Yuhe International (YUII) 10-Q 2010 Q1 Quarterly report

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 Outstanding
Common Stock, $0.001 par value	15,809,563

TABLE OF CONTENTS

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

	Page
Condensed Consolidated Balance Sheets - unaudited	F-2
Condensed Consolidated Statements of Income and Comprehensive Income - unaudited	F-4
Condensed Consolidated Statements of Cash Flows - unaudited	F-5
Notes 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)
ASSETS
Current assets:
Cash and cash equivalents	$	15,710,565	$	14,047,147
Accounts receivable, net of allowances of $18,871 and $18,868		838		838
Inventories		8,268,393		6,560,783
Advances to suppliers		359,927		359,179
Deferred tax assets		15,167		17,766
Total current assets		24,354,890		20,985,713
Plant and equipment, net		29,433,188		29,556,712
Deposits paid for acquisition of long term assets		16,213,668		16,082,613
Notes receivable, net and other receivable, net		46,818		33,635
Unlisted investments held for sale		300,220		300,172
Intangible assets, net		2,835,473		2,851,411
Net investment in direct financing lease		390,907		382,742
Long term prepaid rent		6,544,822		6,570,038
Total assets	$	80,119,986	$	76,763,036
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,687,433	$	5,740,912
Current portion of long term loans		2,311,259		9,433,686
Other payable		1,459,548		1,343,901
Accrued expenses and payroll related liabilities		2,564,740		2,366,134
Advances from customers		655,302		678,366
Other taxes payable		152,626		150,764
Loan from director		292,564		292,517
Other liabilities		143,972		143,949
Due to related companies		1,208		1,208
Total current liabilities		13,268,652		20,151,437
Non-current liabilities
Long-term loans		8,484,371		1,360,206
Total 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		15,722
Additional paid-in capital		30,852,457		30,672,849
Retained earnings		26,243,794		23,316,794
Accumulated other comprehensive income		1,254,903		1,246,028
Total stockholders’ equity		58,366,963		55,251,393
Total 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			2009
Net revenue	$	11,756,917		$	10,914,390
Cost of revenue		(7,856,562	)		(6,852,353	)
Gross profit		3,900,355			4,062,037
Operating Expenses
Selling 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			3,225,107
Non-operating income (expenses)
Interest income		58			96
Other income (expenses)		10,989			(465	)
Investment income		15,612			15,509
Interest expenses		(65,950	)		(325,427	)
Total other income (expenses)		(39,291	)		(310,287	)
Net income before income taxes		2,929,601			2,914,820
Income tax expense		(2,601	)		-
Net income	$	2,927,000		$	2,914,820
Other comprehensive income
Foreign currency translation		8,875			48,272
Comprehensive income	$	2,935,875		$	2,963,092
Earnings per share
Basic	$	0.19		$	0.19
Diluted	$	0.18		$	0.19
Weighted average shares outstanding
Basic		15,735,773			15,722,180
Diluted		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			2009
Cash flows from operating activities
Net income	$	2,927,000		$	2,914,820
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation		179,608			179,712
Depreciation		553,496			500,545
Amortization		16,397			16,372
Capitalized 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			9,443
Long term prepaid rent		26,273			-
Accounts payable		(54,403	)		1,049,384
Other payable		115,430			286,867
Accrued expenses and payroll related liabilities		198,272			(127,994	)
Advances from customers		(23,172	)		51,425
Other taxes payable		1,839			616
Change in net investment in direct financing lease		(8,104	)		-
Net cash provided by operating activities		2,009,655			4,386,943
Cash flows from investing activities
Deposit 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		-			41,442
Net 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 activities
Proceeds from related party payable		-		275,336
Net cash flows provided by financing activities:		-		275,336
Effect of foreign currency translation on cash and cash equivalents		2,275		17,521
Net increase in cash		1,663,418		4,679,774
Cash- beginning of period		14,047,147		13,412,205
Cash- end of period	$	15,710,565	$	18,091,979
Cash paid during the period for:
Interest paid	$	231,576	$	357,632
Supplemental disclosure
Transfer of construction in progress to fixed assets	$	-	$	1,831,131
Cashless 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 31
	2010		2009
	(unaudited)
Raw materials	$	5,876,166	$	5,275,629
Work in progress		2,392,227		1,285,154
Finished 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 cost
Buildings	$	19,233,037		$	19,071,808
Machinery		6,018,162			6,006,596
Motor vehicles		120,089			120,069
Furniture and equipment		107,824			102,154
		25,479,112			25,300,627
Less: accumulated depreciation		(4,266,319	)		(3,716,677	)
		21,212,793			21,583,950
Construction 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	$	12,139,473
Deposits paid for construction in progress		385,348		218,336
Deposits paid for purchase of equipment		3,686,894		3,724,804
Total 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		$	2,977,098
Less: 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:

