UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10−Q




(Mark
One)




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




For the
quarterly period ended: March 31, 2010




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:   001-34512




YUHE
INTERNATIONAL, INC.


(Exact
name of Registrant as Specified in its Charter)




Nevada
                  
                  33-0215298(State
      or other jurisdiction of
                    incorporation
      or organization)
                  
                  (I.R.S.
      Employer Identification.
No.)




301
Hailong Street


Hanting
District, Weifang, Shandong Province


The
People’s Republic of China


(Address
of principal executive offices)




86
536 736 3688


(Registrant’s
Telephone Number)





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




Yes  x   No
o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).       Yes o    No
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 o   Non-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 Exchange Act).




Yes  o    No  x




The
number of shares outstanding of each of the issuer’s classes of common equity as
of March 31, 2010 is as follows:




Class
      of Securities
                  
                  Shares
      OutstandingCommon
      Stock, $0.001 par value
                  
                  15,809,563










TABLE
OF CONTENTS




PagePART
      I FINANCIAL INFORMATIONItem
      1.
                    Financial
      Statements
                    
                    F-1Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    3Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    9Item
      4.
                    Controls
      and Procedures
                    
                    9PART
      II OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    
                    11Item
      1A.
                    Risk
      Factors
                    
                    11Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    11Item
      3.
                    Defaults
      Upon Senior Securities
                    
                    11Item
      4.
                    Reserved
                    
                    11Item
      5.
                    Other
      Information
                    
                    11Item
      6.
                    Exhibits
                    
                    12Signatures
                    
                    
                    13




2





PART
I


FINANCIAL
INFORMATION




ITEM
1. FINANCIAL STATEMENTS.





YUHE
INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS




FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009




Index to
condensed consolidated financial statements




PageCondensed
      Consolidated Balance Sheets - unaudited
                    
                    F-2Condensed
      Consolidated Statements of Income and Comprehensive Income -
      unaudited
                    
                    F-4Condensed
      Consolidated Statements of Cash Flows - unaudited
                    
                    F-5Notes
      to the Condensed Consolidated Financial Statements -
    unaudited
                    
                    F-7




F-1





YUHE
INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED BALANCE SHEETS




(Stated
in US Dollars)




March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      15,710,565
                      
                      
                      $
                      14,047,147Accounts
      receivable, net of allowances of $18,871 and $18,868
                      
                      
                      838
                      
                      
                      
                      838Inventories
                      
                      
                      8,268,393
                      
                      
                      
                      6,560,783Advances
      to suppliers
                      
                      
                      359,927
                      
                      
                      
                      359,179Deferred
      tax assets
                      
                      
                      15,167
                      
                      
                      
                      17,766Total
      current assets
                      
                      
                      24,354,890
                      
                      
                      
                      20,985,713Plant
      and equipment, net
                      
                      
                      29,433,188
                      
                      
                      
                      29,556,712Deposits
      paid for acquisition of long term assets
                      
                      
                      16,213,668
                      
                      
                      
                      16,082,613Notes
      receivable, net and other receivable, net
                      
                      
                      46,818
                      
                      
                      
                      33,635Unlisted
      investments held for sale
                      
                      
                      300,220
                      
                      
                      
                      300,172Intangible
      assets, net
                      
                      
                      2,835,473
                      
                      
                      
                      2,851,411Net
      investment in direct financing lease
                      
                      
                      390,907
                      
                      
                      
                      382,742Long
      term prepaid rent
                      
                      
                      6,544,822
                      
                      
                      
                      6,570,038Total
      assets
                      
                      $
                      80,119,986
                      
                      
                      $
                      76,763,036LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                      
                      $
                      5,687,433
                      
                      
                      $
                      5,740,912Current
      portion of long term loans
                      
                      
                      2,311,259
                      
                      
                      
                      9,433,686Other
      payable
                      
                      
                      1,459,548
                      
                      
                      
                      1,343,901Accrued
      expenses and payroll related liabilities
                      
                      
                      2,564,740
                      
                      
                      
                      2,366,134Advances
      from customers
                      
                      
                      655,302
                      
                      
                      
                      678,366Other
      taxes payable
                      
                      
                      152,626
                      
                      
                      
                      150,764Loan
      from director
                      
                      
                      292,564
                      
                      
                      
                      292,517Other
      liabilities
                      
                      
                      143,972
                      
                      
                      
                      143,949Due
      to related companies
                      
                      
                      1,208
                      
                      
                      
                      1,208Total
      current liabilities
                      
                      
                      13,268,652
                      
                      
                      
                      20,151,437Non-current
      liabilitiesLong-term
      loans
                      
                      
                      8,484,371
                      
                      
                      
                      1,360,206Total
      liabilities
                      
                      
                      21,753,023
                      
                      
                      
                      21,511,643





F-2




YUHE
INTERNATIONAL, INC.




CONSOLIDATED
BALANCE SHEETS




(Stated
in US Dollars)




Stockholders'
      Equity:Preferred
      stock, $.001 par value, 1,000,000 shares authorized, no shares issued and
      outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock at $.001 par value; 500,000,000 shares authorized, 15,809,563 and
      15,722,180 equivalent shares issued and outstanding at March 31, 2010 and
      December 31, 2009, respectively
                  
                  
                  15,809
                  
                  
                  
                  15,722Additional
      paid-in capital
                  
                  
                  30,852,457
                  
                  
                  
                  30,672,849Retained
      earnings
                  
                  
                  26,243,794
                  
                  
                  
                  23,316,794Accumulated
      other comprehensive income
                  
                  
                  1,254,903
                  
                  
                  
                  1,246,028Total
      stockholders’ equity
                  
                  
                  58,366,963
                  
                  
                  
                  55,251,393Total
      liabilities and stockholders’ equity
                  
                  $
                  80,119,986
                  
                  
                  $
                  76,763,036




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




F-3




YUHE INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)




(Stated
in US Dollars)




Three Months Ended March 31,2010
                      
                      
                      2009Net
      revenue
                      
                      $
                      11,756,917
                      
                      
                      $
                      10,914,390Cost
      of revenue
                      
                      
                      (7,856,562
                      )
                      
                      
                      (6,852,353
                      )Gross
      profit
                      
                      
                      3,900,355
                      
                      
                      
                      4,062,037Operating
      ExpensesSelling
      Expenses
                      
                      
                      (110,947
                      )
                      
                      
                      (92,940
                      )General
      and administrative expenses
                      
                      
                      (820,516
                      )
                      
                      
                      (743,990
                      )Total
      operating expenses
                      
                      
                      (931,463
                      )
                      
                      
                      (836,930
                      )Income
      from operations
                      
                      
                      2,968,892
                      
                      
                      
                      3,225,107Non-operating
      income (expenses)Interest
      income
                      
                      
                      58
                      
                      
                      
                      96Other
      income (expenses)
                      
                      
                      10,989
                      
                      
                      
                      (465
                      )Investment
      income
                      
                      
                      15,612
                      
                      
                      
                      15,509Interest
      expenses
                      
                      
                      (65,950
                      )
                      
                      
                      (325,427
                      )Total
      other income (expenses)
                      
                      
                      (39,291
                      )
                      
                      
                      (310,287
                      )Net
      income before income taxes
                      
                      
                      2,929,601
                      
                      
                      
                      2,914,820Income
      tax expense
                      
                      
                      (2,601
                      )
                      
                      
                      -Net
      income
                      
                      $
                      2,927,000
                      
                      
                      $
                      2,914,820Other
      comprehensive incomeForeign
      currency translation
                      
                      
                      8,875
                      
                      
                      
                      48,272Comprehensive
      income
                      
                      $
                      2,935,875
                      
                      
                      $
                      2,963,092Earnings
      per shareBasic
                      
                      $
                      0.19
                      
                      
                      $
                      0.19Diluted
                      
                      $
                      0.18
                      
                      
                      $
                      0.19Weighted
      average shares outstandingBasic
                      
                      
                      15,735,773
                      
                      
                      
                      15,722,180Diluted
                      
                      
                      16,056,599
                      
                      
                      
                      15,722,180




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




F-4





YUHE
INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS




(UNAUDITED)




(Stated
in US Dollars)




Three Months Ended March 31,2010
                      
                      
                      2009Cash
      flows from operating activitiesNet
      income
                      
                      $
                      2,927,000
                      
                      
                      $
                      2,914,820Adjustments
      to reconcile net income to net cash provided by operating
      activities:Stock
      based compensation
                      
                      
                      179,608
                      
                      
                      
                      179,712Depreciation
                      
                      
                      553,496
                      
                      
                      
                      500,545Amortization
                      
                      
                      16,397
                      
                      
                      
                      16,372Capitalized
      interest in construction in progress
                      
                      
                      (206,063
                      )
                      
                      
                      -Income
      from unlisted investment
                      
                      
                      (15,612
                      )
                      
                      
                      -Gain
      on disposal of property, plant and equipment
                      
                      
                      176
                      
                      
                      
                      -Changes
      in operating assets and liabilities:Inventories
                      
                      
                      (1,706,572
                      )
                      
                      
                      (423,234
                      )Advances
      to suppliers
                      
                      
                      2,489
                      
                      
                      
                      (71,013
                      )Deferred
      tax assets
                      
                      
                      2,601
                      
                      
                      
                      9,443Long
      term prepaid rent
                      
                      
                      26,273
                      
                      
                      
                      -Accounts
      payable
                      
                      
                      (54,403
                      )
                      
                      
                      1,049,384Other
      payable
                      
                      
                      115,430
                      
                      
                      
                      286,867Accrued
      expenses and payroll related liabilities
                      
                      
                      198,272
                      
                      
                      
                      (127,994
                      )Advances
      from customers
                      
                      
                      (23,172
                      )
                      
                      
                      51,425Other
      taxes payable
                      
                      
                      1,839
                      
                      
                      
                      616Change
      in net investment in direct financing lease
                      
                      
                      (8,104
                      )
                      
                      
                      -Net
      cash provided by operating activities
                      
                      
                      2,009,655
                      
                      
                      
                      4,386,943Cash
      flows from investing activitiesDeposit
      paid and acquisition of property, plant and equipment
                      
                      
                      (332,155
                      )
                      
                      
                      (41,133
                      )Advance
      to notes receivable
                      
                      
                      -
                      
                      
                      
                      (335
                      )Repayment
      of notes receivable
                      
                      
                      (16,357
                      )
                      
                      
                      -Proceeds
      received from related parties receivables
                      
                      
                      -
                      
                      
                      
                      41,442Net
      cash used in investing activities
                      
                      
                      (348,512
                      )
                      
                      
                      (26
                      )





F-5




YUHE
INTERNATIONAL, INC.




