Accounting Standards Codification (“ASC” or “Codification”) as the single source of authoritative US GAAP for nongovernmental entities. The ASC supersedes all non-SEC accounting and reporting standards that existed at the ASC’s effective date, including FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related literature. The FASB uses Accounting Standards Updates (“ASU”) to amend the ASC. The Codification was effective for interim and annual periods ending after September 15, 2009.

In December 2007, the FASB issued a standard that established new standards to govern the accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and, the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the noncontrolling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings. This new standard was effective for periods beginning after December 15, 2008. The Company has adopted and evaluated this standard and determined that there was no impact as of December 31, 2009 and 2008.

In March 2008, the FASB issued a standard that is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has evaluated the new standard and determined that there was no impact as of December 31, 2009 and 2008.

In May 2009, the FASB issued a standard that established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. The Company has adopted this statement.

On June 16, 2008, the FASB issued a standard to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The new standard determines that unvested share-based payment awards that contain rights to dividend payments should be included in earning per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company has adopted and evaluated the new standard and determined that there was no impact as of December 31, 2009 and 2008.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

 

F-14


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

NOTE 3—INVENTORIES

Inventories are stated at the lower of cost, as determined by the weighted-average method, or market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower. Costs of raised animals include proportionate costs of breeding, including depreciation of the breeding herd, plus the costs of maintenance through the balance sheet date. Purchased cattle are carried at purchase cost plus costs of maintenance through the balance sheet date.

Inventories consisted of the following:

 

     December 31,
     2009      2008

Raw materials

   $ 257,762      $ 138,443

Work in process—biological assets

     1,889,422        1,600,652

Infant hogs

     1,125,254        817,556
               
   $ 3,272,438      $ 2,556,651
               

The Company reviews its inventories periodically for possible obsolete goods and to determine if any reserves are necessary for potential obsolescence. As of December 31, 2009 and 2008, the Company determined that no more reserves were necessary.

NOTE 4—ADVANCES TO SUPPLIERS

The Company advances to certain vendors for the purchase of materials. As of December 31, 2009 and 2008, the advances to suppliers amounted to $84,951 and $11,792, respectively.

NOTE 5—PLANT AND EQUIPMENT

Plant and equipment consist of the following:

 

     December 31,  
     2009     2008  

Buildings

   $ 8,232,866      $ 4,731,798   

Vehicles

     442,742        448,521   

Office equipment

     49,592        22,228   

Production equipment

     386,982        208,895   
                
     9,112,182        5,411,442   

Less: Accumulated depreciation

     (1,331,840     (595,852
                
   $ 7,780,342      $ 4,815,590   
                

The depreciation expense of the plant and equipment for the years ended December 31, 2009 and 2008 amounted to $734,111 and $307,836, respectively

 

F-15


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

NOTE 6—CONSTRUCTION IN PROGRESS

Construction in process consists of amounts expended for building construction and for growing breeder hogs. Once building construction is completed and the breeder hogs are grown, the cost accumulated in construction in process is transferred to property and equipment. As of December 31, 2009 and 2008, the construction in progress is $1,346,903 and $1,901,468, respectively.

NOTE 7—BIOLOGICAL ASSETS

Biological assets consist of the following:

 

     December 31,  
     2009     2008  

Hogs

   $ 1,349,379      $ 1,005,965   

Less: Accumulated amortization

     (607,319     (367,608
                
   $ 742,060      $ 638,357   
                

Total amortization expense of the biological assets for the years ended December 31, 2009 and 2008 amounted to $279,840 and $255,898, respectively.

NOTE 8 – INTANGIBLE ASSETS

Intangible assets include the land use rights. According to the laws of PRC, the government owns all the land in PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 50 years.

Intangible assets at December 31, 2009 and 2008 are as follows:

 

     December 31,  
     2009      2008  

Land use rights

   $ 809,231       $ 807,224   

Less Accumulated amortization

     (77,532      (57,974
                 
   $ 731,699       $ 749,250   
                 

Amortization expense for the Company’s intangible assets for the years ended December 31, 2009 and 2008 was $19,404 and $30,439, respectively.

Amortization expenses of the intangible asset for the next five years after December 31, 2009 are as follows:

 

Year ended December 31, 2010

   $ 19,404

Year ended December 31, 2011

     19,404

Year ended December 31, 2012

     19,404

Year ended December 31, 2013

     19,404

Year ended December 31, 2014

     19,404

Thereafter

     634,679
      
   $ 731,699
      

 

F-16


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

NOTE 9—SHORT-TERM LOAN

As of August 31, 2009 and 2008, the short-term loans were as follows:

 

     December 31,

Description

   2009    2008

Loan payable to Wuhan Huangpi Rural Credit Union, interest at 7.2% annually, due by October 9, 2009, collateralized by certain assets of the Company.

   $ —      $ 656,532

Loan payable to Wuhan Huangpi Rural Credit Union, interest at 7.2% annually, due by October 9, 2010, collateralized by certain assets of the Company

     658,164      —  
             
   $ 658,164    $ 656,532
             

The interest expense was $62,567 and $56,898 for the years ended December 31, 2009 and 2008, respectively.

NOTE 10—ACCOUNTS PAYABLE

At December 31, 2009 and 2008, accounts payable were $318,488 and $208,823, respectively. Accounts payable is primarily payments due to suppliers and vendors for feeds and animal medicines.

NOTE 11—OTHER PAYABLES

Other payables are comprised of the payables to other local hog farmers that the Company purchases buildings and hogs from other local hog farmers, for the purpose of expanding the capacity for feeding breeding hogs. The other payables as of December 31, 2009 and 2008 are $1,793,921 and $1,024,424, respectively.

NOTE 12—RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. The due from/to related parties represented the advances from or to the Company’s shareholders. Such advances are non-interest bearing and due upon demand.

NOTE 13—STATUTORY RESERVES

As stipulated by the Company Law of PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 

   

Making up cumulative prior years’ losses, if any;

 

   

Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

 

   

Allocations of 5 to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory common welfare fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and

 

F-17


Table of Contents

Tianli Agritech, Inc. and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2009 and 2008

 

   

Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

 

   

The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

In accordance with the Chinese Company Law, the company has allocated 10% of its annual net income, amounted to $441,570 and $228,710 as statutory reserve for the years ended December 31, 2009 and 2008, respectively.

According to the new Company Law of PRC executed in 2006, the Company is no longer required to reserve the “Statutory common welfare fund”. Accordingly, the Company did not reserve the common welfare fund as of December 31, 2009 and 2008.

 

F-18


Table of Contents

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

TABLE OF CONTENTS

 

Prospectus Summary

   1

Risk Factors

   11

Forward-Looking Statements

   33

Our Corporate Structure

   34

Use of Proceeds

   36

Dividend Policy

   37

Exchange Rate Information

   37

Capitalization

   38

Dilution

   39

Post-Offering Ownership

   40

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   41

Our Business

   51

Description of Property

   63

Regulation

   64

Management

   67

Related Party Transactions

   74

Principal Shareholders

   76

Description of Share Capital

   77

Shares Eligible for Future Sale

   84

Tax Matters Applicable to U.S. Holders of Our Common Shares

   87

Enforceability of Civil Liabilities

   91

Placement

   92

Legal Matters

   96

Experts

   96

Interests of Experts and Counsel

   96

Where You Can Find More Information

   96

Financial Pages

   F-1

Until                  , 2010 (90 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as a placement agent and with respect to unsold allotments or subscriptions.

 

LOGO

TIANLI AGRITECH, INC.

Common Shares

1,667,000 Share Minimum

2,000,000 Share Maximum

 

 

Prospectus

 

 

Anderson & Strudwick,

Incorporated



Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

[ALTERNATE PAGE]

SUBJECT TO COMPLETION, DATED MARCH 17, 2010

LOGO

Tianli Agritech, Inc.

243,750 Common Shares

This prospectus relates to the resale by the selling shareholders of up to 243,750 of our common shares. The selling shareholders may sell common shares from time to time in the principal market on which our shares is traded at the prevailing market price or in negotiated transactions. We will not receive any proceeds from the sales by the selling shareholders.

No public market currently exists for our shares. We have applied for approval for quotation on the NASDAQ Capital Market under the symbol “OINK” for the common shares we are offering.

The selling shareholders holding 243,750 shares offered through this prospectus may sell their shares once our common shares have been registered and listed on the NASDAQ Capital Market or another national exchange. Once, and if, our common shares begin to be traded or quoted on any stock exchange, market, or trading facility, the selling shareholders may sell their shares from time to time at the market price prevailing on the exchange, market, or trading facility, or at prices related to such prevailing market prices, or in negotiated transactions or a combination of such methods of sale.

Investing in our common shares involves significant risks. See “ Risk Factors ” beginning on page 11 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus. Any representation to the contrary is a criminal offense.

 

 

Prospectus dated                  , 2010


Table of Contents

[ALTERNATE PAGE]

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

TABLE OF CONTENTS

 

Prospectus Summary

   1

Risk Factors

   11

Forward-Looking Statements

   33

Our Corporate Structure

   34

Use of Proceeds

   36

Dividend Policy

   37

Exchange Rate Information

   37

Capitalization

   38

Selling Shareholders

   40

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   41

Our Business

   51

Description of Property

   63

Regulation

   64

Management

   67

Related Party Transactions

   74

Principal Shareholders

   76

Description of Share Capital

   77

Shares Eligible for Future Sale

   84

Tax Matters Applicable to U.S. Holders of Our Common Shares

   87

Enforceability of Civil Liabilities

   91

Plan of Distribution

   92

Legal Matters

   96

Experts

   96

Interests of Experts and Counsel

   96

Where You Can Find More Information

   96

Financial Pages

   F-1

 

 

LOGO

TIANLI AGRITECH, INC.

Common Shares

 

 

Prospectus

 

 


 


Table of Contents

[ALTERNATE PAGE]

 

The Offering   
Common Shares Offered by Selling Shareholders    243,750 shares
Common Shares Outstanding    8,125,000 shares (1)
Use of proceeds    We will not receive any proceeds from the sale of our common shares by the selling shareholders.
NASDAQ Market Symbol    We have applied to use the symbol “OINK” for our common shares. (CUSIP No. G8883T 104)

 

(1)

Based on 8,125,000 of our common shares outstanding as of the date of this prospectus. The number of common shares outstanding excludes up to 2,000,000 common shares to be offered on a best efforts, minimum/maximum offering concurrently herewith.

 

7-A


Table of Contents

[ALTERNATE PAGE]

USE OF PROCEEDS

The selling shareholders are selling all of the shares covered by this prospectus for their own accounts. We will not receive any proceeds from the sale of the shares.

 

36-A


Table of Contents

[ALTERNATE PAGE]

SELLING SHAREHOLDERS

The following table provides, as of the date of this prospectus, information regarding the beneficial ownership of our common shares held by each of the selling shareholders, including:

 

   

the number of shares owned by each shareholder prior to this offering;

 

   

the percentage owned by each shareholder prior to completion of the offering;

 

   

the total number of shares that are to be offered for each shareholder;

 

   

the total number of shares that will be owned by each shareholder upon completion of the offering; and

 

   

the percentage owned by each shareholder upon completion of the offering.

We have agreed to register a total of 243,750 of our common shares held by the selling shareholders. We are registering the shares under this prospectus.

 

Name of Selling Shareholder

   Number of
Common Shares
Beneficially
Owned Prior to
the Offering
   Percentage of
Common
Shares
Beneficially
Owned Prior
to the
Offering (1)
    Number of
Common Shares
Registered for
Sale Hereby
   Number of
Common Shares
Beneficially
Owned after
Completion of
the Offering (2)
   Percentage
Common
Shares
Beneficially
Owned
after
Completion
of the
Offering (2)
 

Jishan Sun

   346,250    4.26   103,750    242,500    2.98

Fulcan Capital Management, LLC

   184,667    2.27   84,667    100,000    1.23

Daybreak Special Situations Master Fund, Ltd.

   22,000    0.27   22,000    0    0

Peizhen Jin

   20,000    0.25   20,000    0    0

Richard Ng

   10,000    0.12   10,000    0    0

John Prinz

   3,333    0.04   3,333    0    0

Total

   586,250    7.22   243,750    342,500    4.22

 

(1)

Based on 8,125,000 common shares outstanding as of the date of this prospectus. The number of common shares outstanding excludes up to 2,000,000 common shares to be offered on a best efforts, minimum/maximum offering concurrently herewith.

(2)

Represents the amount of shares that will be held by the selling shareholders after completion of this offering based on the assumption that all shares registered for sale hereby will be sold. However, the selling shareholders may offer all, some or none of the shares pursuant to this prospectus, and to our knowledge there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares that may be held by the selling shareholders after completion of this offering.

The selling shareholders acquired the shares for their own accounts in the ordinary course of business, and at the time they acquired the shares, they had no agreements, plans or understandings, directly or indirectly, to distribute the shares. None of the selling shareholders, to our knowledge, has had a material relationship with our company other than as a shareholder at any time within the past three years.

 

40-A


Table of Contents

[ALTERNATE PAGE]

PLAN OF DISTRIBUTION

Once, and if, our common shares begin to be traded or quoted on any stock exchange, market, or trading facility, the selling shareholders, who hold an aggregate of 243,750 common shares offered through this prospectus, may sell their shares from time to time at the market price prevailing on the exchange, market, or trading facility, or at prices relating to the prevailing market prices, or in negotiated transactions or a combination of such methods of sale. The selling shareholders may use any one or more of the following methods when selling shares:

 

   

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

   

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

   

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

   

an exchange distribution in accordance with the rules of the applicable exchange;

 

   

privately negotiated transactions;

 

   

settlement of short sales entered into after the date of this prospectus;

 

   

broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share;

 

   

a combination of any such methods of sale;

 

   

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or

 

   

any other method permitted pursuant to applicable law.

In connection with the sale of our common shares or interest therein, the selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of our common shares in the course of hedging the positions they assume. The selling shareholders may also sell common shares short and deliver these securities to close out their short positions, or loan or pledge the common shares to broker-dealers, which in turn may sell the securities. The selling shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The selling shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. Because the selling shareholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. We will make copies of this prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale. Each selling shareholder has informed us that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the common shares.

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling shareholders against certain losses, claims, damages and liabilities.

The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. The maximum commission or discount to be received by any FINRA member or independent broker/dealer will not be greater than 8% for the sale of any securities being registered pursuant to SEC Rule 415.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to our common shares for a period of two business days prior to the commencement of the distribution. In addition, the selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of our common shares by the selling shareholders or any other person.

Our placement agent in the public offering, Anderson & Strudwick, may assist the Selling Shareholders with the sale of their common shares. To the extent the placement agent assists with any resale of such common shares, the maximum commission or discount to be received by it in such capacity will not be greater than 8% for the sale of any securities being registered pursuant to SEC Rule 415.

 

92-A


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

The estimated expenses payable by us in connection with the offering described in this registration statement (other than the placement discounts and commissions) will be as follows. With the exception of the filing fees for the U.S. Securities Exchange Commission, FINRA and NASDAQ, all amounts are estimates.

 

U.S. Securities Exchange Commission registration fee

   $ 958

FINRA filing fee

   $ 1,990

NASDAQ listing fee

   $ 50,000

Legal fees and expenses for Chinese counsel*

   $ 88,000

Legal fees and expenses for British Virgin Islands counsel*

   $ 10,000

Legal fees and expenses for U.S. counsel*

   $ 200,000

Accounting fees and expenses*

   $ 120,000

Printing fees*

   $ 30,000

Miscellaneous*

   $ 9,052
      

Total

   $ 510,000

 

Item 14. Indemnification of Directors and Officers

British Virgin Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Under the memorandum and articles of association of the Registrant, the Registrant may indemnify its directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the Registrant and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.

The Placement Agreement, the form of which is filed as Exhibit 1.1 to this registration statement, will also provide for indemnification of the Registrant and its officers and directors.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Item 15. Recent Sales of Unregistered Securities

In the past three years, we issued 8,125,000 shares in the aggregate to twenty-three shareholders upon the reorganization of our company, in transactions that were not required to be registered under the Securities Act of 1933 (of these 8,125,000 shares, up to 1,000,000, assuming a maximum offering, will be held in escrow). All issuances of common shares to these shareholders were deemed to be exempt under the Securities Act by virtue of Section 4(2) thereof as transactions not involving any public offering. In addition, the issuance of 7,561,250 shares to our founders were deemed not to fall within Section 5 under the Securities Act and to be further exempt under Rule 901 and 903(b)(1) of Regulation S by virtue of being issuances of securities by non-U.S. companies to non-U.S. citizens or residents, conducted outside the United States and not using any element of interstate commerce.

In particular, we issued 7,561,250 shares to 16 shareholders who are our company’s founders and original shareholders upon completion of the reorganization on December 30, 2009 in transactions that are exempt under both Section 4(2) of the Securities Act as transactions not involving any public offering and Rule 901 and 903(b)(1) of Regulation S.

 

II-1


Table of Contents

We also issued 35,333 shares to 3 shareholders in November 2009 in return for cash payments of $105,999. These issuances were made in reliance on Section 4(2) of the Securities Act as transactions not involving any public offering.

Finally, in November and December 2009, we issued, in the aggregate, 528,417 shares to four shareholders in return for certain consulting services in transactions that are exempt under Section 4(2) of the Securities Act as transactions not involving any public offering.

All recipients either received adequate information about the registrant or had access, through their relationships with the registrant, to such information. There were no underwriters employed in connection with any of the transactions set forth above.

 

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

The following exhibits are filed herewith or incorporated by reference in this prospectus:

 

Exhibit
Number

 

Document

     1.1   Form of Placement Agreement (1)
 3(i).1   Amended and Restated Articles of Association of the Registrant (1)
3(ii).1   Amended and Restated Memorandum of Association of the Registrant (1)
     4.1   Specimen Share Certificate (2)
     4.2   Form of Placement Agent Warrant (included in Ex. 10.1) (1)
     5.1   Form of Opinion of Kaufman & Canoles, P.C., Virginia counsel (1)
     5.2   Form of Opinion of Kaufman & Canoles, P.C., British Virgin Islands counsel (1)
   10.1   Form of Placement Agent Warrant Agreement (1)
   10.2   Translation of Entrusted Management Agreement for Fengze (1)
   10.3   Translation of Shareholder Voting Proxy Agreement for Fengze (1)
   10.4   Translation of Pledge of Equity Interest Agreement for Fengze (1)
   10.5   Translation of Exclusive Option Agreement for Fengze (1)
   10.6   Form of Share Incentive Plan (1)
   10.7   Form of Lock-Up Agreement (1)
   10.8   Translation of Employment Agreement between Registrant and Ms. Hanying Li, Chief Executive Officer of the Registrant (1)
   10.9   Translation of Employment Agreement between Registrant and Mr. Bihong Zhang, Chief Financial Officer of the Registrant (1)
   10.10   Form of Make-Good Escrow Agreement (1)
   10.11   Translation of Land Lease Contract – Zhulin (1)
   10.12   Translation of Land Lease Contract – Fengze (1)
   10.13   Translation of Land Lease Contract – Jinmu (1)

 

II-2


Table of Contents
   10.14    Translation of Side Agreement Related to Land Lease Contract – Jinmu (1)
   10.15    Translation of Land Lease Contract – Tianjian (1)
   10.16    Translation of Side Agreement Related to Land Lease Contract – Tianjin (1)
   10.17    Translation of Land Lease Contract – Nanyan (1)
   10.18    Translation of Side Agreement Related to Land Lease Contract – Nanyan (1)
   10.19    Translation of Land Lease Contract – Mingxiang (1)
   10.20    Translation of Side Agreement Related to Land Lease Contract – Mingxiang (1)
   10.21    Translation of Land Lease Contract – Huajian A & B (1)
   10.22    Translation of Side Agreement Related to Land Lease Contract – Huajian A & B (1)
   10.23    Translation of Feed Sale Agreements (1)
   10.24    Translation of Land Use Rights Transfer Agreement – Qingsonggang (1)
   21.1    Subsidiaries and Affiliate of the Registrant (1)
   23.1    Consent of Sherb & Co., LLP (1)
   23.2    Consent of Kaufman & Canoles, Virginia counsel (included in Exhibit 5.1) (1)
   23.3    Consent of Kaufman & Canoles, British Virgin Islands counsel (included in Exhibit 5.2) (1)
   23.4    Consent of Kai Tong Law Firm (included in Exhibit 99.1) (1)
   24.1    Power of Attorney (included at page II-6) (1)
   99.1    Form of Opinion of Kai Tong Law Firm (1)
   99.2    Code of Business Conduct and Ethics (1)

 

(1)

Filed herewith.

(2)

To be filed by amendment.

(b) Financial Statement Schedules

None.

 

Item 17. Undertakings

The Registrant hereby undertakes:

 

  (a) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:

 

  (i) include any prospectus required by section 10(a)(3) of the Securities Act;

 

  (ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

 

II-3


Table of Contents
  (iii) include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

  (b) that, for the purpose of determining any liability under the Securities Act, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

  (c) to file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

 

  (d) to file a post-effective amendment to include any financial statements required by Form 10-K at the start of any delayed offering or throughout a continuous offering.

 

  (e) that insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registration of expenses incurred or paid by a director, officer or controlling person to the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

  (f) that, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

 

  (g) that, for the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of the securities, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

  (i) any preliminary prospectus or prospectus of the Registrant relating to the offering filed pursuant to Rule 424;

 

  (ii) any free writing prospectus relating to the offering prepared by or on behalf of the Registrant or used or referred to by the Registrant;

 

  (iii) the portion of any other free writing prospectus relating to the offering containing material information about the Registrant or its securities provided by or on behalf of the Registrant; and

 

  (iv) any other communication that is an offer in the offering made by the Registrant to the purchaser.

 

  (h) to provide to the Placement Agent at the closing specified in the placement agent agreements, certificates in such denominations and registered in such names as required by the Placement Agent to permit prompt delivery to each purchaser.

 

II-4


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the People’s Republic of China, on March 16, 2010.

 

TIANLI AGRITECH, INC.
By:   / S /    H ANYING L I        
Name:   Hanying Li
Title:  

Chief Executive Officer

(Principal Executive Officer)

Date:   March 16, 2010

 

II-5


Table of Contents

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Hanying Li as his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended and all post-effective amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Date:   March 16, 2010

Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/ S /    H ANYING L I        

  

Chief Executive Officer and Director (Principal Executive Officer)

  March 16, 2010
H ANYING L I     

/ S /    B IHONG Z HANG        

  

Chief Financial Officer and Director (Principal Accounting and Financial Officer)

  March 16, 2010
B IHONG Z HANG     

/ S /    Y OUHANG P ENG        

  

Director and Authorized Representative in the United States

  March 16, 2010
Y OUHANG P ENG     

/ S /    G UOPING W ANG        

  

Director

  March 16, 2010
G UOPING W ANG     

/ S /    C HANGXIN W U        

  

Director

  March 16, 2010
C HANGXIN W U     

/ S /    J ISHAN H U        

  

Director

  March 16, 2010
J ISHAN H U     

/ S /    B ENYAN L I        

  

Director

  March 16, 2010
B ENYAN L I     

 

II-6


Table of Contents

Exhibit Index

 

Exhibit
Number

 

Document

     1.1   Form of Placement Agreement (1)
 3(i).1   Amended and Restated Articles of Association of the Registrant (1)
3(ii).1   Amended and Restated Memorandum of Association of the Registrant (1)
     4.1   Specimen Share Certificate (2)
     4.2   Form of Placement Agent Warrant (included in Ex. 10.1) (1)
     5.1   Form of Opinion of Kaufman & Canoles, P.C., Virginia counsel (1)
     5.2   Form of Opinion of Kaufman & Canoles, P.C., British Virgin Islands counsel (1)
   10.1   Form of Placement Agent Warrant Agreement (1)
   10.2   Translation of Entrusted Management Agreement for Fengze (1)
   10.3   Translation of Shareholder Voting Proxy Agreement for Fengze (1)
   10.4   Translation of Pledge of Equity Interest Agreement for Fengze (1)
   10.5   Translation of Exclusive Option Agreement for Fengze (1)
   10.6   Form of Share Incentive Plan (1)
   10.7   Form of Lock-Up Agreement (1)
   10.8   Translation of Employment Agreement between Registrant and Ms. Hanying Li, Chief Executive Officer of the Registrant (1)
   10.9   Translation of Employment Agreement between Registrant and Mr. Bihong Zhang, Chief Financial Officer of the Registrant (1)
   10.10   Form of Make-Good Escrow Agreement (1)
   10.11   Translation of Land Lease Contract – Zhulin (1)
   10.12   Translation of Land Lease Contract – Fengze (1)
   10.13   Translation of Land Lease Contract – Jinmu (1)
   10.14   Translation of Side Agreement Related to Land Lease Contract – Jinmu (1)
   10.15   Translation of Land Lease Contract – Tianjian (1)
   10.16   Translation of Side Agreement Related to Land Lease Contract – Tianjin (1)
   10.17   Translation of Land Lease Contract – Nanyan (1)
   10.18   Translation of Side Agreement Related to Land Lease Contract – Nanyan (1)
   10.19   Translation of Land Lease Contract – Mingxiang (1)
   10.20   Translation of Side Agreement Related to Land Lease Contract – Mingxiang (1)
   10.21   Translation of Land Lease Contract – Huajian A & B (1)


Table of Contents
   10.22    Translation of Side Agreement Related to Land Lease Contract – Huajian A & B (1)
   10.23    Translation of Feed Sale Agreements (1)
   10.24    Translation of Land Use Rights Transfer Agreement – Qingsonggang (1)
   21.1    Subsidiaries and Affiliate of the Registrant (1)
   23.1    Consent of Sherb & Co., LLP (1)
   23.2    Consent of Kaufman & Canoles, Virginia counsel (included in Exhibit 5.1) (1)
   23.3    Consent of Kaufman & Canoles, British Virgin Islands counsel (included in Exhibit 5.2) (1)
   23.4    Consent of Kai Tong Law Firm (included in Exhibit 99.1) (1)
   24.1    Power of Attorney (included at page II-6) (1)
   99.1    Form of Opinion of Kai Tong Law Firm (1)
   99.2    Code of Business Conduct and Ethics (1)

 

(1)

Filed herewith.

(2)

To be filed by amendment.

Exhibit 1.1

TIANLI AGRITECH, INC.

(a British Virgin Islands company)

Minimum Offering: 1,667,000 Common Shares

Maximum Offering: 2,000,000 Common Shares

($             per share)

PLACEMENT AGREEMENT

                  ,         

Anderson & Strudwick, Incorporated

707 East Main Street, 20 th  Floor

Richmond, Virginia 23219

Ladies and Gentlemen:

The undersigned, Tianli Agritech, Inc., a British Virgin Islands company (the “Company”), hereby confirms its agreement with you as follows:

1.  Introduction . This Agreement sets forth the understandings and agreements between the Company and you whereby, subject to the terms and conditions herein contained, you will offer to sell, on a “best efforts, minimum/maximum” basis on behalf of the Company as provided in Section 4(a) (the “Offering”), at an offering price of U.S. $             per share, a minimum of 1,667,000 common shares and a maximum of 2,000,000 common shares, to be issued by the Company (the “Shares”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Prospectus prepared by the Company and dated  [            ] (the “Prospectus”).

2.  Representations and Warranties of the Company . The Company makes the following representations and warranties to you:

(a)  Registration Statement and Prospectus . The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File No. 333-            ) (as defined below, the “Registration Statement”) conforming to the requirements of the Securities Act of 1933, as amended (the “1933 Act”), and the applicable rules and regulations (the “Rules and Regulations”) of the Commission. Such amendments to such Registration Statement as may have been required prior to the date hereof have been filed with the Commission, and such amendments have been similarly prepared. Copies of the Registration Statement, any and all amendments thereto prepared and filed with the Commission, and each related Preliminary Prospectus, and the exhibits, financial statements and schedules, as finally amended and revised, have been delivered to you for review. The term “Registration Statement” as used in this Agreement shall mean the Company’s Registration Statement on Form S-1, including the Prospectus, any documents incorporated by reference therein, and all financial schedules and exhibits thereto, as amended on the date that the Registration Statement becomes effective. The term “Prospectus” as used in this Agreement shall mean the prospectus relating to the Shares in the form in which it was filed with the Commission pursuant to Rule 424(b) of the 1933 Act or, if no filing pursuant to Rule 424(b) of the 1993 Act is required, shall mean the form of the final prospectus included in the Registration Statement when the Registration Statement becomes effective. The term “Preliminary Prospectus” shall mean any prospectus included in the Registration Statement before it becomes effective. The terms “effective date” and “effective” refer to the date the Commission declares the Registration Statement effective pursuant to Section 8 of the 1933 Act.

(b) A registration statement on Form 8-A (File No. 001-            ) in respect of the registration of the Shares under the U.S. Securities Exchange Act of 1934, as amended (the “1934 Act”), has been filed with the Commission. Such registration statement in the form heretofore delivered to you has been declared effective by the Commission in such form. No other document with respect to such registration statement has heretofore been filed with the Commission. No stop order suspending the effectiveness of such registration statement has been issued and no proceeding for that purpose has been initiated, or to the knowledge of the Company after due inquiry threatened, by the Commission (the various parts of such


registration statement, including all exhibits thereto, each as amended at the time such part of the registration statement became effective, being hereinafter called the “Form 8-A Registration Statement”). The Form 8-A Registration Statement when it became effective conformed, and any further amendments thereto will conform, in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder, and did not and will not, as of the applicable effective date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

(c)  Adequacy of Disclosure . Each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the 1933 Act and the Rules and Regulations, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by you expressly for use in the Registration Statement. When the Registration Statement shall become effective, when the Prospectus is first filed pursuant to Rule 424(b) of the Rules and Regulations, when any amendment to the Registration Statement becomes effective, when any supplement to the Prospectus is filed with the Commission and on the Closing Date (as hereinafter defined), (i) the Registration Statement, the Prospectus and any amendments thereof and supplements thereto will conform in all material respects with the applicable requirements of the 1933 Act and the Rules and Regulations, and (ii) neither the Registration Statement, the Prospectus nor any amendment or supplement thereto will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by you expressly for use in the Registration Statement.

(d)  No Stop Order . The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus with respect to the Shares, and no proceedings for that purpose have been instituted or threatened by the Commission or the state securities or blue sky authority of any jurisdiction.

(e)  Company; Organization and Qualification . The Company has been duly incorporated and is validly existing in good standing under the laws of the British Virgin Islands with all requisite corporate power and authority to enter into this Agreement, to conduct its business as now conducted and as proposed to be conducted, and to own and operate its properties, investments and assets, as described in the Registration Statement and Prospectus. The Company is not in violation of any provision of its memorandum or articles of association or other governing documents and is not in default under or in breach of, and does not know of the occurrence of any event that with the giving of notice or the lapse of time or both would constitute a default under or breach of, any term or condition of any material agreement or instrument to which it is a party or by which any of its properties, investments or assets is bound, except as disclosed in the Registration Statement and Prospectus. Except as noted in the Prospectus, the Company does not own or control, directly or indirectly, any other corporation, association, or other entity. The Company has furnished to you copies of its articles and memorandum of association, as amended, and all such copies are true, correct and complete and contain all amendments thereto through the Closing Date.

(f)  Validity of Shares . The Shares have been duly and validly authorized by the Company and upon issuance, will be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and will conform to the description thereof contained in the Prospectus. The preferences, rights and limitations of the Shares are set forth in the Prospectus under the caption “Description of Share Capital.” No party has any preemptive rights with respect to any of the Shares or any right of participation or first refusal with respect to the sale of the Shares by the Company. No person or entity holds a right to require or participate in the registration under the 1933 Act of the Shares pursuant to the Registration Statement; and, except as set forth in the Prospectus, no person holds a right to require registration under the 1933 Act of any Shares of the Company at any other time. The form of certificates evidencing the Shares complies with all applicable requirements of British Virgin Islands law.

(g)  Capitalization . The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption “Description of Share Capital.” All of the issued and outstanding Shares of the Company have been duly authorized, validly issued, fully paid and are non-assessable. Except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company.

 

2


(h)  Full Power . The Company has full legal right, power, and authority to enter into this Agreement and the Escrow Agreement among the Company, SunTrust Bank (the “Escrow Agent”) and you (the “Escrow Agreement”), to issue and deliver the Shares as provided herein and in the Prospectus and to consummate the transactions contemplated herein and in the Prospectus. Each of this Agreement and the Escrow Agreement has been duly authorized, executed, and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization, or similar laws affecting creditors’ rights generally, regardless of whether such enforceability is considered in equity or at law, (ii) general equity principles, and (iii) limitations imposed by applicable laws or the public policy underlying such laws regarding the enforceability of indemnification or contribution provisions.

(i)  Disclosed Agreements . All agreements between or among the Company and third parties expressly referenced in the Prospectus are legal, valid, and binding obligations of the Company, enforceable in accordance with their respective terms, except to the extent enforceability may be limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization, or similar laws affecting creditors’ rights generally, regardless of whether such enforceability is considered in equity or at law, (ii) general equity principles and (iii) limitations imposed by federal or state securities laws or the public policy underlying such laws regarding the enforceability of indemnification or contribution provisions.

(j)  Consents . Except as disclosed in the Registration Statement and Prospectus, each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body or any other third party necessary for the valid authorization, issuance, sale and delivery of the Shares, the execution, delivery and performance of this Agreement and the consummation by the Company of the transactions contemplated hereby and by the Registration Statement and Prospectus, except such as may be required under the 1933 Act, 1934 Act, or under other applicable securities laws has been made or obtained and is in full force and effect.

(k)  Litigation . There is not pending or, to the knowledge of the Company, threatened or contemplated, any action, suit, proceeding, inquiry, or investigation before or by any court or any governmental authority or agency to which the Company may be a party, or to which any of the properties or rights of the Company may be subject, that is not described in the Registration Statement and Prospectus and (i) that may reasonably be expected to result in any material adverse change in the condition (financial or otherwise) or business of the Company; or (ii) that may reasonably be expected to materially adversely affect any of the material properties of the Company; or (iii) that may reasonably be expected to adversely affect the consummation of the transactions contemplated by this Agreement, nor, to the knowledge of the Company, is there any meritorious basis therefor.

(l)  Financial Statements . The financial statements of the Company together with related schedules and notes included in the Registration Statement and Prospectus present fairly the financial position of the Company as of the dates indicated and the results of operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved. The financial information schedules included in the Registration Statement and the amounts in the Prospectus fairly present the information shown therein and have been compiled on a basis consistent with the financial statements included in the Registration Statement and the Prospectus. No other financial statements or schedules are required by Form S-1 or otherwise to be included in the Registration Statement, the Prospectus or any Preliminary Prospectus. The unaudited pro forma financial information (including the related notes) included in the Prospectus or any Preliminary Prospectus complies as to form in all material respects to the applicable accounting requirements of the 1933 Act and the Rules and Regulations, and management of the Company believes that the assumptions underlying the pro forma adjustments are reasonable. Such pro forma adjustments have been properly applied to the historical amounts in the compilation of the information and such information fairly presents with respect to the Company the financial position, results of operations and other information purported to be shown therein at the respective dates and for the respective periods specified.

 

3


(m)  Independent Accountants . Sherb & Co., CPA, who has audited certain financial statements of the Company and its subsidiaries, are, to the Company’s knowledge, independent public accountants as required by the 1933 Act and the rules and regulations of the Commission promulgated thereunder.

(n)  Disclosed Liabilities . The Company has not sustained, since December 31, 2009, any material loss or interference with its business from fire, explosion, flood, hurricane, accident, or other calamity, whether or not covered by insurance, or from any labor dispute or arbitrators’ or court or governmental action, order, or decree, otherwise than as set forth or contemplated in the Registration Statement and Prospectus; and, since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as otherwise stated in the Registration Statement and Prospectus or as set forth on the Disclosure Schedule, there has not been (i) any material change in the capital stock, long-term debt, obligations under capital leases, or short-term borrowings of the Company, (ii) any material adverse change, or any development that could be reasonably be seen as involving a prospective material adverse change in or affecting the business, prospects, properties, assets, results of operations or condition (financial or other) of the Company, (iii) any liability or obligation, direct or contingent, incurred or undertaken by the Company that is material to the business or condition (financial or other) of the Company, except for liabilities or obligations incurred in the ordinary course of business, (iv) any declaration or payment of any dividend or distribution of any kind on or with respect to the capital stock of the Company, or (v) any transaction that is material to the Company, except transactions in the ordinary course of business or as otherwise disclosed in the Registration Statement and Prospectus.

(o)  Required Licenses and Permits . Except as disclosed in the Prospectus, the Company owns, possesses, has obtained or in the ordinary course of business will obtain, and has made available for your review, all material permits, licenses, franchises, certificates, consents, orders, approvals, and other authorizations of governmental or regulatory authorities as are necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as presently conducted, or as contemplated in the Prospectus to be conducted (the “Permits”), and the Company has not received any notice of proceedings relating to revocation or modification of any such Permits.

(p)  Internal Accounting Measures . The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-14 and 15d-14 under the Exchange Act), which (i) are designed to ensure that material information relating to the Company is made known to the Company’s principal executive officer and its principal financial officer by others within the Company; and (ii) are effective in all material respects to perform the functions for which they were established. The Company’s system of internal accounting controls provides reasonable assurance that: (A) transactions are executed in accordance with management’s general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles in the United States (“US GAAP”); (C) access to assets is permitted only in accordance with management’s general or specific authorization; (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate actions are taken with respect to any differences; and (E) the Company has made and kept books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of such entity and provide a sufficient basis for the preparation of financial statements in accordance with US GAAP. There (x) are not any significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize, and report financial data or (y) has not been any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls. Since the date of the most recent evaluation of the Company’s disclosure controls and procedures, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Upon the effectiveness of the Registration Statement, the Company will be in compliance in all material respect with all provisions of the Sarbanes-Oxley Act of 2002 that are effective and applicable to the Company as an “issuer” as defined under the Sarbanes-Oxley Act of 2002.

(q)  Taxes . The Company has timely paid all taxes that have become due and no tax deficiency has been asserted against the Company, and the Company does not know of any tax deficiency that is likely to be asserted against the Company that if determined adversely to the Company, would, either individually or in the aggregate, have a material adverse effect on the business, prospects, properties, assets, results of operations, or condition (financial or otherwise) of the Company. All tax liabilities are adequately provided for on the books of the Company.

 

4


(r)  Compliance with Instruments . The execution, delivery and performance of this Agreement and the Escrow Agreement, the compliance with the terms and provisions hereof and the consummation of the transactions contemplated herein, therein and in the Registration Statement and Prospectus by the Company, do not and will not violate or constitute a breach of, or default under (i) the memorandum or articles of association of the Company; (ii) any of the material terms, provisions, or conditions of any material instrument, agreement, or indenture to which the Company is a party or by which it is bound or by which its business, assets, investments or properties may be affected; or (iii) any order, statute, rule, or regulation applicable to the Company, or any of its business, investments, assets or properties, of any court or (to the knowledge of the Company) any governmental authority or agency having jurisdiction over the Company, or any of its business, investments, properties or assets; and to the knowledge of the Company do not and will not result in the creation or imposition of any lien, charge, claim, or encumbrance upon any property or asset of the Company.

(s)  Insurance . The Company maintains insurance (issued by insurers of recognized financial responsibility) of the types and in the amounts generally deemed adequate for its business and, to the knowledge of the Company, consistent with insurance coverage maintained by similar companies and similar businesses, all of which insurance is in full force and effect.

(t)  Work Force . To the knowledge of the Company, no general labor problem exists or is imminent with the employees of the Company.

(u)  Securities Matters . The Company and its officers, directors, or affiliates have not taken and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in or constitute the stabilization or manipulation of any security of the Company or to facilitate the sale or resale of the Shares.

(v)  Payment of Commissions and Fees . Except as stated in or contemplated by the Prospectus, neither the Company nor any affiliate of the Company has paid or awarded, nor will any such person pay or award, directly or indirectly, any commission or other compensation to any person engaged to render investment advice to a potential purchaser of Shares as an inducement to advise the purchase of Shares.

(w)  Intellectual Property . Except as disclosed in the Registration Statement and Prospectus, the Company owns, possesses, licenses or has other rights to use the patents and patent applications, copyrights, trademarks, service marks, trade names, technology, know-how (including trade secrets and other unpatented and/or unpatentable proprietary rights) and other intellectual property (or could acquire such intellectual property upon commercially reasonable terms) necessary to conduct its business in the manner in which it is being conducted (collectively, the “Company Intellectual Property”); except as disclosed in the Registration Statement and Prospectus, to the Company’s knowledge, none of the patents owned or licensed by the Company is unenforceable or invalid, and, to the Company’s knowledge, none of the patent applications owned or licensed by the Company would be unenforceable or invalid if issued as patents; to the Company’s knowledge, the Company is not obligated to pay a royalty, grant a license, or provide other consideration to any third party in connection with the Company Intellectual Property other than as disclosed in the Prospectus; except as disclosed in the Registration Statement and Prospectus, the Company has not received any notice of violation or conflict with rights of others with respect to the Company Intellectual Property; except as disclosed in the Registration Statement and Prospectus, there are no pending or to the Company’s knowledge, threatened actions, suits, proceedings or claims by others that the Company is infringing any patent, trade secret, trade mark, service mark, copyright or other intellectual property or proprietary right; and except as disclosed in the Registration Statement and Prospectus, the products or processes of the Company referenced in the Prospectus do not, to the knowledge of the Company, violate or conflict with any intellectual property or proprietary right of any third person.

(x)  Forward Looking Statement . No forward-looking statement (within the meaning of Section 27A of the Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Preliminary Prospectus or the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

5


(y)  Industry Data . The industry-related and market-related statistics obtained from independent industry publications and reports and included in the Registration Statement and the Prospectus agree with the sources from which they are derived.

(z)  Related Party Transactions . No relationship exists between or among the Company and any director, officer, stockholder or affiliate of the Company which is required by the 1933 Act and rules and regulations of the Commission under the 1933 Act to be described in the Registration Statement or the Prospectus which is not so described and described as required in material compliance with such requirement. There are no outstanding loans, advances (except advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members, except as disclosed in the Registration Statement and the Prospectus.

