PART
I
Item
1. Identity Of Directors, Senior Management and Advisers
Not
applicable.
Item
2. Offer Statistics and Expected Timetable
Not
applicable.
Item
3. Key Information
A.
Selected Financial Data
The following table presents the selected
consolidated financial information for our company. The selected consolidated statements of comprehensive loss data for the years
ended December 31, 2014 and 2015 and the consolidated balance sheet data as of December 31, 2014 and 2015 have been derived from
our audited consolidated financial statements which are included in this annual report beginning on page F-1. The selected consolidated
statements of comprehensive income (loss) data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated
balance sheet data as of December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements
which are not included in this annual report. Our audited consolidated financial statements are prepared and presented in accordance
with U.S. GAAP.
Our
historical results are not necessarily indicative of the results that may be expected for any other future period.
You
should read the selected consolidated financial data set forth below in conjunction with Item 5, “Operating and Financial
Review and Prospects” and our audited consolidated financial statements and notes thereto included elsewhere in this Report.
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Statements of Comprehensive Income (Loss) Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
97,363
|
|
|
|
15,085
|
|
|
|
114,190
|
|
|
|
18,115
|
|
|
|
125,088
|
|
|
|
20,206
|
|
|
|
107,695
|
|
|
|
17,531
|
|
|
|
164,251
|
|
|
|
26,370
|
|
Cost of goods sold
|
|
|
86,145
|
|
|
|
13,347
|
|
|
|
97,788
|
|
|
|
15,513
|
|
|
|
102,015
|
|
|
|
16,479
|
|
|
|
88,987
|
|
|
|
14,486
|
|
|
|
140,203
|
|
|
|
22,509
|
|
Gross profit
|
|
|
11,218
|
|
|
|
1,738
|
|
|
|
16,402
|
|
|
|
2,602
|
|
|
|
23,073
|
|
|
|
3,727
|
|
|
|
18,708
|
|
|
|
3,045
|
|
|
|
24,048
|
|
|
|
3,861
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,540
|
|
|
|
858
|
|
|
|
8,186
|
|
|
|
1,298
|
|
|
|
10,388
|
|
|
|
1,678
|
|
|
|
8,605
|
|
|
|
1,401
|
|
|
|
11,270
|
|
|
|
1,809
|
|
Selling expenses
|
|
|
7,360
|
|
|
|
1,140
|
|
|
|
10,027
|
|
|
|
1,591
|
|
|
|
14,055
|
|
|
|
2,270
|
|
|
|
15,162
|
|
|
|
2,468
|
|
|
|
16,649
|
|
|
|
2,673
|
|
Loss from operations
|
|
|
(1,683
|
)
|
|
|
(260
|
)
|
|
|
(1,811
|
)
|
|
|
(287
|
)
|
|
|
(1,370
|
)
|
|
|
(221
|
)
|
|
|
(5,059
|
)
|
|
|
(824
|
)
|
|
|
(3,870
|
)
|
|
|
(621
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
(4,402
|
)
|
|
|
(682
|
)
|
|
|
(4,970
|
)
|
|
|
(788
|
)
|
|
|
(5,418
|
)
|
|
|
(875
|
)
|
|
|
(6,307
|
)
|
|
|
(1,026
|
)
|
|
|
(3,944
|
)
|
|
|
(633
|
)
|
Subsidy income
|
|
|
6,193
|
|
|
|
959
|
|
|
|
7,783
|
|
|
|
1,234
|
|
|
|
1,093
|
|
|
|
176
|
|
|
|
4,604
|
|
|
|
749
|
|
|
|
6,683
|
|
|
|
1,073
|
|
Gain from loan restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,828
|
|
|
|
293
|
|
Other income (expense)
|
|
|
624
|
|
|
|
97
|
|
|
|
449
|
|
|
|
71
|
|
|
|
280
|
|
|
|
45
|
|
|
|
(176
|
)
|
|
|
(28
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
Income (loss) before income tax
|
|
|
733
|
|
|
|
114
|
|
|
|
1,451
|
|
|
|
230
|
|
|
|
(5,416
|
)
|
|
|
(875
|
)
|
|
|
(6,938
|
)
|
|
|
(1,129
|
)
|
|
|
693
|
|
|
|
111
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
|
733
|
|
|
|
114
|
|
|
|
1,451
|
|
|
|
230
|
|
|
|
(5,416
|
)
|
|
|
(875
|
)
|
|
|
(6,938
|
)
|
|
|
(1,129
|
)
|
|
|
693
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.01
|
|
|
|
*
|
|
|
|
0.01
|
|
|
|
*
|
|
|
|
(0.04
|
)
|
|
|
(0.01
|
)
|
|
|
(0.06
|
)
|
|
|
(0.01
|
)
|
|
|
*
|
|
|
|
*
|
|
Diluted
|
|
|
0.01
|
|
|
|
*
|
|
|
|
0.01
|
|
|
|
*
|
|
|
|
(0.04
|
)
|
|
|
(0.01
|
)
|
|
|
(0.06
|
)
|
|
|
(0.01
|
)
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in loss per share computation: (**)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
152,475,667
|
|
|
|
152,475,667
|
|
Diluted
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
123,000,000
|
|
|
|
152,475,667
|
|
|
|
152,475,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
733
|
|
|
|
114
|
|
|
|
1,451
|
|
|
|
230
|
|
|
|
(5,416
|
)
|
|
|
(875
|
)
|
|
|
(6,938
|
)
|
|
|
(1,129
|
)
|
|
|
693
|
|
|
|
111
|
|
Unrealized foreign currency translation adjustment
|
|
|
1,133
|
|
|
|
175
|
|
|
|
251
|
|
|
|
40
|
|
|
|
931
|
|
|
|
150
|
|
|
|
(131
|
)
|
|
|
(21
|
)
|
|
|
(1,274
|
)
|
|
|
(204
|
)
|
Comprehensive income (loss)
|
|
|
1,866
|
|
|
|
289
|
|
|
|
1,702
|
|
|
|
270
|
|
|
|
(4,484
|
)
|
|
|
(725
|
)
|
|
|
(7,069
|
)
|
|
|
(1,150
|
)
|
|
|
(581
|
)
|
|
|
(93
|
)
|
*:
less than 0.01
**:
The outstanding shares are presented assuming the acquisition took place on January 1, 2011.
The
following table presents a summary of our consolidated balance sheet data as of the dates set forth below:
|
|
For
the Year Ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Summary
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
2,359
|
|
|
|
371
|
|
|
|
2,567
|
|
|
|
407
|
|
|
|
4,076
|
|
|
|
667
|
|
|
|
4,546
|
|
|
|
741
|
|
|
|
4,420
|
|
|
|
681
|
|
Accounts
receivable
|
|
|
4,957
|
|
|
|
780
|
|
|
|
10,506
|
|
|
|
1,667
|
|
|
|
17,881
|
|
|
|
2,926
|
|
|
|
15,740
|
|
|
|
2,564
|
|
|
|
31,151
|
|
|
|
4,799
|
|
Inventories,
net
|
|
|
6,430
|
|
|
|
1,012
|
|
|
|
6,664
|
|
|
|
1,058
|
|
|
|
7,492
|
|
|
|
1,226
|
|
|
|
7,738
|
|
|
|
1,261
|
|
|
|
11,588
|
|
|
|
1,785
|
|
Advances
to suppliers
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,563
|
|
|
|
256
|
|
|
|
1,708
|
|
|
|
278
|
|
|
|
496
|
|
|
|
76
|
|
Due
from related party
|
|
|
16,643
|
|
|
|
2,620
|
|
|
|
23,893
|
|
|
|
3,792
|
|
|
|
931
|
|
|
|
152
|
|
|
|
6,695
|
|
|
|
1,091
|
|
|
|
2,216
|
|
|
|
341
|
|
Other
receivables, net
|
|
|
6,693
|
|
|
|
1,054
|
|
|
|
592
|
|
|
|
94
|
|
|
|
3,051
|
|
|
|
499
|
|
|
|
944
|
|
|
|
154
|
|
|
|
229
|
|
|
|
35
|
|
Restricted
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800
|
|
|
|
131
|
|
|
|
8,400
|
|
|
|
1,368
|
|
|
|
400
|
|
|
|
62
|
|
Other
current assets
|
|
|
4,488
|
|
|
|
707
|
|
|
|
1,357
|
|
|
|
215
|
|
|
|
4,457
|
|
|
|
729
|
|
|
|
6,327
|
|
|
|
1,031
|
|
|
|
6,522
|
|
|
|
1,005
|
|
Long-term
prepaid expenses, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,309
|
|
|
|
378
|
|
|
|
2,193
|
|
|
|
357
|
|
|
|
2,078
|
|
|
|
320
|
|
Plant
and equipment, net of accumulated depreciation
|
|
|
46,510
|
|
|
|
7,322
|
|
|
|
46,685
|
|
|
|
7,409
|
|
|
|
47,618
|
|
|
|
7,793
|
|
|
|
43,984
|
|
|
|
7,165
|
|
|
|
40,079
|
|
|
|
6,174
|
|
Construction
in progress
|
|
|
50
|
|
|
|
8
|
|
|
|
4,086
|
|
|
|
648
|
|
|
|
13,095
|
|
|
|
2,143
|
|
|
|
331
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
Intangible
assets
|
|
|
22,583
|
|
|
|
3,555
|
|
|
|
22,083
|
|
|
|
3,505
|
|
|
|
21,583
|
|
|
|
3,532
|
|
|
|
21,083
|
|
|
|
3,435
|
|
|
|
20,583
|
|
|
|
3,171
|
|
Total
assets
|
|
|
110,715
|
|
|
|
17,429
|
|
|
|
118,723
|
|
|
|
18,842
|
|
|
|
125,412
|
|
|
|
20,524
|
|
|
|
120,722
|
|
|
|
19,666
|
|
|
|
120,001
|
|
|
|
18,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
|
69,225
|
|
|
|
10,898
|
|
|
|
38,200
|
|
|
|
6,062
|
|
|
|
94,200
|
|
|
|
15,416
|
|
|
|
85,400
|
|
|
|
13,912
|
|
|
|
72,930
|
|
|
|
11,234
|
|
Accounts
payable
|
|
|
1,839
|
|
|
|
289
|
|
|
|
3,134
|
|
|
|
497
|
|
|
|
2,539
|
|
|
|
416
|
|
|
|
4,504
|
|
|
|
734
|
|
|
|
6,435
|
|
|
|
991
|
|
Advances
from customers
|
|
|
856
|
|
|
|
135
|
|
|
|
470
|
|
|
|
75
|
|
|
|
365
|
|
|
|
60
|
|
|
|
227
|
|
|
|
37
|
|
|
|
317
|
|
|
|
49
|
|
Due
to related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,557
|
|
|
|
742
|
|
|
|
156
|
|
|
|
24
|
|
Other
payables
|
|
|
7,691
|
|
|
|
1,210
|
|
|
|
1,364
|
|
|
|
216
|
|
|
|
1,234
|
|
|
|
202
|
|
|
|
5,899
|
|
|
|
961
|
|
|
|
2,314
|
|
|
|
356
|
|
Long-term
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
43,000
|
|
|
|
6,824
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,160
|
|
|
|
1,103
|
|
Total
liabilities
|
|
|
79,610
|
|
|
|
12,532
|
|
|
|
86,168
|
|
|
|
13,675
|
|
|
|
98,338
|
|
|
|
16,094
|
|
|
|
100,587
|
|
|
|
16,386
|
|
|
|
89,312
|
|
|
|
13,757
|
|
Preferred
shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
550
|
|
|
|
90
|
|
|
|
552
|
|
|
|
90
|
|
|
|
75
|
|
|
|
12
|
|
Common
shares (***)
|
|
|
781
|
|
|
|
123
|
|
|
|
775
|
|
|
|
123
|
|
|
|
752
|
|
|
|
123
|
|
|
|
755
|
|
|
|
123
|
|
|
|
1,195
|
|
|
|
184
|
|
Additional
paid in capital
|
|
|
35,030
|
|
|
|
5,514
|
|
|
|
34,747
|
|
|
|
5,514
|
|
|
|
33,077
|
|
|
|
5,413
|
|
|
|
33,229
|
|
|
|
5,413
|
|
|
|
45,253
|
|
|
|
6,971
|
|
Accumulated
deficit
|
|
|
(9,039
|
)
|
|
|
(1,423
|
)
|
|
|
(7,516
|
)
|
|
|
(1,193
|
)
|
|
|
(12,634
|
)
|
|
|
(2,067
|
)
|
|
|
(19,625
|
)
|
|
|
(3,197
|
)
|
|
|
(20,032
|
)
|
|
|
(3,086
|
)
|
Accumulated
other comprehensive income
|
|
|
4,333
|
|
|
|
682
|
|
|
|
4,549
|
|
|
|
722
|
|
|
|
5,330
|
|
|
|
872
|
|
|
|
5,224
|
|
|
|
851
|
|
|
|
4,197
|
|
|
|
647
|
|
Total
shareholders’ equity
|
|
|
31,105
|
|
|
|
4,896
|
|
|
|
32,555
|
|
|
|
5,167
|
|
|
|
27,074
|
|
|
|
4,431
|
|
|
|
20,135
|
|
|
|
3,280
|
|
|
|
30,689
|
|
|
|
4,727
|
|
***:
The outstanding shares are presented assuming the acquisition took place on January 1, 2011.
Exchange
Rates
Unless
otherwise stated, with the exception of equity at December 31, 2015, we translated balance sheet amounts at RMB 6.4917 to $1.00
as compared to RMB 6.1385 to $1.00 at December 31, 2014. The equity accounts at December 31, 2015 were stated at their historical
rate. The average translation rates applied to income statement accounts for the year ended December 31, 2015 and the year ended
December 31, 2014 were RMB 6.2288 and RMB 6.1432, respectively. We make no representation that the RMB or U.S. dollar amounts
referred to in this report could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular
rate or at all. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed
therein are due to rounding.
The
exchange rate in effect on May 4, 2016, was USD$ 1.00 to RMB 6.4973
B. Capitalization
and Indebtedness
Not
applicable.
C. Reason
for the Offer and Use of Proceeds
Not
Applicable.
D. Risk Factors
Our
business faces significant risks. You should carefully consider the risks described below, as well as the other information contained
in this Report, including our financial statements and related notes. If any of the following risks, as well as other risks and
uncertainties that are not yet identified or that we currently think are immaterial, actually occur, our business, financial condition
and results of operations could be materially and adversely affected. In that event, the trading price of our ordinary shares
could decline, and you may lose part or all of your investment.
Risks
Relating to Our Financial Conditions and Capital Requirements
We
will require additional capital resource to meet our ongoing obligations and anticipated operations for the next twelve months.
Our
cash reserves are not sufficient to meet our ongoing obligations and anticipated operations for the next twelve month period.
As a result, we will need to seek additional funding in the near future. We currently do not have a specific plan of how we will
obtain such funding; however, we anticipate that additional funding will be in the form of equity financing from the sale of shares
of our common stock or renewing our current obligations with loaners. We may also seek to obtain short-term loans from our directors
or unrelated parties. If we raise additional capital through the issuance of equity, the percentage ownership of our company held
by existing shareholders will be reduced and those shareholders may experience significant dilution. In addition, new securities
may contain certain rights, preferences or privileges that are senior to those of our common stock. If we seek to raise additional
capital through the issuance of debt or its equivalents, which will be more difficult for us for our high debt-to-assets ratio
described in more details below, the incurrence of indebtedness, will result in increased interest expense and, may involve agreements
that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, expending
capital, or declaring dividends, or which impose financial covenants on us that impede our ability to manage our operations.
If
we are unable to obtain additional financing, we may be required to reduce the scope of our business development activities, which
could harm our business plans, financial condition and operating results. If we are unable to operate at a reduced scale, we may
not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
Our
operations are cash intensive so we are generally at high risks of encountering cash flow problems.
We
expend a significant amount of cash in our operations, principally to fund hogs procurement. Our suppliers typically require payment
in full upon delivery. In turn, we typically require our customers of chilled and frozen pork to make payment in full on delivery,
although we offer some of our long-standing customers’ credit terms. We generally fund most of our working capital requirements
out of cash flow generated from operations. Because our operations are cash intensive, we are at high risks of having insufficient
cash flow to fund our operating costs if we fail to generate sufficient revenues from our sales, or if we experience difficulties
collecting our accounts receivable.
We
have over $11 million debt due in the next 12 months and a high debt-to-assets ratio.
We
have over $11 million in debt obligations due in the next twelve months. We have historically carried large debt and have been
able to meet our debt obligations. However, if we fail to secure additional financing for the next twelve month period, or if
we fail to obtain further financing or start to generate sufficient cash from operations a year from now and beyond, we could
default on our debts when they become due. As a result, we may face serious adverse consequences, including acceleration of debts
and penalty for defaults, and eventually bankruptcy.
In
addition, our debt to assets ratio is 67% as a result of carrying large debts. Our assets are highly leveraged among the comparable
companies. We anticipate that it will be generally difficult for us to obtain additional loans. If we cannot alternatively secure
equity financing at acceptable terms, as previously discussed we will have to scale down or even cease our operations.
Half
of our cash reserves are held in personal bank accounts in the name of our cashiers, accountants and Chairman, Chief Executive
Officer and principal shareholder.
At
December 31, 2015, we had approximately cash reserve of $1.7 million, among which approximately $1 million cash was held by our
cashiers, accountants and Mr. Wenping Luo, our President, Chief Executive Officer, and Chairman on behalf of us which was presented
as other current assets in our financial statements. If our cashiers or accountants act against the Company’s instructions
with respect to the Company’s cash held in their personal accounts, or if Mr. Wenping Luo utilizes the Company’s fund
in this personal accounts for any other purpose but the in the Company’s interest, we will not able to resort to any legal
remedies. In either of the forgoing cases, we
will face a significant and direct economic
loss and further stressed cash flow and even sever interruption to the daily operation as a result a lack of capital. However,
before the end of April 2016, we had stopped using individual bank accounts to maintain our cash. The cash held by our
cashiers,
accountants and Mr. Wenping Luo, our President, Chief Executive Officer, and Chairman on behalf of us was wholly returned to our
corporate bank accounts before the end of April 2016.
Risks
Relating To Our Business
If
the chilled and frozen pork market in China does not grow as we expect, our results of operations and financial condition may
be adversely affected.
We
believe chilled and frozen pork products have strong growth potential in China and, accordingly, we have continuously increased
our sales of chilled and frozen pork. If the chilled and frozen pork market in China does not grow as we expect, our business
may be harmed, we may need to adjust our growth strategy and our results of operations may be adversely affected.
We
may be unable to anticipate changes in consumer preferences for processed meat products, which may result in decreased demand
for our products.
Our
continued success in the processed meat products market is in large part dependent on our ability to anticipate and develop products
that appeal to the changing tastes, dietary habits and preferences of our customers. If we are not able to anticipate and identify
new consumer trends and develop new products accordingly, demand for our products may decline and our operating results may be
adversely affected. In addition, we may incur significant costs relating to developing and marketing new products or expanding
our existing product lines in reaction to what we perceive to be a consumer preference or demand. Such development or marketing
may not result in the level of market acceptance, volume of sales or profitability anticipated.
We
utilize our exclusive network of independently operated specialty retail stores and supermarket brand counters to sell a significant
portion of our products and maintain our brand image, and should they perform poorly, our revenues and brand image could be materially
and adversely affected.
In
addition to our sales to wholesale customers, we sell our products through specialty retail stores owned and operated by resellers
of our products with whom we have arrangements to sell our product under the Anpulo brand name, and supermarket counters where
we hire our own employees to operate and manage them. All of these retail outlets exclusively sell our pork products and display
the “Anpulo” logo on the outside of the stores. For the years ended December 31, 2015 and 2014, these retail outlets
accounted for approximately 63% and 69%, respectively, of our total revenue. Any significant deterioration in the sales performance
of our retail
outlets could adversely affect our financial
results. In addition, any sanitation, hygiene or food
quality problems that might arise from the
retail outlets could adversely affect our brand image and lead to a loss of
sales.
Our
retails rely on the performance of independently owned and operated stores and supermarkets for the success of our sales, and
should they perform poorly or give priority to our competitors’ products, our sales performance and branding image could
be materially and adversely affected.
We
retail our products through independently owned and operated stores and counters at supermarkets, which in turn sell the products
to end consumers. Any significant deterioration in the sales performance of the independent stores or overall popularity of the
supermarkets, could adversely affect the performance of our products. Furthermore, the supermarkets at which our counters situate
could carry products that directly compete with our products for retail space and consumer purchases. There is a risk that these
supermarkets may give higher priority to products of, or form alliances with, our competitors. If the supermarkets do not provide
our products with similar levels of promotional support, our sales performance and brand imaging could be adversely affected.
The
loss of any of our significant customers could reduce our revenues and our profitability.
Our
key customers are principally wholesalers and distributors, supermarkets and large retailers in China. For the years ended December
31, 2015 and 2014, Wuhan Zhongbai Chain Warehouse Supermarket Co., Ltd. accounted for 19% and 26% of our sales, respectively.
If we lose Wuhan Zhongbai Chain Warehouse Supermarket Co., Ltd. as a customer or any customer who becomes to account for a major
portion of our sales, the loss of a significant portion of our sales to them could have an adverse effect on our business, financial
condition and results of operations. Any extended discontinuance of sales to this customer could, if not replaced, have a material
impact on our operations.
We
may experience difficulties in maintaining long-term relationships with customers who do not currently have a contract with us,
which will harm our ability to maintain a steady sales level.
Some
of our customers including our current largest customer Wuhan Zhongbai Chain Warehouse Supermarket Co., Ltd. (“Wuhan Zhongbai”)
purchase our products through spot orders without contracts. These customers would incur almost no immediate economic cost if
they abandon their business relationship with our Company and place orders with other meat product suppliers. Therefore, there
can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue
to supply these customers at current levels or at all. If we cannot maintain long-term relationships with these customers, a loss
of order volumes from them, or a significant reduction in their purchase orders could have a material adverse effect on our business,
financial condition and results of operations. In particular, if we lose part or all of the orders from Wuhan Zhongbai, we will
experience immediate and considerable decrease in our revenue and profit, and face a further stressed cash flow, without remedies
that would have been available to us if we had a contract.
If
there are any interruptions to or a decline in the amount or quality of hog supply, our production or sales could be materially
and adversely affected.
Live
native hogs and raw pork are the principal raw materials used in our production. We do not rear hogs, but instead purchase them
from suppliers who aggregate supply from local pig farms and individual farmers who only raise one or two pigs in their backyards.
Suppliers may not be able to provide live hogs of desired quantity or quality to meet our requirements. Though we are currently
not dependent on any one particular supplier for a 10% or more portion of live native hogs, any interruptions to or decline in
the amount or quality of live hogs could materially disrupt our production and adversely affect our business. We are vulnerable
to increases in the price of live hogs and other operating costs, and we may not be able to entirely offset increasing costs by
increasing prices. If we are unable to entirely offset cost increases by raising prices, our profit margins and financial condition
could be adversely affected.
