Yayi International net sales decrease 25.0% to $7.0M for five months ended March 31, 2010

Jun 30 2010

Yayi International Inc., (OTC Bulletin Board: YYIN) ("Yayi International" or "the Company"), the first mover and a leading producer and distributor of premium goat milk formula products for infants, toddlers, young children, and adults in the People's Republic of China ("China"), today announced its financial results for the transition period from November 1, 2009 to March 31, 2010.

“We are pleased to see that our marketing, distribution and capacity expansion initiatives are starting to translate into increased sales and expect profitability to improve in line with the higher margin expectations of the new product line.”

The five-month transition report follows a change in the Company's fiscal year end. On March 26, 2010, Yayi International changed its fiscal year end from October 31 to March 31 to devote time and resources to operations during the peak season for sales in the fourth quarter of the calendar year and to focus on annual budgeting and audit preparations during the first quarter of the calendar year.

Five Month Highlights

• Streamlined the product portfolio and increased marketing efforts for the "Milk goat" brand in order to concentrate the Company's resources at targeting a more focused addressable market.
• Co-hosted the "China Goat Milk Industry Development Summit" together with the National Development and Reform Commission and the China Dairy Association in late January 2010 and held a nationwide distributor conference after the summit.
• Gained momentum in Company's sales as the Company introduced its new product mix in January 2010; Yayi International recorded sales of $3.1 million in February and March alone compared with $3.9 million for the three months ended January 31, 2010. Since our distributor conference, we have signed the sales contracts with the distributors with an aggregate expected sales value of approximately $71.4 million (value-added tax included).
• Announced the launch of a flagship Internet store that distributes its goat milk products on Taobao.com, the largest online shopping marketplace in China and Asia.
• Appointed Ms. Veronica Jing Chen as its new Chief Financial Officer, effective February 24, 2010.

"The five-month transition period included several milestones in the development of Yayi International. In line with our expectations, results for the five months were softer as we streamlined our core product portfolio to include only ten formula product lines, restrained sales efforts of previously planned product introductions and temporarily suspended sales of original product lines to supermarkets to accommodate for the transition to our new, more expensive, goat milk formula products. Sales gained momentum as the new product mix hit the shelves in January 2010," said Ms. Li Liu, Chief Executive Officer of Yayi International. "We are pleased to see that our marketing, distribution and capacity expansion initiatives are starting to translate into increased sales and expect profitability to improve in line with the higher margin expectations of the new product line."

Five Months Results

For the five months ended March 31, 2010, net sales decreased 25.0% to $7.0 million from $9.3 million for the same period of 2009. The decrease was mainly because of a shift in product mix and reduced sales efforts during the three months ended October 31, 2009 and the three months ended January 31, 2010 as the Company consciously restrained its marketing activities for old products in preparation for the launch of its new product portfolio in January 2010. However, the Company has witnessed very favorable market reactions following the Company's major TV commercials on China's Central Television (CCTV) and a successful distributor conference early in 2010. As a result, the Company recorded sales of $3.1 million in February and March alone, as compared to the total sales of $3.9 million in the three months ended January 31, 2010.

Gross profit for the five months ended March 31, 2010 dropped 28.1% to $4.6 million, compared with $6.4 million for the corresponding period last year. Gross profit margin narrowed 280 basis points to 66.0% from 68.8% last year, which was primarily attributable to higher unit costs due to the Company utilizing more giveaways and promotional products to attract potential customers. However, the introduction of the new higher-margin product portfolio partially offset the decline in the overall margin thanks to improvement in production efficiency and higher pricing.

Operating expenses for the five-month transition period increased 96.6% to $5.2 million from $2.7 million for the same period last year. The increase was primarily attributable to the increase in sales and marketing expense as well as general administrative expenses. Sales and marketing expense for the five months grew 98.1% to $3.9 million as the Company launched a prime-time TV commercial to promote new product lines nationwide. As a percentage of sales, advertising and promotion expenses were 39.2% for the five months compared with 11.3% for the corresponding period last year. General and administrative expense increased 92.2% to $1.3 million because of the Company's recruitment of a new Chief Financial Officer and a new Director of Production, increased professional fees as a result of engaging Ernst &Young as its Sarbanes-Oxley consultant, as well as investment in IT infrastructure due to business expansion. For the five months ended March 31, 2010, operating expenses as a percentage of net sales were 75.0% versus 28.6% for the same period in 2009.

As a result, the Company had a loss from continuing operations of $0.6 million, compared with an operating profit of $3.7 million for the five months ended March 31, 2009. The Company incurred a tax benefit of approximately $0.1 million for the five months ended March 31, 2010, compared with income tax expenses of approximately $0.9 million for the corresponding period in 2009.