3.  Representations and Warranties of Placement Agent . You represent and warrant to the Company that:

(a) You are a member, in good standing, of the Financial Industry Regulatory Authority (“FINRA”), and are duly registered as a broker-dealer under the 1934 Act, and under the laws of each state in which you propose to offer the Shares, except where such registration would not be required by law.

(b) This Agreement when accepted and approved will be duly authorized, executed and delivered by you and is a valid and binding agreement of you, enforceable in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization, or similar laws affecting creditors’ rights generally, regardless of whether such enforceability is considered in equity or at law, (ii) general equity principles, and (iii) limitations imposed by federal and state securities laws or the public policy underlying such laws regarding the enforceability of indemnification or contribution provisions.

(c) The consummation of the transactions contemplated by the Prospectus relating to the Offering will not violate or constitute a breach of, or default under, your memorandum or articles of association, or any material instrument, agreement, or indenture to which you are a party, or violate any order applicable to you of any federal or state regulatory body or administrative agency having jurisdiction over you or your property.

4.  Sale of Shares .

(a)  Exclusive Agency . The Company hereby appoints you as its exclusive agent to offer for sale, and hereby agrees to sell during the Offering Period (as defined in Section 4.(c)), a minimum of 1,667,000 Shares and a maximum of 2,000,000 Shares, and on the basis of the representations and warranties herein contained but subject to the terms and conditions herein set forth, you accept such appointment and agree to use your best efforts as agent to offer the Shares for sale for the account of the Company, on a cash basis only at the offering price of $             per Share. During the Offering Period (as defined below), the Company will not sell or agree to sell any debt or equity securities otherwise than through you. Subject to your commitment to sell the Shares on a “best efforts, minimum/maximum basis” as provided herein, nothing in this Agreement shall prevent you from entering into an agency agreement, underwriting agreement, or other similar agreement governing the offer and sale of securities with any other issuer of securities, and nothing contained herein shall be construed in any way as precluding or restricting your right to sell or offer for sale securities issued by any other person, including securities similar to, or competing with, the Shares. It is understood between the parties that there is no firm commitment by you to purchase any or all of the Shares.

(b)  Obligation to Offer Shares . Your obligation to offer the Shares is subject to receipt by you of written advice from the Commission that the Registration Statement is effective, is subject to the Shares being qualified for offering under applicable laws in the states as may be reasonably designated by you, is subject to the absence of any prohibitory action by any governmental body, agency, or official, and is subject to the terms and conditions contained in this Agreement and in the Registration Statement.

(c)  Offering Termination Date . The “Offering Period” shall commence on the day that the Prospectus is first made available to prospective investors in connection with the Offering and shall continue until the “Offering Termination Date,” which shall be the earliest of (i) the date the maximum number of Shares (2,000,000) offered have been sold, (ii) May 31, 2010, or (iii) such other date mutually agreeable to the parties hereto. The Company and you agree that unless the minimum number of Shares (1,667,000) offered are sold on or before the Offering Termination Date, all proceeds that have been paid for the Shares will be returned to the purchasers.

 

6


(d)  Escrow Agent . Prior to the sale of all of the Shares, all funds received from purchasers of the Shares shall be placed in an escrow account (the “Escrow Account”) with the Escrow Agent pursuant to the Escrow Agreement, the form of which is attached as an exhibit to the Registration Statement, and all payments of, from or on account of such funds shall be made pursuant to the Escrow Agreement. In the event that the Shares are not sold on or before the Offering Termination Date, all funds then held in the Escrow Account shall be returned promptly to the respective purchasers as provided in the Escrow Agreement.

(e)  Closing Date . As and when the closing of the Offering is effected, which shall be on or before the Offering Termination Date, and proceeds from the Shares sold are received and accepted, on such date (the “Closing Date”) and at such time and place as determined by you (which determination shall be subject to the satisfaction on such date of the conditions contained herein), the funds received from purchasers will be delivered by the Escrow Agent to the Company, by wire transfer of immediately available funds.

(f)  Selling Commissions and Expense . In consideration for your execution of this Agreement and for the performance of your obligations hereunder, the Company agrees to pay you as follows:

(i) by wire transfer of immediately available funds on the Closing Date, if any, a Selling Commission computed at the rate of seven percent (7.0%) of the gross proceeds of the Shares placed in the offering;

(ii) at the closing of the offering, you will have the right to purchase Placement Agent Warrants for the purchase of Shares, equal to ten percent (10%) of the number of Shares sold by you in the Offering at a purchase price of $0.001 per share underlying the Placement Agent Warrants, substantially in the form of Exhibit A attached to this Agreement. FINRA Rule 5110(g)(1) generally provides that any securities of the Company that are unregistered and acquired by you or your related persons (A) during the 180-day period prior to the filing of the Registration Statement or (B) after such filing and deemed to be underwriting compensation by the FINRA shall not be sold during the Offering, or sold, transferred, assigned, pledged, hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities (each, a “Transfer”) by any person for a period of 180 days immediately following the date of effectiveness of the Registration Statement or commencement of sales in the Offering; provided, however, such restriction does not apply to Transfers to your officers or partners (each, a “Permitted Transferee”) during such time period if the securities so Transferred remain subject to the lock-up restriction noted above; and

(iii) by wire transfer of immediately available funds on the Closing Date, if any, an accountable expense allowance computed at the rate of one percent (1%) of the public offering price of the Shares sold by you; such expenses include, but are not limited to fees and expenses of your counsel, due diligence expenses and other expenses not prohibited by FINRA Rule 5110.

(g)  Finder’s Fees . Except as set forth in the Registration Statement or Prospectus, neither you nor the Company, directly or indirectly, shall pay or award any finder’s fee, commission, or other compensation to any person engaged by a potential purchaser for investment advice as an inducement to such advisor to advise the purchase of the Shares or for any other purpose.

(h)  Delivery of Share Certificates . Delivery of certificates in definitive form representing the Shares shall be made at the offices of Anderson & Strudwick, Incorporated or at such other place as shall be agreed upon by the Company and you, on such date as you may request (the “Date of Delivery”). The certificates representing the Shares shall be in such denominations and registered in such names as you may request in writing at least three full business days before the Date of Delivery. The certificates representing the Shares will be made available for examination and packaging at the offices of Anderson & Strudwick, Incorporated or at such other place as shall be agreed upon by the Company and you, not later than at least two (2) full business days prior to each Date of Delivery.

5.  Covenants .

(a)  Covenants of the Company . The Company covenants with you as follows:

(i)  Notices . The Company immediately will notify you, and confirm such notice in writing, (A) of any fact that would make inaccurate any representation or warranty by the Company, and (B) of any change in facts on which your obligation to perform under this Agreement is dependent.

 

7


(ii)  Effectiveness of Registration Statement . The Company will use its best efforts to cause the Registration Statement to become effective (if not yet effective at the date and time this Agreement is executed and delivered by the parties hereto). If the Company elects to rely upon Rule 430A of the Rules and Regulations or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, and subject to the provisions of Section 5.(a)(iii) of this Agreement, the Company will comply with the requirements of Rule 430A and will file the Prospectus, properly completed, pursuant to the applicable provisions of Rule 424(b) within the time prescribed. The Company will notify you immediately, and confirm the notice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, shall have become effective, or any supplement to the Prospectus, or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission to amend the Registration Statement or amend or supplement the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus or the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceeding for any such purposes. The Company will use all reasonable efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain the withdrawal thereof at the earliest possible moment.

(iii)  Amendments to Registration Statement and Prospectus . The Company will not at any time file or make any amendment to the Registration Statement, or any amendment or supplement (i) to the Prospectus, if the Company has not elected to rely upon Rule 430A, or (ii) if the Company has elected to rely upon Rule 430A, to either the Prospectus included in the Registration Statement at the time it becomes effective or to the Prospectus filed in accordance with Rule 424(b), in either case if you shall not have previously been advised and furnished a copy thereof a reasonable time prior to the proposed filing, or if you or your counsel shall reasonably object to such amendment or supplement; provided, however, that if you shall have objected to such amendment or supplement, you shall cease your efforts to sell the Shares until an amendment or supplement is filed.

(iv)  Delivery of Registration Statement . The Company has delivered to you or will deliver to you, without expense to you, at such locations as you shall request, as soon as the Registration Statement or any amended Registration Statement is available, such number of signed copies of the Registration Statement as originally filed and of amended Registration Statements, if any, copies of all exhibits and documents filed therewith, and signed copies of all consents and certificates of experts, as you may reasonably request.

(v)  Delivery of Prospectus . The Company will deliver to you at its expense, from time to time, as many copies of each Preliminary Prospectus as you may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will deliver to you at its expense, as soon as the Registration Statement shall have become effective and thereafter from time to time as requested during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Prospectus (as supplemented or amended) as you may reasonably request. The Company will comply to the best of its ability with the 1933 Act and the Rules and Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the prospectus. If the delivery of a prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made when such Prospectus is delivered not misleading or, if for any

 

8


reason it shall be necessary during the same period to amend or supplement the Prospectus in order to comply with the 1933 Act, the Company will notify you and upon your request prepare and furnish without charge to you and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus that will correct such statement or omission or effect such compliance, and in case you are required to deliver a prospectus in connection with sales of any of the Shares, upon your request but at your expense, the Company will prepare and deliver to you as many copies as you may request of an amended or supplemented Prospectus complying with Section 10(a)(3) of the 1933 Act.

(vi)  Blue Sky Qualification . The Company, in good faith and in cooperation with you, will use its best efforts to qualify the Shares for offering and sale under the applicable “blue sky” or securities laws of such jurisdictions as you from time to time may reasonably designate and to maintain such qualifications in effect until the date on which the Company ceases to be obligated to maintain the effectiveness of the Registration Statement; provided, however, that the Company shall not be obligated to qualify as a foreign entity in any jurisdiction in which it is not so qualified or to make any undertakings in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided.

(vii)  Application of Net Proceeds . The Company will apply the net proceeds received from the sale of the Shares in all material respects as set forth in the Prospectus under the caption “Use of Proceeds.”

(viii)  Cooperation with Your Due Diligence . At all times prior to the Offering Termination Date, the Company will cooperate with you in such investigation as you may make or cause to be made of all the business and operations of the Company in connection with the sale of the Shares, and will make available to you in connection therewith such information in its possession as you may reasonably request, all of which you agree to safeguard as the confidential information of the Company and to refrain from using for any purpose adverse to the interests of the Company.

(ix)  Transfer Agent . The Company will maintain a transfer agent and, if necessary under applicable jurisdictions, a registrar (which may be the same entity as the transfer agent) for its Shares.

(x)  NASDAQ . The Company will use its reasonable best efforts to maintain the quotation of its Shares on The NASDAQ Capital Market.

(xi)  Actions of Company, Officers, Directors, and Affiliates . The Company will not and will use its best efforts to cause its officers, directors, and affiliates not to (i) take, directly or indirectly, prior to termination of the Offering contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or that may cause or result in, or that might in the future reasonably be expected to cause or result in, the stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Shares, (ii) other than under this Agreement, sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of the Shares or (iii) pay or agree to pay to any person any compensation for soliciting any order to purchase any other securities of the Company.

(xii) Upon the earliest of such time as (A) the investors in the Offering own less than ten percent (10%) of our outstanding voting securities or (B) the closing price of one of the Company’s Shares equals or exceeds $24.00 for a period of fifteen consecutive trading days, you will have the right, from time to time, to designate not more than two (2) persons to serve as a non-voting observers to the Company’s Board of Directors. This right shall be subject to our approval, which shall not be unreasonably withheld. The observer to the Board will be entitled to receive up to $6,000 of reimbursed travel expenses per meeting attended in person, subject to a maximum of $12,000 per year, which amount is not in excess of the amount payable for the Company’s independent directors.

(b)  Your Covenants . You covenant with the Company as follows:

(i)  Information Provided . You have not provided and will not provide to the purchasers of Shares any written or oral information regarding the business of the Company, including any

 

9


representations regarding the Company’s financial condition or financial prospects, other than such information as is contained in the Prospectus. You further covenant that, in connection with the Offering you will use your best efforts to comply with such purchaser suitability requirements

(ii)  Prospectus Supplements . Until the termination of this Agreement, if any event affecting the Prospectus, the Company or you shall occur which, in the opinion of counsel to the Company, should be set forth in a supplement to the Prospectus, you agree to distribute each supplement of the Prospectus to each person who has previously received a copy of the Prospectus from you and you further agree to include such supplement in all future deliveries of the Prospectus. You agree that following notice from the Company that a supplement to the Prospectus is necessary, you will cease further efforts to sell the Shares until such a supplement is prepared and delivered to you.

(iii)  Compliance with Laws, Etc . In your sale of the Shares, you will comply in all material respects with applicable laws, rules and regulations and the rules and regulations of applicable self-regulatory organizations (provided, however, that you shall be deemed not to have breached this covenant if your failure to so comply is based on a breach by the Company of any of its representations, warranties or covenants contained in this Agreement and you shall have complied with Section 5.(b)(ii) above.

6.  Payment of Expenses . Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, and subject to the provisions of Section 10 of this Agreement, the Company hereby agrees that it will pay all fees and expenses incident to the performance of its obligations under this Agreement (excluding fees and expenses of counsel for you, except as specifically set forth below), including (a) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto, and the cost of furnishing copies thereof to you, (b) the preparation, printing, and distribution of this Agreement, any selected dealer agreement, the certificates representing the Shares, the blue sky memoranda, and any instruments relating to any of the foregoing, (c) the issuance and delivery of the Shares, including any transfer taxes payable thereon, (d) the fees and disbursements of the Company’s counsel and accountants, (e) the qualification of the Shares under applicable securities laws in accordance with Section 5.(a) of this Agreement and any filing fee paid in connection with the review of the Offering by FINRA, including filing fees and fees and disbursements made in connection therewith and in connection with the blue sky memoranda supplied to you by counsel for the Company, (f) all costs, fees, and expenses in connection with the application for qualifying the Shares for quotation on the NASDAQ Capital Market, (g) the transfer agent’s and registrar’s fees and all miscellaneous expenses referred to in the Registration Statement, (h) costs related to travel and lodging incurred by the Company and its representatives relating to meetings with and presentations to prospective purchasers of the Shares reasonably determined by you to be necessary or desirable to effect the sale of the Shares to the public, (i) any escrow arrangements in connection with the transactions described herein, including any compensation or reimbursement to the Escrow Agent for its services as such, and (j) all other costs and expenses incident to the performance of the Company’s obligations hereunder that are not otherwise specifically provided for in this Section.

7.  Conditions of Your Obligations . Your obligations hereunder shall be subject to, in your discretion, the following terms and conditions:

(a)  Effectiveness of Registration Statement . The Registration Statement shall have become effective not later than 5:30 p.m. on the date of this Agreement or, at such later time or on such later date as you may agree to in writing; and as of the Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been instituted or shall be pending or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the satisfaction of your counsel.

(b)  Closing Date Matters . On the Closing Date, (i) the Registration Statement and the Prospectus, as they may then be amended or supplemented, shall contain all statements that are required to be stated therein under the 1933 Act and the Rules and Regulations and in all material respects shall conform to the requirements of the 1933 Act and the Rules and Regulations; the Company shall have complied in all material respects with Rule 430A (if it shall have elected to rely thereon) and neither the Registration Statement nor the Prospectus, as they may then be amended or supplemented, shall contain an untrue

 

10


statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) there shall not have been, since the respective dates as of which information is given in the Registration Statement, any material adverse change in the business, prospects, properties, assets, results of operations or condition (financial or otherwise) of the Company whether or not arising in the ordinary course of business, (iii) no action, suit or proceeding at law or in equity shall be pending or, to the Company’s knowledge, threatened against the Company that would be required to be set forth in the Prospectus other than as set forth therein and no proceedings shall be pending or, to the knowledge of the Company, threatened against the Company before or by any applicable or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding could materially adversely affect the business, prospects, assets, results of operations or condition (financial or otherwise) of the Company other than as set forth in the Prospectus, (iv) the Company shall have complied with all agreements and satisfied all conditions on their part to be performed or satisfied on or prior to the Closing Date, and (v) the representations and warranties of the Company set forth in Section 2 of this Agreement shall be accurate in all material respects as though expressly made at and as of the Closing Date. On the Closing Date, you shall have received a certificate executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to such effect and with respect to the following additional matters: (A) the Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or preventing or suspending the use of the Prospectus has been issued, and no proceedings for that purpose have been instituted or are pending or, to his knowledge, threatened under the 1933 Act; and (B) he has reviewed the Registration Statement and the Prospectus and, when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus and any amendments or supplements thereto contained all statements and information required to be included therein or necessary to make the statements therein not misleading and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus that has not been so set forth.

(c)  Opinion of Kai Tong Law Firm . At the Closing Date, you shall receive the opinion of Kai Tong Law Firm, counsel for the Company, in form and substance reasonably satisfactory to you, to the effect of  Exhibit B .

(d)  Opinion of Kaufman & Canoles, P.C.  At the Closing Date, you shall receive the opinion of Kaufman & Canoles, P.C., British Virgin Islands counsel to the Company, in form and substance reasonably satisfactory to you, to the effect of  Exhibit C .

(e)  Opinion of Your Counsel . At the Closing Date, you shall receive the favorable opinion of Kaufman & Canoles, P.C., your counsel, with respect to such matters as you may reasonably require and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass on such matters.

(f)  Independent Public Accountants . At the time that this Agreement is executed by the Company, you shall have received from Sherb & Co., CPA a letter, dated the date hereof, in form and substance satisfactory to you, confirming that they are independent public accountants with respect to the Company within the meanings of the 1933 Act and the Rules and Regulations, and stating in effect that:

(i) in their opinion, the financial statements and any supplementary financial information and schedule included in the Registration Statement and covered by their opinion therein comply as to form and in all material respects with the applicable accounting requirements of the 1933 Act and the Rules and Regulations;

(ii) on the basis of limited procedures (set forth in detail in such letter and made in accordance with such procedures as may be specified by you) not constituting an audit in accordance with generally accepted auditing standards, consisting of (but not limited to) a reading of the latest available internal unaudited financial statements of the Company, a reading of the minute books of the Company, inquiries of officials of the Company responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention to cause them to believe that:

(A) the unaudited financial statements and supporting schedule and other unaudited financial data of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the Rules and Regulations or are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement;

 

11


(B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited financial statements included in the Prospectus;

(C) any unaudited pro forma financial information included in the Prospectus does not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the Rules and Regulations or the pro forma adjustments have not been properly applied to historical amounts in the compilation of that information;

(D) at a specified date not more than five (5) days prior to the date of such letter, there was any change in the capital stock or long-term debt or obligations of the Company or there were any decreases in net current assets or net assets, shareholders’ equity, or other items specified by you from that set forth in the Company’s balance sheet at December 31, 2008, except as described in such letter; and

(E) for the period from December 31, 2008 to a specified date not more than five (5) days prior to the date of such letter, there were any decreases in revenues or operating income before interest, depreciation and amortization for the Company, in each case as compared with the corresponding period of the preceding year, except in each case for decreases that the Prospectus discloses have occurred or may occur or that are described in such letter; and

(iii) in addition to the procedures referred to in clause (ii) above and the examination referred to in their reports including in the Registration Statement, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages, and financial information specified by you that are derived from the general accounting records of the Company, that appear in the Registration Statement or the exhibits or schedules thereto and are specified by you, and have compared such amounts, percentages, and financial information with the accounting records of the Company and with material derived from such records and have found them to be in agreement.

(f)  Updated Comfort Letter . At the Closing Date, you shall have received from Sherb & Co., CPA a letter, in form and substance satisfactory to you and dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to Section 7.(e) above, except that the specified date referred to shall be a date not more than five (5) days prior to the Closing Date.

(g)  Post-Financial Developments . In the event that either of the letters to be delivered pursuant to Sections 7.(e) and 7.(f) above sets forth any changes, decreases or increases, it shall be a further condition to your obligations that you shall have reasonably determined, after discussions with officers of the Company responsible for financial and accounting matters and with Sherb & Co., CPA, that such changes, decreases or increases as are set forth in such letter do not reflect a material adverse change in the capital stock, long-term debt, obligations under capital leases, total assets, net current assets, or shareholders’ equity of the Company as compared with the amounts shown in the latest consolidated pro forma balance sheet of the Company, or a material adverse change in the revenues or operating income before interest, depreciation and amortization for the Company in each case as compared with the corresponding period of the prior year.

 

12


(h)  Additional Information . On the Closing Date, you shall have been furnished with all such documents, certificates and opinions as you may reasonably request for the purpose of enabling your counsel to pass upon the issuance and sale of the Shares as contemplated in this Agreement and the matters referred to in Section 7.(b), and in order to evidence the accuracy and completeness of, any of the representations, warranties or statements of the Company, the performance of any of the covenants of the Company, or the fulfillment of any of the conditions herein contained; and all proceedings taken by the Company at or prior to the Closing Date in connection with the authorization, issuance and sale of the Shares as contemplated in this Agreement, shall be satisfactory in form and substance to you and to your counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. Any certificate signed by any officer, partner, or other official of the Company and delivered to you or your counsel shall be deemed a representation and warranty by the Company to you as to the statements made therein.

(i)  Adverse Events . Subsequent to the date hereof, there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange, the NASDAQ National Market or the NASDAQ Capital Market, (ii) a general moratorium on commercial banking activities in the People’s Republic of China or New York, (iii) the outbreak or escalation of hostilities involving the United States or the People’s Republic of China or the declaration by the United States or the People’s Republic of China of a national emergency or war if the effect of any such event specified in this clause (iii) in your reasonable judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus, or (iv) such a material adverse change in general economic, political, financial or international conditions affecting financial markets in the United States or the People’s Republic of China having a material adverse impact on trading prices of securities in general, as, in your reasonable judgment, makes it impracticable or inadvisable to proceed with the public offering of the Shares or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus.

(j)  FINRA Review . FINRA, upon review of the terms of the Offering, shall not have objected to the Offering, the terms of the offering or your participation in the Offering.

(k)  NASDAQ Quotation . The Shares shall be approved for quotation on The NASDAQ Capital Market.

If any of the conditions specified in this Section 7 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement may be terminated by you on notice to the Company at any time at or prior to the Closing Date, and such termination shall be without liability of any party to any other party, except as provided in Sections 6 and 10. Notwithstanding any such termination, the provisions of Section 8 shall remain in effect.

8.  Indemnification and Contribution .

(a)  Indemnification by the Company . The Company will indemnify and hold you harmless against any losses, claims, damages, or liabilities, joint or several, to which you may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any representation, warranty or covenant of the Company herein contained or any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse you for any legal or other expenses reasonably incurred by you in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you expressly for use therein; provided further, that the indemnity agreement contained in Section 8.(a) with respect to any Preliminary Prospectus shall not inure to your benefit if you failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such

 

13


Shares to such person in any case where such delivery is required by the 1933 Act or the Rules and Regulations and if the Prospectus would have cured any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage, or liability. In addition to its other obligations under this Section 8.(a), the Company agrees that, as an interim measure during the pendency of any such claim, action, investigation, inquiry, or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 8.(a), it will reimburse you on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry, or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company’s obligation to reimburse you for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. Any such interim reimbursement payments that are not made to you within thirty (30) days of a request for reimbursement shall bear interest at the prime rate (or reference rate or other commercial lending rate for borrowers of the highest credit standing) published from time to time by The Wall Street Journal (the “Prime Rate”) from the date of such request. This indemnity agreement shall be in addition to any liabilities that the Company may otherwise have. For purposes of this Section 8, the information set forth in the last paragraph on the front cover page (insofar as such information relates to you) and under “Placement” in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished by you to the Company for inclusion in any Preliminary Prospectus, the Prospectus, or the Registration Statement. The Company will not, without your prior written consent, settle or compromise or consent to the entry of any judgment in any pending or threatened action or claim or related cause of action or portion of such cause of action in respect of which indemnification may be sought hereunder (whether or not you are a party to such action or claim), unless such settlement, compromise, or consent includes an unconditional release of you from all liability arising out of such action or claim (or related cause of action or portion thereof). The indemnity agreement in this Section 8.(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls you within the meaning of the 1933 Act or the 1934 Act to the same extent as such agreement applies to you.

(b)  Indemnification by You . You will indemnify and hold harmless the Company against any losses, claims, damages, or liabilities to which the Company may become subject, under the 1933 Act, the 1934 Act, or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any breach of any warranty or covenant by you herein contained or any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that (i) such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement, or the Prospectus or any such amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by you expressly for use therein, or (ii) you failed to deliver an amendment or supplement to the Prospectus that the Company made available to you prior to the Closing Date and that corrected any statement or omission in a Preliminary Prospectus, the Registration Statement or the Prospectus which forms the basis for a claim against the Company; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability, or action. In addition to its other obligations under this Section 8.(b), you agree that, as an interim measure during the pendency of any such claim, action, investigation, inquiry, or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 8.(b), you will reimburse the Company on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry, or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of your obligation to reimburse the Company for such expenses and the possibility that such payments might later been held to have been improper by a court of competent jurisdiction. Any such interim reimbursement payments that are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement shall be in addition to any liabilities that you may otherwise have. You will not, without the Company’s prior written consent, settle or compromise or consent to the entry of any judgment

 

14


in any pending or threatened action or claim or related cause of action or portion of such cause of action in respect of which indemnification may be sought hereunder (whether or not the Company is a party to such action or claim), unless such settlement, compromise, or consent includes an unconditional release of the Company from all liability arising out of such action or claim (or related cause of action or portion thereof). The indemnity agreement in this Section 8.(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer and director of the Company and each person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act to the same extent as such agreement applies to the Company.

(c)  Notices of Claims; Employment of Counsel . Any party that proposes to assert the right to be indemnified under this Section 8 promptly shall notify in writing each party against which a claim is to be made under this Section 8 of the institution of such action but the omission so to notify such indemnifying party of any such action shall not relieve it from any liability it may have to any indemnified party except (i) to the extent that the omission to notify shall have caused or increased the indemnifying party’s liability, and (ii) that the indemnifying party shall be relieved of its indemnity obligation for expenses of the indemnified party incurred before the indemnifying party is notified. Such indemnifying party or parties shall assume the defense of such action, including the employment of counsel (satisfactory to the indemnified party) and payment of fees and expenses. An indemnified party shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party or parties in connection with the defense of such action or the indemnifying party or parties shall not have employed counsel to have charge of the defense of such action or such indemnified party or parties reasonably shall have concluded that there may be defenses available to it or them that are different from or additional to those available to such indemnifying party or parties (in which case such indemnifying party or parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by such indemnifying party or parties. Anything in this paragraph to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any such claim or action effected without its written consent.

(d)  Arbitration . It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 8.(a) and 8.(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the FINRA. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 8.(a) and 8.(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses that is created by the provisions of Sections 8.(a) and 8.(b).

(e)  Contribution . If the indemnification provided for in Section 8.(a) or 8.(b) is unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, or liabilities (or actions in respect thereof) referred to therein, then the Company on the one hand and you on the other shall contribute to the amount paid or payable as a result of such losses, claims, damages, or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and you on the other from the Offering. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then the Company and you shall contribute to such amount paid or payable in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and you on the other in connection with the statements or omissions that resulted in such losses, claims, damages, or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and you on the other shall be deemed to be in the same proportion as the total net proceeds from the Offering (before deducting expenses) received by the Company bear to the total selling commissions received by you in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact or the omission or alleged omission to

 

15


state a material fact relates to information supplied by the Company on the one hand or to information with respect to you and furnished by you respectively, in writing specifically for inclusion in the Prospectus on the other and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The Company and you agree that it would not be just and equitable if contribution pursuant to this Section 8.(e) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to above in this Section 8.(e). The amount paid or payable as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 8.(e) shall be deemed to include any legal or other expenses reasonably incurred by any such party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) with respect to the transactions giving rise to the right of contribution provided in this Section 8.(e) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations in this Section 8.(e) for you to contribute are several in proportion to your respective underwriting obligations and not joint. For purposes of this Section 8.(e), each person, if any, who controls you within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as you, and each director of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act, shall have the same rights to contribution as the Company.

9.  Representations and Agreements to Survive . Except as the context otherwise requires, all representations, warranties, covenants and agreements contained in this Agreement shall remain operative and in full force and effect regardless of any investigation made by you, or on your behalf, or by any controlling person, or by or on behalf of the Company, and shall survive until the fifth anniversary of the Offering Termination Date and the termination of this Agreement pursuant to Section 10 hereof.

10.  Termination of Agreement .

(a)  Termination of Agreement . You shall have the right to terminate this Agreement at any time prior to the Closing Date (i) if any representation or warranty of the Company hereunder shall be found to have been incorrect or misleading in any material respect when made or the Company shall fail, refuse, or be unable to perform any of its agreements hereunder or to fulfill any condition of your obligations hereunder, (ii) if there shall have been since the respective dates as of which information is given in the Registration Statement, a material adverse change, or any development which could reasonably be expected to result in a prospective material adverse change, in or affecting the business, prospects, management, properties, assets, results of operations, or condition (financial or otherwise) of the Company, whether or not arising in the ordinary course of business, (iii) if trading on any national securities exchange shall have been suspended (other than for reasons unrelated to the securities markets), or minimum or maximum prices for trading generally shall have been fixed or maximum ranges for prices for all securities shall have been required on any such exchange by such exchange or by order of the Commission or any other governmental authority having jurisdiction, (iv) if there has occurred or accelerated any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions the effect of which on the financial markets of the United States is such as to make it, in your reasonable judgment, impracticable to market the Shares or enforce contracts for the sale of the Shares, (v) if a banking moratorium has been declared by Virginia, New York or U.S. authorities, (vi) any applicable statute, regulation, rule, or order of any court or other governmental authority has been enacted, published, decreed, or otherwise promulgated that in your sole judgment materially adversely affects or will materially adversely affect the business or operations of the Company, or (vii) any action has been taken by any applicable government or agency in respect of its monetary or fiscal affairs that in your reasonable opinion has a material adverse effect on the securities markets in the United States. You shall have no liability to the Company pursuant to this Agreement or otherwise as a result of any such termination.

(b)  Result of Termination .

(i) If the sale of Shares provided for herein is not consummated by May 31, 2010 due to reasons beyond the control of either party hereto or if the Company abandons the Offering for reasons within its control, then in addition to its obligations with respect to expenses as set forth in Section 6, the Company will reimburse you on demand for all your reasonable out-of-pocket

 

16


expenses (including the fees and expenses of your counsel), including disbursements reasonably incurred by you in reviewing the Registration Statement and the Prospectus, and in investigating and making preparations for the marketing of the Shares up to a maximum of $75,000.

(ii) If the sale of the Shares provided for herein is not consummated for any other reason, the Company shall pay expenses as required by Section 6, and the neither party shall have any additional liability to the other except for such liabilities, if any, as may exist or thereafter arise under Section 8.

11.  Notices .

(a)  Method and Location of Notices . All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be sent by overnight courier, hand-delivered or telecopied and confirmed as follows:

To the Company:

Tianli Agritech, Inc.

Suite F, 23rd Floor

Building B, Jiangjing Mansion

228 Yanjiang Ave.

Jiangan District, Wuhan City

Hubei Province, China 430010

with a copy to:

Kai Tong Law Firm

2504, CITIC Plaza,

233 Tian He North Road

Guang Zhou, China

To you:

Anderson & Strudwick, Incorporated

707 East Main Street

20 th  Floor

Richmond, Virginia 23219

Attention: Mr. L. McCarthy Downs, III

with a copy to:

Kaufman & Canoles, P.C.

Three James Center

1051 East Cary Street, 12 th  Floor

Richmond, Virginia 23219

Attention: Bradley A. Haneberg, Esquire

(b)  Time of Notices . Notice shall be deemed to be given by you to the Company or by the Company to you when it is sent by overnight courier, hand-delivered or telecopied as provided in Section 11.(a).

12.  Parties . This Agreement shall inure solely to the benefit of and shall be binding upon you, the Company and the controlling persons referred to in Section 8, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have a legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained.

13.  Governing Law, Construction, and Time . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. Specified time of day refers to United States Eastern Time. Time shall be of the essence of this Agreement.

14.  Description Headings . The descriptive headings of the several sections and paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

15.  Counterparts . This Agreement may be executed in one or more counterparts, and if executed in more than one counterpart, the executed counterparts shall together constitute a single instrument.

 

17


If the foregoing correctly sets forth the understanding between you and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

 

Very truly yours,
TIANLI AGRITECH, INC.
By:  

 

Name:   Hanying Li
Title:   Chief Executive Officer

Confirmed and accepted as of the date first above written:

 

ANDERSON & STRUDWICK, INCORPORATED
By:  

 

Name:   L. McCarthy Downs, III
Title:   Senior Vice President

 

18


EXHIBIT A

Form of Warrant


EXHIBIT B

Form of Kai Tong Law Firm Opinion


EXHIBIT C

Form of Kaufman & Canoles Opinion

Exhibit 3(i).1

TERRITORY OF THE BRITISH VIRGIN ISLANDS

THE BVI BUSINESS COMPANIES ACT, 2004

AMENDED AND RESTATED

ARTICLES OF ASSOCIATION

OF

TIANLI AGRITECH, INC.

A COMPANY LIMITED BY SHARES

 

1.    REGISTERED SHARES
1.1    Every Shareholder is entitled to a certificate signed by a Director or officer of the Company, or any other person authorized by Resolution of Directors, specifying the number of Shares held by him and the signature of the Director, officer or authorized person and the Seal may be facsimiles. A certificate may be issued in electronic form in accordance with the Electronic Transactions Act, 2001 as from time to time amended or re-enacted.
1.2    Any Shareholder receiving a certificate shall indemnify and hold the Company and its directors and officers harmless from any loss or liability which it or they may incur by reason of any wrongful or fraudulent use or representation made by any person by virtue of the possession thereof. If a certificate for Shares is worn out or lost it may be renewed on production of the worn out certificate or on satisfactory proof of its loss together with such indemnity as may be required and determined under the Company’s policy as set by Resolution of Directors.
1.3    If several Persons are registered as joint holders of any Shares, any one of such Persons may give an effectual receipt for any Distribution.
2.    SHARES
2.1    Shares and other Securities may be issued at such times, to such Persons, for such consideration and on such terms as the Directors may by Resolution of Directors determine.
2.2    Section 46 of the Act ( Pre-emptive Rights ) does not apply to the Company.
2.3    A Share may be issued for consideration in any form, including money, a promissory note, or other written obligation to contribute money or property, real property, personal property (including goodwill and know-how), services rendered or a contract for future services.
2.4    The consideration for a Share with par value shall not be less than the par value of the Share. If a Share with par value is issued for consideration less than the par value, the person to whom the Share is issued is liable to pay to the Company an amount equal to the difference between the issue price and the par value.
2.5    No Shares may be issued for a consideration other than money, unless a Resolution of Directors has been passed stating:
   (a)    the amount to be credited for the issue of the Shares;


   (b)    the determination of the Directors of the reasonable present cash value of the non-money consideration for the issue; and
   (c)    that, in the opinion of the Directors, the present cash value of the non-money consideration for the issue is not less than the amount to be credited for the issue of the Shares.
2.6    The Company shall keep a register (the “ register of members ”) containing:
   (a)    the names and addresses of the Persons who hold Shares;
   (b)    the number of each class and series of Shares held by each Shareholder;
   (c)    the date on which the name of each Shareholder was entered in the register of members; and
   (d)    the date on which any Person ceased to be a Shareholder.
2.7    The register of members may be in any such form as the Directors may approve, but if it is in magnetic, electronic or other data storage form, the Company must be able to produce legible evidence of its contents. Until the Directors otherwise determine, the magnetic, electronic or other data storage form shall be the original register of members.
2.8    A Share is deemed to be issued when the name of the Shareholder is entered in the register of members.
2.9    The entry of the name of a Person in the register of members as a holder of a Share is prima facie evidence that legal title in the Share vests in that Person.
2.10    No share may be issued by the Company that:
   (a)    increases the liability of a person to the Company; or
   (b)   

imposes a new liability on a person to the Company,

 

unless that person, or an authorized agent of that person, agrees in writing to becoming the holder of the share.

3.    REDEMPTION OF SHARES AND TREASURY SHARES
3.1    The Company may purchase, redeem or otherwise acquire and hold its own Shares save that the Company may not, except pursuant to Article 3.7, purchase, redeem or otherwise acquire its own Shares without the consent of Shareholders whose Shares are to be purchased, redeemed or otherwise acquired unless the Company is permitted by the Act or any other provision in the Memorandum or Articles to purchase, redeem or otherwise acquire the Shares without their consent.
3.2    The Company may only offer to purchase, redeem or otherwise acquire Shares if the Resolution of Directors authorizing the purchase, redemption or other acquisition contains a statement that the Directors are satisfied, on reasonable grounds, that immediately after the acquisition the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as they fall due.
3.3    Sections 60 ( Process for acquisition of own shares ), 61 ( Offer to one or more shareholders ) and 62 ( Shares redeemed otherwise than at the option of company ) of the Act shall not apply to the Company.

 

2


3.4    Shares that the Company purchases, redeems or otherwise acquires pursuant to this Article may be cancelled or held as Treasury Shares except to the extent that such Shares are in excess of 50% of the issued Shares in which case they shall be cancelled to the extent of such excess but they shall be available for reissue.
3.5    All rights and obligations attaching to a Treasury Share are suspended and shall not be exercised by the Company while it holds the Share as a Treasury Share.
3.6    Treasury Shares may be transferred by the Company on such terms and conditions (not otherwise inconsistent with the Memorandum and the Articles) as the Company may by Resolution of Directors determine.
3.7    Where:
   (a)    the Company undertakes any division of the issued Shares pursuant to section 40A of the Act, and
   (b)   

pursuant to such division a Shareholder holds a total number of Shares which includes a fractional Share,

 

the Company may compulsorily redeem such fractional Share so that (subsequent to such redemption) the Shareholder holds a whole number of Shares.

4.    MORTGAGES AND CHARGES OF SHARES
4.1    Shareholders may mortgage or charge their Shares.
4.2    There shall be entered in the register of members at the written request of the Shareholder:
   (a)    a statement that the Shares held by him are mortgaged or charged;
   (b)    the name of the mortgagee or chargee; and
   (c)    the date on which the particulars specified in subparagraphs (a) and (b) are entered in the register of members.
4.3    Where particulars of a mortgage or charge are entered in the register of members, such particulars may be cancelled:
   (a)    with the written consent of the named mortgagee or chargee or anyone authorized to act on his behalf; or
   (b)    upon evidence satisfactory to the Directors of the discharge of the liability secured by the mortgage or charge and the issue of such indemnities as the Directors shall consider necessary or desirable.
4.4    Whilst particulars of a mortgage or charge over Shares are entered in the register of members pursuant to this Article:
   (a)    no transfer of any Share the subject of those particulars shall be effected;
   (b)    the Company may not purchase, redeem or otherwise acquire any such Share; and

 

3


   (c)    no replacement certificate shall be issued in respect of such Shares, without the written consent of the named mortgagee or chargee.
5.    FORFEITURE
5.1    Shares that are not fully paid on issue are subject to the forfeiture provisions set forth in this Article and for this purpose Shares issued for a promissory note, other written obligation to contribute money or property or a contract for future services are deemed to be not fully paid.
5.2    A written notice of call specifying the date for payment to be made shall be served on the Shareholder who defaults in making payment in respect of the Shares.
5.3    The written notice of call referred to in Article 5.2 shall name a further date not earlier than the expiration of 14 days from the date of service of the notice on or before which the payment required by the notice is to be made and shall contain a statement that in the event of non-payment at or before the time named in the notice the Shares, or any of them, in respect of which payment is not made will be liable to be forfeited.
5.4    Where a written notice of call has been issued pursuant to Article 5.3 and the requirements of the notice have not been complied with, the Directors may, at any time before tender of payment, forfeit and cancel the Shares to which the notice relates.
5.5    The Company is under no obligation to refund any moneys to the Shareholder whose Shares have been cancelled pursuant to Article 5.4 and that Shareholder shall be discharged from any further obligation to the Company with respect to such cancelled Shares.
6.    TRANSFER AND TRANSMISSION OF SHARES
6.1    Shares may be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee, which shall be sent to the Company for registration.
6.2    The transfer of a Share is effective when the name of the transferee is entered on the register of members.
6.3    If the directors or a duly authorized committee of directors of the Company are satisfied that an instrument of transfer relating to Shares has been signed but that the instrument has been lost or destroyed, they may resolve by Resolution of Directors:
   (a)    to accept such evidence of the transfer of Shares as they consider appropriate; and
   (b)    that the transferee’s name should be entered in the register of members notwithstanding the absence of the instrument of transfer.
6.4    Subject to the Memorandum, the personal representative of a deceased Shareholder may transfer a Share even though the personal representative is not a Shareholder at the time of the transfer.
7.    MEETINGS AND CONSENTS OF SHAREHOLDERS
7.1    Any action required or permitted to be taken by the Shareholders must be effected at a duly called annual or special meeting (as provided for in Articles 7.3 and 7.4) of the Shareholders entitled to vote on such action and may not be effected by a Resolution consented to in writing.
7.2    All meetings of Shareholders (whether annual or special) shall be held on such dates and at such places as may be fixed from time to time by the directors.