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)




(Stated
in US Dollars)




Cash
      flows from financing activitiesProceeds
      from related party payable
                      
                      
                      -
                      
                      
                      
                      275,336Net
      cash flows provided by financing activities:
                      
                      
                      -
                      
                      
                      
                      275,336Effect
      of foreign currency translation on cash and cash
    equivalents
                      
                      
                      2,275
                      
                      
                      
                      17,521Net
      increase in cash
                      
                      
                      1,663,418
                      
                      
                      
                      4,679,774Cash-
      beginning of period
                      
                      
                      14,047,147
                      
                      
                      
                      13,412,205Cash-
      end of period
                      
                      $
                      15,710,565
                      
                      
                      $
                      18,091,979Cash
      paid during the period for:Interest
      paid
                      
                      $
                      231,576
                      
                      
                      $
                      357,632Supplemental
      disclosureTransfer
      of construction in progress to fixed assets
                      
                      $
                      -
                      
                      
                      $
                      1,831,131Cashless
      exercise of 142,816 warrants
                      
                      $
                      87
                      
                      
                      $
                      -




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




F-6




1.
            Basis
      of presentation





The
interim condensed consolidated financial statements included herein, presented
in accordance with United States generally accepted accounting principles and
stated in US dollars, have been prepared by the Company, pursuant to the rules
and regulations of the Securities and Exchange Commission. These statements
reflect all adjustments, consisting of normal recurring adjustments, which, in
the opinion of management, are necessary for fair presentation of the
information contained therein.  These interim condensed consolidated
financial statements should be read in conjunction with the financial statements
of the Company for the year ended December 31, 2009 and notes thereto included
in the Form 10-K of Yuhe International, Inc. filed on March 31,
2010.  The Company follows the same accounting policies in the
preparation of interim reports.


Results
of operations for the interim periods are not indicative of annual
results.




2.
            Organization
      and Basis of Preparation of Financial
Statements


Yuhe
International, Inc.




Yuhe
International, Inc., formerly known as First Growth Investors, Inc., “Yuhe” or
“the Company”, was originally organized under the laws of the State of Nevada on
September 9, 1997. Prior to its business combination with Bright Stand, the
Company was not engaged in any business activities and had no operations, income
producing assets or significant operating capital. At December 31, 2007, the
Company was at development stage until its business combination with Bright
Stand on March 12, 2008.




On March
12, 2008, the Company completed a reverse acquisition transaction with Bright
Stand International Limited, “Bright Stand”, and Kunio Yamamoto, a Japanese
person and the sole former shareholder of Bright Stand.




This
share exchange transaction resulted in Bright Stand’s former shareholder
obtaining a majority voting interest in the Company. Generally accepted
accounting principles require that the company whose shareholders retain the
majority interest in a combined business be treated as the acquirer for
accounting purposes, resulting in a reverse acquisition with Bright Stand as the
accounting acquirer and Yuhe International Inc. as the acquired party.
Accordingly, the share exchange transaction has been accounted for as a
recapitalization of the Company.




F-7




2.
              Organization
      and Basis of Preparation of Financial Statements –
    continued





Bright
Stand International Limited, “Bright Stand”




On August
3, 2007, Bright Stand International Limited, “Bright Stand”, was incorporated
with limited liability in the British Virgin Islands. On January 31, 2008,
Bright Stand International Limited completed the acquisition of 100% common
stock of Weifang Yuhe Poultry Co., Ltd., “PRC Yuhe” and 43.75% of Weifang
Taihong Feed Co., Ltd., “Taihong”. As a result, Bright Stand owned 100% of PRC
Yuhe and owned 43.75% direct interest of Taihong and 56.25% indirect interest of
Taihong through PRC Yuhe. PRC Yuhe and Taihong became the wholly-owned
subsidiaries of Bright Stand.




Weifang
Yuhe Poultry Co., Ltd., “PRC Yuhe”




Weifang
Yuhe Poultry Co., Ltd., “PRC Yuhe”, was established in Weifang, Shandong of the
People’s Republic of China, the “PRC”, as a limited company on March 8, 1996.
PRC Yuhe is a supplier of day-old chicken raised for meat production, or
broilers, in the People’s Republic of China.




Weifang
Taihong Feed Co., Ltd., “Taihong”




Weifang
Taihong Feed Co., Ltd. was established in Weifang, Shandong of the People’s
Republic of China, the “PRC”, as a limited company on May 26, 2003. Taihong is a
feed stock company whose primary purpose is to supply feed stock for PRC Yuhe’s
breeder chicken.




The
Company’s operations are conducted through its subsidiaries in the People’s
Republic of China, PRC Yuhe, and Taihong. The Company and its subsidiaries,
hereinafter, collectively referred to as “the Group”, are engaged in the
business of chicken and feed production.




F-8




3.
            Summary
      of significant accounting policies





(a)
Principles of consolidation




The
condensed consolidated financial statements, prepared in accordance with
generally accepted accounting principles in the United States of America,
include the assets, liabilities, revenues, expenses and cash flows of the
Company and all its subsidiaries. This basis of accounting differs in certain
material respects from that used for the preparation of the books and records of
the Company’s principal subsidiaries, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liabilities established in the PRC, “PRC GAAP”, the
accounting standards used in the place of their domicile.  The accompanying
consolidated financial statements reflect necessary adjustments not recorded in
the books and records of the Company’s subsidiaries to present them in
conformity with generally accepted accounting principles in the United States of
America.




The
condensed consolidated financial statements of the Company include the accounts
of Yuhe International, Inc, Bright Stand International Limited, Weifang Yuhe
Poultry Co., Ltd and Weifang Taihong Feed Co., Ltd. after the date of
acquisitions. All significant intercompany accounts, transactions and cash flows
are eliminated on consolidation.




(b) Use
of estimates




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




F-9




3.
            Summary
      of significant accounting policies –
continued





(c) Basic
and diluted earnings per share




The
Company reports basic earnings per share in accordance with the FASB accounting
standard. Basic earnings per share is computed using the weighted average number
of shares outstanding during the periods presented. The weighted average number
of shares of the Company represents the common stock outstanding during the
reporting periods.




Diluted
earnings per share is based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the year.




Fair
Value Measurements




In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. The guidance for
Level 3 reconciliation disclosures will be effective for annual and interim
periods beginning after December 15, 2010. The Company will adopt this guidance
at the beginning January 1, 2011. Adoption will not have a material impact on
the Company’s consolidated financial statements.




F-10




4.
              Inventories


Inventories
consist of the following:




March 31
                    
                    
                    December 312010
                    
                    
                    2009(unaudited)Raw
      materials
                    
                    $
                    5,876,166
                    
                    
                    $
                    5,275,629Work
      in progress
                    
                    
                    2,392,227
                    
                    
                    
                    1,285,154Finished
      goods
                    
                    
                    -
                    
                    
                    
                    -$
                    8,268,393
                    
                    
                    $
                    6,560,783




F-11




5.
            Unlisted
      investments





Unlisted
investments at March 31, 2010 and December 31, 2009 represent the 3% investment
in Hanting Rural Credit Cooperative, “Hanting”, which was recorded at
cost.  For the three months ended March 31, 2010 and 2009, the Company
recorded $15,612 and $15,509, respectively, as income from unlisted investment
for dividends received from Hanting.   Management of the Company has
reviewed the investment in Hanting for impairment and determined there is no
indication that the carrying amount of Hanting may not be
recoverable.




6.
            Plant
      and equipment, net





Plant and
equipment consists of the following:




March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)At
      costBuildings
                    
                    $
                    19,233,037
                    
                    
                    $
                    19,071,808Machinery
                    
                    
                    6,018,162
                    
                    
                    
                    6,006,596Motor
      vehicles
                    
                    
                    120,089
                    
                    
                    
                    120,069Furniture
      and equipment
                    
                    
                    107,824
                    
                    
                    
                    102,15425,479,112
                    
                    
                    
                    25,300,627Less:
      accumulated depreciation
                    
                    
                    (4,266,319
                    )
                    
                    
                    (3,716,677
                    )21,212,793
                    
                    
                    
                    21,583,950Construction
      in progress
                    
                    
                    8,220,395
                    
                    
                    
                    7,972,762$
                    29,433,188
                    
                    
                    $
                    29,556,712




During
the three months ended March 31, 2010, depreciation expenses amounted to
$553,496, of which $499,608 and $53,888 were recorded as cost of sales and
administrative expense, respectively.




