UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K




(Mark
One)




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




For
the fiscal year ended December 31, 2008





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




For
the transition period from ______ to ______





Commission
File Number 0-28806





ENERGROUP
HOLDINGS CORPORATION


(Exact
name of registrant as specified in its charter)





Nevada
            
            87-0420774(State
      of Incorporation)
            
            (I.R.S.
      Employer Identification No.)No.
      9, Xin Yi Street, Ganjingzi District
            
            +86
      411 867 166 96Dalian
      City, Liaoning Province, PRC 116039
            
            (Registrant’s telephone number, including area code)(Address of principal executive offices, including zip code)




Securities
      registered pursuant to Section 12(b) of the Act:
              
              NoneSecurities
      registered pursuant to Section 12(g) of the Act:
              
              Common Stock, par value $0.001
      per share(Title of
      Class)


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes oNo x





Indicate
by check mark whether the registrant is required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes xNo o





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o





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





Large
      Accelerated Filer o
            
            Accelerated
      Filer oNon-accelerated
      filer o
            
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo x





As of
March 11, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $25.84 million based on a
closing price of $4.00 per share of common stock as reported on the Over-the
Counter Bulletin Board on such date.  On December 31, 2008, we had
21,136,391 shares of our common stock issued and outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE: None.









ENERGROUP
HOLDINGS CORPORATION




FORM
10-K


For
the Year Ended December 31, 2008





TABLE
OF CONTENTS





PagePART
      IItem
      1.
            
            Business
            
            3Item
      1A.
            
            Risk
      Factors
            
            21Item
      1B.
            
            Unresolved
      Staff Comments
            
            36Item
      2.
            
            Properties
            
            36Item
      3.
            
            Legal
      Proceedings
            
            37Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            37PART
      IIItem
      5.
            
            Market
      for Registrant’s Common Equity and Related Stockholder
    Matters
            
            38Item
      6.
            
            Selected
      Financial Data
            
            39Item
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            39Item
      7A.
            
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            53Item
      8.
            
            Financial
      Statements and Supplementary Data
            
            53Item
      9.
            
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            
            54Item
      9A.
            
            Controls
      and Procedures
            
            54PART
      IIIItem
      10.
            
            Directors,
      Executive Officers and Corporate Governance
            
            58Item
      11.
            
            Executive
      Compensation
            
            61Item
      12.
            
            SeSecurity
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            64Item
      13.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            66Item
      14.
            
            Principal
      Accounting Fees and Services
            
            67PART
      IVItem15.
            
            Exhibits,
      Financial Statement Schedules
            
            68Signatures
            
            71




2




PART
I





Item
1. BUSINESS





This
document contains certain statements of a forward-looking nature. Such
forward-looking statements, including but not limited to growth and strategies,
future operating and financial results, financial expectations and current
business indicators are based upon current information and expectations and are
subject to change based on factors beyond our control. Forward-looking
statements typically are identified by the use of terms such as “look,” “may,”
“will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate”
and similar words, although some forward-looking statements are expressed
differently. The accuracy of such statements may be impacted by a number of
business risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated, including but not limited
to:





·
                our
      ability to timely and accurately complete orders
  products;




·
                our
      dependence on a limited number of major
  customers;




·
                political
      and economic conditions within the
PRC;




·
                our
      ability to expand and grow our distribution
  channels;




·
              general
      economic conditions which affect consumer demand for our
      products;




·
              the
      effect of terrorist acts, or the threat thereof, on consumer confidence
      and spending;




·
              acceptance
      in the marketplace of our new products and changes in consumer
      preferences;




·
              foreign
      currency exchange rate
fluctuations;




·
              our
      ability to identify and successfully execute cost control
      initiatives;




·
              other
      risks outlined above and in our other public
  filings.




You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this document. We undertake no obligation to update
this forward-looking information.




While our
management fully intends to make concerted efforts to manage these risks, we
cannot assure you that we will be able to do so successfully. See “Risk Factors”
beginning on page 21
of this report.




Our
Business




We
produce, pack, sell, market and distribute fresh and processed meat products to
customers in the People’s Republic of China (“China” or the “PRC”). Our current
corporate structure is shown below. We own three PRC operating subsidiaries
(collectively, the “Chuming Operating Subsidiaries”):





1.
            Dalian
      Chuming Slaughter and Packaging Pork Company Ltd., whose primary business
      activity is acquiring, slaughtering and packaging of
  pork;




2.
            Dalian
      Chuming Processed Foods Company Ltd., whose primary business activity is
      the processing of raw and cooked meat products;
  and




3




3.
            Dalian
      Chuming Sales Company Ltd., which is responsible for our sales, marketing
      and distribution activities.









Our three
operating subsidiaries are spun off constituents of a former parent company,
Dalian Chuming Group Co., Ltd. (the “Group”). Our company is separate and
independent from the Group, which operates a different business and has
different operations from ours. We took over ownership and control of the three
Chuming Operating Subsidiaries from the Group in September 2007 following our
corporate reorganization (See subsection entitled “Corporate Reorganization” on
page
5 of this report). We are headquartered in the City of Dalian,
Liaoning Province of China. Throughout this report, Energroup Holdings
Corporation, Precious Sheen Investments Limited, Chuming WFOE and the Chuming
Operating Subsidiaries are sometimes collectively referred to as
“Chuming.”





Company
Overview and History




Our
business originated from the founding in 1999 of Dalian Chuming Group
Co., Ltd. the former parent of the Chuming Operating Subsidiaries.  The
Group began as a processor and supplier of fresh and frozen meat and meat
products. Among industrialized farming corporations in northeastern China,
the Group pursued distinction in the Chinese food industry by maintaining high
quality management standards and international safety
certifications.




4





In 2004,
the Group established the Chuming Operating Subsidiaries, which now form
the core of our business, and these companies began producing and supplying
fresh and processed meats under the Chuming brand name. Since then we have
rapidly become a significant producer and supplier in China’s meat industry, and
have achieved consistent profitability and growth since inception. In the first
three years of operation, our sales have grown at an average rate of 42% per
annum. We sell our products to consumers in northeastern China, which has a
population of approximately 108 million. In particular, our current customers
are concentrated in the Liaoning Province (which has a population of
approximately 42 million), and we are the largest pork producer in Dalian City,
which has a population of approximately 3 million, or 6 million including the
greater metropolitan area. At present, all of our sales are within China,
which is the largest pork-consuming nation in the world, with a total of 42
million metric tons consumed in 2008. Due to the rapid development of the
Chinese economy, urbanization and strong income growth, we have observed that
pork consumption patterns are changing and consumption levels are continuing to
increase.




Our major
products are:





·
              Fresh
      meat – pork that is processed in a controlled environmental chamber with
      closely monitored temperatures to ensure quality and safety standards
      during processing right up to the time of delivery to the
      consumer.




·
            Frozen
      fresh meat – butchered pigs that are processed and immediately frozen,
      which includes such products as smoked pork, ham and
      roasts.




·
            Frozen
      fresh byproducts – pork byproducts including pig’s liver, stomach,
      intestine, head and hoof.




We are
part of an established pork production cycle that culminates in sales of
fresh and frozen pork. This cycle includes feedstuff production, pig breeding,
slaughtering, processing, packaging and distribution. We are involved in
the slaughtering, processing, packaging and distribution aspects of the pork
production cycle.





We are
the first pork producer in China to receive “Green Food” certification from
China’s Ministry of Agriculture. Green Food is an innovative certification
program unique to China that is awarded to food processors who produce using
environmentally sustainable methods and meet certain high technical standards of
quality control, safety, and product quality, and generate low levels of
pollution. Under strict supervision, control and regulation in production,
processing, packing, storage and transportation, Green Food-certified companies
must apply these quality control standards from field to customer and regulate
the application of inputs, including pesticide, fertilizer, veterinary drug and
additives to minimize environmental pollution and prevent toxic and harmful
substances from entering the food supply chain. The Green Food certification is
based on standards defined by the Codex Alimentarius Commission (“CAC”), a joint
body of the United Nations Food and Agriculture Organization and the World
Health Organization.





Corporate
Reorganization Prior to Going Public




PRC law
currently limits foreign ownership of certain companies based in the PRC. In
order for us to raise equity capital from investors outside of China, we
established an offshore holding company by the name of Precious Sheen
Investments Limited (“PSI”) in the British Virgin Islands in May 2007. On
September 26, 2007, Chuming WFOE entered into share transfer agreements with
Dalian Chuming Group Co., Ltd., under which Dalian Chuming Group Co., Ltd.
agreed to transfer ownership of the Chuming Operating Subsidiaries to Chuming
WFOE. On October 23, 2007, Chuming WFOE completed all required registrations to
complete the share transfer, and became the 100% owner of the Chuming Operating
Subsidiaries. On November 14, 2007 the Dalian Commerce Bureau approved the
transfer of Dalian Chuming Group Co., Ltd.’s 68% interest in Chuming WFOE to
PSI, and upon this transfer, Chuming WFOE became a wholly foreign owned
enterprise, with PSI as the 100% owner of Chuming WFOE (including its
subsidiaries). On December 13, 2007, the PRC government authorities issued
Chuming WFOE a business license formally recognizing it as a wholly foreign
owned enterprise, of which PSI is the sole shareholder.




5





Following
this corporate restructuring, PSI became the 100% owner and parent company of
Dalian Precious Sheen Investments Consulting Co., Ltd. (“Chuming WFOE”), which
in turn owns 100% of the Chuming Operating Subsidiaries: the Meat Company, the
Food Company and the Sales Company.




Share
Exchange Transaction




In
December 2007, we completed a reverse take-over transaction in the form of a
share exchange, which resulted in our current corporate structure. On December
31, 2007, we acquired all of the outstanding shares of PSI in exchange for
the issuance of 16,850,000 restricted shares of our common stock to the
shareholders of PSI, which represented approximately 97.55% of then-issued
and outstanding common stock (excluding the shares issued in the Financing). As
a result of that transaction, PSI became our wholly owned subsidiary and we
acquired the business and operations of Chuming.




Prior to
the share exchange transaction, Energroup was a public reporting “shell” company
with nominal assets whose sole business was to identify, evaluate and
investigate various companies with the intent that, if such investigation
warrants, a reverse merger transaction be negotiated and completed pursuant to
which Energroup would acquire a target company with an operating business with
the intent of continuing the acquired company’s business as a publicly held
entity.





As a
result of the share exchange transaction, PSI (and its subsidiaries) became the
100% owned subsidiary of Energroup Holdings Corporation, and we acquired the
business and operations of Chuming.





$17
Million Financing





On
December 31, 2007, we completed a $17 million private placement in which we sold
and issued 3,863,635 shares of our common stock to fifteen accredited investors
for $4.40 per share. After giving to the both the Exchange Transaction and the
Financing, we had a total of approximately 21,136,392 shares of our common stock
issued and outstanding, and the PSI Shareholders held 16,850,000 of these
shares, constituting approximately 79.7% of our issued and outstanding common
stock.




Industry
Overview




The
following overview in certain instances cites to materials that are publicly
available without charge. If no citation is provided with respect to certain
information presented in this “Industry Overview” section, that information is
attributed to our own research regarding the world pork market and China’s pork
industry.





World
Pork Market





According to an October 2008 report of the United
States Department of Agriculture (USDA), China is the largest pork producer and
consumer in the world. China is the leading producer among other countries in
the world by a wide margin, and produces and consumes more than half of the
world’s pork. The preliminary number for 2008 worldwide production of pork is
96.7 million tons (CWE, carcass weight equivalent). Generous profits in the
Chinese swine industry partnered with government subsidies and tax incentives
are expected to stimulate production.  The USDA forecast for 2009 is
that the production in China is expected to expand by more than 3% (1.2 million
tons) over 2008 levels.




Pork
Production (1,000 Metric Tons, Carcass Weight Equivalent), 2004-2009
(Estimated)





2004
            
            2005
            
            2006
            
            2007
            
            2008
            
            2009Oct.China
            
            
            43,410
            
            45,553
            
            
            46,505
            
            42,878
            
            
            44,593
            
            46,000EU-27
            
            
            21,753
            
            21,676
            
            
            21,791
            
            22,858
            
            
            22,300
            
            22,100United
      States
            
            
            9,312
            
            9,392
            
            
            9,559
            
            9,962
            
            
            10,682
            
            10,507Brazil
            
            
            2,600
            
            2,710
            
            
            2,830
            
            2,990
            
            
            3,055
            
            3,160Russian
      Federation
            
            
            1,725
            
            1,735
            
            
            1,805
            
            1,910
            
            
            2,040
            
            2,180Vietnam
            
            
            1,408
            
            1,602
            
            
            1,713
            
            1,832
            
            
            1,850
            
            1,850Canada
            
            
            1,936
            
            1,272
            
            
            1,245
            
            1,247
            
            
            1,260
            
            1,255Japan
            
            
            1,272
            
            1,245
            
            
            1,247
            
            1,250
            
            
            1,245
            
            1,240Philippines
            
            
            1,145
            
            1,175
            
            
            1,215
            
            1,245
            
            
            1,190
            
            1,200Mexico
            
            
            1,150
            
            1,195
            
            
            1,108
            
            1,150
            
            
            1,142
            
            1,170Korea,
      Republic of
            
            
            1,100
            
            1,036
            
            
            1,000
            
            1,040
            
            
            1,045
            
            1,045Others
            
            
            5,262
            
            5,312
            
            
            5,485
            
            5,721
            
            
            5,723
            
            5,640Total
            
            
            92,073
            
            94,551
            
            
            96,156
            
            94,730
            
            
            96,710
            
            97,862





Sources: USDA report, Livestock and Poultry: World Markets
and Trade, October 2008.




Note: 2008 data is preliminary
and 2009 is forecast.




6




Pork
Consumption (1,000 Metric Tons, Carcass Weight Equivalent), 2004-2009
(Estimated)





2004
            
            2005
            
            2006
            
            2007
            
            2008
            
            2009OctoberChina
            
            
            43,042
            
            45,150
            
            
            46,051
            
            42,726
            
            
            44,875
            
            46,190EU-27
            
            
            20,528
            
            20,632
            
            
            20,632
            
            21,518
            
            
            20,924
            
            20,680United
      States
            
            
            8,817
            
            8,673
            
            
            8,636
            
            8,966
            
            
            8,604
            
            8,566Russian
      Federation
            
            
            2,338
            
            2,486
            
            
            2,639
            
            2,803
            
            
            2,979
            
            3,139Japan
            
            
            2,529
            
            2,509
            
            
            2,452
            
            2,473
            
            
            2,498
            
            2,488Brazil
            
            
            1,979
            
            1,949
            
            
            2,191
            
            2,260
            
            
            2,380
            
            2,455Vietnam
            
            
            1,386
            
            1,583
            
            
            1,731
            
            1,855
            
            
            1,889
            
            1,889Mexico
            
            
            1,556
            
            1,556
            
            
            1,488
            
            1,521
            
            
            1,597
            
            1,610Korea,
      Republic of
            
            
            1,336
            
            1,311
            
            
            1,420
            
            1,499
            
            
            1,499
            
            1,468Philippines
            
            
            1,169
            
            1,198
            
            
            1,239
            
            1,270
            
            
            1,244
            
            1,243Canada
            
            
            1,068
            
            966
            
            
            973
            
            1,023
            
            
            982
            
            980Others
            
            
            6,145
            
            6,187
            
            
            6,456
            
            6,663
            
            
            6,915
            
            6,902Total
            
            
            91,893
            
            94,200
            
            
            95,908
            
            94,567
            
            
            96,386
            
            97,610




Sources: USDA report, Livestock and Poultry: World Markets
and Trade, October 2008.




Note: 2008 data is preliminary
and 2009 is forecast.




China’s
Pork Industry




According
to China’s National Bureau of Statistics, China’s US$176 billion animal
husbandry sector is the second largest in the country’s basket of agricultural
related industries including farming, forestry and fishery. The present size of
the pork and processed meat market in China is an estimated US$32
billion.




Our
research indicates that China’s per capita meat consumption was just over 55
kilograms by 2000, which is significantly smaller than the consumption level of
over 100 kg per year by western standards. Based on what is known about Chinese
culinary culture and habits, however, our management believes that the Chinese
population is expected to consume more meat as their disposable income
increases. For example, our research indicates that Hong Kong residents, who
have a significantly higher per capita income, consumed on average 124 kg of
meat in 2000.




The
manner in which meat sales are conducted has changed as a result of new hygiene
and food safety regulations that were introduced by the Chinese government in
1995. Historically, the great majority of meat sales in China had taken place in
open-air markets or on streets, i.e. in free wet markets. These markets provided
a location through which the consumer could buy live poultry or freshly
slaughtered meat produced direct from local farmers. As a result of the new
regulations however, governmental agencies recently have encouraged the
replacement of open-air markets by supermarkets and convenience stores, and the
market share of open-air markets has continued to decline. Even with these new
regulations, however, the open-air markets still currently represent 80% of the
overall meat-processing sector in China.




The meat
industry in China is characterized by fragmentation, sanitation and hygiene
issues, as well as social demographic trends. Supply is extremely localized with
limited distribution capability. China’s vast geography and ‘in-development’
transport infrastructure have made it difficult to create national or even
regional level competition in the industry. Our management believes that the
trend towards greater sales through formal supermarkets and chain stores,
coupled with the expansion of our sales and distribution network, will continue
to favorably impact our business.




7





Pork is
China’s most important source of meat and is consumed at a much higher rate than
other categories of meat. The following 2008 USDA Report shows that pork is
consumed in China with three and half times greater volume than poultry or
“broiler meat” and more than seven times more than beef:




Kg Per Person
            
            Relative %Beef
            
            
            4.7
            
            9.8
            %Broiler
      Meat
            
            
            9.6
            
            20
            %Pork
            
            
            33.7
            
            70.2
            %Total:
            
            
            48
            
            100
            %




Sources: USDA report, Livestock and Poultry: World Markets
and Trade, October 2008.




Note: 2008 data is
preliminary




In
addition to a general preference for pork, urbanization and rapid income growth
are working in parallel to create more demand for pork and processed pork
products. An emerging middle class of relatively high-income consumers is
forming in certain Chinese cities. As household incomes rise, these high-income
residents consume more of all categories of foods on a per capita basis.
According to the Urban
Household Survey conducted in 2000 by China’s National Bureau of
Statistics, pork consumption by low-income residents was 13.4 kg whereas it was
19.6 kg for high-income residents. These residents not only demand a greater
quantity of food, but also higher quality (e.g. better cuts of meat, foods that
are safer or healthier) and convenience (processed foods). Reports of food
poisoning and dangerous chemical residues have given rise to strong demand for
“green” foods for which we are certified. We believe that affluent consumers
would be willing to pay premium prices for foods which have safety-related
certifications, foods with purported health benefits or foods with other
desirable attributes. We offer a wide range of food products that appeal to
demands for safety, convenience, quality and health attributes demanded by
high-income urban consumers.




Our
management expects China’s meat industry, which includes the meat processing
business, to grow due to key driving forces including food safety concerns that
we believe will accelerate the transition from the traditional wet market to the
modern dry market; rising modern retail channels; government mandates and
supports of agricultural and meat processing companies; and consolidating
forces.




Transition
from “wet-market” to “dry-market”





We
believe that food safety is a top concern of Chinese consumers who purchase meat
products, and that this will eventually compel modernization of China’s meat
processing industry. Consumer surveys showed that food safety, nutritional value
and taste are the top three concerns of consumers, while price was ranked
fourth. Furthermore, surveys showed that 60% of the consumers have a low degree
of confidence in meat products in general. There are a number of food safety
concerns facing the Chinese pork industry, including swine streptococcus and
Foot and Mouth Disease, the use of antibiotics and illegal feed additives such
as Clenbutero, pork injected with water and illegal slaughterhouses. China’s
meat industry traditionally has been dominated by small and family-operated
butcher shops that would slaughter the livestock in the open-air marketplaces
and without the necessary safety and sterilized equipment. These unsanitary
operations create what is commonly known as the “wet market,” which currently
represents 80% of the overall meat-processing sector. However, the industry is
changing rapidly. Along with the prevalent use of refrigerators in urban
households, health conscious consumers are demanding more sanitary quality meat
products which can only be processed and delivered in a temperature controlled
cold chain environment. This presents significant opportunities to meat
processors with advanced processing plants and refrigerated transportation
capabilities.




8




Government
quality control





Frequent
occurrences of food safety scares have hastened the Chinese government’s effort
in regulating food safety and quality. For example, in 2006 pork containing
Clenbutero were found to be sold in several wet markets in Shanghai that
resulted in over 330 people being poisoned, and an outbreak of swine
Streptococcus in Sichuan Province led to the death of 17 people. In 2007, the
swine industry was plagued with a series of eruption of Porcine Reproductive and
Respiratory Syndrome (PRRS), also known as Blue Ear Disease. Outbreaks of Blue
Ear Disease were still widely reported in many places throughout China in
2008.  A number of Chinese organizations are involved in an effort to
further improve the Chinese meat industry’s safety, hygiene and sanitation
standards, including the Ministry of Agriculture, Ministry of Health, State
Administration of Quality Supervision, Inspection, and Quarantine, State Food
and Drug Administration, and the Ministry of Commerce. Tougher quality standards
set for the meat processing industry represent barriers to newcomers while
forcing operationally inadequate and financially unsound companies to shut down.
Our management anticipates that companies such as ours, with quality meat
processing and modern logistics systems, will benefit as they capture market
share and build consumer brand loyalty.





Government’s
strong support of meat processing industry





The main
theme of China’s 11 th Five
Year Plan is the development of China’s rural economy. With the widening wealth
gap between the rich and poor or between urban and rural regions, China’s
central government has shifted its focus from urban industrial growth to rural
agricultural development aimed at improving the standard of living in the poorer
regions. Many preferential policies were enacted to help the farming communities
including subsidized livestock insurance and interest free loans. Scaled meat
processors are considered active agents in galvanizing the rural economies by
providing jobs, injecting capital, and introducing new technology and management
expertise to the local economies. The Five Year Plans are a series of economic
development initiatives promulgated by the Chinese government; however, they do
not constitute binding or substantive policies or regulations. The Chinese
economy has been shaped primarily by through the plenary sessions of the Central
Committee and National Congresses. The Five Year Plan serves, in part, as a
mapping strategy for economic development, setting growth targets, and launching
reforms. The plan usually includes detailed economic development guidelines for
all its regions and the nation as a whole. As China has transited from a
centrally-planned economy to market economy, the name for the 11th Five-Year
Plan has been characterized as a “guideline” rather than a strict “plan”. The
11th
Five-Year Plan covers the period from 2006 to 2011.




National
retailers provide platform for growth





The
increasingly widespread use of refrigerators in urban Chinese households has
attracted many retailers to carry more frozen food products, making available a
wide variety of frozen products to consumers. Major domestic retailers,
including LianHua have made an impact in introducing more brands of frozen food
products in their retail stores. Even more significantly going forward will be
the rapid expansion of international hypermarkets in China, including France’s
Carrefour, the U.S.’s Wal-mart, and Germany’s Metro. These retailers with
national reach will significantly change the retail industry landscape as they
provide the platform for the large branded food companies to efficiently and
rapidly distribute their products to large and untapped markets. These
international retail chains can also provide excellent export opportunities to
scaled, quality meat processing companies.




Industry consolidation benefits
scaled players





In the
more mature US meat market, the top three producers represent about 50% of the
meat industry there. But in China the meat-processing industry is very
fragmented with over 3,000 meat-processors most of which are small operators.
The top three producers represent less than 5% of the overall market. Pig farms
in China are also very fragmented with over 90% of the farms possessing fewer
than 10 pigs. As smaller players experience pressure from margin compression and
stricter government regulations, we believe scaled meat processors will make
attractive acquisitions in order to capture market share, gain scale, secure raw
material, and move closer to clients. The combination of stricter hygiene
regulations, increasing competition from well-financed players, struggling meat
suppliers, and increasing international competition from companies like Hormel
will induce major industry shakeout and consolidation in the coming
years.




9




Macro
and Demographic Trends





It is
widely believed that a middle class is rapidly emerging in China. China’s GDP
has been growing at over 9% per year for the past 10 years and has created
millions of new consumers.  Although recent government estimates
project slower GDP growth of 7.5% in 2009, in the longer term management still
believes the trend toward expansion of the middle class in China will translate
into higher demand for pork products.





·
              Due
      to the increasing rural migration to urban cities, China expects to double
      its major cities by 2010 creating new waves of Chinese urban meat
      consumers. The number of Chinese cities with over 1 million people is
      projected to reach 125 by 2010 according to the Chinese Academy of
      Sciences, and cities with over 2 million people are projected to reach 300
      by 2020.




·
            Domestic
      demand for meat products in China is expected to grow to a projected 100
      million metric tons in 2010 from an actual 72.4 million metric tons in
      2004 according to Access Asia, an independent research firm. Total
      production value of meat products are expected to increase to a projected
      US$120 billion from an actual US$84 billion and per capita meat
      consumption is expected to increase from an actual 49 kg to a projected 75
      kg during the same period. Pork represents the bulk of meat products
      consumed in China.




With
higher standards of living and more a demanding working lifestyle, urban Chinese
consumers are purchasing more processed meat products and spending more on
dining on meat products outside of the home. Our research indicates
that:





·
              Currently
      less than an estimated 10% of the meat consumed in China is processed.
      Meat consumption out of the home has surpassed in-home meat consumption in
      11 Chinese provinces, especially in more economically developed regional
      markets such as Shanghai, Beijing, and Shenzhen, according to the National
      Bureau of Statistics.




·
            Chinese
      consumers have become more conscious of food safety and quality, fueling
      demand for branded foods. This has become more evident after the
      occurrence of a series of disease outbreaks across Asia including SARS and
      the avian flu. With changing lifestyles and food quality awareness,
      Chinese consumers are seeking more name brands to ensure the quality in
      processed meat that they
purchase.




·
            The
      new health-conscious consumer group has become more educated and concerned
      with the freshness and nutritional value of various meat products. For
      example, LTMP (low temperature meat product) pork has become more popular
      recently as urban consumers become aware that LTMP has better nutritional
      value and fresher taste than the longer-shelf-life HTMP (high temperature
      meat product) pork
products.




Processing
of Meat Products in China




In the
PRC, regulations relating to the processing of meat products are set forth in
the PRC Law of Food Hygiene and the Administrative Measures for the Hygiene of
Meat and Meat Products. A PRC food processing company is required to obtain a
hygiene permit from the Hygiene Bureau of the relevant districts before it is
permitted to apply to the Ministry of Industry and Commerce for a business
license.  In 2007, the Chinese government issued the Regulation of Hog
Slaughtering and started implementation of this regulation since August 1,
2008.  The government issued the Measures of Administrating Hog
Slaughtering in 2008.  These two recent regulations further tightened
the regulation of the live pigs market and raised the bar of entry for new
competitors, which management believes are advantageous to our market position
and will help further our expansion.




A food
processing company may not purchase or use meat that has not been inspected and
approved by the Animal Supervision Authority. Even if the meat has been so
inspected, it must still satisfy other hygiene requirements. Each food
processing company must have facilities to conduct regular laboratory testing of
its products to ensure food safety requirements are met. For instance, sometimes
traceable levels of contaminants and radioactive substances are found in meat
products, and these must not exceed certain established national
standards.




Food
processing companies are required to possess hygienic cold storage facilities,
and proper management of such cold storage facilities must be set out. All
storage equipment and packing materials must also comply with hygienic
standards. All meat products which are packed must be labeled, specifying
requisite information such as name of the product, place of manufacture,
manufacture date, lot number or code, final consumption date and ingredients.
Any meat product to be exported shall be inspected by the Animal and Plant
Quarantine Authority when passing through customs. Only meat products which have
passed such inspections may be exported.




10




Business




We are
principally engaged in the production, processing, sale and distribution of
fresh and prepared meat products in China. Our products are classified as fresh
and frozen pork, and prepared foods, which includes prepared pork, seafood and
by-products.




Our
production facilities are located in Dalian, a coastal city with a population of
3 million (6 million including the greater metropolitan area). Referred to as
the “Boston of China” due to its Northeast proximity and port orientation,
Dalian is the most affluent city in the Liaoning Province, with a population of
42 million. Dalian serves as a finance and export trade center of Northeast
China, and is also the center of the “Buo Sea Economical Zone” (“BSEZ”).
According to China’s National Bureau of Statistics, the BSEZ covers 12% of the
territory and 20% of the population in China, and is the most important economic
center in Northern China. The National Bureau of Statistics also projects that
these two areas may generate a more rapid growth rate than the overall GDP
growth of China in next 10 years. Our facilities include 5 production lines with
the slaughtering capacity of 123,318 metric tons and prepared food capacity of
16,000 metric tons. Our prepared food facilities are the largest in Liaoning
Province.  In 2008, we renovated and expanded our production
facilities for prepared foods, and management believes such improvement will
increase our production of prepared foods by another 15,000 metric tons starting
in 2009.





Our
production lines are imported from international manufacturing automation leader
StorkTM of the Netherlands, with the state-of-the-art technology and specialized
for their in-process testing and quality controls. Our production facilities are
certified under ISO9001 and HACCP. Our pork products are qualified “Green Food”
by the National Green Food Development Center and qualified as one of 14
“National Safe Foods” by the National Slaughtering Authentication
Center.




Our
products are sold under the brand name of “ChumingTM.” We target consumers who
desire high quality pork products. We distribute our products through dealers
and agents to more than 242 supermarkets, including Carrefour, Wal-mart, Metro,
New-mart, Hymall and others. We also distribute our products to over 3,675
schools, hospitals, factory canteens and restaurants, and more than 860
“Chuming” branded showcase stores or specialty counters in wet markets. These
branded showcase stores and specialty counters are resellers of our products
with whom we have arrangements to sell our product under the Chuming brand name
(the principal difference between branded showcase stores specialty counters
being location within a supermarket for the former, and location in a wet market
for the latter).




Our
business activities are the slaughter, processing, packing and distribution of
meat products for sale to clients throughout the PRC. We have a 250,000 square
meter campus which houses an international standards-based meat processing plant
located in the city of Dalian of the Liaoning Province in the PRC. We have a
total of five production lines and an aggregate capacity to slaughter
approximately 1.5 million pigs per year. We purchase hogs from more than 3,000
farms in the Liaoning Province and nearby areas, in addition to having an
exclusive contract with farms owned and operated by the Group, to supply us with
750,000 live hogs in 2008, 800,000 in 2009, and 800,000 in 2010, at local market
prices.  The Group provides breeding pigs, animal feed, vaccination,
veterinary services and technology support to our subcontractor pig farmers,
resulting in more favorable relations with these small independent
suppliers.




Principal
Products




We
produce, distribute and sell fresh meat and prepared food products under the
brand name “ChumingTM,” through our dealership distribution network, our own
sales force and branded showcase stores in the PRC.




We
produce two main types of Processed Meat Products – High Temperature Meat
Products (HTMPs) and Low Temperature Meat Products (LTMPs).




11




High Temperature Meat Products.HTMPs are cooked at a temperature of approximately 121°C and at
approximately 2.5 times atmospheric pressure. These meat products can be stored
at room temperature and have a shelf life of approximately six months from the
date of production. However, the permitted shelf life of these products is 120
days from the date of production, even though the actual shelf life of these
products is six months. HTMPs are generally priced lower than LTMP and do not
require refrigeration. Therefore, they are affordable and accessible to the
average PRC consumer.




Low Temperature Meat Products.LTMPs are cooked at lower temperatures ranging from 65 to 85°C, under 1
atmospheric pressure. These meat products have a shelf life of three months from
the date of production if they are stored at a temperature of 0°C. In 2003, we
introduced our LTMPs to the PRC market. The Group’s R&D studies have shown
that LTMPs generally taste better than HTMPs because they are cooked at lower
temperatures and thus are able to preserve the taste and nutrients found in the
ingredients. The LTMPs generally cater to the taste of consumers in PRC cities
who have higher purchasing power.





Currently,
we have two main series of products for both HTMP and LTMP: the “Ham” series and
the “Sausage” series. The Ham series has chunkier pieces of meat and thus has a
meatier texture. It also has a corresponding higher percentage of meat content.
The Sausage series has a lower percentage of meat content and has a smoother
texture.




The range
of products we offer includes more than 300 varieties of hams and sausages. The
following is a summary of some of the types of Fresh and Processed Meat Products
that we manufacture and how they are categorized:




Fresh
Pork




Chinese
people generally perceive that fresh meat retains a better flavor as compared
with frozen meat. As such, the price of fresh pork meat is approximately 20%
higher than frozen pork meat. The other producers of fresh pork meat in the PRC
are generally farm-based suppliers, which supply the areas around the farms. The
key difference between our fresh pork and that of farm-based suppliers is that
our fresh pork is produced and packed in a highly controlled sanitized
environment in our own facilities. Therefore, consumers have added assurance
that our fresh pork meat is safe for consumption.




In order
for the pork to remain fresh, at our facilities the pigs are slaughtered and
then processed within 30 minutes. The meat is then cooled but not frozen at a
temperature between 32° F (0° C) and 39.2° F (4° C) for about 20 hours.
Following this cooling process, fresh pork is cut into various parts in a
sterilized room with the constant temperature of 12° C. This reduces the risk of
exposure to germs and bacterial contamination. Before delivery, the fresh pork
is kept in our storage room at a controlled temperature of 0 to 4° C. The meat
is stored in airtight sterilizing rooms filled with ozone, which acts as a
sterilizing agent, killing remaining germs and bacteria in the
meat.




With our
own temperature-controlled vans and trucks, we deliver the fresh pork to our
customers including dealers, supermarkets and branded showcase specialty stores.
The entire process of cold production, cold storage and cold delivery is what we
refer to as the “cold chain system.” This cold chain system ensures the
freshness and quality of our product. Our fresh pork products have an average
shelf life of 7 days from the date of production.




Frozen
Pork




In the
production of our frozen pork, the meat is frozen at -31° F (-35° C) to -40° F
(-40° C) for 48 hours. It is then stored or transported at a constant
temperature of between -0.4° F (-18° C) to -13° F (-25° C). Since frozen pork
can be preserved for longer periods of time, our frozen meat products are ideal
for distribution across longer distances to the Northeast and North China as
well as potentially to international markets such as Korea, Russia and Japan.
These products have an average shelf life of 180 days from the date of
production. We also sell our frozen pork to restaurants, supermarkets and fresh
food markets.




12





Prepared
Food Products




Our
prepared food products include prepared pork, seafood and pig by-products, which
accounted for 11.57% of our 2008 revenues.




Prepared Pork Products. Our
prepared pork products are mainly LTMPs, which are cooked at lower temperatures
ranging from 65° C to 85° C and under atmospheric pressure. These meat products
generally have a shelf life of 30 days from the date of production if they are
stored at a temperature ranging from 0° C to 4° C. For LTMPs, we currently have
two series and more than 300 products. These foods are all made from the fresh
pork that we produce. The following is a description of the types of prepared
pork products we offer:




Ham





·
            Chuming
      Cumin Ham




·
            Cooked
      Ham




·
            Roast
      Ham




·
            Premium
      Ham




·
            Sandwich
      Ham




·
            Square
      Ham




·
            Chunky
      Ham




·
            Baby
      Ham




·
            Salted
      Loin




·
            Smoked
      Ham




Sausage




·
              Diary
    Sausage
  ·
              Garlic
    Sausage
  ·
              Spicy
    Sausage
  ·
              Chinese
      Sausage
  ·
              Taiwan
    Sausage
  ·
              Baby
    Sausage


Seafood Products.  Our prepared seafood
products are made from fish, shrimp and other varieties of seafood. With our
techniques of prepared food production, we prepare seafood products such as fish
sausage and shellfish sausage. Seafood products accounted for 6.2% of our
revenue for the full year of 2008.  Due to the abundance of seafood in
Dalian, located on the Northern coast of China, as well as relatively high
profit margins for these products, we plan to expand our seafood output in the
future. The following is a description of the varieties of seafood products we
offer:




·
            Seafood
      sausage·
            Baked
      Fish Sausage·
            Barbequed
      Prawn Sausage·
            Crab
      Sausage·
            Scallop
      Sausage·
            Squid
      Sausage




Pig By-Products. In China,
virtually all parts of the pig are valued for consumption and are used in local
cuisine. Pig “by-products” that are not typically used or sold in other parts of
the world are prepared and sold in the Chinese market. This includes pig
innards, pig skin, pig tails, lard and pig heads. Pig liver, stomach, intestine,
head and hoofs are commonly used in Chinese cuisine and are sold to a ready
market.