Net loss for the five months ended March 31, 2010 was $0.9 million, or $0.04 per weighted average basic and diluted share, compared with net income of $2.1 million, or $0.09 per weighted average basic and diluted share for the five months ended March 31, 2009. The number of weighted average basic and diluted shares increased to approximately 26.0 million shares during the five months from 25.0 million shares due to the conversion effect of convertible notes in December 2009. Excluding non-cash expenses including a write-off on debt issuance costs and accretion of debt discount from the warrants and embedded derivatives issued in connection with the reverse merger on June 6, 2008, an adjustment from the reduction in the exercise price of the Company's Series A and Series D warrants, and interest expenses on a convertible note, adjusted net loss available to common shareholders was $0.7 million, or $0.03 per basic and diluted share for the five months ended March 31, 2010 compared with adjusted net income of $2.3 million, or $0.09 per basic and diluted share for the same period of 2009. For a full reconciliation of net income, please see the reconciliation table below.

Reconciliation of Adjusted Net Income

To supplement the Company's condensed consolidated financial statements for the five months ended March 31, 2010 and March 31, 2009 presented on a GAAP basis, the Company provided adjusted financial information in this release that excludes non-cash expenses including a write-off on debt issuance costs and accretion of debt discount from the warrants and embedded derivatives issued in connection with the Company's reverse merger, an adjustment from the reduction in the exercise price of the Company's Series A and Series D warrants, and interest expenses on a convertible note. The Company's management believes that these adjusted measures, adjusted net income and adjusted diluted earnings per share provide investors with a better understanding of how the results relate to the Company's current and historical performance. The additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies. Management believes that these adjusted financial measures are useful to investors because they exclude non-cash expenses that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, as these measures provide a consistent method of comparison to historical periods. As a result, the provision of these adjusted measures allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Moreover, management believes that these adjusted measures reflect the essential operating activities of the Company. Adjusted measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the adjusted financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded. A reconciliation of each adjusted measures to the nearest GAAP measure appears in the table below:

Twelve Months Results

Total revenue for the twelve months ended March 31, 2010 was approximately $22.2 million, down 9.9% from $24.7 million for the same period in 2009. Gross profit was $15.0 million, down 8.8% from $16.4 million a year ago. Gross margin expanded to 67.3% for the twelve months ended March 31, 2010 from 66.5% for the same period of 2009. The Company recorded an operating income of $4.6 million, compared with $9.3 million last year. Net income attributable to common shares was $2.1 million, compared with $2.2 million in 2009. Basic and diluted net income per share was $0.08 compared to $0.09 in 2009. The financial results of the Company's operations for the fiscal years ended March 31, 2010 and 2009 have not been audited or reviewed and are included in this release for the sole purpose of providing additional information.

Financial Condition

As of March 31, 2010, Yayi International held $4.7 million in cash and cash equivalents, $16.6 million in working capital and a current ratio of 2.1 to 1. Advances were $19.0 million as of March 31, 2010 mainly due to purchase of factory, warehouse, office buildings and machinery equipment that are used in its new production facilities in Tianjin and Weinan of Shaanxi Province, and increased by $0.5 million from October 31, 2010. As of March 31, 2010, the Company had $6.7 million in short-term debt, and 0.1 million long-term liabilities. Shareholders' equity was $10.7 million, compared with $10.1 million as of October 31, 2009.

For the fiscal years ending March 31, 2011 and 2012, the Company intends to expend approximately $18.7 million, of which $10.0 million is for the purchase of equipment and machinery for the goat milk processing facilities and $3.6 million for the construction of dairy farms and milk collection stations in Weinan and Fuping of Shaanxi Province.

Recent Events

On June 3, 2010, Yayi International announced the expansion of its executive team with the addition of Mr. Bao Zhou as Marketing Director, effective May 11, 2010.

On May 20, 2010, Yayi International announced it has added 1,080 retail outlets in China, significantly broadening its distribution network since the Company rolled out a new product portfolio at the beginning of this year.

From May 19 to 21, 2010, the Company participated in the 11^th SIAL China, China's leading annual trade event for the Food, Beverage & Hospitality industries, held at the Shanghai New International Expo Centre.

Business Outlook

Following a successful distributor conference in late January 2010, as of June 28, 2010, Yayi International has signed the sales contracts with distributors with an aggregate expected sales value of approximately $71.4 million (value-added tax included). The Company reaffirms its previous guidance for the new fiscal year ending March 31, 2011 of net sales between $58.6 million to $65.9 million.

"We are encouraged by the swift increase in sales in recent moths and expect our new fiscal year to demonstrate our financial strength as we complete the transition to the new product portfolio and continue with our production capacity expansion through the construction of goat milk powder production lines, goat farm facilities, and goat milk collection stations," said Ms. Liu. "We are still on track to start production at the new processing plant in Tianjin in the fourth quarter of calendar year 2010, and expect to commence production at our new raw milk processing facility in Shaanxi Province by the end of 2011. Together, these two facilities will increase our output of finalized goat milk powder products by 250% by the end of calendar year 2010 and increasing raw milk powder production capacity by 460% by the end of calendar year 2011."