F-12




During
the three months ended March 31, 2009, depreciation expenses amounted to
$500,545, of which $444,333 and $56,212 were recorded as cost of sales and
administrative expense, respectively.




6.
            Plant
      and equipment, net – continued





Capitalized
interest expense included in construction in progress totaled $206,063 and $0
for the three months ended March 31, 2010 and 2009, respectively.




As of
March 31, 2010 and December 31, 2009, buildings and machinery of the Company
with net book value of $383,233 and $556,178, respectively, were pledged as
collateral under certain loan arrangements (Note 12).




7.
            Deposits
      paid for acquisition of long term
assets





Deposits
paid consist of the following:




March
      31,
                      
                      
                      December
      31,2010
                      
                      
                      2009(unaudited)Deposit
      paid for purchase of buildings
                      
                      $
                      12,141,426
                      
                      
                      $
                      12,139,473Deposits
      paid for construction in progress
                      
                      
                      385,348
                      
                      
                      
                      218,336Deposits
      paid for purchase of equipment
                      
                      
                      3,686,894
                      
                      
                      
                      3,724,804Total
      Deposits paid for acquisition of long term assets
                      
                      $
                      16,213,668
                      
                      
                      $
                      16,082,613





F-13




8.
              Intangible
      assets, net




Intangible
assets consist of the following:




March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Land
      use rights, at cost
                    
                    $
                    2,977,577
                    
                    
                    $
                    2,977,098Less:
      accumulated amortization
                    
                    
                    (142,104
                    )
                    
                    
                    (125,687
                    )$
                    2,835,473
                    
                    
                    $
                    2,851,411




As of
March 31, 2010 and December 31, 2009, land use rights of the Company with net
book value of $2,835,473 and $2,851,411, respectively, were pledged as
collateral under certain loan arrangements.




During
the three months ended March 31, 2010 and 2009, amortization expenses included
in the cost of sales were $16,397 and $16,371, respectively.




The
estimated aggregate amortization expenses for the land use right for the five
succeeding years are as follows:




YearRemainder
      of 2010
                  
                  $
                  49,1902011
                  
                  
                  65,5862012
                  
                  
                  65,5862013
                  
                  
                  65,5862014
                  
                  
                  65,586thereafter
                  
                  
                  2,523,939$
                  2,835,473




F-14




9.
              Due
      to related companies





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Others
                    
                    $
                    1,208
                    
                    
                    $
                    1,208




The
amounts due to related companies are unsecured, interest free and have no fixed
repayment date.  These loans are used for working capital
purposes.




10.
            Loan
      from director





Loan from
director totaled $292,564 (original loan amount: Rmb2,000,000) at March 31, 2010
and December 31, 2009 representing bank loan principal borrowed by a director on
behalf of the Company.  The loan is due on November 26, 2011 and bears
interest at 8.19% per annum.




11.
            Other
      payable





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Interest
      payable
                      
                      $
                      69,204
                      
                      
                      $
                      69,193Deposits
      received
                      
                      
                      554,324
                      
                      
                      
                      471,344Others
                      
                      
                      836,020
                      
                      
                      
                      803,364$
                      1,459,548
                      
                      
                      $
                      1,343,901




Deposit
received represent deposits collected from customers as security for
non-payment.




Others
represents apartment rental reimbursement to staff and insurance
payable.




F-15




12.
            Long-term
      loans





The
long-term loans are denominated in Chinese Renminbi and are presented in US
dollars as follows:




March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Loans
      from Nansun Rural Credit, interest rate at 7.56%  to 8.64% per
      annum, the various loans are due on May 17, 2010, Dec 10, 2011, Jan 26,
      2013 and Mar 16, 2013
                    
                    $
                    8,776,935
                    
                    
                    
                    8,775,521Loan
      from Shuangyang Rural Credit, interest rate at 9.83% per annum, due on Oct
      13, 2010
                    
                    
                    950,835
                    
                    
                    
                    950,682Loan
      from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 7.56% per
      annum, due on January 7, 2011
                    
                    
                    1,067,860
                    
                    
                    
                    1,067,68910,795,630
                    
                    
                    
                    10,793,892Less:
      current portion of long-term loans
                    
                    
                    (2,311,259
                    )
                    
                    
                    (9,433,686
                    )$
                    8,484,371
                    
                    
                    
                    1,360,206




Future
maturities of long-term loans as at March 31, 2010 are as follows:




March
      31,2011
                    
                    $
                    2,311,2592012
                    
                    
                    292,5642013
                    
                    
                    8,191,807$
                    10,795,630




F-16




13.
              Accrued
      expenses and payroll related
liabilities




March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(unaudited)Salary
                  
                  $
                  1,508,428
                  
                  
                  $
                  1,254,780Employee
      benefits
                  
                  
                  110,274
                  
                  
                  
                  102,385Others
                  
                  
                  -
                  
                  
                  
                  224,185Accrued
      expenses
                  
                  
                  946,038
                  
                  
                  
                  784,784$
                  2,564,740
                  
                  
                  $
                  2,366,134




Payroll
related liabilities represent accrued payroll and welfare benefits to
employees.




F-17




14.
              Income
      tax





The
Company was incorporated in Nevada and is subject to U.S. income tax at the
statutory tax rate of 34%.  No provision for income taxes have been
made for the U.S. entity as it has a taxable loss for the three months ended
March 31, 2010 and 2009. The Company has accumulated net operating loss
carry forward of $1,310,100 as of March 31, 2010. A full valuation allowance of
$445,434 has been provided against the deferred tax asset as of March 31,
2010.




Bright
Stand was incorporated in the British Virgin Islands and is not subject to
income taxes under the current laws of the British Virgin Islands.




PRC Yuhe
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of the PRC, the corporation income tax rate is 25%. However, PRC
Yuhe is an agricultural company, and in accordance with the relevant regulations
regarding tax exemption, it is tax-exempt as long as it is registered as an
agricultural entity.




Taihong
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of the PRC, the corporate income tax rate is 25%.




The
Company uses the asset and liability method, where deferred tax assets and
liabilities are determined based on the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. Taihong has a net operating loss
carry forward and temporary difference, which resulted in deferred tax assets of
$10,092 and $5,075, respectively, as of March 31, 2010.




F-18




14.
              Income
      tax – continued





The
provision for income taxes consists of the following:




For The Three Months EndedMarch 31,2010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)PRC
      (current)
                    
                    $
                    -
                    
                    
                    $
                    -Deferred
      tax-
      Deferred tax expenses
                    
                    
                    2,601
                    
                    
                    
                    2,445-
      Change in valuation allowance
                    
                    
                    -
                    
                    
                    
                    (2,445
                    )Income
      Tax Expenses
                    
                    $
                    2,601
                    
                    
                    $
                    -




Actual
income tax expenses reported in the consolidated statements of income and
comprehensive income differ from the amounts computed by applying the PRC
statutory income tax rate of 25% to income before income taxes for the three
months ended March 31, 2010 and 2009 for the following reasons:




F-19




14.
              Income
      tax - continued




For The Three Months EndedMarch 31,2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)Income
      before income taxes
                      
                      $
                      2,929,601
                      
                      
                      $
                      2,914,820Computed  “expected”
      income tax expense at 25%
                      
                      
                      732,400
                      
                      
                      
                      728,705Tax
      effect on permanent differences
                      
                      
                      (23,109
                      )
                      
                      
                      2,445Change
      in valuation allowance
                      
                      
                      -
                      
                      
                      
                      -Parent
      company losses for which no benefit has been recognized
                      
                      
                      96,837
                      
                      
                      
                      92,445Effect
      of tax holiday
                      
                      
                      (803,527
                      )
                      
                      
                      (823,595
                      )Income
      Tax Expenses
                      
                      $
                      2,601
                      
                      
                      $
                      -




F-20




14.
            Income
      tax - continued




The tax
effects of temporary differences and carryforwards that give rise to significant
portions of deferred tax assets as of March 31, 2010 and December 31, 2009, were
as follows:




As Of
                    
                    
                    As OfMarch 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Deferred
      tax assetsNet
      operating loss carryforwards
                    
                    $
                    10,092
                    
                    
                    $
                    12,691Bad
      debt allowance
                    
                    
                    5,075
                    
                    
                    
                    5,07515,167
                    
                    
                    
                    17,766Valuation
      Allowance
                    
                    
                    -
                    
                    
                    
                    -Total
      deferred tax assets
                    
                    $
                    15,167
                    
                    
                    $
                    17,766




F-21




14.
              Income
      tax – continued





On
January 1, 2008, the Company adopted FASB ASC 740.10, which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return. This interpretation also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures.




Through
March 31, 2010, the management considered that the Company had no uncertain tax
positions which affected its consolidated financial position and results of
operations or cash flow, and will continue to evaluate for the uncertain
position in future. There are no estimated interest costs and penalties provided
in the Company’s financial statements for the three months ended March 31, 2010
and 2009.




Cumulative
undistributed earnings of foreign subsidiaries, for which no U.S. income or
foreign withholding taxes have been recorded, approximated $27.8 million at
March 31, 2010.  As the company intends to indefinitely reinvest all
such earnings, no provision has been made for income taxes that may become
payable upon distribution of such earnings as allowed under ASC 740.30,
“Accounting for Income Taxes-Other considerations or special
areas”.