The
loss of senior management or key research and development personnel or our inability to recruit additional personnel may harm
our business.
We
are highly dependent on our senior management to manage our business and operations and our key research and development personnel
for the development of new processing technologies and food products and the enhancement of our existing products. In particular,
we rely substantially on our founder, Chairman and Chief Executive Officer, Mr. Wenping Luo to manage our operations. We also
depend on our key research personnel for the development of new products and manufacturing methods, on our key information technology
and logistics personnel for the production, storage and shipment of our products and on our key marketing and sales personnel,
engineers and other personnel with technical and industry knowledge to transport, market and sell our products. We do not maintain
key man life insurance on any of our senior management or key personnel. The loss of any one of them, in particular Mr. Luo, would
have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is
intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management
or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms
a competing company, they may compete with us for customers, business partners and other key professionals and staff members of
our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement
in connection with his employment with us, we may not be able to successfully enforce these provisions in the event of a dispute
between us and any member of our senior management or key personnel.
We
compete for qualified personnel with other food processing companies, food retailers, logistics companies and research institutions.
Intense competition for these personnel could cause our compensation costs to increase significantly, which could have a material
adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued
service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to
attract and retain qualified employees, we may be unable to meet our business and financial goals.
Any
disruptions to our processing facility may materially and adversely affect our business, financial condition and results of operations.
The
loss of our sole hog processing facility could adversely affect our business. Any of our processing facility, equipment or installed
production lines could suspend or cease operations unexpectedly due to a number of events or circumstances, including problems
with our electricity or water supply, equipment failures, regulatory noncompliance, labor disruptions, fires, floods, earthquakes,
acts of war or other catastrophes. While we seek to operate our facility in compliance with all applicable rules and regulations
and take measures to minimize the risks of disruption at our facility, a material disruption at our processing facility could
prevent us from meeting customer demand, reduce our sales and/or negatively impact our business, financial condition and results
of operations.
We
require various licenses and permits to operate our business, and the loss of, failure to renew or failure to obtain any or all
of these licenses and permits could require us to suspend some or all of our production or distribution operations.
In
accordance with PRC laws and regulations, we are required to maintain various licenses and permits in order to operate our business,
including, without limitation, a slaughtering permit for our chilled and frozen pork production facility, a permit for production
of industrial products for our processed meat production facilities, and permits for distribution of our pork products. We are
required to comply with applicable hygiene and food safety standards in relation to our production and distribution processes.
Our premises and transportation vehicles are subject to regular inspections by the regulatory authorities for compliance with
applicable regulations. Failure to pass these inspections, or the loss of or failure to renew our licenses and permits, could
require us to temporarily or permanently suspend some or all of our production or distribution operations, which could disrupt
our operations and adversely affect our revenues and profitability.
Damages
not covered by our insurance might result in losses for us, which could have an adverse effect on our business.
As
is typical in our business, our plants, distribution centers, and vehicles, among others, are insured. However, our insurance
is limited. We do not carry director and officer insurance which could incur substantial financial burdens on us if under our
memorandum and articles of association we ought to defend our directors and officers in a claim brought against or indemnify them
against judgments, fines and amounts paid in settlement.
In
addition, certain kinds of losses cannot be insured against, and our insurance policies are subject to liability limits and exclusions.
If an event that cannot be insured occurs, or the damages are higher than our policy limits, we may incur significant costs. In
addition, we could be required to pay indemnification to parties affected by such an event.
Furthermore,
even where we incur losses that are ultimately covered by insurance, we may incur additional expenses to mitigate the loss, such
as shifting production to another facility. These costs may not be fully covered by our insurance.
If
our pork products become contaminated, we may be subject to product liability claims and product recalls.
Pork
products may be subject to contamination by disease producing organisms. These organisms are generally found in the environment
and as a result, regardless of the manufacturing practices employed, there is a risk that they could be present in our processed
pork products as a result of food processing. Once contaminated products have been shipped for distribution, illness and death
may result if the organisms are not eliminated at the further processing, foodservice or consumer level. Even an inadvertent shipment
of contaminated products is a violation of law and may lead to increased risk of exposure to product liability claims, product
recalls and increased scrutiny by regulatory agencies and may have a material adverse effect on our business, reputation, prospects,
results of operations and financial condition.
Regulatory
enforcement crackdowns on food processing companies in China could increase our
compliance
costs and reduce our profitability.
We
believe we are in compliance in all material respects with all applicable regulatory requirements of China and all local jurisdictions
in which we operate. However, the PRC government authorities have taken certain measures to maintain China's food market in good
order and to improve the integrity of
China's
food industry, such as enforcing full compliance with industry standards and closing certain
food processing companies in China that did not meet regulatory standards. While the closing of competing meat processing plants
that do not meet regulatory standards could increase our revenues in the long term, we may also experience increased regulatory
compliance costs that could reduce our profitability.
Our
failure to comply with increasingly stringent environmental regulations and related litigation could result in significant penalties,
damages and adverse publicity for our business.
Our
operations and properties are subject to extensive and increasingly stringent laws and regulations pertaining to, among other
things, the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous
wastes) or otherwise relating to protection of the environment. In addition, under PRC environmental regulations, we are required
to obtain an approval on environmental impact assessment before the construction of our production facilities, and we are further
required to undergo environmental protection examinations and obtain acceptance approval from the relevant governmental authorities
after we complete the installation of our manufacturing equipment and before we commence commercial production. Failure to comply
with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal
penalties, liability for damages and negative publicity.
We
have incurred, and will continue to incur, significant capital and operating expenditures to comply with these laws and regulations.
We cannot assure you that additional environmental issues will not require currently unanticipated investigations, assessments
or expenditures, or that requirements applicable to us will not be altered in ways that will require us to incur significant additional
costs.
If
the global economy experiences another downturn or crisis, potential disruptions in the capital and credit markets may adversely
affect our business, including the availability and cost of short-term funds for liquidity requirements, our ability to meet short-term
and long-term commitments and our ability to grow our business; each could adversely affect our results of operations, cash flows
and financial condition.
The
global economy has recently experienced a significant contraction, with an almost unprecedented lack of availability of business
and consumer credit. We rely on the credit markets, particularly for short-term borrowings from banks in China, as well as the
capital markets, to meet our financial commitments and short-term liquidity needs if internal funds are not available from our
operations. Disruptions in the credit and capital markets, as have been experienced since mid-2008, could adversely affect our
ability to draw on our short-term bank facilities. Our access to funds under these credit facilities is dependent on the ability
of the banks that are parties to those facilities to meet their funding commitments, which may be dependent on governmental economic
policies in China. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital
and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period
of time.
Long-term
disruptions in the credit and capital markets, similar to those that have been experienced since mid-2008, could result from uncertainty,
changing or increased regulation, reduced alternatives or failures of significant financial institutions and could adversely affect
our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets
stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could
include deferring capital expenditures, and reducing or eliminating discretionary uses of cash.
Continued
market disruptions could cause broader economic downturns, which may lead to lower demand for our products and increased incidence
of customers' inability to pay their accounts. Further, bankruptcies or similar events by customers may cause us to incur bad
debt expense at levels higher than historically experienced. These events would adversely affect our results of operations, cash
flows and financial position.
Our
growth strategy may prove to be disruptive and divert management resources, which could adversely affect our existing businesses.
Over
the last three years, we increased our retail locations from 68 to 107, including specialty retail stores and “Anpulo”
supermarket counter locations. Our growth strategy includes the continued expansion of our retail locations. In addition, when
our financial position permits, we intend to expand our network of sales offices and warehouses to additional cities in China.
The implementation of such strategy involves present financial, managerial and operational challenges, including diversion of
management attention from existing businesses, difficulty with integrating personnel and financial and other systems, increased
expenses, including compensation expenses resulting from newly hired employees, assumption of unknown liabilities and potential
disputes. We also could experience financial or other setbacks if any of our growth strategies incur problems of which we are
not presently aware.
We
may be unable to maintain our profitability in the face of a consolidating retail environment in China.
We
sell substantial amounts of our products to supermarkets and large retailers. The supermarket and food retail industry in China
has been, and is expected to continue, undergoing a trend of development and consolidation. As the retail food trade continues
to consolidate and our retail customers grow larger and become more sophisticated, they may demand lower pricing and increased
promotional programs. Furthermore, larger customers may be better able to operate on reduced inventories and potentially develop
or increase their focus on private label products. If we fail to maintain a good relationship with our large retail customers,
or maintain a wide offering of quality products, or if we lower our prices or increase promotional support of our products in
response to pressure from our customers and are unable to increase the volume of our products sold, our profitability could decline.
Our
operating results may fluctuate from period to period and if we fail to meet market expectations for a particular period.
Our
operating results have fluctuated from period to period and are likely to continue to fluctuate as a result of a wide range of
factors, including seasonal variations in live hog supply and processed meat products consumption. For example, demand for our
products in general is relatively high before the Chinese New Year in January or February each year and lower thereafter. Our
production and sales of chilled and frozen pork are generally lower in the summer due to a lower supply of live hogs, as well
as a slight drop in meat consumption during the hot summer months. Interim reports may not be indicative of our performance for
the year or our future performance, and period-to-period comparisons may not be meaningful due to a number of reasons beyond our
control. We cannot assure you that our operating results will meet the expectations of market analysts or our investors.
Our
largest shareholder has significant influence over our management and affairs and could exercise this influence against your best
interests.
As
of May 5, 2016, Mr. Wenping Luo, our founder, Chairman and Chief Executive Officer and
our
largest shareholder, along with his wife, beneficially owned approximately 49.9% of our outstanding common shares, and
our other executive officers and directors collectively beneficially owned an additional 0.10% of our outstanding common shares.
As a result, pursuant to our memorandum of association and articles of association and applicable laws and regulations, our controlling
shareholder and our other executive officers and directors are able to exercise significant influence over our company, including,
but not limited to, any shareholder approvals for the election of our directors and, indirectly, the selection of our senior management,
the amount of dividend payments, if any, our annual budget, increases or decreases in our share capital, new securities issuance,
mergers and acquisitions and any amendments to our memorandum of association and articles of association. Furthermore, this concentration
of ownership may delay or prevent a change of control or discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which could decrease the market price of our shares.
The
lack of public company experience of our management team could adversely impact our ability to comply with the
reporting
requirements of U.S. securities laws.
Our
management, including our President, Chief Executive Officer, Chief Financial Officer and our directors, has limited experience
in managing a publicly traded company with active operational activities and has no trainings or experience in maintaining books
and records and preparing financial statements in accordance with U.S. GAAP. Our management’s lack of public company experience
could impair our ability to comply with federal securities laws and make required disclosures on a timely basis including those
imposed by Sarbanes-Oxley Act of 2002. Our management may not be able to implement programs and policies in an effective and timely
manner that adequately respond to such increased legal, regulatory compliance and reporting requirements, including establishing
and maintaining internal controls over financial reporting. Any such deficiencies, weaknesses or lack of compliance could have
a materially adverse effect on our ability to comply with the reporting requirements of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) which is necessary to maintain our public company status. If we were to fail to fulfill
those obligations, our ability to continue as a U.S. public company would be in jeopardy in which event you could lose your entire
investment in our company.
If
we fail to develop and maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent fraud; as a result, current and potential shareholders could lose confidence in our financial reports, which
could harm our business and the trading price of our common shares.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively
prevent
fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report
on our internal controls over financial reporting and have our independent registered public accounting firm annually attest to
our evaluation, as well as issue their own opinion on our internal controls over financial reporting. We cannot be certain that
the measures we have undertaken to comply with Section 404 will ensure that we will maintain adequate controls over our financial
processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we
will need will become more complex, and significantly more resources will be required to ensure our internal controls remain effective.
Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results
or cause us to fail to meet our reporting obligations. If we or our auditors discover a material weakness in our internal controls,
the disclosure of that fact, even if the weakness is quickly remedied, could diminish investors' confidence in our financial statements
and harm our share price. In addition, non-compliance with Section 404 could subject us to a variety of administrative sanctions,
including the suspension of trading, ineligibility for listing on one of the national securities exchanges and the inability of
registered broker-dealers to make a market in our common shares, which could reduce our share price.
Our
classified board
structure
may prevent a change in our control.
Our
board of directors is divided into three classes of directors. The current terms of the directors expire in 2016, 2017 and 2018,
respectively. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year
one class of directors is elected by the shareholders. The staggered terms of our directors may reduce the possibility of a tender
offer or an attempt at a
change
in control, even though a tender offer or change
in control might be in the best interest of our shareholders. For directors whose terms were expired in 2014 and 2015, we have
not held a shareholders' meeting to re-elect new directors yet.
We
may not pay dividends.
We
have not previously paid any cash dividends, and we do not anticipate paying any dividends on our common shares. We cannot assure
you that our operations will continue to result in sufficient revenues to enable us to operate at profitable levels or to generate
positive cash flows. Furthermore, there is no assurance our Board of Directors will declare dividends even if we are profitable.
Dividend policy is subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial
condition, capital requirements and other factors. If we determine to pay dividends on any of our common shares in the future,
we will be dependent, in large part, on receipt of funds from Anpulo Laifeng.
We
are an “emerging growth company” under the jobs act and any decision on our part to comply with certain reduced disclosure
requirements applicable to “emerging growth companies” could make our common stock less
attractive
to investors.
We
are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging
growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public
companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with
the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of
holding
a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved. We could be an “emerging growth company” for up to five years, or until the earliest of (i) the last day
of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is
held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter,
or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
In
addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. However, we have elected to opt out of the extended transition period for complying
with the revised accounting standards.
Our
status as an “emerging growth company” under the jobs act of 2012 may make it more difficult to raise capital as and
when we need it.
Because
of the exemptions from various reporting requirements provided to us as an “emerging growth company,” we may be less
attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable
to compare our business with other companies in our industry if they believe that our reports are not as transparent as other
companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results
of operations may be materially and adversely affected.
Risks
Relating To Our Industry
An
outbreak of A/
H1N1
influenza (commonly referred to as “swine flu”) or other diseases could adversely affect our business, results
of operations and financial condition.
A
spread of A/H1N1 influenza such as that which occurred in 2009 and 2010, or any outbreak of other epidemics in China affecting
animals or humans might result in material disruptions to our operations, material disruptions to the operations of our customers
or suppliers, a decline in the supermarket or food retail industry or slowdown in economic growth in China and surrounding regions,
any of which could have a material adverse effect on our operations and sales revenue. Negative association of the A/H1N1 flu
with hogs and pork products, since it is commonly referred to by laypersons as “swine flu”, could have a negative
impact on sales of pork products. Moreover, our facilities and products may be affected by A/H1N1 flu or similar diseases in the
future, or that the market for pork products in China may decline as a result of fear of such an outbreak. If either case should
occur, our business, results of operations and financial condition would be adversely and materially affected.
The
hog slaughtering and processed meat industries in China are subject to extensive government regulation, which is still evolving
and could adversely affect our ability to sell products in China or increase our production costs.
The
hog slaughtering and processed meat industries in China are heavily regulated by a number of governmental agencies, including
primarily the Ministry of Agriculture, the Ministry of Commerce, the Ministry of Health, the General Administration of Quality
Supervision, Inspection and Quarantine and the State Environmental Protection Administration. These regulatory bodies have broad
discretion and authority to regulate many aspects of the hog slaughtering and processed meat industries in China, including, without
limitation, setting hygiene standards for production and quality standards for processed meat products. In addition, the hog slaughtering
and processed meat products regulatory framework in China is still in the process of being developed. If the relevant regulatory
authorities set standards with which we are unable to comply or which increase our production costs and hence our prices so as
to render our products non-competitive, our ability to sell products in China may be limited.
The
hog slaughtering and processed meat industries in China may face increasing competition from both domestic and foreign companies,
as well as increasing industry consolidation, which may affect our market share and profit margin.
The
hog slaughtering and processed meat industries in China are highly competitive. Our processed meat products are targeted at mid-
to high-end consumers, a market in which we face increasing competition, from both domestic and foreign suppliers. See “Description
Business-Competition”. In addition, the evolving government regulations in relation to the hog slaughtering industry has
driven a trend of consolidation through the industry, with smaller operators unable to meet the increasing costs of regulatory
compliance and therefore at a competitive disadvantage. We believe that our ability to maintain our market share and grow our
operations within this landscape of changing and increasing competition is largely dependent upon our ability to distinguish our
products and services.
Our
current or potential competitors may develop products of a comparable or superior quality to ours, or adapt more quickly than
we do to evolving consumer preferences or market trends. In addition, our competitors in the raw meat market may merge or form
alliances to achieve a scale of operations or sales network which would make it difficult for us to compete. Increased competition
may also lead to price wars, counterfeit products or negative brand advertising, all of which may adversely affect our market
share and profit margin. In an effort to expand market share or enter into new markets, some of our competitors have used, and
we expect they will continue to use, aggressive pricing strategies, greater incentives and subsidies for distributors, retailers
and customers. If their efforts are successful, our market share and profit margin may be adversely affected. Furthermore, consolidation
among industry participants in China may potentially result in stronger domestic competitors better able to compete as end-to-end
suppliers as well as competitors more specialized in particular areas and geographic markets. We may not be able to compete effectively
with our current or potential competitors, and our inability to compete successfully against competitors could result in lost
customers, loss of market share and reduced operating margins, which would adversely impact our results of operations.
The
outbreak of animal diseases or other epidemics could adversely affect our operations.
An
occurrence of serious animal diseases, such as foot-and-mouth disease, or any outbreak of other epidemics in China affecting animals
or humans might result in material disruptions to our operations, material disruptions to the operations of our customers or suppliers,
a decline in the supermarket or food retail industry or slowdown in economic growth in China and surrounding regions, any of which
could have a material adverse effect on our operations and turnover. In 2006, there was an outbreak of streptococcus suis in hogs,
principally in Sichuan province, PRC, with a large number of cases of human infection following contact with diseased hogs. There
also were unrelated reports of diseased hogs in Guangdong province, PRC. Our procurement and production facilities are located
in Henan province, PRC and were not affected by the streptococcus suis infection. In 2010, there were reports of an outbreak of
foot-and-mouth disease in several provinces in China, such as Guangdong, Gansu, Jiangxi, Xinjiang and Tibet, and tens of thousands
of hogs were culled after such disease outbreak in 2010. In addition, in 2010 and 2011, there have been reports of outbreaks of
foot-and-mouth disease in countries and regions near China, such as in Japan and South Korea. Such outbreaks could spread to China.
There can be no assurance that our facilities or products will not be affected by an outbreak of this disease or similar ones
in the future, or that the market for pork products in China will not decline as a result of fear of disease. In either case,
our business, results of operations and financial condition would be adversely and materially affected.
Consumer
concerns regarding the safety and quality of food products or health concerns could adversely affect sales of our products.
Our
sales performance could be adversely affected if consumers lose confidence in the safety and quality of our products. Consumers
in China are increasingly conscious of food safety and nutrition. Consumer concerns about, for example, the safety of pork products,
or the safety of food additives used in processed meat products, could discourage them from buying certain products and cause
our results of operations to suffer. Specifically in 2011, there was some negative publicity regarding the quality and safety
of some of our competitors’ meat products. While we believe that we maintain an advanced system for quality assurance and
control, our operations may be impacted by the deteriorating reputation of the food industry in China due to recent food safety
scandals.
We
may be subject to substantial liability should the consumption of any of our products cause personal injury or illness and, unlike
most food processing companies in the United States, we do not maintain product liability insurance to cover our potential liabilities.
The
sale of food products for human consumption involves an inherent risk of injury to consumers. Such injuries may result from tampering
by unauthorized third parties or product contamination or degeneration, including the presence of foreign contaminants, chemical
substances or other agents or residues during the various stages of the procurement and production process. The PRC Food Safety
Law which became effective on June 1, 2009 enhances the supervision and examination of governmental authorities over food production
and provides that no exemption from such inspections and examinations shall be permitted. While we are subject to governmental
inspections and regulations, we cannot assure you that consumption of our products will not cause a health-related illness in
the future, or that we will not be subject to claims or lawsuits relating to such matters.
Even
if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions that our
products caused personal injury or illness could adversely affect our reputation with customers and our corporate and brand image.
Unlike most food processing companies in the United States, but in line with industry practice in China, we do not maintain product
liability insurance. Furthermore, our products could potentially suffer from product tampering, contamination or degeneration
or be mislabeled or otherwise damaged. Under certain circumstances, we may be required to recall products. Even if a situation
does not necessitate a product recall, we cannot assure you that product liability claims will not be asserted against us as a
result. A product liability judgment against us or a product recall could have a material adverse effect on our revenues, profitability
and business reputation.
Our
product and company name may be subject to counterfeiting and/or imitation, which could have an adverse effect upon our reputation
and brand image, as well as lead to higher administrative costs.
We
regard brand positioning as the core of our competitive strategy, and intend to position our “Anpulo” and “Linghaotuzhu”
brand to create the perception and image of health, nutrition, freshness and quality in the minds of our customers. There have
been frequent occurrences of counterfeiting and imitation of products in China in the past. We cannot guarantee that counterfeiting
or imitation of our products will not occur in the future or that we will be able to detect it and deal with it effectively. Any
occurrence of counterfeiting or imitation could negatively affect our corporate and brand image, particularly if the counterfeit
or imitation products cause sickness, injury or death to consumers. In addition, counterfeit or imitation products could result
in a reduction in our market share, a loss of revenues or an increase in our administrative expenses in respect of detection or
prosecution.
Failure
to adequately protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual
property rights may be costly.
We
have registered our “Anpulo” and “Linhaotuzhu” as trademarks in China for the product categories for which
they are currently used. However, there can be no assurance that additional applications, if any, we make to register such mark,
or any other trade name or trademark we may seek to register, will be approved and/or that the right to the use of any such trademarks
outside of their respective current areas of usage will not be claimed by others. We also own the rights to two domain names that
we use in connection with the operation of our business. We believe that such trademarks and domain names provide us with the
opportunity to enhance our marketing efforts for our products. Failure to protect our intellectual property rights may undermine
our marketing efforts and result in harm to our reputation and the growth of our business.
PRC
intellectual property-related laws and their implementation are still under development. Accordingly, intellectual property rights
in China may not be as effective as in the United States or many other countries. Litigation may be necessary to enforce our intellectual
property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability of China's
legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt
the unauthorized use of our intellectual property through litigation in a timely manner or at all. Furthermore, any such litigation
may be costly and may divert management attention away from our business and cause us to expend significant resources. An adverse
determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation.
We have no insurance coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover
them from other parties. All of the foregoing factors could harm our business and financial condition.