 

4


7.3    A meeting of Shareholders, which shall be held no more than once in each calendar year, for such business as may come before the meeting (the “annual meeting of Shareholders”) shall be held at such date and time as may be determined by the directors.
7.4    A meeting of Shareholders other than an annual meeting of Shareholders which shall be held for the consideration of any business, including the election of directors, shall hereinafter be referred to as a “special meeting of Shareholders.” A special meeting of Shareholders may be called by the directors pursuant to a Resolution of Directors at such date, time and for the consideration of any business as may be determined by the directors, save that upon the written request of Shareholders holding at least 30 percent of the votes of the outstanding voting Shares in the Company, the directors shall convene a special meeting of Shareholders in respect of the matter for which the meeting is requested. If a special meeting of Shareholders is called upon by the written request of Shareholders pursuant to the previous sentence, then such written request must specify the nature of the business proposed to be transacted and such business must be a proper matter for Shareholder action, and, as to any proposed business or director nominations that such Shareholders propose to bring before the meeting, such Shareholder must provide with such request the information set forth in subclauses (i) through (viii) of Article 7.17(a). Furthermore, any such business must comply with, and shall be subject to, the requirements and provisions of Articles 7.16(b) and 7.17(b).
7.5    Written notice of all meetings of Shareholders, stating the time, place and, in the case of a special meeting of Shareholders, the purpose or purposes thereof, shall be given by the Company pursuant to a Resolution of Directors not fewer than ten days before the date of the proposed meeting to those persons whose names appear as Shareholders in the register of members on the date of the notice and are entitled to vote at the meeting.
7.6    The directors may fix the date notice is given of a meeting of Shareholders, or such other date as may be specified in the notice, as the record date for determining those Shares that are entitled to vote at the meeting.
7.7    A meeting of Shareholders may be called on short notice:
   (a)    if Shareholders holding not less than 90 percent of the total number of Shares entitled to vote on all matters to be considered at the meeting, or 90 percent of the votes of each class or series of Shares where Shareholders are entitled to vote thereon as a class or series together with not less than a 90 percent majority of the remaining votes, have agreed to short notice of the meeting, or
   (b)    if all Shareholders holding Shares entitled to vote on all or any matters to be considered at the meeting have waived notice of the meeting and for this purpose presence at the meeting shall be deemed to constitute waiver.
7.8    The inadvertent failure of the directors to give notice of a meeting to a Shareholder, or the fact that a Shareholder has not received notice, does not invalidate the meeting.
7.9    A Shareholder may be represented at a meeting of Shareholders by a proxy who may speak and vote on behalf of the Shareholder.
7.10    The instrument appointing a proxy shall be produced at the place appointed for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote.
7.11    An instrument appointing a proxy shall be in such form as the Directors may from time to time determine or such other form as the chairman of the meeting shall accept as properly evidencing the wishes of the Shareholder appointing the proxy.

 

5


      Execution of the instrument appointing a proxy may be accomplished by the Shareholder or such Shareholder’s authorized officer, director, employee or agent signing such instrument by any reasonable means, including, but not limited to, by facsimile signature. A Shareholder may authorize another person or persons to act for such Shareholder as proxy by transmitting or authorizing the transmission of such communication evidencing the Shareholder’s intention to appoint a person or persons as his proxy by means of a telegram, cablegram, or other means of electronic transmission (including but not limited to, via internet or telephone) to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or the other means of electronic transmission (which must be supported by printed evidence thereof) must be either set forth or be submitted with written information from which it can be determined that the telegram, cablegram or printed evidence of the other electronic transmission was authorized by the Shareholder. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Article 7.11 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.
7.12    The following applies where Shares are jointly owned:
   (a)    if two or more persons hold Shares jointly each of them may be present in person or by proxy at a meeting of Shareholders and may speak as a Shareholder;
   (b)    if only one of the joint owners is present in person or by proxy, he may vote on behalf of all joint owners; and
   (c)    if two or more of the joint owners are present in person or by proxy, they must vote as one.
7.13    Subject to such limitations, restrictions, guidelines and procedures as may be established by the directors by Resolution of Directors from time to time, a Shareholder shall be deemed to be present at a meeting of Shareholders if he participates by telephone or other electronic means and all Shareholders participating in the meeting are able to hear each other.
7.14    A meeting of Shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50% of the votes of the Shares entitled to vote on the Resolutions of Shareholders to be considered at the meeting. If a quorum be present, notwithstanding the fact that such quorum may be represented by only a single Shareholder or proxy, then such person may pass a Resolution of Shareholders and a certificate signed by such person accompanied where such person be a proxy by a copy of the proxy instrument shall constitute a valid Resolution of Shareholders. The Shareholders present at a duly called or held meeting of Shareholders at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough Shareholders to leave less than a quorum, if any action (other than adjournment) is approved by at least a majority of the Shares required to constitute a quorum.
7.15    If within two hours from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of Shareholders, shall be dissolved; in any other case it shall stand adjourned to the next business day in the jurisdiction in which the meeting was to have been held at the same time and place or to such other time and place as the chairman of the meeting may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting in person or by proxy not less than one third of the votes of the Shares or each class or series of Shares entitled to vote on the matters to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved.

 

6


7.16    (a)    At any annual meeting of Shareholders, only proposals of business which have been made in accordance with this Article shall be eligible to be brought before such meeting:
      (i)    by or at the direction of the Chairman of the Board or by Resolution of Directors;
      (ii)    by any Shareholder who is a holder of record as of the record date established pursuant to Article 7.6 who is entitled to vote at the meeting and who complies with the requirements and procedures set out in Article 7.17.
   (b)    At any special meeting of Shareholders, only such business shall be conducted as shall have been brought before the meeting pursuant to the notice of meeting made pursuant to Article 7.5.
7.17    (a)    For business to be properly brought to an annual meeting of Shareholders by a Shareholder, such business must be a proper matter for Shareholder action and the Shareholder must have given timely written notice thereof, either by personal delivery or by prepaid registered post to the Secretary of the Company (the “ Secretary ”) at the principal executive offices of the Company. To be considered timely in connection with an annual meeting of Shareholders, a Shareholder’s notice must be delivered not less than 60 days nor more than 90 days prior to the anniversary date of the prior year’s annual meeting of Shareholders; provided, however, that in the event that the date of the annual meeting of Shareholders changed by more than 30 days from such anniversary date, notice from a Shareholder shall also be considered timely if it is delivered not earlier than 90 days prior to such annual meeting nor later than the later of (i) 60 days prior to such annual meeting or (ii) the close of business on the tenth day following the day on which public disclosure is first made of the date of such annual meeting of Shareholders. For the purposes of this Article 7.17, any adjournment(s) or postponement(s) of the original annual meeting of Shareholders whereby such meeting will reconvene within 30 days from original date shall be deemed, for purposes of notice, to be a continuation of such original annual meeting of Shareholders and no business may be brought before any reconvened meeting unless such timely notice of such business was properly given to the Secretary for the meeting as originally scheduled. A Shareholder’s notice to the Secretary shall set out:
      (i)    a brief description of the proposal or the business desired to be brought before the meeting;
      (ii)    the full text of the proposal or business (including the full text of any resolutions proposed for consideration, and, in the event that such business includes a proposal to amend either the Memorandum or the Articles of the Company, the full text of the proposed amendment) and such other information regarding such proposal as would be required in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had such proposal been made by the Company;
      (iii)    the reasons for making the proposal or conducting such business at the meeting;
      (iv)    a representation that the Shareholder is a holder of record of Shares in the Company entitled to vote at such meeting and that such Shareholder intends to appear in person or by a proxy at the meeting to conduct the business being proposed as specified in the notice;
      (v)    the name and address of record of the Shareholder proposing such business and the beneficial owner, if any, on whose behalf the proposal is made;

 

7


      (vi)    the class and number of Shares of the Company which are owned beneficially or of record by such Shareholder and the beneficial owner, if any, on whose behalf the proposal is made;
      (vii)    any material interest of such Shareholder, and the beneficial owner, if any, on whose behalf the proposal is made, in such proposal or business and a description of all relationships, arrangements or understandings between the Shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and
      (viii)    if the Shareholder or the beneficial owner, if any, on whose behalf the proposal is made intends to solicit proxies in support of such Shareholder’s or beneficial owner’s proposal, a representation to that effect.
(b)    Notwithstanding the foregoing or any other Article contained in the Articles, nothing in Articles 7.4, 7.16(a)(ii), 7.16(b) or 7.17 shall be interpreted or construed to require the inclusion of information about any such proposal in any proxy statement distributed by, at the direction of, or on behalf of, the directors. The chairman of a meeting of Shareholders shall have the power and the duty, if the facts so warrant, to determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of Articles 7.4, 7.16 or 7.17 and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding anything contained elsewhere in these Articles, if a Shareholder has notified the Company of his intention to present a proposal at a meeting of Shareholders and such Shareholder does not appear or send a qualified representative, as determined by the chairman of the meeting, to present such proposal at such meeting, the Company need not present such proposal for a vote at such meeting notwithstanding that proxies in respect of such vote may have been received by the Company. Notwithstanding anything contained elsewhere in these Articles, a Shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in Articles 7.4, 7.16(a)(ii), 7.16(b) and 7.17. Nothing in these Articles shall be deemed to affect any rights of Shareholders to request inclusion of proposals in the Company’s proxy statement pursuant to Regulation 14A under the Exchange Act.
7.18    At every meeting of Shareholders, the Chairman of the Board shall preside as chairman of the meeting. If there is no Chairman of the Board or if the Chairman of the Board is not present at the meeting, the vice-Chairman of the Board shall be the chairman of the meeting. If there is no vice-Chairman of the Board or if the vice-Chairman of the Board is not present at the meeting, the chief executive officer shall be the chairman of the meeting. In the absence of the chief executive officer, such other person as shall be selected by the Board shall act as chairman of the meeting. Subject to the Memorandum and these Articles, the Board may adopt by Resolution of Directors, rules and regulations for the conduct of meetings of Shareholders as it shall deem appropriate relating to:
   (a)    the establishment of an agenda or order of business for the meeting and other matters pertaining to the conduct of the meeting;
   (b)    maintaining order at the meeting and the safety of those present;
   (c)    limitations on attendance at or participation in the meeting of shareholders of record, their duly authorized and constituted proxies or such other persons as the directors or chairman of the meeting shall determine;
   (d)    restrictions on entry to the meeting after the time fixed for commencement thereof; and
   (e)    limitations on the time allotted to questions or comments by participants,

 

8


7.19    Subject to the Memorandum, these Articles and any Resolution of Directors, the chairman of the meeting of Shareholders shall have the right and authority to prescribe rules and regulations for the conduct of meetings of Shareholders as he shall deem appropriate, including but not limited to the matters described in Articles 7.18 (a) through (e) above.
7.20    The chairman of the meeting may adjourn any meeting from time to time, and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place.
7.21    At any meeting of the Shareholders, the chairman of the meeting is responsible for deciding in such manner as he considers appropriate whether any resolution proposed has been carried or not, and the result of his decision shall be announced to the meeting (including any adjournment thereof) and recorded in the minutes of the meeting. If the chairman has any doubt as to the outcome of the vote on a proposed resolution, he shall cause a poll to be taken of all votes cast upon such resolution. If the chairman fails to take a poll, then any Shareholder present in person or by proxy who disputes the announcement by the chairman of the result of any vote may immediately following such announcement demand that a poll be taken and the chairman shall cause a poll to be taken. If a poll is taken at any meeting, the result shall be announced to the meeting (including any adjournment thereof) and recorded in the minutes of the meeting.
7.22    Any person other than an individual shall be regarded as one Shareholder and subject to the specific provisions hereinafter contained for the appointment of representatives of such persons the right of any individual to speak for or represent such Shareholder shall be determined by the law of the jurisdiction where, and by the documents by which, the person is constituted or derives its existence. In case of doubt, the directors may in good faith seek legal advice and unless and until a court of competent jurisdiction shall otherwise rule, the directors may rely and act upon such advice without incurring any liability to any Shareholder.
7.23    Any person other than an individual which is a Shareholder of the Company may by resolution of its directors or other governing body of such person authorize such person as it thinks fit to act as its representative at any meeting of the Shareholders or meeting of any class of Shareholders of the Company, and the person so authorized shall be entitled to exercise the same powers on behalf of the person which he represents as that person could exercise if it were an individual Shareholder.
7.24    The chairman of any meeting at which a vote is cast by proxy or on behalf of any person other than an individual may call for a notarially certified copy of such proxy or authority which shall be produced within 7 days of being so requested or the votes cast by such proxy or on behalf of such person shall be disregarded.
7.25    Directors of the Company may attend and speak at any meeting of Shareholders and at any separate meeting of the holders of any class or series of Shares.
7.26    No business of the Company shall be conducted at a meeting of shareholders except in accordance with the provisions of this Article 7.
8.    DIRECTORS
8.1    The Directors shall be elected by a resolution of Shareholders passed in accordance with Article 8.8 below.
8.2    No person shall be appointed as a Director, or nominated as a reserve Director, of the Company unless he has consented in writing to be a Director or to be nominated as a reserve Director.
8.3    The minimum number of Directors shall be one and there shall be no maximum number.

 

9


8.4    The Board shall be divided into three classes of Directors, as nearly equal in numbers as the then total number of Directors permits with the term of office of one class expiring each year.
8.5    At the annual meeting of Shareholders in 2010:
   (a)    Directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting of Shareholders;
   (b)    Directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting of Shareholders; and
   (c)    Directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting of Shareholders.
8.6    At every succeeding annual meeting of Shareholders, the successors to the class of Directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting of Shareholders.
8.7    A Director who retires at the annual meeting of Shareholders shall be eligible for re-election. If he is not re-elected he shall retain office until the meeting elects someone in his place, or if it does not do so, until the end of the meeting.
8.8    The election of Directors at each duly convened and constituted annual meeting of Shareholders shall be determined by a plurality of the votes of the Shares entitled to vote thereon in which respect of which the Shareholders holding the Shares were present at the meeting in person or by proxy and being Shares in respect of which the votes were voted.
8.9    Each Director holds office for the term, if any, fixed by the Resolution of Shareholders appointing him, or until his earlier death, resignation or removal.
8.10    The Directors may at any time appoint any person to be a Director either to fill a vacancy or as an addition to the existing Directors. Where the Directors appoint a person as a Director to fill a vacancy or as an additional Director the term of appointment for that new Director shall not exceed the term that remained when the person who has ceased to be a Director ceased to hold office.
8.11    A vacancy in relation to Directors occurs if a Director dies or otherwise ceases to hold office prior to the expiration of his term of office.
8.12    Where the Company only has one Shareholder who is an individual and that Shareholder is also the sole Director, the sole Shareholder/Director may, by instrument in writing, nominate a person who is not disqualified from being a Director as a reserve director of the Company to act in the place of the sole Director in the event of his death.
8.13    The nomination of a person as a reserve director of the Company ceases to have effect if:
   (a)    before the death of the sole Shareholder/Director who nominated him,
      (i)   he resigns as reserve director, or
      (ii)   the sole Shareholder/Director revokes the nomination in writing; or

 

10


   (b)    the sole Shareholder/Director who nominated him ceases to be able to be the sole Shareholder/Director for any reason other than his death.
8.14    The Company shall keep a register of directors containing:
   (a)    the names and addresses of the persons who are directors of the Company or who have been nominated as reserve directors of the Company;
   (b)    the date on which each person whose name is entered in the register was appointed as a director, or nominated as a reserve director, of the Company;
   (c)    the date on which each person named as a director ceased to be a director of the Company;
   (d)    the date on which the nomination of any person nominated as a reserve director ceased to have effect; and
   (e)    such other information as may be prescribed by the Act.
8.15    The register of directors may be kept in any such form as the Directors may approve, but if it is in magnetic, electronic or other data storage form, the Company must be able to produce legible evidence of its contents. Until a Resolution of Directors determining otherwise is passed, the magnetic, electronic or other data storage shall be the original register of directors.
8.16    A Director is not required to hold a Share as a qualification to office.
8.17    A Director may be removed from office, with cause, by a Resolution of Shareholders or by Resolution of Directors passed at a meeting of directors called for the purpose of removing the director or for purposes including the removal of the director.
8.18    Without prejudice to the provisions of retirement by rotation hereinafter contained, the office of a Director shall be vacated in any of the events following, namely:
   (a)    if he resigns his office by notice in writing delivered to the registered office or tendered at a meeting of the Board; or
   (b)    if the Board resolves that he is through physical or mental incapacity or mental disorder no longer able to perform the functions of a Director; or
   (c)    if he fails, without leave, to attend (whether or not an alternate Director appointed by him attends) three successive Board meetings or four Board meetings in any consecutive period of 12 months despite a notice being given to him prior to such third or fourth meeting (as the case may be) that the provisions of this paragraph might apply and not less than two-thirds of all the other Directors (excluding the Director concerned and, in his capacity as such, any alternate Director appointed by the Director concerned) resolving that his office should be vacated; or
   (d)    if he becomes bankrupt or insolvent or makes an arrangement or composition with his creditors or applies to the Court in connection with a voluntary arrangement; or
   (e)    any event analogous to those listed in Article 8.18(d) under the laws of any other jurisdiction occurs in relation to a Director; or
   (f)    if he is prohibited by law from being a Director; or

 

11


   (g)    if he ceases to be a Director by virtue of the Act or is removed from office pursuant to these Articles.
In the case of Articles 8.18 (b) to (e) inclusive above, the Director shall be removed from office.
8.19    A Resolution of Directors declaring that a Director has vacated office under Article 8.18 shall be conclusive as to that fact and as to the ground of vacation as stated in the resolution.
8.20    Each Director shall have the power to appoint any person to be his alternate Director and may at his discretion remove such alternate Director. If such alternate Director is not another Director, such appointment, unless previously approved by the Board, shall have effect only upon and subject to it being so approved. Any appointment or removal of an alternate Director shall be effected by notice in writing signed by the appointer and delivered to the registered office or tendered at a meeting of the Board. An alternate Director shall, if his appointer so requests, be entitled to receive notices of meetings of the Board or of committees of the Board to the same extent as, but in lieu of, the Director appointing him and shall be entitled to such extent to attend at and vote as a Director at any such meeting at which the Director appointing him is not personally present and to exercise and discharge all the functions, powers and duties of his appointer as a Director and for the purposes of the proceedings at such meeting the provisions of these Articles shall apply as if he were a Director.
8.21    Every person acting as an alternate Director shall (except as regards power to appoint an alternate Director and remuneration) be subject in all respects to the provisions of these Articles relating to Directors and shall alone be responsible to the Company for his acts and defaults and shall not be deemed to be the agent of or for the Director appointing him. An alternate Director may be paid expenses and shall be entitled to be indemnified by the Company to the same extent mutatis mutandis as if he were a Director but shall not be entitled to receive from the Company any fee in his capacity as an alternate Director except only such part (if any) of the remuneration otherwise payable to the Director appointing him as such Director may by notice in writing to the Company from time to time direct.
8.22    Every person acting as an alternate Director shall have one vote for each Director for whom he acts as alternate (in addition to his own vote if he is also a Director). The signature of an alternate Director to any resolution in writing of the Board or a committee of the Board shall, unless the notice of his appointment provides to the contrary, be as effective as the signature of his appointer.
8.23    An alternate Director shall ipso facto cease to be an alternate Director if his appointer ceases for any reason to be a Director provided that, if at any meeting any Director retires by rotation or otherwise but is re-elected at the same meeting, any appointment made by him pursuant to this Article which was in force immediately before his retirement shall remain in force as though he had not retired.
8.24    Each of the Directors shall be paid a fee at such rate as may from time to time be determined by the Board provided that the aggregate of all such fees so paid to Directors (excluding amounts payable under any other Article and any amount payable under any service contract) shall not exceed US$100,000 per annum, or such higher amount as may from time to time be determined by Resolution of Shareholders.
8.25    As the Board determines each Director may be paid his reasonable travelling, hotel and incidental expenses of attending and returning from meetings of the Board or committees of the Board or meetings of Shareholders or separate meetings of the holders of any class or series of Shares or of debentures of the Company and shall be paid all expenses properly and reasonably incurred by him in the conduct of the Company’s business or in the discharge of his duties as a Director. Any Director who, by request, goes or resides abroad for any purposes of the Company or who performs services which in the opinion of the Board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine and such extra remuneration shall be in addition to any remuneration provided for by or pursuant to any other Article.

 

12


9.    POWERS OF DIRECTORS
9.1    The business and affairs of the Company shall be managed by, or under the direction or supervision of, the Directors. The Directors have all the powers necessary for managing, and for directing and supervising, the business and affairs of the Company. The Directors may pay all expenses incurred preliminary to and in connection with the incorporation of the Company and may exercise all such powers of the Company as are not by the Act or by the Memorandum or the Articles required to be exercised by the Shareholders.
9.2    Each Director shall exercise his powers for a proper purpose and shall not act or agree to the Company acting in a manner that contravenes the Memorandum, the Articles or the Act. Each Director, in exercising his powers or performing his duties, shall act honestly and in good faith in what the Director believes to be the best interests of the Company.
9.3    If the Company is the wholly owned subsidiary of a holding company, a Director may, when exercising powers or performing duties as a Director, act in a manner which he believes is in the best interests of the holding company even though it may not be in the best interests of the Company.
9.4    Any Director which is a body corporate may appoint any individual as its duly authorized representative for the purpose of representing it at meetings of the Directors, with respect to the signing of consents or otherwise.
9.5    The continuing Directors may act notwithstanding any vacancy in their body.
9.6    The Directors may by Resolution of Directors exercise all the powers of the Company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the Company or of any third party. The Directors shall have unlimited power to borrow money on behalf of the Company.
9.7    All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for moneys paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as shall from time to time be determined by Resolution of Directors.
9.8    For the purposes of Section 175 ( Disposition of assets ) of the Act, the Directors may by Resolution of Directors determine that any sale, transfer, lease, exchange or other disposition is in the usual or regular course of the business carried on by the Company and such determination is, in the absence of fraud, conclusive.
9.9    The Company has no power to grant loans to the Directors.
10.    PROCEEDINGS OF DIRECTORS
10.1    Any one Director may call a meeting of the Directors by sending a written notice to each other Director.
10.2    The Directors or any committee thereof may meet at such times and in such manner and places within or outside the British Virgin Islands as the Directors may determine to be necessary or desirable.
10.3    A Director is deemed to be present at a meeting of Directors if he participates by telephone or other electronic means and all Directors participating in the meeting are able to hear each other.

 

13


10.4    A Director shall be given not less than 3 days’ notice of meetings of Directors, but a meeting of Directors held without 3 days’ notice having been given to all Directors shall be valid if all the Directors entitled to vote at the meeting who do not attend waive notice of the meeting, and for this purpose the presence of a Director at a meeting shall constitute waiver by that Director. The inadvertent failure to give notice of a meeting to a Director, or the fact that a Director has not received the notice, does not invalidate the meeting.
10.5    A meeting of Directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than one-half of the total number of Directors, unless there are only 2 Directors in which case the quorum is 2.
10.6    If the Company has only one Director the provisions herein contained for meetings of Directors do not apply and such sole Director has full power to represent and act for the Company in all matters as are not by the Act, the Memorandum or the Articles required to be exercised by the Shareholders. In lieu of minutes of a meeting the sole Director shall record in writing and sign a note or memorandum of all matters requiring a Resolution of Directors. Such a note or memorandum constitutes sufficient evidence of such resolution for all purposes.
10.7    At meetings of Directors at which the Chairman of the Board is present, he shall preside as chairman of the meeting. If there is no Chairman of the Board or if the Chairman of the Board is not present, the Directors present shall choose one of their number to be chairman of the meeting.
10.8    An action that may be taken by the Directors or a committee of Directors at a meeting may also be taken by a Resolution of Directors or a resolution of a committee of Directors consented to in writing by all Directors or by all members of the committee, as the case may be, without the need for any notice. The consent may be in the form of counterparts each counterpart being signed by one or more Directors. If the consent is in one or more counterparts, and the counterparts bear different dates, then the resolution shall take effect on the date upon which the last Director has consented to the resolution by signed counterparts.
11.    COMMITTEES
11.1    The Directors may, by Resolution of Directors, designate one or more committees, each consisting of one or more Directors, and delegate one or more of their powers, including the power to affix the Seal, to the committee.
11.2    The Directors have no power to delegate to a committee of Directors any of the following powers:
   (a)    to amend the Memorandum or the Articles;
   (b)    to designate committees of Directors;
   (c)    to delegate powers to a committee of Directors;
   (d)    to appoint or remove Directors;
   (e)    to appoint or remove an agent;
   (f)    to approve a plan of merger, consolidation or arrangement;
   (g)    to make a declaration of solvency or to approve a liquidation plan; or

 

14


   (h)    to make a determination that immediately after a proposed Distribution the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as they fall due.
11.3    Articles 11.2(b) and (c) do not prevent a committee of Directors, where authorized by the Resolution of Directors appointing such committee or by a subsequent Resolution of Directors, from appointing a sub-committee and delegating powers exercisable by the committee to the sub-committee.
11.4    The meetings and proceedings of each committee of Directors consisting of 2 or more Directors shall be governed  mutatis mutandis by the provisions of the Articles regulating the proceedings of Directors so far as the same are not superseded by any provisions in the Resolution of Directors establishing the committee.
11.5    Where the Directors delegate their powers to a committee of Directors they remain responsible for the exercise of that power by the committee, unless they believed on reasonable grounds at all times before the exercise of the power that the committee would exercise the power in conformity with the duties imposed on Directors under the Act.
12.    OFFICERS AND AGENTS
12.1    The Company may by Resolution of Directors appoint officers of the Company at such times as may be considered necessary or expedient. Any number of offices may be held by the same person.
12.2    The officers shall perform such duties as are prescribed at the time of their appointment subject to any modification in such duties as may be prescribed thereafter by Resolution of Directors. In the absence of any specific prescription of duties it shall be the responsibility of the Chairman of the Board to preside at meetings of Directors and Shareholders, the Chief Executive Officer to manage the day to day affairs of the Company, the vice-presidents to act in order of seniority in the absence of the president but otherwise to perform such duties as may be delegated to them by the president, the secretaries to maintain the register of members, minute books and records (other than financial records) of the Company and to ensure compliance with all procedural requirements imposed on the Company by applicable law, and the Chief Financial Officer to be responsible for the financial affairs of the Company.
12.3    The emoluments of all officers shall be fixed by Resolution of Directors.
12.4    The officers of the Company shall hold office until their successors are duly appointed, but any officer elected or appointed by the Directors may be removed at any time, with or without cause, by Resolution of Directors. Any vacancy occurring in any office of the Company may be filled by Resolution of Directors.
12.5    The Directors may, by Resolution of Directors, appoint any person, including a person who is a Director, to be an agent of the Company.
12.6    An agent of the Company shall have such powers and authority of the Directors, including the power and authority to affix the Seal, as are set forth in the Articles or in the Resolution of Directors appointing the agent, except that no agent has any power or authority with respect to the following:
   (a)    to amend the Memorandum or the Articles;
   (b)    to change the registered office or agent;
   (c)    to designate committees of Directors;
   (d)    to delegate powers to a committee of Directors;

 

15


   (e)    to appoint or remove Directors;
   (f)    to appoint or remove an agent;
   (g)    to fix emoluments of Directors;
   (h)    to approve a plan of merger, consolidation or arrangement;
   (i)    to make a declaration of solvency or to approve a liquidation plan;
   (j)    to make a determination that immediately after a proposed Distribution the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as they fall due; or
   (k)    to authorize the Company to continue as a company incorporated under the laws of a jurisdiction outside the British Virgin Islands.
12.7    The Resolution of Directors appointing an agent may authorize the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company.
12.8    The Directors may remove an agent appointed by the Company and may revoke or vary a power conferred on him.
13.    CONFLICT OF INTERESTS
13.1    A Director shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to all other Directors.
13.2    For the purposes of Article 13.1, a disclosure to all other Directors to the effect that a Director is a member, director or officer of another named entity or has a fiduciary relationship with respect to the entity or a named individual and is to be regarded as interested in any transaction which may, after the date of the entry into the transaction or disclosure of the interest, be entered into with that entity or individual, is a sufficient disclosure of interest in relation to that transaction.
13.3    A Director who is interested in a transaction entered into or to be entered into by the Company may:
   (a)    vote on a matter relating to the transaction;
   (b)    attend a meeting of Directors at which a matter relating to the transaction arises and be included among the Directors present at the meeting for the purposes of a quorum; and
   (c)    sign a document on behalf of the Company, or do any other thing in his capacity as a Director, that relates to the transaction, and, subject to compliance with the Act shall not, by reason of his office be accountable to the Company for any benefit which he derives from such transaction and no such transaction shall be liable to be avoided on the grounds of any such interest or benefit.
14.    INDEMNIFICATION
14.1    Subject to the limitations hereinafter provided the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who:
   (a)    is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a Director, an officer or a liquidator of the Company; or

 

16


   (b)    is or was, at the request of the Company, serving as a director, an officer or a liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise.
      The indemnity in Article 14.1 only applies if the person acted honestly and in good faith with a view to the best interests of the Company and, in the case of criminal proceedings, the person had no reasonable cause to believe that their conduct was unlawful.
14.2    The decision of the Directors as to whether the person acted honestly and in good faith and with a view to the best interests of the Company and as to whether the person had no reasonable cause to believe that his conduct was unlawful is, in the absence of fraud, sufficient for the purposes of the Articles, unless a question of law is involved.
14.3    The termination of any proceedings by any judgment, order, settlement, conviction or the entering of a  nolle prosequi  does not, by itself, create a presumption that the person did not act honestly and in good faith and with a view to the best interests of the Company or that the person had reasonable cause to believe that his conduct was unlawful.
14.4    Expenses, including legal fees, incurred by a Director in defending any legal, administrative or investigative proceedings may be paid by the Company in advance of the final disposition of such proceedings upon receipt of an undertaking by or on behalf of the Director to repay the amount if it shall ultimately be determined that the Director is not entitled to be indemnified by the Company in accordance with Article 14.1.
14.5    Expenses, including legal fees, incurred by a former Director in defending any legal, administrative or investigative proceedings may be paid by the Company in advance of the final disposition of such proceedings upon receipt of an undertaking by or on behalf of the former Director to repay the amount if it shall ultimately be determined that the former Director is not entitled to be indemnified by the Company in accordance with Article 14.1 and upon such terms and conditions, if any, as the Company deems appropriate.
14.6    The indemnification and advancement of expenses provided by, or granted pursuant to, this section is not exclusive of any other rights to which the person seeking indemnification or advancement of expenses may be entitled under any agreement, Resolution of Shareholders, resolution of disinterested Directors or otherwise, both as acting in the person’s official capacity and as to acting in another capacity while serving as a Director.
14.7    If a person referred to in Article 14.1 has been successful in defense of any proceedings referred to in Article 14.1, the person is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the person in connection with the proceedings.
14.8    The Company may purchase and maintain insurance in relation to any person who is or was a Director, officer or liquidator of the Company, or who at the request of the Company is or was serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity, whether or not the Company has or would have had the power to indemnify the person against the liability as provided in the Articles.

 

17


15.    RECORDS
15.1    The Company shall keep the following documents at the office of its registered agent:
   (a)    the Memorandum and the Articles;
   (b)    the register of members, or a copy of the register of members;
   (c)    the register of directors, or a copy of the register of directors; and
   (d)    copies of all notices and other documents filed by the Company with the Registrar of Corporate Affairs in the previous 10 years.
15.2    Until the Directors determine otherwise by Resolution of Directors the Company shall keep the original register of members and original register of directors at the office of its registered agent.
15.3    If the Company maintains only a copy of the register of members or a copy of the register of directors at the office of its registered agent, it shall:
   (a)    within 15 days of any change in either register, notify the registered agent in writing of the change; and
   (b)    provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept.
15.4    The Company shall keep the following records at the office of its registered agent or at such other place or places, within or outside the British Virgin Islands, as the Directors may determine:
   (a)    minutes of meetings and Resolutions of Shareholders and classes of Shareholders; and
   (b)    minutes of meetings and Resolutions of Directors and committees of Directors.
15.5    Where any original records referred to in this Article are maintained other than at the office of the registered agent of the Company, and the place at which the original records are maintained is changed, the Company shall provide the registered agent with the physical address of the new location of the records of the Company within 14 days of the change of location.
15.6    The records kept by the Company under this Article shall be in written form or either wholly or partly as electronic records complying with the requirements of the Electronic Transactions Act, 2001 (No. 5 of 2001) as from time to time amended or re-enacted.
16.    REGISTER OF CHARGES
The Company shall maintain at the office of its registered agent, a register of charges in which there shall be entered the following particulars regarding each mortgage, charge and other encumbrance created by the Company:
   (a)    the date of creation of the charge;
   (b)    a short description of the liability secured by the charge;
   (c)    a short description of the property charged;

 

18


   (d)    the name and address of the trustee for the security or, if there is no such trustee, the name and address of the chargee;
   (e)    unless the charge is a security to bearer, the name and address of the holder of the charge; and
   (f)    details of any prohibition or restriction contained in the instrument creating the charge on the power of the Company to create any future charge ranking in priority to or equally with the charge.
17.    SEAL
17.1    The Company shall have a Seal an impression of which shall be kept at the office of the registered agent of the Company. The Company may have more than one Seal and references herein to the Seal shall be references to every Seal which shall have been duly adopted by Resolution of Directors. The Directors shall provide for the safe custody of the Seal and for an imprint thereof to be kept at the registered office.
17.2    Except as otherwise expressly provided herein the Seal when affixed to any written instrument shall be witnessed and attested to by the signature of any one Director or other person so authorized from time to time by Resolution of Directors. Such authorization may be before or after the Seal is affixed, may be general or specific and may refer to any number of sealings. The Directors may provide for the Seal and/or for the signature of any Director or authorized person to be affixed by electronic means on any instrument in accordance with the Electronic Transactions Act, 2001 and it shall have the same force and validity as if the Seal had been affixed to such instrument and the same had been attested to as hereinbefore described.
17.3    A contract, agreement or other instrument executed by or on behalf of the Company by a Director or an authorized agent of the Company is not invalid by reason only of the fact that the Seal is not affixed to the contract, agreement or instrument.
17.4    An instrument is validly executed by the Company as a deed or an instrument under seal if it is either:
   (a)    sealed with the Seal and witnessed by a Director or such other person who is authorized by the Memorandum and these Articles to witness the application of the Seal; or
   (b)    it is expressed to be, or is expressed to be executed as, or otherwise makes clear on its face that it is intended to be, a deed and it is signed by a Director or by a person so authorized from time to time by Resolution of Directors.
18.    DISTRIBUTIONS BY WAY OF DIVIDEND
18.1    The Directors of the Company may, by Resolution of Directors, authorize a Distribution by way of dividend at a time and of an amount they think fit if they are satisfied, on reasonable grounds, that, immediately after the Distribution, the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as they fall due.
18.2    Dividends may be paid in money, shares, or other property.
18.3    Notice of any dividend that may have been declared shall be given to each Shareholder as specified in Article 20.1 and all dividends unclaimed for 3 years after having been declared may be forfeited by Resolution of Directors for the benefit of the Company.
18.4    No dividend shall bear interest as against the Company and no dividend shall be paid on Treasury Shares.

 

19


18.5    The Directors may, before authorizing any Distribution, set aside out of the profits of the Company such sum as they think proper as a reserve fund, any may invest the sum so set apart as a reserve fund upon such securities as they may select.
19.    ACCOUNTS AND AUDIT
19.1    The Company shall keep records that are sufficient to show and explain the Company’s transactions and that will, at any time, enable the financial position of the Company to be determined with reasonable accuracy.
19.2    The Company may by Resolution of Shareholders call for the directors to prepare periodically and make available a profit and loss account and a balance sheet. The profit and loss account and balance sheet shall be drawn up so as to give respectively a true and fair view of the profit and loss of the Company for a financial period and a true and fair view of the assets and liabilities of the Company as at the end of a financial period.
19.3    The Company may by Resolution of Shareholders call for the accounts to be examined by auditors.
19.4    The first auditors shall be appointed by Resolution of Directors; subsequent auditors shall be appointed by Resolution of Shareholders or by Resolution of Directors.
19.5    The auditors may be Shareholders, but no director or other officer shall be eligible to be an auditor of the Company during their continuance in office.
19.6    The remuneration of the auditors of the Company may be fixed by Resolution of Directors.
19.7    The auditors shall examine each profit and loss account and balance sheet required to be laid before a meeting of the Shareholders or otherwise given to Shareholders and shall state in a written report whether or not:
   (a)    in their opinion the profit and loss account and balance sheet give a true and fair view respectively of the profit and loss for the period covered by the accounts, and of the assets and liabilities of the Company at the end of that period; and
   (b)    all the information and explanations required by the auditors have been obtained.
19.8    The report of the auditors shall be annexed to the accounts and shall be given to the Shareholders.
19.9    Every auditor of the Company shall have a right of access at all times to the books of account and vouchers of the Company, and shall be entitled to require from the directors and officers of the Company such information and explanations as he thinks necessary for the performance of the duties of the auditors.
19.10    The auditors of the Company shall be entitled to receive notice of, and to attend any meetings of Shareholders at which the Company’s profit and loss account and balance sheet are to be presented
20.    NOTICES
20.1    Any notice, information or written statement to be given by the Company to Shareholders may be given by personal service or by mail addressed to each Shareholder at the address shown in the register of members or by email or facsimile to an email address or facsimile number notified for that purpose by a Shareholder to the Company.

 

20


20.2    Any summons, notice, order, document, process, information or written statement to be served on the Company may be served by leaving it, or by sending it by registered mail addressed to the Company, at its registered office, or by leaving it with, or by sending it by registered mail to, the registered agent of the Company.
20.3    Service of any summons, notice, order, document, process, information or written statement to be served on the Company may be proved by showing that the summons, notice, order, document, process, information or written statement was delivered to the registered office or the registered agent of the Company or that it was mailed in such time as to admit to its being delivered to the registered office or the registered agent of the Company in the normal course of delivery within the period prescribed for service and was correctly addressed and the postage was prepaid.
21.    VOLUNTARY LIQUIDATION
      The Company may by a Resolution of Shareholders or by Resolution of Directors appoint a voluntary liquidator.
22.    CONTINUATION
      The Company may by Resolution of Shareholders or by a resolution passed unanimously by all Directors of the Company continue as a company incorporated under the laws of a jurisdiction outside the British Virgin Islands in the manner provided under those laws.
23.    BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS
23.1    Notwithstanding anything contained in the Memorandum or these Articles, the Company shall not engage in any business combination with any interested Shareholder for a period of 3 years following the time that such Shareholder became an interested Shareholder unless:
   (a)    prior to such time the board of directors of the Company approved either the business combination or the transaction which resulted in the Shareholder becoming an interested Shareholder;
   (b)    upon consummation of the transaction which resulted in the Shareholder becoming an interested Shareholder, the interested Shareholder owned at least 85% of the voting Shares of the Company outstanding at the time the transaction commenced, excluding for the purposes of determining the voting Shares outstanding (but not the outstanding voting Shares owned by the interested shareholder) those Shares owned (i) by persons who are directors and also officers and (ii) employee share plans in which employee participants do not have the right to determine confidentially whether Shares held subject to the plan will be tendered in a tender or exchange offer; or
   (c)    at or subsequent to such time the business combination is approved by the board of directors and authorized at any annual or special meeting of the Shareholders by the affirmative vote of at least 66  2 /3% of the outstanding voting Shares which are not owned by the interested Shareholder.
23.2    The restrictions set forth in Article 23.1 shall not apply if:
   (a)    Subject to the terms of the Memorandum, the Company by Resolution of Directors or a Resolution of Shareholders adopts an amendment to the Articles expressly electing not to be governed by this Article 23 or otherwise deletes this Article 23; provided that, such amendment of this Article 23 shall be effected in such a way as to ensure that it shall not be effective or operative until 12 months after the adoption of such amendment and shall not apply to any business combination between the Company and any Person who became an interested shareholder of the Company on or prior to such adoption.

 

21


   (b)    The Company does not have a class of voting Shares that is: (i) listed on a national securities exchange; (ii) authorized for quotation on The NASDAQ Capital Market; or (iii) held of record by more than 2,000 Shareholders, unless any of the foregoing results from action taken, directly or indirectly, by an interested Shareholder or from a transaction in which a person becomes an interested Shareholder.
   (c)    A Shareholder becomes an interested Shareholder inadvertently and (i) as soon as practicable divests itself of ownership of sufficient Shares so that the Shareholder ceases to be an interested shareholder; and (ii) would not, at any time within the 3-year period immediately prior to a business combination between the Company and such Shareholder, have been an interested Shareholder but for the inadvertent acquisition of ownership.
   (d)    The business combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (i) is with or by a Person who either was not an interested Shareholder during the previous 3 years or who became an interested Shareholder with the approval of the board of directors of the Company or during a period described in Article 23.2(d), (ii) is approved or not opposed by a majority of the directors then in office (but not less than 1) who were directors prior to any Person becoming an interested Shareholder during the previous 3 years or were recommended for election or elected to succeed such directors by a majority of such directors, and (iii) constitutes one of the following transactions:
      A.    a merger or consolidation of the Company (except for a specified merger);
      B.    a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Company or any direct or indirect majority-owned subsidiary of the Company (other than to any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either the market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding Shares of the Company; or
      C.    a proposed tender or exchange offer for 50% or more of the outstanding voting Shares of the Company.
        

The Company shall give not less than 20 days’ notice to all interested Shareholders prior to the consummation of any of the transactions described in Articles 23.2(d)(iii)(A) and (B).

   (e)    The business combination is with an interested Shareholder who became an interested Shareholder at a time when the restrictions contained in this Article 23 did not apply by reason of an amendment pursuant to Article 23.2(a) or 23.2(b) or at the time of registration by the Registrar of the notice of adoption of the Articles, which set forth this Article 23.
23.3    As used in this Article 23 only, the term:
   (a)    “affiliate” means any Person that directly, or indirectly through 1 or more intermediaries, controls, or is controlled by, or is under common control with, another Person.
   (b)    “associate,” when used to indicate a relationship with any person, means: (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock or

 

22


      voting Shares; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
   (c)    “business combination,” when used in reference to the Company and any interested Shareholder, means:
      (i)    Any merger or consolidation of the Company or any direct or indirect majority-owned subsidiary of the Company with (A) the interested Shareholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested Shareholder and as a result of such merger or consolidation Article 23.1 is not applicable to the surviving entity;
      (ii)    Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in 1 transaction or a series of transactions), except proportionately as a Shareholder of the Company, to or with the interested Shareholder, whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary of the Company which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding Shares of the Company;
      (iii)    Any transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned subsidiary of the Company of any Shares of the Company or of such subsidiary to the interested Shareholder, except: (A) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into Shares of the Company or any such subsidiary which securities were outstanding prior to the time that the interested Shareholder became such; (B) pursuant to a merger of the Company with or into a single direct or indirect wholly-owned subsidiary of the Company; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into Shares of the Company or any such subsidiary which security is distributed, pro rata to all holders of a class or series of Shares of the Company subsequent to the time the interested Shareholder became such; (D) pursuant to an exchange offer by the Company to purchase Shares made on the same terms to all holders of said Shares; or (E) any issuance, cancellation, redemption, buy back or transfer of Shares by the Company; provided however, that in no case under items (C)-(E) of this Article shall there be an increase in the interested Shareholder’s proportionate share of the Shares of any class or series of the Company or of the voting Shares of the Company;
      (iv)    Any transaction involving the Company or any direct or indirect majority-owned subsidiary of the Company which has the effect, directly or indirectly, of increasing the proportionate share of the Shares of any class or series, or securities convertible into the Shares of any class or series, of the Company or of any such subsidiary which is owned by the interested Shareholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any Shares not caused, directly or indirectly, by the interested Shareholder; or
      (v)    Any receipt by the interested Shareholder of the benefit, directly or indirectly (except proportionately as a Shareholder of the Company), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in subparagraphs (i)-(iv) of this Article) provided by or through the Company or any direct or indirect majority-owned subsidiary of the Company.