15.
            Fair value of financial
      instruments





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




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




F-22




16.
              Common
      stock and warrants





(a)  Common
Stock




Total
common stock issued and outstanding of the Company as at March 31, 2010 and
December 31, 2009 are 15,809,563 and 15,722,180 shares,
respectively.




(b)  Warrants




On March
18, 2010, the Company issued 87,383 of common shares to WLT Brothers Capital,
Inc as a result of its cashless exercise of 142,816 warrants issued to
it.  There are no warrant outstanding as at March 31,
2010.




17.
            Stock
      options





As at
March 31, 2010, the total number of stock options outstanding was 383,151
shares.  The Company recognizes compensation expense, net of estimated
forfeitures, over the requisite service period, which is the period during which
the grantee is required to provide services in exchange for the
award.  The Company has elected to recognize compensation cost for
awards with only a service condition that has a graded vesting schedule on a
straight-line basis over the requisite service period for the entire
award.




The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of 109.40%, and a risk-free interest rate of 3.00%. In
determining volatility of the Company’s options, the Company used the average
volatility of the Company’s stock. Fair value per the Black-Scholes model is
$2,186,499. In accordance with FASB ASC 718, the Company has recorded
stock-based compensation expense during the three months ended March 31, 2010
and 2009, of $179,695 and $179,712, respectively, in connection with the
issuance of this option.




The
weighted average grant date fair value of options granted was $5.71 per
share.  The weighted average exercise price of these options was
$3.708 per share.  The total number of stock options outstanding as at
March 31, 2010 and December 31, 2009 was 383,151 shares.




F-23




17.
              Stock
      options – continued





Following
is a summary of the status of options outstanding at March 31,
2010:




Options outstanding
                            
                            
                            Options exercisableExerciseprice
                            
                            Numberoutstanding
                            
                            
                            Weightedaverageremainingcontractual life(years)
                            
                            
                            Weightedaverageexercise price
                            
                            
                            Numberexercisable
                            
                            
                            Weightedaverageremaining
                              contractual life(years)
                            
                            
                            Weightedaverageexercise price$
                            3.708
                            
                            
                            383,151
                            
                            
                            
                            3.2
                            
                            
                            $
                            3.708
                            
                            
                            
                            127,589
                            
                            
                            
                            3.2
                            
                            
                            $
                            3.708





F-24




18.
              Earnings
      per share





Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period.  Diluted earnings per
share is computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period.  The following table sets forth the computation of basic
and diluted net income per share:




For The Three Months EndedMarch 31,2010
                  
                  
                  2009(unaudited)
                  
                  
                  (unaudited)Net
      income attributable to the common stockholders
                  
                  $
                  2,927,000
                  
                  
                  $
                  2,914,820Weighted
      average outstanding shares of common stock
                  
                  
                  15,735,773
                  
                  
                  
                  15,722,180Dilutive
      effect of options, warrants, and contingently issuable
    shares
                  
                  
                  320,826
                  
                  
                  
                  -Common
      stock and common stock equivalents
                  
                  
                  16,056,599
                  
                  
                  
                  15,722,180Earnings
      per share:Basic
                  
                  $
                  0.19
                  
                  
                  $
                  0.19Diluted
                  
                  $
                  0.18
                  
                  
                  $
                  0.19




Basic and
diluted earnings per share are the same as there was no dilutive effect of the
warrants and stock options for the three months ended March 31,
2009.




F-25




19.
              Significant
      concentrations and risk





(a)  Customer
Concentrations




The
Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s gross sales:




For The Three Months EndedMarch 31,2010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)Wang
      Jianbo
                    
                    
                    14.01
                    %
                    
                    
                    *Wei
      Yunchao
                    
                    
                    12.38
                    %
                    
                    
                    *Li
      Chuanwang
                    
                    
                    10.18
                    %
                    
                    
                    *




*
Constitutes less than 10% of the Company’s gross sales.




The
Company has not experienced any significant difficulty in collecting its
accounts receivable in the past and is not aware of any financial difficulties
being experienced by its major customers.




The
Company has the following concentrations of business with each supplier
constituting greater than 10% of the Company’s purchase:




For The Three Months EndedMarch 31,2010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)Gao
      Ping
                    
                    
                    20.87
                    %
                    
                    
                    *Wang
      Jianbo
                    
                    
                    15.26
                    %
                    
                    
                    *Mao
      Shenlin
                    
                    
                    11.24
                    %
                    
                    *




*
Constitutes less than 10% of the Company’s purchase.




F-26




19.
              Significant
      concentrations and risk –
continued





(b)  Credit
Risk




Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents.  As of
March 31, 2010, substantially all of the Company’s cash and cash equivalents
were held by major financial institutions located in the PRC, which management
believes are of high credit quality.




(c)  Company’s
operations are in China




All of
the Company’s products are produced in China.  The Company’s
operations are subject to various political, economic, and other risks and
uncertainties inherent in China.  Among other risks, the Company’s
operations are subject to the risks of transfer of funds; domestic and
international customs and tariffs; changing taxation policies; foreign exchange
restrictions; and political conditions and governmental
regulations.




F-27




20.
              Business
      and geographical segments





The
Company’s operations are classified into two principal reportable segments that
provide different products or services.  PRC Yuhe is engaged in the
business of breeding chicken while Taihong is engaged in the business of feed
production, in which most of the products were used internally.  Separate
management of each segment is required because each business unit is subject to
different production and technology strategies.




Reportable
Segments




For The Three Months Ended
                  March 31, 2010
                  (unaudited)
                
                
                For The Three Months Ended
                  March 31, 2009
                  (unaudited)
                
                
                For The Three MonthsEnded March 31,
                  (unaudited)Productionof chicks
                
                
                Productionof feed
                
                
                Corporate
                
                
                Productionof chicks
                
                
                Productionof feed
                
                
                Corporate
                
                
                Total2010
                
                
                2009External
      revenue
                
                $
                11,696,185
                
                
                $
                60,732
                
                
                $
                -
                
                
                $
                10,827,844
                
                
                $
                86,546
                
                
                $
                -
                
                
                $
                11,756,917
                
                
                $
                10,914,390Intersegment
      revenue
                
                $
                -
                
                
                $
                1,739,994
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,405,913
                
                
                $
                -
                
                
                $
                1,739,994
                
                
                $
                2,405,913Interest
      income
                
                $
                58
                
                
                $
                -
                
                
                $
                -
                
                
                $
                89
                
                
                $
                7
                
                
                $
                -
                
                
                $
                58
                
                
                $
                96Interest
      expense
                
                $
                -
                
                
                $
                (65,950
                )
                
                $
                -
                
                
                $
                (115,401
                )
                
                $
                (210,026
                )
                
                $
                -
                
                
                $
                (65,950
                )
                
                $
                (325,427
                )Depreciation
      and amortization
                
                $
                (539,068
                )
                
                $
                (30,825
                )
                
                $
                -
                
                
                $
                (484,725
                )
                
                $
                (32,192
                )
                
                $
                -
                
                
                $
                (569,893
                )
                
                $
                (516,917
                )Net
      profit/(loss) after tax
                
                $
                3,214,105
                
                
                $
                100,240
                
                
                $
                (387,345
                )
                
                $
                3,294,380
                
                
                $
                (9,782
                )
                
                $
                (369,778
                )
                
                $
                2,927,000
                
                
                $
                2,914,820Expenditures
      for long-lived assets
                
                $
                332,155
                
                
                $
                -
                
                
                $
                -
                
                
                $
                482,916
                
                
                $
                60,463
                
                
                $
                -
                
                
                $
                332,155
                
                
                $
                543,379




Note:
Intersegment revenue of $1,739,994 was eliminated in consolidation.




The
Company’s operations are located in the PRC. All revenue is from customers in
the PRC.  All of the company’s assets are located in the PRC.
Accordingly, no analysis of the Company’s sales and assets by geographical
market is presented.




F-28




21.
              Commitments
      and contingencies





Operating
Leases - In the normal course of business, the Company leases the land for hen
houses under operating lease agreements. The Company rents land, primarily for
the feeding of the chicken. The operating lease agreements generally contain
renewal options that may be exercised at the Company’s discretion after the
completion of the base rental terms. The Company was obligated under operating
leases requiring minimum rentals as follows:




Remainder
      of year ended December 31,2010
                    
                    $
                    52,7932011
                    
                    
                    70,3912012
                    
                    
                    70,3912013
                    
                    
                    70,3912014
                    
                    
                    70,391Thereafter
                    
                    
                    1,252,070Total
      minimum lease payments
                    
                    
                    1,586,427




During
the three months ended March 31, 2010 and 2009, rental expenses were $51,576 and
$28,595, respectively.