Risks
Relating To Conducting Business in China
Substantially
all of our assets and operations are located in China, and substantially all of our revenue is sourced from China. Accordingly,
our results of operations and financial position are subject to a significant degree to economic, political and legal developments
in China, including the following risks:
We
derive virtually all of our revenues from sales in China and a general economic downturn, a recession or a sudden disruption in
business conditions in China could have a material adverse effect on our business and financial condition.
Consumer
spending is generally affected by a number of factors, including general economic conditions, the level of unemployment, inflation,
interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer
purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact
sales of our products. In addition, sudden disruption in business conditions as a result of a terrorist attack, retaliation and
the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters,
pandemic situations or large scale power outages can have a short or, sometimes, long-term impact on consumer spending.
All
of our revenues are generated from sales in China. We anticipate that revenues from sales of our products in China will continue
to represent a substantial proportion of our total revenues in the near future. A downturn in the economy in China, any recession
or a sudden disruption of business conditions in China's economy could, among other things, adversely affect consumer buying power
and discourage consumption of our products, which in turn would have a material adverse effect on our business, financial condition
and results of operations.
Changes
in the political and economic policies of the PRC government, including those that are intended to address the rising inflation
rates in China, could have a material adverse effect on our operations.
Our
business operations may be adversely affected by the political and economic environment in China. China has operated as a socialist
state since 1949 and is controlled by the Communist Party of China. As such, the economy of China differs from the economies of
most developed countries in many respects, including, but not limited to:
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recent years, however, the government has introduced measures aimed at creating a "socialist market economy" and policies
have been implemented to allow business enterprises greater autonomy in their operations. Nonetheless, a substantial portion of
productive assets in China is still owned by the PRC government. Changes in the political leadership of China may have a significant
effect on laws and policies related to the current economic reforms program, other policies affecting business and the general
political, economic and social environment in China, including the introduction of measures to control inflation, changes in the
rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign
investment. Moreover, economic reforms and growth in China have been more successful in certain provinces in China than in others,
and the continuation or increases of such disparities could affect the political or social stability in China.
Although
we believe the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on
the economic development in China, the future direction of these economic reforms is uncertain and the uncertainty may decrease
the attractiveness of our company as an investment, which may in turn materially adversely affect the price at which our shares
trade.
Furthermore,
in recent years the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. These
factors have led to the adoption by the PRC government, from time to time, of various measures designed to restrict the availability
of credit or regulate growth and contain inflation. High inflation may cause the PRC government to impose controls on credit and/or
prices, or to take other actions, which could result in a slowdown in economic activity in China, adversely affect the market
demand for our products or increase the financing costs of our Company. In addition, if prices for our products increase at a
rate that is insufficient to compensate for the rise in the cost of hogs and other supplies due to inflation, and we are unable
to mitigate these inflation increases through customer pricing, our profitability may be reduced and our growth prospects may
be negatively impacted.
Social
conditions in China could have a material adverse effect on our operations as the PRC
government
continues to exert substantial influence over the manner in which we must conduct our business
activities.
The
government of China has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be adversely affected by changes in Chinese laws and
regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property
and other matters. We believe our operations in China are in compliance with all applicable legal and regulatory requirements.
However, the central or local governments may impose new, stricter regulations or interpretations of existing regulations that
would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Were the PRC government, or local municipalities, to limit our ability to develop, produce, import or sell our products in China,
or to finance and operate our business in China, our business could be adversely affected.
We
rely on contractual arrangement with Anpulo Laifeng and its shareholders for the operation of our domestic business in China,
which may not be as effective as direct ownership. If Anpulo Laifeng and its shareholders fail to perform their obligations under
these contractual arrangements, we may have to resort to litigation or arbitration to enforce our right, which may be time-consuming,
unpredictable, expensive and damaging to our operations and reputation.
We
have relied and expect to continue to rely on contractual arrangements with Anpulo Laifeng to operate our domestic business. For
a description of these contractual arrangements, see “Description of Business- Our Corporate Structure- Control Agreements”.
These contractual arrangements provide us with effective control over domestic entity and allow us to obtain economic benefit
from it. Although we have been advised by our PRC counsel, Kai Tong Law firm, that these contractual arrangements are in compliance
with current PRC laws, these contractual arrangements may not be effective in providing control as direct ownership. For example,
Anpulo Laifeng and its shareholders could breach their contractual arrangements with us by failing to operate our domestic business
in an acceptable manner or taking other actions that are detrimental to our interests. In addition, if the shareholders of Anpulo
Laifeng refuse to transfer their equity interests in Anpulo Laifeng to us or our designee when we exercise our call option pursuant
to these contractual arrangements, we may have to take legal actions to compel them to perform their contractual obligations.
If
we were the controlling shareholder of Anpulo Laifeng with direct ownership, we would be able to exercise our rights as shareholders,
rather than our rights under the powers of attorney, to effect changes to their boards of directors, which in turn could implement
changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if Anpulo
Laifeng or their respective shareholders fail to perform their obligations under these contractual arrangements, we may incur
substantial costs to enforce such arrangements and rely on legal remedies under PRC law, which may not be sufficient or effective.
All
of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the
PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is not as developed as in other jurisdictions, such as the United States.
As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Under PRC
law, rulings by arbitrators are final, parties cannot appeal the arbitration results in court and the prevailing parties may only
enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses
and delay. If we are unable to enforce these contractual arrangements, we may not be able to exert effective control over Anpulo
Laifeng and our ability to conduct our business may be negatively affected.
If
we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of
enforcing these contractual arrangements, our business and operations in China could be disrupted, which could materially and
adversely affect our results of operations and damage our reputation. See "—Risks Related to Doing Business in China—Uncertainties
with respect to the PRC legal system could adversely affect our ability to enforce our legal rights."
Recent
regulatory reforms in China may limit our ability as a foreign investor to acquire additional companies or businesses in China,
which could hinder our ability to expand in China and adversely affect our long-term profitability.
Our
long-term business plan may include an acquisition strategy to increase the number or types of products we offer, increase our
manufacturing or production capabilities, strengthen our sources of supply or broaden our geographic reach. Recent PRC regulations
relating to acquisitions of PRC companies by foreign
entities
may limit our ability to acquire PRC companies and adversely affect the implementation of
our strategy as well as our business and prospects.
On
August 8, 2006, the PRC Ministry of Commerce, the State-owned Assets Supervision and Administration
Commission
,
the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission
and the State Administration of Foreign Exchange jointly promulgated a new rule entitled “Provisions Regarding Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors” (the “M&A Rules”), which became effective on
September 8, 2006 and were amended on June 22, 2009 by the Ministry of Commerce, relating to acquisitions by foreign investors
of businesses and entities in China. The M&A Rules provide the basic framework in China for the approval and registration
of acquisitions of domestic enterprises in China by foreign investors.
The
M&A Rules establish additional procedures and requirements that could make some acquisitions of Chinese companies by foreign
investors more time-consuming and complex than in the past. After the promulgation of the M&A Rules, the PRC government can
now exert more control over the acquisitions of Chinese companies, including requirements in some instances that the Ministry
of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese
domestic enterprise.
The
M&A Rules stress the necessity of protecting national economic security in China in the context of foreign acquisitions of
domestic enterprises. Foreign investors must comply with comprehensive reporting requirements in connection with acquisitions
of domestic companies in key industrial sectors that may affect the security of the “national economy” or in connection
with acquisitions of domestic companies holding well-known trademarks or traditional brands in China. Failure to comply with such
reporting requirements that cause, or may cause, significant affect on national economic security may be terminated by the relevant
ministries or be subject to other measures as are deemed necessary to mitigate any adverse effect.
Our
business operations or future strategy could be adversely affected by the M&A Rules. For example, if we decide to acquire
a PRC company, complying with the requirements of the M&A Rules to complete such transactions could be time-consuming, and
any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability
to complete such transactions. This may restrict our ability to implement our acquisition strategy and adversely affect our business
and prospects.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
shareholders to personal liability and limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise materially
and adversely affect us.
The
PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in October 2005 named Notice on Relevant Issues
Concerning Foreign Exchange Administration for PRC Residents to
Engage
in Financing
and Return Investments via Overseas Special Purpose Vehicles, or the Circular 75, requiring PRC residents, including both legal
persons and natural persons, to register with an appropriate local SAFE branch before establishing or controlling any company
outside of China, referred to as an "offshore special purpose company," for the purpose of acquiring any assets of or
equity interest in PRC companies and raising fund from overseas. When a PRC resident contributes the assets or equity interests
it holds in a PRC company into the offshore special purpose company, or engages in overseas financing after contributing such
assets or equity interests into the offshore special purpose company, such PRC resident shall modify its SAFE registration in
light of its interest in the offshore special purpose company and any change thereof. In addition, any PRC resident that is the
shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch, with
respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger,
division, long-term equity or debt investment or creation of any security interest over any assets located in China. PRC residents
who have established or acquired direct or indirect control of offshore companies that have made onshore investments in China
in the past were required to complete the registration procedures by March 31, 2006. Moreover, PRC subsidiaries of an offshore
special purpose company are required to coordinate and supervise the filing in a timely manner of SAFE registrations by the offshore
holding company's shareholders who are PRC residents. If these shareholders fail to comply, the PRC subsidiaries are required
to report to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE
authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer
or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute
additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could
result in fines and other liabilities under PRC laws for evasion of foreign exchange restrictions.
Our
shareholders, who are PRC citizens or residents, have not completed the necessary applications and filings as required under SAFE
Circular 75 and other related rules. We have requested our shareholders, who are PRC citizens or residents to complete the required
applications and filings. However, we cannot guarantee that they will complete the applications and filings or do so in a timely
manner. As such, failure by any such shareholders or beneficial owners to comply with SAFE Circular 75, could subject themselves
to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our ability to contribute additional
capital into or provide loans to our PRC subsidiaries and limit our PRC subsidiaries' ability to make distributions or pay dividends
or affect our ownership structure, which could adversely affect our business and prospects.
In
addition, the PRC National Development and Reform Commission, or the NDRC, promulgated a rule in October 2004 named the Interim
Measures for the Administration of Examination and Approval of Overseas Investment Projects, or the NDRC Rule, which requires
NDRC approvals for overseas investment projects made by PRC entities. The NDRC Rule also provides that approval procedures for
overseas investment projects of PRC individuals must be implemented with reference to this NDRC Rule. However, there exist extensive
uncertainties as to interpretation of the NDRC Rule with respect to its application to a PRC individual's overseas investment
and, in practice, we are not aware of any precedents that a PRC individual's overseas investment has been approved by the NDRC
or challenged by the NDRC based on the absence of NDRC approval. Our current beneficial owners who are PRC individuals did not
apply for NDRC approval for investment in us. We cannot predict how and to what extent this will affect our business operations
or future strategy. For example, the failure of our shareholders who are PRC individuals to comply with the NDRC Rule may subject
these persons or our PRC subsidiary to certain liabilities under PRC laws, which could adversely affect our business.
Fluctuations
in the value of the RMB or further movements in exchange rates may have a material adverse effect on our financial condition and
results of operations.
At
present, all of our sales are denominated in RMB. The value of the RMB against the U.S. dollar and other
currencies
is affected by, among other things, changes in China’s political and economic conditions
and China's foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. However, the People's Bank of China regularly intervenes in the foreign exchange market to limit
fluctuations in RMB exchange rates and achieve policy goals. Following the removal of the U.S. dollar peg in July 2005, the RMB
appreciated more than 20% against the U.S. dollar over the three years following such removal. While international reaction to
the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt
an even more flexible currency policy, which could result in further and more significant appreciation of the RMB against the
U.S. dollar and other foreign currencies. On June 19, 2010, the People's Bank of China announced that it will allow a more flexible
exchange rate for the RMB without mentioning specific policy changes, although it ruled out any large-scale appreciation. It is
difficult to predict how long the current situation may last and when and how the RMB exchange rates may change going forward.
As we rely entirely on dividends paid to us by our PRC subsidiaries, any significant revaluation of the RMB may have a material
adverse effect on our revenues and financial condition, and the value of any dividends payable on our shares in foreign currency
terms. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.
As
very limited types of hedging transactions are available in China to reduce our exposure to exchange rate
fluctuations
,
we have not entered into any such hedging transactions. Accordingly, we cannot predict the impact of future exchange rate fluctuations
on our results of operations and may incur net foreign exchange losses in the future.
Governmental
control of currency conversion may affect the ability of our company to obtain working capital from our subsidiaries located in
China and the value of your investment.
The
PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of
currency out of China. We receive substantially all of our revenues in RMB, which currently is not a freely convertible currency.
Under our current structure, our income is primarily derived from the operations of Anpulo Laifeng. Shortages in the availability
of foreign currency may restrict the ability of Anpulo Laifeng to remit sufficient foreign currency to pay dividends or other
payments to us, or otherwise satisfy its foreign currency-denominated obligations. Under existing PRC foreign exchange regulations,
payments relating to "current account transactions", including dividend payments, interest payments and expenditures
from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain
procedural requirements. However, approval from SAFE or its local branch is required where RMB is to be converted into foreign
currency and remitted out of China for capital-account transactions, such as the repatriation of equity investment in the PRC
and the repayment of the principal loans denominated in foreign currencies. Our PRC subsidiaries are able to pay dividends in
foreign currencies to us without prior approval from SAFE, by complying with certain procedural requirements. Our PRC subsidiaries
may also retain foreign currency in their respective current account bank accounts for use in payment of international current
account transactions. However, we cannot assure you that the PRC government will not take measures in the future to restrict access
to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
Our
PRC subsidiaries are subject to restrictions on making payments to us, which could adversely affect our cash flow and our ability
to pay dividends on our common shares.
We
are a holding company incorporated in the British Virgin Islands and do not have any assets or conduct any business operations
other than our investment in our operating subsidiaries in China. As a result of our holding company structure, we rely entirely
on contractual payments or dividends from our PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends
and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment
of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends
only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each of our PRC
subsidiaries, including Anpulo Laifeng, is required to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches
50% of its respective registered capital. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion
of their net assets to us in the form of dividends, loans or advances. We anticipate that in the foreseeable future our PRC subsidiaries
will need to continue to set aside 10% of their respective after-tax profits to their statutory reserves. Further, as Anpulo Laifeng
in China have in the past, and may in the future, incur debt on their own, the instruments governing such debt may restrict such
subsidiary's ability to make contractual or dividend payments to any parent corporation or other affiliated entity. If we are
unable to receive all of the funds we require for our operations through contractual or dividend arrangements with our PRC subsidiaries,
we may not have sufficient cash flow to fund our corporate overhead and regulatory obligations in the United States and may be
unable to pay dividends on our shares.
Uncertainties
with respect to the PRC legal system could adversely affect our ability to enforce our legal rights.
We
conduct our business primarily through Anpulo Laifeng, our subsidiary in China. Our operations in China are governed by PRC laws
and regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular,
laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions
may be cited for reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments
in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because
of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules
(some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until some time after the violation. The uncertainties regarding such regulations
and policies present risks that may affect our ability to achieve our business objectives. If we are unable to enforce any legal
rights we may have under our contracts or otherwise, our ability to compete with other companies in our industry could be materially
and adversely affected. In addition, any litigation in China may be protracted and result in substantial costs and diversion of
our resources and management attention.
It
may be difficult to effect service of process upon us or our directors or senior management who live in China or to enforce any
judgments obtained from non-PRC courts.
Our
operations are conducted and our assets are located within China. In addition, our directors and all of our senior management
personnel reside in China, where substantially all of their assets are located. You may experience difficulties in effecting service
of process upon us, our directors or our senior management as it may not be possible to effect such service of process outside
China. In addition, China does not have treaties with the United States and many other countries providing for reciprocal recognition
and enforcement of court judgments. Therefore, recognition and enforcement in China of judgments of a court in the United States
or certain other jurisdictions may be difficult or impossible.
Changes
in China’s labor law restrict our ability to reduce our workforce in China in the event of an economic downturn and may
increase our production costs.
In
June 2007, the National People's Congress of China enacted new labor law legislation called the Labor Contract Law, which became
effective on January 1, 2008. On September 18, 2008, the PRC State Council issued the implementing rules for the Labor Contract
Law. The Labor Contract Law formalized workers' rights concerning overtime hours, pensions, layoffs, employment contracts and
the role of trade unions. Considered one of the strictest labor laws in the world, among other things, the Labor Contract Law
provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on
the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract
in most cases, including the case of the expiration of a fixed-term employment contract. Further, the law requires an employer
to conclude an "employment contract without a fixed-term" with any employee who either has worked for the same employer
for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An "employment contract
without a fixed term" can no longer be terminated on the ground of the expiration of the contract, although it can still
be terminated pursuant to the standards and procedures set forth under the Labor Contract Law. Finally, under the Labor Contract
Law, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances,
such as a restructuring undertaken pursuant to China's Enterprise Bankruptcy Law, or where a company suffers serious difficulties
in production and/or business operations, or where there has been a material change in the objective economic circumstances relied
upon by the parties at the time of the employment contract, thereby making the performance of such employment contract impossible.
To date, there has been very little guidance as to how such circumstances for downsizing will be interpreted and enforced by the
relevant PRC authorities. All of our employees working for us exclusively within China are covered by the Labor Contract Law and
thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns
may be curtailed as a result of this regulation. Accordingly, if we face future periods of decline in business activity generally
or adverse economic periods specific to our business, we expect that the Labor Contract Law will exacerbate the adverse effects
of the economic environment on our results of operations and financial condition.
PRC
regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the
proceeds we received from our public offerings to make loans to our PRC subsidiaries or to make additional capital contributions
to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We
are an offshore holding company conducting our operations in China through our PRC subsidiaries. In utilizing the proceeds we
received from any offering, we plan to make loans to our PRC subsidiaries, whether currently in existence or to be formed in the
future, or make additional capital contributions to our PRC subsidiaries.
Any
loans we make to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE or its local counterparts.
Under applicable PRC law, the government authorities must approve a foreign-invested enterprise's registered capital amount, which
represents the total amount of capital contributions made by the shareholders that have registered with the registration authorities.
In addition, the authorities must also approve the foreign-invested enterprise's total investment, which is equal to the company's
registered capital plus the amount of shareholder loans it is permitted to borrow under the law. The ratio of registered capital
to total investment cannot be lower than the minimum statutory requirement. If we make loans to Anpulo Laifeng, our first-tier
PRC subsidiary, that do not exceed its current maximum amount of borrowings, we will have to register each loan with SAFE or its
local counterpart for the issuance of a registration certificate of foreign debts. In practice, it could be time-consuming to
complete such SAFE registration process. Alternatively or concurrently with the loans, we might make capital contributions to
Anpulo Laifeng, and such capital contributions involve uncertainties of their own. Further, SAFE promulgated a circular (known
as Circular 142) on the Relevant Operating Issues Concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-invested Enterprises in August 2008 with respect to the administration of conversion of foreign
exchange capital contributions of a foreign invested enterprise. The circular clarifies that RMB converted from foreign exchange
capital contributions can only be used for the activities within the approved business scope of such foreign invested enterprise
and cannot be used for domestic equity investments unless otherwise permitted.
We
may not be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis,
if at all, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to
our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive
from public offerings and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely
and materially affect our liquidity and our ability to fund and expand our business.
We
may be subject to fines and legal sanctions by SAFE or other PRC government authorities if we or our employees who are PRC citizens
fail to comply with PRC regulations relating to employee share incentive plan adopted by offshore listed companies for PRC citizens.
In
February 2012, SAFE promulgated the Notice on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating
in Stock Incentive Plans of Offshore Listed Companies, or the Stock Option Rule, which terminated the Operating Procedures for
Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Ownership Plans and Stock Option Plans
of Offshore Listed Companies issued by SAFE on March 28, 2007. Under the Stock Option Rule, PRC citizens who participate in any
stock incentive plan including employee stock holding plans, share option plans or similar plans in an offshore listed company
are required, through a Chinese agent which could be a PRC subsidiary of the offshore listed company, to register with the relevant
local SAFE branch and complete certain other procedures. We and our Chinese employees who have participated in our 2006 Equity
Incentive Plan are subject to the Stock Option Rule. Failure to comply with these regulations may subject us or our Chinese employees
to fines or other legal sanctions imposed by SAFE or other PRC government authorities. In addition, the State Administration of
Taxation has issued several circulars concerning employee share options. Under these circulars, our employees working in China
who exercise our share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to make filings
with relevant tax authorities related to employee share options and withhold individual income taxes resulting from the exercise
of their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed
by tax authorizes or other PRC government authorities.
We
may be classified as a “resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable
tax consequences to us and our non-PRC shareholders.
The
new PRC Enterprise Income Tax Law, or the EIT Law, that became effective January 1, 2008 provides that enterprises established
outside of China whose "de facto management bodies" are located in China are considered "resident enterprises"
and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. A recent circular issued by
the PRC State Administration of Taxation regarding the standards used to classify certain Chinese-invested enterprises controlled
by PRC enterprises or PRC group enterprises and established outside of China as "resident enterprises" clarified that
dividends paid by such "resident enterprises" and other income paid by such "resident enterprises" will be
considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when received or recognized by
non-PRC resident enterprise shareholders. This recent circular also subjects such "resident enterprises" to various
reporting requirements with the PRC tax authorities. Under the implementation regulations to the EIT Law, a "de facto management
body" is defined as a body that has material and overall management and control over the manufacturing and business operations,
personnel and human resources, finances and assets of an enterprise. In addition, the recent circular mentioned above specifies
that certain Chinese-invested enterprises controlled by PRC enterprises or PRC group enterprises will be classified as "resident
enterprises" if the following are located or resident in China: senior management personnel and departments that are responsible
for daily production, operation and management; financial and personnel decision-making bodies; key properties, accounting books,
company seal, and minutes of board meetings and shareholders' meetings; and half or more of senior management or directors having
voting rights. As this circular only applies to enterprises established outside of China that are controlled by PRC enterprises
or groups of PRC enterprises, we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises
because our legal entities organized outside of the PRC are overseas incorporated enterprises controlled by individual PRC residents.
In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed
a PRC "resident enterprise" by the PRC tax authorities.
However,
as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with
respect to the interpretation of the term “de facto management body” as applicable to our offshore entities. If we
are classified as a “resident enterprise” for PRC enterprise income tax purposes, our Company and non-PRC resident
shareholders will face unfavorable tax consequences.
If
the PRC tax authorities determine that we are a “resident enterprise”, a number of unfavorable PRC tax consequences
could follow. First, we will be subject to income tax at the rate of 25% on our worldwide income. The impact of the imposition
of such enterprise income tax will be mitigated to the extent we can obtain a foreign tax credit for such taxes against our U.S.
income tax liability on such income. Second, although under the EIT Law and its implementing rules, dividends paid to us from
our PRC subsidiaries would qualify as "tax-exempted income", we cannot assure you that such dividends will not be subject
to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. Finally, dividends payable by us to our investors and gain on the sale of our shares may become subject to
PRC withholding tax. In the case of dividends paid to non-U.S. holders, any PRC withholding tax on dividends may be in addition
to U.S. withholding tax that could otherwise apply. This could have the effect of increasing our effective income tax rate and
could also have an adverse effect on our net income and results of operations, and may require us to withhold tax on our non-PRC
shareholders.
