Emerald Dairy (PINK:EMDY)

On November 30, 2011, Emerald Dairy Inc. (the “Company”) and a lender (the “November 2009 Lender”) entered into a second amendment (the “Second Amendment”) to the loan agreement, dated November 30, 2009, as previously amended on November 30, 2010, under which a promissory note in the principal amount of $1,750,000 (as amended, the “November 2009 Note”) had been issued by the Company in favor of the November 2009 Lender.

Pursuant to the Second Amendment:

(a) the maturity date of the indebtedness represented by the November 2009 Note has been extended from November 30, 2011 to November 30, 2012;

(b) effective as of November 30, 2011, the interest rate on the indebtedness represented by the November 2009 Note has decreased from 10% to 0% per annum; and

(c)  an amended and restated promissory note (the “Amended November 2009 Note”) incorporating the changes set forth in (a) and (b) above will be issued to the November 2009 Lender in exchange for the cancellation of the November 2009 Note.

In the second quarter of 2011, management implemented its strategy to consolidate production of all of our infant formula products at our new state-of-the-art facility in Hailun City, rather than incurring the costs to upgrade our production facility in Beian City to meet increased government standards. We will continue to manufacture other milk powder, rice powder and soybean powder products at the Beian City production facility.

We expect that the raw materials we require to produce our products will continue to increase in the short-term due to inflation. We believe we will be able to increase the prices of our products to pass on any higher raw material costs to consumers. However, there is no guarantee that we will be able to raise prices to the full extent necessary to cover rises in costs for raw materials, which could have a negative material impact on our financial condition and results of operations.

First Quarter Results:

• Total revenue for the first quarter of 2011 was $14.7 million, up 3% from $14.3 million for the quarter ended March 31, 2010 due to an 8% increase in the average selling price per ton
• Gross profit for the first quarter of 2011 was $7.2 million, 1% higher than the $7.1 million in the first quarter of 2010.
• GAAP net income for the first quarter of 2011 was $2.0 million compared to a $2.3 million loss in the first quarter of 2010. Earnings per share were $0.06 per diluted share in the first quarter of 2011.
• Management reaffirmed its 2011 financial forecasts of approximately $70.0 million in revenues.  The Company currently expects to produce and sell approximately 15,000 tons of products in 2011 compared to 10,050 tons in 2010, although there are no assurances it will do so.  

"While we had begun operations at our Hailun Facility during the fourth quarter, and have found that the equipment is operating to expectations, we were prohibited from shipping product until we received the AQSIQ approval in March of this year," began Yong Shan Yang, Chairman and CEO of Emerald Dairy.  "We were essentially operating solely through our existing Bei'an facility during the first quarter, which resulted in minimal year-over-year increase in sales.  We are now fully operational, demand appears to be strong, and we are poised to gain additional market share as many smaller producers who cannot secure AQSIQ approval have shut down or suspended production.  We remain confident in meeting our target of $70.0 million in revenues for fiscal 2011 and, based on the backlog of orders, we expect robust growth for the balance of this year."

Fourth Quarter Results:

• Total revenue for the fourth quarter of 2010 ended December 31, 2010 was 14.8 million, up 10.0% from $13.4 million for the quarter ended December 31, 2009
• Gross profit for the fourth quarter of 2010 was $7.0 million, a 9.4% increase from $6.4 million in the fourth quarter of 2009.
• Adjusted operating income excluding non-cash items was $3.0 million.
• Adjusted net income excluding the non-cash value of stock options and warrants expensed was $2.0 million, an increase of 127.3% year over year. Adjusted earnings per share increased 100.0% to $0.06

Emerald Dairy has a total of 19,000 tons of capacity in 2011 versus 9,000 tons in 2010.The Company will focus its sales efforts on its high-margin, Xinganling® infant formulas which include infant formula milk powder, soybean milk powder and rice powder products.  Revenue for 2011 is forecast to approximately $70.0 million, a 27% increase over 2010.  The Company expects to produce and sell approximately 15,000 tons of products in 2011 compared to 10,050 tons in 2010.  Adjusted net income is forecast to be approximately $12.9million

"Our focus on our higher margin Xinganling®-branded products has significantly improved our revenues, margins and earnings for the year," began Yongshan Yong, CEO and Chairman of Emerald Dairy.  "The results of the ongoing certification of dairy companies in China and our belief that many smaller players will simply not be recertified for operation will provide us an excellent platform to continue our growth especially in Tier 3 and Tier 4 cities in China.  Preference for domestic infant formula brands remains strong in China and our efforts to both enhance our product line with new products like organics and expand our Xinganling® line capacity is testament to our confidence in 2011.   We hope to exceed our guidance for the year and have made a commitment to update our investors on our sales and marketing successes on a more frequent basis throughout the year."

As of December 24, 2010, Emerald Dairy, Inc., a Nevada corporation, and the investors in the Company’s December 2009 private placement of promissory notes in the aggregate principal amount of $1,750,000, entered into an amendment to the purchase agreement under which the Notes had originally been issued.  Pursuant to the Amendment:

• The maturity dates of the Notes were extended from December 24, 2010 to February 22, 2011.

• The Company paid the Investors an aggregate of $43,151, representing the full amount of interest payable through the New Repayment Date (at a rate of 15% per annum).
  

On December 1, 2010, the Company entered into a Loan Agreement with a lender, pursuant to which the Company borrowed $380,000 from the December 2010 Lender, in consideration for which it issued a promissory note to the December 2010 Lender.