 

23


   (d)    “control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting Shares, by contract or otherwise. A Person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary; notwithstanding the foregoing, a presumption of control shall not apply where such Person holds voting stock, in good faith and not for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for 1 or more owners who do not individually or as a group have control of such entity.
   (e)    “interested Shareholder” means any Person (other than the Company and any direct or indirect majority-owned subsidiary of the Company) that (i) is the owner of 15% or more of the outstanding voting Shares of the Company, or (ii) is an affiliate or associate of the Company and was the owner of 15% or more of the outstanding voting Shares of the Company at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such Person is an interested Shareholder, and the affiliates and associates of such Person; provided, however, that the term “interested Shareholder” shall not include (x) any Person who (A) owned Shares in excess of the 15% limitation set forth herein as of, or acquired such Shares pursuant to a tender offer commenced prior to, the date of registration by the Registrar of the notice of adoption of the Articles, which set forth this Article 25, or pursuant to an exchange offer announced prior to the aforesaid date and commenced within 90 days thereafter and either (I) continued to own Shares in excess of such 15% limitation or would have but for action by the Company or (II) is an affiliate or associate of the Company and so continued (or so would have continued but for action by the Company) to be the owner of 15% or more of the outstanding voting Shares of the Company at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such Person is an interested Shareholder or (B) acquired said Shares from a Person described in item (A) of this paragraph by gift, inheritance or in a transaction in which no consideration was exchanged; or (y) any Person whose ownership of Shares in excess of the 15% limitation set forth herein is the result of action taken solely by the Company; provided that such Person shall be an interested Shareholder if thereafter such Person acquires additional Shares of voting Shares of the Company, except as a result of further corporate action not caused, directly or indirectly, by such Person. For the purpose of determining whether a Person is an interested Shareholder, the voting Shares of the Company deemed to be outstanding shall include Shares deemed to be owned by the Person through application of Article 23.3(i) but shall not include any other unissued Shares of the Company which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. Any determination made by the Board of Directors as to whether any Person is or is not an interested shareholder shall be conclusive and binding upon all shareholders of the Company.
   (f)    “owner,” including the terms “own” and “owned,” when used with respect to any Shares of the Company, means a Person that individually or with or through any of its affiliates or associates:
      (i)    beneficially owns such Shares, directly or indirectly; or
      (ii)    has (A) the right to acquire such Shares (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the owner of Shares tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s affiliates or associates until such tendered Shares is accepted for purchase or exchange; or (B) the right to vote such Shares pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the owner of any Shares because of such Person’s right to vote such Shares if the agreement, arrangement or understanding to vote such Shares arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more Persons; or

 

24


   (iii)    has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of subparagraph (ii) of this paragraph), or disposing of such Shares with any other Person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such Shares.
   (g)    “specified merger” means a merger in connection with which all of the following conditions are satisfied: (1) the agreement of merger does not amend in any respect the Memorandum or these Articles, (2) each Share outstanding immediately prior to the effective date of the merger is an identical outstanding or treasury share of the surviving company after the effective date of the merger, and (3) either no Shares of the surviving company and no shares, securities or obligations convertible into such Shares are to be issued or delivered under the plan of merger, or the authorized unissued Shares or the treasury Shares of the surviving company to be issued or delivered under the plan of merger plus those initially issuable upon conversion of any other shares, securities or obligations to be issued or delivered under such plan do not exceed 20% of the Shares of the Company outstanding immediately prior to the effective date of the merger.
   (h)    “voting Shares” means Shares of any class or series entitled to vote generally in the election of directors of the Company. Every reference to a percentage of voting Shares shall refer to such percentage of the votes of such voting Shares.
   (i)    “voting stock” means, with respect to any corporation, stock of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity. Every reference to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.
24.    UNTRACED SHAREHOLDERS
24.1    When the registered address of any Shareholder appears to the Board to be incorrect or out of date such Shareholder may, if the Board so resolves, be treated as if he had no registered address and the Company will not thereafter be obliged to send to such Shareholder cheques, warrants, notices of meetings or copies of the documents referred to in these Articles; provided that no resolution as aforesaid shall be proposed by the Board until cheques or warrants sent to the registered address of such Shareholder have been returned by the Post Office or left uncashed on at least two consecutive occasions or, following one such occasion, reasonable enquiries have failed to establish any new address of such Shareholder.
24.2    The Company shall be entitled to sell at the best price reasonably obtainable any Share of a Shareholder or any Share to which a person is entitled by transmission if and provided that:
   (a)    for a period of twelve years in the course of which at least three dividends have become payable in respect of the Share in question, no cheque or warrant sent by the Company through the post in a prepaid letter addressed to the Shareholder or to the person entitled by transmission to the Share at his address on the register of members or the other last known address given by the Shareholder or the person entitled by transmission to which cheques and warrants are to be sent has been cashed and no communication has been received by the Company from the Shareholder or the person entitled by transmission; and
   (b)    the Company has at the expiration of the said period of twelve years by advertisement in both a leading national newspaper and in a newspaper circulating in the area in which the address referred to in paragraph (a) above is located given notice of its intention to sell such Share; and

 

25


   (c)    the Company has not during the further period of three months after the date of the advertisement and prior to the exercise of the power of sale received any communication from the Shareholder or person entitled by transmission.
24.3    To give effect to any such sale the Company may appoint any person to execute as transferor an instrument of transfer of such Share and such instrument of transfer shall be as effective as if it had been executed by the registered holder of such Share. The Company shall account to the Shareholder or other person entitled to such Share for the net proceeds of such sale and shall be deemed to be his debtor and not a trustee for him in respect of the same. Any money not accounted for to the Shareholder or other person entitled to such Share shall be carried to a separate account and shall be a permanent debt of the Company. Money carried to such separate account may either be employed in the business of the Company or invested in such investments (other than Shares or its holding company, if any) as the Directors may from time to time think fit.

We, NOVASAGE INCORPORATIONS (BVI) LIMITED, of P.O. Box 4389, Road Town, Tortola, British Virgin Islands for the purpose of disapplying Part IV of Schedule 2 of the Act hereby sign these Articles of Association the   day of      , 2010.

 

SUBSCRIBER   NOVASAGE INCORPORATIONS (BVI) LIMITED
 

 

  (sd.)  

 

  Authorized Signatory
In the presence of: WITNESS  

 

  (sd.)  

 

 

 

 

 

 

 

 

26

Exhibit 3(ii).1

TERRITORY OF THE BRITISH VIRGIN ISLANDS

THE BVI BUSINESS COMPANIES ACT, 2004

AMENDED AND RESTATED

MEMORANDUM OF ASSOCIATION

OF

TIANLI AGRITECH, INC.

A COMPANY LIMITED BY SHARES

 

1. DEFINITIONS AND INTERPRETATION

 

1.1 In this Memorandum of Association and the attached Articles of Association, if not inconsistent with the subject or context:

Act ” means the BVI Business Companies Act, 2004 (No. 16 of 2004) and includes the regulations made under the Act;

Articles ” means the attached Articles of Association of the Company;

Board ” means the board of Directors of the Company or the Directors present at a duly convened meeting of the Directors at which a quorum is present;

business day ” means a weekday on which banks are generally open for business in the British Virgin Islands;

clear days ” in relation to the period of a notice means that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect;

Directors ” mean those persons holding office as directors of the Company from time to time;

Distribution ” in relation to a distribution by the Company to a Shareholder means the direct or indirect transfer of an asset, other than Shares, to or for the benefit of the Shareholder, or the incurring of a debt to or for the benefit of a Shareholder, in relation to Shares held by a Shareholder, and whether by means of the purchase of an asset, the purchase, redemption or other acquisition of Shares, a transfer of indebtedness or otherwise, and includes a dividend;

electronic ” means actuated by electric, magnetic, electro-magnetic, electro-chemical or electro-mechanical energy and “by electronic means” means by any manner capable of being so actuated and shall include e-mail and/or other data transmission service;

Exchange Act ” means the U.S. Securities Exchange Act of 1934, as amended;

executed ” includes any mode of execution;


held ” means, in relation to Shares, the Shares entered in the register of members as being held by a member and term “ holds ” and “ holder ” shall be construed accordingly;

month ” means a calendar month;

paid up ” means paid up or credited as paid up and includes any sum paid by way of premium;

Person ” means individuals, corporations, trusts, the estates of deceased individuals, partnerships and unincorporated associations of persons;

present in person ” means, in the case of an individual, that individual or his lawfully appointed attorney being present in person and, in the case of a corporation, being present by duly authorized representative or lawfully appointed attorney and, in relation to meetings, “ in person ” shall be construed accordingly;

public disclosure ” means any disclosure in a press release issued or disseminated in a manner designated to provide broad, non-exclusionary distribution of the information to the public or in a document publicly filed or furnished by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act or in a registration statement under the Securities Act;

Memorandum ” means this Memorandum of Association of the Company;

Registrar ” means the Registrar of Corporate Affairs appointed under section 229 of the Act;

Resolution of Directors ” means either:

 

  (a) a resolution approved at a duly convened and constituted meeting of Directors or of a committee of Directors by the affirmative vote of a majority of the Directors present at the meeting who voted except that where a Director is given more than one vote, he shall be counted by the number of votes he casts for the purpose of establishing a majority; or

 

  (b) a resolution consented to in writing by all Directors or by all members of a committee of Directors of the Company, as the case may be;

Resolution of Shareholders ” means (other than in respect of a resolution of Shareholders for the election of Directors) a resolution approved at a duly convened and constituted meeting of the Shareholders of the Company by the affirmative vote of a majority of the votes of the Shares entitled to vote thereon in respect of which the Shareholders holding the Shares were present at the meeting in person or by proxy and being Shares in respect of which the votes were voted;

Seal ” means any seal which has been duly adopted as the common seal of the Company;

Securities ” means Shares and debt obligations of every kind of the Company, and including without limitation options, warrants and rights to acquire Shares or debt obligations;

Securities Act ” means the U.S. Securities Act of 1933, as amended from time to time;

Securities and Exchange Commission ” means the United States Securities and Exchange Commission;

Share ” means a common share issued or to be issued by the Company;

Shareholder ” means a Person whose name is entered in the register of members of the Company as the holder of one or more Shares or fractional Shares;

 

2


Treasury Share ” means a Share that was previously issued but was repurchased, redeemed or otherwise acquired by the Company and not cancelled;

written ” or any term of like import includes information generated, sent, received or stored by electronic, electrical, digital, magnetic, optical, electromagnetic, biometric or photonic means, including electronic data interchange, electronic mail, telegram, telex or telecopy, and “ in writing ” shall be construed accordingly.

 

1.2 In the Memorandum and the Articles, unless the context otherwise requires a reference to:

 

  (a) an “ Article ” is a reference to an article of the Articles;

 

  (b) a “ Clause ” is a reference to a clause of the Memorandum;

 

  (c) voting by Shareholders is a reference to the casting of the votes attached to the Shares held by the Shareholder voting;

 

  (d) the Act, the Memorandum or the Articles is a reference to the Act or those documents as amended or, in the case of the Act any re-enactment thereof; and

 

  (e) the singular includes the plural and vice versa.

 

1.3 Any words or expressions defined in the Act unless the context otherwise requires bear the same meaning in the Memorandum and the Articles unless otherwise defined herein.

 

1.4 Headings are inserted for convenience only and shall be disregarded in interpreting the Memorandum and the Articles.

 

2. NAME

The name of the Company is Tianli Agritech, Inc. The Company was incorporated on the 9 th day of November, 2009 pursuant to the BVI Business Companies Act. The name of the Company may be changed and this Clause thereby amended by a Resolution of Directors.

 

3. STATUS

The Company is a company limited by shares.

 

4. REGISTERED OFFICE AND REGISTERED AGENT

 

4.1 At the time of filing of the notice disapplying Part IV of Schedule 2 of the Act, the registered office of the Company is at the offices of NOVASAGE INCORPORATIONS (BVI) LIMITED, of P.O. Box 4389, Road Town, Tortola, British Virgin Islands, the office of the first registered agent.

 

4.2 At the time of filing of the notice disapplying Part IV of Schedule 2 of the Act, the registered agent of the Company is NOVASAGE INCORPORATIONS (BVI) LIMITED, of P.O. Box 4389, Road Town, Tortola, British Virgin Islands.

 

3


4.3 The Company may by Resolution of Shareholders or by Resolution of Directors change the location of its registered office or change its registered agent.

 

4.4 Any change of registered office or registered agent will take effect on the registration by the Registrar of a notice of the change filed by the existing registered agent or a legal practitioner in the British Virgin Islands acting on behalf of the Company.

 

5. CAPACITY AND POWERS

 

5.1 Subject to the Act and any other British Virgin Islands legislation, the Company has, irrespective of corporate benefit:

 

  (a) full capacity to carry on or undertake any business or activity, do any act or enter into any transaction; and

 

  (b) for the purposes of paragraph (a), full rights, powers and privileges.

 

5.2 For the purposes of section 9(4) of the Act, there are no limitations on the business that the Company may carry on.

 

6. NUMBER AND CLASSES OF SHARES

 

6.1 The Company is authorized to issue a maximum of 50,000,000 common shares of a single class with par value of US$0.001 each.

 

6.2 The Company may issue fractional Shares and a fractional Share shall have the corresponding fractional rights, obligations and liabilities of a whole Share of the same class or series of Shares.

 

6.3 Shares may be issued in one or more series of Shares as the Directors may by Resolution of Directors determine from time to time.

 

7. RIGHTS OF SHARES

 

7.1 Each Share in the Company confers upon the Shareholder:

 

  (a) the right to one vote at a meeting of the Shareholders or on any Resolution of Shareholders;

 

  (b) the right to an equal share in any dividend paid by the Company; and

 

  (c) the right to an equal share in the distribution of the surplus assets of the Company on its liquidation.

 

7.2 The Company may by Resolution of Directors redeem, purchase or otherwise acquire all or any of the Shares in the Company subject to Article 3 of the Articles.

 

8. VARIATION OF RIGHTS

If at any time the Shares are divided into different classes, the rights attached to any class may only be varied, whether or not the Company is in liquidation, by a resolution passed at a meeting by a majority of the votes cast by those entitled to vote at a meeting of the holders of the issued Shares in that class.

 

4


9. RIGHTS NOT VARIED BY THE ISSUE OF SHARES PARI PASSU

The rights conferred upon the holders of the Shares of any class shall not, unless otherwise expressly provided by the terms of issue of the Shares of that class, be deemed to be varied by the creation or issue of further Shares ranking  pari passu  therewith.

 

10. REGISTERED SHARES

 

10.1 The Company shall issue registered Shares only.

 

10.2 The Company is not authorized to issue bearer Shares, convert registered Shares to bearer Shares or exchange registered Shares for bearer Shares.

 

11. TRANSFER OF SHARES

 

11.1 Subject to the provisions of Articles 6.2 and 6.3 of the Articles, the Company shall, on receipt of an instrument of transfer complying with Article 6 of the Articles, enter the name of the transferee of a Share in the register of members unless the Directors resolve to refuse or delay the registration of the transfer for reasons that shall be specified in a Resolution of Directors.

 

11.2 The Directors may not resolve to refuse or delay the transfer of a Share unless: (a) the Shareholder has failed to pay an amount due in respect of the Share; or (b) such refusal or delay is deemed necessary or advisable in the view of the Company or its legal counsel in order to avoid violation of, or in order to ensure compliance with, any applicable corporate, securities and other laws and regulation.

 

12. AMENDMENT OF THE MEMORANDUM AND THE ARTICLES

 

12.1 Subject to Clause 8, the Company may amend the Memorandum or the Articles by Resolution of Shareholders or by Resolution of Directors, save that no amendment may be made by Resolution of Directors:

 

  (a) to restrict the rights or powers of the Shareholders to amend the Memorandum or the Articles;

 

  (b) to change the percentage of Shareholders required to pass a Resolution of Shareholders to amend the Memorandum or the Articles;

 

  (c) in circumstances where the Memorandum or the Articles cannot be amended by the Shareholders; or

 

  (d) to Clauses 7, 8, 9 or this Clause 12.

 

12.2 Any amendment of the Memorandum or the Articles will take effect on the registration by the Registrar of a notice of amendment, or restated Memorandum and Articles, filed by the registered agent.

 

5


We, NOVASAGE INCORPORATIONS (BVI) LIMITED, of P.O. Box 4389, Road Town, Tortola, British Virgin Islands for the purpose of disapplying Part IV of Schedule 2 of the Act hereby sign these Memorandum of Association the   day of      , 2010.

 

SUBSCRIBER   OFFSHORE INCORPORATIONS LIMITED
 

 

  (sd.)  

 

  Authorized Signatory
In the presence of: WITNESS  

 

  (sd.)  

 

 

 

 

 

 

 

 

6

Exhibit 5.1

 

LOGO        

Kaufman & Canoles, P.C.

Three James Center, 12th Floor

1051 East Cary Street

Richmond, VA 23219

 

Mailing Address

Post Office Box 27828

Richmond, VA 23261

 

T (804) 771.5700

F (804) 771.5777

 

kaufCAN.com

                     , 2010

Tianli Agritech, Inc.

Suite F, 23rd Floor

Building B, Jiangjing Mansion

228 Yanjiang Ave.

Jiangan District, Wuhan City

Hubei Province, China 430010

Re: Tianli Agritech, Inc.

Dear Sir:

We have acted as Virginia counsel for Tianli Agritech, Inc., a British Virgin Islands corporation (the “Company”), in connection with the preparation and filing of the Company’s registration statement on Form S-1 (Registration No. 333-            ) and all amendments thereto (as amended, the “Registration Statement”), as originally filed with the Securities and Exchange Commission (the “Commission”) on March     , 2010. The Registration Statement relates to the offering (the “Offering”) of (i) up to 2,200,000 of the Company’s common shares, $0.001 par value per share (such offered common shares, the “Offering Shares”; the Company’s common shares, the “Shares”) (including up to 200,000 Offering Shares underlying placement agent warrants issued to the placement agent in connection with the offering (the “Placement Agent Warrants”)), and (ii) up to 200,000 Placement Agent Warrants exercisable to purchase one Share each. In addition, the Registration Statement registers the resale of an aggregate of 243,750 Shares (the “Resale Shares”) by certain selling shareholders.

In connection with this opinion, we have examined the Registration Statement and the prospectus contained therein (the “Prospectus”), the Company’s Articles and Memorandum of Association, as amended to date, and the originals, or copies certified to our satisfaction, of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below (collectively, the “Documents”). We are relying (without any independent investigation thereof) upon an Officer’s Certificate from an Officer of the Company, certifying to the truth and accuracy of the factual statements, covenants, representations and warranties set forth in the Documents. In addition, for all purposes of this opinion, as to questions of fact material to this opinion, we have, to the extent deemed appropriate, relied upon certain representations of certain officers of the Company.

The following opinion is given as to matters of Virginia law.

On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Placement Agent Warrants to be issued pursuant to the Placement Agreement in connection with this Offering, when so issued, will be legal, binding obligations of the Company under Virginia law.


We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name in the Prospectus. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under section 7 of the U.S. Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder.

 

Sincerely,
Kaufman & Canoles, P.C.

Exhibit 5.2

 

LOGO   

Kaufman & Canoles, P.C.

Three James Center, 12th Floor

1051 East Cary Street

Richmond, VA 23219

 

Mailing Address

Post Office Box 27828

Richmond, VA 23261

 

T (804) 771.5700

F (804) 771.5777

 

kaufCAN.com

                , 2010

Tianli Agritech, Inc.

Suite F, 23rd Floor

Building B, Jiangjing Mansion

228 Yanjiang Ave.

Jiangan District, Wuhan City

Hubei Province, China 430010

Re: Tianli Agritech, Inc.

Dear Sir:

We have acted as British Virgin Islands counsel for Tianli Agritech, Inc., a British Virgin Islands corporation (the “Company”), in connection with the preparation and filing of the Company’s registration statement on Form S-1 (Registration No. 333-                ) and all amendments thereto (as amended, the “Registration Statement”), as originally filed with the Securities and Exchange Commission (the “Commission”) on March     , 2010. The Registration Statement relates to the offering (the “Offering”) of (i) up to 2,200,000 of the Company’s common shares, $0.001 par value per share (such offered common shares, the “Offering Shares”; the Company’s common shares, the “Shares”) (including up to 200,000 Offering Shares underlying placement agent warrants issued to the placement agent in connection with the offering (the “Placement Agent Warrants”)), and (ii) up to 200,000 Placement Agent Warrants exercisable to purchase one Share each. In addition, the Registration Statement registers the resale of an aggregate of 243,750 Shares (the “Resale Shares”) by certain selling shareholders.

In connection with this opinion, we have examined the Registration Statement and the prospectus contained therein (the “Prospectus”), the Company’s Articles and Memorandum of Association, as amended to date, and the originals, or copies certified to our satisfaction, of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below (collectively, the “Documents”). We are relying (without any independent investigation thereof) upon an Officer’s Certificate from an Officer of the Company, certifying to the truth and accuracy of the factual statements, covenants, representations and warranties set forth in the Documents. We have assumed the authenticity of the signatures and seals set forth in such Officer’s Certificate. In addition, for all purposes of this opinion, as to questions of fact material to this opinion, we have, to the extent deemed appropriate, relied upon certain representations of certain officers of the Company.

The following opinion is given as to matters of British Virgin Islands law.

Based upon the foregoing and in reliance thereon, it is our opinion that the Offering Shares of the Company and any Shares underlying the Placement Agent Warrants are duly authorized and will, upon the receipt of full payment, issuance and delivery in accordance with the terms of the offering described in the Registration Statement, be legally issued, fully paid and non-assessable. In addition, it is our opinion that the Resale Shares have been duly authorized and are duly and validly issued, fully paid and non-assessable Shares of the Company.

We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name in the Prospectus constituting a part thereof. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under section 7 of the U.S. Securities Act of 1933, as amended, or the Rules and Regulations of the Commission thereunder.

 

Sincerely,
Kaufman & Canoles, P.C.

Exhibit 10.1

TIANLI AGRITECH, INC.

WARRANT AGREEMENT

                          ,         

Anderson & Strudwick, Incorporated

707 East Main Street

20 th  Floor

Richmond, Virginia 23219

Ladies and Gentlemen:

Tianli Agritech, Inc., a British Virgin Islands company (the “Company”), agrees to issue and sell to you a warrant (the “Warrant”) to purchase the number of common shares of the Company set forth herein, subject to the terms and conditions contained herein.

1. Issuance of Warrant; Exercise Price . The Warrant, which shall be in the form attached hereto as  Exhibit A , shall be issued to you concurrently with the execution hereof in consideration of the payment by you to the Company of the sum of US $0.001 cash per common share subject to the Warrant, the receipt and sufficiency of which are hereby acknowledged. The Warrant shall provide that you and such other holder(s) of the Warrant, as such may be assigned in accordance herewith, shall have the right to purchase an aggregate of up              to              common shares for an exercise price equal to $             per share (the “Exercise Price”), as described more fully herein. The number, character and Exercise Price of such shares are subject to adjustment as hereinafter provided, and the term “shares” shall mean, unless the context otherwise requires, the common shares and other securities and property receivable upon exercise of the Warrant. The term “Exercise Price” shall mean, unless the context otherwise requires, the price per share purchasable under the Warrant as set forth in this Section 1, as adjusted from time to time pursuant to Section 5.

2.  Notices of Record Date . In the event of (i) any taking by the Company of a record date with respect to the holder(s) of any class of securities of the Company for purposes of determining which of such holder(s) are entitled to dividends or other distributions, or any right to subscribe for, purchase or otherwise acquire shares of any class or any other securities or property, or to receive any other right, (ii) any capital reorganization of the Company, or reclassification or recapitalization of common shares of the Company or any transfer in one or more related transactions of all or a majority of the assets or revenue or income generating capacity of the Company to, or consolidation or merger of the Company with or into, any other entity or person, or (iii) any voluntary or involuntary dissolution or winding up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, (a) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right; or (b) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place and the time, if any is to be fixed, as of which the holders of record of shares (or any other class of shares or securities of the Company, or another issuer pursuant to Section 5, receivable upon the exercise of the Warrant) shall be entitled to exchange their shares (or such other shares or securities) for securities or other property deliverable upon such event. Any such notice shall be deposited in the United States mail, postage prepaid, at least ten (10) days prior to the date therein specified, and the holder(s) of the Warrant(s) may exercise the Warrant(s) and participate in such event as a registered holder of shares, upon exercise of the Warrant(s) so held, within the ten (10) day period from the date of mailing such notice.

3.  No Impairment . The Company shall not, by amendment of its organizational documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other action, avoid or seek to avoid the observance or performance of any other action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement or of the Warrant, but will at all times in good faith take any and all action as may be necessary in order to protect the rights of the holder(s) of the Warrant against impairment. Without limiting the generality of the foregoing, the Company (a) will at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrant, shares issuable from time to time upon exercise of the Warrant, (b) will not increase the par value of any common shares receivable upon exercise of the Warrant above


the amount payable in respect thereof upon such exercise, and (c) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares upon the exercise of the Warrant, or any portion of it.

4.  Exercise of Warrant .

(a)  Exercise for Cash . At any time and from time to time on and after one hundred eighty (180) days after the date of effectiveness or commencement of sales of the Company’s initial public offering (the “IPO”) and expiring on             ,         at 11:59 p.m., Richmond, Virginia time (the “Exercise Period”), the Warrant may be exercised as to all or any portion of the whole number of shares covered by the Warrant by the holder thereof by surrender of the Warrant, accompanied by a subscription for shares to be purchased in the form attached hereto as  Exhibit B  and by a check payable to the order of the Company in the amount required for purchase of the shares as to which the Warrant is being exercised, delivered to the Company at its principal office at Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010, Attention: Hanying Li, Chief Executive Officer.

(b)  Cashless Exercise . In addition, during the Exercise Period and to the extent that the Company has failed to register the shares issuable hereunder in accordance with Section 7 hereof within 90 days of the notification of the Company of the exercise of such demand registration right, the Warrant may be exercised as to all or any portion of the whole number of shares covered by the Warrant by the holder thereof by surrender of Warrant together with irrevocable instructions to the Company to issue in exchange for the Warrant the number of shares equal to the product of (i) the number of shares as to which the Warrant is being exercised multiplied by (ii) a fraction the numerator of which is the Current Value of any share less the Exercise Price therefor and the denominator of which is such Current Value. In the case of the purchase of less than all the shares purchasable under the Warrant, the Company shall cancel such Warrant and shall execute and deliver a new Warrant of like tenor for the unexercised balance. For the purposes hereof, “Exercise Date” shall mean the date on which all deliveries required to be made to the Company upon exercise of the Warrant pursuant to this Section 4 shall have been made.

(c)  Issuance of Certificates . Upon the exercise of a Warrant in whole or in part, the Company will within five (5) days thereafter, at its expense (including the payment by the Company of any applicable issue or transfer taxes), cause to be issued in the name of and delivered to the Warrant holder a certificate or certificates for the number of fully paid and non-assessable shares to which such holder is entitled upon exercise of the Warrant. In the event such holder is entitled to a fractional share, in lieu thereof such holder shall be paid a cash amount equal to such fraction, multiplied by the Current Value of one full share on the date of exercise. Certificates for shares issuable by reason of the exercise of the Warrant shall be dated and shall be effective as of the date of the surrendering of the Warrant for exercise, notwithstanding any delays in the actual execution, issuance or delivery of the certificates for the shares so purchased. In the event the Warrant is exercised as to less than the aggregate amount of all shares issuable upon exercise of the Warrant held by such person, the Company shall issue a new Warrant to the holder of the Warrant so exercised covering the aggregate number of shares as to which the Warrant remains unexercised. In addition to the foregoing, should the Company fail to issue the share certificate or certificates within the time limits referenced in the first sentence of this Section 4(c), if and to the extent not already utilized as to the Warrant or the shares underlying the Warrant, the holder may utilize the cashless exercise contained in Section 4(b) hereof.

(d)  Current Value . For purposes of this section, “Current Value” is defined (i) in the case for which a public market exists for the shares at the time of such exercise, at a price per share equal to (A) the average of the means between the closing bid and asked prices of the shares in the over-the-counter market for 20 consecutive business days commencing 30 business days before the date of such notice, (B) if the shares are quoted on the NASDAQ Capital Market, at the average of the means of the daily closing bid and asked prices of the shares for 20 consecutive business days commencing 30 business days before the date of such notice, or (C) if the shares are listed on any national securities exchange or The NASDAQ National Market, at the average of the daily closing prices of the shares for 20 consecutive business days commencing 30 business days before the date of such notice, and (ii) in the case no public market exists at the time of such exercise, at the Appraised Value. For the purposes of this Agreement, “Appraised Value” is the value determined in accordance with the following procedures. For a period of five (5) days after the

 

2


date of an event (a “Valuation Event”) requiring determination of Current Value at a time when no public market exists for the shares (the “Negotiation Period”), each party to this Agreement agrees to negotiate in good faith to reach agreement upon the Appraised Value of the securities or property at issue, as of the date of the Valuation Event, which will be the fair market value of such securities or property, without premium for control or discount for minority interests, illiquidity or restrictions on transfer. In the event that the parties are unable to agree upon the Appraised Value of such securities or other property by the end of the Negotiation Period, then the Appraised Value of such securities or property will be determined for purposes of this Agreement by a recognized appraisal or investment banking firm mutually agreeable to the holder(s) of the Warrant and the Company (the “Appraiser”). If the holder(s) of the Warrant and the Company cannot agree on an Appraiser within two (2) business days after the end of the Negotiation Period, the Company, on the one hand, and the holder(s) of the Warrant, on the other hand, will each select an Appraiser within ten (10) business days after the end of the Negotiation Period and those Appraisers will determine the fair market value of such securities or property, without premium for control or discount for minority interests. Such independent Appraiser(s) will be directed to determine fair market value of such securities or property as soon as practicable, but in no event later than thirty (30) days after the date of its selection. The determination by Appraiser(s) of the fair market value will be conclusive and binding on all parties to this Agreement. If there are two Appraisers, and they do not agree as to fair market value, then fair market value shall be determined to be the average of the fair market values as determined by each Appraiser. Appraised Value of each share at a time when (i) the Company is not a reporting company under the Securities Exchange Act of 1934 and (ii) the shares are not traded in the organized securities markets, will, in all cases, be calculated by determining the Appraised Value of the entire Company taken as a whole and dividing that value by the number of shares then outstanding, without premium for control or discount for minority interests, illiquidity or restrictions on transfer. The costs of the Appraiser(s) will be borne by the Company. In no event will the Appraised Value of the shares be less than the per share consideration received or receivable with respect to the shares or securities or property of the same class in connection with a pending transaction involving a sale, merger, recapitalization, reorganization, consolidation, or share exchange, dissolution of the Company, sale or transfer of all or a majority of its assets or revenue or income generating capacity, or similar transaction.

5.  Protection Against Dilution . The Exercise Price for the shares and number of shares issuable upon exercise of the Warrant, in whole or in part, is subject to adjustment from time to time as described in this Section 5. Notwithstanding the foregoing, nothing in this Warrant Agreement is intended or may be construed to violate any FINRA Conduct Rule. In particular, the anti-dilution provisions of this Warrant Agreement shall be interpreted in compliance with Rule 5110(f)(2)(H)(vi) and (vii) of the FINRA Conduct Rules.

(a)  Dividends, Subdivisions, Reclassifications, Etc . In case at any time or from time to time after the date of execution of this Agreement, the Company shall (i) take a record of the holders of shares for the purpose of entitling them to receive a dividend or a distribution on shares payable in shares or another class of securities, (ii) subdivide or reclassify its outstanding share of shares into a greater number shares, or (iii) combine or reclassify its outstanding shares into a smaller number of shares, then, and in each such case, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted in such a manner that the Exercise Price for the shares issuable upon exercise of the Warrant immediately after such event shall bear the same ratio to the Exercise Price in effect immediately prior to any such event as the total number of shares outstanding immediately prior to such event shall bear to the total number of shares outstanding immediately after such event.

(b)  Adjustment of Number of Shares Purchasable . When any adjustment is required to be made in the Exercise Price under this Section 5, (i) the number of shares issuable upon exercise of the Warrant, in whole or in part, shall be changed (upward to the nearest full share) to the number of shares determined by dividing (x) an amount equal to the number of shares issuable pursuant to the exercise of the Warrant immediately prior to the adjustment, multiplied by the Exercise Price in effect immediately prior to the adjustment, by (y) the Exercise Price in effect immediately after such adjustment, and (ii) upon exercise of the Warrant, the holder will be entitled to receive the number of shares of other securities referred to in Section 5(a) that such holder would have received had the Warrant been exercised prior to the events referred to in Section 5(a).

 

3


(c)  Adjustment for Reorganization, Consolidation, Merger, Etc . In the case of any reorganization or consolidation of the Company with, or any merger of the Company with or into, another entity (other than a consolidation or merger in which the Company is the surviving corporation) or in case of any sale or transfer to another entity of the majority of assets of the Company, the entity resulting from such reorganization or consolidation or surviving such merger or to which such sale or transfer shall be made, as the case may be, shall make suitable provision (which shall be fair and equitable to each holder of a Warrant) and shall assume the obligations of the Company hereunder (by written instrument executed and mailed to each holder of a Warrant then outstanding) pursuant to which, upon exercise of the Warrant, at any time after the consummation of such reorganization, consolidation, merger or conveyance, the holder shall be entitled to receive the common shares or other securities or property that such holder would have been entitled to upon consummation if such holder had exercised the Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 5.

(d)  Certificate as to Adjustments . In the event of adjustment as herein provided in the paragraphs of this Section 5, the Company shall promptly mail to each Warrant holder a certificate setting forth the Exercise Price and number of shares issuable upon exercise after such adjustment and setting forth a brief statement of facts requiring such adjustment. Such certificate shall also set forth the kind and amount of shares or other securities or property into which the Warrant shall be exercisable after any adjustment of the Exercise Price as provided in this Agreement.

(e)  Minimum Adjustment . Notwithstanding the foregoing, no certificate as to adjustment of the Exercise Price hereunder shall be made if such adjustment results in a change in the Exercise Price then in effect of less than five cents ($0.05) and any adjustment of less than five cents ($0.05) of any Exercise Price shall be carried forward and shall be made at the time of and together with any subsequent adjustment that, together with the adjustment or adjustments so carried forward, amounts to five cents ($0.05) or more; provided however, that upon the exercise of a Warrant, the Company shall have made all necessary adjustments (to the nearest cent) not theretofore made to the Exercise Price up to and including the date upon which such Warrant is exercised.

7.  Registration Rights .

(a)  Demand Registration Under the Securities Act of 1933 . To the extent that sufficient shares have not been registered to permit exercise of the Warrant, then at any time commencing after the closing of the IPO, through and including             ,         parties who collectively hold a majority of the shares issued or issuable upon the exercise of the Warrant shall have the right, exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the “Commission”), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for you and any other holder of a Warrant, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Warrant, the shares underlying the Warrant or other securities held as a result of any adjustment made pursuant to Section 5 hereof (collectively, the “Registrable Securities”). The Company shall notify each holder of a Warrant and the shares underlying the Warrant of any such demand registration request within ten (10) days of receipt of such request. The notified holder(s) may participate in such demand registration by notifying the Company within ten (10) days after receiving the Company’s notification.

(b)  Notice to Be Delivered . The Company covenants and agrees to give written notice of any registration request under Section 7(a) by you or any holder(s) to you and to all other holder(s) of a Warrant or the shares underlying a Warrant within ten (10) days from the date of the receipt of any such registration request.

(c)  Covenants of the Company With Respect to Registration . In connection with any registration under Section 7(a) hereof, the Company covenants and agrees as follows:

(i) The Company shall use its best efforts to file a registration statement within ninety (90) days of receipt of any demand therefore in accordance with Section 7(a), shall use its best efforts to have any registration statement declared effective at the earliest practicable time, and shall furnish you and each holder desiring to sell the Registrable Securities held by you or the other holder(s) as a result of any adjustment made pursuant to the provisions of Section 5 hereof, such number of prospectuses as shall reasonably be requested.

 

4


(ii) The Company shall pay all costs (excluding fees and expenses of counsel for you and any other holder(s) and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Section 7(a) hereof including, without limitation, the Company’s legal and accounting fees, printing expenses, and blue sky fees and expenses. If the Company shall fail to comply with the provisions of Section 7(d), the Company shall, in addition to any other equitable or other relief available to you and any other holder(s), be liable for any or all actual damages (which may include damages due to a loss of profit).

(iii) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as are reasonably requested by you and any other holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction.

(iv) The Company shall indemnify you and any other holder(s) of the Registrable Securities to be sold pursuant to any registration statement and each person, if any, who controls you or any other holder(s) within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the 1934 Act or otherwise, arising from such registration statement to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify you in the Placement Agreement to be entered into by and between you and the Company (the “Placement Agreement”) and to provide for just and equitable contribution as set forth in the Placement Agreement.

(v) You and any other holder(s) of the Registrable Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the 1934 Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the 1934 Act or otherwise, arising from information furnished by or on behalf of such holder(s), or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in the Placement Agreement pursuant to which you have agreed to indemnify the Company and to provide for just and equitable contribution as set forth in the Placement Agreement.

(vi) Nothing contained in this Agreement shall be construed as requiring you or any other holder(s) to exercise any portion of their Warrant prior to the initial filing of any registration statement or the effectiveness thereof.

(vii) The Company shall deliver promptly to you and any other holder(s) of the Registrable Securities participating in the offering copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit you and the other holder(s) of the Registrable Securities to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the Financial Industry Regulatory Authority (“FINRA”); provided that you and each such holder of the Registrable Securities agree not to disclose such information without the prior consent of the Company. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as you and any other holder(s) of the Registrable Securities shall reasonably request.

(viii) If required by the underwriters in connection with an underwritten offering which includes Registrable Securities pursuant to this Section 7, the Company shall enter into an underwriting agreement with one or more underwriters selected for such underwriting. Such

 

5


underwriting agreement shall be satisfactory in form and substance to the Company, you and each other holder of the Registrable Securities, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the underwriters. If required by the underwriters, you and the other holder(s) of the Registrable Securities shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all representations and warranties of the Company to or for the benefit of such underwriters shall, to the extent that they may be applicable, also be made to and for the benefit of you and the other holder(s) of the Registrable Securities. You and the other holder(s) of the Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to you and the other holder(s) of the Registrable Securities and their intended methods of distribution.

(ix) In connection with any registration statement filed pursuant to Section 7 hereof, the Company shall furnish, or cause to be furnished, to you and each holder participating in any underwritten offering and to each underwriter, a signed counterpart, addressed to you, such holder(s) or underwriter, of (i) an opinion of counsel to the Company, dated as of the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a “cold comfort” letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities.

(x) The Company shall promptly notify you and each holder of the Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Act, upon the Company’s discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and upon receipt of such notice you and each holder shall not effect any sale of securities and shall immediately cease utilizing or distributing such prospectus. At the request of you or any such holder(s), the Company shall promptly prepare and furnish to you or such holder(s) and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made.

(xi) For purposes of this Agreement, the term “majority” in reference to you and the other holder(s) of a Warrant or the shares underlying an unexercised Warrant, shall mean in excess of fifty percent (50%) of the shares underlying the then outstanding Warrant(s) that have not been resold to the public pursuant to Rule 144 under the Act or a registration statement filed with the Commission under the Act.

8.  Stock Exchange Listing . In the event the Company lists its shares on any national securities exchange or market, the Company will, at its expense, also list on such exchange, upon exercise of a Warrant, all shares issuable pursuant to such Warrant.

9.  Restrictive Legend . Executed copies of this Agreement shall be filed in the principal office of the Company. Instruments evidencing all or part of the Warrant shall contain the legend shown on  Exhibit A  until one hundred eighty (180) days after the date of effectiveness or commencement of sales of the Company’s IPO, after which time such legend may be removed at the request of the holder thereof.

 

6


10.  Successors and Assigns; Binding Effect . This Agreement shall be binding upon and inure to the benefit of you and the Company and their respective successors and permitted assigns.

11.  Notices . Any notice hereunder shall be given by registered or certified mail, if to the Company, at its principal office referred to in Section 5 and, if to a holder, to the holder’s address shown in the Warrant ledger of the Company, provided that any holder may at any time on three (3) days’ written notice to the Company designate or substitute another address where notice is to be given. Notice shall be deemed given and received after a certified or registered letter, properly addressed with postage prepaid, is deposited in the U.S. mail.

12.  Severability . Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the remainder of this Agreement.

13.  Assignment; Replacement of Warrant . The Warrant and the shares underlying the Warrant may be sold, transferred, assigned, pledged or hypothecated by you prior to one hundred eighty (180) days after the date of effectiveness or commencement of sales of the Company’s IPO only to  bona fide  officers of Anderson & Strudwick, Incorporated, who in turn shall be subject to the same restriction. Any assignment shall be effected in accordance with the Form of Assignment attached hereto as  Exhibit C . If the Warrant is assigned, in whole or in part, the Warrant shall be surrendered at the principal office of the Company, and thereupon, in the case of a partial assignment, a new Warrant shall be issued to the holder thereof covering the number of shares not assigned, and the assignee shall be entitled to receive a new Warrant covering the number of shares so assigned. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and appropriate bond or indemnification protection, the Company shall issue a new Warrant of like tenor.