The
discontinuation of the preferential tax treatments and government subsidies available to us could decrease our net income and
materially and adversely affect our financial condition and results of operations.
Our
PRC subsidiaries are incorporated in China and are governed by PRC income tax laws and regulations. Prior to January 1, 2008,
entities established in China were generally subject to a 30% national and 3% local enterprise income tax rate. Various preferential
tax treatments promulgated by national tax authorities were available to foreign-invested enterprises. Under the new PRC Enterprise
Income Tax Law, or the EIT Law, China has adopted a uniform enterprise income tax rate of 25% for all PRC enterprises (including
foreign-invested enterprises). Under the EIT Law and its implementation regulations, income derived by an enterprise from the
primary processing of agricultural products (including slaughtering live hogs) could be exempt from enterprise income tax. Consequently,
a majority of our subsidiaries in China that slaughter live hogs are exempted from enterprise income tax. For non-primary processing
of agricultural products, we’re subject to the uniform 25% tax rate. We cannot assure you that the tax authorities will
not change their position. We cannot assure you that our PRC subsidiaries will continue to qualify for benefits under the EIT
Law, or that the local tax authorities will not, in the future, change their position and revoke any of our past preferential
tax treatments, any of which could cause our effective tax rate to increase, cause our net income to decrease, and materially
and adversely affect our financial condition and results of operations.
In
addition, the central and local PRC government has provided us with various subsidies to encourage our research and development
activities, building new facilities using information technology, building cold chain logistic and distribution networks, and
for other contributions to the local community, such as increasing employment opportunities. Subsidies granted to us by PRC governmental
authorities are subject to review and may be adjusted or revoked at any time in the future. The discontinuation or reduction of
subsidies currently available to us may materially and adversely affect our financial condition and results of operations.
Our
non-
compliance
with certain social insurance contribution laws and regulations in
the PRC may lead to the imposition of fines and penalties on us.
In
accordance with the relevant PRC national labor laws and regulations, we are required to contribute to a number of employee social
welfare schemes for the benefit of our employees. Such schemes
include
social insurance
(including the basic pension insurance, the basic medical insurance for urban workers, the work-related injury insurance, the
unemployment insurance and the maternity insurance) and housing provident fund contributions. We have not fully complied with
the social insurance and housing fund contribution requirements for our employees.
According
to the confirmation letter issued to us by Laifeng County Office of Enshi Tujia and Miao Autonomous
Prefecture
Housing Provident Fund Management Center, it confirmed that it would not impose any financial penalties or other forms
of administrative penalties on Anpulo Laifeng, nor would it require us to make good any overdue contributions in relation to housing
provident fund.
In
respect of social insurance contributions, as a majority of our employees are rural migrant workers or rural residents, they have
participated in the rural cooperation medical insurance or the basic medical
insurance
for urban residents, according to the confirmation letter issued to us by Laifeng County Social Insurance Bureau, they are permitted
not to participate in the basic medical insurance for urban workers. Under Social Insurance Law of the PRC and other relevant
PRC Laws, the local social insurance authority is entitled to require us to pay the outstanding social insurance within a prescribed
time limit and impose a late charge of 0.05% per day from the day when contribution becomes overdue. If we fail to do so within
such prescribed time limit, a fine ranging from one to three times of the outstanding social insurance may be imposed on us.
Item
4. Information on the Company
In
this Annual Report, the terms “Anpulo,” “Company,” “we,” “us,” and “our,”
refer to Anpulo Food, Inc., and its wholly-owned subsidiary Anpulo International Limited, a holding company formed in Hong Kong
(“Anpulo HK”), Anpulo HK’s wholly-owned subsidiary Guangxiang Investment Consulting Co., Ltd., a limited liability
company located in Shanghai, China (“Anpulo WFOE”), our variable interest entity Laifeng Anpulo (Group) Food Development
Co., Ltd. (“Anpulo Laifeng”), and Anpulo Laifeng’s wholly-owned subsidiary Anpulo Group Hefeng Muye Development
Co., Ltd. (“Anpulo Muye”)
A. History
and Development of the Company
We
are principally engaged in the meat and food processing and distribution business in the People’s Republic of China (“PRC”).
Currently, we have one processing plant located in Laifeng County, Hubei Provinces in the PRC, with a processing plant for hog
slaughtering, cutting, and preserving. Our current maximum production capacity for hog slaughtering is 82 metric tons per day,
based on an eight-hour working day, or approximately 30,000 metric tons on an annual basis. For the cutting function, our current
maximum production capacity is 27 metric tons per day, based on an eight-hour working day, or approximately 10,000 metric tons
on an annual basis. Our plant has 16 smokehouses with a maximum annual production capacity of 150 metric tons in total. We also
own 17 refrigerators for freezing and frozen pork storage. 16 of the refrigerators are located in our processing plant with 2,350
metric tons maximum storage capacity and 1 of the refrigerators located in Wuhan City with 260 metric tons storage capacity.
In
2005, we invested approximately $5,300,000 or RMB 32 million in constructing a new abattoir, a fresh-chilled meat processing facility,
and 11 industrial refrigerators in Laifeng County, Hubei Province. The facility has a production capacity of 82 metric tons per
eight-hour working day, or approximately 30,000 metric tons on an annual basis. The production capacity is designed for the producing
chilled pork, frozen pork, and smoked pork products. The facility had been put into operation on November 20, 2006.
In
June 2011, we invested approximately $430,000 or RMB 2.6 million in installing 5 new refrigerators for an additional 700 metric
tons storage capacity. In February 2012, we installed a new refrigerator with 260 metric tons storage capacity in Wuhan City.
Our
products are sold under the “Anpulo” and “Linghaotuzhu” brand names. Our customers are mainly located
in Hubei and Hunan Province, including the seven major supermarket operators. For the fiscal year ended December 31, 2015, we
are selling our chilled pork, frozen pork, and smoked pork through 49 specialty retail stores, 58 supermarket counters, 70 food
distributors and 43 schools and restaurants. For the fiscal year ended December 31, 2014, we are selling our chilled pork, frozen
pork, and smoked pork through 45 specialty retail stores, 58 supermarkets, 61 food distributors and 42 schools and restaurants.
Corporate
History
On
September 22, 2013, Laifeng Anpulo (Group) Food Development Co., Ltd. (“Anpulo Laifeng”) entered into an entrusted
management agreement with Anpulo International Ltd.’s wholly owned subsidiary, Guangxiang Investment Consulting (Shanghai)
Co., Ltd. (“Anpulo WFOE”), which provides that Anpulo WFOE will be entitled to the full guarantee for the performance
of such entrusted management agreement entered into by the Company. Anpulo International Ltd. (“Anpulo HK”) was incorporated
in Hong Kong, People’s Republic of China (“PRC”) on May 30, 2012. Other than the equity interest in Anpulo WFOE,
Anpulo HK does not own any assets or conduct any operations. Anpulo WFOE is also entitled to receive the residual return of the
Company. As a result of the agreement, Anpulo WFOE will absorb 100% of the expected gains or losses of the Company, which results
in Anpulo WFOE being the primary beneficiary of the Company.
Anpulo
WFOE also entered into a pledge of equity agreement with the principal shareholders of the Company (the “Principal Shareholders”),
who pledged all their equity interest in the entity to Anpulo WFOE. The pledge of equity agreement, which were entered into by
each Principal Shareholder, pledged each of the Principal Shareholders’ equity interest in the Company as a guarantee for
the entrustment payment under the Entrusted Management Agreements. In addition, Anpulo WFOE entered into an option agreement to
acquire the Principal Shareholders’ equity interest in these entities if or when permitted by the PRC laws.
Based
on these exclusive agreements, the Company will be treated as a variable interest entity (“VIE”) of Anpulo HK as required
by generally accepted accounting principles in the United States (“US GAAP”), because Anpulo HK is the primary beneficiary
of the VIE. The profits and losses of the Company are allocated based upon the Entrusted Management Agreement.
On
October 30, 2013, we entered into a Share Exchange Agreement (the “Exchange Agreement”) with Anpulo International.
Pursuant to the terms of the Exchange Agreement, the shareholders of Anpulo HK transferred to Anpulo all of the Anpulo HK Shares
in exchange for the issuance of 122,900,000 shares of our common stock (the “Share Exchange”). As a result of the
Share Exchange, Anpulo HK became a wholly-owned subsidiary of us and the shareholders of Anpulo HK acquired approximately 99.92%
of our issued. By way of background, in February 2012, Wenping Luo, the Chairman and principal shareholder of Anpulo Laifeng,
took control of the Company and changed the Company’s name from Europa Acquisition VII, Inc. to Anpulo Food, Inc., in contemplation
of bringing Anpulo Laifeng and its holding companies public in the United States through a reverse acquisition transaction. The
contemplated reverse acquisition between the Company and Anpulo Laifeng and its holding companies was a mere intent of Mr. Luo
at that time and, this intention was abandoned when in January 2013 Mr. Luo took control of another reporting company that was
formed to acquire a target company or business, Specializer, Inc. and changed this company’s name from Specializer, Inc.
to Anpulo Food Development, Inc.. In August 2013, Mr. Luo’s intention of a reverse acquisition between the Company and Anpulo
Laifeng and its holding companies revived, and as the sole shareholder, officer and director of the Company at that time, he made
the decision to proceed with the reverse acquisition transaction. To date, Mr. Luo, in his capacity as the principal shareholder
and the sole officer and director of Anpulo Food Development, Inc. intends that Anpulo Food Development, Inc. remains as a company
formed to acquire a target or business.
The
effect of the Share Exchange is such that effectively a reorganization of the entities has occurred for accounting purposes and
is deemed to be a reverse acquisition. Subsequent to the Share Exchange the financial statements presented are those of a combined
Anpulo HK and its subsidiaries, including its VIE, Anpulo Laifeng, as if the Share Exchange had been in effect retroactively for
all periods presented. As previously noted the “Company” for financial statement purposes was the consolidation of
Anpulo HK, Anpulo WFOE and Anpulo Laifeng. Subsequent to the Share Exchange the “Company” is referred to as the consolidation
of Anpulo HK, Anpulo WFOE, Anpulo Laifeng and Anpulo, with Anpulo as the legal acquirer in Share Exchange, and subsequent to the
Share Exchange the parent company of the consolidated entity.
For financial reporting purposes, Anpulo HK was considered the acquirer in such transaction. As a result, our historical financial
statements for all periods prior to October 30, 2013 included in this report are those of Anpulo HK.
During
the period from our formation on July 31, 2009 to October 30, 2013, we did not generate any significant revenue, and accumulated
no significant assets, as we explored various business opportunities.
B. Business
Overview
We
process, distribute and market pork and cured pork products
in the People’s Republic
of China, (the “PRC” or “China”).
We do not raise hogs, but instead purchase live hogs from pig
farms or individual farmers in Laifeng County and its neighboring area in China for slaughtering, processing and curing.
As
of December 31, 2015 and 2014, our product line included over 192 unique meat products, including chilled pork, frozen pork and
prepared meats
.
We sell all of our products under our “Anpulo” and “Linghaotuzhu”
brand names.
Our
value-added pork and cured pork products are
targeting
China’s middle and high income class. Our products are marketed domestically to supermarkets, warehouse club stores, foodservice
distributors, restaurant operators, and non-commercial establishments, such as schools, hotel chains, healthcare facilities, army
bases and other food processors.
As of December 31, 2015, our wholesale customers included
70 retailers and 54 school cafeterias, factory canteens, hotels, army bases, hospitals and government departments. As of such
date, we also retail through 58 supermarket counter locations and 49 third-party owned and operated specialty boutique stores.
We
currently have one processing plant in China, located in Laifeng County, Enshi Tujia and Miao Prefecture, Hubei province. Our
total production capacity for chilled pork and frozen pork is approximately 85 metric tons per eight-hour day, or approximately
30,000 metric tons on an annual basis. In addition, we have production capacity for prepared meats of approximately 14 metric
tons per eight-hour day, or approximately 5,000 metric tons on an annual basis.
We
have a video monitored logistics system that integrates transportation and warehouse management. As of December 31, 2015, we had
over 12 temperature-controlled trucks to handle our transportation needs and the capacity for our two temperature adjustable warehouses
totaled approximately 5,230 cubic meters.
Our
Industry
The
Meat Industry in China
According
to the Earth Policy Institute, more than a quarter of all the meat produced worldwide is now eaten in China. Half the world’s
pigs, about 476 million of them are said to reside in China. In
1978
, China’s
meat consumption of 8 million tons was one third the U.S. consumption of 24 million tons. But by 1992, China had overtaken the
United States as the world’s leading meat consumer—and it has not looked back since. Now China’s annual meat
consumption of 71 million tons is more than double that in the United States.
Our
observations reveal that the meat industry in China is highly fragmented, characterized by sanitation and hygiene issues, as well
as social demographic trends. Supply is extremely localized with limited distribution capability. China’s vast geography
and ‘in-development’ transport infrastructure have made it difficult to create national or even regional level competition
in the industry. Our management believes that the trend towards greater sales through formal supermarkets and chain stores, coupled
with the expansion of our sales and distribution network, will continue to favorably impact our business.
Historically,
the vast majority of meat sales in China have taken place in open-air markets or on streets, i.e., in free wet markets. These
markets provide a venue through which customers can buy live poultry or freshly slaughtered meat produced directly from local
farmers. China’s meat industry traditionally has been dominated by small and family-operated butcher shops that would slaughter
the livestock in the open-air marketplaces and without the necessary safety and sterilized equipment. However, if sanitation standards
are not maintained, wet markets can spread disease. Because of the openness, newly introduced animals may come in direct contact
with sales clerks, butchers and customers. Insects such as flies have relatively easy access to the food products. Many times
the carcasses are thrown on the floor to be butchered more easily. In the past, both the avian flu outbreak and SARS can be traced
to the living conditions of keeping of live animals for sale in wet markets and the potential of cross infection this presents.
There are a number of food safety concerns facing the Chinese pork industry, including swine streptococcus and Foot and Mouth
Disease, the use of antibiotics and illegal feed additives, pork injected with water and illegal slaughterhouses. With the increase
of living and hygiene standards, PRC governmental agencies have encouraged the replacement of open-air markets with supermarkets
and convenience stores and, consequently, the market share of open-air markets has continued to decline. We believe that food
safety is a top concern of Chinese consumers who purchase meat products, as health conscious consumers are demanding more sanitary
quality meat products which can only be processed and delivered in a temperature controlled cold chain environment, this will
eventually compel modernization of China’s meat processing industry. We believe this trend will favor our chilled and frozen
pork wholesale business and will result in additional customers for the network of independently operated “Anpulo”
specialty retail stores and supermarket counters that retail our products on an exclusive basis.
The
Pork Industry in China
According
to November 2013 report of the United States Department of Agriculture (“USDA”), since 2010, the market for pork in
China has become the largest in the world, accounting over half of global production and consumption. Production in China has
consistently expanded over the past several years and is forecast at another record 54.7 million tons in 2014, according to USDA.
China became a net importer of pork in 2008. It has imported approximately 400,000 tons of pork per year in recent years. This
compares with global pork trade of less than seven million, according to Rabobank and Earth Policy Institute.
According to USDA November 2013 report, China p
ork imports are expected to grow to a
record
775,000 tons, yet still only account for just over 1 percent of China consumption. Pork is so central to the Chinese diet that
in 2007 the government, hoping to cushion against price spikes, created a strategic pork reserve to accompany its more typical
stockpiles of grain and petroleum.
Pork
is China’s meat of choice, accounting for nearly three fourths of its meat consumption. According to Earth Policy Institute,
on a per person basis, over the past five years, per capita pork consumption in China has grown by over 3 percent a year despite
price increases.
In
addition to a greater general preference for pork, urbanization and rapid income growth are working in parallel to create more
demand for pork and processed pork products. An emerging middle class of relatively high-income consumers is forming in certain
Chinese cities. As household incomes rise, these high-income residents consume more of all categories of foods on a per capita
basis. These residents not only demand a greater quantity of food, but also higher quality (e.g. better cuts of meat, foods that
are safer or healthier) and convenience (processed foods). Reports of food poisoning and dangerous chemical residues have given
rise to strong demand for our pork products whose raw materials are coming from non-polluted mountain grown native hogs. We believe
that affluent consumers would be willing to pay premium prices for foods which coming from a cleaner, safer environment, foods
with purported health benefits or foods with other desirable attributes. We offer a wide range of pork products that appeal to
high-income urban consumers who demand for safety, nutritional value, better taste, quality and convenience.
Competitive
Strengths
We
believe that the following competitive strengths enable us to compete effectively in China's
meat
products market:
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Our
“Anpulo” and “Linghaotuzhu” brand products are sold at premium prices to middle and high income market
in China. Hogs from our region are fed by local farmers with mountain grown herbs, grass, vines, fruits, and other crops such
as corn, potato, and yam, which are free from drug residue, growth hormone and heavy metals residues. We only use hogs supplied
from our region as the raw materials for our pork and cured pork products. The residents in this region have traditionally
made livings on agriculture, livestock and poultry farming, and therefore the area has no industrial or chemical plants and
the pollution is minimal. Hogs raised in our region are grown up in a mountain environment, with an average elevation of 680
meters (2,230 feet). These natively raised hogs typically have a longer growth cycle, normally a few months longer than typical
hogs seen in China or western countries but are awarded with thinner skin, smaller bone structure, less fat, high protein,
tender taste. Because the premium nature of our products, we price them at approximately 20% to 50% higher than similar pork
products.
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Our
geographic location offers lower cost labors and abundant hog supply.
Labor
is a large portion of total operating costs for food processing companies.
Our production
and processing plant is located in Laifeng county, Enshi Tujia and Miao Autonomous Prefecture, which we believe that provides
lower cost labors than that is available for many of our competitors. Laifeng county, and its neighboring counties, are rich
in pig farming, which provides us reliable sources to grow and expand.
The region has hundreds of thousands local experienced
hog-raising farmers. According to our survey, we estimate that Laifeng and its neighboring seven counties currently have an
approximate annual production over four million native hogs. This compares to our current annual slaughter capacity of 300,000
hogs, which provides us reliable sources and ample room to grow and expand
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The
“Anpulo” brand name, to our belief, is well recognized throughout our target markets in Hubei Province, China.
Our “Anpulo” trade name was certified as a “Well-known Trade Name” by the local Administration of
Industry and Commerce of Enshi Prefecture where the Company’s executive office is located and, our “Anpulo”
branded chilled pork and frozen pork products were certified as a “Premier Agricultural Product Brand” by the
local government of Laifeng County. The brand identification differentiates us from many unorganized and low-end meat product
suppliers, and therefore lends us support in developing customer base and implementing our pricing strategy.
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Our
Growth Strategy
Our
long-term business strategy is to establish our Company as a leading provider of premium pork and pork products in China. Our
short-term objectives are to capitalize on current market opportunities and build on our competitive strengths to increase our
market presence and enhance our position as a regional leader in the premium pork markets. The key elements of our growth strategy
include the following:
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Continue
the strategy of offering premium product at premium price.
We apply different pricing strategy than our competitors, targeting
health conscious consumers who are willing to pay premium price for safe, high quality pork products. We believe that food
safety is a top concern of Chinese consumers who purchase meat products.
Our
consumer surveys showed that food safety, nutritional value and taste are the top three concerns of consumers, while price
was ranked fourth.
Therefore, we expect that our products by giving consumers the comfort
and security of safe and health food will remain marketable at extra cost. To distinguish our pork products from the rest,
we plan to continue to sell our pork products at prices approximately 20% to 50% higher than the products of the same category.
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Improve
our warehouse capability
. Our temperature adjustable warehouse capability, although totals approximately 5,230 cubic meters,
falls short of the amount of products that our slaughterhouse could produce in its full capacity. As a result, we are currently
utilizing less than one third of our production capacity at our slaughterhouse. We regard our logistics capabilities as a
key to our growth strategy. We intend to construct new warehouse facilities with walk-in coolers and freezers. The estimated
cost for this project is approximately $700,000. We are currently experiencing a lack of sufficient capital resources to fund
the construction and may encounter difficulties in obtaining additional financing. See “Liquidity and Capital Resource-Requirement
for Additional Funding” on page 43. However, if additional fund becomes available, we intend to prioritize the use of
fund in constructing new warehouse facilities.
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Increase
our market presence in Wuhan City, Chongqing city and Hunan province
. As of December 31, 2015, we operated sales offices
in Laifeng County and Wuhan City and had one warehouse in each of two cities. We plan to increase our market presence by continue
adding more counters in Wuhan City, at a pace of five to ten counters a year within the next five years, in new supermarkets
or at new store location of supermarket already carrying our products. The estimated cost for adding one supermarket counter
is approximately $50,000. We do not currently have sufficient cash reserve to fund adding more counters. To implement this
strategy, we will need to seek additional financing, which may not be available, or at acceptable terms, to us at this time.
See “Liquidity and Capital Resource-Requirement for Additional Funding.” If no fund is secured, we will have to
delay or eventually abandon this strategy. In addition, though no specific action plan is formed, we are also strategizing
to seek expansion opportunities in neighboring provinces. Laifeng county is located in the southwest part of Hubei province
and it’s also in the junction of Hubei province, Hunan province and the municipality Chongqing city. As of December
31, 2015, we sell our products to 22 stores in Hunan province and had no supermarket counter in these two provinces. We believe
our Laifeng location will enable us to continue service the three provinces and municipality and expand our presence there.
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Expand
our product lines.
As of December 31, 2015, our product lines included over 192 types of pork and cured pork products,
and we had no new products under development. At such day, we were unable to ascertain the timeframe by which the development
can be completed. In addition to in-house product development, we plan to seek collaboration with outside academic and research
force to optimize and expand our product lines.
We estimate that these research and development efforts will cost the Company approximately $100,000. Given to the lack of
fund, we are uncertain when we will start this project.
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Enhance
our brand awareness.
We believe we can best achieve sustainable growth through further raising awareness of our brand
names “Anpulo” and “Linghaotuzhu”. We plan to build our brand by focusing on educating consumers of
our pork products through our ongoing holidays and special occasion promotions, and showcase our variety of pork products
through our retail channels including our supermarket counters and third-party owned and operated boutique type, specialty
retail stores. We believe that our retail channels will create additional brand awareness that will benefit our wholesale
customers.
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Our
Products
We
process
live
market hogs and fabricate pork carcasses into various cuts of meat,
and sell them as chilled pork, frozen pork, and prepared meat products.
Chilled
Pork
.
In our production of chilled pork,
in
order for the pork to remain fresh, at our sanitized facilities the pigs are slaughtered and then processed within 30 minutes.