F-29




21.
            Commitments
      and contingencies - continued




Total Considera-tion
                                                      
                                                      
                                                      Total AmountPaid as ofMarch 31, 2010
                                                      
                                                      
                                                      RemainingBalance as ofMarch 31, 2010
                                                      
                                                      Expected Dateof Payment
                                                      
                                                      Starting Dateof Project
                                                      
                                                      Date /ExpectedDate ofCompletion
                                                      
                                                      NotesConstruction of:Breeding
      Farm No. 1 and No. 28
                                                      
                                                      $
                                                      6,120,000
                                                      
                                                      
                                                      $
                                                      4,500,000
                                                      
                                                      
                                                      $
                                                      1,620,000
                                                      
                                                      Progressivelyfrom
      May2010
                                                      
                                                      May
      2005
                                                      
                                                      Set
      up bythe end ofFebruary 2010
                                                      
                                                      
                                                      -Steel
      Structural Surface for Hatchery No. 3
                                                      
                                                      
                                                      570,500
                                                      
                                                      
                                                      
                                                      277,940
                                                      
                                                      
                                                      
                                                      292,560
                                                      
                                                      July
      31, 2010
                                                      
                                                      December10,
      2008
                                                      
                                                      May
      2010
                                                      
                                                      
                                                      -Acquisition
      of 13 Breeder Farms
                                                      
                                                      
                                                      15,194,336
                                                      
                                                      
                                                      
                                                      12,141,426
                                                      
                                                      
                                                      
                                                      3,052,910
                                                      
                                                      End
      of December2010
                                                      
                                                      
                                                      -
                                                      
                                                      Acquired
      onDecember24, 2009
                                                      
                                                      Expected
      tospend$2.49m forrenovationConstruction
      of Breeding Farm and Equipment
                                                      
                                                      
                                                      2,486,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,486,000
                                                      
                                                      Progressivelyfrom
      May2010
                                                      
                                                      May
      2010
                                                      
                                                      January
      2011
                                                      
                                                      
                                                      -Total
                                                      
                                                      $
                                                      24,370,836
                                                      
                                                      
                                                      $
                                                      16,919,366
                                                      
                                                      
                                                      $
                                                      7,451,470





F-30




21.
            Commitments
      and contingencies - continued


Construction
of Breeding Farm No. 1 and No. 28




On August
15, 2008, PRC Yuhe completed construction work and facilities to set up the
southern farm of breeding farm No 1.  On August 30, 2008, PRC Yuhe
purchased 100,000 sets of parent breeders and began to feed.  By the end of
December 2008, PRC Yuhe has spent $4.5 million, approximately equivalent to
RMB29 million, to build breeding farm No 1.  The breeding farm can be split
into the southern and the northern regions.  The northern farm construction
work and facilities have been set up by the end of February 2010.  The
capacity of the northern factory is 130,000 sets of parent
broilers.  The residual payment is $0.9 million, approximately
equivalent to RMB6 million, for the building and facilities; and $0.72 million,
approximately equivalent to RMB 4.9 million, in machinery and is scheduled to be
paid progressively from May 2010. On March 1, 2010, PRC Yuhe completed
construction work and facilities of breeding farm no. 28.  This
breeder farm covers an area of 20.6 acres (125 mu) and has capacity for 130,000
parent breeders.




Construction
of Breeding Farm No. 2, 3, 5, 6, and 7




On
December 6, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build and renovate five of its breeding farms for a total
consideration of $380,000, approximately equivalent to RMB2.6 million. The
construction has been completed at the end of October 2009.  The
residual payment of $87,770, approximately equivalent to RMB600,000, has been
paid by the end of March 2010.




Construction
of Steel Structural Surface for Hatchery No. 3




On
December 10, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build the steel structure for its hatchery farm No. 3 for a total
consideration of $570,500, approximately equivalent to RMB3.9 million. The
estimated completion date of construction is postponed to May 2010 because of
the cold weather and construction will start once the weather is getting
warm.  The residual scheduled payment is $292,560, approximately
equivalent to RMB 2 million, and is scheduled to be paid two months after
completion of construction.




F-31




21.
              Commitments
      and contingencies - continued


Construction
of Breeding Farm and Steel Structural Surface




On June
23, 2009, PRC Yuhe entered into two construction agreements with contractors to
build part of the above breeding farms and construct the steel structure for a
total consideration of $894,120, approximately equivalent to RMB6,112,300, and
$861,280, approximately equivalent to RMB5,887,800, respectively.  The
constructions have been completed as of December 31, 2009.  As of
March 31, 2010, the Company has paid $781,150, approximately equivalent to
RMB5,340,000, and $751,890, approximately equivalent to RMB5,140,000,
respectively to these two suppliers.  The residual payments of
$112,970, approximately equivalent to RMB772,300, and $109,390, approximately
equivalent to RMB747,800, have been paid by the end of March, 2010.




Acquisition
of 13 Breeder Farms




On
December 24, 2009, PRC Yuhe entered into an agreement to purchase thirteen
breeder farms at a total consideration of $15,194,336, approximately equivalent
to RMB103,870,000.  As of March 31, 2010, PRC Yuhe has paid 80% of the
total consideration, or $12,141,426, approximately equivalent to RMB83,000,000.
The remaining balance of $3,052,910, approximately equivalent to RMB20,870,000,
is expected to be paid by the end of December 2010. The farms cover a total area
of 37 hectares (560 mu), for which PRC Yuhe acquired all the ground buildings as
well as the land use rights for 36 years. The purchase price also includes
in-house breeding facilities which supply feed, water and air to the parent
breeders.




22.
            Equipment
      Leasing and Rental Arrangement





On
November 11, 2008, PRC Yuhe entered into equipment leasing agreement and
property rental agreement, collectively, the “Agreements”, with Shandong
Nongbiao Purina Feed Co., Ltd., “Shandong Nongbiao Purina”. Shandong Nongbiao
Purina will construct a feed production facility on a property leased from PRC
Yuhe and become the exclusive feed supplier for PRC Yuhe. Pursuant to the terms
and conditions of the Agreements, Shandong Nongbiao Purina will lease certain
equipment for feed production from, and install them at the premises owned by
PRC Yuhe. The lease term for both the equipment leasing agreement and property
rental agreement is 10 years. After completion of the feed production facility,
the lease term commenced in July 2009 when the production
began.  Shandong Nongbiao Purina shall pay to PRC Yuhe an annual
rental payment for the leased land, premises and facilities of $219,420,
approximately equivalent to RMB1,500,000. The rent payable by Shandong Nongbiao
Purina under the rental agreement will be offset against the prepaid equipment
rental costs of $1,462,820, approximately equivalent to
RMB10,000,000.  As at March 31, 2010, Shandong Nongbiao Purina
advanced $463,036, approximately equivalent to RMB3,165,360, to PRC Yuhe as
rental payment and was recorded as advances from customers.




In
connection with the execution of the Agreements, Shandong Yuhe Food Group Co.,
Ltd., “Yuhe Group”, a PRC company based in Shandong Province, would be the
guarantor of PRC Yuhe for $658,000, approximately equivalent to RMB4,500,000,
for the first five years and for $439,000, approximately equivalent to
RMB3,000,000, for the next five years. No guarantee fee is required according to
the above Agreements.




F-32




22.
            Equipment
      Leasing and Rental Arrangement –
continued





The
leasing arrangement with Purina is accounted for as operating lease with the
exception of the lease of equipment.  The equipment leased to Purina
are accounted for as direct financing lease because the equipment has an
economic useful life of 10 years and the term of the equipment lease is for 10
years.




The
following lists the components of the net investment in direct financing as of
March 31:




March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Minimum
      lease payments receivable
                      
                      $
                      544,991
                      
                      
                      $
                      544,903Less:
      Unearned income
                      
                      
                      (154,084
                      )
                      
                      
                      (162,161
                      )Net
      investment in direct financing lease
                      
                      $
                      390,907
                      
                      
                      $
                      382,742




As of
March 31, 2010, future minimum lease payments to be received for each of the
five succeeding fiscal years are as follows: $0 in 2010 to 2013 and $25,615 in
2014.  There were no minimum lease payments to be received in 2010 to
2013 because Purina has advanced $551,468 for equipment rental as of March 31,
2010.




There are
no contingent rentals included in income for the three months ended March 31,
2010 and 2009.




F-33





ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Special
Note Regarding Forward Looking Statements





This
Quarterly Report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of the Company’s
management and involve risks and uncertainties, as well as assumptions that, if
they ever materialize or prove incorrect, could cause the results of the Company
to differ materially from those expressed or implied by such forward-looking
statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,”
“optimistic,” “intend,” “aim,” “will” or similar expressions are intended to
identify forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements,
including statements regarding new and existing products, technologies and
opportunities; statements regarding market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; uncertainties
related to conducting business in China; any statements of belief or intention;
any of the factors mentioned in the “Risk Factors” section of the Company’s
annual report on Form 10-K; and any statements of assumptions underlying any of
the foregoing. Except as otherwise indicated by the context, references in this
report to the “Company,” “Yuhe International,” “we,” “us,” or “our,” are
references to the combined business of Yuhe International, Inc. and its
subsidiaries.





Overview




The
Company is in the middle of the broiler chicken supply chain. The Company
purchases baby parent breeding stocks from primary breeder farms, raises them
for hatching eggs and sells live day-old broilers to the market. The Company’s
business segment in the broiler supply chain has the highest margin along the
supply chain. The Company produces high quality day-old broilers supported by
its know-how in the areas of feed ingredient composition, immunizations system
and breeding techniques, gained through over a decade of
experience.





Unless
otherwise noted, all dollar figures provided herein are translated into United
States Dollars from Renminbi at year-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.




Unless
otherwise noted, all historical financial information prior to March 12, 2008
refers to PRC Yuhe, which includes the accounts of Taihong.





The
Company’s Business Operations





The
Company’s business is part of the commercial broiler supply chain.





Day-old
broilers are one-day-old broilers that are sold to broiler raisers. Day-old
broilers sold by the Company’s wholly-owned subsidiary, PRC Yuhe, are its
primary source of revenue.