We
produce our products through two of the Chuming Operating Subsidiaries: (i) the
Meat Company in Wangfangdian, and (ii) the Food Company in Dalian.




13




Our fresh
and frozen pork is produced by our subsidiary Meat Company. The Meat Company’s
facilities cover 150,000 square meters and utilize state-of-art slaughtering and
cutting lines imported from Stork Co. of the Netherlands.  The Meat
Company has a slaughtering capacity of 250 pigs per hour, which are 1,500,000
pigs per year at full capacity. Our cutting line has a capacity of 30,132 metric
tons per year. Our cold and freezing storage facilities can store up to 6,000
metric tons of fresh products. The fresh pork and frozen pork produced by the
Meat Company are typically sold either in whole carcass form or in
cuts.




The
prepared foods are produced by our subsidiary Food Company, located in the
Ganjingzi District of Dalian.  The Food Company, which includes a
10,000 square meter processing facility. There are three prepared food
production lines including one pork processing line with the capacity of 10,000
metric tons, one seafood sausage production line with the capacity of 4,500
metric tons and one deli by-product production line with the capacity of 1,500
metric tons.  In 2008, we renovated and expanded our production
facilities to increase the production of our prepared foods.  We
started using our additional production facilities in January
2009.  Management believes, with the improvement and expansion of our
production facilities, the production of our processed foods will increase by
15,000 metric tons from 15,000 metric tons in 2008 to 30,000 metric tons in
2009.  All of the Food Company’s production line equipment is imported
from Germany and features state-of-the-art technology. Based on our own market
research on our competitors, management believes that the Food Company is now
the largest prepared food production plant in the Liaoning
Province.




Supply
of Pigs




We do not
rear pigs, but instead purchase them from our former parent company, the Group
and from other suppliers who aggregate supply from local pig farms. We purchase
live pigs from the Group and third party suppliers on a cash-on-delivery basis.
 While the Group’s breeding operations are well developed and large scale,
most of the pig farming in the PRC is generally not well commercialized. Our
third party suppliers aggregate supplies from hundreds of small pig farms, which
are typically operated as independent family-owned farms. One advantage of
decentralized supply is that we obtain competitive market pricing for our supply
of pigs. Another advantage is that any outbreak of livestock disease is likely
to be confined to a one or more of these farms and would not affect our entire
supply. Potential disadvantages from a decentralized supply of pigs include
variations in quality of stock, and potential variation in quantity and timing
of the supply of hogs to our plant for processing. However, because all pig
farmers who supply pigs to us are all located within the greater Dalian City
metropolitan area (within a two hour radius by truck), the logistical issues
have so far not interfered with our ability to secure a steady supply of hogs.
Since we have around 6,000 local pig farmers who will supply hogs to us, we
ordinarily are able to obtain a reasonably stable supply of hogs, even when some
farms cannot meet our requests for any reason. Also, because our former parent
company, Group, acquires pigs directly from independent farmers then sell pigs
to us in lots (under our Hog Procurement Agreement), to some extent we have
minimized the potential disadvantages discussed above.




Our pig
suppliers supply us with regular quantities of pigs per based on the current
prevailing market price of pigs on the day of delivery. We typically order a
certain number of pigs per day from each of the farms that supply us pigs. For
instance, if we expect to order 80,000 pigs per annum from a supplier, that
supplier will supply somewhere between 240 and 260 pigs per day.




In order
to ensure a consistent supply of fresh pork to our customers, we have made
agreements with over 6,000 pig farms in the Dalian, to supplement our usual
supply of live pigs. These pig farms have agreed to guarantee us a supply of
approximately 350,000 pigs in 2008. Our suppliers have an aggregate capacity to
supply us with approximately 1,100 pigs per day.





We
normally pay a higher than average price per pig, which is typically RMB 1.25
per kg above the average market price for live pigs, in order to acquire what we
believe to be a higher quality supply of pigs. Although we pay a premium for a
higher quality supply of pigs, our management believes that the benefits of this
strategy outweigh the costs because of the goodwill that results from providing
a consistently high-quality product to our customers.




14




We pay
different “market prices” for live pigs depending on quality and weight. 
Incoming live pigs are graded by our quality control personnel based on a number
of criteria (including fat content, health of the animal, absence of injuries,
the net weight), into several categories including “Grades 1- 4” and
“below-grade,” with Grade 1 being the highest quality (and accordingly the
highest price per kilogram).  We then determine prevailing market prices
for live pigs for these various grades based on market data drawn from the local
marketplace, which fluctuates daily.  Approximately 80% of the live pigs
purchased by us are in the Grade 1 and Grade 2 categories.  For example,
for the first quarter of 2008, approximately 80% of the live pigs purchased by
us were Grade 1 and 2, with the remainder in Grade 3 and 4. Since we generally
select higher-quality pigs (Grades 1 and 2) among all live pigs available for
purchase in the marketplace, as a result we pay a higher than average price per
kilogram for our overall supply of live pigs.




In 2006,
2007 and 2008, we paid a total of $ 59.2 million, $ 110.4 million and $ 125.6
million, respectively, for our total supply of live pigs. We paid the Group an
aggregate of $61.7 million and $­­­72.7 million for live pigs during
the years of 2007 and 2008, respectively, and the amounts paid were determined
as described above.




Under our
Long-Term Hog Procurement Agreement between the Group and Meat Company, the
Group agreed to supply no less than 800,000 live hogs in 2009, 800,000 in 2010,
and 800,000 in 2011, and the price for the hogs is set at the fair market price
at the time of delivery.




In 2007,
we experienced a severe supply shortage of hogs that was
unanticipated.  According to China Livestock and Products Annual
Report 2007 dated September 2, 2007 by the USDA Foreign Agriculture Service, the
severe supply shortage of hogs in 2007 was because of a series of outbreaks of
Porcine Reproductive and Respiratory Syndrome (PRRS), also known as Blue Ear
Disease, in China from May 2006.  In 2007, we processed approximately
791,440 pigs through December 31, 2007, which were 208,560 short of our target
of 1,000,000 pigs for 2007.  The problem of Blue Ear Disease persisted
through 2008, and many of such cases were widely reported throughout
China.  In 2008, we processed approximately 806,427 pigs through
December 31, 2008, which were 193,573 short of our target of 1,000,000 pigs for
2008.  Due to the shortage of supply of hogs, during 2008 the
government started offering subsidies and tax incentives to pig farmers in an
effort to stimulate production.   However, the positive effects
of such government incentives may take some time to realize.  Pigs
normally have a growth cycle of 175 days before they are full grown and
slaughtered, and with the outbreaks of the Blue Ear Disease, the supply of pigs
remained tight and the price of pork remained high in 2008 as a result of the
shortage of supply.  The average pork price increased by 28 percent in
2008 compared to 2007.




We
participate in a breeding program with local farmers – under this program, after
a careful selection process, every participating breeder must have a pig farmer
provide a guarantee of supply, who must be responsible for making up any
differences between the agreed amount and actual number of pigs supplied to us.
This program has been in existence since 1998.  Management believes
that since our breeding program has successfully increased farmer income and tax
revenue in our region, our local government has welcomed these
programs.





Among our
suppliers, Zheng Baojiang, Zhang Jihuan, Wang Fujie, Ge Hongqi, and Chen Lienhe
are the most successful pig farmers in our supply chain, and they supplied an
aggregate of 12,500, 10,000, 9,000, 8,500 and 7,000 hogs respectively through
each of the 12 months of 2008, contributing to 5.8% of our total
supply.




In
addition to the quality of our suppliers’ stock, and their health and safety
controls, we have a quality control system of our own to ensure that pigs
supplied to us are healthy and fit for human consumption. We require that pigs
supplied to us be accompanied by required health certificates, and each must
weigh at least between 90kg and 100kg. If the pigs meet the above criteria, we
are then obligated to accept delivery of the pigs. (A pig that weighs between 90
and 100 kg, has more saleable meat per kilogram. If it is below this weight
range, the ratio of meat to innards would be lower, resulting in less saleable
meat per kilogram).




Customers
and Distribution Methods of the Products




Customers




We have
three primary types of customers for our products, which are (1) city and town
households, (2) canteens and restaurants, and (3) food processing
companies.




15




We have
found that Chinese households prefer fresh pork to frozen pork. Consumers
typically buy fresh pork in small quantities, in frequent visits to markets
where it is sold. Households usually choose the supermarkets, the wet market, or
ChumingTM branded showcase stores to buy the fresh pork based on convenience.
This type of customer accounted for 92% of our revenues in 2008.




Canteens
include the cafeterias of government agencies, schools, factories and hospitals.
These customers, including restaurants, often purchase our pork from ChumingTM
branded showcase stores or directly from agents or wholesalers of the Company.
This customer segment accounted for 6% of our revenues in 2008.




In
addition to the above two types of customers, we also provide branded food
processing companies with fresh and frozen pork. However, this customer segment
accounted for less than 2% of our revenue in 2008.  Since our sourced
pigs are of good breed and have undergone strict quality control in the
production process, these food processors regularly rely on our pork as an
ingredient in their products. Our clients in this segment include Taiwan Dachan,
a feed supplier and food processor in Taiwan. These food processing companies
typically gain access to our products through Chuming agents or
wholesalers.




Our
largest customer accounted for approximately 26%, 8.8% and 9% respectively of
our total turnover for the years ended December 31, 2006, 2007 and 2008. Our top
five customers accounted for approximately 71%, 45% and 37.5% of our total
turnover for the years ended December 31, 2006, 2007 and 2008, respectively.
None of our directors, their associates or any significant shareholder of the
Company has any interest in any of our five largest customers.




Distribution
Network




Our
distribution network is organized and divided by geographic markets and sales
regions, including: Dalian Metropolitan, Eastern Liaoning, Western Liaoning,
Jilin, Heilongjiang and Hebei markets. In each market, we have a team led by a
sales officer whose objective is to expand the Chuming sales network by
developing potential dealers, agents and wholesalers, and to maintain the
existing network by assisting our sellers. Our Sales Company works with dealers,
agents and wholesalers, who then submit orders directly to us.




Sales
by Region for the Year Ended December 31, 2008




Dalian
            
            
            59
            %Shenyang
            
            
            24
            %East
      Liaoning
            
            
            5
            %North
      Liaoning
            
            
            3
            %West
      Liaoning
            
            
            3
            %Others
            
            
            6
            %




Retail
Strategy





To
differentiate ourselves, we have a unique retail strategy to complement our
wholesale operations. We sell our product to “showcase stores” which are owned
and operated by independent operators. These specialty boutique-type stores must
have the same design and physical layout and must follow our operating
methodologies. These storefronts are highly visible with the ChumingTM brand
name. We also set merchandising and pricing policies and all employees must
undergo a mandatory training program. There are currently over 860 such boutique
stores in Liaoning Province, providing high brand recognition and communicating
a message of quality that will benefit all channels. These boutique stores
target the new middle class that desire and can afford high quality goods and
services. They provide particular convenience to a typical busy two-income,
middle-class family which shops frequently after work. Most of these boutique
shops are located in Dalian and the major cities of Liaoning Province. Each
store has a minimum monthly sales requirement depending on the city and
store.




Dealers,
agents and wholesalers who we work with serve their own diverse distribution
channels. Our affiliated dealers organize their sales to stores and
supermarkets, such as Carrefour, Wal-mart, Hymall, New-mart and Metro. Our
affiliated agents assist in identifying locations and opening ChumingTM branded
showcase stores in their region, important to expanding our revenues. Our
affiliated wholesalers typically organize the sales to canteens and restaurants
as well as food processing companies. In some regions, our affiliated agents
will also directly contact local canteens and restaurants.




16




Chuming’s
Distribution Network









We have
our ChumingTM branded counters in large stores and supermarkets, which are the
most important and highly visible locations to enhance our brand and image.
Since large supermarkets such as Carrefour and Wal-mart have strict requirements
to approve any suppliers, having ChumingTM counters in these mega-retailers’
flagship stores reinforces the consumer confidence in our products. We have
ChumingTM counters in more than 242 large supermarkets located in Northeast China
and the Hebei Province.





Our most
popular product, fresh pork, is sold primarily though our ChumingTM branded
showcase stores. ChumingTM showcase stores are usually located in high-density,
urban residential areas easily accessible by our customers. The ChumingTM
showcase stores also save time compared to long lines sometimes found at large
supermarkets. ChumingTM showcase stores are all equipped with refrigerators to
keep the pork fresh. We have established more than 860 ChumingTM showcase stores
now operating in Dalian and throughout the Liaoning Province.  In the
next few years, we aim to increase the number of our ChumingTM branded franchise
stores to more than 1,000 outlets.




17




We
provide operators of showcase stores and specialty counters with equipment
(refrigerated showcases, signage, uniforms, heating equipment for processed food
and other equipment), labels and packaging, technical assistance, and permission
to sell our products under the ChumingTM brand name. These operators pay us an
equipment deposit (to cover the cost of equipment), a trademark usage guarantee
deposit, a uniform fee (for the cost of employee uniforms), a one-time start-up
fee to cover the costs of certain materials, and an ongoing fee of approximately
0.5% of the total purchase amount of the products these operators purchase from
us. Operators agree to sell our products exclusively, and may sell other
products only with our consent. Operators are responsible for payment of their
own taxes and government fees, leasing expenses, and other operating costs. If
an operator is terminated, we will refund the equipment deposit upon return of
the equipment, and the trademark deposit if the operator has complied with the
trademark usage guidelines we provide to them. We generally reward high-volume
operators with discounts and incentives on a case-by-case basis.




Delivery




In China,
one of the main obstacles to expanding market share and developing national
brands has been logistical management during processing. We address this issue
by equipping our processing plant with modern technologically advanced,
state-of-the art equipment and production lines. Our advanced logistical
infrastructure includes the use of bar coding and electronic interchange to
enhance the speed and accuracy of data flow. Over the years, we have built an
extensive logistical system that includes 36 contracted refrigerated container
trucks that allow us to better preserve the meat and to expand our market scope
by delivering food to farther retail points. As a result, we have been able to
make deliveries within a 500km radius of our Dalian processing plant.
Furthermore, our modern information technology system adds additional
competitive advantage as it provides us real time market and production data
which in turn enables us to capitalize on the timely information regarding
market pricing, inventory levels, and changes in demand.




After
orders are gathered and processed at the Sales Company, our products are
delivered utilizing our transportation fleet and through pick-up by certain
accounts at our facilities. The quality of our fresh pork is highly dependent on
the storage room and delivery vehicles once they leave the chill room. We
currently own 36 temperature-controlled vehicles, which we employ in our
operations to help guarantee the freshness of pork at the point of delivery to
customer locations in our primary market which is within a two-hour radius of
Dalian.





Quality
Control




We
maintain all required licenses and certificates from the relevant central and
local government authorities with regard to our pork production business. In
2005, we were awarded ISO 9001:2000 certification that covers our production,
research and development and sales activities. ISO 9001 certification indicates
that our abattoirs and pork production operations comply with international
standards of quality assurance established by the International Standards
Organization. All of Chuming’s production lines have also passed the Hazard
Analysis and Critical Control Point (HACCP) test, which is certified by Moody
International Certification Ltd.




We
currently have 82 Quality Control (QC) personnel who run and refine our quality
assurance system. This system is divided into two sections: Meat Production
Supervision and Processed Meat Supervision. The 82 employees who work in our
quality assurance program consist of 34 quality control engineers and 48 staff.
All members of the QC team are trained technicians with qualifications and
experience in animal husbandry, quarantines and veterinary medicine. The quality
control laboratory meets and exceeds all standards set by the authorities and
relevant agencies in the PRC.




In
addition, government inspectors regularly and permanently work in our
slaughtering and packaging plant every shift. They examine animals before
slaughter, supervise sanitation, inspect carcasses and internal organs for
diseases during the slaughtering and processing procedures, and then certify
carcasses and packaged products as to consumer readiness.




As
discussed in the above section regarding our principal products, the pork
products produced from freshly slaughtered pigs at our facilities are chilled or
frozen after slaughtering to prevent deterioration of the meat caused by
bacteria or chemical changes. The chilled and frozen pork are maintained within
the requisite temperature ranges, during subsequent handling, transportation and
distribution to retain freshness and to prevent deterioration of the
meat.




18




Competition




We are
currently one of the largest meat producers in the three northeast provinces of
Jilin, Liaoning and Hei Longjiang. According to management’s estimates, in
Liaoning Province, we are the market leader for both fresh pork with 9.6% market
share and for meat products with a 2.7% market share. Management estimates that
in Dalian, we are the market leader for fresh pork with a 52% market share, and
shares the lead position for meat products with a 23% market share. As we expand
geographically, we expect to encounter additional regional and local
competitors. Our management believes that all food segments in China compete on
the basis of price, product quality, brand identification and customer service,
and that we are well positioned in all of these areas.




Major
Domestic Competitors




Currently,
our primary competition comes from the domestic players that operate in a very
fragmented industry environment. Presently, there is no clearly dominant
producer in the PRC pork industry. The three largest producers in China,
Shuanghui, People’s Food and China Yurun, together capture less than 5% of the
total market. Most of the companies in the industry tend to focus on different
product and market segments. Shuanghui has the largest market share in the HTMP
pork segment, while Yurun is the leader in the LTMP space. Both companies have
done well in the top tier markets. People’s Food, on the hand, tends to focus
more of its distribution efforts on smaller cities, where mass distribution is
more difficult, and typically does not sell through large retail channels. On
the other hand, about 40% of China Yurun’s sales are through supermarket and
hypermarket chains. In terms of geographical focus, we believe People’s Food has
a strong presence in Northeastern China, and China Yurun has announced plans to
expand into the Northeast with plans for two new plants in Shenyang and
Harbin.





New
International Entrants




After
China joined the WTO, many domestic industries were opened to international
competition, including the meat-processing industry. Foreign companies have
already entered China’s major cities, mainly though the major hypermarkets such
as Carrefour. So far, domestic players have an advantage in the introduction of
new products based on local tastes and distribution in below Super-tier cities
such as Beijing and Shanghai. Tyson Foods, Inc., U.S.A. has a joint venture with
Shanghai Ocean Wealth Fish Products Corporation Limited. Hormel Foods
Corporation, U.S.A., has set up representative offices in China in 1995 and
currently operates processing factories in Shanghai and Beijing.




Advertising and Promotional
Activities




Advertising
and promotional expenses were $1,764,788, $2,241,062 and $869 for the years
ended December 31, 2008, 2007, and 2006, respectively.  Our
advertising and marketing expenditures decreased considerably from $2,241,062 in
2007 to $1,764,788 in 2008, partly attributable to outsourcing some of the
marketing and promotion of our products to our independent sales agents, and in
return the Company gave them bigger discounts and incentives on our
products.   The Company believes that advertisements can be
handled more effectively at a regional and local level by the sales agents
individually, and at the same time it is also more cost effective for the
Company.  In 2008, we allocated more of our resources to increase the
advertising and promotional activities aimed at higher performing regions,
retailers and supermarkets.





Advertisements
are principally for Processed Meat Products and Fresh Pork and are targeted at
consumers in the Northeast PRC. We advertise periodically in the local media to
create and maintain public awareness of our products and
branding.  These activities include television commercials, radio,
magazine and newspaper advertisements, and exhibitions. We increase the
frequency of advertisements whenever new products are launched.




Intellectual
Property Rights




Through
our advertising efforts and the consistent quality of its products, our
management believes that consumers in the PRC have come to associate our
“ChumingTM” brand name with quality meat products. Thus, our management believes
that the goodwill in the “ChumingTM” branding is a valuable asset to us. The
“Chuming” trademark and rights to the “Huayu” trademark application in the PRC
are owned by Dalian Chuming Industry Development Co., Ltd., a subsidiary of the
Group. We have been granted a perpetual fully paid up license to use both of
these trademarks in connection with our business, under two trademark agreements
with Dalian Chuming Industry Development Co., Ltd.




19




We
believe that the protection of our brand names is important to our marketing
efforts and believe that we have taken appropriate steps to protect our brand.
We have not discovered any counterfeiting or any infringements of our ChumingTM
or Huayu brand names during the three years prior to the date of this
report.





We
require all resellers who we work with, including specialty counters and
showcase store operators, to comply with our trademark usage policy, and require
them to pay trademark usage guarantee deposits. We also have approximately 42
employees who randomly inspect the facilities of the over 792 operators we work
with to ensure compliance with our policies and other guidelines. We will
generally terminate our business relationship with operators found violating our
policies.




Research
and Development




We have
two operations, a Meat Engineering Center and a Sea Products Center, focused on
the development of new products to the market. In addition to meeting the taste
demands of consumers, these groups focus on quality, nutrition and safety
standards. These groups draw upon a 25-employee research and development staff,
including three professors in the field of animal nutrition and biology,
supporting the safe and rapid introduction to the market of new products,
specifically in the areas of seafood and meat by-products. We currently have
more than 125 products available to consumers, with the average rate of three
new products ready for the market per month. We are also working on
anti-freezing experiments to facilitate preservation of our meats so as to
minimize or eliminate the use of chemical preservatives.




Government
Approval and Regulation of Principal Products




The
Chinese government is actively promulgating a plan for “safe meat” and is
expected to raise the proportion of slaughtering automation to over seventy
percent of all meat and actively enforce authorized slaughtering and quarantine.
Government initiatives take the form of benefits ranging from special grants,
subsidized financing, preferential tax policies, and direct government funding
and other types of subsidies aimed at encouraging the modernization of the meat
industry. In addition, while it is possible that the Chinese central or
provincial governments may enact more stringent regulations that raise standards
for the meat processing industry, we believe that our company is currently a
leader in meat processing safety standards, and would not be affected by such
increased standards.





Compliance
with Environmental Laws




We own
two wastewater treatment plants on premise with a daily treating capacity of six
hundred tons for each plant. Those plants were designed to comply with the
Integrated Wastewater Discharge Standard of the PRC and the Environmental
Protection Regulation of Dalian City. To the knowledge of our management, we
have been in full compliance with environmental protection regulations during at
least the past three years.




Employees




We
currently have approximately 670 employees, the composition of which is as
follows:





R&D and
              Engineering
            
            Production
            
            General and
              Administrative
            
            Sales and
              Marketing
            
            Quality
              Control
            
            TotalMeat
      Company
            
            
            12
            
            189
            
            
            24
            
            12
            
            
            15
            
            252Food
      Company
            
            
            18
            
            166
            
            
            12
            
            8
            
            
            12
            
            216Sales
      Company
            
            
            0
            
            0
            
            
            20
            
            182
            
            
            0
            
            202Total
            
            
            30
            
            355
            
            
            56
            
            202
            
            
            27
            
            670




We and
our predecessor companies have experienced excellent employee retention, which
we believe is a result of our consistently-applied management policies and
proactive employee benefit program participation. The average tenure is four
years for factory workers and twelve years for management staff. All employees
are provided with health insurance, unemployment insurance and retirement
benefits that are provided by the government. We make regular payments into
these government-sponsored health insurance and retirement programs for each
employee. Additionally, we provide free meals and accommodations to all
employees on shift.




20


Certain
of our employees are represented by a labor union which is governed by PRC
Company and Labor Laws. There have been no adverse labor incidents or work
stoppages in our history or our predecessor companies. Management believes that
our relationship with our employees and the union are good.




Corporate
Information




Our
principal executive offices are located at No. 9, Xin Yi Street, Ganjingzi
District, Dalian City, Liaoning Province, PRC 116039. Our main telephone number
is +86 411 867 166 96 and our fax number is +86 411 867 166 90.




RISK
FACTORS





You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this report that are not historic facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.





Risks
Relating 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. Our holding company in China, Chuming WFOE, and the
companies that form its present subsidiaries were incorporated in 2004.
Accordingly, you should consider our future prospects in light of the risks and
uncertainties experienced by early stage companies in evolving industries such
as the meat industry in China. Some of these risks and uncertainties relate to
our ability to:





·
              maintain
      our market position in the meat business in China;


·
              offer
      new and innovative products to attract and retain a larger customer
      base;


·
              attract
      additional customers and increase spending per customer;


·
              increase
      awareness of our brand and continue to develop user and 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


·
                  upgradeour
      technology to support additional research and
      development.


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




21




If
there are any interruptions to or decline in the amount or quality of our live
pigs, raw pork or other major raw material supply, our business could be
materially and adversely affected.




Live pigs
and raw pork are the principal raw materials used in our production. We procure
approximately 58% of our live pigs from Group, and the remainder from various of
third party suppliers who are independent farmers. Our third party suppliers may
not continue to be able to supply an adequate number of live pigs to satisfy our
present and future production needs. The supply of pigs is dependent on the
output of pig farms, which may be affected by outbreaks of diseases or
epidemics. Our current suppliers may not be able to provide live pigs of
sufficient quality to meet our stringent quality control requirements. Any
interruptions to or decline in the amount or quality of our live pig supply
could materially disrupt our production and adversely affect our business. In
addition to live pigs, we also use additives and packaging in our production,
which we source from third party suppliers. Any interruptions to or decline in
the amount or quality of our additives or packaging supply, could also disrupt
our production or sales and adversely affect our business.




We
are vulnerable to increases in the price of live pigs and other operating costs,
and we may not be able to entirely offset these increasing costs by increasing
the prices of our products, particularly our processed meat
products.




We
purchase agricultural products, such as live pigs, for use in our production
process and for resale. The price of such commodities is subject to fluctuations
that are attributable to a number of factors, such as the price of animal feed,
diseases and infections, and weather conditions. If for example, worldwide and
local grain prices should increase, this would affect the price of animal feed,
which may increase the price of live pigs. Higher pig prices may force us to
raise the prices we charge our customers for our products, however we may not
always be able to pass on the entire amount of price increases to our customers,
and/or consumers might cut back on consumption of meat products.





During
2007 and 2008, prices of live pigs rose sharply.  If the costs of raw
materials or other costs of production and distribution of our products increase
further, and we are unable to entirely offset these increases by raising prices
of our products, our profit margins and financial condition could be adversely
affected. According to China Livestock and Products Annual Report 2007 dated
September 25, 2007 by the USDA Foreign Agricultural Service, the severe supply
shortage of hogs in 2007 was because of a series of outbreaks of Porcine
Reproductive and Respiratory Syndrome(PRRS), also known as
Blue Ear Disease, in China from May 2006.  Blue Ear Disease is an
infectious disease that affects swine, characterized by reproductive disorders,
premature delivery, miscarriage, and stillbirth—as well as abnormal breathing in
piglets. According to the report, shortages and a sharp pork price increase
occurred as a result of Blue Ear Disease. The average pork price increased by 48
percent from January to August 2007 over the same period in 2006, while prices
in July and August 2007 increased by 86 and 87 percent, respectively, from the
same months in 2006. The series of outbreak of Blue Ear Disease persisted in
2008.  In 2008, the supply of pigs remained tight and the price of
pork remained high.  The average pork price increased by 28 percent in
2008 compared to 2007.




We paid
the Group an aggregate of $61.7 million and $72.7 million for live pigs during
the full years of 2007 and 2008, respectively.





We
may be unable to anticipate changes in consumer preferences for processed meat
products, which may result in decreased demand for our products.




Our
continued success in the processed meat products market is in large part
dependent on our ability to anticipate and develop products that appeal to the
changing tastes, dietary habits and preferences of customers. If we are not able
to anticipate and identify new consumer trends and develop new products
accordingly, demand for our products may decline and our operating results may
be adversely affected. In addition, we may incur significant costs relating to
developing and marketing new products or expanding our existing product
offerings in reaction to what we perceive to be a consumer preference or demand.
Such development or marketing may not result in the level of market acceptance,
volume of sales or profitability anticipated.




If
the chilled and frozen pork market in China does not grow as we expect, our
results of operations and financial conditions may be adversely
affected.




If the
chilled and frozen pork market in China 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.




22




We
require various licenses and permits to operate our business, and the loss of or
failure to renew any or all of these licenses and permits could materially
adversely affect our business.




In
accordance with PRC laws and regulations, we are required to maintain various
licenses and permits in order to operate our business, including, without
limitation, a slaughtering permit in respect of each of our chilled and frozen
pork production facilities and a permit for production of industrial products in
respect of each of our processed meat production facilities. We are required to
comply with applicable hygiene and food safety standards in relation to our
production processes. Our premises and transportation vehicles are subject to
regular inspections by the regulatory authorities for compliance with applicable
regulations. Failure to pass these inspections, or the loss of or failure to
renew our licenses and permits, could require us to temporarily or permanently
suspend some or all of our production or distribution operations, which could
disrupt our operations and adversely affect our business.




We
are highly dependent on 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
processing methods and technologies, food products and the enhancement of our
existing products. In particular, we rely substantially on our chairman and
chief executive officer, Mr. Shi Huashan, to manage our operations. We also
depend on our key research personnel. In addition, we also rely on information
technology and logistics personnel for the production, storage and shipment of
our products and on marketing and sales personnel, engineers and other personnel
with technical and industry knowledge to transport, market and sell our
products. We do not maintain key man life insurance on any of our senior
management or key personnel. The departure of any one of them, in particular Mr.
Shi, would have a material adverse effect on our business and operations.
Competition for senior management and research and development 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 research and
development personnel that we lose. In addition, if any member of our senior
management or key research and development 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.





We
compete for qualified personnel with other food processing companies, food
retailers, logistics 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.




Our
growth strategy may prove to be disruptive and divert management
resources.




Our
growth 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 could also experience financial or other setbacks if any of our
growth strategies incur problems of which we are not presently aware. We may
require additional financing in the future.





We may
need to obtain additional debt or equity 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




23




·
              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.




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, in particular, third party suppliers of
pigs, typically require payment in full within seven days after delivery,
although some of our suppliers provide us with credit. In turn, we typically
require our customers of chilled and frozen pork to make payment in full on
delivery, although we offer some of our long-standing customers credit terms. 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 receivables, we
may not have sufficient cash flow to fund our operating costs and our business
could be adversely affected.




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




We sell
substantial amounts of our products to supermarkets and large retailers. The
supermarket and food retail industry in China has been, and is expected to
continue, undergoing a trend of development and consolidation. As the food
retail trade continues to consolidate and our retail customers grow larger and
become more sophisticated, they may demand lower pricing and increased
promotional programs. Furthermore, larger customers may be better able to
operate on reduced inventories and potentially develop or increase their focus
on private label products. If we fail to maintain a good relationship with our
large retail customers, or fail to maintain a wide offering of quality products,
or if we lower our prices or increase promotional support of our products in
response to pressure from our customers and are unable to increase the volume of
our products sold, our profitability could decline.




Our
operating results may fluctuate from period to period and if we fail to meet
market expectations for a particular period, our share price may
decline.




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 processed meat products consumption. Our
production and sales of chilled and frozen pork are generally lower in the
summer, due to lower supply of live pigs. 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.
We cannot assure you that our operating results will meet the expectations of
market analysts or our investors. If we fail to meet their expectations, there
may be a decline in our share price.





We
currently derive substantially all of our revenues from sales in China and any
downturn in the Chinese economy could have a material adverse effect on our
business and financial condition.




Substantially
all of our current revenues are generated from sales in China. We anticipate
that revenues from sales of our products in China will continue to represent a
substantial proportion of our total revenues in the near future. Any significant
decline in the condition of the PRC economy could, among other things, adversely
affect consumer buying power and discourage consumption of our products, which
in turn would have a material adverse effect on our business and financial
condition.





We
rely on our exclusive network of showcase stores, network stores and supermarket
brand counters for the success of our sales and our brand image, and should they
perform poorly, our business and brand image could be materially and adversely
affected.




In
addition to our sales to wholesale customers, we sell our products through
showcase stores, network stores and supermarket brand counters. All of these
retail based stores exclusively sell our pork products and display the Chuming
logo on our store facades. For the fiscal year ended 2008, these retail outlets
accounted for approximately 40% of our total revenue. If the sales performance
of our retail based stores deteriorates, this could adversely affect the
financial results of the company. In addition, any sanitation, hygiene, or food
quality problems that might arise from the retail based stores could adversely
affect our brand image and lead to a loss of sales. Chuming does not own any of
the retail based stores.




We
rely on the performance of our wholesaler, retailer and mass merchant customers
for the success of our sales, and should they perform poorly or give priority to
our competitors’ products, our business could be materially and adversely
affected.




In
addition to our retail sales channel, we sell our products to supermarkets and
large retailers, which in turn sell the products to end consumers. If the sales
performance of our wholesale customers deteriorates, this could adversely affect
our sales. Furthermore, our wholesale customers also carry products which
directly compete with our products for retail space and consumer purchases.
There is a risk that our wholesale customers may give higher priority to
products of, or form alliances with, our competitors. If our wholesale customers
do not continue to purchase our products, or provide our products with similar
levels of promotional support, our sales performance and brand imaging could be
adversely affected.




24




The
loss of any of our significant customers could have an adverse effect on our
business.




Our key
customers are principally supermarkets and large retailers in the PRC. We have
not entered into long-term supply contracts with any of these major customers.
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. 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. Further, the loss of any one of our top five
customers could cause us to suffer a temporary setback in our sales, which could
have a short term negative effect on our financial results.





Recent
regulatory enforcement crackdowns on food processing companies in the PRC could
adversely affect our businesses.




Recently,
the PRC government authorities have taken certain measures to maintain the PRC
food market in good order and to improve the integrity of the PRC food industry,
such as enforcing full compliance with industry standards and closing certain
food processing companies in the PRC that did not meet regulatory standards. We
cannot assure you that our businesses and operations will not be affected as a
result of the deteriorating reputation of the food industry in the PRC due to
recent scandals regarding food products.





Environmental
regulations and related government action or litigation could have a material
adverse effect on our business and results of operations.




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 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.




Deterioration
of our perishable products may occur due to delivery delays, malfunctioning of
freezer facilities or poor handling during transportation, which could adversely
affect our business, results of operations and financial condition.




The
condition of our food products (being perishable goods) may deteriorate due to
shipment or delivery delays, malfunctioning of freezer facilities or poor
handling during delivery by shippers or intermediaries. We are not aware of any
instances whereby we were made to compensate for delivery delays, malfunctioning
of freezer facilities or poor handling during transportation. However, there is
no assurance that such incidents will not occur in the future. In the event of
any delivery delays, malfunctioning of freezer facilities or poor handling
during transportation, we may have to make compensation payments and our
reputation, business goodwill and revenue will be adversely
affected.




25




Unexpected
business interruptions could adversely affect our business.




Our
operations are vulnerable to interruption by fire, power failure and power
shortages, floods, computer viruses and other events beyond our
control.  In the event a power failure or power shortage occurs, we
have our own back up electricity generators prepared for such
emergencies.  In particular, China, especially eastern and southern
China, is experiencing frequent electricity shortages.  In addition,
we do not carry business interruption insurance to compensate us for losses that
may occur as a result of these kinds of events and any such losses or damages
incurred by us could disrupt our production and other operations.




If
we fail to develop and maintain an effective system of internal controls, we may
not be able to accurately report our financial results or prevent fraud; as a
result, current and potential shareholders could lose confidence in our
financial reports, which could harm our business and the trading price of our
common stock.




Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002
requires us to evaluate and report on our internal controls over financial
reporting and have our independent registered public accounting firm annually
attest to our evaluation, as well as issue their own opinion on our internal
controls over financial reporting, beginning with our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009.  We plan to prepare for
compliance with Section 404 by strengthening, assessing and testing our system
of internal controls to provide the basis for our report. The process of
strengthening our internal controls and complying with Section 404 is expensive
and time consuming, and requires significant management attention, especially
given that we have not yet undertaken any efforts to comply with the
requirements of Section 404. We cannot be certain that the measures we will
undertake will ensure that we will maintain adequate controls over our financial
processes and reporting in the future. Furthermore, if we are able to rapidly
grow our business, the internal controls that we will need will become more
complex, and significantly more resources will be required to ensure our
internal controls remain effective. Failure to implement required controls, or
difficulties encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations. If we or our
auditors discover a material weakness in our internal controls, the disclosure
of that fact, even if the weakness is quickly remedied, could diminish
investors’ confidence in our financial statements and harm our stock price. In
addition, non-compliance with Section 404 could subject us to a variety of
administrative sanctions, including the suspension of trading, ineligibility for
listing on one of the Nasdaq Stock Markets or national securities exchanges, and
the inability of registered broker-dealers to make a market in our common stock,
which would further reduce our stock price.




We
will incur increased costs as a public company which may affect our
profitability and an active trading market.




As a
public company, Chuming will incur significant legal, accounting and other
expenses that it did not incur as a private company. We are now subject to the
SEC’s rules and regulations relating to public disclosure. SEC disclosures
generally involve a substantial expenditure of financial resources. In addition,
the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by
the SEC, has required changes in corporate governance practices of public
companies. We expect that full compliance with these new rules and regulations
will significantly increase our legal and financial compliance costs and make
some activities more time-consuming and costly. For example, we will be required
to create additional board committees and adopt policies regarding internal
controls and disclosure controls and procedures. Such additional reporting and
compliance costs may negatively impact our financial results. To the extent our
earnings suffer as a result of the financial impact of our SEC reporting or
compliance costs, our ability to develop an active trading market for our
securities could be harmed.




We
have limited business insurance coverage.




The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources. In addition,
since our business operations are based outside of the U.S. (although we
are a Nevada corporation quoted on the OTC Bulletin Board in the U.S.),
directors and officers insurance may not be readily available to us at the
prices and on terms acceptable to us. If we are not able to secure satisfactory
D & O insurance coverage, we may not be able to attract the most qualified
directors and officers, and our business could be indirectly adversely
affected.




26




Risks
Relating To Our Industry




The
pig slaughtering and processed meat industries in China are subject to extensive
government regulation, which is in the process of change and
development.




The pig
slaughtering and processed meat industries in China are 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 pig slaughtering and
processed meat industries in China, including, without limitation, setting
hygiene standards for production and quality standards for processed meat
products. In addition, the pig slaughtering and processed meat products
regulatory framework in China 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 China may be
limited.




The
pig slaughtering and processed meat industries in China may face increasing
competition from both domestic and foreign companies, as well as increasing
industry consolidation, which may affect our market share and profit
margin.




The pig
slaughtering and processed meat industries in China are highly competitive. Our
processed meat products are targeted at mid- to high-end consumers, a market in
which we face increasing competition, particularly from foreign suppliers. In
addition, the evolving government regulations in relation to the pig
slaughtering industry have driven a trend of consolidation through the industry,
with smaller operators unable to meet the increasing costs of regulatory
compliance and therefore are 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 largely dependent upon our
ability to distinguish our products and services.




In
addition, prior to China’s entry into the World Trade Organization (“WTO”), high
barriers to entry existed for many potential competitors in our business through
the use of tariffs and restrictive import licensing and distribution practices.
China’s admission to WTO has lowered some of the tariffs and other barriers to
entry so we can expect that competition will increase.




We cannot
assure you that our current or potential competitors will not develop products
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 in
the raw meat market may merge or form alliances to achieve a scale of operations
or sales network which would make it difficult for us to compete. Increased
competition may also lead to price wars, counterfeit products or negative brand
advertising, all of 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 or other epidemics could adversely affect our
operations.




An
occurrence of serious animal diseases, such as foot-and-mouth disease, or any
outbreak of other epidemics in China 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 China and surrounding regions, any of
which could have a material adverse effect on our operations and turnover. There
can be no assurance that our facilities or products will not be affected by an
outbreak of any disease or outbreak 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.




27





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, or about the safety of food additives used in
processed meat products, could discourage them from buying certain of our
products and cause our results of operations to suffer.




We
may be subject to substantial liability should the consumption of any of our
products cause personal injury or illness.




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 procurement and 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. Consistent with industry practice in China, 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, we may be required to recall
products. Even if a situation does not necessitate a product recall, we cannot
assure you that government sanctions or 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 business, financial
condition or results of operations.




Our
product and company name may be subject to counterfeiting and/or imitation,
which could impact upon our reputation and brand image as well as lead to higher
administrative costs.




We regard
brand positioning as the core of our competitive strategy, and intend to
position our brand, “ChumingTM” to create the perception and image of health,
nutrition, freshness and quality in the minds of our customers. There have been
frequent occurrences of counterfeiting and imitation of products in the PRC in
the past. We cannot guarantee that counterfeiting or imitation of our products
will not occur in the future or that we will be able to detect it and deal with
it effectively. Any occurrence of counterfeiting or imitation could impact
negatively upon our corporate and brand image, particularly if the counterfeit
or imitation products cause sickness, injury or death to consumers. In addition,
counterfeit or imitation products could result in a reduction in our market
share, a loss of revenues or an increase in our administrative expenses in
respect of detection or prosecution.





Risks
Relating To Conducting Business in the PRC




Substantially
all of our assets and projects are located in the PRC, and substantially all of
our revenue is sourced from the PRC. Accordingly, our results of operations and
financial position are subject to a significant degree to economic, political
and legal developments in the PRC, including the following risks:




Economic,
political and social conditions and government policies in China could have a
material adverse effect on our business, financial condition and results of
operations.





Economic,
political and social conditions and government policies in China differ in many
respects from other more fully industrialized nations, and below are examples of
such differences.




28





·
              Structure. Agriculture
      still plays an important role in Chinese economy and employment.
      Agriculture still represents around 50% of the employment, which is
      substantially higher than most developed
  countries.





·
              Capital re-investment.
      Compared with more highly developed nations, there may be less
      availability to Chinese firms of all types of investment capital within
      China.





·
              Government involvement.
      China is still transitioning from a centrally planned economic model to
      that of a free market. As a result, the Chinese government has
      traditionally had a greater degree of regulatory involvement in the
      economic affairs and conduct of firms in China, as compared with firms in
      more advanced market-based
economies.





·
              Allocation of
      resources. Related to the above point, the Chinese government may
      have greater ability to influence the allocation of capital, labor,
      materials, and other resources than governments of other advanced
      market-based economies.





·
              Level of development.
      Although China’s economy has been rapidly growing in recent years, certain
      aspects such as public infrastructure, poverty rate, and other
      measurements of development still lag behind highly developed nations, and
      this affects how companies must conduct business in
  China.





·
              Control of foreign
      exchange. China still maintains strict foreign exchange controls
      which has been in place since 1979, although steps have been taken to
      increase the exchangeability of the Chinese renminbi with other
      currencies.





·
              Growth rate. For
      several years, China’s economy has achieved consistent double digit growth
      rates, and this may put strain on infrastructure, availability on raw
      materials, and ability of firms to manage
  growth.





·
              Rate of inflation.
      According to the Consumer Price Index (CPI) compiled by the National
      Statistics Bureau of China, the overall rate of inflation (CPI) in
      December 2008 is 5.9% and the rate of inflation for food in December 2008
      was 14.3%, which are substantially higher than most of the developed
      countries, and these factors affect the local market environment in which
      Chinese firms must operate.





The
economy of China has been transitioning from a centrally planned economy to a
more market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, a substantial portion of productive assets in China is still owned by
the PRC government. In addition, the PRC government continues to play a
significant role in regulating industries by imposing industrial policies. It
also exercises significant control over China’s economic growth through
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.





Policies
and other measures taken by the PRC government to regulate the economy could
have a significant negative impact on economic conditions in China, with a
resulting negative impact on our business. For example, our financial condition
and results of operations may be materially and adversely affected
by:





·
              new
      laws and regulations and the interpretation of those laws and
      regulations;





·
              the
      introduction of measures to control inflation or stimulate
      growth;





·
              changes
      in the rate or method of
taxation;




29




·
              the
      imposition of additional restrictions on currency conversion and
      remittances abroad; or





·
              any
      actions which limit our ability to develop, produce, import or sell our
      products in China, or to finance and operate our business in
      China.




Uncertainties
with respect to the PRC legal system could adversely affect us.




We
conduct our business primarily through our Chuming Operating Subsidiaries which
are located in China, which are governed by PRC laws and regulations. In
addition, because the parent companies that hold these entities, namely PSI and
Energroup Holdings Corporation, are outside of China, we are generally subject
to laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to wholly foreign-owned enterprises. The PRC legal
system is based on written statutes. Prior court decisions may be cited for
reference but have limited precedential value.





Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management
attention.




You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in this
report.




We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, while we are incorporated in the
State of Nevada, all of our senior executive officers reside within China. As a
result, it may not be possible to effect service of process within the United
States or elsewhere outside China upon our senior executive officers, including
with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, our PRC counsel has advised us that the PRC
does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of judgment of
courts.





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




The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Dalian Precious Sheen Investments
Consulting Co., Ltd. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries and our affiliated entity 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 State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB 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 its
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.




30




Fluctuation
in the value of RMB may have a material adverse effect on your
investment.




The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while we report our
financial results and position in U.S. dollars. Any significant fluctuation in
value of RMB may materially and adversely affect our reported cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.




We
face risks related to health epidemics and other outbreaks.




Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.




Risks
Related to Our Corporate Structure




In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our business in the PRC through Chuming WFOE by means of certain
ownership arrangements. If the PRC government determines that these ownership
arrangements do not comply with applicable regulations, our business could be
adversely affected and we could be subject to sanctions.




As a
result of the share exchange transaction disclosed elsewhere in this report, we
own 100% of the equity interest in Precious Sheen Investments Limited, a British
Virgin Islands company (“PSI”). PSI owns 100% of the equity in Dalian Precious
Sheen Investments Consulting Co., Ltd., a wholly foreign owned enterprise in the
People’s Republic of China. Chuming WFOE is a holding company for the following
three operating subsidiaries: (i) Dalian Chuming Slaughter and Packaging Pork
Company Ltd., (ii) Dalian Chuming Processed Foods Company Ltd., and (iii) Dalian
Chuming Sales Company Ltd., each of which is a limited liability company
headquartered in, and organized under the laws of, China (collectively, the
“Chuming Operating Subsidiaries”). Throughout this report, PSI, Chuming WFOE and
the Chuming Operating Subsidiaries are sometimes collectively referred to
as “Chuming.”





The PRC
government restricts foreign investment in businesses in China. Accordingly, we
operate our business in China through Chuming WFOE. Chuming WFOE holds
the licenses and approvals necessary to operate our business in
China.




Although
we believe we comply with current PRC regulations, we cannot assure you that the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If in the
future the PRC government determines that we do not comply with applicable PRC
law, it could impose fines on our PRC shareholders, and in extreme cases, the
PRC government could take steps to revoke our business and operating licenses,
require us to discontinue or restrict our operations, restrict our right to
collect revenues, require us to restructure our operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our
business. 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.




31




Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may limit our ability to acquire PRC companies and adversely affect the
implementation of our strategy as well as our business and
prospects.




The PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by PRC
residents intends to acquire a PRC company, such acquisition will be subject to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a PRC
company’s assets or equity interests to foreign entities, such as us, for equity
interests or assets of the foreign entities.




In April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a PRC company by an
offshore company controlled by PRC residents has been confirmed by a Foreign
Investment Enterprise Certificate prior to the promulgation of the January
notice, the PRC residents must each submit a registration form to the local SAFE
branch with respect to their respective ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in
China to guarantee offshore obligations.




On May
31, 2007, SAFE issued another official notice known as “Circular 106,” which
requires the owners of any Chinese company to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters in China.




If we
decide to acquire a PRC company, we cannot assure you that we or the owners of
such company, as the case may be, will be able to complete the necessary
approvals, filings and registrations for the acquisition. This may restrict our
ability to implement our acquisition strategy and adversely affect our business
and prospects. In addition, if such registration cannot be obtained, our company
will not be able to receive dividends declared and paid by our subsidiaries in
the PRC and may be forbidden from paying dividends for profit distribution or
capital reduction purposes.





Chuming
is subject to restrictions on making payments to our parent
Company.




We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investment in Chuming and
their operating subsidiaries in China. As a result of our holding company
structure, we rely entirely on payments or dividends from Chuming WFOE for our
cash flow to fund our corporate overhead and regulatory obligations. The PRC
government also imposes controls on the conversion of Renminbi into foreign
currencies and the remittance of currencies out of China. We may experience
difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency. Further, if our subsidiaries in China incur debt on
their own in the future, the instruments governing the debt may restrict their
ability to make payments. If we are unable to receive all of the revenues from
our operations through these contractual or dividend arrangements, we may be
unable to pay dividends on our shares of common stock.




Risk
Relating to an Investment in Our Securities




Generally,
we have not paid any cash dividends to our shareholders and no cash dividends
will be paid in the foreseeable future.




We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide or
may be unable due to pay any dividends. We intend to retain all earnings for our
company’s operations.




32




The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.




As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of US$1,000,000
or annual income exceeding US$200,000 or US$300,000 together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser’s written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common stock, and may result in decreased
liquidity for our common stock and increased transaction costs for sales and
purchases of our common stock as compared to other securities.





Our
common stock is thinly traded and, you may be unable to sell at or near “ask”
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.




We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq Global Select Market, Nasdaq Global Market, Nasdaq
Capital Market (the “Nasdaq Markets”), or other exchanges. Our common stock has
historically been sporadically or “thinly-traded” on the “Over-the-Counter
Bulletin Board,” meaning that the number of persons interested in purchasing our
common stock at or near bid prices at any given time may be relatively small or
nonexistent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to
the attention of such persons, they tend to be risk-adverse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer that has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price. We
cannot give you any assurance that a broader or more active public trading
market for our common stock will develop or be sustained, or that current
trading levels will be sustained.





The
market price of our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” that could lead
to wide fluctuations in our share price. The price at which you purchase our
common stock may not be indicative of the price that will prevail in the trading
market. You may be unable to sell your common stock at or above your purchase
price if at all, which may result in substantial losses to you.




The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. As
noted above, our common stock is sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event a large number of our common shares
are sold on the market without commensurate demand, as compared to a seasoned
issuer which could better absorb those sales without adverse impact on its share
price. The following factors also may add to the volatility in the price of our
common stock: actual or anticipated variations in our quarterly or annual
operating results; adverse outcomes; additions to or departures of our key
personnel, as well as other items discussed under this “Risk Factors” section,
as well as elsewhere in this Report. Many of these factors are beyond our
control and may decrease the market price of our common stock, regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common stock will be at any time, including
as to whether our common stock will sustain its current market prices, or as to
what effect the sale of shares or the availability of common shares for sale at
any time will have on the prevailing market price. However, we do not rule out
the possibility of applying for listing on the Nasdaq Markets or another
exchange.




33




Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through pre-arranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.





Volatility
in our common stock price may subject us to securities litigation.




The
market for our common stock may be characterized by significant price volatility
when compared to seasoned issuers, and we expect our share price will be more
volatile than a seasoned issuer for the indefinite future. In the past,
plaintiffs have often initiated securities class action litigation against a
company following periods of volatility in the market price of its securities.
We may, in the future, be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.




Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.




There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes, as well as
proposed legislative initiatives following the Enron bankruptcy, are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.




Past
activities of our company and its affiliates may lead to future liability for
our company.




Prior to
our acquisition of Chuming in December 2007, we engaged in businesses unrelated
to our current operations. Although certain previously controlling shareholders
of our company are providing certain indemnifications against any loss,
liability, claim, damage or expense arising out of or based on any breach of or
inaccuracy in any of their representations and warranties made regarding such
acquisition, any liabilities relating to such prior business against which we
are not completely indemnified may have a material adverse effect on our
company.




Future
sales of shares of our common stock may decrease the price for such
shares.




Actual
sales, or the prospect of sales by our shareholders, may have a negative effect
on the market price of the shares of our common stock. We may also register
certain shares of our common stock that are subject to outstanding convertible
securities, if any, or reserved for issuance under our stock option plans, if
any. Once such shares are registered, they can be freely sold in the public
market upon exercise of the options. If any of our shareholders either
individually or in the aggregate cause a large number of securities to be sold
in the public market, or if the market perceives that these holders intend to
sell a large number of securities, such sales or anticipated sales could result
in a substantial reduction in the trading price of shares of our common stock
and could also impede our ability to raise future capital.




34





Acquisitions
of the type we just completed with Chuming are often heavily scrutinized by the
SEC and we may encounter difficulties or delays in obtaining future regulatory
approvals.




Historically,
the SEC and Nasdaq have not generally favored transactions in which a
privately-held company merges into or is acquired by a largely inactive company
with publicly traded stock, and there is a significant risk that we may
encounter difficulties in obtaining the regulatory approvals necessary to
conduct future financing or acquisition transactions, or to eventually achieve a
listing of shares on one of the Nasdaq stock markets or on a national securities
exchange. On June 29, 2005, the SEC adopted rules dealing with private company
mergers into dormant or inactive public companies. As a result, it is likely
that we will be scrutinized carefully by the SEC and possibly by the Financial
Industry Regulatory Authority, which could result in difficulties or delays in
achieving SEC clearance of any future registration statements or other SEC
filings that we may pursue, in attracting FINRA-member broker-dealers to serve
as market-makers in our common stock, or in achieving admission to one of the
Nasdaq stock markets or any other national securities market. As a consequence,
our financial condition and the value and liquidity of your shares of our common
stock may be negatively impacted.




Our
corporate actions are substantially controlled by our principal shareholders and
affiliated entities.




Our
principal shareholders and their affiliated entities will own approximately
69.5% of our outstanding ordinary shares, representing approximately 69.5% of
our voting power. These shareholders, acting individually or as a group, could
exert substantial influence over matters such as electing directors and
approving mergers or other business combination transactions. In addition,
because of the percentage of ownership and voting concentration in these
principal shareholders and their affiliated entities, elections of our Board of
Directors will generally be within the control of these shareholders and their
affiliated entities. While all of our shareholders are entitled to vote on
matters submitted to our shareholders for approval, the concentration of shares
and voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of our
company.




The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.




Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Nevada law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may    similarly discourage the filing of derivative
litigation by our shareholders against our directors and officers even though
such actions, if successful, might otherwise benefit our company and
shareholders.





The
market price for our stock may be volatile.




The
market price for our stock may 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 financial estimates by securities research
  analysts;





·
            conditions
      in agricultural markets;





·
            changes
      in the economic performance or market valuations of other meat processing
      companies;





·
              announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint




35




·
            ventures
      or capital commitments;





·
            addition
      or departure of key personnel;





·
            fluctuations
      of exchange rates between RMB and the U.S.
  dollar;





·
            intellectual
      property litigation;





·
              general
      economic or political conditions in
China.




In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.




We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.




We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from a recent offering will be sufficient to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.




Item
1B. UNRESOLVED STAFF COMMENTS




On
February 11, 2008, we filed a registration statement on Form S-1 in order to
register shares of our common stock for resale by selling shareholders. On March
7, 2008, we received a letter from the staff of the Securities and Exchange
Commission (“SEC”) with comments on our initial Form S-1 filing. On April 29,
2008, we filed Amendment No. 1 to our Form S-1 to respond to the staff’s
comments.   On May 13, 2008, we received an additional comment
letter from the SEC.  On May 27, 2008, we filed Amendment No. 2 to our
Form S-1 in response to these comments.  On June 9, 2008, we received
an additional comment letter from the SEC.  As of the date of this
report, we have not filed an amendment to the S-1 registration statement in
response to the SEC’s June 9, 2008 comments.




Item
2. PROPERTIES





Facilities




Our main
facility and principal executive offices are located at No. 9, Xin Yi Street,
Ganjingzi District, Dalian City, Liaoning Province, PRC 116039, which also
serves as the headquarters for our food subsidiary and sales subsidiary. Our
main facility is located on 89 acres in the industrial area of Dalian, where we
have developed over 74,000 sq. meters of factory floor. In addition to our
corporate offices, we also own and maintain housing for up to 760 employees, and
health maintenance facilities. Our slaughtering subsidiary’s principal facility
is located at No.2026, Zhuanshi Street, Wafangdian Town, Dalian City, Liaoning
Province, PRC. We believe that these facilities will be sufficient to house our
operations for at least the next three years, and we have the capacity to
accommodate our projected long-term growth plans.




36




Land
Lease on Main Facility




We have
acquired the land use certificate for 89 acres of land in Dalian City, which
entitles us to use and dispose of the land and the commercial or residential
buildings located on the land. Our Food Company occupies this piece of
land.





We have
also opened offices in eighteen cities outside of Dalian. We have entered into
leasing agreements for those office spaces for terms ranging from one and three
years. These offices are mainly sales offices and they are generally very small
in size. They are located in surrounding cities, mainly in Liaoning Province. In
total, we paid approximately $69,000 rent in 2008 for these eighteen
offices.




Real
Property Rights




We have
rights to use and occupy two parcels of state-owned land, which are 106,466
square meters and 48,461 square meters in area, respectively, on which our
operations are located. These land use rights are granted to us under two
certificates dated March 3, 2003, granted by the Government of the Ganjingzi
District of Dalian: (i) Gan Guo Yong [2003] No. 04010 for Site Number 4-17-03-09
(106,466 square meters), and (ii) Gan Guo Yong [2003] No. 04009 for Site Number
4-17-03-10 (48,461 square meters). These land use rights entitle us to use of
the land for a period of fifty years (until March 20, 2053) for industrial
purposes. Our Food Company occupies these two pieces of land.




We
pledged our land use rights in the second parcel above (Gan Guo Yong [2003] No.
04009 for Site Number 4-17-03-10) to the Bank of China, Liaoning Province
Branch, and the pledge has a term from December 14, 2006 to December 13, 2011.
Our plant, warehouse and office building have all been completed, and we are in
the process of filing the proper documentation with the local PRC government to
bring these properties into operation.





Item
3. LEGAL PROCEEDINGS





We are
not aware of any material existing or pending legal proceedings against us, nor
are we involved as a plaintiff in any material proceeding or pending litigation.
There are no proceedings in which any of our current directors, officers or
affiliates, or any registered or beneficial shareholder, is an adverse party or
has a material interest adverse to us.





Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.




37


PART
II





Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS





Market
Price of Common Equity





Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
“ENHD.” As of December 31, 2008, there were approximately 182 shareholders
of record of our common stock. The number of registered shareholders excludes
any estimate by us of the number of beneficial owners of common shares held in
street name. The following table sets forth the high and low bid information for
the common stock for each quarter within the last three fiscal years, as
reported by the OTC Bulletin Board. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.





Low
            
            
            High2008Quarter
      ended December 31, 2008
            
            $
            0.25
            
            
            $
            259.50Quarter
      ended September 30, 2008
            
            $
            0.25
            
            
            $
            5.00Quarter
      ended June 30, 2008
            
            $
            5.00
            
            
            $
            5.00Quarter
      ended March 31, 2008
            
            $
            5.00
            
            
            $
            241.502007Quarter
      ended December 31, 2007
            
            $
            5.00
            
            
            $
            5.00Quarter
      ended September 30, 2007
            
            $
            4.65
            
            
            $
            4.65Quarter
      ended June 30, 2007
            
            $
            4.65
            
            
            $
            4.65Quarter
      ended March 31, 2007
            
            $
            4.65
            
            
            $
            4.652006Quarter
      ended December 31, 2006
            
            $
            0.30
            
            
            $
            0.30Quarter
      ended September 30, 2006
            
            $
            0.30
            
            
            $
            0.30Quarter
      ended June 30, 2006
            
            $
            0.30
            
            
            $
            1.01Quarter
      ended March 31, 2006
            
            
            0.30
            
            
            
            1.01




On March
11, 2009, the closing sale price of our common stock on the OTC Bulletin Board
was $4.00 per share.




Dividend
Policy





We do not
anticipate declaring or paying any cash dividends on our capital stock. We
currently intend to retain all of our net income for use in our business, and do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to 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 condition and future prospects and
other factors the Board of Directors may deem relevant.




38





Item
6. SELECTED FINANCIAL DATA





You
should read the summary consolidated financial data set forth below in
conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
and our predecessor’s financial statements and the related notes included
elsewhere in this report. The financial data for the twelve month period ending
December 31, 2008, 2007 and 2006 were derived from audited financial statements
included in this report. Historical results are not necessarily indicative of
the results to be expected for any future period.




(US dollars in thousands)Twelve Months Ended
              December 31,2008
              (audited)
            
            2007
              (audited)
            
            2006
              (audited)
            
            2005
              (audited)
            
            2004
              (unaudited)Consolidated
      Statements of Operations Data:Sales
            
            
            176,360
            
            124,696
            
            70,396
            
            54,119
            
            
            654Cost
      of Sales
            
            
            149,794
            
            104,379
            
            57,794
            
            45,284
            
            
            711Gross
      Profit
            
            
            26,566
            
            20,317
            
            12,601
            
            8,835
            
            
            (56)Operating
      Expenses
            
            
            7,823
            
            6,246
            
            2,891
            
            1,647
            
            
            402Income
      from Operations
            
            
            18,743
            
            14,071
            
            9,709
            
            7,188
            
            
            (459)Other
      Income (Expense), net
            
            
            (11,385
            )
            (1,476
            )
            (1,583
            )
            (1,008)
            
            
            5,164Income
      Before Taxes
            
            
            7,357
            
            12,620
            
            8,126
            
            6,180
            
            
            4,705Income
      Taxes
            
            
            (520)
            
            968
            
            1.6
            
            191
            
            
            66Net
      Income
            
            
            6,837
            
            11,652
            
            8,128
            
            5,988
            
            
            4,772Foreign
      Currency Translation
            
            
            528
            
            2,064
            
            611
            
            286
            
            
            -Comprehensive
      Income
            
            
            7,366
            
            13,716
            
            8,739
            
            6,274
            
            
            0.7Basic
      Net Income Per Share (in US$)
            
            
            0.40
            
            0.67
            
            0.47
            
            0.35
            
            
            0.28Diluted
      Net Income Per Share (in US$)
            
            
            0.32
            
            0.67
            
            0.47
            
            0.35
            
            
            0.28Basic
      Weighted Average Number of Shares Outstanding
            
            
            13,409,120
            
            17,272,756
            
            17,272,756
            
            17,272,756
            
            
            17,272,756Diluted
      Weighted Average Number of Shares Outstanding
            
            
            17,272,756
            
            17,272,756
            
            17,272,756
            
            17,272,756
            
            
            17,272,756





(US dollars in thousands)Twelve Months Ended
              December 31,2008
              (audited)
            
            2007
              (audited)
            
            2006
              (audited)
            
            2005
              (audited)
            
            2004
              (unaudited)Balance Sheet
      Data:Total
      Assets
            
            $
            90,683
            
            
            $
            66,620
            
            
            $
            56,846
            
            
            $
            50,993
            
            
            $
            29,957Current
      Liabilities
            
            
            23,758
            
            
            
            17,682
            
            
            
            16,764
            
            
            
            18,979
            
            
            
            2,358Long
      Term Liabilities
            
            
            -
            
            
            
            -
            
            
            
            17,909
            
            
            
            18,580
            
            
            
            19,309Stockholders
      Equity
            
            
            66,926
            
            
            
            48,938
            
            
            
            22,174
            
            
            
            13,434
            
            
            
            8,290




Item
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS







The
following discussion and analysis of the results of operations and financial
condition of the Company for the fiscal years ended December 31, 2008, 2007, and
2006 should be read in conjunction with the Selected Consolidated Financial
Data, the consolidated financial statements, and the notes to those financial
statements that are included elsewhere in this report. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this report. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.




39




OVERVIEW





We are a
meat processing company that specializes in pork and pork products. We have a
unique wholesale and retail distribution model and sell directly to over 9,200
retail outlets, including supermarkets and hypermarkets across Northeast
China.




Dalian
Precious Sheen Investments Consulting Co., Ltd., or Chuming WFOE, is our holding
company established in the People’s Republic of China (the “PRC” or “China”) as
a holding company for our three PRC operating subsidiaries, referred to
elsewhere in this report as the “Chuming Operating Subsidiaries”:




1.
            Dalian
      Chuming Slaughter and Packaging Pork Company Ltd. (also referred to in
      this report as “Meat Company”), whose primary business activity is
      acquiring, slaughtering and packaging of pork;2.
            Dalian
      Chuming Processed Foods Company Ltd. (also referred to in this report as
      “Food Company”), whose primary business activity is the processing of raw
      and cooked meat products; and3.
            Dalian
      Chuming Sales Company Ltd. (also referred to in this report as “Sales
      Company”), which is responsible for Chuming’s sales, marketing and
      distribution operations.




The
Chuming Operating Subsidiaries are spun off constituents of Chuming’s former
parent company, Dalian Chuming Group Co., Ltd., or the “Group.” Our primary
business activities are the production and packing of fresh pork and also
production of processed meat products for distribution and sale to clients
throughout the PRC. We are headquartered in the City of Dalian,
Liaoning Province of China. Chuming WFOE was incorporated in China as wholly
foreign owned enterprise on in December 2007.




CRITICAL ACCOUNTING POLICIES AND
ESTIMATES





Our
management’s discussion and analysis of our financial condition and results of
operations are based on our combined financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.





While our
significant accounting policies are more fully described in Note 2 to our
combined financial statements included in this report, we believe that the
following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis.





Method of Accounting




The Company maintains its general
ledger and journals with the accrual method accounting for financial reporting
purposes.  The financial statements and notes are representations of
management.  Accounting policies adopted by the Company conform to
generally accepted accounting principles in the United States of America and
have been consistently applied in the presentation of financial statements,
which are compiled on the accrual basis of accounting.




Principles
of Consolidation




The consolidated financial statements,
which include the Company and its subsidiaries, are compiled in accordance with
generally accepted accounting principles in the United States of
America.  The consolidated financial statements include 100% of
assets, liabilities, and net income or loss of those wholly-owned
subsidiaries.




40




The Company owned the three operating
subsidiaries since its inception.  The Company also owns two
intermediary holdings companies.   As of December 30, 2008, the
detailed identities of the consolidating subsidiaries are as
follows:




Name
      of Company
            
            Place
      of
              Incorporation
            
            Attributable
              Equity
              Interest
            
            Registered
              CapitalPrecious
      Sheen Investments Limited
            
            
            BVI
            
            100
            %
            USD
            10,000Dalian
      Chuming Precious Sheen Investment Consulting Co., Ltd.
            
            
            PRC
            
            100
            %
            RMB
            29,400,682Dalian
      Chuming Slaughtering & Pork Packaging Co. Ltd.
            
            
            PRC
            
            100
            %
            RMB
            10,000,000Dalian
      Chuming Processed Foods Co. Ltd.
            
            
            PRC
            
            100
            %
            RMB
            5,000,000Dalian
      Chuming Sales Co. Ltd.
            
            
            PRC
            
            100
            %
            RMB
            5,000,000




The consolidation of these operating
subsidiaries into a newly formed holding company i.e. “the Company” is permitted
by United States GAAP: ARB51 paragraph 22 and 23.




Use
of Estimates




The preparation of financial statements
in conformity with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management makes these
estimates using the best information available at the time the estimates are
made; however, actual results could differ materially from these
estimates.




Accounts
Receivable




The
Company extends unsecured, non-interest bearing credit to its customers;
accordingly, the Company carries an allowance for doubtful accounts, which is an
estimate, made by management.  Management makes its estimate based on
prior experience rates and assessment of specific outstanding customer
balances.  Management may extend credit to new customers who have met
the criteria of the Company’s credit policy.  It is typically the case
that new customers must make payments in advance before we sell our products to
them. For our premier customers such as supermarkets, we do typically provide a
grace period for payment at approximately 30-45 days.




In
order for us to minimize bad debt, we exercise control over both the length of
the receivables, and the quantity of products shipped to our customers to whom
we have extended credit, such as those who pay on a monthly basis. In exercising
control over order quantities, on a product by product basis, we set maximum
limits that will be shipped to those customers. If in the event, the customer is
near their maximum and has an outstanding balance, we will request payment even
if it is outside of the normal payment cycles of our customers.




Inventory
Carrying Value




Inventory, consisting of raw materials
in the form of livestock, work in progress, and finished products, is stated at
the lower of cost or market value.  Finished products are comprised of
direct materials, direct labor and an appropriate proportion of
overhead.  Periodic evaluation is made by management to identify if
inventory needs to be written down because of damage, or
spoilage.  Cost is computed using the weighted average
method.




We
observe and evaluate the value of inventory on a product by product basis. For
our fresh meat products which are typically sold as carcasses (hogs sliced in
half), we typically carry zero inventory as these products are sold immediately.
We use a just in time model for fresh meat products. Our customers require fresh
meat so we do not carry any excess inventory beyond the hogs that we slaughter
each day. Current market conditions have also influenced our inventory across
the board. For our products that we require additional processing such as hams
and sausages we typically, carry two days’ worth of inventory. For meat that has
been separated into smaller packaged portion, we typically carry one weeks’
worth of inventory. The PRC is currently facing a pork shortage, so as a result,
presently we are able to sell all the fresh pork that we slaughter. Accordingly,
we have not been required to write down inventory for spoilage. Also, if the
hogs do not meet our requirements for quality they are disposed of, and charged
off immediately to our cost of sales, and they will not enter our
inventory.




41




Purchase
Deposit




Purchase
deposit represents the cash paid in advance for purchasing raw
materials.  The purchase deposit is interest free and
unsecured.




Property,
Plant, and Equipment




Property, Plant, and Equipment are
stated at cost.  Repairs and maintenance to these assets are charged
to expense as incurred; major improvements enhancing the function and/or useful
life are capitalized.  When items are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any gains or
losses arising from such transactions are recognized.




Property
and equipment are depreciated using the straight-line method over their
estimated useful life with a 5% salvage value.  Their useful lives are
as follows:




Fixed
      Asset Classification
            
            Useful
      LifeLand
      Improvements
            
            10
      yearsBuildings
            
            20
      yearsBuilding
      Improvements
            
            10
      yearsManufacturing
      Machinery & Equipment
            
            10
      yearsOffice
      Equipment
            
            5
      yearsFurniture
      & Fixtures
            
            5
      yearsVehicles
            
            5
      years




Customer
Deposits




Customer Deposits represents money the
Company has received in advance for purchases of pork and pork
products.  The Company considers customer deposits as a liability
until products have been shipped and revenue is earned.




Statutory
Reserve




Statutory
reserve refer to the amount appropriated from the net income in accordance with
laws or regulations, which can be used to recover losses and increase capital,
as approved, and, are to be used to expand production or
operations.  PRC laws prescribe that an enterprise operating at a
profit, must appropriate, on an annual basis, from its earnings, an amount to
the statutory reserve to be used for future company development.  Such
an appropriation is made until the reserve reaches a maximum equalling 50% of
the enterprise’s capital.




Earnings
Per Share




The
Company computes earnings per share (“EPS”) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., contingent shares, convertible
securities, options, and warrants) as if they had been converted at the
beginning of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per
share or decrease loss per share) are excluded from the calculation of diluted
EPS.




42




In
connection with our reverse acquisition completed on December 31, 2007, a total
of 3,863,636 shares of our common stock held by a trust, the beneficiaries of
which include our CEO Mr. Shi Huashan and his family, were deposited into a make
good escrow account. See “Strategic Financing” beginning on page 4. We accounted
for this deposit of escrow shares as “contingent shares,” and accordingly
reduced the number of shares deemed outstanding for accounting purposes from
17,272,756 to 13,409,120. Accordingly, our “basic” weighted average shares
outstanding is 17,272,756, and our “diluted” weighted average shares outstanding
is 17,272,756. If and when the make good escrow shares are released to their
original owners or to investors, our “basic” weighted average shares outstanding
will be increased accordingly. The effect of this accounting treatment of the
make good escrow shares, is that our reported basic net income per share will be
higher than our diluted net income per share, during the period in which the
make-good shares are held in escrow.