The
meat is then chilled but not frozen at a temperature of between 32℉ (0℃)
and 39.2℉ (4℃) for about 20 hours.
Following this cooling process, fresh pork is cut into various parts in
a sterilized room with the constant temperature of 12°C. This reduces the risk of exposure to germs and bacterial contamination.
Before delivery, the fresh pork is kept in our storage room at a controlled temperature of 0 to 4°C. The meat is stored in
airtight sterilizing rooms filled with ozone, which acts as a sterilizing agent, killing remaining germs and bacteria in the meat.
It
is thereafter maintained at that temperature during transportation.
The entire
process of cold production, cold storage and cold delivery is what we refer to as the “cold chain system.” This cold
chain system ensures the freshness and quality of our product. Our fresh pork products have an average shelf life of 7 days from
the date of production.
While
chilled pork generally is more costly than frozen pork, our market research indicates a trend among customers toward chilled pork
and away from frozen pork, as t
he public generally
perceives that fresh meat retains a better flavor as compared with frozen meat
.
With
our own temperature-controlled trucks, we deliver the chilled pork to our customers
who
comprise mainly supermarkets, specialty boutique stores, fresh food distributors and wholesalers located within a 500 km delivery
radius of our processing plant.
Frozen
Pork
. In the production of our frozen pork, the meat is frozen at –31℉ (–35℃) to –40℉
(–40℃) for 48 hours, after which it is stored or transported at a constant temperature of between –0.4℉
(–18℃) to –13℉ (–25℃).
Since
frozen pork can be preserved for longer periods of time, our frozen meat products are ideal for distribution across longer distances
to
our future targeted first tier cities in China, such as Shanghai, Beijing, Shenzhen,
and Guangzhou. Generally, frozen pork
products have an average shelf life of 180 days from the date of production.
Frozen
pork is cheaper relative to chilled pork at the retail level. Food and food processing companies usually require frozen pork in
their production of processed meats such as luncheon meat and canned, stewed meat. In China, most of the pork sold in markets,
supermarkets and restaurants is frozen. The customers for our frozen pork include food processing companies and food distributors.
Hog
By-Products and Variety Meats
.
In
China, virtually all parts of the pig are valued for consumption and are used in local cuisine. Pig “by-products”
that are not typically used or sold in other parts of the world are prepared and sold in the Chinese market. This includes pig
innards, pig skin, pig tails, lard and pig heads. Pig liver,
stomach, intestine, head and
hoofs are commonly used in Chinese cuisine and are sold to a ready market. These items are also sold to food processing companies
to be used as raw materials for other meat and meat-based products.
Prepared
Meats
. We also produce a line of prepared meats, such as sausages, hams and Chinese cured hams that includes more than 30
items that are marketed under our “Anpulo” brand.
Supply
of Hogs
Live
native hogs and raw pork are the principal raw materials used in our production. We do not rear hogs, but instead purchase them
from suppliers who aggregate supply from local pig farms and individual farmers who only raise one or two pigs in their backyards.
Our suppliers ship their hogs to our slaughter house, and we pay them on cash-on-delivery basis. The apparent advantages of this
decentralized hog supply structure are two folds: first, we obtain competitive market pricing for our supply of pigs; second,
if there is any outbreak of livestock disease, it is likely to be confined to one or a few of these farms and would not affect
our entire supply. Potential disadvantages include variations in quality of stock, and potential variation in quantity and timing
of the supply of hogs to our plant for processing. We are not dependent on any one particular supplier for a 10% or more portion
of live native hogs. We purchase native hogs on a daily basis, and most of the native hogs are processed within 48 hours of arrival.
We currently slaughter less than 100,000 hogs per year. Meanwhile, our survey indicates that Laifeng county and its seven neighboring
counties produce approximate four million native hogs every year. Therefore, we believe the sources of supply of live native hogs
are more than adequate for our present needs.
Manufacturing
and Production
For
each of the years ended December 31, 2015, and 2014 substantially all of our assets, including all of our material assets, were
located in China.
As
of December 31, 2015, we owned and operated one slaughterhouse in Laifeng County, Hubei province to carry out the business of
slaughtering hogs and the production of chilled and frozen pork products. Our current total production capacity for chilled pork
and frozen pork is approximately 85 metric tons per eight-hour day, or approximately 30,000 metric tons on an annual basis. As
of such date, we owned one facility in Laifeng County for prepared pork products. We have production capacity for prepared pork
products of 14 metric tons per eight-hour day, or approximately 5,000 metric tons on an annual basis.
We
procure hogs from local hog farms and breeders located in close proximity to our slaughterhouse. All the hogs we purchase for
slaughtering in our slaughterhouse must have all the health certificates issued by the relevant authorities in China to ensure
that the hogs have been under strict and consistent supervision during the rearing period and are in good health when they are
purchased by us. In addition, the hogs slaughtered in our slaughterhouse are also subject to inspections by our own certified
veterinarians.
Production
of Chilled and Frozen Pork Products.
Our veterinarians ensure that only healthy hogs are slaughtered at our slaughterhouse.
We maintain all required licenses and certificates from central and local government authorities with regard to our pork production
business. In October 2007, we were awarded certifications ISO 9001 and ISO14001. The ISO 9001 certification relates to our production,
research and development and sales activities. The ISO 9001 certification indicates that our slaughterhouse and pork production
operations comply with international standards of quality assurance established by the International Organization of Standardization.
The ISO14001 was developed to provide a management system to help organizations reduce their environmental impact. The ISO14001
provides the framework for us to demonstrate our commitment to the environmental by reducing harmful effects on environment and
providing evidence of continual improvement of environmental management.
When
hogs arrive at the slaughterhouse, our certified veterinarians, together with the local Animal Husbandry Department inspectors,
conduct a physical inspection of the hogs to ascertain whether they are fit for human consumption. Blood and urine samples are
obtained from a random sample of hogs which are tested for disease. The hogs are then weighed and are quarantined for approximately
six to twelve hours, during which time only water is provided to the hogs.
After
the quarantine period has passed, we conduct another physical inspection of the hogs. This physical inspection is conducted jointly
with the inspectors from the Animal Husbandry Department. Hogs that are found fit for human consumption will be slaughtered while
those found to be deficient are immediately culled. We shower the hogs with water before and after slaughter to clean them. Instruments
used for slaughtering and cutting up the carcasses are sterilized several times a day.
Quality
control checks are conducted at all production stages to detect and remove meat that is spoiled or has been infected by bacteria.
The appearance of the skin, internal organs and the meat itself is subject to physical observation and laboratory testing to see
if the hog is diseased. Every hog that is slaughtered in our slaughterhouse is assigned a serial number so that a trace can be
run on any processed hog. All of these quality control checks are conducted by our veterinarians and quality control staff.
A
high level of hygiene is maintained at our slaughterhouse. All staff and visitors who enter the slaughterhouse must first put
on protective clothing and be sterilized with disinfectant. All packaging materials used for meat also must be sterilized.
Storage
and Transportation of Pork Products
The
pork products from freshly slaughtered hogs at our slaughterhouse are blast frozen after slaughtering to prevent deterioration
of the meat caused by bacteria or chemical changes. Frozen meat is stored at a temperature of between –9.4°F (–23°C)
and –0.4°F (–18°C) before being transported. Chilled meat is chilled to between 32°F (0°C) and
39.2°F (4°C) before being transported. The chilled and frozen pork is stored at our warehouse in Laifeng County or transported
and stored at our warehouse in Wuhan City. We transport our chilled and frozen pork with a 12 temperature-controlled truck fleet
between warehouse and to our customers. The chilled and frozen pork is maintained within the requisite temperature ranges during
subsequent handling, transportation and distribution to retain freshness and to prevent deterioration of the meat.
Sales,
Marketing and Distribution
Our
key customers are principally supermarkets, meat distributors, warehouse club stores, food retailers, foodservice distributors,
restaurant operators, hotel chains, and noncommercial foodservice establishments such as schools, healthcare facilities, the military
and other food processors in China. For the years ended December 31, 2015 and 2014, Wuhan Zhongbai accounted for 19% and 26% of
our total revenues, respectively. We do not currently maintain any contract with Wuhan Zhongbai. Any extended discontinuance of
sales to this customer could, if not replaced, will have a material impact on our operations. Other than Wuhan Zhongbai, for the
years ended December 31, 2015 and 2014, we sold our pork products to an individual, Mr. Lin Chen, and those sales represent 10%
and 14% of our total revenues, respectively. No other single customer or customer group represented more than 10% of our 2015
and 2014 sales. No material amount of our business is dependent on government contracts.
We
market our pork products through our sales team by
developing
potential dealers, agents and wholesalers, and to maintain the existing network by assisting our sellers.
Our
sales team is responsible for securing orders for our pork products, maintaining and building relationships with existing customers
and for securing new customers. Our sales team is also involved in identifying new markets in line with the existing customer
base and our geographical expansion plans.
In
China, one of the main obstacles to expanding market share and developing national brands has been logistical management. Over
the years, we have built a video-monitored logistical system that includes two temperature adjustable warehouses, each in Laifeng
County and Wuhan City, where our sales offices are located, and 12 temperature-controlled trucks. Our logistical system that allow
us to better preserve the meat and to expand our market scope
by
delivering food
to farther retail points.
Our temperature adjustable warehouse capability, although totals
approximately 5,230 cubic meters, falls short of the amount of products that our slaughterhouse could product in its full capacity.
As a result, we are currently utilizing less than one third of our production capacity at our slaughterhouse. We regard our logistics
capabilities as a key to our growth strategy. We intend to construct new warehouse facilities with walk-in coolers and freezers
if and when we are able to secure additional funding for these construction projects.
Retail
Operations
We
have successfully established a vertically integrated fresh meat and meat products supply chain from farming, slaughtering, cutting,
processing and wholesaling to retailing via an exclusive network of specialty boutique stores
and
supermarket brand counters. We believe that by broadening awareness of our entire product
line, our retail stores will help drive the revenues of all of our business lines, including the revenues from our wholesale channels.
Specialty
Retail Stores.
Our products are distributed through specialty boutique-type retail stores that are owned and operated by third
parties. All these specialty retail stores have the same interior decorations and physical layout designed by us, targeting the
middle and high income class that desire and can afford high quality goods and services. For these specialty retail stores, we
provide operators with refrigerated showcases, signage, uniforms, labels and packaging, technical assistance, and permission to
sell our products under our brand names. These independent operators agree to exclusively sell our products, and may sell other
products only with our consent. These specialty retail stores are managed following our management guidelines and pricing policies.
The independent operators are responsible for payment of their own taxes and government fees, leasing expenses, and other operating
costs. We generally reward high-volume operators with discounts and incentives on a case-by-case basis. We sell our products to
these specialty stores at prices for profit. We do not collect any commission from these resellers. As of December 31, 2015, there
were 49 such specialty boutique retail stores owned and operated by independent operators. These stores provide high visibility
and brand name recognition for our quality products by having our brand names in their storefronts.
“Anpulo”
Supermarket Counters.
We also have established “Anpulo” supermarket
counters in supermarkets and local markets. As of December 31, 2015, there were 58 “Anpulo” supermarket counters.
The counters are exclusive purveyors of our meats and meat products. We have sole discretion in determining the sales prices and
product selection. The sales personnel working at these supermarket counters are hired by us and are employees of our Company.
A majority of the “Anpulo” counters at supermarkets use our standardized physical design and layout in addition to
following related rules and guidelines provided by the supermarket partners. We pay these supermarkets a charge of a fixed percentage
of our sales. We directly sell our products to retail customers shopping at these supermarket counters.
Intellectual
Property
We
regard brand positioning as the core of our competitive strategy. Since the ultimate aim of our business strategy is to satisfy
the customer, gaining a valued position in the minds of customers is of paramount importance. Our branding process seeks to create
a unique identity and to properly position our brand platform. To protect our brand position, we have registered our “Anpulo”
logo as a trademark in pork product category and “Linhaotuzhu” logo as a trademark in sausage category.
We
cannot give any assurance that the protection afforded our intellectual property will be adequate. It may be possible for third
parties to obtain and use, without our consent, intellectual property that we own or are licensed to use. Unauthorized use of
our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely
affect our business. See “Risk Factors - Risks Related to Our Business - Failure to adequately protect our intellectual
property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.”
Competition
The
production and sale of meat and food products in China are highly competitive. Our pork products compete with several large and
small regional pork processors.
The principal
competitive elements are price, product safety and quality, brand identification, breadth and depth of product offerings, availability
of products, customer service and credit terms. In the retail supermarket industry,
our
products compete with the premium pork product line of COFCO Corporation. COFCO Corporation has greater resources, owns or controls
more processing plants and equipment, or offer a larger product line than we do. In addition, a number of the world's largest
food processing companies have recently established joint ventures with food manufacturers or producers in China, and we expect
competition from these ventures to increase in the future.
Our
competitive strategy is to increase and sustain consumer demand and loyalty by raising safe and healthy food
awareness
and educating customers of our premium pork products in our marketing activities, increase
brand recognition, and build support for our pricing policies.
Government
Regulation
The
PRC government is actively promulgating a plan for “safe meat” and is taking various measures to raise the proportion
of slaughtering automation to over 70% of all meat and actively enforce authorized slaughtering and quarantine. Special grants,
subsidized financing, preferential tax policies, governmental funding and other subsidies are provided to well-performing enterprises
in order to acquire technology and equipment in meat processing. Such government incentives provide competitive advantages and
opportunities to well-performing companies because such policies work to raise the bar for entering the industry and to eliminate
inefficient companies in the industry. We expect such government support for the processing of agricultural products to continue
for a number of years in the foreseeable future. However, the determination as to whether we can continue to benefit from such
government programs in the future will depend on how the government administers its incentive programs and how well we perform.
If we maintain the current trend in our performance, it is possible we may obtain further government support through such incentive
programs.
In
February 2009, the Standing Committee of the National People’s Congress of China issued the Food Safety Law. Any enterprise
engaged in the production, processing, sale, import and export, and inspection of food and food-related products must comply with
the Food Safety Law, which prescribes the licenses and safety requirements in respect of food, food additives, food containers,
food packaging materials, detergents and disinfectants, food utensils and equipment, as well as food safety standards, assessment
of food safety risks and management of food safety accidents. According to the Food Safety Law, any enterprise engaged in production
of food must obtain a food production license from the competent quality inspection administration authority at or above the county
level.
In
December 2009, the PRC Ministry of Commerce issued the Hog Slaughtering Industry Development Guidelines for 2010-2015. The guidelines
state that the government will control the number of slaughterhouse in China and specifically that there should be less than four
slaughterhouse in urban areas of municipalities and cities with a resident population of five million or more, and less than two
slaughterhouse in urban areas of other cities at or above the prefecture level.
Government
and consumers take the food safety as one of their top priorities. With the government support, the consolidation of the industry
is accelerating.
We
are also subject to stringent environmental regulations. See “Risk Factors - Risks Relating to Our Business - Our failure
to comply with increasingly stringent environmental regulations and related litigation could result in significant penalties,
damages and adverse publicity for our business.”
C.
Organization Structure
Overview
We
are a holding company and conduct substantially all of our production, marketing, finance, research and development, and administrative
activities through our indirect subsidiaries located in China. We were incorporated in the State of Nevada under the name “Europa
Acquisition VII, Inc.” on July 30, 2010. On February 9, 2012, the Company filed with the State of Nevada Certificate of
Amendment of Certificate of Incorporation changing its name from Europa Acquisition VII, Inc., to Anpulo Food, Inc. On June 25,
2012, the Company re-domiciled from the State of Nevada to British Virgin Islands. Prior to October 30, 2013, we were organized
as a vehicle to investigate and, if such investigation warrants, acquire a target company or business seeking the perceived advantages
of being a publicly held corporation. From July 30, 2010 to October 30, 2013, we did not generate any revenue and we accumulated
no significant assets as we explored a possible business combination. We entered into our current line of business on October
30, 2013 by acquiring Anpulo HK, its wholly-owned subsidiary Anpulo WFOE and the variable interest entity Anpulo Laifeng.
On
October 30, 2013, we acquired all of the outstanding shares of Anpulo HK in exchange for the issuance by us of an aggregate of
122,900,000 restricted ordinary shares to the shareholders of Anpulo HK. As a result of our share exchange with Anpulo HK, which
is commonly referred to as a “reverse acquisition,” Anpulo HK became our wholly owned subsidiary. By way of background,
in February 2012, Wenping Luo, the Chairman and principal shareholder of Anpulo Laifeng, took control of the Company and changed
the Company’s name from Europa Acquisition VII, Inc. to Anpulo Food, Inc., in contemplation of bringing Anpulo Laifeng and
its holding companies public in the United States through a reverse acquisition transaction. The contemplated reverse acquisition
between the Company and Anpulo Laifeng and its holding companies was a mere intent of Mr. Luo at that time and, this intention
was abandoned when in January 2013 Mr. Luo took control of another reporting company that was formed to acquire a target company
or business, Specializer, Inc. and changed this company’s name from Specializer, Inc. to Anpulo Food Development, Inc..
In August 2013, Mr. Luo’s intention of a reverse acquisition between the Company and Anpulo Laifeng and its holding companies
revived, and as the sole shareholder, officer and director of the Company at that time, he made the decision to proceed with the
reverse acquisition transaction. To date, Mr. Luo, in his capacity as the principal shareholder and the sole officer and director
of Anpulo Food Development, Inc. intends that Anpulo Food Development, Inc. remains as a company formed to acquire a target or
business.
Anpulo
HK formed Anpulo WFOE on September 6, 2013. Upon completion of the acquisition, we owned all of the outstanding capital stock
of Anpulo HK, and Anpulo HK became our wholly-owned subsidiary in Hong Kong. Anpulo HK, in turn, owns all of the outstanding capital
stock of Anpulo WFOE, our operating subsidiary based in China. Anpulo WFOE has entered into control agreements with all of the
owners of Anpulo Laifeng, which agreements allow Anpulo WFOE to control Anpulo Laifeng. Through our ownership of Anpulo HK, Anpulo
HK’s ownership of Anpulo WFOE and Anpulo WFOE’s contractual agreements with the owners of Anpulo Laifeng as well as
Anpulo Laifeng itself, we control Anpulo Laifeng.
Corporate
History – Anpulo Laifeng
Anpulo
Laifeng was incorporated on March 3, 2005 as a domestic Chinese corporation. As Anpulo Laifeng has continued to grow, it has increased
its registered capital, which presently stands at RMB 40,500,000 (approximately $6,500,000). On December 31, 2015, Anpulo Laifeng
additionally increased its registered capital of RMB 10,000,000 (approximately $1,540,000) from Mr. Wenping Luo’s contribution.
Our
director, Wenping Luo, is also the chairman and principal shareholder of Anpulo Laifeng and holds 95%, and along with his wife,
Jinfeng Hu, together they hold 100% of the equity interest of Anpulo Laifeng. Indeed, the holders of the majority of the shares
of Anpulo Laifeng also hold the majority of the shares of Anpulo HK. Because our controlling shareholders also own the vast majority
of Anpulo Laifeng shares and also because Anpulo Laifeng has entered into control agreements pursuant to which our wholly-owned
subsidiary Anpulo WFOE has effective managerial authority over the business of Anpulo Laifeng.
On
December 29, 2015, Anpulo Laifeng established a wholly-owned subsidiary, Anpulo Group Hefeng Muye Development Co., Ltd. (“Anpulo
Muye”), a limited liability company in PRC.
Sales
of Hog Farm to Tian Agritech, Inc.
In
2011, the Company decided not to continue its then existing livestock farming operation. On May 12, 2011, Anpulo Laifeng entered
into an assets purchase agreement with Tianli Agritech, Inc. (“Tianli”), pursuant to which Anpulo Laifeng sold its
hog farm to Tianli, which is located in Enshi Tujia and Miao Autonomous Prefecture of Hubei Province, for a purchase price of
$2.2 million.
On
March 29, 2011, Anpulo Laifeng and Tianli executed a strategic cooperation agreement (the “Strategic Cooperation Agreement”)
which outlined two companies’ plan of cooperation. On August 1 and August 30, 2011, Anpulo Laifeng entered into a collaborative
agreement and a supplemental agreement (the “Collaboration Agreements”) with Tianli, pursuant to which, Tianli established
retail operations within the retail facilities with whom Anpulo Laifeng had ongoing business arrangements, and used the trademark
“Tianli An Puluo” at Tianli’s retail sales departments in local major supermarkets in greater Wuhan City. These
Collaborative Agreements were terminated as of June 15, 2012. Under the Collaborative Agreements, Tianli was the principal in
the transaction and recorded revenues when Anpulo Laifeng sold products its customers and, Tianli and Anpulo Laifeng shared the
net income of the collaborative retail business on a ratio of 60% to Tianli and 40% to Anpulo Laifeng.
On
June 15, 2012, upon the termination of the Strategic Cooperation Agreement and the Collaboration Agreements, Anpulo Laifeng assumed
the receivable as of June 15, 2012, along with all assets and liabilities generated and incurred with the retail operations under
the Collaborative Arrangement.
Control
Agreements
We
conduct our business in China through our subsidiary, Anpulo HK, and its wholly-owned subsidiary Anpulo WFOE. Anpulo WFOE, in
turn, conducts its business through Anpulo Laifeng, which we consolidate as a variable interest entity. Anpulo WFOE and Anpulo
Laifeng operate in connection with a series of control agreements, rather than through an equity ownership relationship.
Chinese
laws and regulations currently do not prohibit or restrict foreign ownership in meat products businesses. Yet, Chinese laws and
regulations do prevent direct foreign investment in certain industries. On September 22, 2013, to protect the Company’s
shareholders from possible future foreign ownership restrictions, Anpulo Laifeng as well as all of the shareholders of Anpulo
Laifeng entered into an Entrusted Management Agreement, Exclusive Option Agreement, Shareholders’ Voting Proxy Agreement
and Pledge of Equity Interest Agreement (collectively, the “Control Agreements”) with Anpulo WFOE.