14.  Rights of Shareholders . Until exercised, the Warrant shall not entitle the holder thereof to any of the rights of a shareholder of the Company.

15.  Governing Law . This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Virginia without giving effect to the principles of choice of laws thereof.

16.  Definition . All references to the word “you” in this Agreement shall be deemed to apply with equal effect to any persons or entities to whom a Warrant has been transferred in accordance with the terms hereof, and, where appropriate, to any persons or entities holding shares issuable upon exercise of a Warrant.

17.  Headings . The headings herein are for purposes of reference only and shall not limit or otherwise affect the meaning of any of the provisions hereof.

[Execution Page Follows – Tianli Agritech, Inc. – Warrant Agreement]

 

7


[Execution Page – Tianli Agritech, Inc. – Warrant Agreement]

 

Very truly yours,
TIANLI AGRITECH, INC.
By:  

 

Name:   Hanying Li
Title:   Chief Executive Officer

Accepted as of the      day of             ,         .

ANDERSON & STRUDWICK, INCORPORATED

 

By:  

 

Name:   L. McCarthy Downs, III
Title:   Senior Vice President

 

8


EXHIBIT A

No.     

             Common Shares

(as may be adjusted pursuant to the

terms of the Warrant Agreement)

TIANLI AGRITECH, INC.

COMMON SHARES PURCHASE WARRANT

THIS IS TO CERTIFY that ANDERSON & STRUDWICK, INCORPORATED or its assigns as permitted in that certain Warrant Agreement (the “Warrant Agreement”) dated             ,          between the Company (as hereafter defined) and Anderson & Strudwick, Incorporated is entitled to purchase at any time or from time to time on or after the closing of the initial public offering of the Company’s common shares and before                     ,         ,                      common shares of Tianli Agritech, Inc., a British Virgin Islands company (the “Company”), for an exercise price of $             per share. This Warrant is issued pursuant to the Agreement, and all rights of the holder of this Warrant are further governed by, and subject to the terms and provisions of such Warrant Agreement, copies of which are available upon request to the Company. The holder of this Warrant and the shares issuable upon the exercise hereof shall be entitled to the benefits, rights and privileges and subject to the obligations, duties and liabilities provided in the Warrant Agreement.

UNTIL ONE HUNDRED EIGHTY (180) DAYS AFTER THE DATE OF EFFECTIVENESS OR COMMENCEMENT OF SALES OF THE INITIAL PUBLIC OFFERING OF TIANLI AGRITECH, INC., NEITHER ANDERSON & STRUDWICK, INCORPORATED NOR ANY ASSIGNEE OF ALL OR A PORTION OF THE RIGHTS PURSUANT TO THIS WARRANT MAY SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE ANY OF ITS RIGHTS PURSUANT TO THIS WARRANT OTHER THAN TO BONA FIDE OFFICERS OF ANDERSON & STRUDWICK, INCORPORATED.

Subject to the provisions of the Securities Act of 1933, of the Warrant Agreement and of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, only to the extent expressly permitted in such documents and then only at the office of the Company at Tianli Agritech, Inc., Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010, Attention: Hanying Li, Chief Executive Officer, by the holder hereof or by a duly authorized attorney-in-fact, upon surrender of this Warrant duly endorsed, together with the Assignment hereof duly endorsed. Until transfer hereof on the books of the Company, the Company may treat the registered holder hereof as the owner hereof for all purposes.

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its proper corporate officers thereunto duly authorized.

 

TIANLI AGRITECH, INC.
By:  

 

Name:  

 

Title:  

 

 

ATTEST:
By:  

 

Name:  

 

Title:  

 


EXHIBIT B

FORM OF SUBSCRIPTION

To Tianli Agritech, Inc.:

The undersigned, the holder of Warrant Number             , hereby irrevocably elects to exercise the purchase right represented by such Warrant, and to purchase thereunder              * common shares of Tianli Agritech, Inc.

As payment therefor, the undersigned (mark one):

                  herewith makes a payment in cash or by check of U.S. $            , or

                  requests to utilize the cashless exercise provision in Section 4(b) of the Warrant Agreement.

Further, the undersigned requests that the certificate or certificates for such shares be issued in the name of and delivered to the undersigned. The undersigned acknowledges and agrees that shares to be received by the undersigned are subject to the restrictions on transfer set forth in the Warrant.

 

     

 

      (Signature)
     

 

     

 

      (Address)
Dated:  

 

   

 

* Insert here the number of common shares set forth on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment (which adjustment will be made in the issuance of such shares, other stock, securities, property, or cash) for additional common shares or any other stock or other securities or property or cash that, pursuant to the adjustment provisions of the Warrant, is deliverable upon exercise.


EXHIBIT C

FORM OF ASSIGNMENT

(To be signed only upon transfer of Warrant)

For value received, Anderson & Strudwick, Incorporated, the registered holder of the Warrant issued by Tianli Agritech, Inc. to purchase                      shares of common stock represented by Warrant             , hereby sells, assigns and transfers of such Warrants to officers of Anderson & Strudwick, Incorporated as set forth below, with the remaining balance (            ) to be reissued to Anderson & Strudwick, Incorporated:

 

Assignee/Transferee       Amount Assigned/Transferred

 

     

 

Anderson & Strudwick, Incorporated does hereby irrevocably constitute and appoint the undersigned’s attorney to make such transfer on the books of the Warrant Agent maintained for that purpose, with full power of substitution in the premises.

The undersigned represents and warrants that the transfer of the attached Warrant is permitted by the terms of the Warrant Agreement pursuant to which the attached Warrant has been issued, and the transferees hereof, by acceptance of this Agreement, agrees to be bound by the terms of the Warrant Agreement with the same force and effect as if a signatory thereto.

 

      ANDERSON & STRUDWICK, INCORPORATED
      By:  

 

      Name:  

 

      Title:  

 

Date:  

 

     

Signature Guaranteed by:

THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO S.E.C RULE 17 Ad-15.

Exhibit 10.2

Entrusted Management Agreement

Between

ZHANG Xin

WANG Kaiying

LI Hanying

Wuhan Fengze Agricultural and Technology Development Co., Ltd.

And

Wuhan Fengxin Agricultural and Technology Development Co., Ltd.

Dec 1st, 2009

Wuhan, China


Entrusted Management Agreement

This Entrusted Management Agreement (the “Agreement”) is entered into on the Dec 1 st , 2009 in Wuhan, China by:

Party A:

1. ZHANG Xin, a citizen of PRC with ID Card number             , owns 87.93% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd;

2. WANG Kaiying, a citizen of PRC with ID Card number             , owns 2.07% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd;

3. LI Hanying, a citizen of PRC with ID Card number             , owns 10% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd;

4. Wuhan Fengze Agricultural and Technology Development Co., Ltd is an enterprise incorporated and existing within the territory of China in accordance with the law of the People’s Republic of China, the registration number of its legal and valid Business License is             and the legal registered address is Wuhan Huangpi District, Luohan Street, Qigang Village.

and

Party B: Wuhan Fengxin Agricultural and Technology Development Co., Ltd is a Wholly Foreign Owned Enterprise registered in Wuhan, PRC.

Whereas:

1. Party A constitutes Wuhan Fengze Agricultural and Technology Development Co., Ltd (hereinafter referred to as “Wuhan Fengze”) and all of its shareholders holding all issued and outstanding shares of Wuhan Fengze. Under this Agreement, Wuhan Fengze, ZHANG Xin, WANG Kaiying and LI Hanying have acted collectively as one party to this Agreement;

2. Wuhan Fengxin Agricultural and Technology Development Co., Ltd (hereinafter referred to as “Party B”) is a Wholly Foreign Owned Enterprise incorporated and existing within the territory of China in accordance with the law of the People’s Republic of China, and the legal registered address is Room 1518, Xinhongji Garden, 6 Qiuchang Street Jiangan District, Wuhan, Hubei.

3. Party A desires to entrust Party B to manage and operate Wuhan Fengze;

4. Party B agrees to accept such entrustment and to manage Wuhan Fengze on behalf of Party A.

Therefore, in accordance with laws and regulations of the People’s Republic of China, the Parties agree as follows after friendly consultation based on the principle of equality and mutual benefit.

 

- 1 -


Article 1 Entrusted Management

1.1 Party A agrees to entrust the management of Wuhan Fengze to Party B pursuant to the terms and conditions of this Agreement. Party B agrees to manage Wuhan Fengze in accordance with the terms and conditions of this Agreement.

1.2 The term of this Entrusted Management Agreement (the “Entrusted Period”) shall be from the effective date of this Agreement to the earlier of the following:

 

  (1) the winding up of Wuhan Fengze, or

 

  (2) the termination date of this Entrusted Management Agreement to be determined by the Parties hereto, or

 

  (3) the date on which Party B completes the acquisition of Wuhan Fengze.

1.3 During the Entrusted Period, Party B shall be fully and exclusively responsible for the management of Wuhan Fengze. The management service includes without limitation the following:

 

(1) Party B shall be fully and exclusively responsible for the operation of Wuhan Fengze, which includes the right to appoint and terminate Wuhan Fengze, members of Board of Directors and the right to hire managerial and administrative personnel etc. Party A or its voting proxy shall make a shareholder’s resolution and a Board of Directors’ resolution based on the decision of Party B.

 

(2) Party B has the full and exclusive right to manage and control all cash flow and assets of Party A. Wuhan Fengze shall open an entrusted account or designate an existing account as an entrusted account. Party B has the full and exclusive right to decide the use of the funds in the entrusted account. The authorized signature of the account shall be appointed or confirmed by Party B. All of the funds of Wuhan Fengze shall be kept in this account, including but not limited to its existing working capital and purchase price received from selling its production equipment, inventory, raw materials and accounts receivable to Party B (if any), all payments of funds shall be disbursed through this entrusted account, including but not limited to the payment of all existing accounts payable and operating expenses, payment of employees salaries and purchase of assets, and all revenues from its operation shall be kept in this account.

 

(3) Party B shall have the full and exclusive right to control and administrate the financial affairs and daily operation of Wuhan Fengze, such as entering into and performance of contracts, and payment of taxes etc.

1.4 As consideration for the services provided by Party B hereunder, Party A shall pay an entrusted management fee to Party B which shall be equal to the earnings before tax (if any) of Wuhan Fengze. The entrusted management fee shall be as follows: during the term of this agreement, the entrusted management fee shall equal to Wuhan Fengze’s estimated earnings before tax, being the monthly revenues after deduction of operating costs, expenses and taxes. If the earnings before tax is zero, Wuhan Fengze is not required to pay the entrusted management fee; if Wuhan Fengze sustains losses, all such losses will be carried over to next month and deducted from next month’s entrusted management fee. Both Parties shall calculate, and Party A shall pay, the monthly entrusted management fee within 20 days of the following

 

- 2 -


month. The above monthly payment shall be adjusted after the end of each quarter but before the filing of tax return for such quarter (the “Quarterly Adjustment”), so as to make the after-tax profit of that quarter is zero. In addition, the above he above monthly payment shall be adjusted after the end of each fiscal year but before the filing for the yearly tax return (the “Annual Adjustment”), so as to make the after-tax profit of that fiscal year is zero.

1.5 Party B shall assume all operation risks out of the entrusted management of Wuhan Fengze and bear all losses of Wuhan Fengze. If Wuhan Fengze has no sufficient funds to repay its debts, Party B is responsible for paying off these debts on behalf of Wuhan Fengze; if Wuhan Fengze’s net assets are lower than its registered capital, Party B is responsible for funding the deficit.

Article 2 Rights and Obligations of the Parties

2.1 During the term of this Agreement, Party A’s rights and obligations include:

 

(1) to hand over Wuhan Fengze to Party B for entrusted management as of the effectiveness date of this Agreement and to hand over all of business materials together with Business License and corporate seal of Wuhan Fengze to Party B;

 

(2) Party A has no right to make any decision regarding Wuhan Fengze’s operations without the prior written consent of Party B;

 

(3) to have the right to know the business conditions of Wuhan Fengze at any time and provide proposals;

 

(4) to assist Party B in carrying out the entrusted management according to Party B’s requirement;

 

(5) to perform its obligations pursuant to the Shareholders’ Voting Rights Proxy Agreement, signed by and between ZHANG Xin, WANG Kaiying, LI Hanying and Party B on Dec 1st, 2009 in Wuhan, and not to violate the said agreement;

 

(6) not to intervene Party B’s management over Wuhan Fengze in any form by making use of shareholder’s power;

 

(7) not to entrust or grant their shareholders’ rights in Wuhan Fengze to a third party other than Party B without Party B’s consent;

 

(8) not to otherwise entrust other third party other than Party B to manage Wuhan Fengze in any form without Party B’s prior written consent;

 

(9) not to terminate this Agreement unilaterally with for any reason whatsoever; or

 

(10) to enjoy other rights and perform other obligations under the Agreement.

2.2 During the term of this Agreement, Party B’s rights and obligations include:

 

(1) to enjoy the full and exclusive right to manage Wuhan Fengze independently;

 

- 3 -


(2) to enjoy the full and exclusive right to dispose of all assets of Wuhan Fengze;

 

(3) to enjoy all profits and bear losses arising from Wuhan Fengze’s operations during the Entrusted Period;

 

(4) to appoint all directors of Wuhan Fengze;

 

(5) to appoint the legal representative, general manager, deputy general manager, financial manager and other senior managerial personnel of Wuhan Fengze;

 

(6) to convene shareholders’ meetings of Wuhan Fengze in accordance with the Shareholders’ Voting Rights Proxy Agreement and sign resolutions of shareholders’ meetings; and

 

(7) to enjoy other rights and perform other obligations under the Agreement.

Article 3 Representations and Warranties

The Parties hereto hereby make the following representations and warranties to each other as of the date of this Agreement that:

 

(1) has the right to enter into the Agreement and the ability to perform the same;

 

(2) the execution and delivery of this Agreement by each party have been duly authorized by all necessary corporate action;

 

(3) the execution of this Agreement by the officer or representative of each party has been duly authorized;

 

(4) each party has no other reasons that will prevent this Agreement from becoming a binding and effective agreement between both parties after execution;

 

(5) the execution and performance of the obligations under this Agreement will not:

 

  (a) violate any provision of the business license, articles of association or other similar documents of its own;

 

  (b) violate any provision of the laws and regulations of PRC or other governmental or regulatory authority or approval;

 

  (c) violate or result in a breach of any contract or agreement to which the party is a party or by which it is bound.

 

- 4 -


Article 4 Effectiveness

This Agreement shall take effect after it is duly executed by the authorized representatives of the parties hereto with seals affixed.

Article 5 Liability for Breach of Agreement

During the term of this Agreement, any violation of any provisions herein by either party constitutes breach of contract and the breaching party shall compensate the non-breaching party for the loss incurred as a result of this breach.

Article 6 Force Majeure

The failure of either party to perform all or part of the obligations under the Agreement due to force majeure shall not be deemed as breach of contract. The affected party shall present promptly valid evidence of such force majeure, and the failure of performance shall be settled through consultations between the parties hereto.

Article 7 Governing Law

The conclusion, validity, interpretation, and performance of this Agreement and the settlement of any disputes arising out of this Agreement shall be governed by the laws and regulations of the People’s Republic of China.

Article 8 Settlement of Dispute

Any disputes under the Agreement shall be settled at first through friendly consultation between the parties hereto. In case no settlement can be reached through consultation, each party shall have the right to submit such disputes to China International Economic and Trade Arbitration Commission in Beijing. The Place of arbitration is Beijing. The arbitration award shall be final and binding on both parties.

Article 9 Confidentiality

9.1 The parties hereto agree to cause its employees or representatives who has access to and knowledge of the terms and conditions of this Agreement to keep strict confidentiality and not to disclose any of these terms and conditions to any third party without the expressive requirements under law or request from judicial authorities or governmental departments or the consent of the other party, otherwise such party or personnel shall assume corresponding legal liabilities.

9.2 The obligations of confidentiality under Section 1 of this Article shall survive after the termination of this Agreement.

Article 10 Severability

10.1 Any provision of this Agreement that is invalid or unenforceable due to the laws and regulations shall be ineffective without affecting in any way the remaining provisions hereof.

 

- 5 -


10.2 In the event of the foregoing paragraph, the parties hereto shall prepare supplemental agreement as soon as possible to replace the invalid provision through friendly consultation.

Article 11 Non-waiver of Rights

11.1 Any failure or delay by any party in exercising its rights under this Agreement shall not constitute a waiver of such right.

11.2 Any failure of any party to demand the other party to perform its obligations under this Agreement shall not be deemed as a waiver of its right to demand the other party to perform such obligations later.

11.3 If a party excuses the non-performance by other party of certain provisions under this Agreement, such excuse shall not be deemed to excuse any future non-performance by the other party of the same provision.

Article 12 Non-transferability

Unless otherwise specified under this Agreement, no party can assign or delegate any of the rights or obligations under this Agreement to any third party nor can it provide any guarantee to such third party or carry out other similar activities without the prior written from the other party.

Article 13 Miscellaneous

13.1 Any and all taxes arising from execution and performance of this Agreement and during the course of the entrusted management and operation shall be borne by the Parties respectively pursuant to the provisions of laws and regulations.

13.2 Any amendment entered into by the parties hereto after the effectiveness of this Agreement shall be an integral part of this Agreement and have the same legal effect as part of this Agreement. In case of any discrepancy between the amendment and this Agreement, the amendment shall prevail. In case of several amendments, the amendment with the latest date shall prevail.

13.3 This Agreement is executed by Chinese and English in duplicate and both the English version and Chinese version shall have the same effect. Each of the original Chinese and English versions of this Agreement shall be executed in 6 copies. Each party shall hold two original of each version.

13.4 In witness hereof, the Agreement is duly executed by the parties hereto on the date first written above.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

 

 

- 6 -


(Page of signature only)

Party A:

ZHANG Xin (signature):

WANG Kaiying (signature):

LI Hanying (signature):

Wuhan Fengze Agricultural and Technology Development Co., Ltd

(official seal)

Authorized representative:

(signature)

Party B:

Wuhan Fengxin Agricultural and Technology Development Co., Ltd

(official seal)

Authorized representative:

(signature)

 

- 7 -

Exhibit 10.3

SHAREHOLDERS’ VOTING

PROXY AGREEMENT

BETWEEN

ZHANG XIN

WANG KAIYING

LI HANYING

AND

WUHAN FENGXIN AGRICULTURAL AND TECHNOLOGY DEVELOPMENT CO., LTD.

December 1st, 2009

WUHAN, CHINA


Shareholders’ Voting Proxy Agreement

This Shareholders’ Voting Proxy Agreement (the “Agreement”) is entered into as of Dec 1 st , 2009 between the following parties in Wuhan:

Party A : Wuhan Fengxin Agricultural and Technology Development Co., Ltd.

 

Registered Address:  

Room 1518, Xinhongji Garden, 6 Qiuchang Street

Jiangan District, Wuhan, Hubei

Legal Representative: Ms. LI Hanying

Party B:

1. ZHANG Xin, a citizen of PRC with ID Card number             , owns 87.93% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

2. WANG Kaiying, a citizen of PRC with ID Card number             , owns 2.07% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

3. LI Hanying, a citizen of PRC with ID Card number             , owns 10% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

In this Agreement, Party A and Party B are called collectively as the “Parties,” each of them is called as the “Party,” and Party B are collectively called the “Grantors.”

WHEREAS:

 

1. Party A is a Wholly Foreign Owned Enterprise incorporated under the laws of the People’s Republic of China;

 

2. As of the date of this Agreement, the Grantors are shareholders of Wuhan Fengze Agricultural and Technology Development Co., Ltd. (the “Wuhan Fengze”) and collectively legally hold all of the equity interest of Wuhan Fengze;

 

3. Each of the Grantors desires to appoint the persons designated by Party A to exercise its shareholder’s voting rights at the shareholders’ meeting of Wuhan Fengze (“Voting Rights”) and Party A is willing to designate such persons.

NOW THEREFORE, the Parties hereby have reached the following agreement upon friendly consultations:

1. Each of Party B hereby agrees to irrevocably appoint the persons designated by Party A with the exclusive right to exercise, on his behalf, all of his Voting Rights in accordance with the laws and Wuhan Fengze’s Articles of Association, including but not limited to the rights to sell or transfer all or any of his equity interests of Wuhan Fengze, and to appoint and elect the directors and Chairman as the authorized legal representative of Wuhan Fengze.

 

- 1 -


2. The persons designated by Party A shall be the full board of Party A (the “Proxy Holders”). Party A agrees that it shall maintain a board of directors with composition and members identical to the board of directors of the overseas parent company of Party A.

3. Party A agrees to designate such Proxy Holders pursuant to Section 1 of this Agreement, who shall represent Party B to exercise his Voting Rights pursuant to this Agreement.

4. All Parties to this Agreement hereby acknowledge that, regardless of any change in the equity interests of Wuhan Fengze, each of the Grantors shall appoint the person designated by Party A with all Voting Rights. All Parties to this Agreement agree, neither of Party B can transfer his equity interests (the “Transferor”) of Wuhan Fengze to any individual or company (other than Party A or the individuals or entities designated by Party A).

5. Each of the Grantors hereby acknowledges that he/she will withdraw the appointment of the persons designated by Party A if Party A change such designated person and reappoint the substituted persons designated by Party A as the new Proxy Holders to exercise his Voting Rights at the shareholder’s meeting of Wuhan Fengze.

6. All authorizations made under this Agreement shall be conclusive and binding upon the Grantors and each and every act and thing affected by the Proxy Holders pursuant hereto shall be as good, valid and effectual as if the same had been done by the Grantors. The Grantors hereby irrevocably and unconditionally undertake at all times hereafter to ratify and confirm whatsoever the Proxy Holders shall lawfully do or cause to be done by virtue of all such authorizations conferred by this Agreement.

7. The Grantors hereby irrevocably and unconditionally undertake at all times to indemnify and keep indemnified each of the Proxy Holders against any and all actions, proceedings, claims, costs, expenses and liabilities whatsoever arising from the exercise or purported exercise of any of the powers conferred or purported to be conferred by this Agreement.

8. This Agreement has been duly executed by the parties’ authorized representatives as of the date first set forth above and shall become effective upon execution.

9. This Agreement shall not be terminated prior to the completion of acquisition of all of the equity interests in, or all assets or business of Wuhan Fengze by Party A;

 

10. Any amendment and termination of this Agreement shall be in written and agreed upon by the Parties.

11. The conclusion, validity, interpretation, and performance of this Agreement and the settlement of any disputes arising out of this Agreement shall be governed by the laws and regulations of the People’s Republic of China.

 

- 2 -


12. This Agreement is executed in both Chinese and English in three (3) copies; each Party holds one and each original copy has the same legal effect. Both the English version and Chinese version shall have the same effect.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

 

 

- 3 -


(Page of signature only)

Party A: Wuhan Fengze Agricultural and Technology Development Co., Ltd.

(Seal)

Legal Representative/Authorized Representative (Signature):

Party B:

ZHANG Xin (signature):

WANG Kaiying (signature):

LI Hanying (signature):

This Agreement is agreed and accepted by:

Wuhan Fengze Agricultural and Technology Development Co., Ltd.

(Seal)

Legal Representative/Authorized Representative (Signature):

 

- 4 -

Exhibit 10.4

Pledge of Equity Agreement

This Agreement is executed by:

Pledgeors (hereinafter collectively referred to as “Party A”):

1. ZHANG Xin, a citizen of PRC with ID Card number             , owns 87.93% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

2. WANG Kaiying., a citizen of PRC with ID Card number             , owns 2.07% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

3. LI Hanying, a citizen of PRC with ID Card number             , owns 10% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

Pledgee (hereinafter referred to as “Party B”):

Wuhan Fengxin Agricultural and Technology Development Co., Ltd., a Wholly Foreign Owned Enterprise registered in Wuhan, PRC.

Whereas:

1. Party A consists of all of the shareholders of Wuhan Fengze Agricultural and Technology Development Co., Ltd. (hereinafter referred to as Wuhan Fengze.), who legally hold all of the equity interest of Wuhan Fengze.

2. Wuhan Fengxin Agricultural and Technology Development Co., Ltd. is a Wholly Foreign Owned Enterprise incorporated and existing within the territory of PRC in accordance with the law of PRC and its legal registered address is Room 1518, Xinhongji Garden, 6 Qiuchang Street Jiangan District, Wuhan, Hubei.

3. Wuhan Fengze. is an enterprise incorporated and existing within the territory of PRC in accordance with the law of PRC, the registration number of its legal valid business license is            and its legal registered address is Wuhan Huangpi District, Luohan Street, Qigang Village.

4. Party B intends to acquire all of the equity interests or assets of Wuhan Fengze. Prior to the completion of such acquisition, Party A agreed to entrust the management and operation of Wuhan Fengze. to Party B and to sell part of operating assets of Wuhan Fengze. to Party B. In order to protect the interests of Party B, Party A agrees to pledge the 100% of equity interest of Wuhan Fengze. they own to Party B.


5. Party B accepts the pledge of the equity interest by Party A.

Therefore , in accordance with applicable laws and regulations of the People’s Republic of China, the Parties hereto reach the Agreement through friendly negotiation on the principle of equality and mutual benefit and abide by.

Article 1 Guaranteed Obligation

The equity interest is being pledged to guarantee all of the rights and interests Party A is entitled to under all of the following listed agreements by and among Party A and Party B:

(a) Entrusted Management Agreement, by and between Party A, Wuhan Fengze. and Party B on Dec 1st, 2009 in Wuhan;

(b) Exclusive Option Agreement by and among Party A, Wuhan Fengze. and Party B on Dec 1st, 2009 in Wuhan;

(e) Shareholders’ Voting Proxy Agreement, by and between Party A and Party B on Dec 1st, 2009 in Wuhan;

Article 2 Pledged Properties

Party A pledges, by way of first priority pledge, all of its rights, title and interest, in, to and under all or any part of:

 

  (a) 100% of the equity interest in Wuhan Fengze.;

 

  (b) 100% of the registered capital (“Registered Capital”) of Wuhan Fengze.;

 

  (c) all investment certificates and other documents in respect of the Registered Capital of Wuhan Fengze.;

 

  (d) all money, dividends, interest and benefits at any time arising in respect of all the equity interest and Registered Capital of Wuhan Fengze.; and all voting rights and all other rights and benefits attaching to or accruing to the equity interest or the Registered Capital of Wuhan Fengze. to Party B.

Article 3 Scope of Guaranteed Obligations

The scope of the guaranteed obligations is all rights and interests Party A is entitled to in accordance with all the agreements signed by and among Party A and Party B.

 

2


Article 4 Pledge Procedure and Registration

Party A shall try with its best effort to after the date of this Agreement, process the registration procedures with Wuhan Administration for Industry and Commerce concerning the pledged equity interest and ensure that all other approval(s) from or registration with relevant PRC authorities is granted or duly secured.

Article 5 Transfer of Pledged Equity Interest

Party A shall not transfer any of the pledged equity interest without the prior written consent of Party B during the term of this agreement.

Article 6 Effectiveness, Modification and Termination

 

6.1 This Agreement shall go into effect when it is signed by the authorized representatives of the Parties with seals affixed;

 

6.2 Upon the effectiveness of this Agreement and unless otherwise agreed upon by the parties hereto, neither party may modify or terminate this Agreement. Any modification or termination shall be in writing after both parties’ consultations. The provisions of this Agreement remain binding on both parties prior to any written agreement on modification or termination.

Article 7 Governing Law

The execution, validity, interpretation and performance of this Agreement and the disputes resolution under this Agreement shall be governed by the laws of PRC.

Article 8 Liability for Breach of Agreement

Upon the effectiveness of this Agreement, the Parties hereto shall perform their respective obligations under the Agreement. Any failure to perform the obligations stipulated in the Agreement, in part or in whole, shall be deemed as breach of contract and the breaching party shall compensate the non-breaching party for the loss incurred as a result of the breach.

Article 9 Settlement of Dispute

The parties shall strive to settle any dispute arising from the interpretation or performance of this Agreement through friendly consultation. In case no settlement can be reached through consultation within thirty (30) days after such dispute is raised, each party can submit such matter to China International Economic and Trade Arbitration Commission South China Sub-Commission in Shenzhen in accordance with its rules then in effect. The arbitration shall take place in Shenzhen. The arbitration award shall be final, conclusive and binding upon both parties.

 

3


Article 10 Severability

 

10.1 Any provision of this Agreement that is invalid or unenforceable due to the Laws and regulations shall be ineffective without affecting in any way the remaining provisions hereof.

 

10.2 In the event of the foregoing paragraph, the parties hereto shall prepare supplemental agreement as soon as possible to replace the invalid provision through friendly consultation.

Article 11 Miscellaneous

 

11.1 The headings contained in this Agreement are for the convenience of reference only and shall not in any other way affect the interpretation of the provisions of this Agreement.

 

11.2 The Agreement shall be executed in five copies, both in Chinese and English. Each party holds one Chinese and one English original, and the remaining shall be kept for completing relevant procedures. Each copy shall have equal legal force, and both the English version and Chinese version shall have the same effect.

 

11.3 In witness hereof, the Parties hereto have executed this Agreement on the date described in the first page.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

 

 

4


(Page of signature only)

Party A:

ZHANG Xin ( signature ):

WANG Kaiying (signature):

LI Hanying (signature):

Party B:

Wuhan Fengxin Agricultural and Technology Development Co., Ltd.

(seal)

Authorized representative:

(signature)

 

5

Exhibit 10.5

EXCLUSIVE OPTION AGREEMENT

BETWEEN

WUHAN FENGXIN AGRICULTURAL AND TECHNOLOGY DEVELOPMENT CO., LTD.

AND

WANG KAIYING

LI HANYING

ZHANG XIN

WUHAN FENGZE AGRICULTURAL AND TECHNOLOGY DEVELOPMENT CO., LTD.

Dec 1st, 2009

WUHAN, CHINA


EXCLUSIVE OPTION AGREEMENT

This Exclusive Option Agreement (the “Agreement”) is entered into as of Dec 1st, 2009 between the following Parties in Wuhan.

Party A:

Wuhan Fengxin Agricultural and Technology Development Co., Ltd.

Registered Address: Room 1518, Xinhongji Garden, 6 Qiuchang Street Jiangan District, Wuhan, Hubei Legal

Representative: Ms. LI Hanying

Party B:

1. WANG Kaiying, a citizen of PRC with ID Card number             , owns 2.07% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

2. LI Hanying, a citizen of PRC with ID Card number             , owns 10% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

3. ZHANG Xin, a citizen of PRC with ID Card number             , owns 87.93% shares of Wuhan Fengze Agricultural and Technology Development Co., Ltd.;

Party C: Wuhan Fengze Agricultural and Technology Development Co., Ltd. Registered Address: Wuhan Huangpi District, Luohan Street, Qigang Village. Legal Representative: Ms. LI Hanying

In this Agreement, Party A, Party B and Party C are called collectively as the “Parties” and each of them is called as the “Party”.

WHEREAS:

1. Party A is a Wholly Foreign Owned Enterprise incorporated under the laws of the People’s Republic of China (the “PRC”);

2. Party C is a limited liability company incorporated in Wuhan and with business license issued by the Wuhan Municipal Administration for Industry and Commerce;

3. As of the date of this Agreement Party B are shareholders of Wuhan Fengze Agricultural and Technology Development Co., Ltd. (hereinafter referred to as “Wuhan Fengze”) and collectively legally hold all of the equity interest of Wuhan Fengze.

 

1


NOW, THEREFORE, the Parties through mutual negotiations hereby enter into this Agreement according to the following terms and conditions:

 

1. THE GRANT AND EXERCISE OF PURCHASE OPTION

 

  1.1 Grant: Party B and C hereby grant Party A an irrevocable exclusive purchase option to purchase all or part of the shares of Party C, currently owned by any of Party B; Party C further hereby grant Party A an irrevocable exclusive purchase option to purchase all or part of the assets and business of Party C, in each case in accordance with Article 1.3 of this contract (the “Option”). The aforesaid purchase options are irrevocable and shall be exercised only by Party A (or the qualified persons appointed by Party A). The term “person” used herein shall include any entity, corporation, partnership, joint venture and non-corporate organizations.

 

  1.2 Exercise Procedures:

1.2.1 Party A shall notify Parties B and C in writing prior to exercising its option (the “Option Notice” hereinafter).

1.2.2 The next day upon receipt of the Option Notice, Parties B and C, together with party A (or the qualified person appointed by Party A), shall promptly compile a whole set of documents (the “Transfer Documents”) to be submitted to the government bodies for approving the shares or assets and business transfer in connection with the Option exercise so that the shares or assets and business transfer can be transferred, in whole or in part.

1.2.3 Upon the completion of the compilation of all the Transfer Documents and the Transfer Documents being confirmed by Party A, Parties B and C shall promptly and unconditionally obtain, together with Party A (or the qualified person appointed by Party A), all approvals, permissions, registrations, documents and other necessary approvals to effectuate the transfer of the shares and remaining assets and business of Party C in connection with the Option exercise.

 

  1.3 Exercise Condition: Party A may immediately exercise the option of acquiring the equity interests in or remaining assets and business of Party C whenever Party A considers it necessary to acquire Party C and it is doable in accordance with PRC laws and regulations.

 

2. PRICE OF ACQUISITION

 

  2.1 Party A and Party B shall enter into relevant agreements regarding the price of acquisition based on the circumstances of the exercise of option.

 

  2.2 Party A has the discretion to decide the time and arrangement of the acquisition, provided that the acquisition will not violate any PRC laws or regulations then in effect.

 

2


3. REPRESENTATIONS AND WARRANTIES

 

  3.1 Each party hereto represents to the other Parties that: (1) it has all the necessary rights, powers and authorizations to enter into this Agreement and perform its duties and obligations hereunder; (2) Party B and warrant, represent and guarantee that this Agreement, the Restructuring Exercise or the Listing shall be in compliance with any and all applicable PRC laws and shall indemnify, defend and hold harmless Party A and Party C for all fines, penalties, damages or claims sustained by Party A or Party C arising out of Party B’s violation of this section; and (3) the execution or performance of this Agreement shall not violate any contract or agreement to which it is a party or by which it or its assets are bounded.

 

  3.2 Party B and Party C hereto represent to Party A that: With respect to the equity interest held by Party B in Party C, (1) Party B are legally registered shareholders of Party C and have paid Party C the full amount of their respective portions of Party C’s registered capital required under the PRC laws; (2) except Pledge of Equity Agreement, signed by and between Party B and Party A on Dec 1st, 2009 in Wuhan, neither of Party B has mortgaged or pledged his shares of Party C , nor has either of them granted any security interest or borrow against his shares of Party C in any form; And (3) neither of Party B has sold or will sell to any third party its equity interests in Party C.

With respect to the assets of Wuhan Fengze which may be transferred to Party A at Party A’s option hereunder, (1) Wuhan Fengze owns all such assets and has not mortgaged or pledged or otherwise encumber such assets; and (2) Wuhan Fengze has not sold or will sell to any third party such assets.

 

  3.3 Party C hereto represents to Party A that: (1) it is a limited liability company duly registered and validly existing under the PRC law; and (2) its business operations are in compliance with applicable laws of the PRC in all material aspects.

 

4. COVENANTS

The Parties further agree as follows:

 

  4.1 Before Party A has acquired all the equity/assets and business of Party C by exercising the purchase option provided hereunder, Party C shall not:

4.1.1 sell, assign, mortgage or otherwise dispose of, or create any encumbrance on, any of its assets, operations or any legal or beneficiary interests with respect to its revenues (unless such sale, assignment, mortgage, disposal or encumbrance is relating to its daily operation or has been disclosed to and agreed upon by Party A in writing);

4.1.2 enter into any transaction which may materially affect its assets, liability, operation, shareholders’ equity or other legal rights (unless such transaction is relating to its daily operation or has been disclosed to and agreed upon by Party A in writing); and

 

3


4.1.3 distribute any dividend to its shareholders in any manner.

 

  4.2 Before Party A has acquired all the equity/assets/business of Party C by exercising the purchase option provided hereunder, Party B shall not:

4.2.1 sell, assign, mortgage or otherwise dispose of, or create any encumbrance on, any of the equity held by them in Party C, except for the pledge of such shares made according to the Pledge of Equity Agreement, signed by and between Party B, C and Party A on Dec1st, 2009 in Wuhan.

 

  4.3 Before Party A has acquired all the equity/assets/business of Party C by exercising the purchase option provided hereunder, Party B and/or Party C shall not individually or collectively:

4.3.1 Supplement, alter or amend the articles of association of Party C in any manner to the extent that such supplement, alteration or amendment may have a material effect on Party C’s assets, liability, operation, shareholders’ equity or other legal rights;

4.3.2 cause Party C to enter into any transaction to the extent such transaction may have a material effect on Party C’s assets, liability, operation, shareholders’ equity or other legal rights (unless such transaction is relating to Party C’s daily operation or has been disclosed to and agreed upon by Party A in writing); and

 

  4.4 Party B shall entrust Party A to manage Party C in accordance with Entrusted Management Agreement, signed by and between Party B, C and Party A on Dec 1st, 2009 in Wuhan.

 

  4.5 Non Competition:

When Party A exercises the Option, each of Party B and Party C irrevocably and unconditionally agree and undertake to Party A that it will not without the prior written consent of Party B:-

a. be directly or indirectly engaged or concerned (whether as an employee, agent, independent contractor, consultant, advisor or otherwise) in the conduct of any business competing with Party A’s Business (the “Business”);

b. carry on for his/its own account either alone or in partnership or be concerned as a director or shareholder in any company engaged in any business competing with the Business;

 

4


c. assist any person, firm or company with technical advice or assistance in relation to any business competing with the Business;

d. solicit or entice away or attempt to solicit or entice away the custom of any person, firm, company or organization who shall at any time have been a customer, client, distributor or agent of Party A or in the habit of dealing with Party A;

e. solicit or entice away or attempt to solicit or entice away from Party A any person who is an officer, manager or employee of Party A whether or not such person would commit a breach of his contract of employment by reason of leaving Party A;

f. in relation to any trade, business or company, use any name in such a way as to be capable of or likely to be confused with the name of Party A and shall use all reasonable endeavors to procure that no such name shall be used by any other person, firm or company;

g. otherwise be interested, directly or indirectly, in any business competing with the Business.

 

5. ASSIGNMENT OF AGREEMENT

 

  5.1 Party B and Party C shall not transfer their rights and obligations under this Agreement to any third party without the prior written consent of Party A.

 

  5.2 Each of Party B and Party C hereby agrees that Party A shall have the right to transfer all of its rights and obligation under this Agreement to any third party whenever it desires. Any such transfer shall only be subject to a written notice sent to Party B and Party C by Party A, and no any further consent from Party Band Party C will be required.

 

6. CONFIDENTIALITY

The Parties acknowledge and confirm that any oral or written materials exchanged by the Parties in connection with this Agreement are confidential. The Parties shall maintain the secrecy and confidentiality of all such materials. Without the written approval by the other Parties, any Party shall not disclose to any third party any relevant materials, but the following circumstances shall be excluded:

 

  6.1 The materials is known or will be known by the public (except for any materials disclosed to the public by the Party who receives such materials);

 

  6.2 The materials are required to be disclosed under the applicable laws or the rules or provisions of stock exchange; or

 

5


  6.3 The materials disclosed by each Party to its legal or financial consultant relate to the transaction contemplated under this Agreement, and such legal or financial consultant shall comply with the confidentiality set forth in this Section. The disclosure of the confidential materials by an employee of any Party shall be deemed disclosure of such materials by such Party, and such Party shall be liable for breaching the contract. This Article 6 shall survive this Agreement even if this Agreement is invalid, amended, revoked, terminated or unenforceable by any reason.

 

7. BREACH OF CONTRACT

Any violation of any provision hereof, any incomplete or mistaken performance of any obligation provided hereunder, any misrepresentation made hereunder, any material nondisclosure or omission of any material fact, or any failure to perform any covenants provided hereunder by any Party shall constitute a breach of this Agreement. The breaching Party shall be liable for any such breach pursuant to the applicable laws.

 

8. APPLICABLE LAW AND DISPUTE RESOLUTION

 

  8.1 Applicable Law

The execution, validity, interpretation and performance of this Agreement and the disputes resolution under this Agreement shall be governed by the laws of PRC.

 

  8.2 Dispute Resolution

The Parties shall strive to settle any dispute arising from the interpretation or performance of this Agreement through friendly consultation. In case no settlement can be reached through consultation within thirty (30) days after such dispute is raised, each an submit such matter to China International Economic and Trade Arbitration Commission South China Sub-Commission in Shenzhen in accordance with its rules. The arbitration shall take place in Shenzhen. The arbitration award shall be final, conclusive and binding upon both Parties.

 

9. EFFECTIVENESS AND TERMINATION

 

  9.1 This Agreement shall be effective upon the execution hereof by all Parties hereto and shall remain effective thereafter.

 

  9.2 This Agreement may not be terminated without the unanimous consent of all the Parties except that Party A may, by giving a thirty (30) days prior notice to the other Parties hereto, terminate this Agreement.

 

10. MISCELLANEOUS

 

  10.1 Amendment, Modification and Supplement

Any amendment and supplement to this Agreement shall be made by the Parties in writing. The amendment and supplement duly executed by each Party shall be deemed an integral part of this Agreement and shall have the same legal effect as this Agreement.

 

6


  10.2 Entire Agreement

The Parties acknowledge that this Agreement constitutes the entire agreement of the Parties with respect to the subject matters therein and supersedes and replaces all prior or contemporaneous agreements and understandings in oral or written form.

 

  10.3 Severability

If any provision of this Agreement is adjudicated to be invalid or non-enforceable according to relevant PRC laws of the PRC, such a provision shall be deemed invalid only to the extent the PRC laws are applicable in China, and the validity, legality and enforceability of the other provisions hereof shall not be affected or impaired in any way. The Parties shall, through consultation based on the principal of fairness, replace such invalid, illegal or non-enforceable provision with valid provision so that any substituted provision may bring the similar economic effects as those intended by the invalid, illegal or non-enforceable provision.

 

  10.4 Headings

The headings contained in this Agreement are for the convenience of reference only and shall not in any other way affect the interpretation, explanation or the meaning of the provisions of this Agreement.