The Company intends to apply substantially all of the proceeds from the Loan toward residual costs related to completion of the first production line of its new milk powder processing facility located in Hailun City, Heilongjiang Province, People’s Republic of China.

• Revenue was $12.9 million, up 27.0% from 3Q2009 and a quarterly record.

• Gross margins increased 510 basis points to 50.3% driven by higher sales of the Company's high-margin Xinganling(R) brand.

• Adjusted net income was 2.0 million and adjusted EPS was 0.06, an increase of 127% and 100% respectively.

• $7.2 million in cash flow from operations for the first nine months of 2010."We had a very productive third quarter on several fronts," stated Yong Shan Yang, CEO and President of Emerald Dairy, "Xinganling® continues to demonstrate increasing market preference among consumers and families who are willing to  pay a bit more to buy Xinganling versus local and lower end brands.   We continued to make adjustment in our current 9,000 ton capacity line and increased our production for the quarter to meet at least part of this demand.  Beginning November, we brought on line our second production line (line "B") at our new facility in Hailun and we have already begun shipping out orders of Xinganling to our customer base. The expanded capacity will allow us to meet incremental customer demand for our products in 'Tier Two' to 'Tier Four' cities which is are showing increasing appetite for mid-range infant formula products like our Xinganling® -branded products.   Our initial target is to reach forty percent capacity utilization over the next six months and near full capacity within 12 months which should meet forecasted demand with our installed customer base. We are pleased with the returns we have seen with our brand and marketing investments to date as evidenced by growth in our key product lines.  We started selling three organic products under our Xinganling(R) brand and will leverage our broad distribution footprint to gain additional market share," Yang concluded.

Guidance for 2010

Emerald Dairy reiterated its full year 2010 guidance of $60-65 million in revenues and $8.0 to $9.0 in non-GAAP adjusted net income.

In November 2010, we commenced production at our new production facility. The new facility currently has one production line, which has the capacity to produce over 9,000 tons of milk power annually. This first phase of this project has cost us an aggregate of approximately $22.0 million, including land use rights, construction expenses and equipment costs.

The new facility has the capacity to handle a second production line. Although there can be no assurance will add a second production line to our new facility, we currently intend to do so. If we were to add a second production line at this new facility it would enable us to produce over 9,000 additional tons of milk powder per year, giving us a total annual production capacity of approximately 29,000 tons of milk powder. We believe the cost to add a second production line would be an additional $15.0 million. Although there can be no assurance will add a second production line to our new facility, we plan to fund the second production line with a combination of retained earnings and, to the extent necessary, funds raised from the capital market through private or public equity offerings, private or public debt offerings and/or equipment lease transactions. We currently have no sources for the additional financing we would need to add a second production line at our new processing facility. There can be no assurance that that any additional financing will become available to us, and if available, on terms acceptable to us. \

Historically we relied primarily on investments by our Chief Executive Officer and shareholders, and bank loans, to meet our cash and capital expenditures. However, as the amount of our capital expenditures increases, we expect to depend more on the capital markets to raise funds through private and public offerings of equity and/or debt. There can be no assurance that any future financing will be available to us when needed, and on commercially reasonable terms.

 Second Quarter 2010 Results

• Total revenue for the second quarter of 2010 ended June 30, 2010 was $13.3 million, up 29.9% from $10.2 million.
  
• GAAP net income for the second quarter of 2010 was $1.3 million, an increase of 1.6%. Earnings per share in both quarters were $0.04 per diluted share.
  
• Adjusted net income excluding the non-cash value of stock options was $2.1 million, an increase of 64.7% year over year.

Adjusted earnings per share increased 50.0% to $0.6 based on 34,660,893 weighted average diluted shares outstanding on June 30, 2010. In the same period prior year, the Company recorded only 30,105,880 fully diluted shares.

"Our company has been running at nearly full capacity utilization for over a year and we have continued to shift more production to our higher margin Xinganling brand products and our sales team and distribution partners have been able to sell everything we produce," began Yong Shan Yang, CEO and President of Emerald Dairy "Though we have been able to make incremental improvements to maximize capacity at our Bei'an facility, our new line and facility in Hailun will be our principal growth driver for the balance of this year and into 2011. The Hailun line will be our second production line ("Line B") and will more than double our current capacity to 19,000 metric tons annually. We are focused on 'Tier Two' through 'Tier Four' cities, which represent 600 cities with the fastest growth of household incomes in China and provide us with the most growth potential. We have increased our marketing budget to lead this production expansion as we build further awareness for our Xianganling(R) brand, which is well respected and recognized amongst families in these high growth cities," Yang concluded.

Guidance for 2010

The management maintains its 2010 guidance provided at the beginning of the year of

• $60-65 million in revenues
• 8.0 to $9.0 in non-GAAP adjusted net income.

"The Chinese dairy market is estimated at $13 billion a year in sales, and is expected to grow at a rate of 15.0% per year for the foreseeable future," began Chairman and CEO of Emerald Dairy, Mr. Yong Shan Yang. "With 16 million infants born in China every year, we are confident we will secure more market share in our target markets of 'Tier Two' through "Tier Four' cities in China. This category of cities represents the fastest growing populations in China and provides us the most growth potential. Demand for our products has been increasing and we added a third shift in 2008 to maintain pace with orders at that time. Now, we are in the process of completing our new production facility and adding the first production line with 10,000 tons of capacity, more than double our capacity to increase our earnings and revenues," Yang concluded.

Guidance for the 2010 ending December 31, 2010 is from $60 million to $65 million in revenues and approximately $8.0 million in net income. Guidance is dependent upon the Company's ability to complete expansion of its manufacturing facilities.

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