The
Control Agreements operate as follows:
|
●
|
in
the Entrusted Management Agreement, Anpulo Laifeng and all of its shareholders granted to Anpulo WFOE the exclusive responsibility
for the operation of Anpulo Laifeng, including the rights to appoint and terminate members of its board of directors, to manage
and control all cash flow and assets of Anpulo Laifeng, and to control and administer the financial affairs and daily operations
of Anpulo Laifeng.
|
|
|
|
|
●
|
in
the Exclusive Option Agreement, Anpulo Laifeng and all of its shareholders irrevocably granted to Anpulo WFOE the exclusive
option to purchase all of their shares of Anpulo Laifeng; and
|
|
|
|
|
●
|
in
the Shareholders’ Voting Proxy Agreement, all of the shareholders of Anpulo Laifeng irrevocably appointed Mr. Wenping
Luo, an individual designated by Anpulo WFOE, with the exclusive right to exercise their voting rights associated with their
shares in Anpulo Laifeng;
|
|
|
|
|
●
|
in
the Equity Pledge Agreement, all of the shareholders of Anpulo Laifeng pledged all of their rights and interests equity in
Anpulo Laifeng, including rights in the shares of Anpulo Laifeng and associated voting rights, to Anpulo WFOE. In the end
of January 2014, we completed the registration with the SAIC local branch of the equity pledge for all of the shares of Anpulo
Laifeng provided by the equity pledge agreement. Upon the completion of such registration, the equity pledge is deemed to
have been established. Anpulo WFOE now holds security interest in the equity in Anpulo Laifeng to secure its rights and interests
under the contractual agreements.
|
As
a result of these Control Agreements, which also cause Anpulo WFOE to absorb 100% of the expected losses and gains of Anpulo Laifeng,
we are considered the primary beneficiary of Anpulo Laifeng. While Anpulo Laifeng maintains its separate corporate identity, management
authority for its decisions and actions is formally vested in Anpulo WFOE, and indirectly with its ultimate parent entity, Anpulo,
as a result of the Control Agreements. Accordingly, we consolidate Anpulo Laifeng’s operating results, assets and liabilities
in our financial statements.
In
exchange for tendering control of Anpulo Laifeng, the shareholders of Anpulo Laifeng received ownership of the majority of the
shares of Anpulo. Anpulo Laifeng shareholders collectively received 122,900,000 of 123,000,000 issued and outstanding shares on
September 22, 2013, representing 99.92% of Anpulo’s issued ordinary shares.
Our
current corporate structure is as follows:
(1)
|
Contractual
arrangements including an Entrusted Management Agreement, Exclusive Option Agreement, Shareholders’ Voting Proxy Agreement
and Pledge of Equity Interest Agreement. For a description of these agreements, see “Corporate Structure— Contractual
Arrangements with Anpulo and Anpulo’s Shareholders.”
|
|
|
(2)
|
The
shareholders of Anpulo Laifeng are Wenping Luo (96%) and Jinfeng Hu (4%) after Mr. Wenping Luo made additional capital contribution
of RMB 10 million at December 31, 2015.
|
D.
Property, Plants and Equipment
The
following table shows certain information relating to our corporate offices and other facilities.
Property
|
|
Address
|
|
Rental
Term
|
|
Space
|
Headquarter (containing one slaughterhouse,
one warehouse, and one sale office)
|
|
Hangkong Road,
Laifeng County, Hubei
Province,
China 445700
|
|
Company Owned
|
|
Land area 6.26 acres (25,313.87 square meters),
construction area 116,100 sq. feet (6,735.41 square meters)
|
|
|
|
|
|
|
|
Distribution Center in Wuhan (containing one
warehouse and one sale office)
|
|
65 Lvjiawan,
Qingshan District,
Wuhan,
Hubei, China 430080
|
|
5 years
(December 1, 2013 -
November
31, 2018)
(Had been replaced with a 6 months rental agreement and will be renewed every 6 months)
|
|
14,000 sq. feet (1,300 square meters)
|
|
|
|
|
|
|
|
Sale office in Wuhan
|
|
Room A-21-I, Tower A,
7 Xudong Road,
Hongshan District,
Wuhan, Hubei, China
|
|
20 years
(December 1, 2013 –
November
30, 2033)
|
|
2,148 sq. feet (199.6 square meters)
|
Item
4a. Unresolved Staff Comments
Not
applicable.
Item
5. Operating and Financial Review and Prospects.
The
following discussion of our financial condition and results of operations is based upon, and should be read in conjunction with,
our audited consolidated financial statements and the related notes included in this annual report on Form 20-F. This report contains
forward-looking statements. See “Forward-Looking Information.” In evaluating our business, you should carefully consider
the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report on
Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
Factors
affecting our results of operations
We
believe the following factors have a significant effect on our results of operations:
|
●
|
Demand
for our products
– We believe our products have a strong growth potential in China and, accordingly, we have
continuously increased our sales of chilled and frozen pork. However, if demands for processed meat products in China do not
grow as we expect, we may need to adjust our growth strategy and our results of operations may be adversely affected
|
|
●
|
Reliance
on wholesalers and distributors
- Our key customers are principally wholesalers and distributors, supermarkets and
large retailers in China. If we lose these wholesalers and distributors as customers, the loss of a significant portion of
our sales to them could have an adverse effect on our business, financial condition and results of operations.
|
|
|
|
|
●
|
Availability
of stable hog supply
- Live native hogs and raw pork are the principal raw materials used in our production. Our business
depends on the cost and quality of live hogs. If we are unable to purchase quality live hogs at a reasonable cost, our profit
margins and financial condition could be adversely affected.
|
|
|
|
|
●
|
Cost
of maintaining our hog processing facility
– Our profit margin depends on the cost of maintaining our processing
facility, equipment or installed production lines. While we seek to operate our facility in compliance with all applicable
rules and regulations and take measures to minimize the cost and risks of disruption at our facility, a material disruption
at our processing facility could prevent us from meeting customer demand, reduce our sales and adversely affect our results
of operations
.
|
|
|
|
|
●
|
Cost
of regulatory compliance
- we believe that we are in compliance in all material respects with all applicable regulatory
requirements of China and all local jurisdictions in which we operate. However, the cost of regulatory compliance under PRC
law could vary as PRC government authorities have taken certain measures to maintain China's food market in good order and
to improve the integrity of China's food industry, such as enforcing full compliance with industry standards and closing certain
food processing companies in China that did not meet regulatory standards. While the closing of competing meat processing
plants that do not meet regulatory standards could increase our revenues in the long term, we may also experience increased
regulatory compliance costs that could reduce our profitability.
|
|
|
|
|
●
|
Wage
inflation:
Wage inflation has been growing rapidly in the countries in which we maintain a significant number of personnel.
Wage inflation contributes to increasing our cost of services, and selling, general and administrative expenses. The impact
of wage inflation is mitigated to a limited extent by several factors, including our ability to shift work away from our facilities
that may be disproportionately affected by wage inflation, as well as our ability to pass some of the cost to our clients
through provisions in a number of our contracts that permit us to increase prices based on inflation and related indicators
|
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
We evaluate, on an on-going
basis
, our estimates for reasonableness as changes occur
in our business environment. We base our estimates on experience, the use of independent third-party specialists, and various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical
accounting policies are defined as those that are reflective of significant judgments, estimates and uncertainties, and
potentially
result in materially different results under different assumptions and conditions. We believe the following are our critical
accounting policies:
Basis
of Presentation
Our
consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States,
or U.S. GAAP.
As
reflected in the accompanying consolidated financial statements, we had net income (loss) of $111,285 and ($1,129,396) for the
years ended December 31, 2015 and 2014. Although we improved our operations in 2015, we still had cash reserve, short-term loans,
and an accumulated deficit of $1,685,527, $11,234,345, and $3,085,757 at December 31, 2015, respectively. These matters raise
substantial doubt about the company’s ability to continue as a going concern. The ability of the Company to continue as
a going concern is dependent on the Company’s ability to further implement its business plan, raise additional capital,
and generate more revenues. The consolidated financial statements do not include any adjustments that might be necessary if the
Company is unable to continue as a going concern.
Going
Concern
Although
we improved our operations from a net loss of $1.1 million for the year ended December 31, 2014 to a net income of $0.1 million
at the end of 2015, we had outstanding loans as of December 31, 2015 for $11.2 million that are due in the next 12 months and
our cash reserves was $1.7 million at the same date, which may not be sufficient to repay our outstanding short-term loans. In
addition, we had a working capital deficit of $3.8 million as of December 31, 2015. Thus, we may not be able to raise funds from
the U.S. markets to pay off these obligations. These conditions raise a substantial doubt as to whether we may continue as a going
concern. We are planning to negotiate with our lenders to extend or renew our loans and are planning to seek additional financing
from local banks in the PRC. We will also seek to improve our cash flows from operations by implementing cost control measures
and reducing our inventory purchases.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Anpulo, Anpulo HK, Anpulo WFOE, Anpulo Laifeng and
Anpulo
Muye
. All intercompany transactions and account balances are eliminated in consolidation.
Use
of Estimates
In
preparing financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements,
as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management,
include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.
Accounts
Receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At December 31,
2015 and 2014, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amounts of $125,103 and $132,301, respectively.
Inventory
Valuation
Inventories,
consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower
of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories
may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand,
the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on
estimates. The Company did not record inventory reserve at December 31, 2015 and 2014.
Revenue
Recognition
Pursuant
to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is
reasonably assured. The Company recognizes revenues from the sale of its pork products upon shipment and transfer of title.
Sales
revenue represents the invoiced value of goods, net of value-added tax, or VAT. Our products sold and services provided in China
are subject to VAT of 13% to 17% of gross sales price. This VAT may be offset by VAT paid by us on raw materials and other materials
included in the cost of producing the finished product. We recorded VAT payable and VAT receivable net of payments in the financial
statements. The VAT tax return is filed offsetting the payables against the receivables.
Income
Taxes
The
Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts
for income taxes using the liability method prescribed by ASC Topic 740, “Income Taxes.” Under this method, deferred
tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The
Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates
is recognized as income or loss in the period that includes the enactment date.
The
Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods
remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute
of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such
adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part,
upon the results of operations for the given period. As of December 31, 2015 and 2014, the Company had no uncertain tax positions,
and will continue to evaluate for uncertain positions in the future.
Valued
Added Tax
All
the subsidiaries of the Company in the PRC are subject to value added tax (“VAT”) imposed by the Government of the
PRC on its purchase and sales of goods, its purchase of property, plant and equipment and the freight expenses being incurred.
The output VAT is charged to customers who purchase goods from the Company and debited to trade accounts receivable and credited
to VAT payable — output VAT. The input VAT is incurred when the Company purchases goods and property, plant and equipment
from its vendors and the freight expenses being incurred. The input VAT incurred is debited to VAT recoverable or VAT payable
— input VAT and credited to payables accounts or cash and cash equivalent. VAT payable is computed on a monthly basis and
payable in the following month based on the difference between the amount of output VAT and input VAT as of month-end, The applicable
VAT rate is ranged from 13% to 17% in general, depending on the types of products purchased and sold. If the amount of validated
input VAT being aroused by purchasing goods and property, plant, equipment and the freight expenses incurred exceeds that of output
VAT for sales of goods during the month, the debit VAT payable balance as of month-end will be carried forward to be creditable
against future collection of output VAT in the following months, and will be reclassified as VAT recoverable under other receivables.
In addition, input VAT is off-the-price and not included in the cost of inventory.
Starting
from June 1, 2015, the Company was required by the Laifeng County tax authority to calculate its input VAT in accordance with
the “Circular on Measures for the Pilot Project of Assessment and Deduction of Input Value-added Tax on Agricultural Products
in Certain Industries (Cai Shui [2012] No.38, hereafter referred to as “Pilot Project Circular”) issued by the PRC
State Administration of Taxation on April 6, 2012. According to the Pilot Project Circular, qualified taxpayers who purchase agricultural
products as raw materials for the production will be able to deduct their input VAT in accordance with methods provided in the
Circular, instead of verifying the input VAT through their actual purchases of goods or property. Where the agricultural products
are purchased for producing goods, the input VAT amount can be calculated using three different methods. The Company was required
to use the input-output method to calculate its input VAT. This method uses national and industry standards to determine the amount
of agricultural products used in unit sales, which in turn forms the basis of determining the deductible input VAT amount.
A. Operating
Results
Operating
results
In
fiscal year 2015, we continued to focus on the implementation of our strategic plan to continue the growth we have experienced
in the last five years. However, due to a lack of funding, we have put on hold several growth strategic plans, including constructing
new warehouse facilities with walk-in coolers and freezers, adding supermarket counters in Wuhan city, completing in-house product
development and seeking outside product research and development collaboration, and will continue to do so until additional funding
is secured.
Comparison
of the Results of Operations for the Years Ended December 31, 2015 and 2014
All
amounts, other than percentages, are in U.S. dollars
|
|
For Years Ended
December 31,
|
|
|
|
|
|
Percentage of
|
|
|
|
2015
|
|
|
2014
|
|
|
Net Change
|
|
|
Change
|
|
Revenues
|
|
$
|
26,369,680
|
|
|
$
|
17,530,874
|
|
|
$
|
8,838,806
|
|
|
|
50.4
|
%
|
Cost of goods sold
|
|
|
22,508,894
|
|
|
|
14,485,524
|
|
|
|
8,023,370
|
|
|
|
55.4
|
%
|
Gross profit
|
|
|
3,860,786
|
|
|
|
3,045,350
|
|
|
|
815,436
|
|
|
|
26.8
|
%
|
Selling, general and administrative expenses
|
|
|
4,482,155
|
|
|
|
3,868,850
|
|
|
|
613,305
|
|
|
|
15.9
|
%
|
Loss from operations
|
|
|
(621,369
|
)
|
|
|
(823,500
|
)
|
|
|
202,131
|
|
|
|
(24.6
|
%)
|
Interest expense
|
|
|
(633,256
|
)
|
|
|
(1,026,734
|
)
|
|
|
393,478
|
|
|
|
(38.3
|
%)
|
Subsidy income – Interest expense
|
|
|
168,842
|
|
|
|
638,875
|
|
|
|
(470,033
|
)
|
|
|
(73.6
|
%)
|
Subsidy income
|
|
|
904,046
|
|
|
|
110,626
|
|
|
|
793,420
|
|
|
|
717.2
|
%
|
Gain from loan restructuring
|
|
|
293,452
|
|
|
|
-
|
|
|
|
293,452
|
|
|
|
n/a
|
|
Other expense
|
|
|
(430
|
)
|
|
|
(28,663
|
)
|
|
|
28,233
|
|
|
|
(98.5
|
%)
|
Net other income (expense)
|
|
|
732,654
|
|
|
|
(305,896
|
)
|
|
|
1,038,550
|
|
|
|
(339.5
|
%)
|
Loss before income taxes
|
|
|
111,285
|
|
|
|
(1,129,396
|
)
|
|
|
1,240,681
|
|
|
|
(109.9
|
%)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
111,285
|
|
|
$
|
(1,129,396
|
)
|
|
$
|
1,240,681
|
|
|
|
(109.9
|
%)
|
Revenues
.
Total revenue increased from $17.5 million for the year ended December 31, 2014 to $26.4 million for the same period in 2015,
which represented an increase of $8.8 million, or approximately 50.4%. The increase in revenues was primarily benefited from an
apparent decline in the supply in China hog market which directly pushes the market prices of pork and pork products to higher
level.
The
following table sets forth our revenues by sales channel for the years ended December 31, 2015 and 2014.
|
|
Sales by Distribution Channel (US dollars in thousands)
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
“Branded” retail stores and supermarket stores
|
|
$
|
16,584
|
|
|
|
63
|
%
|
|
$
|
12,099
|
|
|
|
69
|
%
|
Food services distributors
|
|
|
7,743
|
|
|
|
29
|
%
|
|
|
4,322
|
|
|
|
25
|
%
|
Restaurants and non-commercial
|
|
|
2,043
|
|
|
|
8
|
%
|
|
|
1,110
|
|
|
|
6
|
%
|
|
|
$
|
26,370
|
|
|
|
100
|
%
|
|
$
|
17,531
|
|
|
|
100
|
%
|
During
the year ended December 31, 2015, revenue from sales to “branded” retail stores and supermarket stores was $16.6 million,
which represented an increase of $4.5 million, or approximately 37%, as compared to the year ended December 31, 2014. During the
year ended December 31, 2015, revenues from sales to food service distributors increased to $7.7 million, which represented an
increase of $3.4 million, or approximately 79%, as compared to the year ended December 31, 2014. During the year ended December
31, 2015, revenue from sales to restaurants and non-commercial customers increased to $2.0 million, which represented an increase
of $0.9 million, or approximately 84%, as compared to the year ended December 31, 2014. As stated above, we were enjoying the
sale jump from all of our distribution channels primarily due to an apparent decline in the supply in China hog market which indirectly
pushes the market prices of pork and pork products to higher level.
Cost
of goods sold
. Cost of goods sold increased from $14.5 million for the year ended December 31, 2014 to $22.5 million for the
year ended December 31, 2015, which represented an increase of approximately $8.0 million, or 55.4%. The increase in cost of goods
sold was due to an apparent decline in the supply in China hog market which directly pushes the purchase prices of hogs to higher
level.
Gross
Profit
. The gross profit margin maintained flat at 15% and 17% for the years ended December 31, 2015 and 2014.
Expenses
.
Selling, general and administrative expenses increased by $613,305 in the year ended December 31, 2015 as compared to the same
period in 2014. Our selling expenses increased $204,670 comparing our 2 year operating results of 2015 and 2014. The major increase
was from our payroll and commission to salesmen. Our general and administrative expenses increased $408,635 during the year ended
December 31, 2015. The increase was primarily a result of an increase in bad debt expense of $357,810.
Interest
income (expense)
. We had interest expense of $633,256 during the year ended December 31, 2015, which represents a decrease
of $393,478 or 38.3%, comparing with the interest expense of $1,026,734 in the same period of 2014. The decrease in interest expense
was primarily due to a loan restructuring with Laifeng Credit Guaratee Corporation in 2015. As a result of the loan restructuring
deal, we successfully extended our loans with Laifeng Credit Guaratee Corporation to 2018 and the relevant interest charges were
waived accordingly as well. Additionally, we also received subsidies of $168,842 from local government for our interest expenditures
during the year ended December 31, 2015, comparing $638,875 subsidy in the same period of 2014. We do not recognize or accrue
the subsidy income until we receive the subsidy.
We
have benefitted from government grants and subsidies. In particular, we received (a) one-time subsidy for interest expense of
$168,842 and $638,875 during the years ended December 31, 2015 and 2014, and (b) subsidies of $904,046 and $110,626 for supporting
agricultural development in minority areas in the years ended December 31, 2015 and 2014, respectively. The one-time subsidies
for interest expenses were granted based on the amount of the Company’s outstanding bank loans and the number of days that
the bank loans were outstanding. The one-time subsidies for interest expense were recognized as income upon received. No subsidies
for bank interest expenses were deferred. The subsidies were recorded as “subsidy income” in our financial statements.
The subsidies are generally determined based on the local government’s financial status, policy, and various political factors.
There is no guarantee that we will continue to receive such subsidies in comparable amounts or at all in the future.
Income
Taxes
. The effective tax rate in the PRC on income generated from the sale of prepared products is 25% and there is no income
tax on income generated from the sale of raw products including raw meat products. At December 31, 2015, we had a net operating
loss carry-forward for Chinese income tax purposes aggregating approximately $2 million which will expire through the year 2020.
Potential
risks of the impact of inflation and political changes to our business are fully described in “Risk Factors” under
Item 3.D and are hereby incorporated by reference.
B. Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise
operate on an ongoing basis. At December 31, 2015 our working capital deficit was (3,834,223) as compared to ($7,731,054) at December
31, 2014, reflecting an increase of $2.2 million in the accounts receivable and a reduction of $2.7 million in our short-term
loans, and partly offset by decreases of $1.3 million in our restricted assets. These funds are located in financial institutions
located as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Country
|
|
Dollar
|
|
|
%
|
|
|
Dollar
|
|
|
%
|
|
United States
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
China
|
|
|
680,877
|
|
|
|
100
|
%
|
|
|
740,532
|
|
|
|
100
|
%
|
|
|
$
|
680,877
|
|
|
|
100
|
%
|
|
$
|
740,532
|
|
|
|
100
|
%
|
The
components of cash flows are discussed below:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Net cash used in operating activities
|
|
$
|
(986,028
|
)
|
|
$
|
(139,648
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(102,182
|
)
|
|
|
1,685,731
|
|
Net cash provided by (used in) financing activities
|
|
|
710,424
|
|
|
|
(1,479,331
|
)
|
Exchange rate effect on cash
|
|
|
318,131
|
|
|
|
6,756
|
|
Net cash inflow (outflow)
|
|
$
|
(59,655
|
)
|
|
$
|
73,508
|
|
Cash
Used in Operating Activities
We
have financed our operations over the two years ended December 31, 2015 and 2014 primarily through cash from borrowings under
our lines of credit with various lending banks in the PRC.
Net cash used in operating activities
was $0.99 million in the year ended December 31, 2015. Cash used in operating activities in the year ended December 31, 2015 consisted
primarily of net income of $0.1 million due to our increased gross margin of $0.8 million, decreased interest expense of $0.3
million, and increased subsidy income of $0.3 million which had been partly offset by the increased operating expenses of $0.6
million. Other than that, it also consisted depreciation and amortization of $0.8 million, an amortization expense of $0.1 million
from prepaid expenses, a bad debt expense of $0.2 million, and an non-cash gain of $0.3 million from our loan restructuring. In
addition, we reported a decrease at restricted assets of $0.4 million, which was offset by an increase of $1.6 million at accounts
receivable, an increase of $0.6 million at inventories and a decrease of $0.6 million from other payables.
Net
cash used in operating activities was $0.14 million in the year ended December 31, 2014. Cash used in operating activities in
the year ended December 31, 2014 consisted primarily of net loss of $1.1 million due to decreased gross margin of $0.7 million
and increased interest expense of $0.2 million which had been partly offset by the increased subsidy income of $0.6 million. Other
than that, it also consisted depreciation and amortization of $0.8 million, an amortization expense of $0.2 million from prepaid
expenses, an increased other receivables of $0.6 million, which was offset by a recovery gain from bad debt allowance of $0.2
million, an increase of $1.2 million at restricted cash which were cash deposits as a collateral for our outstanding bank loans
and an increase of $0.3 million at other current assets which represents cash held by our CEO and employees on behalf of the Company.
Cash
Provided by (Used in) Investing Activities
Net
cash used in investing activities was $0.1 million in the year ended December 31, 2015. The activities primarily consisted of
our new purchase of equipment.
Net
cash provided by investing activities was $1.7 million in the year ended December 31, 2014. The activities primarily consisted
of our disposal of an investment in the hotel construction project in Laifeng County which had been sold to Fengming for $2.7
million or RMB 17 million on April 20, 2014. We had collected part of the proceeds of approximately $2 million from the resale.
Cash
Provided by (Used in) Financing Activities
Net
cash provided by financing activities was $0.7 million in the year ended December 31, 2015. During the period, we received the
proceeds from our renewal short-term loans of $11.6 million and new capital of $1.5 million contributed from one of our main shareholder
offset by repayments of our short-term loans of $12.4 million.
Net
cash used in financing activities was $1.5 million in the year ended December 31, 2014. During the period, cash provided by financing
activities consisted of the proceeds from our renewal short-term loans of $16.6 million offset by repayments of our short-term
loans of $18.1 million.
Requirement
for Additional Funding
We
anticipate that our current cash reserves plus cash from our operating activities will not be sufficient to meet our ongoing obligations
and fund our operations for the next twelve months.