3




The
Company purchases parent breeding chicken from grandparent breeder farms and
raises them to maturity. Once these parent breeding chicken have matured, they
produce hatching eggs that the Company incubates and then sells the resulting
day-old broiler chicks to its customers.





Under
normal circumstances, female parent breeder chicken become productive from the
26 th week,
and are no longer commercially productive after the 66th week. Typically a
breeder is capable of producing approximately 167 eggs which will be hatched to
137 broilers over its production lifetime and the breeders are maintained by the
Company for a period of 420 days. The Company sources its parent breeder chicken
from licensed suppliers located in Beijing, and Shandong and Jiangsu provinces
and these suppliers are required to have a vaccination certificate and a breeder
production certificate for the sale of the breeders. The Company’s hatching eggs
typically must be incubated for a period of 21 days. At least 28 weeks usually
pass from the Company’s receipt of a day-old parent breeder to its sale of the
first day-old broilers.




The
Company operates in two elements of the broiler supply chain: day-old broiler
production and feed production. These activities are operated under two separate
subsidiaries, PRC Yuhe and Taihong, respectively.





Results
of Operations





The
following is a discussion of the Company’s results of operations for the three
months ended March 31, 2010 compared to the three months ended March 31,
2009.




The
Three Months Ended March 31, 2010 Compared to The Three Months Ended March 31,
2009




All amounts,
                      
                      
                      As a
                      
                      
                      All amounts,
                      
                      
                      As a
                      
                      
                      Increase/
                      
                      
                      Increase/other than
                      
                      
                      percentage of
                      
                      
                      other than
                      
                      
                      percentage of
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)percentage, in
                      
                      
                      net revenues
                      
                      
                      percentage, in
                      
                      
                      net revenues
                      
                      
                      Dollar ($)
                      
                      
                      PercentageU.S. dollars
                      
                      
                      
                      
                      
                      U.S. dollarsFor 
      the three
                      
                      
                      For 
      the three
                      
                      
                      For 
      the three
                      
                      
                      For 
      the three
                      
                      
                      For 
      the three
                      
                      
                      For 
      the threemonths
      ended
                      
                      
                      months
      ended
                      
                      
                      months
      ended
                      
                      
                      months
      ended
                      
                      
                      months
      ended
                      
                      
                      months
      endedMarch
      31
                      
                      
                      March
      31
                      
                      
                      March
      31
                      
                      
                      March
      31
                      
                      
                      March
      31
                      
                      
                      March
      312010
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2010Net
      revenue
                      
                      
                      11,756,917
                      
                      
                      
                      100.00
                      %
                      
                      
                      10,914,390
                      
                      
                      
                      100.00
                      %
                      
                      
                      842,527
                      
                      
                      
                      7.72
                      %Cost
      of revenue
                      
                      
                      7,856,562
                      
                      
                      
                      66.83
                      %
                      
                      
                      6,852,353
                      
                      
                      
                      62.78
                      %
                      
                      
                      1,004,209
                      
                      
                      
                      14.65
                      %Gross
      profit
                      
                      
                      3,900,355
                      
                      
                      
                      33.17
                      %
                      
                      
                      4,062,037
                      
                      
                      
                      37.22
                      %
                      
                      
                      (161,682
                      )
                      
                      
                      -3.98
                      %Selling
      expenses
                      
                      
                      110,947
                      
                      
                      
                      0.94
                      %
                      
                      
                      92,940
                      
                      
                      
                      0.85
                      %
                      
                      
                      18,007
                      
                      
                      
                      19.37
                      %General
      and administrative expenses
                      
                      
                      820,516
                      
                      
                      
                      6.98
                      %
                      
                      
                      743,990
                      
                      
                      
                      6.82
                      %
                      
                      
                      76,526
                      
                      
                      
                      10.29
                      %Income
      from operations
                      
                      
                      2,968,892
                      
                      
                      
                      25.25
                      %
                      
                      
                      3,225,107
                      
                      
                      
                      29.55
                      %
                      
                      
                      (256,215
                      )
                      
                      
                      -7.94
                      %Interest
      income
                      
                      
                      58
                      
                      
                      
                      0.00
                      %
                      
                      
                      96
                      
                      
                      
                      0.00
                      %
                      
                      
                      (38
                      )
                      
                      
                      -39.58
                      %Other
      income (expenses)
                      
                      
                      10,989
                      
                      
                      
                      0.09
                      %
                      
                      
                      (465
                      )
                      
                      
                      0.00
                      %
                      
                      
                      11,454
                      
                      
                      
                      -2,463.23
                      %Investment
      income
                      
                      
                      15,612
                      
                      
                      
                      0.13
                      %
                      
                      
                      15,509
                      
                      
                      
                      0.14
                      %
                      
                      
                      103
                      
                      
                      
                      0.66
                      %Interest
      expenses
                      
                      
                      65,950
                      
                      
                      
                      0.56
                      %
                      
                      
                      325,427
                      
                      
                      
                      2.98
                      %
                      
                      
                      (259,477
                      )
                      
                      
                      -79.73
                      %Income
      tax expense
                      
                      
                      2,601
                      
                      
                      
                      0.02
                      %
                      
                      
                      -
                      
                      
                      
                      0.00
                      %
                      
                      
                      2,601
                      
                      
                      
                      0.00
                      %Net
      income
                      
                      
                      2,927,000
                      
                      
                      
                      24.90
                      %
                      
                      
                      2,914,820
                      
                      
                      
                      26.71
                      %
                      
                      
                      12,180
                      
                      
                      
                      0.42
                      %





4




Net revenue. Net revenue
increased by $0.84 million, or 8%, to $11.76 million for the three months ended
March 31, 2010 from $10.91 million for the three months ended March 31, 2009.
The increase was driven by the increase in sales volume of the Company’s day-old
broilers by 2.5 million birds, or 11%, from 23.1 million birds for the three
months ended March 31, 2009 to 25.6 million birds for the three months ended
March 31, 2010. The increase in sales volume was a result of capacity expansion
in year 2010. The increase in sales volume was partially offset by a decrease in
unit selling price. The selling price of day-old broilers decreased by 2.7% from
RMB 2.99 per bird for the three months ended March 31, 2009 to RMB 2.91 per bird
for the three months ended March 31, 2010. This price decline was within a
normal range and within management’s expectation, especially compared to a
period of high prices during the last quarter of year 2008 which extended
through the first quarter of year 2009.




$10.89
million, or 92.6%, of net revenue, came from day old broilers sales; $0.63
million, or 5.4%, of net revenue, came from the sale of retired parent broilers,
which earned approximately $28,000 in gross profit in this period; $0.07
million, or 0.6% of net revenue, came from sales of non-fecundated eggs; $0.11
million, or 0.9% of net revenue, came from chicken dung and other business; and
$0.06 million, or 0.5% of net revenue, came from external feed sales of
Taihong.




Cost of revenue. The
Company’s cost of revenue increased by $1.00 million, or 14.7%, to $7.86 million
for the three months ended March 31, 2010 from $6.85 million for the three
months ended March 31, 2009. The main reasons for the increase in the cost of
revenue were the increase in sales volume and the increase in unit cost, which
increased by RMB0.16, or 8.6%, to RMB2.01 for the three months ended March 31,
2010 from RMB1.85 for the three months ended March 31, 2009. The unit cost
increase is due to the increase in feed price in 2010; the price of corn, which
is the major component of feed, increased 27%. The detailed price per ton for
the various components of the feed is as below:




RMB/Ton




Period\Rawmaterial
                        
                        Corn
                        
                        
                        Soybean
                        
                        
                        Bean oil
                        
                        
                        Corn Bran
                        
                        
                        Wheat BranQ1
      2009
                        
                        
                        1509
                        
                        
                        
                        3421
                        
                        
                        
                        6895
                        
                        
                        
                        1671
                        
                        
                        
                        1352Q1
      2010
                        
                        1917
                        
                        
                        
                        3392
                        
                        
                        
                        7671
                        
                        
                        2040
                        
                        
                        
                        1725Growth
      rate
                        
                        
                        27
                        %
                        
                        
                        -1
                        %
                        
                        
                        11
                        %
                        
                        
                        22
                        %
                        
                        
                        28
                        %


Note:
Soybean price fluctuations are small because the soybean market is fully linked
with the international market.




Feed cost
comprises 60% of cost of revenue for parent broiler breeding whereas feed cost
is 80% of cost of revenue for commercial broiler breeding.




As a
percentage of net revenue, the cost of revenue increased by 4 percentage points,
from 63% for the three months ended March 31, 2009 to 67% for the three months
ended March 31, 2010.




Gross profit. The Company’s
gross profit decreased by $0.16 million, or 4%, to $3.9 million for the three
months ended March 31, 2010 from $4.06 million for the three months ended March
31, 2009. Gross profit as a percentage of net revenue was 33% for the three
months ended March 31, 2010 as compared to 37% for the three months ended March
31, 2009. The decrease was mainly attributable to the increase in unit cost
of the Company’s day-old broilers, as discussed above.




General and administrative
expenses. General and administrative expenses increased by $0.08 million,
or 10%, to $0.82 million for the three months ended March 31, 2010 from $0.74
million for the three months ended March 31, 2009. The increase in general and
administrative expenses was mainly due to additional audit fees paid to Grant
Thornton, our former independent registered public accounting firm, which
increased by about $70,000.