 

  10.5 Language and Copies

This Agreement is written in Chinese and English and both the English version and Chinese version shall have the same effect. This Agreement is executed in four (4) copies for each version; each Party holds one and each original copy has the same legal effect.

 

  10.6 Successor

This Agreement shall bind and benefit the successor or the transferee of each Party.

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

 

 

7


IN WITNESS THEREFORE, the Parties hereof have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.

PARTY A:

Wuhan Fengxin Agricultural and Technology Development Co., Ltd.

(seal)

Legal Representative/Authorized Representative (Signature):

PARTY B:

WANG Kaiying ( signature ):

LI Hanying ( signature ):

ZHANG Xin ( signature ):

PARTY C:

Wuhan Fengze Agricultural and Technology Development Co., Ltd.

(seal)

Legal Representative/Authorized Representative (Signature):

 

8

Exhibit 10.6

TIANLI AGRITECH, INC.

2010 SHARE INCENTIVE PLAN

1. Purpose and Effective Date .

(a) The purpose of the Tianli Agritech, Inc. 2010 Share Incentive Plan (the “Plan”) is to further the long term stability and financial success of Tianli Agritech, Inc. (the “Company”) by attracting and retaining personnel, including employees, non-employee directors, and consultants, through the use of stock incentives. It is believed that ownership of Company stock will stimulate the efforts of those employees upon whose judgment, interest and efforts the Company is and will be largely dependent for the successful conduct of its business.

(b) The Plan was adopted by the Board of Directors and the shareholders of the Company on             ,         ,              (the “Effective Date”).

2.  Definitions .

(a)  Act . The Securities Exchange Act of 1934, as amended.

(b)  Affiliate . The meaning assigned to the term “affiliate” under Rule 12b-2 of the Act.

(c)  Applicable Withholding Taxes . The aggregate amount of federal, state and local income and payroll taxes that the Company is required to withhold (based on the minimum applicable statutory withholding rates) in connection with any exercise of an Option or the award, lapse of restrictions or payment with respect to Restricted Stock.

(d)  Award . The award of an Option or Restricted Stock under the Plan.

(e)  Beneficiary . The person or persons entitled to receive a benefit pursuant to an Award upon the death of a Participant.

(f)  Board . The Board of Directors of the Company.

(g)  Cause . Dishonesty, fraud, misconduct, gross incompetence, gross negligence, breach of a material fiduciary duty, material breach of an agreement with the Company, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Committee, which determination shall be binding. Notwithstanding the foregoing, if “Cause” is defined in an employment agreement between a Participant and the Company, “Cause” shall have the meaning assigned to it in such agreement.

(h)  Change of Control .

(i) The acquisition by any unrelated person of beneficial ownership (as that term is used for purposes of the Act) of 50% or more of the then outstanding common shares of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors. The term “unrelated person” means any person other than (x) the Company and its subsidiaries, (y) an employee benefit plan or related trust sponsored by the Company or its subsidiaries, and (z) a person who acquires stock of the Company pursuant to an agreement with the Company that is approved by the Board in advance of the acquisition. For purposes of this subsection, a “person” means an individual, entity or group, as that term is used for purposes of the Act;

(ii) Any tender or exchange offer, merger or other business combination, sale of assets or any combination of the foregoing transactions, and the Company is not the surviving corporation; and

(iii) A liquidation of the Company.

(i)  Code . The Internal Revenue Code of 1986, as amended.

(j)  Committee . The Compensation Committee of the Board.

(k)  Company . Tianli Agritech, Inc.


(l)  Company Stock . The common shares of the Company. In the event of a change in the capital structure of the Company (as provided in Section 12 below), the shares resulting from such a change shall be deemed to be Company Stock within the meaning of the Plan.

(m)  Consultant . A person rendering services to the Company who is not an “employee” for purposes of employment tax withholding under the Code.

(n)  Corporate Change . A consolidation, merger, dissolution or liquidation of the Company, or a sale or distribution of assets or stock (other than in the ordinary course of business) of the Company; provided that, unless the Committee determines otherwise, a Corporate Change shall only be considered to have occurred with respect to Participants whose business unit is affected by the Corporate Change.

(o)  Date of Grant . The date as of which an Award is made by the Committee.

(p)  Disability or Disabled . As to an Incentive Stock Option, a Disability within the meaning of Code Section 22(e)(3). As to all other Incentive Awards, the Committee shall determine whether a Disability exists and such determination shall be conclusive.

(q)  Fair Market Value .

(i) If Company Stock is traded on a national securities exchange, the average of the highest and lowest registered sales prices of Company Stock on such exchange;

(ii) If Company Stock is traded in the over-the-counter market, the average between the closing bid and asked prices as reported by the NASDAQ Stock Market; or

(iii) If shares of Company Stock are not publicly traded, the Fair Market Value shall be determined by the Committee using any reasonable method in good faith.

Fair Market Value shall be determined as of the applicable date specified in the Plan or, if there are no trades on such date, the value shall be determined as of the last preceding day on which Company Stock is traded.

(r)  Incentive Stock Option . An Option intended to meet the requirements of, and qualify for favorable Federal income tax treatment under, Code Section 422.

(s)  Nonstatutory Stock Option . An Option that does not meet the requirements of Code Section 422, or that is otherwise not intended to be an Incentive Stock Option and is so designated.

(t)  Option . A right to purchase Company Stock granted under the Plan, at a price determined in accordance with the Plan.

(u)  Participant . Any individual who receives an Award under the Plan.

(v)  Restricted Stock . Company Stock awarded upon the terms and subject to the restrictions set forth in Section 7 below.

(w)  Rule 16b-3 . Rule 16b-3 of the Act, including any corresponding subsequent rule or any amendments to Rule 16b-3 enacted after the effective date of the Plan.

(x)  10% Shareholder . A person who owns, directly or indirectly, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or an Affiliate. Indirect ownership of stock shall be determined in accordance with Code Section 424(d).

3.  General . Awards of Options and Restricted Stock may be granted under the Plan. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options.

4.  Stock . Subject to Section 12 of the Plan, there shall be reserved for issuance under the Plan a total of 1,012,500 unissued shares of Company Stock. Shares allocable to Options granted under the Plan that expire or otherwise terminate unexercised and shares that are forfeited pursuant to restrictions on Restricted Stock awarded under the Plan may again be subjected to an Award under this Plan. For purposes of determining the number of shares that are available for Awards under the Plan, such number shall, if permissible under Rule 16b-3, include the number of shares surrendered by a Participant or retained by the Company (a) in connection with the exercise of an Option or (b) in payment of Applicable Withholding Taxes.

 

2


5.  Eligibility .

(a) Any employee of, non-employee director of, or Consultant to the Company or its affiliates, who, in the judgment of the Committee, has contributed or can be expected to contribute to the profits or growth of the Company is eligible to become a Participant. The Committee shall have the power and complete discretion, as provided in Section 14, to select eligible Participants and to determine for each Participant the terms, conditions and nature of the Award and the number of shares to be allocated as part of the Award; provided, however, that any award made to a member of the Committee must be approved by the Board. The Committee is expressly authorized to make an Award to a Participant conditioned on the surrender for cancellation of an existing Award.

(b) The grant of an Award shall not obligate the Company to pay an employee any particular amount of remuneration, to continue the employment of the employee after the grant or to make further grants to the employee at any time thereafter.

(c) Non-employee directors and Consultants shall not be eligible to receive the Award of an Incentive Stock Option.

6.  Stock Options .

(a) Whenever the Committee deems it appropriate to grant Options, notice shall be given to the Participant stating the number of shares for which Options are granted, the Option price per share, whether the options are Incentive Stock Options or Nonstatutory Stock Options, and the conditions to which the grant and exercise of the Options are subject. This notice, when duly accepted in writing by the Participant, shall become a stock option agreement between the Company and the Participant.

(b) The Committee shall establish the exercise price of Options. The exercise price of an Incentive Stock Option shall be not less than 100% of the Fair Market Value of such shares on the Date of Grant, provided that if the Participant is a 10% Shareholder, the exercise price of an Incentive Stock Option shall be not less than 110% of the Fair Market Value of such shares on the Date of Grant. The exercise price of a Nonstatutory Stock Option Award shall not be less than 100% of the Fair Market Value of the shares of Company Stock covered by the Option on the Date of Grant.

(c) Options may be exercised in whole or in part at such times as may be specified by the Committee in the Participant’s stock option agreement. The Committee may impose such vesting conditions and other requirements as the Committee deems appropriate, and the Committee may include such provisions regarding a Change of Control or Corporate Change as the Committee deems appropriate.

(d) The Committee shall establish the term of each Option in the Participant’s stock option agreement. The term of an Incentive Stock Option shall not be longer than ten years from the Date of Grant, except that an Incentive Stock Option granted to a 10% Shareholder may not have a term in excess of five years. No option may be exercised after the expiration of its term or, except as set forth in the Participant’s stock option agreement, after the termination of the Participant’s employment. The Committee shall set forth in the Participant’s stock option agreement when, and under what circumstances, an Option may be exercised after termination of the Participant’s employment or period of service; provided that no Incentive Stock Option may be exercised after (i) three months from the Participant’s termination of employment with the Company for reasons other than Disability or death, or (ii) one year from the Participant’s termination of employment on account of Disability or death. The Committee may, in its sole discretion, amend a previously granted Incentive Stock Option to provide for more liberal exercise provisions, provided however that if the Incentive Stock Option as amended no longer meets the requirements of Code Section 422, and, as a result the Option no longer qualifies for favorable federal income tax treatment under Code Section 422, the amendment shall not become effective without the written consent of the Participant.

(e) An Incentive Stock Option, by its terms, shall be exercisable in any calendar year only to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of Company Stock with respect to which Incentive Stock Options are exercisable by the Participant for the first time during the calendar year does not exceed $100,000 (the “Limitation Amount”). Incentive Stock Options granted under the Plan and all other plans of the Company and any parent or Subsidiary of the Company shall be aggregated for purposes of determining whether the Limitation Amount has been exceeded. The Board may impose such conditions as it deems appropriate on an Incentive Stock option to ensure that the foregoing requirement is met. If Incentive Stock Options that first become exercisable in a calendar year exceed the Limitation Amount, the excess Options will be treated as Nonstatutory Stock Options to the extent permitted by law.

 

3


(f) If a Participant dies and if the Participant’s stock option agreement provides that part or all of the Option may be exercised after the Participant’s death, then such portion may be exercised by the personal representative of the Participant’s estate during the time period specified in the stock option agreement.

(g) If a Participant’s employment or services is terminated by the Company for Cause, the Participant’s Options shall terminate as of the date of the misconduct.

7.  Restricted Stock Awards .

(a) Whenever the Committee deems it appropriate to grant a Restricted Stock Award, notice shall be given to the Participant stating the number of shares of Restricted Stock for which the Award is granted and the terms and conditions to which the Award is subject. This notice, when accepted in writing by the Participant, shall become an Award agreement between the Company and the Participant. Certificates representing the shares shall be issued in the name of the Participant, subject to the restrictions imposed by the Plan and the Committee. A Restricted Stock Award may be made by the Committee in its discretion without cash consideration.

(b) The Committee may place such restrictions on the transferability and vesting of Restricted Stock as the Committee deems appropriate, including restrictions relating to continued employment and financial performance goals. Without limiting the foregoing, the Committee may provide performance or Change of Control or Corporate Change acceleration parameters under which all, or a portion, of the Restricted Stock will vest on the Company’s achievement of established performance objectives. Restricted Stock may not be sold, assigned, transferred, disposed of, pledged, hypothecated or otherwise encumbered until the restrictions on such shares shall have lapsed or shall have been removed pursuant to subsection (c) below.

(c) The Committee may provide in a Restricted Stock Award, or subsequently, that the restrictions will lapse if a Change of Control or Corporate Change occurs. The Committee may at any time, in its sole discretion, accelerate the time at which any or all restrictions will lapse or may remove restrictions on Restricted Stock as it deems appropriate.

(d) A Participant shall hold shares of Restricted Stock subject to the restrictions set forth in the Award agreement and in the Plan. In other respects, the Participant shall have all the rights of a shareholder with respect to the shares of Restricted Stock, including, but not limited to, the right to vote such shares and the right to receive all cash dividends and other distributions paid thereon. Certificates representing Restricted Stock shall bear a legend referring to the restrictions set forth in the Plan and the Participant’s Award agreement. If stock dividends are declared on Restricted Stock, such stock dividends or other distributions shall be subject to the same restrictions as the underlying shares of Restricted Stock.

8.  Method of Exercise of Options .

(a) Options may be exercised by giving written notice of the exercise to the Company, stating the number of shares the Participant has elected to purchase under the Option. Such notice shall be effective only if accompanied by the exercise price in full in cash; provided that, if the terms of an Option so permit, the Participant may (i) deliver Company Stock that the Participant has owned for at least six months (valued at Fair Market Value on the date of exercise), or (ii) exercise any applicable net exercise provision contained therein. Unless otherwise specifically provided in the Option, any payment of the exercise price paid by delivery of Company Stock acquired directly or indirectly from the Company shall be paid only with shares of Company Stock that have been held by the Participant for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes).

(b) Notwithstanding anything herein to the contrary, Awards shall always be granted and exercised in such a manner as to conform to the provisions of Rule 16b-3.

9.  Applicable Withholding Taxes . Each Participant shall agree, as a condition of receiving an Award, to pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, all Applicable Withholding Taxes with respect to the Award. Until the Applicable Withholding Taxes have been paid or arrangements satisfactory to the Company have been made, no stock certificates (or, in the case of Restricted Stock, no stock certificates free of a restrictive legend) shall be issued to the Participant. As an alternative to making a cash

 

4


payment to the Company to satisfy Applicable Withholding Tax obligations, the Committee may establish procedures permitting the Participant to elect to (a) deliver shares of already owned Company Stock (subject to such restrictions as the Committee may establish, including a requirement that any shares of Company Stock so delivered shall have been held by the Participant for not less than six months) or (b) have the Company retain that number of shares of Company Stock that would satisfy all or a specified portion of the Applicable Withholding Taxes. Any such election shall be made only in accordance with procedures established by the Committee and in accordance with Rule 16b-3.

10.  Nontransferability of Awards .

(a) In general, Awards, by their terms, shall not be transferable by the Participant except by will or by the laws of descent and distribution or except as described below. Options shall be exercisable, during the Participant’s lifetime, only by the Participant or by his guardian or legal representative.

(b) Notwithstanding the provisions of (a) and subject to federal and state securities laws, the Committee may grant Nonstatutory Stock Options that permit a Participant to transfer the Options to one or more immediate family members, to a trust for the benefit of immediate family members, or to a partnership, limited liability company, or other entity the only partners, members, or interest-holders of which are among the Participant’s immediate family members. Consideration may not be paid for the transfer of Options. The transferee of an Option shall be subject to all conditions applicable to the Option prior to its transfer. The agreement granting the Option shall set forth the transfer conditions and restrictions. The Committee may impose on any transferable Option and on stock issued upon the exercise of an Option such limitations and conditions as the Committee deems appropriate.

11.  Termination, Modification, Change . If not sooner terminated by the Board, this Plan shall terminate at the close of business on the tenth anniversary of the Effective Date. No Awards shall be made under the Plan after its termination. The Board may terminate the Plan or may amend the Plan in such respects as it shall deem advisable; provided that, if and to the extent required by Rule 16b-3, no change shall be made that increases the total number of shares of Company Stock reserved for issuance pursuant to Awards granted under the Plan (except pursuant to Section 12), expands the class of persons eligible to receive Awards, or materially increases the benefits accruing to Participants under the Plan, unless such change is authorized by the shareholders of the Company. Notwithstanding the foregoing, the Board may unilaterally amend the Plan and Awards as it deems appropriate to ensure compliance with Rule 16b-3 and to cause Incentive Stock Options to meet the requirements of the Code and regulations thereunder. Except as provided in the preceding sentence, a termination or amendment of the Plan shall not, without the consent of the Participant, adversely affect a Participant’s rights under an Award previously granted to him.

12.  Change in Capital Structure .

(a) In the event of a stock dividend, stock split or combination of shares, spin-off, reclassification, recapitalization, merger or other change in the Company’s capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common shares or preferred stock of the Company), the number and kind of shares of stock or securities of the Company to be issued under the Plan (under outstanding Awards and Awards to be granted in the future), the exercise price of options, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the adjustment would produce fractional shares with respect to any Award, the Committee may adjust appropriately the number of shares covered by the Award so as to eliminate the fractional shares.

(b) In the event the Company distributes to its shareholders a dividend or sells or causes to be sold to a person other than the Company or a Subsidiary shares of stock in any corporation (a “Spinoff Company”) which, immediately before the distribution or sale, was a majority owned Subsidiary of the Company, the Committee shall have the power, in its sole discretion, to make such adjustments as the Committee deems appropriate. The Committee may make adjustments in the number and kind of shares or other securities to be issued under the Plan (under outstanding Awards and Awards to be granted in the future), the exercise price of Options, and other relevant provisions, and, without limiting the foregoing, may substitute securities of a Spinoff Company for securities of the Company. The Committee shall make such adjustments as it determines to be appropriate, considering the economic effect of the distribution or sale on the interests of the Company’s shareholders and the Participants in the businesses operated by the Spinoff Company, and subject to the proviso that any such adjustments or new options shall not be made or

 

5


granted, respectively, that would result in subjecting the Plan to variable plan accounting treatment. The Committee’s determination shall be binding on all persons. If the adjustment would produce fractional shares with respect to any Award, the Committee may adjust appropriately the number of shares covered by the Award so as to eliminate the fractional shares.

(c) To the extent required to avoid a charge to earnings for financial accounting purposes, adjustments made by the Committee pursuant to this Section 12 to outstanding Awards shall be made so that both (i) the aggregate intrinsic value of an Award immediately after the adjustment is not greater than or less than the Award’s aggregate intrinsic value before the adjustment and (ii) the ratio of the exercise price per share to the market value per share is not reduced.

(d) Notwithstanding anything in the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee’s determination shall be conclusive and binding on all persons for all purposes. The Committee shall make its determinations consistent with Rule 16b-3 and the applicable provisions of the Code.

13.  Change of Control . In the event of a Change of Control or Corporate Change, the Committee may take such actions with respect to Awards as the Committee deems appropriate. These actions may include, but shall not be limited to, the following:

(a) At the time the Award is made, provide for the acceleration of the vesting schedule relating to the exercise or realization of the Award so that the Award may be exercised or realized in full on or before a date initially fixed by the Committee;

(b) Provide for the purchase or settlement of any such Award by the Company for any amount of cash equal to the amount which could have been obtained upon the exercise of such Award or realization of a Participant’s rights had such Award been currently exercisable or payable;

(c) Make adjustments to Awards then outstanding as the Committee deems appropriate to reflect such Change of Control or Corporate Change; provided, however, that to the extent required to avoid a charge to earnings for financial accounting purposes, such adjustments shall be made so that both (i) the aggregate intrinsic value of an Award immediately after the adjustment is not greater than or less than the Award’s aggregate intrinsic value before the Award and (ii) the ratio of the exercise price per share to the market value per share is not reduced; or

(d) Cause any such Award then outstanding to be assumed, or new rights substituted therefore, by the acquiring or surviving legal entity in such Change of Control or Corporate Change.

14.  Administration of the Plan .

(a) The Plan shall be administered by the Committee, who shall be appointed by the Board. The Board may designate the Compensation Committee of the Board, or a subcommittee of the Compensation Committee, to be the Committee for purposes of the Plan. If and to the extent required by Rule 16b-3, all members of the Committee shall be “Non-Employee Directors” as that term is defined in Rule 16b-3, and the Committee shall be comprised solely of two or more “outside directors” as that term is defined for purposes of Code section 162(m). If any member of the Committee fails to qualify as an “outside director” or (to the extent required by Rule 16b-3) a “Non-Employee Director,” such person shall immediately cease to be a member of the Committee and shall not take part in future Committee deliberations. The Board of Directors may from time to time may appoint members of the Committee and fill vacancies, however caused, in the Committee.

(b) The Committee shall have the authority to impose such limitations or conditions upon an Award as the Committee deems appropriate to achieve the objectives of the Award and the Plan. Without limiting the foregoing and in addition to the powers set forth elsewhere in the Plan, the Committee shall have the power and complete discretion to determine (i) which eligible persons shall receive an Award and the nature of the Award, (ii) the number of shares of Company Stock to be covered by each Award, (iii) whether Options shall be Incentive Stock options or Nonstatutory Stock Options, (iv) the Fair Market Value of Company Stock, (v) the time or times when an Award shall be granted, (vi) whether an Award shall become vested over a period of time, according to a performance-based vesting schedule or otherwise, and when it shall be fully vested, (vii) the terms and conditions under which restrictions imposed upon an Award shall lapse, (viii) whether a Change of Control or Corporate Change exists, (ix) the terms of

 

6


incentive programs, performance criteria and other factors relevant to the issuance of Incentive Stock or the lapse of restrictions on Restricted Stock or Options, (x) when Options may be exercised, (xi) whether to approve a Participant’s election with respect to Applicable Withholding Taxes, (xii) conditions relating to the length of time before disposition of Company Stock received in connection with an Award is permitted, (xiii) notice provisions relating to the sale of Company Stock acquired under the Plan, and (xiv) any additional requirements relating to Awards that the Committee deems appropriate. Notwithstanding the foregoing, no “tandem stock options” (where two stock options are issued together and the exercise of one option affects the right to exercise the other option) may be issued in connection with Incentive Stock Options.

(c) The Committee shall have the power to amend the terms of previously granted Awards so long as the terms as amended are consistent with the terms of the Plan and, where applicable, consistent with the qualification of an option as an Incentive Stock Option. The consent of the Participant must be obtained with respect to any amendment that would adversely affect the Participant’s rights under the Award, except that such consent shall not be required if such amendment is for the purpose of complying with Rule 16b-3 or any requirement of the Code applicable to the Award.

(d) The Committee may adopt rules and regulations for carrying out the Plan. The Committee shall have the express discretionary authority to construe and interpret the Plan and the Award agreements, to resolve any ambiguities, to define any terms, and to make any other determinations required by the Plan or an Award agreement. The interpretation and construction of any provisions of the Plan or an Award agreement by the Committee shall be final and conclusive. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel.

(e) A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members, and any action so taken shall be fully effective as if it had been taken at a meeting.

15.  Issuance of Company Stock . The Company shall not be required to issue or deliver any certificate for shares of Company Stock before (i) the admission of such shares to listing on any stock exchange on which Company Stock may then be listed, (ii) receipt of any required registration or other qualification of such shares under any state or federal securities law or regulation that the Company’s counsel shall determine is necessary or advisable, and (iii) the Company shall have been advised by counsel that all applicable legal requirements have been complied with. The Company may place on a certificate representing Company Stock any legend required to reflect restrictions pursuant to the Plan, and any legend deemed necessary by the Company’s counsel to comply with federal or state securities laws. The Company may require a customary written indication of a Participant’s investment intent. Until a Participant has been issued a certificate for the shares of Company Stock acquired, the Participant shall possess no shareholder rights with respect to the shares.

16.  Rights Under the Plan . Title to and beneficial ownership of all benefits described in the Plan shall at all times remain with the Company. Participation in the Plan and the right to receive payments under the Plan shall not give a Participant any proprietary interest in the Company or any Affiliate or any of their assets. No trust fund shall be created in connection with the Plan, and there shall be no required funding of amounts that may become payable under the Plan. A Participant shall, for all purposes, be a general creditor of the Company. The interest of a Participant in the Plan cannot be assigned, anticipated, sold, encumbered or pledged and shall not be subject to the claims of his creditors.

17.  Beneficiary . A Participant may designate, on a form provided by the Committee, one or more beneficiaries to receive any payments under Awards of Restricted Stock or Incentive Stock after the Participant’s death. If a Participant makes no valid designation, or if the designated beneficiary fails to survive the Participant or otherwise fails to receive the benefits, the Participant’s beneficiary shall be the first of the following persons who survives the Participant: (a) the Participant’s surviving spouse, (b) the Participant’s surviving descendants,  per stirpes , or (c) the personal representative of the Participant’s estate.

18.  Notice . All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (a) if to the Company—at its principal business address to the attention of the Secretary; (b) if to any Participant—at the last address of the Participant known to the sender at the time the notice or other communication is sent.

 

7


19.  Interpretation . The terms of this Plan and Awards granted pursuant to the Plan are subject to all present and future regulations and rulings of the Secretary of the Treasury relating to the qualification of Incentive Stock Options under the Code or compliance with Code section 162(m), to the extent applicable, and they are subject to all present and future rulings of the Securities and Exchange Commission with respect to Rule 16b-3. If any provision of the Plan or an Award conflicts with any such regulation or ruling, to the extent applicable, the Committee shall cause the Plan to be amended, and shall modify the Award, so as to comply, or if for any reason amendments cannot be made, that provision of the Plan and/or the Award shall be void and of no effect.

 

8

Exhibit 10.7

Lock-Up Agreement

                  ,             

 

By Facsimile (            )

  

By Facsimile ((804) 648-3404)

Tianli Agritech, Inc.    Anderson & Strudwick, Incorporated
Suite F, 23rd Floor    707 East Main Street
Building B, Jiangjing Mansion    20 th  Floor
228 Yanjiang Ave., Jiangan District    Richmond, Virginia 23219
Wuhan City, Hubei Province, China 430010    Attn: L. McCarthy Downs, III,
Attn: Hanying Li             Senior Vice President
          CEO   

Re: Lock-Up Agreement

Dear Ms. Li and Mr. Downs:

The undersigned understands that Anderson & Strudwick, Incorporated (the “Placement Agent”), proposes to enter into a Placement Agreement with Tianli Agritech, Inc. (the “Company”), providing for the public offering (the “Offering”), by the Placement Agent of a minimum of 1,667,000 common shares and a maximum of 2,000,000 common shares (the “Shares”).

In consideration of the Placement Agent’s agreement to undertake the Offering of the Shares on a “best efforts, minimum/maximum” basis, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned agrees that the undersigned will not register, offer, sell, contract to sell or grant any Shares or any securities convertible into or exercisable or exchangeable for the Shares or any warrants to purchase the Shares (including, without limitation, securities of the Company which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon the exercise of a stock option or warrant) for a period of (a) as to one-half (   1 /2) of the Shares now or in the future beneficially owned by the undersigned, ninety (90) days after the date of effectiveness or commencement of sales of the public offering and (b) as to the other one-half of such Shares now or in the future beneficially owned by such individual, one hundred ninety (190) days after the date of effectiveness or commencement of sales of the public offering. The obligations under this lock-up period are separate from any obligations that may relate to the Make Good Escrow Agreement to be entered between the Placement Agent, an escrow agent, the Company and certain shareholders of the Company on the date hereof.

The undersigned understands that the Company, the Placement Agent and the Representatives will proceed with the Offering in reliance upon this Lock-up Agreement.

 

Very truly yours,
By:  

 

Name:  

 

Its:  

 

Exhibit 10.8

Employment Contract – Hanying Li

BETWEEN:   Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd. , a company legally incorporated under the laws of People’s Republic of China, having a mailing address at Room 1518, Xinhongji Garden, 6# Qiuchang Street, in the city and district of Jiangan District, Wuhan, acting and represented herein by Mrs. LI HANYING, chairman of the board , declaring duly authorized, (hereinafter called the “FENGXIN”)

AND:  Mrs. LI HANYING, residing at Bingjiang Gardon Building 5 Room 1903,Yanjiang Street, Jingan District, Wuhan Hubei, (hereinafter called the “LI HANGYING”)

(FENGXIN and LI HANYING hereinafter collectively called “Parties”)

1. PREAMBLE

The preamble is an integral part of this contract.

WHEREAS FENGXIN requires the services of LI HANYING as President and CEO;

WHEREAS, LI HANYING agreed to provide FENGXIN her full-time services as President and CEO;

WHEREAS the parties wish to confirm their agreement in writing;

WHEREAS the parties have the capacity and quality of exercise all the rights necessary for the conclusion and implementation of the agreement found in this contract;

THEREFORE THE FOREGOING, THE PARTIES AGREE AS FOLLOWS:

2. PURPOSE

2.1 Services

LI HANYING agrees to assume full-time for FENGXIN (minimum of forty (40) hours per week) the role of president and CEO during the entire duration of the contract;

2.2 Term

This contract is for an initial term of 36 months, renewable for an additional period of 24 months unless either party terminates it in writing at least three (3) months before the expiration of the initial term;


3. CONSIDERATION

3.1 Service Awards

In consideration of the provision of services, FENGXIN to pay LI HANYING, as compensation;

The gross amount of US 146,000.00 dollars annually is constituted by a basis compensation of US 50,000.00 dollars and a conditional Year-end awards that no more than US 96,000.00 dollars.

The basis compensation is calculated at the rate of twelve (12) equal monthly installments consecutively of US 4,167.00 dollars each, less withholding taxes applicable.

The Year-end award shall only be paid under the condition of 3.3.3

3.2 Expenditure incurred

FENGXIN will reimburse LI HANYING all reasonable expenses incurred in connection with this Agreement, upon presentation of appropriate documentation;

3.3 Terms and conditions of payment

3.3.1 The price payable by FENGXIN to LI HANYING is as follows:

3.3.2 The sum of US 4,167.00 dollars on the 6 th of each month from Dec 1 st , 2009.

3.3.3 The sum of Year-end award shall be paid on the Dec 31, 2010, Dec 31, 2011 and Dec 31, 2012 only under the condition that FENGXIN’s annual profit reach or over 150% of its last year’s annual profit. And the data of each FENGXIN’s annual profit shall in accordance with audit report issued at the end of each corresponding year.

3.3.4 Expenses will be reimbursed on presentation of an expense account on the 24th of each month.

4. SPECIAL PROVISIONS

4.1 Obligations of FENGXIN

FENGXIN agrees and undertakes to LI HANYING as follows:

FENGXIN to bring LI HANYING collaboration and will provide information necessary to ensure the full and faithful discharge of services to be rendered;


4.2 Obligation to LI HANYING

LI HANYING agrees and undertakes to FENGXIN to the following: The services must be made full time in a professional manner, according to the rules generally accepted by industry.

4.3 Commitment to confidentiality and nondisclosure

LI HANYING recognizes that certain disclosures to be provided by FENGXIN have or may have considerable strategic importance, and therefore represent trade secrets for purposes of this contract. During the term of this Contract and for a period of 36 months following the end of it, LI HANYING is committed to FENGXIN to:

a) keep confidential and not disclose the information;

b) take and implement all appropriate measures to protect the confidentiality of the information;

c) not disclose, transmit, exploit or otherwise use for its own account or for others, elements of information;

4.4 Exclusivity of service provider

During the term of this Contract and for a period of 24 months following the end of it, LI HANYING is committed to FENGXIN not render services to or for direct or indirect competitors of FENGXIN.

4.5 Responsibilities

4.5.1 Board Administration and Support — Supports operations and administration of Board by advising and informing Board members, interfacing between Board and staff, and supporting Board’s evaluation of chief executive

4.5.2 Program, Product and Service Delivery: Oversees design, marketing, promotion, delivery and quality of programs, products and services

4.5.3 Financial, Tax, Risk and Facilities Management: Recommends yearly budget for Board approval and prudently manages organization’s resources within those budget guidelines according to current laws and regulations

4.5.4 Human Resource Management: Effectively manages the human resources of the organization according to authorized personnel policies and procedures that fully conform to current laws and regulations.

4.5.5 Community and Public Relations: Assures the organization and its mission, programs, products and services are consistently presented in strong, positive image to relevant stakeholders.


4.5.6 Fundraising (nonprofit-specific): Oversees fundraising planning and implementation, including identifying resource requirements, researching funding sources, establishing strategies to approach funders, submitting proposals and administrating fundraising records and documentation

4.6 Relationship between the parties

Neither party may bind the other in any way whatsoever to anyone, except in accordance with the provisions of this contract.

4.7 Representations and Warranties LI HANYING

LI HANYING represents and warrants to FENGXIN that:

a) She has the capacity required to undertake under this contract, such capacity was not limited by any commitment to another person;

b) She has the expertise and experience required to execute and complete the its obligations under this contract;

c) She will make services efficient and professional manner, according to the rules generally accepted by industry;

4.8 Termination of Contract

Either party may terminate this contract at any time, upon presentation of a 60 days notice given to the other party. Amounts due and options purchases of shares will be delivered when calculated on a pro-rata to the time elapsed since the last payment or the last delivery of stock options.

5. GENERAL PROVISIONS

Unless specific provision to the contrary in this Agreement, the following provisions apply.

5.1 Force Majeure

Neither party can be considered in default under this contract if the performance of its obligations in whole or in part is delayed or prevented by following a force majeure situation. Force majeure is an external event, unforeseeable, irresistible and it absolutely impossible to fulfill an obligation.

5.2 Severability

The possible illegality or invalidity of an article, a paragraph or provision (or part of an article, a paragraph or provision) does not in any way affect the legality of other items, paragraphs or provisions of this contract, nor the rest of this article, this paragraph or provision unless a contrary intention is evident in the text.


5.3 Notices

Any notice to a party is deemed to have been validly given if in writing and sent by registered or certified mail, by bailiff or by courier to such party at the address listed at the beginning of this contract or any other address that the party may indicate a similar notice to another party. A copy of any notice sent by mail must be sent by one mode of delivery mentioned above.

5.4 Titles

The headings used in this contract are only for reference and convenience only. They do not affect the meaning or scope of the provisions they designate.

5.5 No Waiver

The inertia, neglect or delay by any party to exercise any right or remedy under this Agreement shall in no way be construed as a waiver of such right or remedy.

5.6 Rights cumulative and not alternative

All the rights mentioned in this Agreement are cumulative and not alternative. The waiver of a right should not be construed as a waiver of any other right.

5.7 Totality and entire agreement

This contract represents the full and entire agreement between the parties. No statement, representation, promise or condition not contained in this agreement can and should be allowed to contradict, modify or affect in any manner whatsoever the terms thereof.

5.8 Contract Amendment

This contract may be amended only by a writing signed by all parties.

5.9 Gender and Number

All words and terms used in this agreement shall be interpreted as including the masculine and feminine and singular and plural as the context or meaning of this contract.

5.10 Assignable

Neither party may assign or otherwise transfer to any third party or of his rights in this contract without the prior written permission of the other party to that effect.


5.11 Computation of time

In computing any period fixed by the contract:

a) the day that marks the starting point is not counted, but the terminal is;

b) non-juridical days (Saturdays, Sundays and holidays) are counted;

c) when the last day is not legal, the deadline is extended to the next juridical day.

5.12 Currencies

All sums of money under this contract refer to US Dollars.

5.13 Applicable Laws

This contract is subject to the laws of the People’s Republic of China.

5.14 Election of domicile

The parties agree to elect domicile in the judicial district of Wuhan P.R.China , and chose it as the appropriate district to hear any claim arising from the interpretation, application, and performance, the entry into force, validity and effect of this contract.

5.15 Copies

When initialed and signed by all parties, each copy of this contract shall be deemed an original, but these examples do not reflect all one and the same agreement.

5.16 Scope of Contract

This contract binds the parties and their successors, heirs and assigns, respectively.

5.17 Solidarity

If a party consists of two or more persons, they are forced and severally liable to the other party.

5.18 Time is of Essence

If a party must fulfill an obligation under this contract within a specified time, the passage of time will effectively be part of this notice.


6. EFFECTIVE DATE OF CONTRACT

This Agreement shall enter into force Dec 1 st , 2009

SIGNED BY THREE (3) copies,

IN THE CITY OF WUHAN, HUBEI PROVINCE,

DATED Dec 1 st , 2009

Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd

/s/ Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd

LI HANYING

/s/ LI HANYING

Exhibit 10.9

Employment Contract – Bihong Zhang

BETWEEN:  Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd., a company legally incorporated under the laws of People’s Republic of China, having a mailing address at Room 1518, Xinhongji Garden, 6# Qiuchang Street, in the city and district of Jiangan District, Wuhan, acting and represented herein by Mrs. LI Hanying, chairman of the board, declaring duly authorized, (hereinafter called the “FENGXIN”)

AND:  Mr. ZHANG Bihong, residing at Room 802, Building 17, Luyuannan Avenue No.3, Tongzhou District, Beijing (hereinafter called the “ZHANG Bihong”)

(FENGXIN and ZHANG Bihong hereinafter collectively called “Parties”)

1. PREAMBLE

The preamble is an integral part of this contract.

WHEREAS FENGXIN requires the services of ZHANG Bihong as Chief Financial Officer ( CFO );

WHEREAS, ZHANG Bihong agreed to provide FENGXIN his full-time services as CFO;

WHEREAS the parties wish to confirm their agreement in writing;

WHEREAS the parties have the capacity and quality of exercise all the rights necessary for the conclusion and implementation of the agreement found in this contract;

THEREFORE THE FOREGOING, THE PARTIES AGREE AS FOLLOWS:

2. PURPOSE

2.1 Services

ZHANG Bihong agrees to assume full-time for FENGXIN (minimum of forty (40) hours per week) the role of CFO during the entire duration of the contract;

2.2 Term

This contract is for an initial term of 36 months, renewable for an additional period of 24 months unless either party terminates it in writing at least three (3) months before the expiration of the initial term;


3. CONSIDERATION

3.1 Service Awards

In consideration of the provision of services, FENGXIN to pay ZHANG Bihong, as compensation;

The gross amount of US 87,800.00 dollars annually is constituted by a basis compensation of US 40,800.00 dollars and a conditional Year-end awards that no more than US 47,000.00 dollars.

The basis compensation is calculated at the rate of twelve (12) equal monthly installments consecutively of US 3,400.00 dollars each, less withholding taxes applicable.

The Year-end award shall only be paid under the condition of 3.3.3

3.2 Expenditure incurred

FENGXIN will reimburse ZHANG Bihong all reasonable expenses incurred in connection with this Agreement, upon presentation of appropriate documentation;

3.3 Terms and conditions of payment

3.3.1 The price payable by FENGXIN to ZHANG Bihong is as follows:

3.3.2 The sum of US 3,400.00 dollars on the 6th of each month from Dec 1 st , 2009.

3.3.3 The sum of Year-end award shall be paid on the Dec 31, 2010, Dec 31, 2011 and Dec 31, 2012 only under the condition that FENGXIN’s annual profit reach or over 150% of its last year’s annual profit. And the data of each FENGXIN’s annual profit shall in accordance with audit report issued at the end of corresponding year.

3.3.4 Expenses will be reimbursed on presentation of an expense account on the 24th of each month.

4. SPECIAL PROVISIONS

4.1 Obligations of FENGXIN

FENGXIN agrees and undertakes to ZHANG Bihong as follows:

FENGXIN to bring ZHANG Bihong collaboration and will provide information necessary to ensure the full and faithful discharge of services to be rendered;

4.2 Obligation to ZHANG BIHONG

ZHANG Bihong agrees and undertakes to FENGXIN to the following:

The services must be made full time in a professional manner, according to the rules generally accepted by industry.


4.3 Commitment to confidentiality and nondisclosure

ZHANG Bihong recognizes that certain disclosures to be provided by FENGXIN have or may have considerable strategic importance, and therefore represent trade secrets for purposes of this contract. During the term of this Contract and for a period of 36 months following the end of it, ZHANG Bihong is committed to FENGXIN to:

a) keep confidential and not disclose the information;

b) take and implement all appropriate measures to protect the confidentiality of the information;

c) not disclose, transmit, exploit or otherwise use for its own account or for others, elements of information;

4.4 Exclusivity of service provider

During the term of this Contract and for a period of 24 months following the end of it, ZHANG Bihong is committed to FENGXIN not render services to or for direct or indirect competitors of FENGXIN.

4.5 Responsibilities

 

4.5.1 Maintain executive responsibility for financial operations, including working capital, capital expenditures, debt levels, taxes, budget, and general accounting.

 

4.5.2 Develop and direct financial plans to the strategic business plan, company growth, and market opportunities and direction.

 

4.5.3 Establish and maintain stable cash flow management policies and procedures, and ensure cash resources are available for daily operations and business and product development.

 

4.5.4 Set-up and/or oversee all financial and operational controls and metrics within the organization.

 

4.5.4 Analyze current and future business operations and plans to determine financial effectiveness.

 

4.5.5 Manage outside lending and equity relationships, as well as relations with investors and shareholders within the investment community.

 

4.5.6 Prepare and file federal, state, third-party, and other financial reports to ensure compliance with GAAP, SEC, and IRS and other taxing entity requirements.


4.5.7 Establish the performance goals, allocate resources, and assess policies for employees, through other managers.

4.6 Relationship between the parties

Neither party may bind the other in any way whatsoever to anyone, except in accordance with the provisions of this contract.

4.7 Representations and Warranties ZHANG Bihong

ZHANG Bihong represents and warrants to FENGXIN that:

a) he has the capacity required to undertake under this contract, such capacity was not limited by any commitment to another person;

b) he has the expertise and experience required to execute and complete the its obligations under this contract;

c) he will make services efficient and professional manner, according to the rules generally accepted by industry;

4.8 Termination of Contract

Either party may terminate this contract at any time, upon presentation of a 60 days notice given to the other party. Amounts due and options purchases of shares will be delivered when calculated on a pro-rata to the time elapsed since the last payment or the last delivery of stock options.

5. GENERAL PROVISIONS

Unless specific provision to the contrary in this Agreement, the following provisions apply.

5.1 Force Majeure

Neither party can be considered in default under this contract if the performance of its obligations in whole or in part is delayed or prevented by following a force majeure situation. Force majeure is an external event, unforeseeable, irresistible and it absolutely impossible to fulfill an obligation.

5.2 Severability

The possible illegality or invalidity of an article, a paragraph or provision (or part of an article, a paragraph or provision) does not in any way affect the legality of other items, paragraphs or provisions of this contract, nor the rest of this article, this paragraph or provision unless a contrary intention is evident in the text.


5.3 Notices

Any notice to a party is deemed to have been validly given if in writing and sent by registered or certified mail, by bailiff or by courier to such party at the address listed at the beginning of this contract or any other address that the party may indicate a similar notice to another party. A copy of any notice sent by mail must be sent by one mode of delivery mentioned above.

5.4 Titles

The headings used in this contract are only for reference and convenience only. They do not affect the meaning or scope of the provisions they designate.