Specifically,
as of December 31, 2015, we had approximately cash of $1.7 million, including $0.7 million cash held by us and $1 million cash
held by our cashier, accountants and Mr. Wenping Luo, our President, Chief Executive Officer, and Director on behalf of us which
was presented as other current assets in our financial statements. Meanwhile, we have approximately $11.2 million of bank loans
due in the next 12 months. Additionally, we used approximately $0.9 million of cash in operating activities was for the year of
2015. If our operating activities present similar cash flow result as 2015, we anticipated that, our cash reserve of $1.7 million
at December 31, 2015, will be insufficient to satisfy our bank loans of $11.2 million due in the next 12 months and, we will need
to obtain additional $10.4 million, to meet our ongoing obligations and fund our operations during that twelve months period,
if we cannot renew the bank loans as they become due.
As
a result, we will need to seek additional funding in the near future. We currently do not have a specific plan of how we will
obtain such funding; however, we anticipate that additional funding will be in the form of equity financing from the sale of shares
of our common stock or renewing our current obligations with loaners. We may also seek to obtain short-term loans from our directors
or unrelated parties. Additional funding may not be available, or at acceptable terms, to us at this time. If we are unable to
obtain additional financing, we may be required to reduce the scope of our business development activities, which could harm our
business plans, financial condition and operating results.
C. Research
and Development
Research
and development continues to be a significant component of our strategy to extend our existing brands and product lines and expand
into new branded items and product lines. From early 2009 to middle 2011, we collaborated with Huazhong Agricultural University
and Hubei Normal University to analyze the formation of “Linhaotuzhu” meat and examine its value by its look, taste,
nutrition and its processed-product potential. Our collaboration with the two universities ended in 2011 after the project was
completed.
During
2012, we launched 15 new products that were developed in our technology center by our own in-house research personnel. As of November
30, 2013, we had over 30 new products under development. At such date, we have yet to ascertain the timeframe by which the development
can be completed. The total cost of developing these products was estimated around $80,000. We require additional financing to
continue these product development projects. Please see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Liquidity and Capital Resource – Requirement for Additional Funding.”
We
focus our research and development efforts on improving our development efficiency and the quality and the market acceptance of
our products offering. In the fiscal years ended December 31, 2015 and 2014, we spent $0 and $20,281, respectively, on research
and development activities. The cost of such research and development activities includes wages related to research and development
personnel and expenses related to consumption of research materials. As of December 31, 2015, we temporarily suspend our research
activities at development of new products. We may resume the activities upon we obtain better market feedbacks to support our
further development of new products.
D. Trend
Information
Other
than as disclosed in the foregoing disclosures and elsewhere in this Annual Report, we are not aware of any trends, uncertainties,
demands, commitments or events for the period from January 1, 2015 to December 31, 2015 that are reasonably likely to have a material
adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause our disclosed financial
information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance
Sheet Arrangements
We
do not have any material off-balance sheet commitments or arrangements.
F. Tabular
Disclosure of Contractual Obligations
The
following table summarizes our contractual obligations at December 31, 2014 and the effect those obligations are expected to have
on our liquidity and cash flow in future periods.
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1 – 3 Years
|
|
|
3 – 5 Years
|
|
|
Over 5 Years
|
|
Contractual obligations *
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
$
|
12,337,366
|
|
|
$
|
11,234,345
|
|
|
$
|
1,103,021
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Others
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
12,337,366
|
|
|
$
|
11,234,345
|
|
|
$
|
1,103,021
|
|
|
$
|
-
|
|
|
$
|
-
|
|
*:
|
Bank loans consisted of short-term
and long-term bank loans. Historically, we have refinanced these bank loans for an additional term of one year and we expect to
continue to refinance these loans upon expiration.
|
The
material terms of the short-term loan agreements were summarized as follow:
|
|
December 31, 2015
|
|
Loan payable to Bank of China, annual interest rate of 4.35%, due by December 2, 2016 with property provided by Laifeng Urban Construction Investment Co., Ltd. and by the shareholders as collaterals and guaranteed by Laifeng Anpulo Yunxing Transportation Co., Ltd.
|
|
$
|
4,313,200
|
|
Loan payable to Agricultural Development Bank of China, annual interest rate of 5.6%, due by January 21, 2016, guaranteed by Enshi Agricultural Development Credit Guarantee Co., Ltd. and Mr. Wenping Luo. The loan had been repaid in January 21, 2016.
|
|
|
1,540,429
|
|
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 4.35%, due by March 21, 2016 with Mr. Wenping Luo as guarantor and pledged with Anpulo Laifeng’s accounts receivable of $804,064. The loan had been renewed to June 21, 2016
|
|
|
358,920
|
|
Loan payable to Agricultural Development Bank of China, annual interest rate of 4.6%, due by September 22, 2016 with buildings provided by Anpulo Laifeng as collateral.
|
|
|
2,926,814
|
|
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 4.6%, due by September 9, 2016 with property provided by 2 individuals, Benshuang Yao and Youxiang Zhou as collateral.
|
|
|
2,002,557
|
|
Loan payable to Laifeng Jiuding Pawn Co., Ltd., annual interest rate of 3.6%, due by April 9, 2016. The loan had been repaid in April 11, 2016
|
|
|
92,425
|
|
|
|
$
|
11,234,345
|
|
G. Safe
Harbor.
See
“Special Note Regarding Forward-looking Statements.”
Item
6. Directors, Senior Management and Employees
A. Directors
and Senior Management
The
following table sets forth the name and age of our current officer and director.
Name
|
|
Age
|
|
Position
|
Wenping
Luo
|
|
46
|
|
President,
Chief Executive Officer, and Director
|
Maochun
Kang
|
|
41
|
|
Chief
Financial Officer
|
Tao
Yang
|
|
35
|
|
Director
|
Chunhai
Lin
|
|
50
|
|
Director
|
Xinlian
Zhang
|
|
59
|
|
Director
|
Shijia
Li
|
|
52
|
|
Director
|
Set
forth below is a brief description of the background and business experience of our executive officer and director for the past
ten years.
Wenping
Luo,
age
46, has over 20 years of experience in business development, marketing, and enterprise building. Mr. Luo has
served as our President, Chief Executive Officer, and Chairman of the Board since February 2012. Mr. Luo founded Laifeng Anpulo
(Group) Food Development Co., Ltd. in 2005. Between 1998 and 2005, Mr. Luo was the chairman of Yunxin Auto Service Co., Ltd.,
an auto repairing company located in Laifeng County. Mr. Luo has also served as a director and chief executive officer of Anpulo
Food Development, Inc. since December 2012. Anpulo Food Development, Inc. is a development stage company with no any business
activity. Mr. Luo is currently studying business management in Huazhong Technology University. Mr. Luo was nominated as a director
for his experience in food servicing industry and leadership of our company.
Through
his prior service as our President, Chief Executive Officer and Chairman of the Board and his experience of
founding
Anpulo Laifeng, Mr. Luo possesses knowledge and experience in the meat product industry that aids him in efficiently and
effectively identifying and executing our strategic priorities.
Maochun
Kang,
age 41, has served as the Company’s Chief Financial Officer since December 2013. Mr. Kang has been with Anpulo
Laifeng since 2007, starting with the controller position, later promoted the chief financial officer position in July 2012. From
2005 through 2006, Mr. Kang was vice president of the
accounting
department of Golden
Mountain Industries Co., Ltd., a company engaged in liquor production and agricultural products processing. From 2003 through
2005, Mr. Kang was the accounting manager of Changsha Shenao Real Estate Co., Ltd., a real estate development company. From 1996
through 2003, Mr. Kang was the accounting manager of Hunan Longshan Cigarette Co., Ltd., a cigarette manufacturing company. Mr.
Kang is a licensed Certified Public Accountant in China. Mr. Kang received his degree in Science and Technology from Changsha
University.
Tao
Yang,
age 35, has served as a director of the Company since December 2013. Mr. Yang has been with Anpulo Laifeng since 2006,
through the positions of office manager, sales manager, until promoted to general manager in January 2013. From 2004 through 2006,
Mr. Yang was a trainer working
for
Laifeng Children Body Skill Training Center. From
2002 through 2004, Mr. Yang was an advertising manager for Guiyuan Advertising Company, Ltd. Mr. Yang was nominated as a director
because his first-hand knowledge of and experience in the Company’s sales activities will offer valuable insights in formulating
the Company’s future marketing strategies.
Chunhai
Lin
, age 50, has served as a director since December 2013. Mr. Lin has been a partner of Hubei Xiongzhen Law Firm since 2000.
Mr. Lin received his bachelor degree in politics and law from Central China Normal University. As a director, Mr. Lin’s
legal knowledge and long-time experience in practice law in China will help the Company navigate the complex regulatory compliance
matters that often occur to a fast-growing food product company.
Xinlian
Zhang
, age 59, has served as a director since December 2013. Ms. Zhang has been a retiree since 2013. From 2008 through 2012,
Ms. Zhang was the director of Bureau of Environmental Health of Laifeng County Urban Administration. From 1988 through 2008, Ms.
Zhang was the director of Bureau of Environmental Health of Laifeng County. Ms. Zhang has won numerous national awards and recognition,
including China’s “Three Eight Red Banner Pacesetter”, “The National Model Labor Award”, and other
recognition such as “10 Outstanding Personnel of Enshi Tujia and Miao Autonomous Prefecture”. Ms. Zhang was nominated
as a director because her insights and authoritative opinions on the food industry in Laifeng county will provide the Company
strategic guidance in its growth and development.
Shijia
Li,
age 52, has served as a director since December 2013. Mr. Li has been general manager of the farmer finance department
of Agricultural Bank of China Enshi Branch since February 2012. From April 2009 through January 2012, Mr. Li was general manager
of consumer finance department of Agricultural Bank of China Enshi Branch. From August 2006 through March 2009, Mr. Li was general
manager of Agricultural Bank of China Hefeng County Sub-branch. From January 2005 through July 2006, Mr. Li was general manager
of Agricultural Bank of China Laifeng County Sub-branch. From July 2001 through January 2005, Mr. Li was deputy general manager
of Agricultural Bank of China Laifeng County Sub-branch. Mr. Li was nominated as a director because his knowledge and experience
with the finance and banking matters in China is critical assets for the Company in exploring and evaluating capital raising opportunities.
Family
Relationship
There
are no family relationships between any of our directors or executive officers.
Employment
Agreements
Generally
Under
Chinese law, we may only terminate employment agreements without cause and without penalty by providing notice of non-renewal
one month prior to the date on which the employment agreement is scheduled to expire. If we fail to provide this notice or if
we wish to terminate an employment agreement in the absence of cause, then we are obligated to pay the employee one month’s
salary for each year we have employed the employee. We are, however, permitted to terminate an employee for cause without penalty
to our company, where the employee has committed a crime or the employee’s actions or inactions have resulted in a material
adverse effect to us.
Our
employment agreements with our executive officers generally provide for a term of three years, extendable for an additional two
years, and a salary to be paid monthly. The agreements also provide that executive officers are to work an average of forty hours
per week and are entitled to all legal holidays as well as other paid leave in accordance with PRC laws and regulations and our
internal work policies. Under such agreements, our executive officers can be terminated for cause without further compensation.
The employment agreements also provide that we will pay for all mandatory social security programs for our executive officers
in accordance with PRC regulations. During the agreement and for three (3) years afterward, our executive officers are subject
to keep trade secrets confidential. In addition, our employment agreements with our executive officers prevent them from rendering
services for our competitors for a period of two (2) years after termination of employment.
Wenping
Luo
We
do not have employment agreement with our President and Chief Executive Officer, Mr. Wenping Luo. However, our variable interest
entity Anpulo Laifeng entered into an employment agreement with Mr. Luo effective December 1, 2013. Under the terms of that employment
agreement, Mr. Luo serves as chairman of the board and chief executive officer of Anpulo Laifeng and is entitled to the following:
|
●
|
Base
compensation of RMB 240,000 (about $39,344), payable in 12 equal monthly installments of RMB 20,000 (about $3,279) each.
|
|
|
|
|
●
|
Reimbursement
of reasonable expenses incurred by Mr. Luo.
|
Ms.
Luo’s employment agreement commenced on December 1, 2013 and is scheduled to expire on November 30, 2016. Mr. Luo’s
employment agreement is subject to automatic renewal through November 30, 2018 unless terminated prior to such renewal.
Mr.
Luo has agreed during the term of the agreement and for 36 months afterwards to:
|
●
|
keep
confidential and not disclose the information;
|
|
|
|
|
●
|
take
and implement all appropriate measures to protect the confidentiality of the information;
|
|
|
|
|
●
|
not
disclose, transmit, exploit or otherwise use for its own account or for others, elements of information;
|
Mr.
Luo has also agreed not to compete with our company directly or indirectly during his employment and for a period of 24 months
afterwards.
Mr.
Luo’s agreement may be terminated at any time by either party upon presentation of 60 days’ prior notice.
Maochun
Kang
We
do not have employment agreement with our Chief Financial Officer, Mr. Maochun Kang. However, our variable interest entity Anpulo
Laifeng entered into an employment agreement with Mr. Kang effective December 1, 2013. Under the terms of that employment agreement,
Mr. Kang serves as chief financial officer of Anpulo Laifeng and is entitled to the following:
|
●
|
Base
compensation of RMB 120,000 (about $19,672), payable in 12 equal monthly installments of RMB 10,000 (about $1,639) each.
|
|
|
|
|
●
|
Reimbursement
of reasonable expenses incurred by Mr. Kang.
|
Mr.
Kang’s employment agreement commenced on December 1, 2013 and is scheduled to expire on November 30, 2016. Mr. Kang’s
employment agreement is subject to automatic renewal through November 30, 2018 unless terminated prior to such renewal.
Mr.
Kang has agreed during the term of the agreement and for 36 months afterwards to:
|
●
|
keep
confidential and not disclose the information;
|
|
|
|
|
●
|
take
and implement all appropriate measures to protect the confidentiality of the information;
|
|
|
|
|
●
|
not
disclose, transmit, exploit or otherwise use for its own account or for others, elements of information;
|
Mr.
Kang has also agreed not to compete with our company directly or indirectly during his employment and for a period of 24 months
afterwards.
Mr.
Kang’s agreement may be terminated at any time by either party upon presentation of 60 days’ prior notice.
B. Compensation
Compensation
The
following
table
shows the annual compensation paid by us for the years ended December
31, 2015 and 2014 to Wenping Luo, our principal executive officer and Maochun Kang, our principal financial and accounting officer.
Name and Principal Position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
All Other Compensation ($)
|
|
|
Totals ($)(1)
|
|
Wenping Luo
|
|
|
2015
|
|
|
$
|
38,530
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,530
|
|
President, Chief Executive Officer
|
|
|
2014
|
|
|
$
|
10,332
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maochun Kang
|
|
|
2015
|
|
|
$
|
19,265
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,265
|
|
Chief Financial Officer
|
|
|
2014
|
|
|
$
|
8,718
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,718
|
|
(1)
|
Represents
the compensations of Mr. Luo and Mr. Kang for serving as executive officers of Anpulo Laifeng. The Company has not entered
into any compensation arrangements with Mr. Luo or Mr. Kang.
|
Outstanding
Equity Awards at Fiscal Year End
No
equity
award
was outstanding at the December 31, 2015.
Compensation
of Our Director
All
directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected
and until their successors have been duly elected and qualified. There are no family relationships among our directors or executive
officers. Officers are elected by and serve at the discretion of the Board of Directors. Employee directors do not receive any
compensation for their services. Non-employee directors are entitled to receive $10,000 per year for serving as directors and
may receive option grants from our company. In addition, non-employee directors are entitled to receive compensation for their
actual travel expenses for each Board of Directors meeting attended.
Summary
Compensation Table Fiscal Years 2015 – Directors
|
|
Director
Fees earned
or paid in
cash
|
|
|
Total (1)
|
|
Name
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Wenping Luo(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
Tao Yang(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
Chunhai Lin(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
Xinlian Zhang(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
Shijia Li(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
None
of the directors received any ordinary share awards, option awards, nonqualified deferred compensation earnings or non-equity
incentive plan compensation in fiscal years 2015 and 2014.
|
(2)
|
Mr.
Luo and Mr. Yang received payment in their capacities as officers of our company and/or subsidiaries/affiliates but did not
receive any compensation for serving as directors of our company for the fiscal years 2015 and 2014.
|
(3)
|
Messers.
Lin, Zhang, and Li did not become directors until 2013 and they did not receive any payment for the fiscal years 2015 and
2014.
|
C. Board
Practices
Board
of Directors
Our
board of directors currently consists of five directors. We expect that all current directors will continue to serve on the board.
There are no family relationships between any of our executive officers and directors.
The
directors will be divided into three classes, as nearly equal in number as the then total number of directors permits. Class I
directors shall face re-election at our annual general meeting of shareholders in 2014 and every three years thereafter. We have
not host our annual general meeting of shareholders in 2015 and 2014 yet. As a result, the re-election of Class I directors had
not been conducted. Class II directors shall face re-election at our annual general meeting of shareholders in 2015 and every
three years thereafter. Class III directors shall face re-election at our annual general meeting of shareholders in 2016 and every
three years thereafter.
If
the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of
directors in each class as nearly as possible. Any additional directors of a class elected to fill a vacancy resulting from an
increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number
of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third
parties to gain control of our company by making it difficult to replace members of the Board of Directors.
A
director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the
interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any
vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure
and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director
may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in
which he is so interested and may vote on such motion.
There
are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed
by us in a general meeting.
Chunhai
Lin, Xinlian Zhang and Shijia Li, who constitute a majority of our Board of Directors, are deemed to be independent under the
definition of independence provided by NASDAQ Listing Rule 5605(a)(15).
There
are no other arrangements or understandings pursuant to which our directors are selected or nominated.
Mr.
Wenping Luo currently holds both the positions of Chief Executive Officer and Chairman of the Board. These two positions have
not been consolidated into one position; Mr. Luo simply holds both positions at this time. We do not have a lead independent director
because of the foregoing reason and also because we believe our independent directors are encouraged to freely voice their opinions
on a relatively small company board. We believe this leadership structure is appropriate because we are a smaller reporting company
in the process of listing on a public exchange; as such we deem it appropriate to be able to benefit from the guidance of Mr.
Luo as both our principal executive officer and Chairman of the Board.
Our
Board of Directors plays a key role in our risk oversight. The Board of Directors makes all relevant Company decisions. As a smaller
reporting company with a small board of directors, we believe it is appropriate to have the involvement and input of all of our
directors in risk oversight matters.
Board
Committees
We
have not formed an Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee as of the filing of
this report. Our Board of Directors performs the principal functions of an Audit Committee. We currently do not have an audit
committee financial expert on our Board of Directors. We believe that an audit committee financial expert is not required because
the cost of hiring an audit committee financial expert to act as one of our directors and to be a member of an Audit Committee
outweighs the benefits of having an audit committee financial expert at this time.
D. Employees
As
of December 31, 2015, we employed 338 employees, of whom four were certified veterinarians, 12 were operating personnel, 198 were
sales personnel, 10 were quality control personnel and 20 were administrative personnel. We are not subject to any collective
bargaining agreement and we believe our relationship with our employees is good.
E. Share
Ownership
Share
Ownership
The
following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) each director
and named executive officer, (ii) all executive officers and directors as a group; and (iii) each shareholder known to be the
beneficial owner of 5% or more of the outstanding ordinary shares of the Company as of May 16, 2016.
Beneficial
ownership is determined in accordance with the rules of the SEC. Generally, a person is considered to beneficially own securities:
(i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, and (ii) of which such
person has the right to acquire beneficial ownership at any time within 60 days (such as through exercise of share options or
warrants). For purposes of computing the percentage of outstanding shares held by each person or group of persons, any shares
that such person or persons has the right to acquire within 60 days of May 16, 2016 are deemed to be outstanding, but are not
deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any
shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise indicated below,
the address of each person listed in the table below is c/o No 8, North of Fengxiang Avenue, Xiangfeng Town, Laifeng County, Hubei
Province 445700, China.
Named Executive Officers and Directors
|
|
Amount of
Beneficial
Ownership(1)
|
|
|
Percentage
Ownership(2)
|
|
|
|
|
|
|
|
|
Wenping Luo, Principal Executive Officer and Director
|
|
|
92,000,000
|
(3)
|
|
|
49.92
|
%
|
Maochun Kang, Chief Financial Officer
|
|
|
100,000
|
|
|
|
0.05
|
%
|
Tao Yang, Director
|
|
|
100,000
|
|
|
|
0.05
|
%
|
Chunhai Lin, Director
|
|
|
0
|
|
|
|
-
|
|
Xinlian Zhang, Director
|
|
|
0
|
|
|
|
-
|
|
Shijia Li, Director
|
|
|
0
|
|
|
|
-
|
|
All Directors and Executive Officers as a Group (6 people)
|
|
|
92,200,000
|
|
|
|
50.02
|
%
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the
common shares.
|
(2)
|
Based
on 184,296,166 ordinary shares issued and outstanding as of May 5, 2016.
|
(3)
|
Includes
6,000,000 shares owned by Mr. Luo’s spouse, Jinfeng Hu.
|
Item
7. Major Shareholders and Related Party Transactions
A. Major
Shareholders
Except
as set forth under Item 6E, the Company does not have any major shareholder who beneficially owns 5% or more of our ordinary shares.
B. Related
Party Transactions
Transactions
with Related Persons
Share
Buyback from Principal Stockholder
During
the year of 2015, we had issued 61,126,166 shares of our common stock to various people in China for the purchase price of $0.11
per share. We were planning to issue 70 million shares of our common stock in total and raised approximately $7.7 million from
the issuances. The capital collected from new share issuances would be used to buy back our outstanding preferred stock at approximately
$0.09 per share. As the result of the issuances of our common stock and buy back transaction, we had bought back and canceled
78,370,000 shares of preferred stock as of December 31, 2015.
Personal
Loans from Officer, Director and Principal Stockholder
During
2015, we obtained an aggregate financial supports of approximately $18,000 from Wuhan ShanqingMeiyao Trading Co., Ltd., whose
the principal stockholder is the relative of Mr. Wenping Luo, for the Company’s working capital purpose. We had repaid approximately
$32,000 during the year 2015. In addition, at December 31, 2015, we reported a payable of $13,560 to Wuhan ShanqingMeiyao Trading
Co., Ltd. These loans were due upon demand and no interest was charged.
During
2015, we obtained an aggregate financial supports of approximately $90,000 from Linhao Tuweicai Restaurant, whose the principal
stockholder is the relative of Mr. Wenping Luo, for the Company’s working capital purpose. We had repaid approximately $44,000
during the year 2015. In addition, at December 31, 2015, we reported a payable of $6,105 to Wuhan ShanqingMeiyao Trading Co.,
Ltd. These loans were due upon demand and no interest was charged.