5




General
and administrative expenses for the first quarter of 2010 were comprised mainly
of public company related expenses of $0.39 million, including stock based
compensation of $179,695, representing 48% of total general and administrative
expenses; audit fees of $0.14 million, representing 17% of total general and
administrative expenses; human resources and related expenses of $0.12 million,
representing 15% of total general and administrative expenses; facilities and
utility expenses of $0.09 million, representing 11% of total general and
administrative expenses; travel expenses of $0.04 million, representing 5% of
total general and administrative expenses; and tax expense of $0.03 million,
representing 4% of total general and administrative expenses.




Selling expenses. The
Company’s selling expenses increased by $18,007, or 19%, to $110,947 for the
three months ended March 31, 2010 from $92,940 for the same period in 2009.
Selling expenses for the first quarter of 2010 were comprised mainly of
packaging and transportation expenses of $73,539, representing 66% of total
selling expenses; human resources and related expenses of $14,105, representing
13% of total selling expenses; and travel, office expenses and advertising
expenses of $22,865, representing 20% of total selling expenses. The increase in
selling expenses was primarily due to the increase in packaging and
transportation expenses as a result of increased sales volume. As a percentage
of net revenue, selling expenses remained 1%, which was the as with the level
for the three months ended March 31, 2009. The Company expects that its selling
expenses will not increase in proportion with sales growth because the Company
distributes its product through distributors.




Interest expenses.Interest
expenses decreased by $259,477, or 80%, to $65,950 for the three months ended
March 31, 2010 from $325,427 for the same period in 2009. The decrease was due
to the increase in interest being capitalized in construction in
progress. Capitalized interest for the three months ended March 31, 2010
and 2009, was $206,063 and $0, respectively. If interest had not been
capitalized, interest expense on bank loans would have been $272,013 and
$325,427 for the three months ended March 31, 2010 and 2009 respectively. As the
Company continues to expand its operations by acquiring more farm facilities and
equipment in the coming years, the amount of capitalized bank interest is not
expected to decline in the near future.




Net income. Net income
increased by $0.01 million, or 0.42%, to $2.93 million for the three months
ended March 31, 2010 from $2.91 million for the three months ended March 31,
2009, as a result of the factors described above.




Liquidity
and Capital Resources




The
Company expects that its strong positive working capital of $11.09 million as of
March 31, 2010 and positive cash flow provided by operating activities of $1.99
million will meet its foreseeable working capital needs for the next 12 months
from the date of this report. In the first quarter of year 2010, the Company
renewed 7 bank loans for a total of $8.19 million with local banks, these loans
will expire in year 2013.




In
connection with this renewal, the interest rates on these loans were reduced to
a fixed annual interest rate of 7.56% compared to the previous rates which
varied between 8.64% and 13.82%.




The
balance of Yuhe’s bank loans was approximately $10.8 million as of March 31,
2010. Under the new terms for the bank loans, the Company can reduce its average
bank loan interest rate from 10.8% to 7.8%. The Company expects to reduce
interest expense prior to any capitalized interest from approximately $1.2
million per annum, approximately equivalent to RMB 8.2 million, to $0.86 million
per annum, approximately equivalent to RMB 5.9 million.




6




General




As of
March 31, 2010, the Company had cash and cash equivalents of approximately
$15.71 million. The following table provides detailed information about the
Company’s net cash flow for the three months ended March 31, 2010.




Quarter ended
                      
                      
                      Quarter endedMarch 31, 2010
                      
                      
                      March 31, 2009Net
      cash provided by operating activities
                      
                      $
                      2,009,655
                      
                      
                      $
                      4,386,943Net
      cash used in investing activities
                      
                      
                      (348,512)
                      
                      
                      
                      (26)Net
      cash provided by financing activities
                      
                      
                      -
                      
                      
                      
                      275,336Effect
      of foreign currency translation on cash
                      
                      
                      2,275
                      
                      
                      
                      17,521Net
      cash inflow
                      
                      
                      1,663,418
                      
                      
                      
                      4,679,774Cash
      at beginning of period
                      
                      
                      14,047,147
                      
                      
                      
                      13,412,205Cash
      at end of period
                      
                      $
                      15,710,565
                      
                      
                      $
                      18,091,979




Operating Activities. Net
cash provided by operating activities was $2.0 million for the three months
ended March 31, 2010 compared to $4.4 million for the three months ended March
31, 2009. The net cash provided by operating activities was primarily
attributable to the net income of $2.93 million; a decrease of $0.03 million of
long term prepaid rent; and a decrease of $0.12 million of other payable; offset
by an increase of $1.71 million of inventories; an increase of $0.05 million of
accounts payable; an increase of $0.16 million of accrued expenses; an increase
of $0.04 million of payroll and payroll related liabilities and non cash
adjustment for depreciation and amortization of $0.57 million; non cash
compensation of $0.18 million; and capitalized interest in construction in
progress of $0.21 million.  Compared to the same period in 2009, the
Company’s net cash provided by operating activities decreased because of
expansion in production capacity which has led to an increase in the inventories
during the quarter ended March 31, 2010.  Also, the Company purchased
$1.3 million more inventory than the same period in
2009.  Furthermore, the Company paid down $0.05 million accounts
payable compared to an increase in accounts payable of $1.05 million during the
same period in 2009.




Investing Activities. Net
cash used in investing activities for the three months ended March 31, 2010 was
$0.35 million compared to $26 for the three months ended March 31, 2009.
The net cash used in investing activities was primarily attributable to an
increase of $0.33 million in capital expenditure for the building of breeder
farms and purchase of equipment and repayment of notes receivable of $0.02
million for the three months ended March 31, 2010. The following is a summary of
the $0.33 million cash used in deposits paid and acquisition of property, plant
and equipment:




Three Months ended
                      
                      
                      Three Months endedMarch 31, 2010
                      
                      
                      March 31, 2009Deposits
      paid for purchase of equipment
                      
                      $
                      205,997
                      
                      
                      $Purchase
      of equipment
                      
                      
                      141,770
                      
                      
                      
                      41,133Others
                      
                      
                      (15,612)
                      
                      
                      
                      -Total
      deposit paid and acquisition of property, plant and
    equipment
                      
                      $
                      332,155
                      
                      
                      $
                      41,133




Consistent
with the Company’s production expansion, compared to the same period in 2009,
the Company made more capital expenditure on production equipment and production
facilities, representing an increase of approximately $0.29 million, which
contributed to the increase in cash used in investing activities.




Financing Activities. There
was no cash flow used in or provided by financing activities.  During
the quarter ended March 31, 2010, the Company was able to renew some of its bank
loans and extend the maturity dates to year 2013.




7




Loan
Facilities




As
at March 31, 2010, maturities of the Company’s bank loans are as
follows:




As of  March 31,2011
                    
                    
                    2,311,2592012
                    
                    
                    292,5642013
                    
                    
                    8,191,807$
                    10,795,630




All
amounts, other than percentages, are in U.S.
dollars




Type
                                  
                                  Lender
                                  
                                  Term
                                  
                                  Maturity Date
                                  
                                  Principal AmountBank loan
                                  
                                  Hanting Kaiyuan
                                    Rural Credit Cooperative
                                  
                                  24 months
                                  
                                  Jan 7, 2011
                                  
                                  $
                                  1,067,860Bank loans
                                  
                                  Nansun Rural Credit
                                  
                                  36 months
                                  
                                  Mar
      16, 2013
                                  
                                  
                                  4,827,315Bank loan
                                  
                                  Nansun Rural Credit
                                  
                                  24 months
                                  
                                  Dec 10
      2011
                                  
                                  
                                  292,564Bank loan
                                  
                                  Nansun Rural Credit
                                  
                                  36 months
                                  
                                  May
      17 2010
                                  
                                  
                                  292,564Bank loans
                                  
                                  Nansun Rural Credit
                                  
                                  36 months
                                  
                                  Jan
      26, 2013
                                  
                                  
                                  3,364,492Bank loans
                                  
                                  Shuangyang Rural Credit
                                  
                                  24
      months
                                  
                                  Oct 13, 2010
                                  
                                  
                                  950,835Total
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  10,795,630




The
Company has eleven loan facilities from three institutions and the following are
the material terms of such bank loans.




Loan
from Hanting Kaiyuan Rural Credit Cooperative:




On
January 8, 2009, PRC Yuhe renewed the loan agreement with Hanting Kaiyuan Rural
Credit Cooperative. Pursuant to the loan agreement, Hanting Kaiyuan Rural Credit
Cooperative loaned PRC Yuhe $1,067,859 at an interest rate of 7.56% per annum.
PRC Yuhe is obligated under such loan agreement to pay interest monthly and
repay the loan on its maturity date, January 7, 2011. The loan is secured by the
plant and equipment of PRC Yuhe with a net book value of $380,356 as of March
31, 2010.




Loans
from Nansun Rural Credit:




PRC Yuhe
renewed four loan agreements with Nansun Rural Credit on March 19,
2010.  The interest rate for the loan agreements is 7.56% per annum
for the renewed bank loan agreement, compared to the original rate of 13.82%,
because PRC Yuhe’s business activities were supported by the government. The
total amount of these four bank loans is $4,827,315.




The
interest rate on four other loans from Nansun Rural Credit with an outstanding
balance of $3,364,492 was reduced from 8.64% to 7.56% due to the interest rate
adjustment by the PRC government.




Another
bank loan from Nansun Rural Credit with an outstanding balance of $292,564 was
borrowed in December 2009 with an interest rate of 7.56% per annum.