Recent
Accounting Pronouncements




In
March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133" ("SFAS 161"). SFAS 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 161 requires entities to provide greater
transparency about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008.




In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). Statement 162 will become effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles."




In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate. FSP
APB 14-1 is effective for fiscal years beginning after December 15,
2008 on a retroactive basis.




The
Company is currently evaluating the potential impact, if any, of the adoption of
the above recent accounting pronouncements on its consolidated results of
operations and financial condition.




RESULTS
OF OPERATIONS





Comparison of Years Ended December
31, 2008 and December 31, 2007.





The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:




Year Ended
            
            
            
            
            Year EndedDecember 31,
            
            % of
            
            
            December 31,
            
            % of2008
            
            Sales
            
            
            2007
            
            SalesSales
            
            $
            176,360,013
            
            
            100.00
            %
            
            $
            124,696,036
            
            
            100.00
            %Cost
      of Sales
            
            
            149,794,249
            
            
            84.94
            %
            
            
            104,378,909
            
            
            83.67
            %Gross
      Profit
            
            
            26,565,764
            
            
            15.04
            %
            
            
            20,317,127
            
            
            16.33
            %Selling
      Expenses
            
            
            5,147,366
            
            
            2.92
            %
            
            
            4,672,862
            
            
            3.75
            %General
      & Administrative Expenses
            
            
            2,675,661
            
            
            1.52
            %
            
            
            1,572,836
            
            
            1.26
            %Total
      operating Expense
            
            
            7,823,027
            
            
            4.44
            %
            
            
            6,245,698
            
            
            5.01
            %Operating
      Income / (Loss)
            
            
            18,742,737
            
            
            11.32
            %
            
            
            14,071,429
            
            
            11.32
            %Other
      Income (Expense)
            
            
            (11,385,383
            )
            
            (6.46
            )
      %
            
            
            (1,475,730
            )
            
            (1.16
            )
      %Earnings
      Before Tax
            
            
            7,357,354
            
            
            4.17
            %
            
            
            12,619,687
            
            
            10.16
            %(Income
      Tax Expense) / Deferred Tax Benefit
            
            
            (520,089
            )
            
            (0.29
            )
      %
            
            
            (967,540
            )
            
            (0.78
            )
      %Net
      Income
            
            $
            6,837,265
            
            
            3.88
            %
            
            $
            11,652,147
            
            
            9.38
            %Basic
      and Diluted Earnings Per Share
            
            
            0.32
            
            
            
            
            
            
            0.67Weighted
      Average Shares Outstanding
            
            
            17,272,756
            
            
            
            
            
            
            17,272,756




43




Sales. Our sales include
revenues from sales of our Fresh Pork, Frozen Pork, and Processed Food Products.
During the year ended December 31, 2008, we had sales of $176,360,013 as
compared to sales of $124,696,036 for the year ended December 31, 2007, an
increase of approximately 41.4%. This increase consisted of an increase in the
sale of Fresh Pork of $46.5 million or 48.8%, from $95.3 million in 2007 to
$141.8 million in 2008, an increase in the sale of Frozen Pork of $2.9 million
or 26.4%, from $11.2 million to $14.1 million, and an increase in the sale of
Processed Food Products of $2.2 million or 12.1%, from $18.2 to $20.4 million
for the years then ended.  In 2008, we raised our average per-kilogram sale
prices to our customers, which coincided with an increase in the cost of live
pigs and other production costs.  The average per-kilogram sales price
for our Fresh Pork, Frozen Pork and Processed Foods to customers increased by
12%, 28.8% and 30.9%, respectively, compared to the prior year.





Despite
the high price of live hogs, our sales volume of products (by weight) still
increased slightly for Fresh Pork and Processed Foods by 4.13% and 0.1%,
respectively, compared to 2007.  We usually sell our Fresh Pork
through our independent sales agents and supermarkets.  Our profit
margin for sales through supermarkets is generally higher than other channels,
which is the reason why we are continuing to actively pursue this particular
sales channel.  In 2008, many of our sales agents were able to achieve
higher sales since we implemented the extension of payment terms to creditworthy
customers.  Since many of our sales agents are long standing customers
with good credit, they were able to take advantage of the extension of payment
terms to generate greater cash flow and to create higher sales in
2008.  Another factor attributable to the increase of sales and sales
volume was that we increased the number of our sales agents and showcase stores
from 7,600 in 2007 to 9,200 in 2008.  Management believes that this
increase in sales and sales volume, despite elevated live hog prices, resulted
from increased consumer demand, and increased consumer awareness of our brand
and availability of our products.  However, the sales volume of our
Frozen Pork decreased considerably in 2008, with 38.3% less sales volume
compared to the prior year.  Even though the  sales volume
of Frozen Pork decreased significantly in 2008, our sales revenue for Frozen
Pork increased by 26.4% from 2007 because we were able to increase the prices of
Frozen Pork, and pass most of it to our consumers.  Our Frozen Pork is
usually sold to cities outside of Liaoning province and the sales volume was
especially impacted during the fourth quarter of
2008,which  management believes is due to the effect of economic
slowdown, which led to less spending on certain foods such as meat
products.





Cost of Sales. Cost of sales
for 2008 increased by $45,415,340 or 43.5 %, from $104,378,909 for the year
ended December 31, 2007 to $149,794,249 for the year ended December 31, 2008.
The significant increase in cost of sales was mainly attributable to the cost of
live pigs.  Our cost of sales for our various product categories in
2008 is summarized as follows:




(In
      thousands of U.S. Dollars)% of
            
            
            
            
            % of2008
            
            Sales
            
            
            2007
            
            SalesFresh
      Pork
            
            $
            121,742
            
            81.2
            %
            
            $
            84,622
            
            81.11
            %Frozen
      Pork
            
            
            11,026
            
            7.4
            %
            
            
            7,058
            
            6.76
            %Processed
      Food Products
            
            
            17,019
            
            11.4
            %
            
            
            12,653
            
            12.13
            %Total
      Cost of Sales:
            
            $
            149,794
            
            100
            %
            
            $
            104,378
            
            100
            %




Management
estimates that the average cost of live pigs increased by approximately 28% for
2008, as compared with the prior year, which was the most significant factor
causing an increase in our cost of sales.  In 2007, the average cost
for live pigs progressively increased from RMB8.0 per kilogram in first quarter,
to RMB10.3 per kilogram in second quarter, to RMB13.78 per kilogram in third
quarter, and to RMB14.2 per kilogram in the fourth quarter.  The
average price for live hogs was RMB11.46 per kilogram for the full year of
2007.  In 2008, the price of live pigs reached RMB16 per kilogram in
the first quarter, then the average price decreased slightly to RMB15.76 in the
second quarter, and then further declined to an average price of RMB14.43, where
it remained for the last two quarters of 2008.  The average price for
live hogs was RMB14.63 per kilogram for the full year of 2008.




44





In 2008,
we experienced price increases in electricity, water and coal, all of which we
use in our production process.  However, this increase in utilities
was in proportion to the increase of our sales volume, and not due to an
increase in the unit price of the utilities, with the exception of coal for
which the unit price did increase slightly.  Total wages increased in
2008 due to the addition of new employees to handle the increase of our sales,
but the salaries of our employees remained stable.  Lastly, we
experienced slight increases in transportation and delivery costs in 2008,
corresponding with the increased sales.  Even with the significant
increase of the cost of live pigs in 2008, management estimates that we were
able to recoup approximately 98% of the cost increases through increased
consumer prices for our products.  Management also believes that
productivity remained steady, with no significant changes from 2007 to
2008.




Gross Profit. Gross profit
was $26,565,764 for the year ended December 31, 2008 as compared to $20,317,127
for the year ended December 31, 2007, representing an increase of $6,248,637, or
approximately 30.8%.   The gross profits for Fresh Pork, Frozen
Pork and Processed Foods in 2008 were $20,059,628, $3,109,969 and 3,396,166,
respectively.  Management attributes the increase in gross profit to
strong increases in sales, driven by strong demand for our
products.  In 2008, we increased the prices of our products in order
to mitigate the impact of higher prices of live hogs in
2008.   Our gross profit as a percentage of sales was 15.04% in
2008 as compared to 16.33% in 2007. The slight decrease in gross profit as a
percentage of sales was attributable to the increased cost of live pigs, which
we were not able to pass all of such increase to our customers.





Selling Expenses. Selling
expenses totaled $5,147,366 for the year ended December 31, 2008, as compared to
$4,672,862 for the year ended December 31, 2007, an increase of $474,504 or
10.2%.  The increase of our selling expenses in 2008 is attributable
to the addition of new salespersons to our sales team, increased incentives for
salespersons, buy-in fees paid to supermarkets for placement of our products,
and expenses for market and product development, sales planning and training,
etc.   In 2008, our advertising and marketing expenditures
decreased from $2,241,062 in 2007 to $1,764,788 in 2008.   Our
advertising and marketing expenditures decreased considerably because part of
the marketing and promotion of our products were handled individually by sales
agents, and in return the Company gave them bigger discounts and incentives on
our products.   The Company believed that advertisements can be
handled more effectively at a regional and local level by the sales agents, and
at the same time it is also more cost effective for the Company.  In
2008, the Company allocated more of our resources and increased advertising and
promotional activities aimed at higher performing regions, retailers and
supermarkets.  Our advertising and promotional activities included
television commercials, radio, magazine and newspaper advertisements, and
exhibitions.  The Company also developed new markets in 2008, adding
nine new sales offices in cities such as Harbin, Dalian and Changchun,
etc.





General and Administrative
Expenses. General and Administrative Expenses totaled $2,675,661 for the
year ended December 31, 2008 as compared to $1,572,836 for the year ended
December 31, 2007, an increase of $1,102,825 or 70.1%. This significant increase
is primarily attributable to higher costs of doing business as a public
company.  In 2008, our expenses for
attorneys,  accountants  and public relations consultants
increased, as compared to the prior year.  Because the amount of our
total sales was higher in 2008, we also had to contribute more into a riverbank
maintenance fee, price adjustment fund, and stamp tax mandated by local
governmental agencies in proportion to our total sales.  In 2008, our
land use tax has increased from RMB 4.5 to RMB 6 per square meter which also
slightly increased our general expenses.





Other Income (Expense). Our
other income (expense) consisted of Interest Income, Other Expenses, and
Interest Expense. We had total Other Expenses of $11,385,383 for the year ended
December 31, 2008 as compared to $1,451,742 for the year ended December 31,
2007, an increase of $9,933,641 or 684.3%. The substantial increase in Other
Expenses in 2008 was primarily attributable to the accrual of the expected
release of escrowed shares pursuant to a make good agreement related to the
Exchange Transaction and Financing on December 31, 2007.




Pursuant
to such make good agreement, a total of 3,863,636 shares of our common stock
held by a trust, the beneficiaries of which include our CEO Mr. Shi Huashan and
his family, were deposited into a make good escrow account.  These
shares are to be released back to Mr. Shi and his family if the Company meets
the following earnings targets of $15.9 million, and $20.9 million in after-tax
net income for the years ended December 31, 2008, and 2009
respectively.  In the event that the Company does not meet the
aforementioned financial targets, the escrowed shares will be released, on a
pro-rata basis, to the investors in the Financing.  In accordance with
Topic 5.T of the Staff Accounting Bulletins (SAB 79), the Company expects to
record a compensatory expense for the shares upon their release from
escrow.  Whether the shares are released to the accredited investors
or released to Mr. Shi, the Company will record an expense with a corresponding
credit to the Company’s contributed paid in capital.  The Company
anticipates that compensatory expense to be recognized in future operating
periods could be in a range between $17 million to $29.2 million. The Company
approximates this range based on the per share offering price of $4.4 at
December 31, 2007 and a potential future stock price of $7.57 based on a $20
million net income (short of the target of $20.9 million net income) with a
price-to-earnings ratio of 8.0, which is comparable to the valuation used in the
offering at December 31, 2007.  For the year ended December 31, 2008,
the Company has met their 2008 financial target, and therefore the Company
expects that 1,931,818 shares will be released.  The Company recorded
an expense for the expected release of shares deposited the escrow account in
the amount of $10,622,294, which significantly increased our Other
Expenses.




45





Net Income. Our net income
for the year ended December 31, 2008 was $6,837,265 as compared to $11,652,147
for the year ended December 31, 2007, a decrease of $4,814,882 or 41.3%. This
decrease in net income is basically attributable to the recorded expense in the
amount of 10,622,294 in 2008 as above-mentioned.





Comparison of Years Ended December
31, 2007 and December 31, 2006.





The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:




Year Ended
            
            
            
            
            Year EndedDecember 31,
            
            % of
            
            
            December 31,
            
            % of2007
            
            Sales
            
            
            2006
            
            SalesSales
            
            $
            124,696,036
            
            100.00
            %
            $
            70,396,439
            
            100.00
            %Cost
      of Sales
            
            
            104,378,909
            
            83.67
            %
            
            57,794,853
            
            82.10
            %Gross
      Profit
            
            
            20,317,127
            
            16.33
            %
            
            12,601,586
            
            17.90
            %Selling
      Expenses
            
            
            4,672,862
            
            3.75
            %
            
            1,556,805
            
            2.21
            %General
      & Administrative Expenses
            
            
            1,572,836
            
            1.26
            %
            
            1,334,866
            
            1.90
            %Total
      operating Expense
            
            
            6,245,698
            
            5.01
            %
            
            2,891,671
            
            4.11
            %Operating
      Income / (Loss)
            
            
            14,071,429
            
            11.32
            %
            
            9,709,915
            
            13.79
            %Other
      Income (Expense)
            
            
            (1,475,730
            )
            (1.16)
            %
            
            (1,583,155
            )
            (2.25)
            %Earnings
      Before Tax
            
            
            12,619,687
            
            10.16
            %
            
            8,126,760
            
            11.54
            %(Income
      Tax Expense) / Deferred Tax Benefit
            
            
            (967,540
            )
            (0.78)
            %
            
            (1,609
            )
            0.00
            %Net
      Income
            
            $
            11,652,147
            
            9.38
            %
            $
            8,128,369
            
            11.55
            %Basic
      and Diluted Earnings Per Share
            
            
            0.67
            
            
            
            
            0.47Weighted
      Average Shares Outstanding
            
            
            17,272,756
            
            
            
            
            17,272,756




Sales. Our sales include
revenues from sales of our Fresh Pork, Frozen Pork, and Processed Food Products.
During the year ended December 31, 2007, we had sales of $124,696,036 as
compared to sales of $70,396,439 for the year ended December 31, 2006, an
increase of approximately 77%. This increase consisted of an increase in the
sale of Fresh Pork of $51.6 million or 112%, from $46.0 million in 2006 to $97.7
million in 2007, an increase in the sale of Frozen Pork of $1.6 million or 22%,
from $7.2 million to $8.8 million, and an increase in the sale of Processed Food
Products of $1.1 million or 6.3%, from $17.1 to $18.2 million for the years then
ended.  In 2007, we raised our average per-kilogram sale prices to our
customers, which coincided with an increase in the cost of live pigs and other
production costs. In addition, despite these consumer price increases, in 2007
our sales volume of products (by weight) increased, with the largest increase in
volume occurring in our Processed Foods division. In 2007, we began selling our
products through over 170 new franchise operators. Management believes that this
increase in sales volume, despite raised consumer prices, resulted from
increased consumer demand, and increased consumer awareness of our brand and
availability of our products.




46





Cost of Sales. Cost of sales
for 2007 increased by $47,361,536 or 81.9%, from $57,794,853 for the year ended
December 31, 2006 to $104,333,172 for the year ended December 31, 2007. The
increase was attributable to the 77% increase in sales for 2007 as compared to
the prior year. Our cost of sales for our various product categories in 2007 is
summarized as follows:




(In
      thousands of U.S. Dollars)% of
            
            
            
            
            
            
            
            % of2007
            
            
            
            Sales
            
            
            
            2006
            
            
            
            SalesFresh
      Pork
            
            $
            84,622
            
            
            
            81.11
            %
            
            $
            36,016
            
            
            
            62.32
            %Frozen
      Pork
            
            
            7,058
            
            
            
            6.76
            %
            
            
            4,856
            
            
            
            8.40
            %Processed
      Food Products
            
            
            12,653
            
            
            
            12.13
            %
            
            
            16,924
            
            
            
            29.28
            %Total
      Cost of Sales:
            
            $
            104,378
            
            
            
            100
            %
            
            $
            57,795
            
            
            
            100
            %




In the
second quarter of 2007, and throughout the year, we experienced a sharp increase
in the cost of live pigs. Management estimates that the average cost of live
pigs increased by approximately 60% for 2007, as compared with the prior year,
which was the most significant factor causing an increase in our cost of sales.
Secondly, we experienced price increases in electricity, water and coal, all of
which we use in our production process. Thirdly, wages increased in 2007 by an
estimated 7.5%. Lastly, we experienced slight increases in transportation and
delivery costs in 2007. Management estimates that we were able to recoup
approximately 90% of these cost increases through increased consumer prices for
our products. Management also believes that productivity remained steady, with
no significant changes from 2006 to 2007.




Gross Profit. Gross profit
was $20,317,127 for the year ended December 31, 2007 as compared to $12,601,586
for the year ended December 31, 2006, representing an increase of $7,761,277, or
approximately 61.1%. Management attributes the increase in gross profit to
strong increases in sales, driven by strong demand for our products. In
addition, we were able to achieve price increases in order to mitigate the
impact of higher commodity and input prices in 2007. Our gross profit as a
percentage of sales was 16.33% in 2007 as compared to 17.90% in 2006. The slight
decrease in gross profit as a percentage of sales was attributable to these
commodity and input price increases, not all of which we were able to pass on to
our customers in the form of higher product prices.





Selling Expenses. Selling
expenses totaled $4,672,862 for the year ended December 31, 2007, as compared to
$1,556,805 for the year ended December 31, 2006, an increase of $3,116,057 or
200%. In 2007 we expanded our advertising and marketing expenditures from
$150,000 in 2006, to $3.8 million in 2007, in our efforts to increase brand
awareness and encourage sales. These activities included television commercials,
radio, magazine and newspaper advertisements, and exhibitions.





General and Administrative
Expenses. General and Administrative Expenses totaled $1,572,836 for the
year ended December 31, 2007 as compared to $1,334,866 for the year ended
December 31, 2006, an increase of $237,970 or 17.8%. This modest increase is
primarily attributable to increased hiring of staff, and slight increases in
business expenses related to new customer acquisition.




Other Income (Expense). Our
other income (expense) consisted of Interest Income, Other Expenses, and
Interest Expense. We had total Other Expenses of $1,451,742 for the year ended
December 31, 2007 as compared to $1,583,155 for the year ended December 31,
2006, a decrease of $131,413 or 8.3%. The decrease in Other Expenses in 2007 is
primarily attributable to a decrease in Interest Expenses, as we reduced the
principal amount outstanding under our bank loan obligations by approximately
$17 million.




47





Net Income. Our net income
for the year ended December 31, 2007 was $11,652,147 as compared to $8,128,369
for the year ended December 31, 2006, an increase of $3,523,778 or 43.9%. This
increase in net income is basically attributable to the factors described above,
but primarily from the increase in sales and gross profit. Net income as a
percentage of sales decreased from 11.55% in 2006 to 9.38% in 2007, and
management attributes this primarily decrease to our expanded advertising and
marketing initiatives in 2007. A secondary contributing factor to the decrease
in net income as a percentage of sales was a $965,930 increase in tax expenses
in 2007 as compared to 2006. In 2006, we benefitted from a one-time tax credit
from the Dalian City local government of approximately $440,000. In 2007 we
received no such tax credit, and also recognized higher taxable
income.





Comparison
of Years Ended December 31, 2006 and December 31, 2005.





The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:





Year Ended
            
            
            
            Year EndedDecember 31,
            
            % of
            
            December 31,
            
            % of2006
            
            Sales
            
            2005
            
            SalesSales
            
            $
            70,396,439
            
            100.00
            %
            $
            54,119,895
            
            100.00
            %Gross
      Profit
            
            
            12,601,586
            
            17.90
            %
            
            8,835,709
            
            83.67
            %Selling
      Expenses
            
            
            1,556,805
            
            2.21
            %
            
            711,226
            
            16.33
            %General
      & Administrative Expenses
            
            
            1,334,866
            
            1.90
            %
            
            936,179
            
            1.31
            %Total
      operating Expense
            
            
            2,891,671
            
            4.11
            %
            
            1,647,405
            
            1.73
            %Operating
      Income / (Loss)
            
            
            9,709,915
            
            13.79
            %
            
            7,188,304
            
            3.04
            %Other
      Income (Expense)
            
            
            (1,583,155
            )
            -2.25
            %
            
            (1,008,248
            )
            13.28
            %Earnings
      Before Tax
            
            
            8,126,760
            
            11.54
            %
            
            6,180,056
            
            -1.86
            %(Income
      Tax Expense) / Deferred Tax Benefit
            
            
            (1,609
            )
            0.00
            %
            
            (191,284
            )
            11.42
            %Net
      Income
            
            $
            8,128,369
            
            11.55
            %
            $
            5,988,772
            
            -0.35
            %Basic
      and Diluted Earnings Per Share
            
            
            0.47
            
            
            
            
            0.35Weighted
      Average Shares Outstanding
            
            
            17,272,756
            
            
            
            
            17,272,756





Sales. Our sales include
revenues from sales of our Fresh Pork, Frozen Pork, and Processed Food Products.
During the year ended December 31, 2006, we had sales of $70,396,439 as compared
to sales of $54,119,895 for the year ended December 31, 2005, an increase of
approximately 30.1%. This increase is attributable to an increase in the sale of
Fresh Pork of $9,354,422 or 25.5%, from $36,684,253 in 2005 to $46,038,675 in
2006, an increase in the sale of Frozen Pork of $1,918,527 or 36.1%, from
$5,309,877 to $7,228,405, and an increase in the sale of Processed Food Products
of $5,003,594 or 42%, from $12,125,765 to $17,129,359 for the years then
ended.  The most notable factor in the increase in our sales in 2006 from
the prior year was the expansion of sales through sales agents, whose customers
are resellers who operated specialty counters.   In 2007, we
significantly expanded our sales through agents. Also in 2006, we added over 300
retailers to our network (from approximately 100 operators in 2005 to 425
operators in 2006), which increased sales by an additional $5 million compared
to the prior year. We also began selling our products in 31 new supermarket
locations, which added $4 million to our sales as compared to the prior year. We
also added seafood to our product line at the end of 2005, which began
generating sales and contributed an estimated $2.9 million in sales. Overall, in
2006 management believes the key drivers for our sales results was our ramp-up
of production capacity from increased availability of live hogs, increased brand
awareness among consumers, increased availability of our product though retain
channels, and the expansion of our product line with the addition of
seafood.




48




Cost of Sales. Cost of sales
for 2006 increased $12,510,667 or 28%, from $45,284,186 for the year ended
December 31, 2005 to $57,794,853 for the year ended December 31, 2006. The
increase in our cost of sales for our various product categories is summarized
as follows:





% of
            
            
            
            % of2006
            
            Sales
            
            2005
            
            SalesFresh
      Pork
            
            $
            36,015,632
            
            51.16
            %
            $
            29,609,886
            
            54.71
            %Frozen
      Pork
            
            
            4,855,542
            
            6.90
            %
            
            3,779,626
            
            6.98
            %Processed
      Food Products
            
            
            16,923,679
            
            24.04
            %
            
            11,894,674
            
            21.98
            %Total
      Cost of Sales:
            
            $
            57,794,853
            
            82.10
            %
            $
            45,284,186
            
            83.67
            %




Since our
fresh pork production line began in late 2004, we began to realize operating
efficiencies, and in 2006, this contributed to a reduction in the cost of sales
for fresh pork as a percentage of total sales. Our efficiency gains in fresh
pork production was partially offset by the startup costs associated with
launching our new seafood products. In 2005 our production of seafood was
limited, but in 2006 we began producing seafood products in significant volume.
Our operating costs, such as the price of live pigs, utilities (electricity,
water and coal), labor and transportation remained relatively unchanged from
2005 to 2006.





Gross Profit. Gross profit
was $12,601,586 for the year ended December 31, 2006 as compared to $8,835,709
for the year ended December 31, 2005, representing gross margins of
approximately 17.90% and 16.33% of sales, respectively. As previously discussed,
we achieved operating efficiencies in 2006 in the production of fresh pork,
which also contributed to an increase in our gross profit margin in 2006 as
compared with 2005. These efficiency gains were partially offset by the cost of
launching our new line of seafood products and ramping up seafood production in
2005. At the same time, the cost of our operating inputs remained relatively
unchanged from 2005 to 2006, which helped us increase our gross profit
margin.





Selling Expenses. Selling
expenses totaled $1,556,805 for the year ended December 31, 2006, as compared to
$711,226 for the year ended December 31, 2005, an increase of $845,579 or 119%.
This increase is primarily attributable to new business development. Management
attributes the increase in selling expenses for 2006 to the roll-out of our
seafood line and hiring new sales personnel to expansion of our sales and
marketing efforts. Selling expenses in 2006 included market research, give-away
of product samples, and some advertising.





General and Administrative
Expenses. General and Administrative Expenses totaled $1,334,866 for the
year ended December 31, 2006 as compared to $936,179 for the year ended December
31, 2005, an increase of $398,687 or 43%. This increase is primarily
attributable to increases in management compensation and hiring of new staff,
and increased business expenses such as business travel.




Other Income (Expense). Our
other income (expense) consisted of Interest Income, Other Expenses, and
Interest Expense. We had total Other Expense of $1,583,155 for the year ended
December 31, 2006 as compared to $1,008,248 for the year ended December 31,
2005, an increase of $574,907 or 57%. The increase in other expenses is mainly
due to an increase of Interest Expense of $486,821 or 50.17%, from $970,383 at
the year ended December 31, 2005 to $1,457,204 at the year ended December 31,
2006. In December of 2005, we obtained a $4.4 million working capital loan from
a local bank in China, which we used in the operations of the Food Company. As a
result, we incurred increased interest expenses in 2006 as compared to
2005.





Net Income. Our net income
for the year ended December 31, 2006 was $8,128,369 as compared to $5,988,772
for the year ended December 31, 2005, which is an increase of $2,139,597, or
35.7%. Management attributes this increase in net income to an increase in sales
and operating efficiencies in the production of fresh pork, offset by higher
interest expenses, higher personnel costs, and increased selling
expenses.




49





LIQUIDITY
AND CAPITAL RESOURCES




Cash
Flows





Twelve
Months Ended December 31, 2008





Net cash
inflow used from operating activities was $3.23 million in fiscal 2008 and while
net cash flow sourced in operating activities was $1.97 million in fiscal
2007.  Prior to 2007, we offered flexible payment terms to agents who
purchase pork products from us for resale to retailers, but in March of 2007, we
eliminated this practice and required agents to pay promptly for products
ordered.   In 2008, we established a more comprehensive set of
payment terms determined by the creditworthiness and the length of time we have
worked with such agents and retailers.  For example, we require our
new customers to pre-pay or pay upon delivery for our products since we are
unfamiliar with their history and creditworthiness.  For customers we
have worked with over a period of time and with good credit, we give them until
the end of the month to pay for our products.  For customers we have
worked with for over 3 years and have established their creditworthiness, we
offer them payment terms of 30 to 60 days.  We are more lenient toward
large retailers and supermarkets since they have a more complete accounting and
purchasing system and there is a lesser possibility of breach of payment terms
or non-payment.  The payment terms for such large retailers usually
range between 45 to 75 days, to be negotiated with each individual retailer
prior to the execution of contract.  To improve our process of
collecting accounts receivable as compared to the prior year, we have also
placed a cap on accounts receivable in proportion to the quantity
ordered.  The agent or retailer must pay down the balance of the
accounts payable once the maximum cap is reached on their accounts, even if it
is prior to the expiration of their payment terms.





In 2008,
there was an increase in interest paid to $1.76 million compared to the prior
year.  We owed interest payment of $809,994 in 2007 which the Group
has paid on our behalf in 2007.  We repaid the Group the 2007 interest
payment of $809,994 in 2008.  In 2008, we also made an interest
payment for the interest we owed in 2008 in the amount of
$953,460.  We had an increase in interest earned of $264,774 in 2008
due to the deposit of more money in our bank accounts and we also earned higher
interest by moving some of our money to certificate of deposit
accounts.




We had
$4.25 million in escrowed funds in December 2007.  Pursuant to a
holdback escrow agreement executed on December 31, 2007, $2 million was held in
escrowed funds subject to hiring a certain number of independent directors, $1.5
million was held subject to hiring a qualified Chief Financial Officer, $250,000
was held to hire one of the agreed upon investor relations firms, and $500,000
was held to hire one of the independent public accounting firms of
record.  As of fiscal year 2008, only $2 million in the escrow account
has been released for satisfying the criteria of hiring the independent
directors.  Net cash flow used in investing activities was $3.76
million in fiscal 2008, compared to cash used in investing activities of $11.3
million in fiscal 2007.   There was an increase from $2.8 million
to $5.8 million in expenditures for plant and equipment in 2008.  The
$3 million increase in spending was used in the renovation and expansion of the
production facilities for prepared foods.  As a result of the
expansion, starting 2009 we can increase our production of prepared foods from
15,000 metric tons to 30,000 metric tons per year.  We did not incur
any expenses for land use rights in 2008 compared to the $4.1 million we paid
for land use rights in 2007. The expense for land use rights in 2007 was a
one-time payment that we paid off in 2007.





Net cash
flow used in financing activities was $1.44 million in fiscal 2008 as compared
to net cash sourced from financing activities of $18.26 million in fiscal
2007.  The Company maintains two revolving bank loans with the Bank of
China (Liaoning Branch) in the term of eleven months.  The amount of
credit and interest rate of the bank loans are re-negotiated at the end of each
term, and the parties re-execute a new revolving loan agreement every year after
negotiation.   Upon the expiration of both of our revolving loan
agreements executed with the Bank of China (Liaoning Branch) in 2007 that
expired during October 2008, we renegotiated and executed two new revolving loan
agreements in the total amount of $9.26 million in November
2008.  However, this cash inflow was offset by repayment of the above
mentioned 2007 bank loans that expired in October 2008 in the amount of $10.07
million.  Compared to 2007, the total amount of our revolving bank
loans decreased by $1.44 million in 2008.  For additional details
concerning the repayment, see Note 9(B) in the footnotes to our financial
statements included with this report.




50





The cash
flow statement shows that there was an $18 million increase in Accounts
Receivable in 2008 compared to 2007.  The significant increase was
attributable to the more comprehensive billing system implemented by the Company
in 2008, which offered our creditworthy customers longer and more flexible
payment terms.  The implementation of the new billing system boosted
our Accounts Receivable and also increased our sales and gross
profits.  Other Receivable also increased by over $1 million in 2008
because we implemented new credit/debit card machines and had to make
adjustments in our accounting to correspond with such change.  Many of
our showcase stores and customers made cash payments in the past.  Due
to safety reasons and the problem of counterfeit money, we no longer accepted
cash payments in 2008 and switched to using credit/debit card machines provided
by the Bank of China.  The time of process for the actual payment to
be deposited into our bank account takes approximately 4 business
days.  During this time, the payments are recorded in Other Receivable
since they are not actually received and cannot be counted as Accounts
Receivable yet.  After the money has been transferred into our bank
account, we settle and deduct the relevant Accounts Receivable from Other
Receivable accordingly.





Our
Related Party Receivable decreased by $9.2 million in 2007, yet has an increase
of $6.9 million in 2008.   The significant increase is due to the
accounting of the Company’s transactions with certain related parties. In the
normal course of business which includes the purchases of hogs and other raw
materials, sale of pork and pork products, the Company conducts transactions
with the following related parties: Dalian Chuming Group Co., Ltd (“Group”) and
the Group subsidiaries, that are not consolidated into Energroup Holdings or
Energroup’s subsidiary, Dalian Chuming Precious Sheen Investments Consulting Co.
Ltd. (Chuming): (1) Dalian Chuming Industrial Development Co., Ltd.,
(“Industrial Development Co.”) (2) Dalian Chuming Trading Co., Ltd, (“Trading
Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd., (“Mingxing”) (4) Dalian
Chuming Stockbreeding Combo Development Co., Ltd., (“Combo Development Co.”) (5)
Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”), and (6) Dalian Chuming
Biological Technology Co., Ltd., (“Biological Co.”) and (7) Dalian Huayu Seafood
Food Co., Ltd. (“Huayu”).  The Company and the aforementioned related
parties share common beneficial ownership.  All transactions with
related parties are generally performed at arm’s length.




In the
event that the Company has both receivables from, and payables to the Group, it
will setoff the balances in order to arrive at a single balance that is either
due from, or due to the Group.  The Company’s net receivable balance
at December 31, 2008 was $10,919,777.  Of the $10,919,777 net
receivable owed by the Group to the Company, the entire amount has been
securitized by bank drafts issued by the bank on behalf of subsidiaries of the
Group to the Company.  These notes are collateralized by deposits at
the bank by those particular subsidiaries of the Group.  The drafts
can be endorsed and discounted to the bank for cash; however the Company
currently intends to hold these drafts until maturity.




Our
Accounts Payable increased significantly in 2008 to $3.9 million.  The
reason was attributable to the extension of our billing period from the original
30 to 60 days granted by our supplier who sells us supplementary materials and
packaging materials.  The extension of payment term was to reward us
for being a good customer.  Another contributing factor was we had to
pay for the renovation and equipment costs due to the expansion of our
production facilities in 2008.  Our taxes payable also increased in
2008 due to an increase of our payable value-added tax.  Our Customer
Advances increased by $3.2 million in 2008.  The increase of such
advances was for the renovation and expansion of production facilities and
purchasing of new equipments.  Since the Company has yet to receive an
invoice for such renovation and equipment expenses, such costs cannot be
accounted into the Company’s assets yet.





Twelve
Months Ended December 31, 2007





Net cash
inflow sourced from operating activities was $1.97 million in fiscal 2007 and
while net cash flow used in operating activities was $7.1 million in fiscal
2006. Prior to 2007, we offered flexible payment terms to agents who purchase
pork products from us for resale to retailers, but in March of 2007, we
eliminated this practice and required agents to pay promptly for products
ordered. In addition, we have worked with our larger customers to make
improvements in the collection process. As a result we believe we have improved
our process of collecting accounts receivable as compared to the prior year. In
2007, we also used $108.5 million in cash to purchase materials and pay
employees in our efforts to satisfy increased customer demand for our
products.




51




Net cash
flow used in investing activities was $11.3 million in fiscal 2007, compared to
cash used in investing activities of $1.9 million in fiscal 2006. The increase
in cash flow used in investing activities from 2006 to 2007 was a result of an
equity financing, and a one-time payment by us for land use rights. In 2007, we
completed a $17 million private placement, and agreed to have $4.25 million of
the net proceeds deposited into an escrow account for release contingent upon
our satisfaction of certain criteria relating to the structure of the board,
management and appointment of and auditing firm. Also in 2007, we paid
approximately $4.2 million to our local government for land use rights which we
acquired in 2004.





Net cash
flow used in financing activities was $2.7 million in fiscal 2007 as compared to
net cash sourced from financing activities of $1.8 million in fiscal 2006. This
change was a result of our $17 million private placement financing, $4.25
million of which was held back in an escrow account, and the repayment of a
construction loan with an original principal amount of $19.3 million, in
addition to other short term loans. Our private placement financing brought in
approximately $14.7 million in cash proceeds, excluding amounts held back in
escrow. However, this cash inflow was offset by the payment of $23.2 million
that was used toward to repayment in full of our construction loan from 2004,
and certain short term business loans.





Contractual
Obligations and Off-Balance Sheet Arrangements




Contractual
Obligations




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





The
following tables summarize our contractual obligations as of December 31, 2008,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.