Year
Remainder of 2010	$	49,190
2011		65,586
2012		65,586
2013		65,586
2014		65,586
thereafter		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	$	69,193
Deposits received		554,324		471,344
Others		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			8,775,521
Loan from Shuangyang Rural Credit, interest rate at 9.83% per annum, due on Oct 13, 2010		950,835			950,682
Loan from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 7.56% per annum, due on January 7, 2011		1,067,860			1,067,689
		10,795,630			10,793,892
Less: 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	$	2,311,259
2012		292,564
2013		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	$	1,254,780
Employee benefits		110,274		102,385
Others		-		224,185
Accrued 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 Ended
	March 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 Ended
	March 31,
	2010			2009
	(unaudited)			(unaudited)
Income before income taxes	$	2,929,601		$	2,914,820
Computed  “expected” income tax expense at 25%		732,400			728,705
Tax effect on permanent differences		(23,109	)		2,445
Change in valuation allowance		-			-
Parent company losses for which no benefit has been recognized		96,837			92,445
Effect 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 Of
	March 31,		December 31,
	2010		2009
	(unaudited)
Deferred tax assets
Net operating loss carryforwards	$	10,092	$	12,691
Bad debt allowance		5,075		5,075
		15,167		17,766
Valuation 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 exercisable
Exercise price		Number outstanding		Weighted average remaining contractual life (years)		Weighted average exercise price		Number exercisable		Weighted average remaining contractual life (years)		Weighted average exercise 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 Ended
	March 31,
	2010		2009
	(unaudited)		(unaudited)
Net income attributable to the common stockholders	$	2,927,000	$	2,914,820
Weighted average outstanding shares of common stock		15,735,773		15,722,180
Dilutive effect of options, warrants, and contingently issuable shares		320,826		-
Common stock and common stock equivalents		16,056,599		15,722,180
Earnings per share:
Basic	$	0.19	$	0.19
Diluted	$	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 Ended
	March 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 Ended
	March 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 Months Ended March 31, (unaudited)
	Production of chicks			Production of feed			Corporate			Production of chicks			Production of feed			Corporate			Total
																			2010			2009
External revenue	$	11,696,185		$	60,732		$	-		$	10,827,844		$	86,546		$	-		$	11,756,917		$	10,914,390
Intersegment revenue	$	-		$	1,739,994		$	-		$	-		$	2,405,913		$	-		$	1,739,994		$	2,405,913
Interest income	$	58		$	-		$	-		$	89		$	7		$	-		$	58		$	96
Interest 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		$	2,914,820
Expenditures 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	$	52,793
2011		70,391
2012		70,391
2013		70,391
2014		70,391
Thereafter		1,252,070
Total 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 Amount Paid as of March 31, 2010		Remaining Balance as of March 31, 2010		Expected Date of Payment	Starting Date of Project		Date / Expected Date of Completion	Notes
Construction of:
Breeding Farm No. 1 and No. 28	$	6,120,000	$	4,500,000	$	1,620,000	Progressively from May 2010	May 2005		Set up by the end of February 2010		-
Steel Structural Surface for Hatchery No. 3		570,500		277,940		292,560	July 31, 2010	December 10, 2008		May 2010		-
Acquisition of 13 Breeder Farms		15,194,336		12,141,426		3,052,910	End of  December 2010		-	Acquired on December 24, 2009	Expected to spend $2.49m for renovation
Construction of Breeding Farm and Equipment		2,486,000		-		2,486,000	Progressively from May 2010	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		$	544,903
Less: 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 ($)			Percentage
	U.S. dollars					U.S. dollars
	For  the three		For  the three			For  the three			For  the three			For  the three			For  the three
	months ended		months ended			months ended			months ended			months ended			months ended
	March 31		March 31			March 31			March 31			March 31			March 31
	2010		2010			2009			2009			2010			2010
Net 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\Raw material	Corn			Soybean			Bean oil			Corn Bran			Wheat Bran
Q1 2009		1509			3421			6895			1671			1352
Q1 2010	1917				3392			7671		2040				1725
Growth 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 ended
	March 31, 2010		March 31, 2009
Net cash provided by operating activities	$	2,009,655	$	4,386,943
Net cash used in investing activities		(348,512)		(26)
Net cash provided by financing activities		-		275,336
Effect of foreign currency translation on cash		2,275		17,521
Net cash inflow		1,663,418		4,679,774
Cash at beginning of period		14,047,147		13,412,205
Cash 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 ended
	March 31, 2010		March 31, 2009
Deposits paid for purchase of equipment	$	205,997	$
Purchase of equipment		141,770		41,133
Others		(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.

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Loan Facilities

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

	As of  March 31,
2011		2,311,259
2012		292,564
2013		8,191,807
	$	10,795,630

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

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

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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 period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-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	$	1,181,680
Purchase 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.

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 (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.

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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.

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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

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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 Zhentao
Gao Zhentao
Chief Executive Officer
(On behalf of the Registrant and as Principal Executive Officer)
By:	/s/ Hu Gang
Hu Gang
Chief Financial Officer
(On behalf of the Registrant and as Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
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

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