The last
bank loan from Nansun Rural Credit with an outstanding balance of $292,564 was
borrowed in May 17, 2007 with an interest rate of 8.64% per annum.




All loans
from Nansun Rural Credit are secured by the land use right and building of PRC
Yuhe and Taihong with a net book value of $2,516,727 as of March 31,
2010.




8




Loans
from Shuangyang Rural Credit:




Taihong
renewed the loan agreements with Shuangyang Rural Credit on October 13, 2008,
amounting to $950,835. The interest rate for the loans is 9.83% per annum.
Taihong is obligated under such loan agreements to pay interest monthly and
repay the loans on their maturity date, October 13, 2010. The loans are secured
by the plant and equipment of Taihong with a net book value of $321,623 as
of March 31, 2010.




Due to
related companies:




As of
March 31, 2010, the Company has $1,208 due to Halter Financial Investments
LP. The amounts due to this related company are unsecured, interest free
and have no fixed repayment date.  These loans are used for working
capital purposes.




Contractual
Obligations




Below
is a table summarizing the Company’s contractual obligations as of March 31,
2010:




Payments due by periodContractual Obligations
                  
                  Total
                  
                  
                  Less than 1
                    year
                  
                  
                  1-3 years
                  
                  
                  3-5 years
                  
                  
                  More than
                    5 yearsLong-Term
      Debt Obligations
                  
                  $
                  10,795,630
                  
                  
                  $
                  2,311,259
                  
                  
                  $
                  8,484,371
                  
                  
                  
                  -
                  
                  
                  
                  -Due
      to Related Companies
                  
                  $
                  1,208
                  
                  
                  $
                  1,208
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      Lease Obligations
                  
                  $
                  1,586,428
                  
                  
                  $
                  52,793
                  
                  
                  $
                  211,173
                  
                  
                  $
                  140,782
                  
                  
                  $
                  1,181,680Purchase
      Obligations
                  
                  $
                  4,076,866
                  
                  
                  $
                  4,076,866
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  16,460,132
                  
                  
                  $
                  6,442,126
                  
                  
                  $
                  8,695,544
                  
                  
                  $
                  140,782
                  
                  
                  $
                  1,181,680





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
applicable.




ITEM
4. CONTROLS AND PROCEDURES




(a)              Evaluation
of disclosure controls and procedures.





The
Company’s management, under the supervision and with the participation of its
chief executive officer and chief financial officer, Messrs. Gao Zhentao and Hu
Gang, respectively, evaluated the effectiveness of the Company’s disclosure
controls and procedures as of March 31, 2010, the end of the period covered by
this Report. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, such as this Form 10-Q, that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure.  Based on that
evaluation, Messrs. Gao and Hu concluded that the Company’s disclosure controls
and procedures were effective as of March 31, 2010.




9




(b)              Changes
in internal control over financial reporting.




As
previously reported, management concluded that certain related party loans
between the Company and Shandong Yuhe Food Group Co., Ltd., “Yuhe Food”,
constituted prohibited transactions under Section 402 of the Sarbanes-Oxley Act
of 2002.  All such related party loans had been repaid as of the end of
February 2010. In addition, there were certain audit adjustments identified by
the Company’s former independent auditors related to the Company’s financial
statements for the year ended December 31, 2009 indicating a material weakness
in the Company’s internal control over financial reporting.  The
adjustments mainly related to transferring amounts from work-in-progress to
fixed assets, separating the current portion of long term debt from long term
debt, and verifying the nature of capital leases and operating
leases.




In order
to address the foregoing material weaknesses, the Company has taken certain
remedial action to strengthen its internal control over financial reporting
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting. In March 2010, the Company’s Audit Committee engaged Ernst &
Young (China) Advisory Limited, “Ernst & Young”, to review its payment
procedures. Ernst & Young has finished its review, which covered all
payments made between January 1, 2010 to March 31, 2010. Ernst & Young
delivered a report on its review to all board members of the
Company.  On May 4, 2010, based on discussions with the Company’s
management team and its review of the Ernst & Young report, the Board of
Directors and the Audit Committee concluded that (1) the Company has cleared all
inter-company balances with related party companies; (2) there was no payment
between the Company and its related party companies from March 1, 2010 to March
31, 2010; and (3) no material exception was noted during the review of payment
procedures.




In
addition, the Board of Directors has implemented the following measures to
ensure adequate internal controls in the payment procedures, prevent recurrence
of unauthorized or improper related party payments and timely detect related
party transactions.




A:
Update and Revision of Relevant Policies and Procedures




The
Company intends to update its code of business ethics and other relevant
policies and procedures to clearly stipulate that.




(1)
            Related
      party loans are a violation of the Company’s code of business ethics and
      are strictly prohibited.


(2)
            All
      related party transactions are required to be reported to and approved by
      the Board of Directors in advance.





B:
Implementation of the relevant policies and procedures




The
revised policies will be communicated within the Company. All department heads
will be required to confirm their acknowledgement of the revised policies in
writing. The Finance Department will play a major role in the implementation of
the revised policies and will strictly follow the revised policy and report any
transactions that violate or appear to violate the policies.




C:
Monitoring of the Operation of Internal Controls




The
Company will fill the new position of Internal Auditor, who will directly
report to the Chairman of the Audit Committee functionally, and to the Chief
Financial Officer from an administrative perspective. The Internal Auditor will
conduct an internal audit quarterly to review the Company’s payment procedures
and test the controls as stated in the revised policies. The Internal Auditor
will also conduct a specific audit to review all related party transactions
quarterly to examine whether the revised policies are properly implemented. The
Internal Auditor is required to report the results of these audits to the Board
of Directors. The Internal Auditor is expected to start to work on June 1, 2010.
The Board of Directors is in the process of reviewing the background and
experience of a number of candidates and refining the job description of the
Internal Auditor.




Under the
direction of the Audit Committee, management will continue to review and make
necessary changes to the system of internal controls and the control
environment, as well as policies and procedures to improve the overall
effectiveness of internal control over financial reporting.




10





PART
II




OTHER
INFORMATION




ITEM
1. LEGAL PROCEEDINGS




From time
to time, the Company becomes involved in various lawsuits and legal proceedings
that arise in the ordinary course of business. While the ultimate outcome of
these lawsuits and legal proceedings cannot be determined at this time, it is
the opinion of management that the resolution of these actions will not have a
material adverse effect on the Company’s financial condition, results of
operations or cash flows.




ITEM
1A. RISK FACTORS




Not
applicable.




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




During
the first quarter of 2010, the Company issued unregistered securities to a
limited number of accredited investors as described below:




(1)   In
February 2010, the Company issued 87,383 new shares to WLT Brothers Capital,
Inc. in connection with its cashless exercise of 142,816 warrants issued to it
as compensation for its services as co-placement agent. The issuance of these
securities was deemed to be exempt from registration pursuant to Section 4(2) of
the Securities Act.




There
were no underwritten offerings employed in connection with the transaction set
forth above.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.




ITEM
4. RESERVED




ITEM
5. OTHER INFORMATION





Make Good
Escrow Agreements




According
to the Consolidated Statements of Income and Comprehensive Income of the Company
in its Form 10-K for the fiscal year ended December 31, 2009 filed by the
Company with the Securities and Exchange Commission on March 31, 2010, the
Company’s After Tax Net Income for the fiscal year ended December 31, 2009 has
exceeded $12,350,000, being 95% of $13,000,000, the 2009 Guaranteed After Tax
Net Income, and (ii) its Earnings Per Share on a fully diluted basis for the
fiscal year ended December 31, 2009 has exceeded $0.740, the 2009 Guaranteed
Earnings Per Share, as set forth in the Make Good Escrow Agreement





The
Company entered into a Make Good Escrow Agreement, dated March 12, 2008, with
Mr. Kunio Yamamoto, the “Make Good Pledgor”, Tri-State Title & Escrow, LLC,
the “Escrow Agent”, Roth Capital Partners LLC, “Roth Capital” and each of the
investors in the private offering of securities of the Company.  On
May 7, 2010, Roth Capital executed a Form of Release and instructed the Escrow
Agent to release 1,679,990 shares of common stock, the 2009 Make Good Shares, to
Mr. Kunio Yamamoto, the Make Good Pledgor.





The
Company entered into a separate Make Good Escrow Agreement, dated March 12,
2008, with Mr. Kunio Yamamoto, the “Make Good Pledgor”, Interwest Transfer
Company, Inc., the “Escrow Agent”, and HFG International Limited,
“HFG”.  HFG has executed a Form of Release to release 235,196 shares
of the Company’s common stock to Mr. Kunio Yamamoto, the Make Good
Pledgor.  On or about May 5, 2010, 235,196 shares of the Company’s
common stock were released by HFG to Mr. Kunio Yamamoto.




11




ITEM 6. EXHIBITS





31.1
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *




31.2
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002. *




32.1
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002. *




32.2
            Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002. **
      filed herewith




12




SIGNATURES




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




DATED:
May 14, 2010




YUHE
INTERNATIONAL, INC.




By:
                  /s/
      Gao ZhentaoGao
      ZhentaoChief
      Executive Officer(On
      behalf of the Registrant and as Principal Executive
    Officer)By:
                  /s/
      Hu GangHu
      GangChief
      Financial Officer(On
      behalf of the Registrant and as Principal Financial
    Officer)





13




EXHIBIT
INDEX




ExhibitNumber
            
            Description31.1
            
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
            
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
            
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*32.2
            
            Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*




* filed
herewith




14