Payments Due by PeriodTotal
            
            
            Less than 1
              year
            
            
            1-3 Years
            
            
            3-5 Years
            
            5 Years +Contractual Obligations :Bank
      Indebtedness
            
            $
            6,419,422
            
            
            $
            6,419,422
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Other
      Indebtedness
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Capital
      Lease Obligations
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
      Leases
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Purchase
      Obligations
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Total
      Contractual Obligations:
            
            $
            6,419,422
            
            
            $
            6,419,422
            
            
            $
            -
            
            
            $
            -
            
            
            
            -




Off-balance
Sheet Arrangements




We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.




Related
Party Transactions





For a
description of our related party transactions, see the section of this Report
entitled “Certain Relationships and Related Party Transactions.”




52





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Quantitative and Qualitative
Disclosures about Market Risk





We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.





Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
obligations; thus, fluctuations in interest rates would not have a material
impact on the fair value of these securities. At December 30, 2008, we had
approximately $5,695,798 in cash and cash equivalents. A hypothetical 10%
increase or decrease in interest rates would not have a material impact on our
earnings or loss, or the fair market value or cash flows of these
instruments.




Foreign Exchange Rate. All of
our sales and inputs are transacted in Renminbi (“RMB”). As a result, changes in
the relative values of U.S. Dollars and RMB affect our reported levels of
revenues and profitability as the results are translated into U.S. Dollars for
reporting purposes. However, since we conduct our sales and purchase inputs in
RMB, fluctuations in exchange rates are not expected to significantly affect our
financial stability, or gross and net profit margins. We do not currently expect
to incur significant foreign exchange gains or losses, or gains or losses
associated with any foreign operations.





Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We recorded net foreign currency gains of 2,064,272 and
$528,277 in 2007 and 2008, respectively. We have not used any forward contracts,
currency options or borrowings to hedge our exposure to foreign currency
exchange risk. We cannot predict the impact of future exchange rate fluctuations
on our results of operations and may incur net foreign currency losses in the
future. As our sales denominated in foreign currencies, such as RMB, continue to
grow, we may consider using arrangements to hedge our exposure to foreign
currency exchange risk. Our financial statements are expressed in
U.S. dollars but the functional currency of our operating subsidiary is
RMB. The value of your investment in our stock will be affected by the foreign
exchange rate between U.S. dollars and RMB. A decline in the value of RMB
against the U.S. dollar could reduce the U.S. dollar equivalent
amounts of our financial results, the value of your investment in our company
and the dividends we may pay in the future, if any, all of which may have a
material adverse effect on the price of our stock.







ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




53




Energroup
Holdings Corporation
 
 Audited
Consolidated Financial Statements
 
 December
31, 2008, 2007 and 2006
 
 (Stated
in U.S. Dollars)
  Energroup
Holdings Corporation
 
 Contents
                    PagesReport
      of Registered Public Accounting Firm
                    F-1Consolidated
      Balance Sheets
                    F-2—F-3Consolidated
      Statements of Operations
                    F-4Consolidated
      Statements of Changes in Stockholders’ Equity
                    F-5Consolidated
      Statements of Cash Flows
                    F-6—F-7Notes
      to Consolidated Financial Statements
                    F-8—F-30
  
 
 Board of
Directors and Stockholders
 Energroup
Holdings Corporation
 
 Report of Registered
Independent Public Accounting Firm
 
 
 We have
audited the accompanying consolidated balance sheets of Energroup Holdings
Corporation as of December 31, 2008, 2007, and 2006 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. 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 audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 Energroup Holdings
Corporation as of December 31, 2008, 2007, and 2006, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
 
 South
      San Francisco, California
                Samuel
      H. Wong & Co., LLPJanuary
      23, 2009
                Certified
      Public Accountants
  
  Energroup
Holdings Corporation
 Consolidated
Balance Sheets
 At
December 31, 2008, 2007, and 2006
 (Stated
in US Dollars)
 
 Notes
                                                
                                                
                                                At
                                                
                                                
                                                At
                                                
                                                
                                                AtDecember 31,
                                                
                                                
                                                December 31,
                                                
                                                
                                                December 31,ASSETS
                                                
                                                
                                                
                                                
                                                2008
                                                
                                                
                                                2007
                                                
                                                
                                                2006Current
      AssetsCash
                                                
                                                
                                                2(D)
                                                
                                                $
                                                5,695,798
                                                
                                                
                                                $
                                                14,031,851
                                                
                                                
                                                $
                                                3,075,787Restricted
      Cash
                                                
                                                
                                                3
                                                
                                                
                                                
                                                2,177,091
                                                
                                                
                                                
                                                4,250,000
                                                
                                                
                                                
                                                -Accounts
      Receivable
                                                
                                                
                                                2(E),4
                                                
                                                
                                                18,661,065
                                                
                                                
                                                
                                                622,433
                                                
                                                
                                                
                                                1,798,397Other
      Receivable
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,162,412
                                                
                                                
                                                
                                                1,068,939
                                                
                                                
                                                
                                                679,019Related
      Party Receivable
                                                
                                                
                                                5
                                                
                                                
                                                
                                                10,919,777
                                                
                                                
                                                
                                                3,964,357
                                                
                                                
                                                
                                                13,148,788Inventory
                                                
                                                
                                                2(F),6
                                                
                                                
                                                6,051,109
                                                
                                                
                                                
                                                2,916,016
                                                
                                                
                                                
                                                2,385,447Advance
      to Suppliers
                                                
                                                
                                                2(G)
                                                
                                                
                                                1,453,861
                                                
                                                
                                                
                                                267,807
                                                
                                                
                                                
                                                1,110,449Prepaid
      Expenses
                                                
                                                
                                                
                                                
                                                
                                                
                                                62,734
                                                
                                                
                                                
                                                46,401
                                                
                                                
                                                
                                                90,913Prepaid
      Taxes
                                                
                                                
                                                
                                                
                                                
                                                
                                                334,413
                                                
                                                
                                                
                                                185,319
                                                
                                                
                                                
                                                -Deferred
      Tax Asset
                                                
                                                
                                                2(Q)
                                                
                                                
                                                643,609
                                                
                                                
                                                
                                                613,844
                                                
                                                
                                                
                                                574,316Total
      Current Assets
                                                
                                                
                                                
                                                
                                                
                                                
                                                48,161,869
                                                
                                                
                                                
                                                27,966,967
                                                
                                                
                                                
                                                22,863,116Non-Current
      AssetsProperty,
      Plant & Equipment, net
                                                
                                                
                                                2(H),7
                                                
                                                
                                                25,794,151
                                                
                                                
                                                
                                                24,836,496
                                                
                                                
                                                
                                                20,875,462Land
      Use Rights, net
                                                
                                                
                                                2(I),8
                                                
                                                
                                                13,430,435
                                                
                                                
                                                
                                                12,855,980
                                                
                                                
                                                
                                                8,911,119Construction
      in Progress
                                                
                                                
                                                2(J)
                                                
                                                
                                                3,262,146
                                                
                                                
                                                
                                                927,866
                                                
                                                
                                                
                                                4,165,407Other
      Assets
                                                
                                                
                                                
                                                
                                                
                                                
                                                34,807
                                                
                                                
                                                
                                                32,619
                                                
                                                
                                                
                                                30,519Total
      Assets
                                                
                                                
                                                
                                                
                                                
                                                $
                                                90,683,408
                                                
                                                
                                                $
                                                66,619,928
                                                
                                                
                                                $
                                                56,845,623LIABILITIES
      & STOCKHOLDERS' EQUITYCurrent
      LiabilitiesBank
      Loans
                                                
                                                
                                                9(A)
                                                
                                                $
                                                6,419,422
                                                
                                                
                                                $
                                                7,383,095
                                                
                                                
                                                $
                                                6,971,538Accounts
      Payable
                                                
                                                
                                                
                                                
                                                
                                                
                                                7,695,208
                                                
                                                
                                                
                                                3,779,274
                                                
                                                
                                                
                                                4,207,992Taxes
      Payable
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,341,971
                                                
                                                
                                                
                                                1,677,194
                                                
                                                
                                                
                                                2,259,465Other
      Payable
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,318,142
                                                
                                                
                                                
                                                1,471,381
                                                
                                                
                                                
                                                1,362,607Accrued
      Liabilities
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,724,266
                                                
                                                
                                                
                                                3,347,013
                                                
                                                
                                                
                                                912,707Customer
      Deposits
                                                
                                                
                                                2(L)
                                                
                                                
                                                3,258,752
                                                
                                                
                                                
                                                24,161
                                                
                                                
                                                
                                                1,049,212Related
      Party Payable
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Total
      Current Liabilities
                                                
                                                
                                                
                                                
                                                
                                                
                                                23,757,761
                                                
                                                
                                                
                                                17,682,118
                                                
                                                
                                                
                                                16,763,521Long
      Term LiabilitiesBank
      Loans
                                                
                                                
                                                9(B)
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                17,908,539Total
      Liabilities
                                                
                                                
                                                
                                                
                                                
                                                $
                                                23,757,761
                                                
                                                
                                                $
                                                17,682,118
                                                
                                                
                                                $
                                                34,672,060
 
 See Notes
to Financial Statements and Accountant’s Report
  F-2
  Energroup
Holdings Corporation
 Consolidated
Balance Sheets
 At
December 31, 2008, 2007, and 2006
 (Stated
in US Dollars)
 
 At
                          
                          
                          At
                          
                          
                          AtNotes
                          
                          December 31,
                          
                          
                          December 31,
                          
                          
                          December 31,Stockholders' Equity
                          
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006Preferred
      Stock - $0.001 Par Value 10,000,000 Shares Authorized; 0 Shares Issued
      & Outstanding at December 31, 2008, 2007, and 2006,
      respectively.
                          
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Common
      Stock - $0.001 Par Value 21,739,130 Shares Authorized; 21,136,392 Shares
      Issued & Outstanding at December 31, 2008 and 2007, and 17,272,756
      Shares Issued & Outstanding at December 31, 2006.
                          
                          10
                          
                          
                          21,137
                          
                          
                          
                          21,137
                          
                          
                          
                          17,273Additional
      Paid in Capital
                          
                          
                          
                          
                          26,062,337
                          
                          
                          
                          15,440,043
                          
                          
                          
                          2,396,079Statutory
      Reserve
                          
                          2(M),11
                          
                          
                          2,077,488
                          
                          
                          
                          751,444
                          
                          
                          
                          751,444Retained
      Earnings
                          
                          
                          
                          
                          35,275,457
                          
                          
                          
                          29,764,236
                          
                          
                          
                          18,112,089Accumulated
      Other Comprehensive Income
                          
                          2(N)
                          
                          
                          3,489,228
                          
                          
                          
                          2,960,951
                          
                          
                          
                          896,679Total
      Stockholders' Equity
                          
                          
                          
                          
                          66,925,647
                          
                          
                          
                          48,937,811
                          
                          
                          
                          22,173,564Total
      Liabilities & Stockholders' Equity
                          
                          
                          
                          $
                          90,683,408
                          
                          
                          $
                          66,619,928
                          
                          
                          $
                          56,845,623
 
 See Notes
to Financial Statements and Accountant’s Report
  F-3
  Energroup
Holdings Corporation
 Consolidated
Statements of Operations
 For
the years ended December 31, 2008, 2007, and 2006
 (Stated
in US Dollars)
 
 For the
                                          
                                          
                                          For the
                                          
                                          
                                          For theyear ended
                                          
                                          
                                          year ended
                                          
                                          
                                          year endedNote
                                          
                                          
                                          December 31,
                                          
                                          
                                          December 31,
                                          
                                          
                                          December 31,2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006Sales
                                          
                                          
                                          2(O)
                                          
                                          $
                                          176,360,013
                                          
                                          
                                          $
                                          124,696,036
                                          
                                          
                                          $
                                          70,396,439Cost
      of Sales
                                          
                                          
                                          2(P)
                                          
                                          
                                          149,794,249
                                          
                                          
                                          
                                          104,378,909
                                          
                                          
                                          
                                          57,794,853Gross
      Profit
                                          
                                          
                                          
                                          
                                          
                                          
                                          26,565,764
                                          
                                          
                                          
                                          20,317,127
                                          
                                          
                                          
                                          12,601,586Operating ExpensesSelling
      Expenses
                                          
                                          
                                          2(Q)
                                          
                                          
                                          5,147,366
                                          
                                          
                                          
                                          4,672,862
                                          
                                          
                                          
                                          1,556,805General
      & Administrative Expenses
                                          
                                          
                                          2(R)
                                          
                                          
                                          2,675,661
                                          
                                          
                                          
                                          1,572,836
                                          
                                          
                                          
                                          1,334,866Total
      Operating Expense
                                          
                                          
                                          
                                          
                                          
                                          
                                          7,823,027
                                          
                                          
                                          
                                          6,245,698
                                          
                                          
                                          
                                          2,891,671Operating
      Income/(Loss)
                                          
                                          
                                          
                                          
                                          
                                          
                                          18,742,737
                                          
                                          
                                          
                                          14,071,429
                                          
                                          
                                          
                                          9,709,915Other Income (Expenses)Other
      Income
                                          
                                          
                                          
                                          
                                          
                                          
                                          5,780
                                          
                                          
                                          
                                          114,496
                                          
                                          
                                          
                                          -Interest
      Income
                                          
                                          
                                          
                                          
                                          
                                          
                                          284,774
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          147Other
      Expenses
                                          
                                          
                                          
                                          
                                          
                                          
                                          (100,183
                                          )
                                          
                                          
                                          (90,508
                                          )
                                          
                                          
                                          (126,098
                                          )Interest
      Expense
                                          
                                          
                                          
                                          
                                          
                                          
                                          (953,460
                                          )
                                          
                                          
                                          (1,475,730
                                          )
                                          
                                          
                                          (1,457,204
                                          )Release
      of Escrowed Make Good Shares
                                          
                                          
                                          
                                          
                                          
                                          
                                          (10,622,294
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Total
      Other Income (Loss) and Expense
                                          
                                          
                                          
                                          
                                          
                                          
                                          (11,385,383
                                          )
                                          
                                          
                                          (1,451,742
                                          )
                                          
                                          
                                          (1,583,155
                                          )Earnings
      before Tax
                                          
                                          
                                          
                                          
                                          
                                          
                                          7,357,354
                                          
                                          
                                          
                                          12,619,687
                                          
                                          
                                          
                                          8,126,760(Income
      Tax Expense)/Deferred Tax Benefit
                                          
                                          
                                          2(V),13
                                          
                                          
                                          (520,089
                                          )
                                          
                                          
                                          (967,540
                                          )
                                          
                                          
                                          1,611Net
      Income
                                          
                                          
                                          
                                          
                                          
                                          $
                                          6,837,265
                                          
                                          
                                          $
                                          11,652,147
                                          
                                          
                                          $
                                          8,128,371Earnings
      Per Share
                                          
                                          
                                          2(Z),16-   Basic
                                          
                                          
                                          
                                          
                                          
                                          $
                                          0.40
                                          
                                          
                                          $
                                          0.87
                                          
                                          
                                          $
                                          0.61-   Diluted
                                          
                                          
                                          
                                          
                                          
                                          $
                                          0.32
                                          
                                          
                                          $
                                          0.67
                                          
                                          
                                          $
                                          0.47Weighted
      Average Shares Outstanding-    Basic
                                          
                                          
                                          
                                          
                                          
                                          
                                          17,272,756
                                          
                                          
                                          
                                          13,409,120
                                          
                                          
                                          
                                          13,409,120-    Diluted
                                          
                                          
                                          
                                          
                                          
                                          
                                          21,182,756
                                          
                                          
                                          
                                          17,272,756
                                          
                                          
                                          
                                          17,272,756
  For the
                              
                              
                              For the
                              
                              
                              For theyear ended
                              
                              
                              year ended
                              
                              
                              year endedDecember 31,
                              
                              
                              December 31,
                              
                              
                              December 31,
                              
                              
                              AccumulatedComprehensive Income
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              TotalsNet
      Income
                              
                              $
                              6,837,265
                              
                              
                              $
                              11,652,147
                              
                              
                              $
                              8,128,371
                              
                              
                              
                              26,617,783Other
      Comprehensive Income:Foreign
      Currency Translation Adjustment
                              
                              
                              528,277
                              
                              
                              
                              2,064,272
                              
                              
                              
                              610,696
                              
                              
                              
                              3,203,245$
                              7,365,542
                              
                              
                              $
                              13,716,419
                              
                              
                              $
                              8,739,067
                              
                              
                              $
                              29,821,028
 See Notes
to Financial Statements and Accountant’s Report
  F-4
  Energroup
Holdings Corporation
 Consolidated
Statements of Changes in Stockholders’ Equity
 For
the years ended December 31, 2008, 2007, and 2006
 (Stated
in US Dollars)
 
 AccumulatedCommon
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      
                      
                      
                      ComprehensiveShares
                      
                      
                      
                      
                      
                      Paid in
                      
                      
                      Statutory
                      
                      
                      Retained
                      
                      
                      OtherOutstanding
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Reserve
                      
                      
                      Earnings
                      
                      
                      Income
                      
                      
                      TotalBalance,
      January 1, 2006
                      
                      
                      17,272,756
                      
                      
                      $
                      17,273
                      
                      
                      $
                      2,396,079
                      
                      
                      $
                      72,508
                      
                      
                      $
                      10,662,654
                      
                      
                      $
                      285,983
                      
                      
                      $
                      13,434,497Net
      Income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      8,128,371
                      
                      
                      
                      
                      
                      
                      
                      8,128,371Appropriations
      of Retained Earnings
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      678,936
                      
                      
                      
                      (678,936
                      )
                      
                      
                      
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      610,696
                      
                      
                      
                      610,696Balance,
      December 31, 2006
                      
                      
                      17,272,756
                      
                      
                      $
                      17,273
                      
                      
                      $
                      2,396,079
                      
                      
                      $
                      751,444
                      
                      
                      $
                      18,112,089
                      
                      
                      $
                      896,679
                      
                      
                      $
                      22,173,564Balance,
      January 1, 2007
                      
                      
                      17,272,756
                      
                      
                      $
                      17,273
                      
                      
                      $
                      2,396,079
                      
                      
                      $
                      751,444
                      
                      
                      $
                      18,112,089
                      
                      
                      $
                      896,679
                      
                      
                      $
                      22,173,564Issuance
      of Common Stock & Warrants
                      
                      
                      3,863,636
                      
                      
                      
                      3,864
                      
                      
                      
                      13,043,964
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,047,828Net
      Income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      11,652,147
                      
                      
                      
                      
                      
                      
                      
                      11,652,147Appropriations
      of Retained Earnings
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,064,272
                      
                      
                      
                      2,064,272Balance,
      December 31, 2007
                      
                      
                      21,136,392
                      
                      
                      $
                      21,137
                      
                      
                      $
                      15,440,043
                      
                      
                      $
                      751,444
                      
                      
                      $
                      29,764,236
                      
                      
                      $
                      2,960,951
                      
                      
                      $
                      48,937,811Balance,
      January 1, 2008
                      
                      
                      21,136,392
                      
                      
                      $
                      21,137
                      
                      
                      $
                      15,440,043
                      
                      
                      $
                      751,444
                      
                      
                      $
                      29,764,236
                      
                      
                      $
                      2,960,951
                      
                      
                      $
                      48,937,811Release
      of Shares Placed in Escrow
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,622,294
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,622,294Net
      Income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      6,837,265
                      
                      
                      
                      
                      
                      
                      
                      6,837,265Appropriations
      of Retained Earnings
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,326,044
                      
                      
                      
                      (1,326,044
                      )
                      
                      
                      
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      528,277
                      
                      
                      
                      528,277Balance,
      December 31, 2008
                      
                      
                      21,136,392
                      
                      
                      $
                      21,137
                      
                      
                      $
                      26,062,337
                      
                      
                      $
                      2,077,488
                      
                      
                      $
                      35,275,457
                      
                      
                      $
                      3,489,228
                      
                      
                      $
                      66,925,647
  See
Notes to Financial Statements and Accountant’s Report
  F-5
  Energroup
Holdings Corporation
 Consolidated
Statements of Cash Flows
 For
the years ended December 31, 2008, 2007, and 2006
 (Stated
in US Dollars)
 
 For the
                        
                        
                        For the
                        
                        
                        For theyear ended
                        
                        
                        year ended
                        
                        
                        year endedDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007
                        
                        
                        2006Cash
      Flow from Operating ActivitiesCash
      Received from Customers
                        
                        $
                        153,507,080
                        
                        
                        $
                        112,741,680
                        
                        
                        $
                        59,979,793Cash
      Paid to Suppliers & Employees
                        
                        
                        (155,266,953
                        )
                        
                        
                        (108,527,656
                        )
                        
                        
                        (65,116,627
                        )Interest
      Received
                        
                        
                        284,774
                        
                        
                        
                        -
                        
                        
                        
                        147Interest
      Paid (net of amount capitalized)
                        
                        
                        (1,763,404
                        )
                        
                        
                        (1,247,575
                        )
                        
                        
                        (1,580,310
                        )Income
      Tax Paid
                        
                        
                        -
                        
                        
                        
                        (1,007,067
                        )
                        
                        
                        (400,065
                        )Miscellaneous
      Receipts
                        
                        
                        5,780
                        
                        
                        
                        9,182
                        
                        
                        
                        -Cash
      Sourced/(Used) in Operating Activities
                        
                        
                        (3,232,723
                        )
                        
                        
                        1,968,564
                        
                        
                        
                        (7,117,062
                        )Cash
      Flows from Investing ActivitiesEscrowed
      Funds from Private Placement Placed in Restricted Cash
                        
                        
                        2,072,909
                        
                        
                        
                        (4,250,000
                        )
                        
                        
                        -Payments
      for Purchases of Equipment & Construction of Plant
                        
                        
                        (5,832,731
                        )
                        
                        
                        (2,882,433
                        )
                        
                        
                        (1,655,077
                        )Payments
      for Purchases of Land Use Rights
                        
                        
                        -
                        
                        
                        
                        (4,198,178
                        )
                        
                        
                        (265,509
                        )Payments
      for Deposits
                        
                        
                        -
                        
                        
                        
                        (2,100
                        )
                        
                        
                        -Cash
      Sourced/(Used) in Investing Activities
                        
                        
                        (3,759,822
                        )
                        
                        
                        (11,333,712
                        )
                        
                        
                        (1,920,586
                        )Cash
      Flows from Financing ActivitiesFinancing
      Transaction - Proceeds Allocated to Accrued Liabilities for Liquidated
      Damages
                        
                        
                        -
                        
                        
                        
                        1,700,000
                        
                        
                        
                        -Financing
      Transaction - Proceeds of Issuance
      of      Common Stock &
      Warrants
                        
                        
                        -
                        
                        
                        
                        13,047,828
                        
                        
                        
                        -Proceeds
      from Bank Borrowings
                        
                        
                        9,264,246
                        
                        
                        
                        5,725,377
                        
                        
                        
                        1,753,971Repayment
      of Bank Loans
                        
                        
                        (10,700,664
                        )
                        
                        
                        (2,217,265
                        )
                        
                        
                        -Cash
      Sourced/(Used) in Financing Activities
                        
                        
                        (1,436,417
                        )
                        
                        
                        18,255,939
                        
                        
                        
                        1,753,971Net
      Increase/(Decrease) in Cash & Cash Equivalents for the
      Year
                        
                        
                        (8,428,962
                        )
                        
                        
                        8,891,791
                        
                        
                        
                        (7,283,677
                        )Effect
      of Currency Translation
                        
                        
                        92,910
                        
                        
                        
                        2,064,273
                        
                        
                        
                        180,050Cash
      & Cash Equivalents at Beginning of Year
                        
                        
                        14,031,851
                        
                        
                        
                        3,075,787
                        
                        
                        
                        10,179,414Cash
      & Cash Equivalents at End of Year
                        
                        $
                        5,695,798
                        
                        
                        $
                        14,031,851
                        
                        
                        $
                        3,075,787Non-Cash Financing
Activity:Extinguishment
      of Debt by Setoff Against Related Party Receivables
                        
                        $
                        -
                        
                        
                        $
                        21,005,094
                        
                        
                        $
                        -Release
      of shares held in escrow
                        
                        $
                        10,622,294
                        
                        
                        $
                        -
                        
                        
                        $
                        -
  See Notes
to Financial Statements and Accountant’s Report
 F-6
 
 Energroup
Holdings Corporation
 Reconciliation
of Net Income to Cash Provided/(Used) in Operating Activities
 For
the years ended December 31, 2008, 2007, and 2006
 (Stated
in US Dollars)
 
 For the
                        
                        
                        For the
                        
                        
                        For theyear ended
                        
                        
                        year ended
                        
                        
                        year endedDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007
                        
                        
                        2006Net
      Income
                        
                        $
                        6,837,265
                        
                        
                        $
                        11,652,147
                        
                        
                        $
                        8,128,371Adjustments
      to Reconcile Net Income to Net Cash Provided by Cash
      Activities:Non
      Cash Expense Recorded for the Release of Escrowed Shares
                        
                        
                        10,622,294
                        
                        
                        
                        -
                        
                        
                        
                        -Extinguishment
      of Debt by Setting Off Against Related Party Receivable
                        
                        
                        -
                        
                        
                        
                        (21,005,094
                        )
                        
                        
                        -Liquidated
      Damages Included in Accrued Liabilities
                        
                        
                        -
                        
                        
                        
                        (1,700,000
                        )
                        
                        
                        -Amortization
                        
                        
                        331,468
                        
                        
                        
                        253,317
                        
                        
                        
                        160,782Depreciation
                        
                        
                        2,540,797
                        
                        
                        
                        2,158,940
                        
                        
                        
                        1,651,055Provision
      for Bad Debt
                        
                        
                        103,773
                        
                        
                        
                        5,456
                        
                        
                        
                        -Decrease/(Increase)
      in Accounts Receivable
                        
                        
                        (18,142,404
                        )
                        
                        
                        1,170,508
                        
                        
                        
                        1,523,176Decrease/(Increase)
      in Other Receivable
                        
                        
                        (1,093,473
                        )
                        
                        
                        (389,920
                        )
                        
                        
                        353,046Decrease/(Increase)
      in Related Party Receivable
                        
                        
                        (6,955,420
                        )
                        
                        
                        9,184,432
                        
                        
                        
                        (12,877,984
                        )Decrease/(Increase)
      in Inventory
                        
                        
                        (3,135,093
                        )
                        
                        
                        (530,569
                        )
                        
                        
                        546,573Decrease/(Increase)
      in Advance to Suppliers
                        
                        
                        (1,186,054
                        )
                        
                        
                        842,641
                        
                        
                        
                        (374,793
                        )Decrease/(Increase)
      in Prepaid Taxes
                        
                        
                        (149,096
                        )
                        
                        
                        (185,317
                        )
                        
                        
                        -Decrease/(Increase)
      in Prepaid Expenses
                        
                        
                        (16,333
                        )
                        
                        
                        44,512
                        
                        
                        
                        (40,297
                        )Decrease/(Increase)
      in Deferred Tax Benefit
                        
                        
                        (29,764
                        )
                        
                        
                        (39,528
                        )
                        
                        
                        (401,674
                        )Increase/(Decrease)
      in Accounts Payable
                        
                        
                        3,915,934
                        
                        
                        
                        (428,718
                        )
                        
                        
                        (3,611,921
                        )Increase/(Decrease)
      in Taxes Payable
                        
                        
                        664,777
                        
                        
                        
                        (582,271
                        )
                        
                        
                        1,371,696Increase/(Decrease)
      in Other Payable
                        
                        
                        846,762
                        
                        
                        
                        108,773
                        
                        
                        
                        482,075Increase/(Decrease)
      in Related Party Payable
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,506,002
                        )Increase/(Decrease)
      in Accrued Liabilities
                        
                        
                        (1,622,747
                        )
                        
                        
                        2,434,306
                        
                        
                        
                        (106,278
                        )Increase/(Decrease)
      in Customer Advances
                        
                        
                        3,234,591
                        
                        
                        
                        (1,025,051
                        )
                        
                        
                        585,113Total
      of all adjustments
                        
                        
                        (10,069,987
                        )
                        
                        
                        (9,683,583
                        )
                        
                        
                        (15,245,431
                        )Net
      Cash Provided by/(Used in) Operating Activities
                        
                        $
                        (3,232,723
                        )
                        
                        $
                        1,968,564
                        
                        
                        $
                        (7,117,062
                        )
  See Notes
to Financial Statements and Accountant’s Report
 F-7
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 1.           The Company and Principal
Business Activities
 
 Energroup
Holdings Corporation (the “Company”) (OTCBB: ENHD) is a holding company
incorporated in the state of Nevada in the United States of America whose
primary business operations are conducted through its three operating
subsidiaries: (1) Dalian Chuming Processed Foods Company Ltd., (“Food Company”)
(2) Dalian Chuming Slaughter and Packaging Pork Company Ltd. (“Meat Company”),
and (3) Dalian Chuming Sales Company Ltd. (“Sales Company”), which are
incorporated in the People’s Republic of China (“PRC”).   The
Company is headquartered in the City of Dalian, Liaoning Province of
China.
 
 The three
operating subsidiaries were spun-off constituents of the former parent company,
Dalian Chuming Group Co. Ltd (“Group”).  The Company indirectly holds
the three operating subsidiary companies through its wholly owned intermediary
subsidiaries: (A) Precious Sheen Investments Limited (“PSI”), a British Virgin
Islands corporation, and (B) Dalian Chuming Precious Sheen Investments
Consulting Co., Ltd., (“Chuming”), a wholly foreign owned enterprise
incorporated in the PRC.
 
 The
Company’s primary business activities are the production and packing of fresh
pork and also production of processed meat products for distribution and sale to
clients throughout the PRC and Russia.
 
 Corporate
Reorganization
 
 PRC law
currently has limits on foreign ownership of certain companies.  To
enable Chuming to raise equity capital from investors outside of China, it
established an offshore holding company by incorporating Precious Sheen
Investments Limited in the British Virgin Islands in May 2007.  On
September 26, 2007, Chuming entered into share transfer agreements with Dalian
Chuming Group Co., Ltd., under which Dalian Chuming Group Co., Ltd. agreed to
transfer ownership of three operating subsidiaries (collectively known as
“Chuming Operating Subsidiaries”) to Chuming.  On October 23, 2007,
Chuming completed all required registrations to complete the share transfer, and
became the 100% owner of the Chuming Operating Subsidiaries.  On
November 14, 2007 the Dalian Commerce Bureau approved the transfer of Dalian
Chuming Group Co., Ltd’s 68% interest in Chuming to PSI, and upon this transfer,
Chuming became a wholly foreign owned enterprise, with PSI as the 100% owner of
Chuming (including its subsidiaries). On December 13, 2007, the PRC government
authorities issued Chuming a business license formally recognizing it as a
wholly foreign owned enterprise, of which PSI is the sole
shareholder.
 
 The
following is a description of the Chuming Operating Subsidiaries: -
 
 A. Dalian
Chuming Slaughter and Packaging Pork Company Ltd., whose primary business
activity is acquiring, slaughtering, and packaging of pork and
cattle;
 
 B. Dalian
Chuming Processed Foods Company Ltd., whose primary business activity is the
processing of raw and cooked meat products; and
 
 C. Dalian
Chuming Sales Company Ltd., which is responsible for Chuming’s sales, marketing,
and distribution operations.
 
 Share
Exchange Transaction
 
 On
December 31, 2007, the Company acquired all of the outstanding shares of PSI in
exchange for the issuance of 16,850,000 restricted shares of our common stock to
the shareholders of PSI, which represented approximately 97.55% of the
then-issued and outstanding common stock of the Company (excluding the shares
issued in the Financing). As a result of that transaction, PSI became our wholly
owned subsidiary and we acquired the business and operations of the three
operation subsidiaries.
  F-8
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 The share
exchange transaction has been accounted for as a recapitalization of PSI where
the Company (the legal acquirer) is considered the accounting acquiree and PSI
(the legal acquiree) is considered the accounting acquirer.  As a
result of this transaction, the Company is deemed to be a continuation of the
business of PSI.
 
 Accordingly,
the financial data included in the accompanying consolidated financial
statements for all periods prior to December 31, 2007 is that of the accounting
acquirer (PSI).  The historical stockholders’ equity of the accounting
acquirer prior to the share exchange has been retroactively restated as if the
share exchange transaction occurred as of the beginning of the first period
presented.
 
 
 2.            
Summary of Significant
Accounting Policies
 
 (A)
              Method
      of Accounting
 
 The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes.  The financial statements
and notes are representations of management.  Accounting policies
adopted by the Company conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements, which are compiled on the accrual basis of
accounting.
 
 (B)
              Principles
      of Consolidation
 
 The
consolidated financial statements, which include the Company and its
subsidiaries, are compiled in accordance with generally accepted accounting
principles in the United States of America.  All significant
inter-company accounts and transactions have been eliminated.  The
consolidated financial statements include 100% of assets, liabilities, and net
income or loss of those wholly-owned subsidiaries.
 
 The
Company owned the three operating subsidiaries since its
inception.  The Company also owns two intermediary holdings
companies.   As of December 31, 2008, the detailed identities of
the consolidating subsidiaries are as follows: -
 
 Name of Company
                
                Place
                  of
                  Incorporation
                
                Attributable
                  Equity
                  Interest
                
                Registered
                  CapitalPrecious
      Sheen Investments Limited
                
                BVI
                
                100%
                
                USD
      10,000Dalian
      Chuming Precious Sheen Investment Consulting Co., Ltd.
                
                PRC
                
                100%
                
                RMB
      29,400,682Dalian
      Chuming Slaughtering & Pork Packaging  Co.
    Ltd.
                
                PRC
                
                100%
                
                RMB
      10,000,000Dalian
      Chuming Processed Foods Co. Ltd.
                
                PRC
                
                100%
                
                RMB
      5,000,000Dalian
      Chuming Sales Co. Ltd.
                
                PRC
                
                100%
                
                RMB
      5,000,000
 
 The
consolidation of these operating subsidiaries into a newly formed holding
company i.e. “the Company” is permitted by United States GAAP: ARB51 paragraph
22 and 23.
  F-9
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 (C)
              Use
      of Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates.
 
 (D)
              Cash
      Equivalents
 
 For
purposes of the statement of cash flows, the Company considers all highly liquid
equity or debt instruments purchased with a maturity of three months or less to
be cash equivalents.
 
 (E)
              Accounts
      Receivable
 
 The
Company extends unsecured, non-interest bearing credit to its customers;
accordingly, the Company carries an allowance for doubtful accounts, which is an
estimate, made by management.  Management makes its estimate based on
prior experience rates and assessment of specific outstanding customer
balances.  Management may extend credit to new customers who have met
the criteria of the Company’s credit policy.
 
 (F)
              Inventory
      Carrying Value
 
 Inventory,
consisting of raw materials in the form of livestock, work in progress, and
finished products, is stated at the lower of cost or market
value.  Finished products are comprised of direct materials, direct
labor and an appropriate proportion of overhead.  Periodic evaluation
is made by management to identify if inventory needs to be written down because
of damage, or spoilage.  Cost is computed using the weighted average
method.
 
 (G)
              Purchase
      Deposit
 
 Purchase
deposit represents the cash paid in advance for purchasing raw
materials.  The purchase deposit is interest free and
unsecured.
 
 (H)
              Property,
      Plant, and Equipment
 
 Property,
Plant, and Equipment are stated at cost.  Repairs and maintenance to
these assets are charged to expense as incurred; major improvements enhancing
the function and/or useful life are capitalized.  When items are sold
or retired, the related cost and accumulated depreciation are removed from the
accounts and any gains or losses arising from such transactions are
recognized.
 
 Property
and equipment are depreciated using the straight-line method over their
estimated useful life with a 5% salvage value.  Their useful lives are
as follows: -
 
 Fixed Asset Classification
                      
                      Useful LifeLand
      Improvements
                      
                      10
      yearsBuildings
                      
                      20
      yearsBuilding
      Improvements
                      
                      10
      yearsManufacturing
      Machinery & Equipment
                      
                      10
      yearsOffice
      Equipment
                      
                      5
      yearsFurniture
      & Fixtures
                      
                      5
      yearsVehicles
                      
                      5
      years
  F-10
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 (I)
              Land
      Use Rights
 
 Land Use
Rights are stated at cost less accumulated amortization.  Amortization
is provided over its useful life, using the straight-line method.  The
useful life of the land use right is 50 years.
 