5.5 No Waiver

The inertia, neglect or delay by any party to exercise any right or remedy under this Agreement shall in no way be construed as a waiver of such right or remedy.

5.6 Rights cumulative and not alternative

All the rights mentioned in this Agreement are cumulative and not alternative. The waiver of a right should not be construed as a waiver of any other right.

5.7 Totality and entire agreement

This contract represents the full and entire agreement between the parties. No statement, representation, promise or condition not contained in this agreement can and should be allowed to contradict, modify or affect in any manner whatsoever the terms thereof.

5.8 Contract Amendment

This contract may be amended only by a writing signed by all parties.

5.9 Gender and Number

All words and terms used in this agreement shall be interpreted as including the masculine and feminine and singular and plural as the context or meaning of this contract.

5.10 Assignable

Neither party may assign or otherwise transfer to any third party or of his rights in this contract without the prior written permission of the other party to that effect.


5.11 Computation of time

In computing any period fixed by the contract:

a) the day that marks the starting point is not counted, but the terminal is;

b) non-juridical days (Saturdays, Sundays and holidays) are counted;

c) when the last day is not legal, the deadline is extended to the next juridical day.

5.12 Currencies

All sums of money under this contract refer to Chinese currency.

5.13 Applicable Laws

This contract is subject to the laws of the People’s Republic of China.

5.14 Election of domicile

The parties agree to elect domicile in the judicial district of Wuhan,China , and chose it as the appropriate district to hear any claim arising from the interpretation, application, performance, the entry into force, validity and effect of this contract.

5.15 Copies

When initialed and signed by all parties, each copy of this contract shall be deemed an original, but these examples do not reflect all one and the same agreement.

5.16 Scope of Contract

This contract binds the parties and their successors, heirs and assigns, respectively.

5.17 Solidarity

If a party consists of two or more persons, they are forced and severally liable to the other party.

5.18 Time is of Essence

If a party must fulfill an obligation under this contract within a specified time, the passage of time will effectively be part of this notice.


6. EFFECTIVE DATE OF CONTRACT

This Agreement shall enter into force Dec 1 st , 2009.

SIGNED BY THREE (3) copies,

IN THE CITY OF WUHAN, HUBEI PROVINCE,

DATED: Dec 1 st , 2009.

Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd

/s/ Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd

ZHANG Bihong

/s/ ZHANG Bihong

Exhibit 10.10

Make Good Escrow Agreement

THIS MAKE GOOD ESCROW AGREEMENT  (the “Make Good Agreement”), dated effective as of             , 2010, is entered into by and among Tianli Agritech, Inc., a British Virgin Islands corporation (the “Company”); Anderson & Strudwick, Inc. (“A&S”); Ms. Hanying Li and Mr. Bihong Zhang, in their individual capacities (collectively the “Make Good Pledgors” and each individually a “Make Good Pledgor”); and SunTrust Bank, N.A., as escrow agent (“Escrow Agent”).

WHEREAS , A&S has agreed, pursuant to the terms of that Placement Agreement dated as of the date hereof (the “Placement Agreement”), to engage in a “best efforts, minimum/maximum” initial public offering of common shares (the “Offering”) of the Company. As an inducement to A&S to assist with the Offering and as set forth in the Placement Agreement, each Make Good Pledgor has agreed to place certain shares of the Company’s common shares, par value $0.001 per share (the “Shares”) into escrow for the benefit of the Company and investors in the Offering in the event the Company fails to satisfy certain After-Tax Net Income thresholds; provided, however, that the Shares will be returned to the Make Good Pledgors if the Shares (i) meet the definition of covered securities under the Securities Act of 1933 and (ii) have a closing price of at least 2.5 times the Offering price for five trading days in any ten trading day period.

WHEREAS , pursuant to the requirements of the Placement Agreement, the Company and Make Good Pledgors have agreed to establish an escrow on the terms and conditions set forth in this Make Good Agreement;

WHEREAS , the Escrow Agent has agreed to act as escrow agent pursuant to the terms and conditions of this Make Good Agreement; and

WHEREAS , all capitalized terms used but not defined herein shall have the meanings assigned them in the Placement Agreement;

NOW, THEREFORE , in consideration of the mutual promises of the parties and the terms and conditions hereof, the parties hereby agree as follows:

1. Appointment of Escrow Agent.  The Make Good Pledgors and the Company hereby appoint Escrow Agent to act in accordance with the terms and conditions set forth in this Make Good Agreement, and Escrow Agent hereby accepts such appointment and agrees to act in accordance with such terms and conditions.

2. Establishment of Escrow.  Prior to the request of effectiveness for the Offering, the Make Good Pledgors shall deliver, or cause to be delivered, to the Escrow Agent certificates evidencing an aggregate of 1,000,000 Shares (the “Escrow Shares”), along with bank signature stamped stock powers executed in blank (or such other signed instrument of transfer acceptable to the Company’s Transfer Agent). The Escrow Shares shall be pledged to secure the Company’s commitment to achieve the 2010 Target EPS (as defined below); provided, however, that the Escrow Shares will be returned to the Make Good Pledgors in accordance with Section 4(c) hereof in the event the Company meets the requirements of that section. As used in this Make Good Agreement, “Transfer Agent” means ComputerShare Trust Company, N.A., or such other entity hereafter retained by the Company as its stock transfer agent as specified in a writing from the Company to the Escrow Agent and A&S.

3. Representations of Make Good Pledgors.  Each Make Good Pledgor hereby represents and warrants to A&S as follows:

a. All of the Escrow Shares are validly issued, fully paid and nonassessable shares of the Company, and free and clear of all pledges, liens and encumbrances.

b. Performance of this Make Good Agreement and compliance with the provisions hereof will not violate any provision of any applicable law and will not conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon, any of the properties or assets of any Make Good Pledgor pursuant to the terms of any indenture, mortgage, deed of trust or other agreement or instrument binding upon such Make Good Pledgor, other than such breaches, defaults or liens which would not have a material adverse effect taken as a whole.


4. Disbursement of Escrow Shares.

a. Each Make Good Pledgor agrees that, upon the filing of the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2010 with the Commission (the “2010 Annual Report”), the Escrow Shares will be transferred to the Company and/or returned to each Make Good Pledgor, in order to cause the Company to achieve, to the extent possible, After-Tax Net Earnings Per Share for the fiscal year ending December 31, 2010 of at least $0.7407 per Share (the “2010 Target EPS”):

1. If the Company’s 2010 After-Tax Net Income divided by all issued and outstanding Shares (including the Escrow Shares) is at least equal to the 2010 Target EPS, then all Escrow Shares will be returned to the respective Make Good Pledgors. In such case, A&S shall provide written instruction (with a copy to the Company) and direct the Escrow Agent to return all such Escrow Shares to the respective Make Good Pledgors.

2. If the Company’s 2010 After-Tax Net Income divided by all issued and outstanding Shares (including the Escrow Shares) is less than the 2010 Target EPS, then A&S shall provide written instruction (with a copy to the Company) and direct the Escrow Agent (a) to return to the Make Good Pledgors (on a pro rata basis to each Make Good Pledgor) the number of Escrow Shares equal to:

Company’s 2010 After-Tax Net Income/2010 Target EPS) – all issued Shares other than Escrow Shares

and (b) to instruct the Transfer Agent to transfer to the Company (on a pro rata basis from each Make Good Pledgor) for no additional consideration a number of Make Good Shares that is equal to:

Escrow Shares – Escrow Shares returned to Make Good Pledgors

In the event the formulas set forth in Section 4(a)(2) would result in a fractional number of Escrow Shares being returned to any Make Good Pledgor, such fractional number shall be disregarded. In no event shall the failure by the Company to achieve the 2010 Target EPS result in the delivery by the Make Good Pledgors to the Company of a number of shares that is in excess of the number of Escrow Shares pledged hereunder. Subject to the timing of the Transfer Agent, transfers required under this Section shall be made to the Company within 30 Business Days after the date which the 2010 Annual Report is filed with the Commission, provided that Escrow Agent is given notice of the 2010 Annual Report’s filing and results. If the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2010 specify that the 2010 Target EPS shall have been achieved, no transfer of the Escrow Shares to the Company shall be required by this Section and A&S shall provide written instruction (with a copy to the Company) to the Escrow Agent to return all Escrow Shares deposited with the Escrow Agent to the Make Good Pledgors within 30 Business Days after the date which the 2010 Annual Report is filed with the Commission, provided that Escrow Agent is given notice of the 2010 Annual Report’s filing and results. The Escrow Agent need only rely on the letter of instruction from A&S in this regard and will disregard any contrary instructions. The Escrow Agent shall be entitled to rely on the calculations provided by A&S in releasing the Escrow Shares for disbursement, with no further responsibility to calculate or confirm amounts.

b. Notwithstanding anything to the contrary contained herein, in the event that the release of any of the Escrow Shares to the Company or the Make Good Pledgors or any other party is deemed to be an expense or deduction from revenues/income of the Company for the applicable year, as required under GAAP, then such expense or deduction shall be excluded for purposes of determining whether or not the 2010 Target EPS has been achieved by the Company. The parties further acknowledge that the Company will account for (i) any employee stock options granted under its stock incentive plan by expensing the value of such options as they become vested, beginning one year after the initial grant and (ii) any placement agent’s warrants granted in the Company’s initial public offering of common shares by netting the value of such warrants against offering proceeds.

c. Notwithstanding anything to the contrary contained herein, the Escrow Shares shall be returned to the Make Good Pledgors without regard to the 2010 Target EPS in the event (i) the closing price of the Shares is equal to at least 2.5 times the Offering price for five trading days in any ten trading day period and (ii) the Shares are, at such time, covered securities, as such term is defined in the Securities Act of 1933.

 

2


5. Duration.  This Make Good Agreement shall terminate upon the distribution of all the Escrow Shares in accordance with the terms of this Make Good Agreement. The Company agrees to promptly provide the Escrow Agent written notice of the filing with the Commission of any financial statements or reports referenced herein.

6. Escrow Shares.  If any Escrow Shares are deliverable to the Company in accordance with this Make Good Agreement, (i) each Make Good Pledgor covenants and agrees to execute all such instruments of transfer (including stock powers and assignment documents) as are customarily executed to evidence and consummate the transfer of the Escrow Shares from Make Good Pledgor to the Company, to the extent not done so in accordance with Section 2, and (ii) following its receipt of the documents referenced in Section 6(i), the Company and Escrow Agent covenant and agree to cooperate with the Transfer Agent so that the Transfer Agent promptly transfers such Escrow Shares to the Company. Until such time as (if at all) the Escrow Shares are required to be delivered in accordance with this Make Good Agreement, any dividends payable in respect of the Escrow Shares and all voting rights applicable to the Escrow Shares shall be retained by each Make Good Pledgor. Should the Escrow Agent receive dividends or voting materials, such items shall not be held by the Escrow Agent, but shall be passed immediately on to the Make Good Pledgor and shall not be invested or held for any time longer than is needed to effectively re-route such items to the Make Good Pledgor. If the Escrow Agent receives a communication requiring the conversion of the Escrow Shares to cash or the exchange of the Escrow Shares for that of an acquiring company, the Escrow Agent shall solicit and follow the written instructions of each Make Good Pledgor; provided that the cash or exchanged shares are instructed to be redeposited into the Escrow Account. Each Make Good Pledgor shall be responsible for all taxes resulting from any such conversion or exchange.

7. Interpleader.  Should any controversy arise among the parties hereto with respect to this Make Good Agreement or with respect to the right to receive the Escrow Shares, Escrow Agent and/or A&S shall have the right to consult and hire counsel and/or to institute an appropriate interpleader action to determine the rights of the parties. Escrow Agent and/or A&S are also each hereby authorized to institute an appropriate interpleader action upon receipt of a written letter of direction executed by the parties so directing either Escrow Agent or A&S. If Escrow Agent or A&S is directed to institute an appropriate interpleader action, it shall institute such action not prior to thirty (30) days after receipt of such letter of direction and not later than sixty (60) days after such date. Any interpleader action instituted in accordance with this Section 7 shall be filed in any court of competent jurisdiction in the Commonwealth of Virginia, and the Escrow Shares in dispute shall be deposited with the court and in such event Escrow Agent and A&S shall be relieved of and discharged from any and all obligations and liabilities under and pursuant to this Make Good Agreement with respect to the Escrow Shares and any other obligations hereunder.

8. Exculpation and Indemnification of Escrow Agent and A&S.

a. Escrow Agent is not a party to, and is not bound by or charged with notice of any agreement out of which this escrow may arise. Escrow Agent acts under this Make Good Agreement as a depositary only and is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the subject matter of the escrow, or any part thereof, or for the form or execution of any notice given by any other party hereunder, or for the identity or authority of any person executing any such notice. Escrow Agent will have no duties or responsibilities other than those expressly set forth herein. Escrow Agent will be under no liability to anyone by reason of any failure on the part of any party hereto (other than Escrow Agent) or any maker, endorser or other signatory of any document to perform such person’s or entity’s obligations hereunder or under any such document. Except for this Make Good Agreement and instructions to Escrow Agent pursuant to the terms of this Make Good Agreement, Escrow Agent will not be obligated to recognize any agreement between or among any or all of the persons or entities referred to herein, notwithstanding its knowledge thereof. A&S’s sole obligation under this Make Good Agreement is to provide written instruction to Escrow Agent (following such time as the Company files certain periodic financial reports as specified in Section 4 hereof) directing the distribution of the Escrow Shares. A&S will provide such written instructions upon review of the relevant After-Tax Net Earnings Per Share amount reported in such periodic financial reports as specified in Section 4 hereof. A&S is not charged with any obligation to conduct any investigation into the financial reports or make any other investigation related thereto. In the event of any actual or alleged mistake or fraud of the Company, its auditors or any other person (other than A&S) in connection with such financial reports of the Company, A&S shall have no obligation or liability to any party hereunder.

 

3


b. Escrow Agent will not be liable for any action taken or omitted by it, or any action suffered by it to be taken or omitted, absent gross negligence or willful misconduct. Escrow Agent may rely conclusively on, and will be protected in acting upon, any order, notice, demand, certificate, or opinion or advice of counsel (including counsel chosen by Escrow Agent), statement, instrument, report or other paper or document (not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and acceptability of any information therein contained) which is reasonably believed by Escrow Agent to be genuine and to be signed or presented by the proper person or persons. The duties and responsibilities of the Escrow Agent hereunder shall be determined solely by the express provisions of this Make Good Agreement and no other or further duties or responsibilities shall be implied, including, but not limited to, any obligation under or imposed by any laws of the Commonwealth of Virginia upon fiduciaries. THE ESCROW AGENT SHALL NOT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY (I) DAMAGES, LOSSES OR EXPENSES ARISING OUT OF THE SERVICES PROVIDED HEREUNDER, OTHER THAN DAMAGES, LOSSES OR EXPENSES WHICH HAVE BEEN FINALLY ADJUDICATED TO HAVE DIRECTLY RESULTED FROM THE ESCROW AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR (II) SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSSES OF ANY KIND WHATSOEVER (INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF THE ESCROW AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES AND REGARDLESS OF THE FORM OF ACTION.

c. The Company and each Make Good Pledgor each hereby, jointly and severally, indemnify and hold harmless each of Escrow Agent, A&S and any of their principals, partners, agents, employees and affiliates from and against any expenses, including reasonable attorneys’ fees and disbursements, damages or losses suffered by Escrow Agent or A&S in connection with any claim or demand, which, in any way, directly or indirectly, arises out of or relates to this Make Good Agreement or the services of Escrow Agent or A&S hereunder; except, that if Escrow Agent or A&S is guilty of willful misconduct or gross negligence under this Make Good Agreement, then Escrow Agent or A&S, as the case may be, will bear all losses, damages and expenses arising as a result of its own willful misconduct or gross negligence. Promptly after the receipt by Escrow Agent or A&S of notice of any such demand or claim or the commencement of any action, suit or proceeding relating to such demand or claim, Escrow Agent or A&S, as the case may be, will notify the other parties hereto in writing. For the purposes hereof, the terms “expense” and “loss” will include all amounts paid or payable to satisfy any such claim or demand, or in settlement of any such claim, demand, action, suit or proceeding settled with the express written consent of the parties hereto, and all costs and expenses, including, but not limited to, reasonable attorneys’ fees and disbursements, paid or incurred in investigating or defending against any such claim, demand, action, suit or proceeding. The provisions of this Section 8 shall survive the termination of this Make Good Agreement, and the resignation or removal of the Escrow Agent.

9. Compensation of Escrow Agent.  Escrow Agent shall be entitled to compensation of $1,500 in the aggregate for its services under this Agreement, which compensation shall be paid by the Company. The fee agreed upon for the services rendered hereunder is intended as full compensation for Escrow Agent’s services as contemplated by this Make Good Agreement;  provided however , that in the event that Escrow Agent renders any material service not contemplated in this Make Good Agreement, or there is any assignment of interest in the subject matter of this Make Good Agreement, or any material modification hereof, or if any material controversy arises hereunder, or Escrow Agent is made a party to any litigation pertaining to this Make Good Agreement, or the subject matter hereof, then Escrow Agent shall be reasonably compensated by the Company for such extraordinary services and reimbursed for all costs and expenses, including reasonable attorney’s fees, occasioned by any delay, controversy, litigation or event, and the same shall be recoverable from the Company. Prior to incurring any costs and/or expenses in connection with the foregoing sentence, Escrow Agent shall be required to provide written notice to the Company of such costs and/or expenses and the relevancy thereof and Escrow Agent shall not be permitted to incur any such costs and/or expenses which are not related to litigation prior to receiving written approval from the Company, which approval shall not be unreasonably withheld.

10. Resignation of Escrow Agent.  At any time, upon ten (10) days’ written notice to the Company, Escrow Agent may resign and be discharged from its duties as Escrow Agent hereunder. As soon as practicable after its

 

4


resignation, Escrow Agent will promptly turn over to a successor escrow agent appointed by A&S the Escrow Shares held hereunder upon presentation of a document appointing the new escrow agent and evidencing its acceptance thereof. If, by the end of the 10-day period following the giving of notice of resignation by Escrow Agent, A&S shall have failed to appoint a successor escrow agent, Escrow Agent may interplead the Escrow Shares into the registry of any court having jurisdiction.

11. Records.  Escrow Agent shall maintain accurate records of all transactions hereunder. Promptly after the termination of this Make Good Agreement or as may reasonably be requested by the parties hereto from time to time before such termination, Escrow Agent shall provide the parties hereto, as the case may be, with a complete copy of such records, certified by Escrow Agent to be a complete and accurate account of all such transactions. The authorized representatives of each of the parties hereto shall have access to such books and records at all reasonable times during normal business hours upon reasonable notice to Escrow Agent and at the requesting party’s expense.

12. Notice.  All notices, communications and instructions required or desired to be given under this Make Good Agreement must be in writing and shall be deemed to be duly given if sent by registered or certified mail, return receipt requested, or overnight courier, to the addresses listed on the signature pages hereto.

13. Execution in Counterparts.  This Make Good Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

14. Assignment and Modification.  This Make Good Agreement and the rights and obligations hereunder of any of the parties hereto may not be assigned without the prior written consent of the other parties hereto. Subject to the foregoing, this Make Good Agreement will be binding upon and inure to the benefit of each of the parties hereto and their respective successors and permitted assigns. No other person will acquire or have any rights under, or by virtue of, this Make Good Agreement. No portion of the Escrow Shares shall be subject to interference or control by any creditor of any party hereto, or be subject to being taken or reached by any legal or equitable process in satisfaction of any debt or other liability of any such party hereto prior to the disbursement thereof to such party hereto in accordance with the provisions of this Make Good Agreement. This Make Good Agreement may be amended or modified only in writing signed by all of the parties hereto.

15. Applicable Law.  This Make Good Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia without giving effect to the principles of conflicts of laws thereof.

16. Headings.  The headings contained in this Make Good Agreement are for convenience of reference only and shall not affect the construction of this Make Good Agreement.

17. Attorneys’ Fees.  If any action at law or in equity, including an action for declaratory relief, is brought to enforce or interpret the provisions of this Make Good Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees from the other party (unless such other party is the Escrow Agent), which fees may be set by the court in the trial of such action or may be enforced in a separate action brought for that purpose, and which fees shall be in addition to any other relief that may be awarded.

18. Merger or Consolidation.  Any corporation or association into which the Escrow Agent may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer all or substantially all of its corporate trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which the Escrow Agent is a party, shall be and become the successor escrow agent under this Make Good Agreement and shall have and succeed to the rights, powers, duties, immunities and privileges as its predecessor, without the execution or filing of any instrument or paper or the performance of any further act.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

5


IN WITNESS WHEREOF , the parties have duly executed this Make Good Agreement as of the date set forth opposite their respective names.

 

COMPANY:
Tianli Agritech, Inc.
By:  

 

Name:   Hanying Li
Title:   CEO
MAKE GOOD PLEDGORS:

 

Hanying Li

 

Bihong Zhang
A&S:
Anderson & Strudwick, Incorporated
By:  

 

Name:   L. McCarthy Downs III
Its:   Senior Vice President
ESCROW AGENT:
SunTrust Bank, N.A.
By:  

 

Name:  

 

Its:   Trust Officer, Escrow Services

 

6

Exhibit 10.11

Land Lease Contract - Zhulin

Contractee: Wuhan Huangpi District Yaoji Town Zhulin Villager’s Committee

Legal Representative: Chen Lidian

Contractor: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Legal Representative: Li Hanying

Contractee collectively agreed and with approval by the town government willing to contract the village reservoir and surrounding part of the dry-land to the contractor for construction of hoggery. Contractee and Contractor have signed the contract and agreed on the terms and conditions stipulated below:

 

1. Contacting Land: Huangpi District Yaoji Town Zhulin Village XIWA hill, DAWA hill, HUANGTUWA hill, LIZI hill, DAYAN hill and surrounding dry-land, tea garden, Caijiawan reservoir.

 

2. Contracting Area: The total construction area is about 411 Mu, which includes: 277.1 Mu of barren hill, 23.5 Mu of pool, 20.27 Mu of first-class dry-land, 21.6 Mu of tea garden and 70.2 Mu of reservoir. The accurate area shall base on the confirmation by administrative department of town government.

 

3. Contracting Price (the price is calculating with Renminbi):

22168.00 Yuan per year for barren hill;

3894.00 Yuan per year for first-class dry-land;

1880.00 Yuan per year for pool

Which price will increase 10% every five years.

 

4.

Term of contract is 50 years. Starting on Feb 1st 2008 and expired on Jan 31 st , 2058.

 

5. After the contracting land was delivered to the Contractor, the Contractee shall not interfere with the Contractor with his construction, operation and management pursuant to this contract. The Contractor shall not engage in stone or mineral sand mining, real estate development. The Contractor can only be engaged in farming the land, cultivation as well as industry-related development in this contract. In case the contractor willing to engage in other projects must be permitted by law and with the written consent of the Contractee.

 

6. The Zhulin Village Caijiawan reservoir can be used by the contractor for his construction and live use water with a total water fee of RMB 10000.00 Yuan per year. The Contractor has the right to use the reservoir by his own arrangement. Besides that, the Contractee shall bear the responsibility for reservoir’s maintenance and management for impurity removal and maintenance of flood control. Contractee provide to Contractor with all existing water sources free of charge but its drainage pumping costs shall be borne by the Contractor. Contractor shall solve his farms and sewage drainage issues. Contractor can choose the framework of solution is to open channel or pipe discharge and bear the cost himself with convenient conditions provided by the Contractee.

During the term of contract, Contractor shall guarantee the water quality (first-class) and prevent water from pollution. In case that pollution happens, the Contractor shall responsible for sewage processing and bear the costs under the Contractee’s supervise. If a significant environmental pollution caused by the Contractor, the Contractee has right to terminate the contract.

 

7. Within the contract term, neither Contractee nor Contractor can terminate the contract at will, the Contractor can not re-contract to third party or use the contracting land for other project development, otherwise any lost arise shall be borne by the party that breach the contract.

 

8. In the contract period, for the reason of land requisition for state construction, the Contractee and Contractor shall apply for the land compensation together. Which compensation corresponds to any property above the ground shall belong to Contractor; the part related to appreciated land value shall belong to Contractee. The actual land-using units should bear all Cntractor’s loss that caused.


9. Any loss caused by Force Majeure that Contractee shall be free from responsibility.

 

10. Contractee and Contractor shall not terminate or modify the contract at will. For the issues unmentioned in this contract, both parties shall make supplemental provisions in accordance with the measures for lease of state-owned land of Hubei Province, and such provisions shall have the same effect as this contract.

 

11. During the contract term, the Contractee shall be Yaoji Town Zhulin Village Committee for the whole term. All the rights and obligations contained in this contract shall not be affected by any change of personnel in Committee. Contractor shall pay Contractee a corresponding fee of RMB7000.00 per year.

 

12.

Payment Method and Date. Contractor shall pay the rental of RMB 50942.00 Yuan once a year; payment date is February 1 st every year. Under the condition that Contractor fails to pay the rental over 90 days, the Contractee has the right to recover the contracting lands.

 

13. Matters disputed herein due to contract conclusion, validation, performance, alteration and termination, both Contractee and Contractor shall negotiate for settlement, for failure of negotiation, and the dispute shall be submitted to Wuhan Arbitration Committee for arbitration.

 

14. The contract shall be taking effect after signed by both parties and paid the agreed payment

 

15. This contract shall be made in seven copies, two copies for Contractee and two copies for Contractor, other copies for City Bureau of Agriculture, Huangpi District Stockbreeding Center and Huangpi Yaoji Town Government.

Contractee: Wuhan Huangpi District Yaoji Town Zhulin Villager’s Committee

(Seal)

Legal Representative: Chen Lidian

Contractor: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

(Seal)

Legal Representative: Li Hanying

Jan. 21st, 2008

Exhibit 10.12

Land Lease Contract - Fengze

Party A: Huangpi District Luohanshi Street Qigang Villager’s Committee (Lessor)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Lessee)

After mutual consideration, Party A has decided to lease some of its land to Party B that include part of barren hill and surrounding dry-land for breed-farm use. Through full negotiation, Party A and Party B have signed the contract and agreed on the terms and conditions stipulated below so as to ensure the lawful rights and interests of both parties.

1. Location and area of leased land

Party A shall lease to Party B Tiger hill in Qigang village as well as its surrounding area. Which definitely as: XIADA Bay Tiger hill, FANGHU Bay ZUO hill, DAYU Corner YUJIA hill, FANGHU Bay XIAYA North, FANGHU Bay Western of ZUO hill, XIAJIADA Bay AO filed, DIGANG hill and etc.

Total area is 236.6 Mu, which include: 132.6 Mu of barren hill, 21 Mu of pool, 66.65 Mu of dry-land (23.65 Mu for first-class and 43 Mu for second-class), 16.35 Mu of farmland. The accurate area shall base on the confirmation by administrative department of town government.

2. Leasing Price (the price is calculating with Renmingbi):

40.00 Yuan per Mu per year for barren hill;

100.00 Yuan per Mu per year for first-class dry-land and farmland;

60.00 Yuan per Mu per year for second-class dry-land;

40.00 Yuan per Mu per year for pool

3. Payment Method and Date.

Party B shall pay the rental of RMB 12,760.00 Yuan once a year; payment date is May 1 st every year. Under the condition that Contractor fails to pay the rental over 30 days, the Party B shall pay Party A bank debt interest in the same period.

4. Term of contract is 30 years. Start on May 30th, 2005 and expired on May 29th, 2035.

5. After the leasing land was delivered to the Party B, the Party A shall not interfere with Party B with his construction, operation and management pursuant to this contract.

6. Nishui Riverway can be used by the Party B for his construction and live use water. Party A provide to Party B with all existing water sources free of charge, however, its drainage pumping costs shall be


borne by the Party B. Party B shall solve his farms and sewage drainage issues. Party B can choose the framework of solution is to open channel or pipe discharge and bear the cost himself with convenient conditions provided by the Party A.

7. Concerning 110 tombs seat in the leasing area, Party A shall solely responsible for which tomb moving and relocation issues. Party B shall pay Party A a transfer fee of amount of RMB 16,800.00 Yuan. Since Party B obtains the receipt of transfer fee, Party B has no responsibility for the issues herein.

8. Party A shall bear all the cost and compensation rise from residents moving, pool recovering and etc in the leasing area. Party B shall pay Party A a total compensation of RMB 12700.00 Yuan. Since Party B obtains the receipt of transfer fee, Party B has no responsibility for the issues herein.

10. There are total 3213 different kinds of tree in the leasing land, Party B shall bear the compensation fee of RMB 4 per tree for the peasants for the ownership of those trees in return. Since Party B obtains the receipt of transfer fee, Party B has no responsibility for the issues herein.

11. Upon the expiration of land lease, both two parties shall leave 6 months period for renewing negotiation, Party B shall have the priority right of lease in connection with the land. In case that Party B will not renew the lease, Party A can recover the land and obtain all the property in the leasing area in a fixed price agreed by both parties. In this case however, Party A has no right to prevent Party B to remove all the property required from the leasing land.

12. During the lease term, neither Party A nor Party B can terminate the contract at will, the Party B can not re-contract to third party or use the leasing land for other project development, otherwise any lost arise shall be borne by the party that breach the contract. During the lease term, for the reason of land requisition for state construction, the Party A and Party B shall apply for the land compensation together. Which compensation corresponds to any property above the ground shall belong to Party B, the part related to appreciated land value shall belong to Party A. The actual land-using units should bear all Party B’s loss that caused.

13. Any loss caused by Force Majeure that Party A shall be free from responsibility.

14. Party A and Party B shall not terminate or modify the lease at will. For the issues unmentioned in this contract, both parties shall make supplemental provisions in accordance with the measures for lease of state-owned land of Hubei Province, and such provisions shall have the same effect as this contract.

 

2


15. During the lease term, the Party A shall be Luohanshi Street Qigang Villager’s Committee for the whole term. All the rights and obligations contained in this lease shall not be affected by any change of personnel in Committee.

16. Matters disputed herein due to lease conclusion, validation, performance, alteration and termination, both Party A and Party B shall negotiate for settlement, for failure of negotiation, and the dispute shall be submitted to Wuhan Arbitration Committee for arbitration.

17. The lease shall be taking effect after signed by both parties and paid the agreed payment

18. This lease shall be made in seven copies, two copies for Party A and two copies for Party B, other copies for City Bureau of Agriculture, Huangpi District Stockbreeding Center and Huangpi Yaoji Town Government.

Party A: Luohanshi Street Qigang Villager’s Committee

(Seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

(Seal)

Legal Representative: Li Hanying

 

3

Exhibit 10.13

Land Lease Contract - Jinmu

Party A: Caidian District Yuxian Town Qianjin Village Committee (hereinafter referred to as Party A):

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (hereinafter referred to as Party B):

In order to promote the economic development, after Party A and Party B’s negotiation, Party A agrees to lease hilly land which is near Qianjin Primary School to Party B for construction of hoggery with ten thousand pigs, on the basis of mutual benefit and equal consultations, the contract is concluded for the purpose of joint compliance by both parties.

I. Rental Subject Matter and Area

From Qianjin Village new primary school to old primary school 80mu hilly land (including part of cultivated land, see layout plan for the specific scope); construction area of present classroom building of Qianjin Village new primary school is about 700 square meters, construction area of classroom building of old primary school is about 400 square meters.

II. Rental time: lease term of land and house is fifty years; rental time is calculated from the date of signing contract. Rental time of classroom building of new primary school is calculated from the date of Qianjin quarry transfer.

III. Rental Price: Price of land lease is paddy field 9.7mu, 200 Yuan per mu per year; dry land 10.54mu, 90 Yuan per mu per year; wasteland 52.76mu, 70 Yuan per mu per year, total amount of 50 years lease rent shall be calculated by actual measurement after construction; lease price of house is 3000 yuan RMB per year; lease price of old primary school is 1500 yuan RMB per year. Total rents of fifty years are 329090 yuan, previous Jinmu company has already fully paid up.

IV. During rental term of Party B, Party A shall not rent out to others.

V. During rental term, Party B can only be engaged on breeding production, feed processing, if altering use, the Party B shall get permission from Party A, does not make business for continuous three years, the Party A has the right to terminate the contract.

VI. Expiration of contract, the plant building invested and constructed by Party B shall be treated after reasonable negotiation from both parties by national policy. Party A has the right of pre-exemption; Party B has the right of bargain renewed option.

VII. During rental term, if encountered the change, adjustment of village leaders, the contract shall not be changed.

VIII. Party A and Party B’s Rights and Responsibilities

(1) Party A’s Rights and Responsibilities

1. Party A shall be responsible for relevant problems in leasing scope.

2. Party A shall try to establish good infrastructure for Party B, provide tap water connector for daily use for Party B within the scope of 200 meters; take charge of electric connection with power management department; maintain roads from Qianjin Road to Qianjin Primary School; allow Party B to drill well in the scope of lease.

3. Party B’s employment freedom of labour shall be guaranteed, on the same conditions, the Party A’s staff and resources could be prior used.

4. Party A shall be responsible for creating good public security, providing listing protection service of public security for Party B’s lawful operation.

5. Party A shall not allow other units to invest and establish stockbreeding farm within prescribed scope of jurisdiction.

(2) Party B’s Rights and Responsibilities

1. Party B should do legal and law-abiding business within the confines of the existing law and national policy.


2. Party B should pay agreement money on time.

3. During rental term, the Party has all right such as autonomy of production, employment independently and so on.

4. Party B’s production operation shall be in accordance with requirements of environmental protection. Production and living wastewater shall be discharged after achieving standards of treatment.

5. If Party B requires to purchase feed, on the same market price, Party B should give priority to purchase Party A’s agricultural products.

IX. Liability for Breach of Contract

 

1. Both parties shall comply with the above agreement together, if either party who breaches of contract, the default party should pay 10% of subject matter amount by the contract.

 

2. After agreement signature, either party is not allowed to terminate the contract unilaterally. If either party terminated the contract, the default party should compensate the counter party economic losses.

X. Unaccomplished matter in the contract, supplementary contract should be signed between the Party A and the Party B, the supplementary contract has the same legal force with this contract.

XI. This contract is in sextuplicate, the Party A and the Party B each holds two copies, the local government and land administration department of the Party A each holds one copy for filling. The contract shall enter into force from the signing and sealing date by both Parties.

 

Party A (Legal Representative):    Party B (Legal Representative):
Cai Xianping (signature)    Li Hanying (signature)
Wuhan City Caidian District Yuxian Town Qianjin    Wuhan Fengze Agricultural Science and
Village Committee (seal)    Technology Development Co., Ltd. (seal)

Date of Signature: Jan. 18, 2009

Exhibit 10.14

Side Agreement Related to Land Lease Contract - Jinmu

Jan 28 th , 2007

Party A: Wuhan Caidian District Yuxian Town Qianjin Village Committee (Hereinafter refer to as Party A)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Hereinafter referred to as Party B)

Party A is willing to rent the semi-hillside land in front of Qianjin elementary school to Party B for cultivation development. Besides two parties have already entered a Land Tenancy Agreement of Caidian District; concerning the pertinent matters, the following issues are hereby agreed by consensus:

 

1. Party A consents that Party B can build houses for the need of cultivation in the rented land like office, dormitory, duty room, warehouse, job shop, hog house, etc.

 

2. All the construction costs and other relevant charges will be paid by Party B. The property rights and rights to use of all the houses built are exclusively owned by Party B, which Party A has no right to interfere.

 

3. The property rights and operational rights of the trees, fruits and vegetables newly planted by Party B in the land rented shall exclusively be owned by Party B, which Party A has no right to interfere.

 

4. In case that land imposition for government’s policy purpose occurred, all the compensation above ground shall belong to Party B; the value concerning the land itself shall belong to Party A.

 

5. On the expiration of the lease, if Party B no longer rents the land, the constructions above ground should be disposed by Party B and Party A has no right to interfere.

 

6. The two parties voluntarily abide by the above agreements; any party in breach should bear the economical responsibility caused to the other party and the corresponding legal responsibilities.

 

7. This agreement is sealed in duplicate, each party holds one copy. If occurred, any disputes should be resolved by the arbitration authority or the People’s Court on the location where Agreement perform.

Party A: Wuhan Caidian District Yuxian Town Qianjin Village Committee

               Wuhan Caidian District Yuxian Town Qianjin Village Committee (seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (seal)

Exhibit 10.15

Land Lease Contract - Tianjian

Party A: Villagers Committee of Qunyi, Wangjiahe Town, Huangpi District, Wuhan City (hereinafter referred to as “Party A”)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (hereinafter referred to as “Party B”)

In response to the policy of enriching the people and through full negotiation, Party A has decided to lease to Party B the land classified into the “four-wild” land and possessed by Dawan Community, Qunyi Village, Wangjiahe Town for breed-farm use so as to stimulate the economy and benefit local peasant household. Party A and Party B have signed the contract and agreed on the terms and conditions stipulated below.

1. Party A shall lease to Party B the land classified into the “four -wild” land and possessed by Dawan Union with an area of 95 Mu.

2. Term of lease: 30 years, starting on Jan. 1 st , 2009 and expired on Jan 31 st , 2039. Land boundary is defined with boundary markers.

3. Term of payment: rent is RMB 150.00 Yuan/year per Mu. Party B shall pay Party A lease rent amounting to RMB 14,250.00 Yuan every year. Party B shall pay off in one lump sum before Jan. 3 rd every year. Party A shall provide the effective receipt at the time of receiving the payment made by the Party B.

4. During the term of lease, Party A shall be responsible for agricultural tax while other taxes and dues related to the production and operation activities shall be borne by Party B.

5. Party A shall provide Party B with a land to dig a well within a proper area free of charge. Party A shall unconditionally provide convenience for Party B in connection with sewage disposal and power supply. Existing ditches shall be unconditionally provided for the use of Party B. The fee arising from cleaning the ditches shall be borne by Party B. Party A shall be coordinate and look for solutions.

6. Party A shall be responsible for coordinating and looking for solutions in connection with production safety protection.

7. Party A shall promise that there isn’t reconstruction of large-scale feed farm within the range of 1 km from the land of the village.

8. During the contract term, in case that the land is acquired for national construction, the land compensation fees shall be owned by Party A. All the other compensation shall be owned by Party B. Party A shall cease to charge the lease rent from the year (included) when the land is acquired. Accordingly, the contract shall be terminated.


9. Upon the expiration of land lease, Party B shall have the priority right of lease in connection with the land.

10. The two parties shall sign a supplemental agreement for the issues unmentioned in this contract through friend negotiation, and such agreement shall have the same effect as this contract.

11. The contract shall be effective as the date of Jan. 1 st , 2009. This contract shall be made in quadruplicate, one for each party and the other two for relevant department.

Party A: Villagers Committee of Qunyi, Wangjiahe Town, Huangpi District, Wuhan City

Villagers Committee of Qunyi, Wangjiahe Town, Huangpi District, Wuhan City (Seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Seal)

Dec. 30 th , 2008

 

2

Exhibit 10.16

Side Agreement Related to Land Lease Contract – Tianjin

Jan. 8, 2007

Party A: Wuhan Huangpi District Wangjiahe Qunyi Village Committee (Hereinafter refer to as Party A)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Hereinafter referred to as Party B)

Party A is willing to rent the “Four-Wild” land in Wangjihe Town Dawan Union to Party B for cultivation development. Besides two parties have already entered a Land Tenancy Agreement; concerning the pertinent matters, the following issues are hereby agreed by consensus:

 

1. Party A consents that Party B can build houses for the need of cultivation in the rented land like office, dormitory, duty room, warehouse, job shop, hog house, etc.

 

2. All the construction costs and other relevant charges will be paid by Party B. The property rights and rights to use of all the houses built are exclusively owned by Party B, which Party A has no right to interfere.

 

3. The property rights and operational rights of the trees, fruits and vegetables newly planted by Party B in the land rented shall exclusively be owned by Party B, which Party A has no right to interfere.

 

4. In case that land imposition for government’s policy purpose occurred, all the compensation above ground shall belong to Party B; the value concerning the land itself shall belong to Party A.

 

5. On the expiration of the lease, if Party B no longer rents the land, the constructions above ground should be disposed by Party B and Party A has no right to interfere.

 

6. The two parties voluntarily abide by the above agreements; any party in breach should bear the economical responsibility caused to the other party and the corresponding legal responsibilities.

 

7. This agreement is sealed in duplicate, each party holds one copy. If occurred, any disputes should be resolved by the arbitration authority or the People’s Court on the location where Agreement perform.

Party A: Wuhan Huangpi District Wangjiahe Qunyi Village Committee

               Wuhan Huangpi District Wangjiahe Qunyi Village Committee (seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (seal)

Exhibit 10.17

Land Lease Contract - Nanyan

Party A: Villagers Committee of Nanyan, Wangjiahe Town, Huangpi District, Wuhan City (hereinafter referred to as “Party A”)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (hereinafter referred to as “Party B”)

In response to the policy of enriching the people and through full negotiation, Party A has decided to lease to Party B the land classified into the “four types of wasteland” and possessed by Dawan Community, Qunyi Village, Wangjiahe Town for breed-farm use so as to stimulate the economy and benefit local peasant household. Party A and Party B have signed the contract and agreed on the terms and conditions stipulated below.

1. Party A shall lease to Party the land classified into the “four types of wasteland” and possessed by Junchenwan with an area of 86 mu.

2. Term of lease: 25 years, starting on Jan. 1 st , 2007 and expired on Dec. 30 th , 2032. Land boundary is defined with boundary markers.

3. Term of payment: 150.00 yuan/year. mu. Party B shall pay Party A lease rent amounting to 129,000 yuan every year. Party B shall pay off in one lump sum before Jan. 7 th every year. Party A shall issue effective receipt at the time of receiving the payment made by the Party B.

4. During the term of lease, Party A shall be responsible for agricultural tax while other taxes and dues related to the production and operation activities shall be borne by Party B.

5. Party A shall provide Party B with a land to dig a well within a proper area free of charge. Party A shall unconditionally provide convenience for Party B in connection with sewage disposal and power supply. The quality of sewage to be discharged shall be monitored and controlled by the environmental protection department. Party A’s villagers shall not affect the normal production and operation activities of Party B before the sewage is proven up to the standard by the environmental protection department. Existing ditches shall be unconditionally provided for the use of Party B. The fee arising from cleaning the ditches shall be borne by Party B. Party A shall be coordinate and look for solutions.