 (J)
              Construction
      in Progress
 
 Construction
in progress represents the direct costs of design, acquisition, and construction
of buildings, building improvements, and land improvements.  These
costs are capitalized in the Construction-in-Progress account until
substantially all activities necessary to prepare the assets for their intended
use are completed.  At such point, the Construction-in-Progress
account is closed and the capitalized costs are transferred to their appropriate
asset classification.  No depreciation is provided until the assets
are completed and ready for their intended use.
 
 (K)
              Accounting
      for Impairment of Assets
 
 The
      Company reviews the recoverability of its long-lived assets, such as
      property and equipment, when events or changes in circumstances occur that
      indicate the carrying value of the asset group may not be
      recoverable.  The assessment of possible impairment is based on
      the Company’s ability to recover the carrying value of the asset from the
      expected future cash flows, undiscounted and without interest charges, of
      the related operations.  If these cash flows are less than the
      carrying value of such assets, an impairment loss is recognized for the
      difference between estimated fair value and carrying value.  The
      measurement of impairment requires management to estimate future cash
      flows and the fair value of long-lived
assets.
 
 (L)
              Customer
      Deposits
 
 Customer
Deposits represents money the Company has received in advance for purchases of
pork and pork products.  The Company considers customer deposits as a
liability until products have been shipped and revenue is earned.
 
 (M)
              Statutory
      Reserve
 
 Statutory
reserve refer to the amount appropriated from the net income in accordance with
laws or regulations, which can be used to recover losses and increase capital,
as approved, and, are to be used to expand production or
operations.  PRC laws prescribe that an enterprise operating at a
profit, must appropriate, on an annual basis, from its earnings, an amount to
the statutory reserve to be used for future company development.  Such
an appropriation is made until the reserve reaches a maximum equalling 50% of
the enterprise’s capital.
 
 (N)
              Other
      Comprehensive Income
 
 Comprehensive
      income is defined to include all changes in equity except those resulting
      from investments by owners and distributions to owners.  Among
      other disclosures, all items that are required to be recognized under
      current accounting standards as components of comprehensive income are
      required to be reported in a financial statement that is presented with
      the same prominence as other financial statements.  The
      Company’s current component of other comprehensive income is the foreign
      currency translation adjustment.
  F-11
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 (O)
              Recognition
      of Revenue
 
 Revenue
from the sale of pork products, etc., is recognized on the transfer of risks and
rewards of ownership, which generally coincides with the time when the goods are
delivered to customers and the title has passed.
 
 (P)
              Cost
      of Sales
 
 The
Company’s cost of sales is comprised of raw materials, factory worker salaries
and related benefits, machinery supplies, maintenance supplies, depreciation,
utilities, inbound freight, purchasing and receiving costs, inspection and
warehousing costs
 
 (Q)
              Selling
      Expense
 
 Selling
expenses are comprised of outbound freight, salary for the sales force, client
entertainment, commissions, depreciation, advertising, and travel and lodging
expenses.
 
 (R)
              General
      & Administrative
 
 General
and administrative costs include executive compensation, quality control, and
general overhead such as the finance department, administrative staff, and
depreciation and amortization expense.
 
 (S)
              Shipping
      and handling
 
 All
shipping and handling are expensed as incurred and are included as a component
of cost of sales.
 
 (T)
              Advertising
      Expense
 
 Costs
related to advertising and promotion expenditures are expensed as incurred
during the year.  Advertising costs are charged to selling
expense
 
 (U)
              Retirement
      Benefits
 
 Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statement of operations as
incurred.
 
 (V)
              Income
      Taxes
 
 The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are available. The
Company has implemented Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. Income tax liabilities computed according to
the United States and People’s Republic of China (PRC) tax laws are provided for
the tax effects of transactions reported in the financial statements and
consists of taxes currently due plus deferred taxes related primarily to
differences between the basis of fixed assets and intangible assets for
financial and tax reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes also are recognized for operating losses that are available to
offset future income taxes. A valuation allowance is created to evaluate
deferred tax assets if it is more likely than not that these items will either
expire before the Company is able to realize that tax benefit, or that future
realization is uncertain.
  F-12
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 In
respect of the Company’s subsidiaries domiciled and operated in
China:
 
 ·
              Chuming
      and Chuming Operating Subsidiaries are located in the PRC and PSI is
      located in the British Virgin Islands; all of these entities are subject
      to the relevant tax laws and regulations of the PRC and British Virgin
      Islands in which the related entity domiciled.  The maximum tax
      rates of the subsidiaries pursuant to the countries in which they domicile
      are: -
  Subsidiary
                
                Country of Domicile
                
                Income Tax RateChuming
      and Chuming Operating Subsidiaries
                
                PRC
                
                
                25.00
                %PSI
                
                British
      Virgin Islands
                
                
                0.00
                %
 
 ·
              Effective
      January 1, 2008, PRC government implements a new 25% tax rate across the
      board for all enterprises regardless of whether domestic or foreign
      enterprise without any tax holiday which is defined as "two-year exemption
      followed by three-year half exemption" hitherto enjoyed by tax payers. As
      a result of the new tax law of a standard 15% tax rate, tax holidays
      terminated as of December 31, 2007. However, PRC government has
      established a set of transition rules to allow enterprises already started
      tax holidays before January 1, 2008, to continue enjoying the tax holidays
      until being fully utilized.
 
 ·
              The
      Company is subject to United States Tax according to Internal Revenue Code
      Sections 951 and 957. Corporate income tax is imposed on progressive rates
      in the range of: -
 
 Taxable IncomeRate
                      
                      Over
                      
                      
                      But Not Over
                      
                      
                      Of Amount Over15%
                      
                      
                      0
                      
                      
                      
                      50,000
                      
                      
                      
                      025%
                      
                      
                      50,000
                      
                      
                      
                      75,000
                      
                      
                      
                      50,00034%
                      
                      
                      75,000
                      
                      
                      
                      100,000
                      
                      
                      
                      75,00039%
                      
                      
                      100,000
                      
                      
                      
                      335,000
                      
                      
                      
                      100,00034%
                      
                      
                      335,000
                      
                      
                      
                      10,000,000
                      
                      
                      
                      335,00035%
                      
                      
                      10,000,000
                      
                      
                      
                      15,000,000
                      
                      
                      
                      10,000,00038%
                      
                      
                      15,000,000
                      
                      
                      
                      18,333,333
                      
                      
                      
                      15,000,00035%
                      
                      
                      18,333,333
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 Based on
the consolidated net income for the year ended December 31, 2008, the Company
shall not be subject to income tax.
 
 (W)
              Economic
      and Political Risks
 
 The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
  F-13
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 (X)
              Foreign
      Currency Translation
 
 The
Company maintains its financial statements in the functional
currency.  The functional currency of the Company is the Renminbi
(RMB).  Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet
dates.  Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchanges
rates prevailing at the dates of the transaction.  Exchange gains or
losses arising from foreign currency transactions are included in the
determination of net income for the respective periods.
 
 For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars.  Assets and liabilities are translated at the exchange rates
at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates.  Any translation adjustments resulting are not
included in determining net income but are included in foreign exchange
adjustment to other comprehensive income, a component of stockholders’
equity.
 
 Exchange Rates
                    
                    12/31/2008
                    
                    
                    12/31/2007
                    
                    
                    12/31/2006Period
      end RMB : US$ exchange rate
                    
                    
                    6.85420
                    
                    
                    
                    7.3141
                    
                    
                    
                    7.8175Average
      period RMB : US$ exchange rate
                    
                    
                    6.96225
                    
                    
                    
                    7.6172
                    
                    
                    
                    7.9819
 
 RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions.  No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
 
 (Y)
              Earnings
      Per Share
 
 The
Company computes earnings per share (“EPS”) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per
share basis of potential common shares (e.g., contingent shares, convertible
securities, options, and warrants) as if they had been converted at the
beginning of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per
share or decrease loss per share) are excluded from the calculation of diluted
EPS.
 
 (Z)
              Recent
      Accounting Pronouncements
 
 In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161
requires entities to provide greater transparency about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.
 
 F-14
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). Statement 162 will become effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles."
 
 In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate. FSP
APB 14-1 is effective for fiscal years beginning after December 15,
2008 on a retroactive basis.
 
 The
Company is currently evaluating the potential impact, if any, of the adoption of
the above recent accounting pronouncements on its consolidated results of
operations and financial condition.
 
 3.
              Restricted
      Cash
 
 The
restricted cash reflects funds received from the financing transaction described
in Note 18 that are held in an escrow with US Bank in the United
States.  These funds are restricted until fulfilment of the following
criteria: (1) the hiring of a Chief Financial Officer that meets the approval of
the investors within 90 days of the closing (subsequently extended to 120 days),
at such point the Company will release $1.5 million from restriction, (2)
appointment of a Board of Directors that has majority of independent members, at
such point $2.0 million will be released from restriction, and (3) appoint a
successor auditor, at which point $500,000 will be released from
restriction.  There is $250,000 in the escrow account that has already
been earmarked for investor relations purposes.
 
 At
December 31, 2008, the Company has not fulfilled requirement (3), and did not
fulfill requirement (1).  The Company has requested bids for
consideration from auditing firms that were on an approved list submitted by,
Pinnacle Fund, whom was the lead investor in the Company’s financing transaction
in December 2007, detailed in Note 18 – Financing
Transaction.
 
 F-15
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 4.
              Accounts
      Receivable
 
 Accounts Receivable at December 31,
consisted of the following: -
 
 At
                        
                        
                        At
                        
                        
                        AtDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007
                        
                        
                        2006Accounts
      Receivable – Trade
                        
                        
                        18,849,560
                        
                        
                        $
                        707,156
                        
                        
                        $
                        1,877,664Less:
      Allowance for Doubtful Accounts
                        
                        
                        (188,495
                        )
                        
                        
                        (84,723
                        )
                        
                        
                        (79,267
                        )Net
      Accounts Receivable
                        
                        
                        18,661,065
                        
                        
                        $
                        622,433
                        
                        
                        $
                        1,798,397
 
 At
                      
                      
                      At
                      
                      
                      AtDecember 31,
                      
                      
                      December 31,
                      
                      
                      December 31,Allowance for Bad Debts
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Beginning
      Balance
                      
                      $
                      (84,723
                      )
                      
                      $
                      (79,267
                      )
                      
                      $
                      (76,754
                      )Allowance
      Provided
                      
                      $
                      (103,772
                      )
                      
                      
                      (5,456
                      )
                      
                      
                      (2,513
                      )Charged
      Against Allowance
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Ending
      Balance
                      
                      $
                      (188,495
                      )
                      
                      $
                      (84,723
                      )
                      
                      $
                      (79,267
                      )
 
 During
the second quarter of the 2008 fiscal year, management revised the Company’s
credit policy.  Based on management’s review, the Company began
extending more favorable credit terms to its top tier
customers.  Those customers that qualified as top tier were extended
approximately 45 to 60 days of credit.  The Company previously
extended one to two days of credit.  As of December 31, 2008, the
Company has not had any receivables that were unrecoverable.
 
 Accounts
Receivable Aging Analysis
 At
December 31, 2008
 0-30
      Days
                          
                          31-60
      Days
                          
                          
                          61-90
      Days
                          
                          
                          91-120
      Days
                          
                          
                          Total 
      Outstanding$
      10,478,579
                          
                          $
                          1,627,515
                          
                          
                          $
                          168,045
                          
                          
                          $
                          6,575,420
                          
                          
                          $
                          18,849,560
 
 5.
              Related Party
      Receivable
 
 In the
normal course of business which includes the purchases of hogs and other raw
materials, sale of pork and pork products, the Company conducts transactions
with the following related parties: Dalian Chuming Group Co., Ltd (“Group”) and
the Group subsidiaries, that are not consolidated into Energroup Holdings or
Energroup’s subsidiary, Dalian Chuming Precious Sheen Investments Consulting Co.
Ltd. (Chuming): (1) Dalian Chuming Industrial Development Co., Ltd.,
(“Industrial Development Co.”) (2) Dalian Chuming Trading Co., Ltd, (“Trading
Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd., (“Mingxing”) (4) Dalian
Chuming Stockbreeding Combo Development Co., Ltd., (“Combo Development Co.”) (5)
Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”), and (6) Dalian Chuming
Biological Technology Co., Ltd., (“Biological Co.”) and (7) Dalian Huayu Seafood
Food Co., Ltd. (“Huayu”).  The Company and the aforementioned related
parties share common beneficial ownership.  All transactions with
related parties are generally performed at arm’s length.
 
 In the
event that the Company has both receivables from, and payables to the Group it
will, in accordance with FIN 39, setoff the balances in order to arrive at a
single balance that is either due from, or due to the Group.  The
Company’s net receivable balance of $10,919,777at December 31, 2008 is
shown in the following table.
 
 F-16
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 Ref.
                                                
                                                Subsidiary
                                                  Due to:
                                                
                                                Nature of Balance
                                                
                                                Related Party
                                                
                                                Balance
                                                
                                                Description of
                                                  TransactionA
                                                
                                                Food
      Company
                                                
                                                Sale
      of Products resulting in Trade Receivable from
                                                
                                                Dalian
      Huayu Seafood Food Co., Ltd.
                                                
                                                
                                                234,699
                                                
                                                Food
      Company sold cooked food to Huayu dating back to
1/2007.Subtotal
      of Related Party Sales
                                                
                                                $
                                                234,699B
                                                
                                                Food
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Huayu Seafood Co., Ltd.
                                                
                                                
                                                2,917,918
                                                
                                                Huayu
      borrowed loan from Food Company back to 11/2008C
                                                
                                                Food
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Mingxing Livestock Product Co. Ltd.,
                                                
                                                
                                                4,376,878
                                                
                                                Mingxing
      borrowed loan from Food Company back to 12/2008D
                                                
                                                Meat
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Fodder Co., Ltd.
                                                
                                                
                                                34,714
                                                
                                                Meat
      Companypaid utility fees for Fodder Co. dating back to
    7/2008.E
                                                
                                                Meat
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Stockbreeding Combo Development Co., Ltd.
                                                
                                                
                                                3,445,292
                                                
                                                Prepayment
      to Group for Purchase of hogs dating back to 7/2008.F
                                                
                                                Meat
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Group Co., Ltd.
                                                
                                                
                                                68,211
                                                
                                                Meat
      Company purchased office supplies on behalf of the Group dating back to
      11/2005G
                                                
                                                Food
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Group Co., Ltd.
                                                
                                                
                                                1,458,959
                                                
                                                Food
      Company paid bank loan principal and interest on behalf of Industrial Co.
      dating back to 1/2008H
                                                
                                                Sales
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Huayu Seafood Co., Ltd.
                                                
                                                
                                                1,562,263
                                                
                                                Sales
      Company paid Huayu to help it buy materials dating back to
      9/2008.I
                                                
                                                Sales
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Group Co., Ltd.
                                                
                                                
                                                5,212,167
                                                
                                                Sales
      Company paid the Group to help it buy materials dating back to
      7/2008.J
                                                
                                                Sales
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Stockbreeding Combo Development Co., Ltd.
                                                
                                                
                                                19,568,483
                                                
                                                Sales
      Company paid for Stockbreeding to buy hogs from farmer dating back
      7/2008K
                                                
                                                Sales
      Company
                                                
                                                Loan
      Receivable from
                                                
                                                Dalian
      Chuming Fodder Co., Ltd.
                                                
                                                
                                                2,509,410
                                                
                                                Sales
      Company paid for feeding materials on behalf of Fodder  dating
      back to 9/2008.Subtotal
      of Loans to Related Parties
                                                
                                                $
                                                41,154,295Gross
      Related Party Receivable
                                                
                                                $
                                                41,388,994
  F-17
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 Subsidiary Due from:
                                
                                Nature of Balance
                                
                                Related Party
                                
                                Balance
                                
                                Description of
                                  TransactionL
                                
                                Meat
      Company
                                
                                Purchase
      of Raw Materials resulting in Trade Payable to
                                
                                Dalian
      Chuming Group Co., Ltd.
                                
                                
                                5,396,217
                                
                                Purchase
      of hogs from Group dating back to 12/1/2004.M
                                
                                Meat
      Company
                                
                                Purchase
      of Raw Materials resulting in Trade Payable to
                                
                                Dalian
      Chuming Group Co., Ltd.
                                
                                
                                7,365,945
                                
                                Purchase
      of hogs from Group dating back to 7/2008.N
                                
                                Food
      Company
                                
                                Purchase
      of Raw Materials resulting in Trade Payable to
                                
                                Dalian
      Huayu Seafood Food Co., Ltd
                                
                                
                                2,621,251
                                
                                Advance
      from Huayu for the purchase of product dating back to
    12/2007.Subtotal
      of Purchases from Related Parties
                                
                                $
                                15,383,413
 
 O
                                            
                                            Food
      Company
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Chuming Group Co., Ltd.
                                            
                                            
                                            950,134
                                            
                                            Group
      paid for salaries and other G&A expenses on behalf of Food dating back
      to 1/2004.P
                                            
                                            Meat
      Company
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Chuming Stockbreeding Combo Development Co., Ltd.
                                            
                                            
                                            123,210
                                            
                                            Meat
      Company collected bank loans for Stockbreeding Co. dating back to
      7/2008Q
                                            
                                            Meat
      Company
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Chuming Industrial Development Co., Ltd.
                                            
                                            
                                            6,477
                                            
                                            Industrial
      Development paid salaries on behalf of Meat Company dating back to
      1/2005.R
                                            
                                            Meat
      Company
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Mingxing Livestock Product Co. Ltd.,
                                            
                                            
                                            393,919
                                            
                                            Meat Company collected
      bank loans on behalf of Mingxing dating back to 8/2008S
                                            
                                            Meat
      Company
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Huayu Seafood Food Co., Ltd
                                            
                                            
                                            541,738
                                            
                                            Huayu
      lent funds to Meat Company for necessary operation activities dating
      12/2008T
                                            
                                            Sales
      Company
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Mingxing Livestock Product Co. Ltd.,
                                            
                                            
                                            986,256
                                            
                                            Sales
      Company borrowed funds from Mingxing for operations purpose dating back to
      12/2008U
                                            
                                            WFOE
                                            
                                            Loan
      Payable to
                                            
                                            Dalian
      Chuming Group Co.
                                            
                                            
                                            12,084,070
                                            
                                            Group
      loaned funds to WFOE (incl. funds transferred from Meat for US
      RTO.Subtotal
      of Loans from Related Parties
                                            
                                            $
                                            15,085,804Gross
      Related Party Payable
                                            
                                            $
                                            30,469,217Setoff Related Party
      Receivable (Receivables have been setoff against
      payables)
                                            
                                            $
                                            10,919,777
  F-18
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006


A.
              The
      Food Company sold USD 235 thousand (RMB 1.6 million) worth of cooked food
      to Huayu on credit.  This transaction impacted the statement of
      income.  After applying a 17% valued added tax, the Food Company
      generated USD 200 thousand (RMB 1.4 million) in sales revenue from this
      transaction.
 
 B.
              Food
      Company loaned USD 2.9 million (RMB 20 million) to Huayu in November
      2008.
 
 C.
              Food
      Company loaned USD 4.4 million (RMB 30 million) to Mingxing in December
      2008.
 
 D.
              Meat
      Company paid USD 35 thousand (RMB 237 thousand) for utility fees on behalf
      of Fodder Co. in the 3rd quarter of 2008, which resulted in this
      receivable.
 
 E.
              The
      prepayment of USD 3.5 million (RMB 23.6 million) from Meat Company to the
      Group for hogs was increased by USD 96 thousand (RMB 0.6 million), USD
      0.15 million (RMB 1 million), and USD 4.1 million (RMB 28.3 million) in
      July, August, and September respectively.  Simultaneously, the
      Group paid down its balance in the amounts of USD 1.3 million (RMB 8.9
      million) and USD 230 thousand (RMB 1.54 million) to Meat
      Company.
 
 F.
              The
      balance of USD 68 thousand (RMB 467 thousand) for the purchase of office
      supplies by Meat Company for the Group, was still outstanding as of
      December 31, 2008.
 
 G.
              Food
      Company paid certain bank loan interest and principal on behalf of
      Industrial Co. prior to 2008.  This resulted in a receivable of
      USD 1.5 million (RMB 10 million) owed by Industrial Co. to the Food
      Company.  A balance of USD 1.5 million (RMB 10 million) remained
      outstanding as of December 31,
2008.
 
 H.
              The
      Sales Company advanced USD 1.6 million (RMB10.7 million) to Huayu for the
      purchase of raw materials, resulting in this
  receivable.
 
 I.
              The
      Sales Company paid for the purchase of certain materials for the Group,
      resulting in a balance of USD 5.2 million (RMB 35.7 million) receivable
      from Group to Sales Company.   This balance was increased
      by USD 5.8 million (RMB 39.6 million) and USD 3.9 million (RMB 20.6
      million) in the 3rd and 4th quarters of 2008, in connection with the
      purchase of additional materials by Sales Company.  The Group
      has paid down USD 4.5 million (RMB 20.3 million) of this balance,
      resulting in an ending balance of USD 5.2 million (RMB 35.7
      million).


J.
              Sales
      Company paid USD 19.6 million (RMB 134.1 million) to local farmers for the
      purchase of hogs, on behalf of the Group, which gave rise to this
      receivable from the Group to Sales
Company.
 
 K.
              Sales
      Company purchase feed materials, paid construction fees, and utility costs
      for Fodder Co., resulting in a receivable of USD 2.5 million (RMB17.2
      million) due from Fodder Co. to Sales Company.  In 2008, the
      following transactions affected the balance of this
      receivable:  USD 0.8 million (RMB 5.4 million) was paid to buy
      feeding materials, USD 1.1 million (RMB 7.7 million) was paid for
      construction fees, and USD 0.6 million (RMB 4 million) for
      utilities.
 
 L.
              The
      Company acquired hogs from the Group, resulting in a balance payable from
      the Company to the Group of USD 5.4 million (RMB 36.9
      million).  In 2008, this balance was affected by the following
      transactions:  increases by USD 3.9 million (RMB 27.4 million),
      USD 5.5 million (RMB 37.7 million), USD 5.2 million (RMB 35.1 million),
      and USD 480 thousand (RMB 3.3 million) in July, August, September, and
      December respectively.  The Company paid USD 9.8 million (RMB
      67.4 million) to settle this balance in September 2008. The increase in
      the balance as result of the purchase hogs would impact the statements of
      income; however, the effect of the repayment is isolated to the Company’s
      balance sheet.
 
 M.
              The
      Group sold hogs to Meat Company on August 12, 2008 which were not
      immediately paid for, which resulted in a net payable from the Meat
      Company to Group in the amount of USD 7.4 million (RMB 50.5
      million).
 
 N.
              The
      USD 2.6 million (RMB 18 million) deposit owed to Huayu was still
      outstanding at December 31, 2008.
 
 O.
              The
      Group paid USD 954 thousand (RMB 6.5 million) in salaries and general
      administrative expense on behalf of Food Company, resulting in this
      payable.


F-19
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
  P.
                The
      outstanding balance of USD 123 thousand (RMB 84 thousand) due from Meat
      Company to Combo Development Co. resulted from the fact that Meat Company
      collected USD 52 thousand (RMB 0.4 million) hogs sales and USD 1.5 million
      (RMB 10.4 million) in proceeds from a bank loan on behalf of Combo
      Development Co. in August and September, 2008 respectively.
      Simultaneously, the Meat Company repaid USD 1.5 million (RMB 10 million)
      to Combo Development Co.
 
 Q.
                The
      a balance of USD 6 thousand (RMB 44 thousand) owed by Industrial
      Development Co. to Meat Company was still outstanding at December 31,
      2008.
 
 R.
                Meat
      Company collected bank loans on behalf of Mingxing dating back to August
      2008.
 
 S.
                Meat
      Company borrowed USD 542 thousand (RMB 3.7 million) operating funds from
      Huayu in December 2008.
 
 T.
                Sales
      Company borrowed USD 986 thousand (RMB 6.7 million) from Mingxing in
      December 2008.
 
 U.
                The
      outstanding payable balance of USD 12.1 million (RMB 83.2 million) due to
      the Group has been transferred to the books of Chuming, i.e., WFOE owes
      Chuming the amount stated above.   This balance was
      increased by USD 250 thousand (RMB 1.7 million) in the fourth quarter of
      2008.
  The
related party receivable balance detailed above, and the related transactions
that comprise that balance were integral and material to the Company’s
operations.  The Company was reliant on transactions with the above
related parties in order to conduct its business normally.  The
Company acknowledges that it has the responsibility to comply with paragraph c
of SFAS 57 which calls for the dollar amounts of transactions for each of the
periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding
period.  The Company’s accounting system in the past was manual and
accordingly is not able to, from a cost benefit perspective, summarize and
provide further detail on the related party transactions.  Also, the
Company’s current accounting department does not have sufficient staff in order
to perform an exercise to further detail the related party payables and
receivables beyond what has been provided above; however the Company is taking
steps to update its accounting systems and methods to provide fuller detail
regarding these transactions for future periods.  The Company does
represent that the balances disclosed above are both accurate and reliable
within acceptable thresholds of materiality.
 
 The
Company’s related party receivables and payables in the period presented were in
the form of either short-term loans bearing no interest, or trade payables and
receivables relating to the purchase of raw materials, supplies or products for
which payment was due within a short period of time.  Management
believes that the net receivables from related parties are fully
recoverable.
 
 Of the
$10,919,777 netreceivable owed by the
Group to the Company, the entire amount has been securitized by bank drafts
issued by the bank on behalf of subsidiaries of the Group to the
Company.  These notes are collateralized by deposits at the bank by
those particular subsidiaries of the Group.  The drafts can be
endorsed and discounted to the bank for cash; however the Company currently
intends to hold these drafts until maturity.  The following table
summarizes the amounts of each draft.
 
 Subsidiary
      of the Group
                    
                    AmountHuayu
                    
                    $
                    2,917,919Mingxing
                    
                    
                    4,376,878Combo
      Development
                    
                    
                    2,188,439Group
                    
                    
                    1,436,540$
                    10,919,777
 
 F-20
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 6.
              Inventory
 
 At
                        
                        
                        At
                        
                        
                        AtDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007
                        
                        
                        2006Raw
      Materials
                        
                        $
                        867,549
                        
                        
                        $
                        1,039,440
                        
                        
                        $
                        875,223Work
      in Progress
                        
                        
                        241,738
                        
                        
                        
                        547,889
                        
                        
                        
                        365,961Finished
      Goods
                        
                        
                        4,941,822
                        
                        
                        
                        1,328,688
                        
                        
                        
                        1,144,263$
                        6,051,109
                        
                        
                        $
                        2,916,016
                        
                        
                        $
                        2,385,447
 
 7.
              Property, Plant &
      Equipment
 
 At
                    
                    
                    
                    
                    AccumulatedDecember31,2008:
                    
                    Cost
                    
                    
                    Depreciation
                    
                    
                    NetBuildings
                    
                    $
                    21,604,325
                    
                    
                    $
                    (3,607,219
                    )
                    
                    $
                    17,997,105Manufacturing
      Equipment
                    
                    
                    10,061,608
                    
                    
                    
                    (3,132,725
                    )
                    
                    
                    6,928,883Office
      Equipment
                    
                    
                    195,577
                    
                    
                    
                    (150,670
                    )
                    
                    
                    44,907Vehicles
                    
                    
                    913,816
                    
                    
                    
                    (477,265
                    )
                    
                    
                    436,551Furniture
      & Fixture
                    
                    
                    524,020
                    
                    
                    
                    (137,317
                    )
                    
                    
                    386,704$
                    33,299,346
                    
                    
                    $
                    (7,505,196
                    )
                    
                    $
                    25,794,151
 
 At
                    
                    
                    
                    
                    AccumulatedDecember31,2007:
                    
                    Cost
                    
                    
                    Depreciation
                    
                    
                    NetBuildings
                    
                    $
                    19,910,391
                    
                    
                    $
                    (2,522,257
                    )
                    
                    $
                    17,388,134Manufacturing
      Equipment
                    
                    
                    9,066,948
                    
                    
                    
                    (2,041,694
                    )
                    
                    
                    7,025,254Office
      Equipment
                    
                    
                    122,124
                    
                    
                    
                    (60,298
                    )
                    
                    
                    61,826Vehicles
                    
                    
                    652,231
                    
                    
                    
                    (321,138
                    )
                    
                    
                    331,093Furniture
      & Fixture
                    
                    
                    49,204
                    
                    
                    
                    (19,015
                    )
                    
                    
                    30,189$
                    29,800,898
                    
                    
                    $
                    (4,964,402
                    )
                    
                    $
                    24,836,496
 
 At
                    
                    
                    
                    
                    AccumulatedDecember31,2006:
                    
                    Cost
                    
                    
                    Depreciation
                    
                    
                    NetBuildings
                    
                    $
                    14,663,106
                    
                    
                    $
                    (1,174,049
                    )
                    
                    $
                    13,489,057Manufacturing
      Equipment
                    
                    
                    8,346,776
                    
                    
                    
                    (1,403,176
                    )
                    
                    
                    6,943,600Office
      Equipment
                    
                    
                    68,198
                    
                    
                    
                    (14,165
                    )
                    
                    
                    54,033Vehicles
                    
                    
                    572,290
                    
                    
                    
                    (203,600
                    )
                    
                    
                    368,690Furniture
      & Fixture
                    
                    
                    30,550
                    
                    
                    
                    (10,468
                    )
                    
                    
                    20,082$
                    23,680,920
                    
                    
                    $
                    (2,805,458
                    )
                    
                    $
                    20,875,462
  F-21
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 8.
              Land Use
      Right
 
 The Company had the following
intangible assets outstanding at December 31:
 
 At
                        
                        
                        At
                        
                        
                        AtDecember 31,
                        
                        
                        December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007
                        
                        
                        2006Land
      Use Rights, atCost
                        
                        $
                        14,407,503
                        
                        
                        $
                        13,501,580
                        
                        
                        $
                        9,303,402Less:
      AccumulatedAmortization
                        
                        
                        (977,068
                        )
                        
                        
                        (645,600
                        )
                        
                        
                        (392,283
                        )$
                        13,430,435
                        
                        
                        $
                        12,855,980
                        
                        
                        $
                        8,911,119
 
 9.
              Bank
      Loans
 
 (A)
              Short
      Term Bank Loans
 
 At
December 31, 2008 the Company had the following short term loans
outstanding:
 
 Bank
                              
                              Interest Rate
                              
                              Due Date
                              
                              AmountBank
      of China
                              
                              
                              6.1586
                              %
                              10/26/2009
                              
                              $
                              4,376,878Bank
      of China
                              
                              
                              7.3260
                              %
                              10/17/2009
                              
                              
                              2,042,543$
                              6,419,422
 
 The loan
provided by the Bank of China is secured by the Meat Company’s land use rights,
which have been appraised at a fair market value of $5,605,611 (RMB
41,000,000).  Also, the Shanghai Pudong Development Bank loan has been
guaranteed by the Dalian Chuming Group Co., Ltd.
 
 (B)
              Bank
      Loan through Group
 
 The
Company obtained a loan of $20,466,901 (RMB 160,000,000) from the Group;
which in turn, obtained these funds in a joint loan commitment from both China
Development Bank and Shenzhen Development Bank (“Banks”) via a collateralized
loan.  The Group collateralized the loan by purchasing a bond
from China Export and Credit Insurance Corporation (“Bond
Issuer”).  The bond guarantees to the Banks the entire principal and
accrued interest of the loan.  The cost of the bond is RMB 1,000,000
annually, or in USD: $120,668, 121,902, and 125,284 for the years 2004, 2005,
and 2006, respectively, which was paid by the Company.  The loan
carries a fixed interest of 5.76% per annum.  The Company pledged both
land use rights and buildings to the Bond Issuer.  The Company pursued
a loan from the Group as the financing solution of choice because the Company’s
tangible assets, at the time of origination, were insufficient to collateralize
the loan. Additionally, the Company lacked the favorable credit history to
directly establish credit facility with the bank.
 
 At
December 31, 2007, the Company repaid its debt, in its entirety to the Group by
setting off receivables owed by the Group to the Company.  The Company
repaid the loan in order to meet the requirements of the equity financing
transaction detailed in Note 18.  The balances are now owed by the
Group to the Banks, and liability for paying the bonding insurance annually lies
with the Group.  The pledged collateral of land use rights and
buildings made to the Bond Issuer still underlie the loan currently owed by the
Group, and as such, the Company’s assets, namely the buildings and land use
rights are at risk if the Group were to default on this loan.
 
 F-22
 
 Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 10.
              Capitalization
 
 As a
result of a reverse-acquisition on December 31, 2007 that was consummated via a
share exchange, and a concurrent equity financing, in the form of a private
placement by issuing common stock to ten accredited investors, the Company’s
capitalization is now reflected by the table shown below:
  Name of Shareholder
                                    
                                    Number of
                                      Shares
                                    
                                    
                                    Common
                                      Stock
                                      Capital
                                    
                                    
                                    Additional
                                      Paid in
                                      Capital
                                    
                                    
                                    Equity %Operating
      Companies Founders
                                    
                                    
                                    14,688,948
                                    
                                    
                                    $
                                    14,689
                                    
                                    
                                    $
                                    2,396,079
                                    
                                    
                                    
                                    69.50
                                    %Pre-RTO
      Shareholders
                                    
                                    
                                    422,756
                                    
                                    
                                    
                                    423
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2.00
                                    %Advisors
      & Consultants
                                    
                                    
                                    2,161,052
                                    
                                    
                                    
                                    2,161
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    10.22
                                    %Private
      Investors
                                    
                                    
                                    3,863,636
                                    
                                    
                                    
                                    3,864
                                    
                                    
                                    
                                    13,043,964
                                    
                                    
                                    
                                    18.28
                                    %21,136,392
                                    
                                    
                                    $
                                    21,137
                                    
                                    
                                    $
                                    15,440,043
                                    
                                    
                                    
                                    100.00
                                    %
  11.
              Commitments of
      Statutory Reserve
 
 In
compliance with PRC laws, the Company is required to appropriate a portion of
its net income to its statutory reserve up to a maximum of 50% of an
enterprise’s registered capital in the PRC.  The Company had future
unfunded commitments, as provided below.
 
 At
                              
                              
                              At
                              
                              
                              AtDecember 31,
                              
                              
                              December 31,
                              
                              
                              December 31,2008
                              
                              
                              2007
                              
                              
                              2006PRC
      Registered Capital
                              
                              
                              15,566,849
                              
                              
                              
                              3,642,866
                              
                              
                              
                              2,413,352-
      Statutory Reserve Ceiling based on 50% of Registered
      Capital
                              
                              
                              7,783,424
                              
                              
                              
                              1,821,433
                              
                              
                              
                              1,206,676Less: -
      Retained Earnings appropriated to Statutory
      Reserve
                              
                              
                              (2,077,488
                              )
                              
                              
                              (751,444
                              )
                              
                              
                              (751,444
                              )Reserve
      CommitmentOutstanding
                              
                              $
                              5,705,936
                              
                              
                              $
                              1,069,989
                              
                              
                              $
                              455,232
  12.
              Advertising
      Costs
 
 Advertising
expenses were $2,629,853, $3,611,666, and $869 for the years ended December 31,
2008, 2007, and 2006, respectively.
 
 13.
              Income
      Taxes
 
 The
Company’s different operating subsidiaries are subject to different income tax
regulations under PRC law.
 
 F-23
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 The
operating subsidiary, Meat Company, has been given special tax-free status by
the PRC government because of the Company standing as leader in its industry in
Dalian; therefore, no provision for income tax in the PRC was made for years
2008, 2007, and 2006.
 
 The
Company’s operating subsidiary, Food Company, has provided provisions for income
taxes in years 2008, 2007, and 2006, of $508,844, $967,539, and
$400,605, respectively.
 
 The
Company’s operating subsidiary, Sales Company, has not provided provisions for
income taxes in years 2008, 2007, and 2006 as it has incurred operating losses
for those respective years.  The Company has determined that deferred
tax assets arising from net operating losses in prior years may not realized,
accordingly, the company has recognized a tax expense to the income statement in
the amount of $11,246.
 
 After
adjusting for special tax-free status and net operating loss, the consolidated
taxable earnings were determined, and the results were as follows:
-
 
 i.
                2007
                Tax
      expense
                (520,089)ii.
                2006
                Tax
      expense
                (967,539)iii.
                2005
                Tax
      benefit
                1,609
 
 Beginning
December 31, 2007, the Company’s foreign subsidiaries became subject to U.S.
income tax liability; however, the tax is deferred until foreign source income
is repatriated to the Company and the Company has not currently determined when
foreign source income will be repatriated.  Accordingly, the company
has not made any provisions for U.S. income tax liability.
 
 On March
16, 2007, the PRC government passed new tax legislation that repealed
preferential tax treatment for foreign investment enterprises in the PRC and
enacted new tax regulations.  Under such regulations, with certain
exceptions, both domestic and foreign enterprises will be taxed at a standard
enterprise income tax rate of 25%.  The Company’s two operating
subsidiaries, Food Company, and Sales Company are subject to the 25% income
tax rate beginning January 1, 2008.  Based on current PRC legislation,
Meat Company should be expected to continue benefiting from a tax
holiday.
 
 14.
              Commitments
 
 It is
company policy to develop plant facilities based on availability of cash
resources without incurring capital commitments.  Therefore, the
Company did not have any capital commitments existing at December 31,
2008.
 
 On
December 19, 2007, the Company entered into a hog purchase agreement whereby the
Group will provide at fair market price a minimum number of hogs to the
Company.  At December 31, 2008, the Company expects minimum quantities
of hogs detailed in the following table:
 
 Year
                              
                              Hogs
                              
                              
                              PricePerHog
                              
                              
                              Amount2009
                              
                              
                              800,000
                              
                              
                              $
                              187.13
                              
                              
                              $
                              149,704,3062010
                              
                              
                              800,000
                              
                              
                              $
                              205.84
                              
                              
                              
                              164,674,737$
                              314,379,043
 
 The
Company believes that the fair market price of the hogs will increase by 10%
each year.  The assumption of 10% reflects that Company expectations
in regards to inflation, and the rising costs of inputs in breeding
livestock.
  F-24
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 
 15.
              Operating
      Segments
 
 The
Company individually tracks the performance of its three operating subsidiaries
Meat Company, Food Company, and Sales Company.  Meat Company is
primarily engaged in the slaughter and processing of pork livestock for
wholesale and retail distribution.  Food Company is primarily engaged
in the production of pork-based food products, such as sausages and cured meats,
for retail distribution.  Sales Company is primarily engaged in the
sale and distribution of products produced by Food Company and Meat
Company.
 
 Below is
a presentation of the Company’s results of operations and financial position for
its operating subsidiaries at December 31, 2008, 2007, and 2006 and for the
years then ended.  The Company has also provided reconciling
adjustments with the Company and its intermediate holding companies Dalian
Chuming Precious Sheen Investments Consulting Ltd. (“Chuming WFOE”) and Precious
Sheen Investments Ltd (PSI).
  Results
      of Operations
                
                
                
                
                
                
                
                
                
                
                Chuming
      WFOE,For
      the year ended
                
                Meat
                
                
                Food
                
                
                Sales
                
                
                PSI,
      &December
      31, 2008
                
                Company
                
                
                Company
                
                
                Company
                
                
                Eliminations
                
                
                TotalSales
                
                $
                165,540,800
                
                
                $
                20,275,953
                
                
                $
                82,629,122
                
                
                $
                (92,085,862
                )
                
                $
                176,360,013Cost
      of Sales
                
                
                143,467,926
                
                
                
                17,018,115
                
                
                
                81,394,069
                
                
                
                (92,085,862
                )
                
                
                149,794,249Gross
      Profit
                
                
                22,072,873
                
                
                
                3,257,837
                
                
                
                1,235,054
                
                
                
                -
                
                
                
                26,565,764Operating
      (Loss)/Profit
                
                
                19,835,123
                
                
                
                2,038,279
                
                
                
                (2,475,995
                )
                
                
                (654,670
                )
                
                
                18,742,737Other
      Income (Expense)
                
                
                (684,408
                )
                
                
                (95,144
                )
                
                
                (6,952
                )
                
                
                (10,598,879
                )
                
                
                (11,385,383
                )Earnings/(Loss)
      before Tax
                
                
                19,150,715
                
                
                
                1,943,135
                
                
                
                (2,482,947
                )
                
                
                (11,253,549
                )
                
                
                7,357,354(Income
      Tax Expense)
                
                
                -
                
                
                
                (508,844
                )
                
                
                (11,246
                )
                
                
                -
                
                
                
                (520,089
                )Net
      Income/(Loss)
                
                
                19,150,715
                
                
                
                1,434,292
                
                
                
                (2,494,193
                )
                
                
                (11,253,549
                )
                
                
                6,837,265
  Eliminated Intercompany Sales of Products Sold duringYear ended December 31, 2008Sold From:
                        
                        Sold To:
                        
                        AmountFood
      Company
                        
                        Sales
      Company
                        
                        $
                        15,614,380Meat
      Company
                        
                        Sales
      Company
                        
                        
                        66,171,117Meat
      Company
                        
                        Food
      Company
                        
                        
                        10,300,365$
                        92,085,862
  F-25
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
  Results
      of Operations
                
                
                
                
                
                
                
                
                
                
                Chuming
      WFOE,For
      the year ended
                
                Meat
                
                
                Food
                
                
                Sales
                
                
                PSI,
      &December
      31, 2007
                
                Company
                
                
                Company
                
                
                Company
                
                
                Eliminations
                
                
                TotalSales
                
                $
                113,777,514
                
                
                $
                18,224,294
                
                
                $
                26,110,284
                
                
                $
                (33,416,057
                )
                
                $
                124,696,035Cost
      of Sales
                
                
                99,779,158
                
                
                
                12,672,576
                
                
                
                25,343,231
                
                
                
                (33,416,057
                )
                
                
                104,378,908Gross
      Profit
                
                
                13,998,356
                
                
                
                5,551,718
                
                
                
                767,053
                
                
                
                -
                
                
                
                20,317,127Operating
      (Loss)/Profit
                
                
                10,842,549
                
                
                
                3,624,143
                
                
                
                (368,002
                )
                
                
                (27,261
                )
                
                
                14,071,429Other
      Income (Expense)
                
                
                (691,006
                )
                
                
                (712,807
                )
                
                
                (47,929
                )
                
                
                -
                
                
                
                (1,451,742
                )Earnings/(Loss)
      before Tax
                
                
                10,151,543
                
                
                
                2,911,336
                
                
                
                (415,931
                )
                
                
                (27,261
                )
                
                
                12,619,687(Income
      Tax Expense)/Credit
                
                
                -
                
                
                
                967,539
                
                
                
                -
                
                
                
                -
                
                
                
                967,539Net
      Income/(Loss)
                
                $
                10,151,543
                
                
                $
                1,943,797
                
                
                $
                (415,931
                )
                
                $
                (27,261
                )
                
                $
                11,652,147
  Eliminated
      Intercompany Sales of Products Sold duringYear
      ended December 31, 2007Sold
      From:
                      Sold
      To:
                      
                      AmountFood
      Company
                      Sales
      Company
                      
                      $
                      4,221,813Meat
      Company
                      Sales
      Company
                      
                      
                      20,435,143Meat
      Company
                      Food
      Company
                      
                      
                      8,759,101$
                      33,416,057
  Results
      of Operations
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        Chuming
      WFOE,For
      the year ended
                        
                        Meat
                        
                        
                        Food
                        
                        
                        Sales
                        
                        
                        PSI,
      &December
      31, 2006
                        
                        Company
                        
                        
                        Company
                        
                        
                        Company
                        
                        
                        Eliminations
                        
                        
                        TotalSales
                        
                        $
                        64,169,418
                        
                        
                        $
                        7,351,567
                        
                        
                        $
                        17,277,285
                        
                        
                        $
                        (18,401,830
                        )
                        
                        $
                        70,396,439Cost
      of Sales
                        
                        
                        54,146,375
                        
                        
                        
                        4,855,542
                        
                        
                        
                        16,923,680
                        
                        
                        
                        (18,130,743
                        )
                        
                        
                        57,794,853Gross
      Profit
                        
                        
                        10,023,044
                        
                        
                        
                        2,496,025
                        
                        
                        
                        353,605
                        
                        
                        
                        (271,087
                        )
                        
                        
                        12,601,586Operating
      (Loss)/Profit
                        
                        
                        9,253,704
                        
                        
                        
                        1,930,499
                        
                        
                        
                        (1,203,200
                        )
                        
                        
                        (271,087
                        )
                        
                        
                        9,709,916Other
      Income (Expense)
                        
                        
                        (849,450
                        )
                        
                        
                        (718,182
                        )
                        
                        
                        (15,522
                        )
                        
                        
                        -
                        
                        
                        
                        (1,583,154
                        )Earnings/(Loss)
      before Tax
                        
                        
                        8,404,254
                        
                        
                        
                        1,212,317
                        
                        
                        
                        (1,218,722
                        )
                        
                        
                        (271,087
                        )
                        
                        
                        8,126,762(Income
      Tax Expense)/Credit
                        
                        
                        -
                        
                        
                        
                        400,065
                        
                        
                        
                        (401,674
                        )
                        
                        
                        -
                        
                        
                        
                        (1,609
                        )Net
      Income/(Loss)
                        
                        $
                        8,404,254
                        
                        
                        $
                        812,252
                        
                        
                        $
                        (817,049
                        )
                        
                        $
                        (271,087
                        )
                        
                        $
                        8,128,371
 F-26
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
  Eliminated
      Intercompany Sales of Products Sold duringYear
      ended December 31, 2006Sold
      From:
                            
                            Sold
      To:
                            
                            AmountFood
      Company
                            
                            Sales
      Company
                            
                            $
                            3,735,082Meat
      Company
                            
                            Sales
      Company
                            
                            
                            12,709,432Meat
      Company
                            
                            Food
      Company
                            
                            
                            1,686,229$
                            18,130,743
 
 Financial
      Position
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Chuming
      WFOE,At
                    
                    Meat
                    
                    
                    Food
                    
                    
                    Sales
                    
                    
                    PSI,
      &December
      31, 2008
                    
                    Company
                    
                    
                    Company
                    
                    
                    Company
                    
                    
                    Eliminations
                    
                    
                    TotalCurrent
      Assets
                    
                    
                    74,713,237
                    
                    
                    
                    21,126,826
                    
                    
                    
                    41,826,291
                    
                    
                    
                    (89,504,485
                    )
                    
                    
                    48,161,868Non
      Current Assets
                    
                    
                    22,624,642
                    
                    
                    
                    19,570,329
                    
                    
                    
                    325,480
                    
                    
                    
                    1,088
                    
                    
                    
                    42,521,540Total
      Assets
                    
                    $
                    97,337,879
                    
                    
                    $
                    40,697,155
                    
                    
                    $
                    42,151,770
                    
                    
                    $
                    (89,503,397
                    )
                    
                    $
                    90,683,408Current
      Liabilities
                    
                    
                    42,293,137
                    
                    
                    
                    34,796,536
                    
                    
                    
                    45,747,946
                    
                    
                    
                    (99,079,857
                    )
                    
                    
                    23,757,761Total
      Liabilities
                    
                    
                    42,293,137
                    
                    
                    
                    34,796,536
                    
                    
                    
                    45,747,946
                    
                    
                    
                    (99,079,857
                    )
                    
                    
                    23,757,761Net
      Assets
                    
                    
                    55,044,742
                    
                    
                    
                    5,900,619
                    
                    
                    
                    (3,596,176
                    )
                    
                    
                    9,576,460
                    
                    
                    
                    66,925,647Total
      Liabilities
                      &
      Net Assets
                    
                    $
                    97,337,879
                    
                    
                    $
                    40,697,155
                    
                    
                    $
                    42,151,770
                    
                    
                    $
                    (89,503,397
                    )
                    
                    $
                    90,683,408
 
 Financial
      Position
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Chuming
      WFOE,At
                    
                    Meat
                    
                    
                    Food
                    
                    
                    Sales
                    
                    
                    PSI,
      &December
      31, 2007
                    
                    Company
                    
                    
                    Company
                    
                    
                    Company
                    
                    
                    Eliminations
                    
                    
                    TotalCurrent
      Assets
                    
                    $
                    36,387,010
                    
                    
                    $
                    19,361,784
                    
                    
                    $
                    24,500,857
                    
                    
                    $
                    (52,282,684
                    )
                    
                    $
                    27,966,967Non
      Current Assets
                    
                    
                    22,256,798
                    
                    
                    
                    16,228,202
                    
                    
                    
                    167,961
                    
                    
                    
                    -
                    
                    
                    
                    38,652,961Total
      Assets
                    
                    $
                    58,643,808
                    
                    
                    $
                    35,589,986
                    
                    
                    $
                    24,668,818
                    
                    
                    $
                    (52,282,684
                    )
                    
                    $
                    66,619,928Current
      Liabilities
                    
                    $
                    25,289,655
                    
                    
                    $
                    31,425,683
                    
                    
                    $
                    25,664,664
                    
                    
                    $
                    (64,697,884
                    )
                    
                    $
                    17,682,118Total
      Liabilities
                    
                    
                    25,289,655
                    
                    
                    
                    31,425,683
                    
                    
                    
                    25,664,664
                    
                    
                    
                    (64,697,884
                    )
                    
                    
                    17,682,118Net
      Assets
                    
                    
                    33,354,152
                    
                    
                    
                    4,164,303
                    
                    
                    
                    (995,846
                    )
                    
                    
                    12,415,200
                    
                    
                    
                    48,937,810Total
      Liabilities
                      &
      Net Assets
                    
                    $
                    58,643,808
                    
                    
                    $
                    35,589,986
                    
                    
                    $
                    24,668,818
                    
                    
                    $
                    (52,282,684
                    )
                    
                    $
                    66,619,928
 
 Financial
      Position
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Chuming
      WFOE,At
                    
                    Meat
                    
                    
                    Food
                    
                    
                    Sales
                    
                    
                    PSI,
      &December
      31, 2006
                    
                    Company
                    
                    
                    Company
                    
                    
                    Company
                    
                    
                    Eliminations
                    
                    
                    TotalCurrent
      Assets
                    
                    $
                    27,676,447
                    
                    
                    $
                    18,497,318
                    
                    
                    $
                    27,870,908
                    
                    
                    $
                    (51,181,557
                    )
                    
                    $
                    22,863,116Non
      Current Assets
                    
                    
                    21,257,469
                    
                    
                    
                    12,561,441
                    
                    
                    
                    163,596
                    
                    
                    
                    -
                    
                    
                    
                    33,982,507Total
      Assets
                    
                    $
                    48,933,916
                    
                    
                    $
                    31,058,759
                    
                    
                    $
                    28,034,504
                    
                    
                    $
                    (51,181,557
                    )
                    
                    $
                    56,845,623Current
      Liabilities
                    
                    
                    16,426,173
                    
                    
                    
                    22,340,903
                    
                    
                    
                    28,560,949
                    
                    
                    
                    (50,564,504
                    )
                    
                    
                    16,763,521Total
      Liabilities
                    
                    
                    27,619,010
                    
                    
                    
                    29,056,605
                    
                    
                    
                    28,560,949
                    
                    
                    
                    (50,564,504
                    )
                    
                    
                    34,672,060Net
      Assets
                    
                    
                    21,314,906
                    
                    
                    
                    2,002,154
                    
                    
                    
                    (526,445
                    )
                    
                    
                    (617,053
                    )
                    
                    
                    22,173,564Total
      Liabilities
                      &
      Net Assets
                    
                    $
                    48,933,916
                    
                    
                    $
                    31,058,759
                    
                    
                    $
                    28,034,504
                    
                    
                    $
                    (51,181,557
                    )
                    
                    $
                    56,845,623
  F-27
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 16.
              Earnings Per
      Share
 
 Components
of basic and diluted earnings per share were as follows: -
 
 For
      the
                    
                    
                    For
      the
                    
                    
                    For
      theyear
      ended
                    
                    
                    year
      ended
                    
                    
                    year
      endedDecember
      31,
                    
                    
                    December
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      Income (A)
                    
                    $
                    6,837,265
                    
                    
                    $
                    11,652,147
                    
                    
                    $
                    8,128,371Basic
      Weighted Average Shares Outstanding (B)
                    
                    
                    17,272,756
                    
                    
                    
                    13,409,120
                    
                    
                    
                    13,409,120Dilutive
      Shares:-Addition
      to Common Stock from Exercise of Placement Warrants
                    
                    
                    46,364
                    
                    
                    
                    -
                    
                    
                    
                    --Addition
      to Common Stock from Contingent Shares Held in Escrow (Please refer to
      Note 18)
                    
                    
                    3,863,636
                    
                    
                    
                    3,863,636
                    
                    
                    
                    3,863,636Diluted
      Weighted Average Shares Outstanding: (C)
                    
                    
                    21,182,756
                    
                    
                    
                    17,272,756
                    
                    
                    
                    17,272,756Earnings
      Per Share:-Basic
      (A)/(B)
                    
                    $
                    0.40
                    
                    
                    $
                    .87
                    
                    
                    $
                    0.61-Diluted
      (A)/(C)
                    
                    $
                    0.32
                    
                    
                    $
                    .67
                    
                    
                    $
                    0.47Weighted
      Average Shares Outstanding:-Basic
                    
                    
                    17,272,756
                    
                    
                    
                    13,409,120
                    
                    
                    
                    13,409,120-Diluted
                    
                    
                    21,182,756
                    
                    
                    
                    17,272,756
                    
                    
                    
                    17,272,756
 
 17.
              Concentration of
      Risk
 
 (A)
              Demand
      risk
 
 The
Company had concentrations of risk in demand for its products because its sales
were made to a small number of customers.
  F-28
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 (B)
              Supply
      Risk
 
 The
Company is subject to concentration of supply shortage risk because it purchases
its materials for resale from a few select vendors. The Company’s availability
of supply is correlated with the few select vendors’ ability to meet the market
demand.  In 2007, the entire industry in the PRC faced a shortage in
the supply of hogs.
 
 18.           Financing
Transaction
 
 On
December 31, 2007, the Company, a Nevada corporation (“Energroup” or the
“Company”), acquired Precious Sheen Investments Ltd. (“PSI”) in a reverse
take-over transaction, by executing a Share Exchange Agreement (“Exchange
Agreement”) by and among Energroup, PSI, and all of the shareholders of PSI’s
issued and outstanding share capital (the “PSI Shareholders”). PSI owned 100% of
the equity in Chuming WFOE. Chuming WFOE is a holding company for the following
three operating subsidiaries: (i) Meat Company, (ii) Food Company, and (iii)
Sales Company, each of which is a limited liability company headquartered in,
and organized under the laws of, China (also referred to elsewhere as the
“Chuming Operating Subsidiaries”).
 
 As a
result of the reverse take-over transaction, PSI’s Shareholders became
Energroup’s controlling shareholders and PSI became Energroup’s wholly-owned
subsidiary. As a result of PSI becoming Energroup’s wholly-owned subsidiary,
Energroup acquired the business and operations of Chuming and the Chuming
Operating Subsidiaries.
 
 Under the
Exchange Agreement, Energroup completed the acquisition of all of the issued and
outstanding shares of PSI through the issuance of 16,850,000 restricted shares
of common stock of Energroup to PSI’s Shareholders. Immediately prior to the
Exchange Agreement transaction, the Company had 422,756 shares of common stock
issued and outstanding. Immediately after the issuance of the shares to PSI’s
Shareholders, the Company had 17,272,756 shares of common stock issued and
outstanding. The 422,756 shares of PSI were cancelled and 17,272,756 shares of
Energroup were issued to reflect this reverse take-over
transaction.
 
 Concurrently
with the Exchange Agreement, Energroup also entered into a Securities Purchase
Agreement (the “Purchase Agreement”) pursuant to which Energroup agreed to issue
and sell 3,863,635 shares of its common stock to ten accredited investors for an
aggregate purchase price of $17,000,000 or $4.40 per share (the “Financing”).
The closing of the Financing coincided with the Closing of the reverse take-over
transaction.
 
 In
connection with the sales of securities to accredited investors under the
securities purchase agreement, Hunter Wise Financial Group, LLC (the “Placement
Agent”), was compensated with a commission of $1,190,000 which is equal to 7.00%
of the aggregate purchase price and a warrant to purchase the 386,364 shares of
the Company’s common stock at an exercise price of $4.40 per share. At
December 31, 2007, the Company had adequate authorized capital to issue common
shares upon the exercise of the warrant.
 
 At
December 31, 2008, the total number of shares outstanding, on a fully diluted
basis, is shown in the following table:
 
 i.
                    Common
      shares outstanding prior to offering of securities
                    
                    
                    17,272,756ii.
                    Common
      shares issued under securities purchase agreement
                    
                    
                    3,863,636iii.
                    Common
      shares issuable upon exercise of placement agent warrants
                    
                    
                    386,36421,522,756
  F-29
  Energroup
Holdings Corporation
 Notes
to Consolidated Financial Statements
 As
of and for the years ended December 31, 2008, 2007, and 2006
 Concurrent
with the Company’s financing transaction, the Company agreed to register for
resale the common shares that were sold under the securities purchase
agreement.  Pursuant to filing a Form S-1 registration statement with
the U.S. Securities and Exchange Commission, the Company entered into a
Registration Rights Agreement with the Investors.  The agreement calls
for liquidated damages to be paid by the Company, if in the event the
registration statement is not declared effective within 135 days of the closing
of the financing transaction.  The liquidated damages will be 1% of
the total financing amount in cash per month for each month after the 135
period.  The agreement states a maximum penalty of $1.70 million or
10% of the financing amount.  At December 31, 2007, the Company
accounted for the liability under the registration rights agreement in
accordance with FASB Staff Position No. EITF 00-19-2 Accounting for Registration Payment
Arrangements.  Under such accounting treatment, the liquidated
damages are accounted for as a reduction of the proceeds.  In
asserting the most conservative position, the Company has accrued the maximum
liability of $1.7 million and is carrying that balance in the accrued
liabilities account.  In the event that the registration becomes
effective in a timeframe that is earlier than February 15, 2009, the portion
that is not legally owed, or in the event that investors waive any liquidating
damages, the accrual will be reversed and the funds will be added back to the
Company’s additional paid in capital.
 
 In
connection with a make good agreement related to the financing transaction on
December 31, 2007, the Company’s Chairman and CEO, Mr. Shi Huashan placed in
escrow 3,863,636 shares, which were beneficially owned by him.  These
shares are to be released back to him if the Company meets the following
earnings targets of $15.9 million, and $20.9 million in after-tax net income for
the years ended December 31, 2008, and 2009 respectively.  In the
event that the Company does not meet the aforementioned financial targets, the
escrowed shares will be released, on a pro-rata basis, to the investors in the
financing transaction.  In accordance with SFAS 128, Earnings Per Share, for the
sake of calculating the Company’s earnings per share, the Company has accounted
for the 3,863,636 escrowed shares as contingently issuable shares as such they
are not included in the weighted average basic shares outstanding but are
included in the weighted average diluted shares outstanding.  Please
refer to Note 16.
 
 In
accordance with Topic 5.T of the Staff Accounting Bulletins (SAB 79), the
Company expects to record a compensatory expense for the shares upon their
release from escrow.  Whether the shares are released to the
accredited investors or released to Mr. Shi the Company will record an expense
with a corresponding credit to the Company’s contributed paid in
capital.  The Company anticipates that compensatory expense to be
recognized in future operating periods could be in a range between $17.0 million
to $29.2 million.  The Company approximates this range based on the
per share offering price of $4.40 at December 31, 2007 and a potential future
stock price of $7.57 based on a $20.0 million net income (short of the target of
$20.9 million net income) with a price-to-earnings ratio of 8.0, which is
comparable to the valuation used in the offering at December 31,
2007.
 
 For the
year ended December 31, 2008, the Company recorded an expense for the expected
release of shares deposited in the escrow account.  The Company
expects that 1,931,818 shares will be released from escrow.  The
amount of expense recorded was $10,622,294.  The impact on earnings
per share, on a basic and diluted basis, was  $0.61 and $0.50,
respectively.
 
 19.
              Change of Chief
      Financial Officer
 
 The
Company filed an 8-K on December 29, 2008 in connection with the change of Chief
Financial Officer where Mr. Zhang Yizhao resigned his position and Ms. Wang Shu
was appointed to this position that she had previously held until September 28,
2008. Mr. Zhang Yizhao's total remuneration during his term of service at
the Company was approximately $71,000 (RMB 500,000).
  F-30




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





On
February 6, 2008, MantylaMCREYNOLDS LLC (“McReynolds”) resigned as the
independent auditor of Energroup Holdings Corporation. McReynolds served as our
independent auditor for the Registrant’s fiscal years ended December 31, 1999
through December 31, 2006, and the interim periods during 2007. On December 31,
2007, we completed a reverse takeover transaction which resulted in a change of
control of the Company, and acquisition by the Company of a food processing
company based in the city of Dalian, China. Following this change,
MantylaMCREYNOLDS LLC resigned as our independent auditor.





McReynolds’
report on the our financial statements for the two most recent fiscal years did
not contain any adverse opinions or disclaimers of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles,
except for a going concern opinion expressing substantial doubt about the
ability of the Companyto continue as a going concern with respect to the
Registrant in 2006, during which time the Registrant had “shell company” status
under Rule 12b-2 of the Exchange Act.





During
the two most recent fiscal years and the interim periods through February 6,
2008, there were no disagreements with McReynolds on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of McReynolds
would have caused them to make reference to this subject matter of the
disagreements in connection with their report, nor were there any “reportable
events” as such term is described in Item 304(a)(1)(iv) of Regulation S-B. On
February 11, 2008, we filed a Current Report on Form 8-K disclosing the
resignation of MantylaMCREYNOLDS LLC. In connection with their resignation,
McReynolds furnished a letter stating that McReynolds reviewed our 8-K and was
in agreement with the statements made concerning the auditor in the
8-K.





Also on
February 6, 2008, we engaged Samuel H. Wong & Co., LLP (“Wong & Co.”) as
our outside independent accounting firm. This action has also been approved by
the Registrant’s board of directors. During the two most recent fiscal years and
any subsequent interim period prior to the engagement of Wong & Co., neither
us nor anyone on our behalf consulted with Wong & Co., regarding either (i)
the application of accounting principles to a specified transaction, either
contemplated or proposed, or the type of audit opinion that might be rendered on
our financial statements, or (ii) any matter that was either the subject of a
“disagreement” or a “reportable event.”





ITEM
      9A.
            CONTROLS
      AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including its chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.





As of
December 31, 2008, the end of the fiscal year covered by this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) were effective at the reasonable assurance level.




54


Management’s
Annual Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over
financial reporting is a process designed under the supervision of our principal
executive and principal financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP.


Under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of
December 31, 2008.




On
December 31, 2007, we acquired the business of Chuming via a share exchange
transaction. Prior to the share exchange transaction, Energroup was a public
reporting “shell” company with nominal assets whose sole business was to
identify, evaluate and investigate various companies with the intent that, if
such investigation warrants, a reverse merger transaction be negotiated and
completed pursuant to which Energroup would acquire a target company with an
operating business with the intent of continuing the acquired company’s business
as a publicly held entity. As a public reporting shell company, we did not
maintain elaborate controls and procedures. Additionally, as a privately-held
company prior to the share exchange transaction, Chuming only maintained
controls and procedures necessary and as suitable for a privately held company.
Consequently, immediately following our share exchange transaction, we lacked
the controls and procedures that would be appropriate for a public reporting
company of our size and stature.





As a
result of the material weaknesses described below, our management concluded that
as of December 31, 2007 we did not maintain effective internal control over
financial reporting based on the criteria established in Internal
Control—Integrated Framework, issued by COSO.




As of
December 31, 2008, the Company had yet to become compliant with SOX 404 and
maintain effective internal controls; however, the progress of the Company’s
remedial measures is detailed below.  The Company expects to be
compliant by the end of 2009.





A
“material weakness” is a significant deficiency, or combination of significant
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements presented will not be
prevented or detected. A “significant deficiency” is a control deficiency, or
combination of control deficiencies, that adversely affects a company’s ability
to initiate, authorize, record, process or report external financial data
reliably in accordance with GAAP such that there is more than a remote
likelihood that a misstatement of the annual or interim financial statements
presented that is more than inconsequential will not be prevented or
detected.




At
December 31, 2007, Chuming and its business first became a part of the
Company, and as of that date, management has identified the following material
weaknesses in our internal control over financial reporting, and has proposed
the following plan of implementation with respect to each material
weakness:





·
              Weakness:The Company’s
      board of directors has yet to pass a formal resolution to put in place a
      strategic plan and framework in order to comply with the regulations
      placed on issuers concerning internal
controls.




Implementation Plan: The
board of directors intends to pass a resolution to adopt the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) Framework which
provides for a structure to establish a control environment, risk assessment,
control activities, information and communication, and monitoring of effective
internal controls. The board also intends that the Chief Executive Officer shall
be made to take ultimate ownership of establishing an effective internal control
system.




As of
December 31, 2008, the Company had not yet passed a formal resolution, however,
Board has instructed Ms. Ma Feng Qin, a Board Member, to take charge of the
implementation of a system of an internal control system that will ultimately
meet the goal of compliance with SOX 404 Act.  The Company notes that,
as a result of turnover in Board Members and Senior Financial Officers, the
expertise in US financial reporting standards and related internal controls that
was expected to be contributed to the Company by those individuals at the time
of their election and hiring, has never been evaluated, or put to use;
nevertheless, remaining board member and senior officers of the Company have
pressed forward to take on the responsibility onto themselves.  The
Company anticipates hiring more professionals with experience in SOX 404 to
enable the Company to effectively address this issue.




55





·
              Weakness: The Company
      lacks a comprehensive Code of Ethics that is applicable to the entire
      Company including officers, employees, and
  directors.




Implementation Plan: The
Company intends to adopt a formal Code of Ethics that will communicated to all
personnel at all levels of the organization, and that senior management will be
held to a standard that they will be responsible to encourage an environment
that promotes ethical behavior and discourages both the necessity of, and the
opportunities to act unethically.





As of
December 31, 2008, the Company has adopted a formal code of
ethics.   The Company intends to distribute this Code of Ethics
to relevant employees, and to hold discussions with such employees as to how it
applies.





·
              Weakness:The Company
      lacks a guideline that specifically states the objective and core
      functions of the Company so that there is no ambiguity to all members of
      the organization as to what type of business transactions the Company
      should be conducting. This guideline should also be reviewed on regular
      basis by management and the Board of Directors in order to address the
      ever changing business environment and the demands of the
      market.




Implementation Plan:Management intends to prepare a guideline that the board of directors
will review and adopt.





As of
December 31, 2008 the Board of Directors and management have written and adopted
a formal guideline that defines the Company’s core business lines and how to
grow within these lines of business on a five year basis.  The
Company, however, has yet to provide evidence that the Company has complied with
such guideline.




·
              Weakness:The Company
      has material weaknesses in its system of producing information for
      financial reporting and management of fixed and intangible assets. The
      cost basis, and the related accumulated amortization and depreciation
      pertaining to these assets presently are poorly kept. The calculation of
      the expense for amortization and depreciation for these assets is
      inconsistent and at times the necessary details to make the calculation
      are, at times not readily available. For certain subsidiaries there are
      assets that have not been assigned a unique identifying number or code to
      result in proper tracking of those particular
  assets.





Implementation Plan: The
Company will revisit its management of and systems for dealing with fixed and
intangible assets for financial reporting purposes. The Company will also
conduct training for its employees, in order improve the over quality of
calculations. Finance managers will be required to review and sign off on
schedules and accounting entries related to these assets, with a focus in
accuracy and precision of calculation and recording of entries.




As of
December 31, 2008, the Company has established a written policy for the
management of and related reporting of fixed assets and intangible assets so
that the assets are safeguarded, maintained, and carried at the proper
value.





·
              Weakness: The Company’s
      disclosures and present manually-based accounting method for tracking
      related party transactions is inadequate. Since the corporate
      reorganization and separation of Chuming from the Group occurred recently,
      the Company does not have a fully detailed database which can be utilized
      to generate sophisticated reports and analysis of the transactions between
      it and certain related parties. The Company needs to formalize all netting
      agreements for which the related parties, at different times, can be both
      a vendor and a customer.  Further, the Company must adopt a more
      systematic approach to accounting for its related-party
      transactions.




56




Implementation Plan:The
Company will write and rewrite formal contracts with these Related Parties that
will detail the nature of these transactions. Schedules detailed these
transactions will be revised to be easily be understandable and detailed for
their inclusion in the Company’s financial statements.
  As of
December 31, 2008, the Company has implemented from an operational standpoint, a
plan for the elimination of related party transactions unrelated to the
Company’s core business transactions.  Therefore, all related party
transactions, except for the purchase of hogs which is conducted under an
arms-length Hog Procurement Agreement, will be phased out and
eliminated.  The Company continues to develop desktop and closing
procedures in order to report historical and remaining related party balances on
a more timely and accurate basis.  Contracts with related parties,
which include netting agreements, have been formalized for past transactions;
however, on going forward basis the Company is in the process of creating
standardized contracts that will govern related party transactions that occur
frequently and regularly, such as purchases of hogs.
 
 ·
                Weakness: The Company
      accounting department is currently understaffed and lacks personnel with
      expertise in US GAAP and SEC reporting
  standards.
 
 Implementation Plan: The
Company is currently in the hiring process for a senior financial accounting
officer and staff accountants to fulfill the demands and rigors of being a US
public reporting company. The Company will also provide training to existing
employees on the requirements of US GAAP and SEC Reporting
standards.
 
 As of
December 31, 2008 the Company had hired a new Chief Financial Officer, however
as of the date of this report, the Company continues to be in pursuit of a
senior financial reporting officer knowledgeable in US GAAP and SEC Reporting
standards.  The Company’s previous attempts to fill this role have not
resulted in long term fit for the Company and its needs.  Upon hiring
of a senior financial reporting officer, that individual could further hire and
train personnel as needed.  The Company has retained a recruiting firm
to help with filling this role.
  ·
                Weakness:The Company
      does not have an internal audit function and
  department.
 
 Implementation Plan: The
Company will establish an internal audit department.
 
 As of
December 31, 2008 the Company has created an internal audit
department.  The effectiveness of this new department is currently
under evaluation, and has yet to be determined.
  ·
                  Weakness: The Company
      does not have a standardized and unified Enterprise Resource Planning
      Software (ERP). The Company’s accounting systems are disparate and
      sometimes manual in nature which makes them neither scalable nor efficient
      for financial reporting purposes and management decision making
      needs.
  Implementation Plan:The
Company will review its current ERP systems and consider the need to either
purchase a new package or revise the functionality and deployment of its current
systems.
 
 As of
December 31, 2008, the Company had issued requests for proposals for ERP systems
that will meet the growing needs of the Company.  Upon receipt and
acceptance of the appropriate bid, the Company expects that a system will be
fully implemented by the end of 2009; however, auditor is awaiting evidence of
this process.
 