6. Party A shall be responsible for coordinating and looking for solutions in connection with production safety protection.

7. Party A shall promise that there isn’t reconstruction of large-scale feed farm within the range of 1 km from the land of the village.

8. During the contract term, in case that the land is acquired for national construction, the land compensation fees shall be owned by Party A. All the other compensation shall be owned by Party B. Party A shall cease to charge the lease rent from the year (included) when the land is acquired. Accordingly, the contract shall be terminated.

 

10. Upon the expiration of land lease, Party B shall have the priority right of lease in connection with the land.

11. The two parties shall sign a supplemental agreement for the issues unmentioned in this contract through friend negotiation, and such agreement shall have the same effect as this contract.

12. The contract shall be effective as the date of Jan. 1 st , 2007. This contract shall be made in quadruplicate, one for each party and the other two for relevant department.


Party A: Villagers Committee of Qunyi, Wangjiahe Town, Huangpi District, Wuhan City

Villagers Committee of Qunyi, Wangjiahe Town, Huangpi District, Wuhan City (Seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Seal)

Dec. 30 th , 2006

Exhibit 10.18

Side Agreement Related to Land Lease Contract – Nanyan

Jan. 6th, 2007

Party A: Wuhan Huangpi District Wangjiahe Town Nanyan Villagers Committee (Hereinafter refer to as Party A)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Hereinafter referred to as Party B)

Party A is willing to rent the “Four-Wild” land in Wangjihe Town Dawan Union to Party B for cultivation development. Besides two parties have already entered a Land Tenancy Agreement; concerning the pertinent matters, the following issues are hereby agreed by consensus:

 

1. Party A consents that Party B can build houses for the need of cultivation in the rented land like office, dormitory, duty room, warehouse, job shop, hog house, etc.

 

2. All the construction costs and other relevant charges will be paid by Party B. The property rights and rights to use of all the houses built are exclusively owned by Party B, which Party A has no right to interfere.

 

3. The property rights and operational rights of the trees, fruits and vegetables newly planted by Party B in the land rented shall exclusively be owned by Party B, which Party A has no right to interfere.

 

4. In case that land imposition for government’s policy purpose occurred, all the compensation above ground shall belong to Party B; the value concerning the land itself shall belong to Party A.

 

5. On the expiration of the lease, if Party B no longer rents the land, the constructions above ground should be disposed by Party B and Party A has no right to interfere.

 

6. The two parties voluntarily abide by the above agreements; any party in breach should bear the economical responsibility caused to the other party and the corresponding legal responsibilities.

 

7. This agreement is sealed in duplicate, each party holds one copy. If occurred, any disputes should be resolved by the arbitration authority or the People’s Court on the location where Agreement perform.

Party A: Wuhan Huangpi District Wangjiahe Town Nanyan Villagers Committee

               Wuhan Huangpi District Wangjiahe Town Nanyan Villagers Committee (seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (seal)

Exhibit 10.19

Translation of Land Lease Contract – Mingxiang

Lessor (hereinafter referred to as Party A): Wuhan City Huangpi District Liji Town Rongzhai Village

Lessee (hereinafter referred to as Party B): Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

According to “ Law of the Peoples Republic of China on Land Contract in Rural Areas” and “ Contract Law of the People’s Republic of China” and other relevant laws and regulations, the contract on rental affairs of rural land contracted operation rights is concluded between the Party A and the Party B on the basis of consensus:

I. Rental Area

The Party A will lease the 110 Mu contracted land (place name, four boundaries, land use is attached) which is located at Rongzhai Village (Town) Liji Street to Party B for production operation.

II. Term of rent is 30 years, namely, from Dec. 30, 2006 to Dec. 30, 2036.

III. Rental Price

Total price of rental area is RMB 20000 Yuan RMB per year.

IV. Payment Method and Date

Party B shall adopt the following first method and date to pay rents.

 

1. Party B shall adopt cash payment to pay rentals; payment shall be delivered in December every year.

 

2. Party B shall adopt payment-in-kind to pay rentals; payment date is                             .

V. Delivery Time

Party A shall deliver the land for lease to Party B by Dec. 30, 2006.

VI. Special Agreements on Rights and Responsibilities

 

1. Contract agreement between Party A and the Contractor is still in effect. The responsibilities performed by Party A shall be still undertaken by Party A. But if Party B does not perform the responsibilities in rental contract to Party A which make Party A can not perform, Party B shall undertake joint liability for breach of contract with Party A.

 

2. Party A has right to supervise operating land condition of Party B, and require Party B to perform contract responsibilities by the contract.

 

3. Party A has right to recover land contracted operation rights after the expiration of the lease term.

 

4. Party B has right to require Party A to deliver the land for lease by the contract agreed standards, and require Party A to perform other contractual obligations.

 

5. Party B shall not alter agricultural use of the land for lease.

 

6. Party B has autonomy of production and management of the land for lease on the premise that party B does not alter agricultural use of the land, not disrupt water system, not influence the third party’s production and management and ensure to make second ploughing.

 

7. Party B should manage the land for lease, increase the investment to ensure land fertility, and shall not be engaged in predatory business.


VII. Modification, Rescission of the Contract

 

1. If the nation, collectivity requires to expropriate, use the land for lease for construction in accordance with the law, Party B shall obey the requirements of the nation and collectivity.

 

2. Party B shall transfer parts or entire rights he owned in rental contract to the third Party in rental term with the concurrence of the Party A and the contractor, and sign written supplemental agreement.

 

3. Party A and Party B require termination of the contract, each party shall inform the other party six months in advance.

VIII. Liability for Breach of Contract

 

1. Each party who breaches of contract should pay penalty to the observant party, amount of breach is 30% of rents.

 

2. Owing to one party breaches of contract, and for which caused economy damages, default party should compensate the counter party corresponding losses. The detailed compensation amount is depends upon how much damage occurred.

IX. Disputes Clause

Matters disputed herein due to contract conclusion, validation, performance, alteration and termination, Party A and Party B both parties shall negotiate for settlement. For failure of negotiation, one of the following three methods shall be used.

 

1. Submit to villagers’ committee, sub district office, the people’s governments of the townships and towns, agricultural contract management agency for mediation.

 

2. Submit to Wuhan City arbitration committee for arbitration.

 

3. Bring the suit in People’s Court with jurisdiction.

X. Condition for Effect-Taking

The contract shall be taking effect after signed by both parties.

XI. Other Clauses

1. Unaccomplished matters in the contract should be negotiated with consensus between Party A and Party B before signature, and supplemented in the agreement; the supplemented agreement has the same effectiveness with this contract.

2. This contract is in quadruplication, Party A and Party B each holds one copy, contractor and signed units each hold one copy.

 

Party A:    Party B:
Villager’s Committee of Wuhan City Huangpi    Wuhan Fengze Agricultural Science and
District Liji Town Rongzhai Village (seal)    Technology Development Co., Ltd. (seal)

Date of Signature: Dec. 30, 2006

Exhibit 10.20

Translation of Side Agreement Related to Land Lease Contract – Mingxiang

Jan 10 th , 2007

Party A: Wuhan Huangpi District Liji Town Rongzhai Village Committee (Hereinafter refer to as Party A)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Hereinafter referred to as Party B)

Party A is willing to rent the land of 110 Mu contract rented by Liji Town Rongzhai Village to Party B for cultivation development. Besides two parties have already entered a Land Tenancy Agreement of Huangpi District; concerning the pertinent matters, the following issues are hereby agreed by consensus:

 

1. Party A consents that Party B can build houses for the need of cultivation in the rented land like office, dormitory, duty room, warehouse, job shop, hog house, etc.

 

2. All the construction costs and other relevant charges will be paid by Party B. The property rights and rights to use of all the houses built are exclusively owned by Party B, which Party A has no right to interfere.

 

3. The property rights and operational rights of the trees, fruits and vegetables newly planted by Party B in the land rented shall exclusively be owned by Party B, which Party A has no right to interfere.

 

4. In case that land imposition for government’s policy purpose occurred, all the compensation above ground shall belong to Party B; the value concerning the land itself shall belong to Party A.

 

5. On the expiration of the lease, if Party B no longer rents the land, the constructions above ground should be disposed by Party B and Party A has no right to interfere.

 

6. The two parties voluntarily abide by the above agreements; any party in breach should bear the economical responsibility caused to the other party and the corresponding legal responsibilities.

 

7. This agreement is sealed in duplicate, each party holds one copy. If occurred, any disputes should be resolved by the arbitration authority or the People’s Court on the location where Agreement perform.

Party A: Wuhan Huangpi District Liji Town Rongzhai Village Committee

               Wuhan Huangpi District Liji Town Rongzhai Village Committee (seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (seal)

Exhibit 10.21

Translation of Land Lease Contract – Huajian A & B

Party A: State-operated Hanchuan City Sanxingyuan Original Rice Farm (Lessor)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Lessee)

After mutual consideration, Party A has decided to lease some of its land to Party B. Through full negotiation, Party A and Party B have signed the contract and agreed on the terms and conditions stipulated below so as to ensure the lawful rights and interests of both parties.

1. Location and area of leased land

Party A shall lease to Party B two plots of land located on Sanxingyuan Original Rice Farm for breeding use, with an area of 150 Mu in total.

2. Term of lease: 20 years, starting on Jan. 1 st , 2007 and expired on Dec. 30 th , 2026 (subject to the Gregorian calendar).

3. Party A’s rights and obligations

(1). Party A shall own the property in the leased land. Party A shall have the right to collect lease rent from Party B.

(2). Party A shall provide power supply and water supply for Party B and charge according to the prices specified for agricultural use.

(3). Party A shall have the right to monitor Party B in connection with land use. In case Party B operates, leases, sells or uses the land for other purpose, violating the stipulations set forth in the contract and relevant provisions, Party A shall have the right to terminate the contract and claim against damage.

(4). In case Party B fails to pay lease rent as stipulated in the contract, Party A shall have the right to terminate the contract and claim against liquidated damage.

(5). During the contract term, leased land shall not be resumed without authorization. Party A shall have the right to resume the leased land only on the condition that the resumption is authorized by the People’s Government for the reason of social public interests. If the leased land is resumed in advance, Party A shall inform Party B of the location, scope, reason for resumption and date of resumption in written form and make public announcement. Party A shall make proper compensation to Party B. Compensation standard shall be determined through negotiation according to the value of buildings on the land, other objects fixed to land and residual period of lease. If no agreement is reached, the compensation standard shall be determined by the government that approves the resumption.

4. Party B’s rights and obligations

(1). Party B shall pay lease rent year by year since 2007. The payment shall be made on every Jan. 8 th of each year. Contract rent is RMB100 Yuan/Mu, and RMB 15,000 Yuan in total per year (amount in words: Renmingbi Fifteen Thousand Yuan Only).

(2). Party B shall only engage in the activities stipulated in the contract during contract term. In case of change, Party B shall get approval of farm committee.


(3). In case that Party B requires early termination of the contract, Party B shall inform Party A of the intention of termination 6 months prior to the date of expiration of contract and assume the liability for breach of contract.

(4). Upon the expiration of the contract, if Party B continues to lease the land, Party B shall enjoy the priority right of lease under the same condition.

(5). During the contract term, Party B could only transfer, sublease or pledge the leased land with consent of Party B when necessary.

5. Liability for breach of contract

(1). Party A and Party B shall not terminate the contract at will. Party B shall handle transfer procedure with the consent of Party A in case Party B is unable to continue the operation for special reasons when such transfer is necessary.

(2). If Party B fails to pay lease rent on time, Party B shall be charged a late fee of 10% of each day’s rent per day from the day when the payment is due.

(3). In case that Party B terminates the contract without reasons, Party B shall pay Party A lease rent on time in the contract term and liquidated damages amounting to 20% of total lease rent.

(4). In case that Party A terminates the contract without reasons, Party A shall not only make compensation set forth in the contract to Party B but also pay Party B liquidated damages amounting to 20% of total lease rent.

6. Miscellaneous

(1). During the contract term, any party shall not amend or terminate the contract at will.

(2). For the issues unmentioned in this contract, both parties shall make supplemental provisions in accordance with the Measures for Lease of State-owned Land of Hubei Province, and such provisions shall have the same effect as this contract.

(3). This contract shall be made in triplication, one for each party.

Signature of responsible person of Party A:

Company seal: State-operated Hanchuan City Sanxingyuan Original Rice Farm (Seal)

Signature of responsible person of Party A: Li Hanying

Company seal: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Seal)

Jan. 8 th , 2007

Exhibit 10.22

Translation of Side Agreement Related to Land Lease Contract – Huajian A & B

Jan. 16, 2007

Party A: Wuhan Hanchuan City Sanxingyuan Original Rice Farm (Hereinafter refer to as Party A)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (Hereinafter referred to as Party B)

Party A is willing to rent a land of 150 Mu in its original rice farm to Party B for cultivation development. Besides two parties have already entered a Land Tenancy Agreement; concerning the pertinent matters, the following issues are hereby agreed by consensus:

 

1. Party A consents that Party B can build houses for the need of cultivation in the rented land like office, dormitory, duty room, warehouse, job shop, hog house, etc.

 

2. All the construction costs and other relevant charges will be paid by Party B. The property rights and rights to use of all the houses built are exclusively owned by Party B, which Party A has no right to interfere.

 

3. The property rights and operational rights of the trees, fruits and vegetables newly planted by Party B in the land rented shall exclusively be owned by Party B, which Party A has no right to interfere.

 

4. In case that land imposition for government’s policy purpose occurred, all the compensation above ground shall belong to Party B; the value concerning the land itself shall belong to Party A.

 

5. On the expiration of the lease, if Party B no longer rents the land, the constructions above ground should be disposed by Party B and Party A has no right to interfere.

 

6. The two parties voluntarily abide by the above agreements; any party in breach should bear the economical responsibility caused to the other party and the corresponding legal responsibilities.

 

7. This agreement is sealed in duplicate, each party holds one copy. If occurred, any disputes should be resolved by the arbitration authority or the People’s Court on the location where Agreement perform.

 

Party A:   Wuhan Hanchuan City Sanxingyuan Original Rice Farm
  Wuhan Hanchuan City Sanxingyuan Original Rice Farm (seal)

Party B: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd.

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (seal)

Exhibit 10.23

Translation of Feed Sale Contracts

 

Supplier:    Wuhan Zhu Brothers Feed Technology Co., Ltd.
Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.
   (Farm No. 1-2)

Place of Contract Signing

1. Agreements are made as followings upon the negotiation of both supplier and buyer.

2. Product name, quantity and amount

 

Product Name

  Brand    Product Specification    Quantity    Unit Price    Amount (RMB)

Corn

        1,400,000    2.0    2,800,000

Soybean meal

        420,000    3.8    1,596,000

Bran

        150,000    1.5    225,000

Total

  Say Four Million and Six Hundred Twenty one Thousand Renminbi only

3. The product quality should be in accordance with the company requirements of the buyer.

4. Delivery place: the warehouse of the buyer

5. Delivery date: subject to the time and quantity notified by the buyer

6. Time limit for the disagreement of the product: the buyer should propose disagreement concerning product quantity and quality upon delivery, or it will be viewed as that the product quantity and quality is qualified. Any disagreement concerning product physical and chemical index from the buyer side should be proposed within 7 days, or it will be viewed that the product provided is qualified.

7. Payments and time limitation: payments should be settled within 10 days upon the product arrive in the buyer’s warehouse.

8. Liability for breach of contract: Both of the contracting party should abide by the contract strictly. If the second party delays to pay the first party, liquidated damages shall be applied to the second party. The standard is 1% of the total contract amount each day. At the meantime, if the first party delays product delivery, then liquidated damage of 1% of the total contract amount shall be applied to him.

9. Quality acceptance standard: follow relative national standard; if any quality disagreement, proposals for quality test in national testing institution can be made by either of the two parties.

10. Others: this contract is duplicated and in the possession of both parties and shall be dully effect officially upon the signature and stamp of the representatives of both parties. The fax of this contract is effective.

11. Disputes resolution: any disputes appeared in this contract shall be firstly resolved by friendly negotiation. If failed, then any party shall be entitled to lodge a complaint to people’s court in charge.

 

Supplier:

   Wuhan Zhu Brothers Feed Technology Co., Ltd.    Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.

Address

      Address   

Legal Representative

      Legal Representative   

Entrusted Agent

   Zhu Rui ( Signature )    Entrusted Agent    Li Zili( Signature )
Wuhan Zhu Brothers Feed Technology Co., Ltd .(seal)    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd. (seal)

Dec. 25, 2008


Sales Contract

 

Supplier:    Wuhan Zhu Brothers Feed Technology Co., Ltd.    Dec. 25, 2008
Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.   
   ( Farm No. 3 and 4 )   

1. Agreements are made as followings upon the negotiation of both supplier and buyer.

2. Product name, quantity and amount

 

Product Name

   Brand    Product Specification    Quantity    Unit Price    Amount (RMB)

Corn

   Dong Bei    60 Kg    1,000,000    2.0    2,000,000.00

Soybean meal

   Si Hai    70 Kg    400,000    3.8    1,520,000.00

Bran

   He Nan    60 Kg    90,000    1.5    135,000.00

Total

   Say Three Million Six Hundred and Fifty Five Thousands Renminbi Only

3. The product quality should be in accordance with the company requirements of the buyer.

4. Delivery place: the warehouse of the buyer

5. Delivery date: subject to the time and quantity notified by the buyer

6. Time limit for the disagreement of the product: the buyer should propose disagreement concerning product quantity and quality upon delivery, or it will be viewed as that the product quantity and quality is qualified. Any disagreement concerning product physical and chemical index from the buyer side should be proposed within 7 days, or it will be viewed that the product provided is qualified.

7. Payments and time limitation: payments should be settled within 10 days upon the product arrive in the buyer’s warehouse.

8. Liability for breach of contract: Both of the contracting party should abide by the contract strictly. If the second party delays to pay the first party, liquidated damages shall be applied to the second party. The standard is 1% of the total contract amount each day. At the meantime, if the first party delays product delivery, then liquidated damage of 1% of the total contract amount shall be applied to him.

9. Quality acceptance standard: follow relative national standard; if any quality disagreement, proposals for quality test in national testing institution can be made by either of the two parties.

10. Others: this contract is duplicated and in the possession of both parties and shall be dully effect officially upon the signature and stamp of the representatives of both parties. The fax of this contract is effective.

11. Disputes resolution: any disputes appeared in this contract shall be firstly resolved by friendly negotiation. If failed, then any party shall be entitled to lodge a complaint to people’s court in charge.

 

Supplier:    Wuhan Zhu Brothers Feed Technology Co., Ltd.    Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.
Address       Address   
Legal Representative       Legal Representative   
Entrusted Agent    Zhu Rui ( Signature )    Entrusted Agent    Li Zili( Signature )
Wuhan Zhu Brothers Feed Technology Co., Ltd .(seal)    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd. (seal)


Sales Contract

 

Supplier:    Wuhan Zhu Brothers Feed Technology Co., Ltd.
Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.
   ( Farm No. 5-6 )

1. Agreements are made as followings upon the negotiation of both supplier and buyer.

2. Product name, quantity and amount

 

Product Name

   Brand    Product Specification    Quantity    Unit Price    Amount (RMB)

Corn

         1,900,000    2.0    3,800,000.00

Soybean meal

         550,000    3.8    2,090,000.00

Bran

         360,000    1.5    540,000.00

Whey Powder

         5500    5.0    27,500.00

Total

   Say Six Million and Four Hundred Fifty-Seven Thousand and Five Hundreds Renminbi only

3. The product quality should be in accordance with the company requirements of the buyer.

4. Delivery place: the warehouse of the buyer

5. Delivery date: subject to the time and quantity notified by the buyer

6. Time limit for the disagreement of the product: the buyer should propose disagreement concerning product quantity and quality upon delivery, or it will be viewed as that the product quantity and quality is qualified. Any disagreement concerning product physical and chemical index from the buyer side should be proposed within 7 days, or it will be viewed that the product provided is qualified.

7. Payments and time limitation: payments should be settled within 10 days upon the product arrive in the buyer’s warehouse.

8. Liability for breach of contract: Both of the contracting party should abide by the contract strictly. If the second party delays to pay the first party, liquidated damages shall be applied to the second party. The standard is 1% of the total contract amount each day. At the meantime, if the first party delays product delivery, then liquidated damage of 1% of the total contract amount shall be applied to him.

9. Quality acceptance standard: follow relative national standard; if any quality disagreement, proposals for quality test in national testing institution can be made by either of the two parties.

10. Others: this contract is duplicated and in the possession of both parties and shall be dully effect officially upon the signature and stamp of the representatives of both parties. The fax of this contract is effective.

11. Disputes resolution: any disputes appeared in this contract shall be firstly resolved by friendly negotiation. If failed, then any party shall be entitled to lodge a complaint to people’s court in charge.

 

Supplier:    Wuhan Zhu Brothers Feed Technology Co., Ltd.    Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.
Address       Address   
Legal Representative       Legal Representative   
Entrusted Agent    Zhu Rui ( Signature )    Entrusted Agent    Li Zili( Signature )
Wuhan Zhu Brothers Feed Technology Co., Ltd .(seal)    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd. (seal)


Dec. 25, 2008

Sales Contract

 

Supplier:

   Wuhan Zhu Brothers Feed Technology Co., Ltd.

Buyer

   Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.
   ( Farm No. 8 )

1. Agreements are made as followings upon the negotiation of both supplier and buyer.

2. Product name, quantity and amount

 

Product Name

   Brand    Product Specification    Quantity    Unit Price    Amount (RMB)

Corn

   Dong Bei    60 Kg    3.200.000    2.0    6,400,000.00

Soybean meal

   Si Hai    60 Kg    900,000    3.8    3,420,000.00

Bran

   He Nan    60 Kg    440,000    1.5    660,000.00

Whey Powder

   Wu Han    20 KG    14,000    5.0    70,000.00

Total

   Say Ten Million and Five Hundred and Fifty Thousand Renminbi only

3. The product quality should be in accordance with the company requirements of the buyer.

4. Delivery place: the warehouse of the buyer

5. Delivery date: subject to the time and quantity notified by the buyer

6. Time limit for the disagreement of the product: the buyer should propose disagreement concerning product quantity and quality upon delivery, or it will be viewed as that the product quantity and quality is qualified. Any disagreement concerning product physical and chemical index from the buyer side should be proposed within 7 days, or it will be viewed that the product provided is qualified.

7. Payments and time limitation: payments should be settled within 10 days upon the product arrive in the buyer’s warehouse.

8. Liability for breach of contract: Both of the contracting party should abide by the contract strictly. If the second party delays to pay the first party, liquidated damages shall be applied to the second party. The standard is 1% of the total contract amount each day. At the meantime, if the first party delays product delivery, then liquidated damage of 1% of the total contract amount shall be applied to him.

9. Quality acceptance standard: follow relative national standard; if any quality disagreement, proposals for quality test in national testing institution can be made by either of the two parties.

10. Others: this contract is duplicated and in the possession of both parties and shall be dully effect officially upon the signature and stamp of the representatives of both parties. The fax of this contract is effective.

11. Disputes resolution: any disputes appeared in this contract shall be firstly resolved by friendly negotiation. If failed, then any party shall be entitled to lodge a complaint to people’s court in charge.

 

Supplier:    Wuhan Zhu Brothers Feed Technology Co., Ltd.    Buyer    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd.
Address       Address   
Legal Representative       Legal Representative   
Entrusted Agent    Zhu Rui ( Signature )    Entrusted Agent    Li Zili( Signature )
Wuhan Zhu Brothers Feed Technology Co., Ltd .(seal)    Wuhan Fengze Agricultural Science & Technology Development Co., Ltd. (seal)

Dec. 25, 2008

Exhibit 10.24

Translation of Land Use Rights Transfer Agreement

Chapter I General Provisions

Article 1 Both parties to the contract.

Transferor: Wuhan Mingxiang Animal Husbandry Co., Ltd (hereinafter referred to as Party A)

Address: Qingsonggang Village, Liji Town, Huangpi District, Wuhan City

Representative: Tu Guihua

Transferee: Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (hereinafter referred to as Party B)

Address: Qigang Village, Luohan Street, Huangpi District, Wuhan City

Representative: Li Hanying

According to Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas and relative policies issued by the State, both parties hereby enter this Contract based on the principle of equality, voluntary and compensatory.

Article 2 Party A acquires the land-use right according to remising . Party A voluntarily transfer land-use right to the party B with compensation. Whereas, underground resources, objects buried underground and municipal public facilities shall not be included in the scope of land-use right transfer.

Article 3 Party B shall retransfer, lease, or mortgage the right to the use of the land or use it for other economic activities in accordance with these regulations, within the term of transferee land-use right in the contract.

Party B shall in their activities to develop, utilize and manage the land, abide by the laws and regulations of the People’s Republic of China and relevant regulations of the People’s Government of Hubei Province within the term of transferee land-use. Meanwhile, the party B shall be consistent with overall land use planning and urban construction planning, and perform other rights and responsibilities on land-use right transfer stipulated in contract by the Party A. and may not jeopardize the interests of the society and the public. And their lawful rights and interests shall be protected by the laws of the State.

Chapter II Four Boundaries (of land), Areas and Terms of

Transfer Land Parcel

Article 4 Land parcel that the Party A transfers to the Party B is located at Qingsonggang Village, Liji Town, Huangpi District, Wuhan City. The land area is 60 Mu.

Article 5 The land-use right of this land parcel in the contract shall only be transferred on the basis of residual maturity use right stipulated in land-use right from the Party A.

Article 6 Transfer terms is from March 01, 2006 to January 28, 2055 , for total 48 years 10 months.

Chapter III Land Transfer Cost and Its Payment Method

Article 7 The land-use transfer cost of this land parcel is 85,947.90 Yuan per Mu, amounted RMB Say Five Million One Hundred Fifty Six Thousand Eight Hundred Seventy Four Yuan .

 

1


Article 8 Party B shall pay off total amount land-use transfer cost within two years after the contract becoming effective from the date of signing. if overdue payment, and more than two months, penalty, one-thousandth of unpaid total amount land-use transfer cost, shall be paid per day since the date of overdue. If payment is ninety days overdue, is deem as the party B termination of land-use transfer right contract automatically. The paid land cost granting fees would be send back, but the advance payment shall not be send back.

Article 9 Party A should handle all procedures of the previous purchased land parcel within two years (by the end of December 2008). Both parties shall handle land alteration registration procedures, alteration of land use certificate and pay tax fees by the regulations on time in Wuhan City Huangpi District Land & Resources Administration Bureau.

Article 10 Party B agrees to remit regulated payment cost to the Party A’s bank account by installments within payment period stipulated in the contract.

Chapter IV Retransfer of Land-use

Article 11 Party B has the residual maturity use right to re-transfer (includes sell, exchange and grant) all or part of land parcel stipulated in the contract, but the party B shall not violate usage of collective land stipulated in lease contract signed with Huangpi District Liji Town Rongzhai Villagers’ Committee.

Article 12 With consent of Liji Town Rongzhai Villagers’ Committee, Party B could alter the usage of land after approved by Wuhan City Huangpi District within transferee term, if the party B requires to alter land usage stipulated in the original lease agreement.

Chapter V Expiration

Article 13 Upon expiration of the term of use in stipulations of contract, if the party B continues to use this land parcel, shall submit renewal application to Huangpi District Land & Resources Administration Bureau of Wuhan City before one year of expiration with consent of Huangpi District Land & Resources Administration Bureau of Wuhan City, to handle relevant renewal procedures.

Chapter VI Liability for Breach of Contract

Article 14 If one party does not perform responsibilities stipulated in this contract, is deemed as breach of the contract, the default party shall compensate to observant party due to breach of contract causes all direct lose and loss of obtainable profits.

Article 15 Party A causes the claims that the party B’s postpone of land-use right occupation due to faults. It shall be handled in accordance with Article 14 of this contract.

Chapter VII Laws to be Applied and Settlement of Disputes

Article 16 Laws and administrative regulations of the People’s Republic of China is applicable for resolution of conclusion, effectiveness, termination, performance and disputes in the contract.

Article 17 If disputes are occurred while performing the contract, which shall be solved and negotiated by parties in dispute. For failure of negotiation, any party could sue to People’s Court within jurisdiction.

Chapter VIII Validation and Others

Article 18 The Contract shall become effective upon signing and sealing of the both parties.

Article 19 In case of matters not settled down in this Contract, both parties shall alter the contract or sign a supplemental article as appendix of this contract after negotiation, and such appendix of this contract has the same effect as this contract.

This contract shall be made in duplicate with the Party A and the Party B.

 

2


Party A: Wuhan Mingxiang Animal Husbandry Co., Ltd. (Common Seal)

Representative: Tu Guihua (Signature)

Party B: Wuhan Fengze Agricultural Science & Technology Development Co., Ltd. (Common Seal)

Representative: Li Hanying (Signature)

Date of Signature: Jan. 06, 2007

Signed at: Huangpi District, Wuhan City

 

3

Exhibit 21.1

Subsidiaries and Affiliate of Registrant

The follow are the Registrant and its subsidiaries:

Registrant (British Virgin Islands):

Tianli Agritech, Inc.

Subsidiary (Hong Kong):

HC Shengyuan Limited

Subsidiary (PRC)

Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd.

Affiliate (PRC)

Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. (variable interest entity controlled pursuant to contractual arrangements with Registrant’s wholly owned subsidiary, Wuhan Fengxin Agricultural Science and Technology Development Co., Ltd.)

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the use of our report dated February 7, 2010 on the financial statements of Tianli Agritech, Inc. and Subsidiaries, for the years ended December 31, 2009 and 2008 included herein on the registration statement of Tianli Agritech, Inc. and Subsidiaries on Form S-1, and to the reference to our firm under the heading “Expert” in the prospectus.

 

/s/ Sherb & Co., LLP
Certified Public Accountants
New York, New York
March 16, 2010

Exhibit 99.1

Form of Chinese Legal Opinion

                     , 2010

Tianli Agritech, Inc.

Suite F, 23rd Floor

Building B, Jiangjing Mansion

228 Yanjiang Ave.

Jiangan District, Wuhan City

Hubei Province, China 430010

Dear Sirs:

We are qualified lawyers of the People’s Republic of China (the “PRC” ) and are qualified to issue opinions on the laws and regulations of the PRC.

We have acted as PRC counsel for Tianli Agritech, Inc., a British Virgin Islands corporation (the “Company”), in connection with the preparation and filing of the Company’s registration statement on Form S-1 (Registration No. 333-                  ) and all amendments thereto (as amended, the “Registration Statement”), as originally filed with the Securities and Exchange Commission (the “Commission”) on March      , 2010. The Registration Statement relates to the offering (the “Offering”) of (i) up to 2,200,000 of the Company’s common shares, $0.001 par value per share (such offered common shares, the “Offering Shares”; the Company’s common shares, the “Shares”) (including up to 200,000 Offering Shares underlying placement agent warrants issued to the placement agent in connection with the offering (the “Placement Agent Warrants”)), and (ii) up to 200,000 Placement Agent Warrants exercisable to purchase one Share each. In addition, the Registration Statement registers the resale of an aggregate of 243,750 Shares (the “Resale Shares”) by certain selling shareholders.

In rendering this opinion, we have examined the originals, or copies certified or otherwise identified to our satisfaction, of documents provided to us by the Company and such other documents, corporate records, certificates issued by governmental authorities in the PRC and officers of the Company and other instruments as we have deemed necessary or advisable for the purposes of rendering this opinion.

In rendering this opinion, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity with authentic original documents submitted to us as copies and the completeness of the documents provided to us. We have also assumed that no amendments, revisions, modifications or other changes have been made with respect to any of the documents after they were submitted to us for purposes of this opinion. We have further assumed the accuracy and completeness of all factual statements in the documents.

As used herein, (a) “PRC Laws” means all laws, regulations, statutes, orders, decrees, guidelines, notices, judicial interpretations, subordinary legislations of the PRC which are publicly available (other than the laws of the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region); (b) “Governmental Agencies” means any court, governmental agency or body or any stock exchange authorities of the PRC (other than the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region); (c) “Governmental Approvals” means all approvals, consents, waivers, sanctions, authorizations, declarations, filings, registrations, exemptions, permissions, endorsements, annual inspections, qualifications,


licenses, certificates and permits required by Governmental Agencies; (d) “Prospectus” means the prospectus, including all amendments or supplements thereto, that forms part of the Registration Statement.

On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce ( “MOFCOM” ), the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission ( “CSRC” ), and the State Administration of Foreign Exchange ( “SAFE” ), jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rule” ), which became effective on September 8, 2006. The New M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.

Based on our understanding of current Chinese laws, regulations and rules, including the New M&A Rule and the CSRC procedures announced on September 21, 2006:

 

   

The Company currently controls its Chinese affiliate, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., by virtue of VIE agreements between Wuhan Fengze Agricultural Science and Technology Development Co., Ltd. and our affiliate, Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd., but not through equity interest or asset acquisition which are stipulated in the New M&A Rule; and

 

   

In spite of the lack of clarity on this issue, the CSRC currently has not issued any definitive rule or interpretation regarding whether offerings like the one contemplated by this Prospectus are subject to the New M&A Rule.

This opinion relates to the PRC Laws in effect on the date hereof.

We hereby consent to the use of this opinion in, and the filing hereof as an exhibit to, the above-mentioned Registration Statement. In giving such consent, we do not thereby admit that we fall within the category of the person whose consent is required under Section 7 of the U.S. Securities Act of 1933, as amended, or the regulations promulgated thereunder.

Yours sincerely,

Kai Tong Law Firm

Exhibit 99.2

TIANLI AGRITECH, INC.

CODE OF BUSINESS CONDUCT AND ETHICS

This Code of Business Conduct and Ethics covers a wide range of business practices and procedures. It does not cover every issue that may arise, but it sets out basic principles to guide the employees of Tianli Agritech, Inc. and its subsidiaries (the “Company”). All of our employees must conduct themselves in accordance with these principles and seek to avoid even the appearance of improper behavior. The Company’s agents and representatives, including consultants and directors, to the extent practicable, shall also follow this Code.

This Code is in addition to and supplements the other policies and procedures which have been implemented by the Company. If a law conflicts with a policy in this Code, you must comply with the law; however, if a local custom or policy conflicts with this Code, you must comply with the Code. If you have any questions about a conflict, you should ask your supervisor how to handle the situation.

All claims of violations of this Code will be investigated by appropriate personnel. Those who violate the standards in this Code will be subject to disciplinary action.  If you are in a situation that you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 14 of this Code.

 

1. Compliance with Laws, Rules and Regulations

Obeying the law, both in letter and in spirit, is the foundation on which this Company’s ethical standards are built. All employees must respect and obey the laws of all jurisdictions in which the Company operates. Any employee who is unsure about any aspect of these laws should seek advice from supervisors, managers or other appropriate personnel.

 

2. Record-Keeping

Accuracy and reliability in the preparation of all business records is critically important to the Company’s decision-making process and to the proper discharge of its financial, legal, and reporting obligations. All of the Company’s books, records, accounts and financial statements shall be maintained in reasonable detail, shall appropriately reflect the Company’s transactions and shall conform both to applicable legal requirements and to the Company’s system of internal controls. Unrecorded or “off the books” funds or assets shall not be maintained unless permitted by applicable law or regulation.

Many employees regularly incur business expenses, which must be documented and recorded accurately. If you are not sure whether a certain expense is appropriate, consult the policy or ask your supervisor.

Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos and formal reports. Records shall always be retained or destroyed according to the Company’s record retention policies.

 

3. Conflicts of Interest and Related Party Transactions

A “conflict of interest” exists when a person’s private interest interferes in any way with the interests of the Company. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. Loans to, or guarantees of obligations of, employees and their family members may create conflicts of interest. Loans to, or guarantees of obligations of, directors, executive officers and their family members are prohibited.

A conflict of interest almost always exists when a Company employee works concurrently for a competitor, customer or supplier. You are not allowed to work for a competitor as a consultant or board member. The best policy is to avoid any direct or indirect business connection with the Company’s competitors, customers or suppliers, except on the Company’s behalf.


A conflict of interest may occur when an employee of the Company has an ownership or financial interest in another business organization that is doing business with the Company. These transactions between the Company and the other organization are characterized as related party transactions. While not all related party transactions are improper, the Company must be aware of the details of each such transaction so that it can make a judgment as to the appropriateness of the transaction. If you or a family member have any ownership or financial interest in another organization that conducts business or seeks to conduct business with the Company, you must report the situation to the Chief Executive Officer (“CEO”) and cooperate with the legal staff by providing all relevant facts. The CEO will determine whether or not the related party transaction is a conflict of interest.

Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by the Board of Directors. Conflicts of interest may not always be clear, so if you have a question, you should consult with higher levels of management or the Company’s CEO. Any employee, officer or director who becomes aware of a conflict or potential conflict shall bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in Section 14 of this Code.

 

4. Confidentiality

Employees must maintain the confidentiality of confidential information entrusted to them by the Company or its customers, except when disclosure is authorized by the CEO or legally mandated. Even within the Company, you should disclose confidential information only to those employees who need to know the information. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us. The obligation to preserve confidential information continues even after employment ends.

 

5. Insider Trading

Employees who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of the Company’s business. All non-public information about the Company shall be considered confidential information. To use non-public information for personal financial benefit or to “tip” others who might make an investment decision on the basis of this information is not only unethical but also illegal. If you have any questions, you should consult the Company’s CEO.

 

6. Corporate Opportunities

Employees, officers and directors are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No employee shall use corporate property, information, or position for improper personal gain, and no employee shall compete with the Company directly or indirectly. Employees, officers and directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.

 

7. Competition and Fair Dealing

The Company seeks to outperform its competition fairly and honestly. The Company seeks competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary information, possessing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is prohibited. Each employee shall endeavor to respect the rights of and deal fairly with the Company’s customers, suppliers, competitors and employees. No employee shall take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional  unfair-dealing  practice.

The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment shall ever be offered, given, provided or accepted by any Company employee, family member of an employee or agent unless it:

 

   

is not a cash gift,

 

   

is consistent with customary business practices,

 

   

is not excessive in value,

 

2


   

cannot be construed as a bribe or payoff, and

 

   

does not violate any laws or regulations.

 

8. Discrimination and Harassment

The diversity of the Company’s employees is a tremendous asset. The Company is firmly committed to providing equal opportunity in all aspects of employment and shall not tolerate any illegal discrimination or harassment or any kind. Examples include derogatory comments based on racial, gender, religious, or ethnic characteristics and unwelcome sexual advances.

 

9. Health and Safety

The Company strives to provide each employee with a safe and healthful work environment. Each employee has the responsibility for maintaining a safe and healthful workplace for all employees by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.

Violence and threatening behavior are not permitted. Employees must report to work in condition to perform their duties, free from the influence of alcohol or illegal drugs. The use of alcohol or illegal drugs in the workplace is not tolerated.

 

10. Protection and Proper Use of Company Assets

All employees shall endeavor to protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability. All Company assets should be used for legitimate business purposes. Any suspected incident of theft, carelessness, or waste of or with Company assets shall be immediately reported for investigation. Company equipment shall not be used for non-Company business, although incidental personal use may be permitted by your supervisor.

The obligation of employees to protect the Company’s assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil and/or criminal penalties.

 

11. Accounting and Related Matters

All employees participate, in some measure, in the gathering of information made available to the Company’s accounting department for use in the Company’s financial reports and other information required to be publicly disclosed by the Securities and Exchange Commission and the NASDAQ Stock Market LLC. Each employee should endeavor to ensure that such information is accurate and complete in all material respects through full compliance with the Company’s accounting requirements, internal disclosure and accounting controls and audits.

 

12. Waivers of the Code of Business Conduct and Ethics

Any waiver of this Code for executive officers or directors may be made only by the Nominating Committee of the Board and shall be promptly disclosed as required by law or stock exchange regulation.

 

13. Administration of Code

This Code shall be administered by the Company’s CEO, who shall act as the Corporate Compliance Officer of the Company, Company employees are encouraged to seek guidance regarding the application or interpretation of this Code from the CEO and are expected to cooperate fully in any investigation of any potential violation of this Code.

 

3


15. Reporting Violations; Compliance Procedures

All employees shall work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know right from wrong. Since no one can anticipate every situation that will arise, it is important to have a way to approach a new question or problem. These are the steps to keep in mind:

 

   

Make sure you have all the facts In order to reach the right solutions, you must be as fully informed as possible.

 

   

Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper ? This will enable you to focus on the specific question you are faced with and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is.

 

   

Clarify your responsibility and role In most situations there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem.

 

   

Discuss the problem with your supervisor .  You are encouraged to talk to your supervisor about any issues concerning illegal, unethical or improper behavior and when in doubt about the best course of action in a particular situation. This is the basic guidance for all situations. In many cases your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember it is your supervisor’s responsibility to help solve problems.

 

   

Report serious violations to the Company’s CEO You should report serious violations that have not been properly addressed by your supervisor or other resources of the Company to the CEO. However, if it is not appropriate to discuss an issue with the CEO, or if you believe that the CEO has not properly addressed the violations, you may contact any independent director of the Board of Directors. In the rare case that you become aware of a material legal violation or a breach of fiduciary duty by an employee of the Company, address your concerns to: Nominating Committee Chairman, Tianli Agritech, Inc., Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010.

 

   

Reporting of accounting issues If you are aware of an issue concerning accounting, auditing or the Company’s internal accounting controls, address your concerns with the Company’s internal audit function or to the CEO. In the event that you believe that the Company has not properly responded to the issue, you may address your concerns to: Audit Committee Chairman, Tianli Agritech, Inc., Suite F, 23rd Floor, Building B, Jiangjing Mansion, 228 Yanjiang Ave., Jiangan District, Wuhan City, Hubei Province, China 430010.

 

   

You may report any possible violation in confidence and without fear of retaliation If your situation requires that your identity be kept secret, your anonymity will be protected and you will be guaranteed confidentiality in the handling of your claim. It is the policy of the Company not to allow retaliation for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct.

 

   

Always ask first, act later : If you are unsure of, what to do in any situation, seek guidance  before you act .

 

4