 ·
                Weakness:The Company’s
      present methods and systems for tracking related party transactions are
      inadequate. Since the corporate reorganization and separation of Chuming
      from the Group occurred recently (at the end of 2007), and the Company’s
      accounting system in the past was manually based, only manual records of
      related party transactions are currently available. Further, the Company
      notes that its current accounting staff is not sufficient in size to
      undertake an exercise to completely re-summarize all of the events and
      transactions that led to the current related party transaction balances
      disclosed in its financial statements. Specifically, paragraph 2(c) of the
      Statement of Financial Accounting Standards No. 57 (SFAS 57) requires us
      to disclose in our financial statements the dollar amounts of each of the
      periods presented, for our related-party transactions. Due to certain
      limitations in our historical records, the present capacity of our
      accounting staff, and the fact that our historical records relating to
      these related party transactions are manually-based, these related party
      transactions have been presented according to their general category and
      current balance, with each such balance representing one or more prior
      transactions culminating in such
balance.
  57





Implementation Plan:The
Company will write and rewrite formal contracts with these Related Parties as
necessary to detail the nature of these transactions. The Company’s accounting
staff will formalize the process of recording these related party transactions,
so that the nature of these transactions are more easily understandable and may
be adequately disclosed in the Company’s financial statements. The Company and
management acknowledge our responsibility to comply with the requirements of
SFAS 57, and fully intend to take all necessary steps to update our accounting
systems and procedures in order to achieve such compliance on an ongoing basis.
In addition, we expect that the foregoing material weakness is related to our
lack of adequate accounting staff (see paragraph below), and that appropriate
changes to our staff are expected to eliminate the foregoing material
weakness.




In regard
to the above implementation plan, the Company refers to the above that detail
the Company’s plan in dealing with related party transactions.




This
report does not specifically detail all possible material weaknesses of the
Company that may lead to material misstatements in the Company’s financial
statements. However, in light of the Chuming’s transition from being a
privately-owned enterprise to becoming a part of a U.S. public reporting
company, we believe the foregoing report serves as a valuable evaluation of the
current status of the Company’s internal controls.




Any one
of the material weaknesses described above could result in a misstatement of the
aforementioned accounts or disclosures that would result in a material
misstatement to the annual or interim Consolidated Financial Statements that
might not be prevented or detected. As a result, management has determined that
each of the control deficiencies discussed above constitutes a material
weakness.




Management’s
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2007 has been audited by Samuel H. Wong & Co., our
independent registered public accounting firm, as stated in their report, which
is included herein.





Management’s
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2008 which is still considered to still have material
weaknesses has been audited by Samuel H. Wong & Co., our independent
registered public accounting firm.




Changes
in Internal Controls





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our international
control over financial reporting.





ITEM
      9B.
            OTHER
      INFORMATION





None.





PART
III





ITEM
      10.
            DIRECTORS
      AND EXECUTIVE OFFICERS OF THE
REGISTRANT




Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers





On
January 28, 2008, our Board of Directors appointed Mr. Matthew Dillion and Mr.
Nestor Gounaris as independent directors on the Company’s Board of Directors,
effective January 28, 2008.




58





The Board
of Directors appointed Mr. James Boyle as an independent director on the Board
of Directors, effective February 21, 2008.





Ms. Wendy
Li resigned from the Board of Directors, effective February 7,
2008.





Effective
December 9, 2008, Mr. Dillon, Mr. Boyle and Mr. Gounaris each resigned from
their positions as independent directors of the
Company.





Mr. Zhang
Yizhao was first appointed on September 18, 2008 as Chief Financial Officer of
the Company and served until December 23, 2008. We entered into an employment
agreement with Mr. Zhang dated September 18, 2008. Under that agreement, Mr.
Zhang was to be paid an annual salary of $180,000, and was eligible to
participate in equity or non-equity bonus programs to be determined by the Board
of Directors. Mr. Zhang resigned on December 23, 2008 for personal
reasons.





Following
Mr. Zhang’s resignation, Ms. Wang has assumed the duties of Chief Financial
Officer effective December 23, 2008. The terms of Wang Shu's employment as Chief
Financial Officer of the Company is set forth in her original employment
agreement dated December 31, 2007.





Management




Our board of director consisted of the following
individuals as of December 31, 2008:








Name
            
            Age
            
            Position
            
            Effective
      Date of AppointmentShi
      Huashan
            
            50
            
            President,
      Chief Executive Officer and Chairman(1)
            
            January
      28, 2008Wang
      Shu
            
            34
            
            Chief
      Financial Officer and Director(1)
            
            January
      28, 2008Ma
      Fengqing
            
            47
            
            Vice
      President and Director
            
            January
      28, 2008Wang
      Shuying
            
            58
            
            Director
            
            January
      28, 2008







(1)
              The
      effective date of appointment of the CEO and CFO was December 31,
      2007.








Mr. Shi
Huashan,age
50,is a graduate
of Beijing Renwen University in Corporate Law, and the founder of Chuming. Mr.
Shi Huashan has nearly 20 years of experience in the food industry. He
established Dalian Chuming Industry Development Company in 1992, which started
the Dalian Chuming Group Co., Ltd. From 1992 to present he has served as
President and CEO of Chuming and the Dalian Chuming Group Co., Ltd. companies.
In 2004, he was selected by the China Meats Association as one of the “Ten Most
Influential Entrepreneurs in the China Meat Industry.” Mr. Shi Huashan is the
current President of the Dalian Food Association. He is Chuming’s President,
Chief Executive Officer, and Chairman of the Board of Directors.




Ms. Wang
Shu, age 34, is a
graduate of Liaoning University, with a major in accounting, Ms. Wang Shu has
more than 11 years of experience in finance. From 1996 to 2001, she worked at
Dalian Huaqiao House Development Company as its chief accountant. In 2001, she
joined Dalian Chuming Group Co., Ltd., and in her present role serves as
Chuming’s as Chief Financial Officer, and as a member of the Board of
Directors




Ms. Ma
Fengqin,age 47,
is a graduate of Dalian Electric Power Economic School, with a major in
accounting. From 1990 to 1993, she worked at Dalian Thermo Engineering Company
as its Chief Accountant. From 1992 to 2001, Ms. Ma served as Vice President of
Dalian Chuming Industry Development Company. Since 2002 she has served as
Chuming’s Vice President, and a member of the Board of Directors. Ms. Ma is
married to Mr. Shi Huashan, Chairman of the Board of Directors.




59





Ms. Wang
Shuying, age 58,
member of the Chuming Board of Directors, served from 1996-2004 as Chief of the
Dalian Planning Committee’s Agriculture Economy Development Section, and now
works as a consultant to the Section.  From 1991-1996 she was Vice Chief of
the Section.  A graduate of Dalian Railway College, she was a staff member
of the Dalian Machinery Bureau’s Agriculture Machinery Department from
1977-1984.  From 1984-1989 Ms. Wang was Chief of the Dalian Planning
Committee’s Industry Section, before undertaking German language studies at the
Beijing Foreign Trading University.  She completed a training program in
Germany at Heidelberg Hiller College from 1989-1991 prior to returning to
Dalian’s Planning Committee.





The
Board of Directors and Committees





Our Board
of Directors does not maintain a separate audit, nominating or compensation
committee.  Functions customarily performed by such committees are
performed by its Board of Directors as a whole.  We are not required
to maintain such committees under the applicable rules of the Over-the-Counter
Bulletin Board.  We do not currently have an “audit committee
financial expert” since we currently do not have an audit committee in
place.  We intend to create board committees, including an independent
audit committee, in the near future.





We do not
currently have a process for security holders to send communications to the
Board.





Director
Independence





Our
common stock is quoted on the Over-the-Counter Bulletin Board and, therefore, we
are not required to maintain a board consisting of majority independent
directors and we are not currently otherwise subject to any law, rule or
regulation requiring that all or any portion of our Board of Directors include
"independent" directors.  Our board of directors reviewed the independence
of the directors using the criteria established by the American Stock Exchange.
 As of December 31, 2008, the board of directors determined that only one
of the directors was independent based on such criteria.





Family
Relationships





President
and Chairman of the board of directors Mr. Shi Huashan, and Ms. Ma Fengqin, who
is a vice president and director, are husband and wife.





Involvement in Certain Legal
Proceedings




Our
directors, executive officers and control persons have not been involved in any
of the following events during the past five years:




1.    
any bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time;




2.    
any conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);




3.    
being subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or




4.    
being found by a court of competent jurisdiction (in a civil action), the SEC or
the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.




Section 16(a) of the Exchange
Act




Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and certain of our officers, as well as persons who own more than 10% of a
registered class of our equity securities (“Reporting Persons”), to file reports
with the Securities and Exchange Commission. To our knowledge, based solely on
review of the copies of such reports furnished to us and written representations
that no other reports were required, during the fiscal year ended December 31,
2008 all Section 16(a) filing requirements applicable to its officers, directors
and greater than ten percent shareholders were complied with, except that Form
3s were inadvertently filed late by Fuyuan Chen, Shu Wang, Huashan Shi and Shine
Gold Holdings Limited on January 16, 2008.




60





Code
of Ethics





As of
December 31, 2008, the Company has adopted a formal code of
ethics.   The Company has developed a formal code of ethics that
will apply to all of its employees (including its executive officers). The
Company intends to distribute this Code of Ethics to its employees, and to hold
discussions with the employees as to how it applies.




ITEM
      11.
            EXECUTIVE
      COMPENSATION





Compensation
Discussion and Analysis





This
compensation discussion and analysis describes the material elements of the
compensation awarded to our current executive officers. This compensation
discussion focuses on the information contained in the following tables and
related footnotes and narrative for the last completed fiscal year. Our Board of
Directors currently oversees and administers our executive compensation
program.





Our
current executive compensation program presently includes a base salary. Our
compensation program does not include (i) discretionary annual cash
performance-based incentives, (ii) termination/severance and change of control
payments, or (iii) perquisites and benefits.





Our
Compensation Philosophy and Objectives





Our
philosophy regarding compensation of our executive officers includes the
following principles:





·
                our
      compensation program should align the interests of our management team
      with those of our
shareholders;





·
            our
      compensation program should reward the achievement of our strategic
      initiatives and short- and long-term operating and financial
      goals;





·
            compensation
      should appropriately reflect differences in position and
      responsibility;





·
            compensation
      should be reasonable and bear some relationship with the compensation
      standards in the market in which our management team operates;
      and





·
            the
      compensation program should be understandable and
      transparent.




In order
to implement such compensation principles, we have developed the following
objectives for our executive compensation program:




·
              overall
      compensation levels must be sufficiently competitive to attract and retain
      talented leaders and motivate those leaders to achieve superior
      results;





·
              a
      portion of total compensation should be contingent on, and variable with,
      achievement of objective corporate performance goals, and that portion
      should increase as an executive’s position and responsibility
      increases;





·
              total
      compensation should be higher for individuals with greater responsibility
      and greater ability to influence our achievement of operating goals and
      strategic initiatives;




61




·
              the
      number of elements of our compensation program should be kept to a
      minimum, and those elements should be readily understandable by and easily
      communicated to executives, shareholders, and others;
  and





·
              executive
      compensation should be set at responsible levels to promote a sense of
      fairness and equity among all employees and appropriate stewardship of
      corporate resources among
shareholders.





Determination
of Compensation Awards





Our Board
of Directors is provided with the primary authority to determine the
compensation awards available to our executive officers. To aid the board of
directors in making its determination for the last fiscal year, our current
senior management provided recommendations to the board of directors regarding
the compensation of all executive officers.





Director
Compensation





In connection with the Exchange Transaction
in December 2007, we appointed seven new directors consisting of four
independent directors in 2008, Wang Shuying, Matthew Dillon, Nestor Gounaris and
James Boyle, and three non-independent directors, Shi Huashan, Wang Shu and Ma
Fengqin. For the fiscal year of 2008, we paid our independent directors a flat
fee of $1,000 per month as compensation for their services on the
Board.  On December 9, 2008, Messrs. Dillon, Gounaris and Boyle
resigned form the Board of Directors.  As a result, following their
resignations we only paid compensation to Ms. Wang Shuying as our independent
director.





Executive
Compensation





The
following executive compensation disclosure reflects all compensation for fiscal
year 2008 received by our principal executive officer, principal financial
officer, and three most highly compensated executive officers whose salary
exceeded US$100,000. We refer to these individuals in this report as “named
executive officers.”




Summary
Compensation





The
following table reflects all compensation awarded to, earned by or paid to our
directors and named executive officers for our fiscal years ended December 31,
2007 and 2008:





Summary
Compensation





Annual
      Compensation (2)Name
      and
              Principal
      Position
            
            Fiscal
              Year
            
            Salary
      (1)
              ($)
            
            All Other
              Compensation (3)
              ($)
            
            Total
              ($)Shi
      Huashan
            
            2008
            
            $
            100,000
            
            -
            
            
            100,000Chief
      Executive Officer, President
            
            2007
            
            
            60,000
            
            -
            
            
            60,000Wang
      Shu
            
            2008
            
            $
            40,000
            
            -
            
            
            40,000Chief
      Financial Officer
            
            2007
            
            
            20,000
            
            10,000
            
            
            30,000Wang
      Shuying
            
            2008
            
            
            12,000
            
            -
            
            
            12,000Director
            
            2007
            
            
            -
            
            -
            
            
            -Chen
      Fuyan
            
            2008
            
            
            12,000
            
            -
            
            
            12,000Chief
      Operating Officer
            
            2007
            
            
            -
            
            -
            
            
            -Ma
      Fengqin
            
            2008
            
            
            12,000
            
            -
            
            
            12,000Director
            
            2007
            
            
            -
            
            -
            
            
            -







(1)
            Expressed
      in U.S. Dollars based on the interbank exchange rate of 6.85420 RMB
      for each 1.00 U.S. Dollar for the year ended December 31,
      2008.




62




(2)
            In
      2008, compensation paid to our officers and directors included no bonuses,
      stock or option awards, non-equity incentive plan awards, or non-qualified
      deferred compensation, and accordingly, these columns have been omitted
      from this table.(3)
            In
      2008, all other compensation includes transportation subsidy,
      telecommunication subsidy, and other fringe
  benefits.





None of
our executive officers received, nor do we have any arrangements to pay out, any
bonus, stock awards, option awards, non-equity incentive plan compensation, or
non-qualified deferred compensation.





Grants
of Plan-Based Awards





We did
not make any grants of plan-based awards to our directors or named executive
officers during our fiscal year-ended December 31, 2008.





Outstanding
Equity Awards





There are
no unexercised options, stock that has not vested, or equity incentive plan
awards for any of our directors or named executive officers outstanding as of
December 31, 2008.





Option
Exercises and Stock Vested





There
were no exercises of stock options, stock appreciation rights, or similar
instruments, and no vesting of stock, including restricted stock, restricted
stock units and similar instruments, during the last completed fiscal year for
any of our directors or named executive officers.





Pension
Benefits





We
currently have no plans that provide for payments or other benefits at,
following, or in connection with retirement of our directors or named executive
officers.





Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans





We
currently have no defined contribution or other plans that provide for the
deferral of compensation to our directors or named executive officers on a basis
that is not tax-qualified.





Potential
Payments Upon Termination or Change-in-Control





Other
than any employment agreements described in this report, we currently have no
contract, agreement, plan or arrangement, whether written or unwritten, that
provides for payments to a named executive officer at, following, or in
connection with any termination, including without limitation resignation,
severance, retirement or a constructive termination of a named executive
officer, or a change in control of the registrant or a change in the named
executive officer’s responsibilities, with respect to each named executive
officer.




Employment
Agreements





Effective
at closing of the Exchange Transaction described elsewhere in this report, we
entered into executive employment agreements with each of Mr. Shi Huashan
(President and Chief Executive Officer), Ms. Wang Shu (acting Chief Financial
Officer) and Mr. Chen Fuyuan (Chief Operating Officer). Each agreement provides
for a yearly salary of USD $100,000 payable in monthly installments in
accordance with our standard payroll practices for salaried employees. Each
executive officer’s salary will be subject to adjustment pursuant to our
employee compensation policies in effect from time to time. Under the terms of
each of the agreements, each executive officer will be entitled to the benefits
that we customarily make available to employees in comparable positions. Each
officer has the right to terminate his or her employment by giving us prior
notice with or without cause, and we hold an equal right. The Board of Directors
or appropriate committee thereof, may from time to time, in its sole discretion,
adjust the salaries and benefits paid to our executive officers. A copy of the
employment agreements are included as exhibits to our Form 8-K filed on January
7, 2008.




63




Mr. Zhang
Yizhao was first appointed on September 18, 2008 as Chief Financial Officer of
the Company and served until December 23, 2008.   We entered into
an employment agreement with Mr. Yizhao Zhang dated September 18,
2008.  Under that agreement, Mr. Zhang was to be paid an annual salary
of $180,000, and was eligible to participate in equity or non-equity bonus
programs to be determined by the Board of Directors.  Mr. Zhang
resigned on December 23, 2008 for personal reasons.





Following
Mr. Zhang’s resignation, Ms. Wang has assumed the duties of Chief Financial
Officer effective December 23, 2008. The terms of Wang Shu's employment as Chief
Financial Officer of the Company is set forth in her original employment
agreement dated December 31, 2007.





The
following is a summary of the compensation to be paid under these employment
agreements in the upcoming fiscal year ended December 31, 2009 to our named
executive officers:




Summary
of Compensation To Be Paid Under Employment Agreements for


Fiscal
Year Ended December 31, 2009





Annual
      CompensationName and Principal
      Position
            
            Salary
            
            Bonus
      (1)
            
            Other annual
              CompensationShi
      Huashan
              President,
      Chief Executive Officer
            
            $
            100,000
            
            —
            
            
            —Wang
      Shu
              Chief
      Financial Officer
            
            $
            100,000
            
            —
            
            
            —Chen
      Fuyuan
              Chief
      Operating Officer
            
            $
            100,000
            
            —
            
            
            —




We have
no arrangements with our executive officers to pay bonuses or other annual
compensation.




Indemnification
of Officers and Directors





The
Nevada Revised Statutes and our bylaws permit us to indemnify our officers and
directors for liabilities they may incur, including liabilities under the
Securities Act and Exchange Act. Our bylaws provide that our officers and
directors may be indemnified by us in the event of third party actions, if the
officer or director acted in good faith and in a manner that he or she
reasonably believed was in or not against the company’s best interests, and with
respect to any criminal action or proceeding, had no reason to believe that his
or her actions were unlawful. Our bylaws also provide that we may provide
indemnification for our officer and directors for any action by the company
against such directors and officers, if the officer or director acted in good
faith and in a manner that he or she reasonably believed was in or not against
the company’s best interests, except no indemnification may be made for
negligence or misconduct of such director’s or officer’s duties to the company,
unless a court in which the matter is brought determines that in view of all the
circumstance of the case, the person is fairly and reasonably entitled to
indemnification. This and our bylaws indemnification may, however, be
unenforceable as against public policy.




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT





The
following table sets forth information regarding the beneficial ownership of our
common stock as of December 31, 2008, for each of the following
persons:





·
              each
      of our directors and each of the named executive officers in the
      “Management” section of this
report;


·
              all
      directors and named executive officers as a group;
  and
  64


·
              each
      person who is known by us to own beneficially five percent or more of our
      common stock.





Beneficial
ownership is determined in accordance with the rules of the SEC. Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name. Unless otherwise indicated, the address of each
beneficial owner listed below is c/o Dalian Precious Sheen Investments
Consulting Co., Ltd., No. 9, Xin Yi Street, Ganjingzi District, Dalian City,
Liaoning Province, PRC 116039. The percentage of class beneficially owned set
forth below is based on 21,136,391 shares of our common stock outstanding on
December 31, 2008.








Common Stock Beneficially OwnedNamed executive officers and
      directors:
            
            Number
      of
              shares
              beneficially
              owned
            
            Percentage of
              class beneficially
              ownedShi
      Huashan
            
            
            14,688,948
            (1)
            69.5
            %Wang
      Shu
            
            
            0
            
            0
            %Chen
      Fuyuan
            
            
            0
            
            0
            %Ma
      Fengqin
            
            
            0
            
            0
            %Wang
      Shuying
            
            
            0
            
            0
            %All
      directors and executive officers as a group (5 persons)
            
            
            14,688,948
            
            69.5
            %5%
      Shareholders:Shine
      Gold Holdings Limited
            
            
            10,690,668
            (1)
            50.6
            %Shiny
      Snow Holdings Limited
            
            
            1,948,890
            (1)
            9.2
            %Smart
      Beat Limited
            
            
            2,049,390
            (1)
            9.7
            %Barry
      Kitt
            
            
            2,045,455
            (2)
            9.7
            %







(1)
              Shine
      Gold Holdings Limited, Shiny Snow Holding Limited, and Smart Beat Limited,
      are each companies organized under the laws of the British Virgin Islands
      (collectively, the “Shi Family Companies”). The registered address
      for the Shi Family Companies is Palm Grove House, P.O. Box 438,
      Road Town, Tortola, British Virgin Islands. Mr. Shi Huashan and
      certain of his relatives (the “Shi Family”) have entered into trust
      agreements with three non-PRC individuals, under which the non-PRC
      individuals shall hold the shares of the Shi Family Companies as
      trustees for the benefit of the Shi Family. The natural persons with
      voting power and investment power on behalf of the Shi Family
      Companies are (i) Chong Shun, (ii) Kuo Ching Wan Amy, and (iii) Wey
      Meirong, respectively (collectively, the “Trustees”).
      As beneficiaries of the trust arrangements, members of the Shi Family
      have only economic rights with respect to the shares held by the
      Shi Family Companies. Mr. Shi Huashan and the Shi Family hereby
      disclaim beneficial ownership except to the extent of their pecuniary
      interest in the Company shares held by the Shi Family
      Companies.




(2)
              Barry
      Kitt exercises investment discretion and control over the shares of common
      stock of the Company held by The Pinnacle Fund, L.P., a Texas limited
      partnership (“Pinnacle”) and Pinnacle China Fund, L.P., a Texas limited
      partnership (“Pinnacle China”). Pinnacle Advisers, L.P. (“Advisers”) is
      the general partner of Pinnacle. Pinnacle Fund Management, LLC
      (“Management”) is the general partner of Advisers. Mr. Kitt is the sole
      member of Management. Pinnacle China Advisers, L.P. (“China Advisers”) is
      the general partner of Pinnacle China. Pinnacle China Management, LLC
      (“China Management”) is the general partner of China Advisers. Kitt China
      Management, LLC (“China Manager”) is the manager of China Management. Mr.
      Kitt is the manager of China Manager. As of December 31, 2007, Pinnacle
      and Pinnacle China were the beneficial owners of 2,045,454 shares of
      Common Stock. Mr. Kitt may be deemed to be the beneficial owner of
      the shares of Common Stock beneficially owned by Pinnacle and Pinnacle
      China. Mr. Kitt expressly disclaims beneficial ownership of all
      shares of Common Stock beneficially owned by Pinnacle and Pinnacle
      China.




65




Equity
Compensation Plan Information




We have
not adopted any equity compensation plan as of December 31,
2008.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS





Related
Party Transactions of Chuming





Our
current Chief Executive Officer, Mr. Shi Huashan, is also the Chief Executive
Officer and a controlling beneficial shareholder of our former parent company,
Dalian Chuming Group Co., Ltd. Mr. Shi devotes the majority of his time and
effort to his role as our Chief Executive Officer under our employment agreement
with him. A description of the executive employment agreements we have with our
executives, including the employment agreement between Mr. Shi and the Company,
under the heading “Employment Agreements” earlier in this report. However, some
portion of his time is spent on the business and affairs of Dalian Chuming Group
Co., Ltd., and in his capacity as the principal executive officer, he presides
over management and the day-to-day operations of Dalian Chuming Group Co.,
Ltd.




In the
normal course of business, we conduct transactions with the following related
parties, that are not consolidated into the Company or its subsidiaries: (1)
Dalian Chuming Group Co., Ltd., also referred to this report as the “Group”, and
the Group’s subsidiaries: (2) Dalian Chuming Industrial Development Co., Ltd.,
(3) Dalian Chuming Trading Co., Ltd, (4) Dalian Mingxing Livestock Product Co.
Ltd., (5) Dalian Chuming Stockbreeding Combo Development Co., Ltd., (6) Dalian
Chuming Fodder Co., Ltd., (7) Dalian Chuming Biological Technology Co., Ltd.,
and (8) Dalian Huayu Seafood Food Co., Ltd. The Company and the aforementioned
related parties share common beneficial ownership. All related party
transactions are conducted between Chuming WFOE and the Group. All transactions
with related parties are generally performed at arm’s length, and in 2008, all
such transactions were conducted at arm’s length.




Management
believes that these transactions are material to our operations and
results.  For further details concerning the nature of these
transactions, refer to footnote 5 in the Notes to Consolidated Financial
Statements as at and for the years ended December 31, 2008, 2007 and
2006.   Paragraph 2(c) of the Statement of Financial Accounting
Standards No. 57 (SFAS 57) requires us to disclose in our financial statements
the dollar amounts of each of the periods presented, as well as the effect of
any change in the method of establishing the terms from that used in the
preceding period, for our related-party transactions.  Due to certain
limitations in our historical records heading up to the end of fiscal 2007, the
present capacity of our accounting staff, and the fact that our historical
records relating to these related party transactions are manually-based, we have
presented these related party transactions according to their general category
and current balance, and each such balance may represent a series of prior
transactions culminating in such balance.  The Company and management
acknowledge our responsibility to comply with the requirements of SFAS 57, and
fully intend to take all necessary steps to update our accounting systems and
procedures in order to achieve such compliance on an ongoing
basis.  Specifically, we intend to update our systems and methods of
tracking related party transactions, by adding appropriate accounting staff to
enhance our capabilities, and put in place procedures to track and record all
relevant aspects of our related party transactions as necessary to comply with
the requirements of SFAS 57 and the SEC disclosure rules.




The
Company believes that its related-party transactions with the Group, as a whole,
have a significant bearing on our financial results.  As of December
31, 2008, approximately 58% of our supply of live hogs was acquired from the
Group.  Accordingly, our cost of sales is significantly correlated
with our hog purchasing arrangement with the Group.  The hogs that
were purchased from the Group comprised 49% and 52% of our total cost of sales
for the years 2008 and 2007, respectively.  The remainder of our
supply of hogs was purchased by us directly from breeders, whom we provide
training and technical advice to help ensure quality.




Due to
the non-exclusive roles of Mr. Shi as our CEO and the principal executive
officer of the Group, with whom we conduct business from time to time, potential
conflicts of interest may arise. In particular, situations might arise in which
we transact business with the Group, and certain terms of agreements might be
favorable to us, but conversely unfavorable to the Group, and vice versa.
In order to effectively handle such conflict of interest scenarios, our
management intends to submit all related party transactions to our independent
board of directors, or appropriate committee of the board, for review and
approval.




66


The
“Chuming” trademark and rights to the “Huayu” trademark application in the PRC
are owned by Dalian Chuming Industry Development Co., Ltd., a subsidiary of the
Group. We have been granted a perpetual fully paid up license to use both of
these trademarks in connection with our business, under two trademark agreements
with Dalian Chuming Industry Development Co., Ltd.




On
December 17, 2007, we entered into a Long-Term Hog Procurement Agreement
with the Group, our former parent. This agreement specifies that the
Group should supply no less than 800,000 live hogs in 2009 and 800,000 in 2010,
and the price for the hogs is at the fair market price at the time of
acquisition.




In 2004, we obtained a loan of
$20,466,901 (RMB 160,000,000) from the Group, which in turn, obtained these
funds in a joint loan commitment from both China Development Bank and Shenzhen
Development Bank (“Banks”) via a collateralized loan. The Group
collateralized the loan by purchasing a bond from China Export and Credit
Insurance Corporation (“Bond Issuer”). The bond guarantees to the Banks the
entire principal and accrued interest of the loan. The cost of the bond is RMB
1,000,000 annually, or in USD: $120,668, 121,902, and 125,284 for the years
2004, 2005, and 2006, respectively, which was paid by us. The loan carries a
fixed interest of 5.76% per annum. We pledged both land use rights and buildings
to the Bond Issuer. We pursued a loan from the Group as the financing solution
of choice because our tangible assets, at the time of origination, were
insufficient to collateralize the loan. Additionally, we at that time lacked the
favorable credit history to directly establish credit facility with the
bank.




At
December 31, 2007, we repaid the debt in its entirety to the Group by setting
off receivables owed by the Group to us. We repaid the loan in order to meet the
requirements of the equity financing transaction detailed in Note 18 of our
financial statements included in this report. The balances are now owed
by the Group to the Banks, and liability for paying the bonding insurance
annually lies with the Group. The pledged collateral of land use rights and
buildings made to the Bond Issuer still underlie the loan currently owed by the
Group, and as such, our assets, namely the buildings and land use rights are at
risk if the Group were to default on this loan.




At December 31, 2008, the Company
had the following short term loans outstanding:







Bank
            
            Interest
      Rate
            
            Due
      Date
            
            AmountBank
      of China
            
            
            6.1586
            %
            10/26/2009
            
            $
            4,376,878Bank
      of China
            
            
            7.3260
            %
            10/17/2009
            
            
            2,042,543$
            6,419,422






The loan
provided by the Bank of China is secured by the Meat Company’s land use rights,
which have been appraised at a fair market value of $5,605,611 (RMB 41,000,000).
The Shanghai Pudong Development Bank loan has been guaranteed by the
Group.




ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





As
approved by our Board of Directors, we dismissed MantylaMCREYNOLDS
LLC (“McReynolds”) as our independent auditors effective February 06,
2008.  McReynolds served as our independent auditors for the fiscal
years ended December 31, 2006 and December 31, 2005 and for the quarterly
review for 2006. On February 06, 2008, we engaged Samuel H. Wong & Co., LLP
(“Wong & Co.”) as our outside independent accounting firm for the fiscal
years ended December 31, 2007 and December 31, 2008.




67




The
following table sets forth fees billed to us by our current auditors, Samuel H.
Wong & Co., LLP, during the fiscal years ended December 31, 2007 and
December 31, 2008 for: (i) services rendered for the audit of our
annual financial statements and the review of our quarterly financial
statements, (ii) services by our auditor that are reasonably related to the
performance of the audit or review of our financial statements and that are not
reported as Audit Fees, (iii) services rendered in connection with tax
compliance, tax advice and tax planning, and (iv) all other fees for
services rendered.




December 31,
              2008
            
            
            December 31,
              2007(i)     
      Audit Fees
            
            $
            152,816
            
            
            $
            204,817(ii)    
      Audit Related Fees
            
            
            -
            
            
            
            -(iii)   
      Tax Fees
            
            
            -
            
            
            
            -(iv)   
      All Other Fees
            
            
            -
            
            
            
            -Total
      fees
            
            $
            152,816
            
            
            $
            204,817





Fees for
audit services include fees associated with the annual audit and the review of
documents filed with the SEC including quarterly reports on Form 10-Q and the
annual report on Form 10-K. Audit-related fees principally included accounting
consultation and information system control reviews. Tax fees included tax
compliance, tax advice and tax planning work.





PART
IV





ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





(1) Financial
Statements





The
following consolidated financial statements of Energroup Holdings Corporation
are included in Part II, Item 8 of this Report:





Consolidated
      Balance Sheets as of December 31, 2008, 2007 and 2006Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007 and
      2006Consolidated
      Statements of Changes in Stockholders’ Equity for the years Ended December
      31, 2008, 2007 and 2006Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006Notes
      to Consolidated Financial Statements




(2)
Financial Statement Schedules




Schedules
are omitted because the required information is not present or is not present in
amounts sufficient to require submission of the schedule or because the
information required is given in the consolidated financial statements or the
notes thereto.





68


(3)
Exhibits








EXHIBIT
INDEX




Exhibit
              Number
            
            Description2.1
            
            Share
      Exchange Agreement by and among the Company, PSI and PSI Shareholders
      dated December 2007 (1)2.2
            
            Articles
      and Plan of Merger (change in domicile from Utah to Nevada)
      (2)3.1
            
            Articles
      of Incorporation of  Energroup Holdings Corporation
    (4)3.2
            
            Bylaws
      of Energroup Holdings Corporation (4)3.3
            
            Articles
      of Amendment to Articles of Incorporation of  Energroup Holdings
      Corporation (4)3.4
            
            Articles
      of Amendment to Articles of Incorporation of Energroup Technologies, Inc.
      (Reverse Split) (2)3.5
            
            Articles
      of Incorporation of Energroup Holdings Corporation (2)3.6
            
            Certificate
      of Amendment to Articles of Incorporation of Energroup Holdings
      Corporation (Reverse Split) (3)4.1
            
            Registration
      Rights Agreement dated December 2007 among Energroup and the investors
      signatory thereto (1)4.2
            
            Form
      of Common Stock Purchase Warrant issued to Placement Agent (December 2007)
      (1)10.1
            
            Lockup
      Agreement dated December 2007 among Energroup and the Shareholders
      signatory thereto (1)10.2
            
            Executive
      Employment Agreement dated December 2007 between Energroup and Mr. Shi
      Huashan (1)10.3
            
            Executive
      Employment Agreement dated December 2007 between Energroup and Ms. Wang
      Shu (1)10.4
            
            Executive
      Employment Agreement dated December 2007 between Energroup and Mr. Chen
      Fuyuan (1)10.5
            
            Executive
      Employment Agreement dated September 2008 between Energroup and Mr. Yizhao
      Zhang  (5)10.6
            
            Long-Term
      Hog Procurement Agreement dated December 17,2007 between Dalian Chuming
      Group Co., Ltd. and Dalian Chuming Slaughter and Packaging Pork Company,
      Ltd. (1)10.7
            
            Trademark
      License Contract (Chuming) dated December 2007 (English translation)
      (1)10.8
            
            Trademark
      License Contract (Huayu) dated December 2007 (English translation)
      (1)10.9
            
            Securities
      Purchase Agreement dated December 2007 among Energroup, PSI, Chuming, and
      the investors signatory thereto (1)





10.10
            
            Make
      Good Escrow Agreement dated December 2007 among Energroup, Make Good
      Pledgor, Escrow Agent and the investors signatory thereto
    (1)10.11
            
            Holdback
      Escrow Agreement dated December 2007 among Energroup, Escrow Agent and the
      investors signatory thereto (1)10.12
            
            Loan
      Agreement between Dalian Chuming Food Co. Ltd. and Bank of China dated
      November 2008*10.13
            
            Loan
      Agreement between Dalian Chuming Meat Co. Ltd. and Bank of China dated
      November 2008*14.1
            
            Code
      of Ethics*24.1
            
            Power
      of Attorney (included as part of the signature pages to this registration
      statement)31.1
            
            Certification
      by Chief Executive Officer pursuant to Sarbanes-Oxley Section
      302*




69




31.2
            
            Certification
      by Chief Financial Officer pursuant to Sarbanes-Oxley Section
      302*32.1
            
            Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section
    1350*32.2
            
            Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section
    1350*







*
            Filed
      herewith.





(1)
            Previously
      filed with our Current Report on Form 8-K on January 7, 2008 and
      incorporated herein by reference.





(2)
            Previously
      filed with our Current Report on Form 8-K on August 22, 2007 and
      incorporated herein by reference.





(3)
            Previously
      filed with our Current Report on Form 8-K on December 14, 2007 and
      incorporated herein by reference.





(4)
            Previously
      filed with our General form for registration of securities under the
      Securities Act of 1933 on Form S-1 on February 11, 2008 and incorporated
      herein by reference.





(5)
            Previously
      filed with our Current Report on Form 8-K on September 24, 2008 and
      incorporated herein by reference.




70




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 31st day of March,
2009.


ENERGROUP
      HOLDINGS CORPORATIONBy:
              /s/
      Shi HuashanShi
      HuashanPresident,
      Chief Executive Officer
                and
      Chairman of the Board




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:




Signature
              
              Title
              
              Date/s/
      Shi Huashan
              
              Chief
      Executive Officer,
              
              March
      31, 2009Shi
      Huashan
              
              President,
      and Director
                (Principal
      Executive Officer)/s/
      Wang Shu
              
              Chief
      Financial Officer and Director
              
              March
      31, 2009Wang
      Shu
              
              (Principal
      Financial and Accounting Officer)/s/
      Wang Shuying
              
              Director
              
              March
      31, 2009Wang
      Shuying/s/
      Ma Fengqin
              
              Director
              
              March
      31, 2009Ma
      Fengqin




71