During
2015 and 2014, we had Ms. Jinfeng Hu, who is Mr. Wenping Luo’s wife, paid approximately $160,000 and $80,579 on behalf of
the Company to our suppliers. As of December 31, 2015 and 2014, we reported a payable of $4,313 and $80,579 to Ms. Jinfeng Hu,
respectively. The loan was due upon demand and no interest was charged.
During
2014, we obtained an aggregate financial supports of approximately $5,937,000 from Mr. Wenping Luo, the principal stockholder
and President and Chief Executive Officer and a director of the Company, for the Company’s working capital purpose. We had
repaid approximately $5,275,000 during the year 2014. In addition, at December 31, 2014, we reported a payable of $661,820 to
Mr. Wenping Luo. These loans were repaid in 2015 and no interest was charged.
Personal
Loans to Officer, Director and Principal Stockholder
During
2015, we loaned an aggregate of approximately $31,657,010 to Wenping Luo, the principal stockholder and President and Chief Executive
Officer and a director of the Company, for his personal use. $31,329,000 of these loans had been collected by 2015 and the amount
due from Mr. Luo to the Company at December 31, 2015 was $328,376. These loans were due upon demand and had been charged interest
expensed at 4.35% annually.
During
2015, we loaned an aggregate of approximately $2,700 to Junyi Luo, a relative of Mr. Wenping Luo, for his personal use. The amount
due from Mr. Junyi Luo to the Company at December 31, 2015 was $2,619. These loans were due upon demand and no interest was charged.
During
2015, we loaned an aggregate of approximately $481,000 to Laifeng Anpulo Yunxing Transportation Co., Ltd., whose major shareholder
is Mr. Wenping Luo, for working capital purpose. $477,000 of these loans had been collected by 2015 and the amount due from Laifeng
Anpulo Yunxing Transportation Co., Ltd. to the Company at December 31, 2015 was $10,321. These loans were due upon demand and
no interest was charged.
The
above loans would be in violation of the Sarbanes-Oxley Act of 2002, including Section 402’s prohibition against personal
loans to directors and executive officers, either directly or indirectly, had they occurred after Anpulo Laifeng became a variable
interest entity of our Company. Management is aware of the ramifications, and has committed to avoiding it by implementing controls
that will prevent this type of violation from happening in the future. Please see “Policies and Procedures for Review, Approval
or Ratification of Transactions with Related Persons.”
Sales
to Related Parties
In
2015, the Company made sales of pork products to each of Laifeng Anpulo Yunxing Transportation Co., Ltd., Laifeng Fangchi Hotel,
Laifeng Fengming Manor Hotel, and Wuhan Shanqing Meiyao Trading Co., Ltd. The major shareholder of the foregoing four companies,
in each case, is Mr. Wenping Luo, the principal stockholder and President and Chief Executive Officer and a director of the Company.
As of December 31, 2015, the Company had receivables from these three companies as set forth below:
|
●
|
$8,557
from Laifeng Anpulo Yunxing Transportation Co., Ltd.
|
|
|
|
|
●
|
$38,995
from Laifeng Fangchi Hotel.
|
|
|
|
|
●
|
$22,231
from
Laifeng Fengming Manor Hotel
|
|
|
|
|
●
|
$42,232
from
Wuhan Shanqing Meiyao Trading Co., Ltd.
|
In
2014, the Company made sales of pork products to each of Laifeng Anpulo Yunxing Transportation Co., Ltd., Laifeng Fangchi Hotel,
Linhao Tuweicai Restaurant, and Wuhan Shanqing Meiyao Trading Co., Ltd. The major shareholder of Laifeng Anpulo Yunxing Transportation
Co., Ltd. and Laifeng Fangchi Hotel is Wenping Luo, the principal stockholder and President and Chief Executive Officer and a
director of the Company. The major shareholders of Linhao Tuweicai Restaurant and Wuhan ShanqingMeiyao Trading Co., Ltd. are Wenping
Luo’s relatives. As of December 31, 2014, the Company had receivables from these four companies as set forth below:
|
●
|
$16,366
from Laifeng Anpulo Yunxing Transportation Co., Ltd.
|
|
|
|
|
●
|
$166,697
from Laifeng Fangchi Hotel.
|
|
|
|
|
●
|
$18,939
from
Wuhan ShanqingMeiyao Trading Co., Ltd
.
|
|
|
|
|
●
|
$39,734
from
Linhao Tuweicai
Restaurant.
|
On
November 18, 2012, the Company entered into a cooperation agreement with the government of Laifeng County to build and operate
a high end hotel. As of April 20, 2014 (disposal date) and December 31, 2013, the Company had invested $2,761,893 (or RMB 17 million)
and $2,142,989 in the hotel construction and may need additional $2.95 million capital to complete this construction. On April
20, 2014, the Company assigned and transferred all of its rights and obligations under the cooperation agreement to Laifeng Fengming
Manor Hotel Management Co., Ltd. (“Fengming”) for approximately $2.7 million or RMB 17 million. No gain or loss was
recognized from this transaction. Fengming is owned by Mr. Junyi Luo, Mr. Wenping Luo’s son. Mr. Wenping Luo does neither
have any direct or indirect investment in Fengming nor hold any management position in Fengming. The Company had collected RMB
12 million or $1,953,379 from Fengming on May 2014. The remaining balance of $848,924 had been collected in 2015.
Policies
and Procedures for Review, Approval or Ratification of Transactions with Related Persons
We
had substantial related party transactions as described above and have had no corporate governance policies in place to review,
authorize and approve such transactions. Specifically, the Company’s variable interest entity made loans to related party
companies which would be in violation of the Sarbanes-Oxley Act of 2002, including Section 402’s prohibition against personal
loans to directors and executive officers, either directly or indirectly, had they occurred after Anpulo Laifeng became a variable
interest entity of our Company. These loans, if occur in the future, may subject us and our officers and directors to possible
criminal, civil or administrative sanctions, penalties, or investigations, in addition to potential shareholder lawsuits. Management
is aware of the ramifications, and has committed to avoiding it by implementing controls that will prevent this type of violation
from happening in the future.
We
expect to prepare and adopt a written related-person transactions policy that sets forth our policies and procedures regarding
the identification, review, consideration and approval or ratification of “related-persons transactions.” For purposes
of our policy only, a “related-person transaction” will be a transaction, arrangement or relationship (or any series
of similar transactions, arrangements or relationships) in which we and any “related person” are participants involving
an amount that exceeds $120,000 or one percent of the average of the Company’s total assets at the year-end for 2015. Transactions
involving compensation for services provided to us as an employee, director, consultant or similar capacity by a related person
will not be covered by this policy. A related person will be any executive officer, director or a holder of more than five percent
of our ordinary shares, including any of their immediate family members and any entity owned or controlled by such persons.
We
anticipate that, where a transaction has been identified as a related-person transaction, the policy will require management to
present information regarding the proposed related-person transaction to our audit committee (or, where approval by our audit
committee would be inappropriate, to another independent body of our board of directors) for consideration and approval or ratification.
Management’s presentation will be expected to include a description of, among other things, the material facts, the direct
and indirect interests of the related persons, the benefits of the transaction to us and whether any alternative transactions
are available.
To
identify related-person transactions in advance, we are expected to rely on information supplied by our executive officers, directors
and certain significant shareholders. In considering related-person transactions, our board of directors will take into account
the relevant available facts and circumstances including, but not limited to:
|
●
|
the
risks, costs and benefits to us;
|
|
●
|
the
effect on a director’s independence in the event the related person is a director, immediate family member of a director
or an entity with which a director is affiliated;
|
|
●
|
the
terms of the transaction;
|
|
●
|
the
availability of other sources for comparable services or products; and
|
|
●
|
the
terms available to or from, as the case may be, unrelated third parties or to or from our employees generally.
|
We
also expect that the policy will require any interested director to excuse himself or herself from deliberations and approval
of the transaction in which the interested director is involved.
Promoters
and Certain Control Persons
A
“promoter” within the definition of 12b-2 includes (i) any person who, acting alone or in conjunction with one or
more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer;
or (ii) any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or
indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of
securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities.
We
have no knowledge of any person who would be deemed a “promoter” of our company during the past five years within
the meaning of Rule 405 under the Securities Act.
C. Interests
of Experts and Counsel
Not
applicable
Item
8. Financial Information
A. Consolidated
Statements and Other Financial Information
Financial
Statements
See
our audited financial statements for the fiscal years ended December 31, 2015 and 2014 included under Item 18 of this annual report.
Legal
Proceedings
We
are currently not involved in any lawsuits or legal proceedings that might arise in the ordinary course of business. From time
to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result may arise from time to time that may harm our business.
There were no material pending legal proceedings to which we are a party or of which any of our property is the subject.
Dividend
Policy
We
have never declared or paid any cash dividends on our common shares. We anticipate that we will retain any earnings to support
operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the
foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors
and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects
and other factors the Board of Directors may deem relevant.
If
we determine to pay dividends on any of our common shares in the future, as a holding company, we will be dependent on receipt
of funds from Anpulo WFOE, which in turn would be dependent on the receipt of funds from our variable interest entities, Anpulo
Laifeng and Anpulo Muye. Payments of dividends by Anpulo WFOE to our Company are subject to laws and regulations in the PRC including
the requirement that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized
to conduct foreign exchange business. Further, such remittances would require Anpulo WFOE to provide an application for remittance
that includes, in addition to the application form, a foreign registration certificate, board resolution, capital verification
report, audit report on profit and stock bonuses, and a tax certificate. There are no such similar foreign exchange restrictions
in the British Virgin Islands.
B. Significant
Changes
On
March 9, 2016, the Company sold 170,000 shares of its common stock to various individuals in China for the purchase price of $0.11
per share.
Item
9. The Offer and Listing
A. Offer
and Listing Details
Our common
stock is quoted on OTCQB, under the symbol “ANPFF”. As of May 12, 2016, the closing price for our common stock was
$0.52 per share. The bid prices set forth below reflect inter-dealer quotations, do not include retail markups, markdowns or commissions
and do not necessarily reflect actual transactions.
The following table sets forth,
for the periods indicated, the high and low bid prices of our common stock.
|
|
High
|
|
|
Low
|
|
Fiscal Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2016 (until May 12, 2016)
|
|
$
|
1.15
|
|
|
$
|
0.40
|
|
Quarter ended March 31, 2016
|
|
$
|
3.58
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2015
|
|
|
|
|
|
|
Quarter ended December 31, 2015
|
|
$
|
3.6
|
|
|
$
|
0.95
|
|
Quarter ended September 30, 2015
|
|
$
|
3.7
|
|
|
$
|
3.3
|
|
Quarter ended June 30, 2015
|
|
$
|
3.81
|
|
|
$
|
0.6
|
|
Quarter ended March 31, 2015
|
|
$
|
4.6
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
December 2014
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
November 2014
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
B. Plan
of Distribution
Not
applicable.
C. Markets
On
June 13, 2014 our ordinary shares were listed on the OTCQB under the ticker symbol “ANPFF”.
D. Selling
Shareholders
Not
applicable.
E. Dilution
Not
applicable.
F. Expense
of the Issue
Not
applicable.
Item
10. Additional Information
A. Share
Capital
Not
applicable.
B. Memorandum
and Articles of Association
Information
relating to our Memorandum and Articles of Association is
incorporated by reference to the Registration Statement
on Form S-1 (File No. 333-192006), as filed with the SEC on March 31, 2013.
C. Material
Contracts
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item
4. Information on the Company” or elsewhere in this annual report on Form 20-F.
D. Exchange
Controls
Pursuant
to the Regulations on the Administration of Foreign Exchange issued by the State Council and effective in 1996, as amended in
January 1997 and August 2008, respectively, current account transactions, such as the sale or purchase of goods, are not subject
to PRC governmental approvals. Certain organizations in the PRC, including foreign-invested enterprises, may purchase, sell and/or
remit foreign currencies at certain banks authorized to conduct foreign exchange business upon providing valid commercial documents.
However, approval of the PRC State Administration of Foreign Exchange, or SAFE, is required for capital account transactions.
In
August 2008, SAFE issued a circular on the conversion of foreign currency into Renminbi by a foreign-invested company that regulates
how the converted Renminbi may be used, or the SAFE Circular 142. The circular requires that the registered capital of a foreign-invested
enterprise converted into Renminbi from foreign currencies may only be utilized for purposes within its business scope. For example,
such converted amounts may not be used for investments in or acquisitions of other companies, which can inhibit the ability of
companies to consummate such transactions. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi registered
capital of foreign-invested enterprises converted from foreign currencies. The use of such Renminbi capital may not be changed
without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not
been utilized. Furthermore, SAFE promulgated a circular in November 2010, which, among other things, requires the authenticity
of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner
described in the offering documents. Violations may result in severe penalties, such as heavy fines.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular,
the opening of various special purpose foreign exchange accounts (e.g. pre-establishment expenses account, foreign exchange capital
account, guarantee account), the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange
profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification
of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before.
In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over
Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration
by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration
and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information
provided by SAFE and its branches.
In
April 8, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital
Settlement of Foreign-invested Enterprises, which will, upon its effective date as of June 1, 2015, supersedes the SAFE Circular
142. This circular provides that, among other things, the foreign-invested company may convert the foreign currency in its capital
account into RMB on a “at will” basis and the RMB funds so converted can be used for equity investments. However,
the RMB funds so converted shall not be used for the purposes of, whether directly or indirectly, (i) paying expenditures
out of the ordinary course of business; (ii) investing in securities; (iii) extending entrusted loans or paying off
loans extended or assumed by other companies; (iv) purchasing real estate properties not for self-use except when the foreign
invested company is a company approved to engaging in real estate development business.
E. Taxation
The
following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership
and disposition of our ordinary shares. Investors should consult their own tax advisor concerning the tax consequences of your
particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing
jurisdiction.
Taxation
in the British Virgin Islands
The
Government of the British Virgin Islands will not, under existing legislation, impose any income, corporate or capital gains tax,
estate duty, inheritance tax, gift tax or withholding tax upon the company or its security holders (who are not tax resident in
the British Virgin Islands).
The
company, and all distributions, interest and other amounts paid by the company to persons who are not tax resident in the British
Virgin Islands, are exempt from any income, withholding or capital gains taxes in the British Virgin Islands, with respect to
the shares in the company owned by them and dividends received on such shares, nor will they be subject to any estate or inheritance
taxes in the British Virgin Islands.
No
estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not tax resident in
the British Virgin Islands with respect to any shares, debt obligations or other securities of the company.
All
instruments relating to transactions in respect of the shares, debt obligations or other securities of the company and all instruments
relating to other transactions relating to the business of the company are exempt from the payment of stamp duty in the British
Virgin Islands, provided that they do not relate to real estate situated in the British Virgin Islands.
There
are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to the company or
its shareholders.
People’s
Republic of China Taxation
Under
the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, an enterprise established outside
the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC
enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income.
On
April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled
Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82,
which provides certain specific criteria for determining whether the “de facto management body” of a PRC controlled
enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on July 27, 2011, the SAT issued the
Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or
SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82; the bulletin became effective on September 1,
2011. SAT Bulletin 45 clarified certain issues in the areas of resident status determination, post-determination administration
and competent tax authorities procedures. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC
enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise by virtue of having its “de facto
management body” in China only if all of the following conditions are met: (a) the senior management and core management
departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human
resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting
books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and
(d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC.
Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC enterprises or
PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein
may reflect the SAT’s general position on how the term “de facto management body” could be applied in determining
the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or
foreigners.
We
do not believe Anpulo Food Inc. meets all of the criteria described above. We believe that none of Anpulo Food Inc. and its subsidiaries
outside of China is a PRC tax resident enterprise, because none of them is controlled by a PRC enterprise or PRC enterprise group,
and because their records (including the resolutions of its board of directors and the resolutions of shareholders) are maintained
outside the PRC. However, as the tax resident status of an enterprise is subject to determination by the PRC tax authorities and
uncertainties remain with respect to the interpretation of the term “de facto management body” when applied to our
offshore entities, we may be considered as a resident enterprise and may therefore be subject to PRC enterprise income tax at
25% on our global income. In addition, if the PRC tax authorities determine that our company is a PRC resident enterprise for
PRC enterprise income tax purposes, dividends paid by us to non-PRC holders may be subject to PRC withholding tax, and gains realized
on the sale or other disposition of ADSs or ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC
enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty),
if such dividends or gains are deemed to be from PRC sources. Any such tax may reduce the returns on your investment in the ADSs.
If
we are considered a “non-resident enterprise” by the PRC tax authorities, the dividends paid to us by our PRC subsidiaries
will be subject to a 10% withholding tax. The EIT Law also imposes a withholding income tax of 10% on dividends distributed by
an foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered
as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with
the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement. Under the Arrangement Between
the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital, the dividend withholding tax rate may be reduced to 5%, if a Hong Kong resident enterprise
that receives a dividend is considered a non-PRC tax resident enterprise and holds at least 25% of the equity interests in the
PRC enterprise distributing the dividends, subject to approval of the PRC local tax authority. However, if the Hong Kong resident
enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividends
may remain subject to withholding tax at a rate of 10%. Accordingly, Anpulo International Limited may be able to enjoy the 5%
withholding tax rate for the dividends it receives from its PRC subsidiaries if it satisfies the relevant conditions under tax
rules and regulations, and obtains the approvals as required.
According
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued
by the PRC State Administration of Taxation on December 10, 2009, with retroactive effect from January 1, 2008, or SAT Circular
698, where a non-resident enterprise transfers the equity interests in a PRC resident enterprise indirectly through a disposition
of equity interests in an overseas holding company (other than a purchase and sale of shares issued by a PRC resident enterprise
in public securities market), or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that:
(a) has an effective tax rate less than 12.5% or (b) does not tax foreign income of its residents, the non-resident
enterprise, as the seller, shall report such Indirect Transfer to the competent tax authority of the PRC resident enterprise within
30 days of execution of the equity transfer agreement for such Indirect Transfer. The PRC tax authority will examine the true
nature of the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement
without reasonable commercial purposes and for the purpose of avoiding or reducing PRC tax, they will disregard the existence
of the overseas holding company that is used for tax planning purposes and re-characterize the Indirect Transfer. As a result,
gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10%. SAT Circular 698 also
points out that when a non-resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties
at a price lower than the fair market value, the competent tax authorities have the power to make a reasonable adjustment on the
taxable income of the transaction.
On
February 3, 2015, the SAT issued a Public Notice [2015] No. 7, or Public Notice 7, to supersede existing provisions in relation
to the Indirect Transfer as set forth in Circular 698, while the other provisions of Circular 698 remain in force. Public Notice
7 introduces a new tax regime that is significantly different from that under Circular 698. Public Notice extends its tax jurisdiction
to capture not only Indirect Transfer as set forth under Circular 698 but also transactions involving transfer of immovable property
in China and assets held under the establishment and place in China of a foreign company through the offshore transfer of a foreign
intermediate holding company. Public Notice 7 also addresses transfer of the equity interest in a foreign intermediate holding
company widely. In addition, Public Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial
purposes and introduces safe harbour scenarios applicable to internal group restructurings. However, it also brings challenges
to both the foreign transferor and transferee of the Indirect Transfer as they have to make self-assessment on whether the transaction
should be subject to PRC tax and to file or withhold the PRC tax accordingly.
There
are few guidances and practical experience as to the application of Circular 698 and Public Notice 7. Where non-resident investors
were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable
commercial purpose, we and our non-resident investors may become at risk of being taxed under Circular 698 and Public Notice 7
and may be required to expend valuable resources to comply with Circular 698 and Public Notice 7 or to establish that we should
not be taxed under Circular 698 and Public Notice 7, which may have a material adverse effect on our financial condition and results
of operations or the non-resident investors’ investments in us.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Public Notice 7 to make adjustments to the taxable
capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. We
may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise
under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions
under SAT Circular 59, Circular 698 and Public Notice 7, our income tax costs associated with such potential acquisitions will
be increased, which may have an adverse effect on our financial condition and results of operations.
United
States Federal Income Tax Consequences
The
following is a discussion of the material U.S. federal income tax considerations applicable to an investment in ordinary shares
by a U.S. holder, as defined below, that will hold the ordinary shares as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the “Code”). This summary is based upon existing U.S. federal tax law,
which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the
Internal Revenue Service (the “IRS”) with respect to any U.S. federal income tax consequences described below, and
there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address the tax
consequences to any particular holder nor any tax considerations that may apply to holders subject to special tax rules, such
as banks, insurance companies, individual retirement and other tax-deferred accounts, regulated investment companies, individuals
who are former U.S. citizens or former long-term U.S. residents, dealers in securities or currencies, tax-exempt entities, persons
subject to the alternative minimum tax, persons that hold ordinary shares as a position in a straddle or as part of a hedging,
constructive sale or conversion transaction for U.S. federal income tax purposes, persons that have a functional currency other
than the U.S. dollar, persons that own (directly, indirectly or constructively) 10% or more of our equity or persons that are
not U.S. holders.
In
addition, this discussion does not address any state, local or non-U.S. tax considerations (other than the discussion below relating
to certain withholding rules and the United States — Australian income tax treaty). Each U.S. holder is urged to consult
its tax advisor regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of an investment in
our ordinary shares.
In
this section, a “U.S. holder” means a beneficial owner of ordinary shares that is, for U.S. federal income tax purposes:
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an
individual who is a citizen or resident of the United States;
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a
corporation (or other entity treated as a corporation) created or organized (or treated as created or organized) in or under
the laws of the United States, any state thereof or the District of Columbia;
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an
estate the income of which is subject to U.S. federal income taxation regardless of its source; or
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a
trust (i) the administration of which is subject to the primary supervision of a court in the United States and for which
one or more U.S. persons have the authority to control all substantial decisions or (ii) that has an election in effect under
applicable income tax regulations to be treated as a U.S. person.
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As
used in this section, a “non-U.S. holder” is a beneficial owner of ordinary shares that is not a U.S. holder or an
entity or arrangement treated as a partnership for U.S. federal income tax purposes.
If
an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds ordinary shares, the U.S. federal
income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners
of partnerships that will hold ordinary shares should consult their tax advisors.
You
are urged to consult your own tax advisor with respect to the U.S. federal, as well as state, local and non-U.S., tax consequences
to you of acquiring, owning and disposing of ordinary shares in light of your particular circumstances, including the possible
effects of changes in U.S. federal and other tax laws.
Dividends
Subject
to the discussion below under “Passive Foreign Investment Company Rules,” any cash distributions (including the amount
of any PRC tax withheld) paid on our ordinary shares out of our current or accumulated earnings and profits, as determined under
United States federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income
on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares. Because we do not intend to
determine our earnings and profits on the basis of United States federal income tax principles, any distribution we pay will generally
be treated as a “dividend” for United States federal income tax purposes. A non-corporate U.S. Holder will be subject
to tax on dividend income from a “qualified foreign corporation” at a lower applicable capital gains rate rather than
the marginal tax rates generally applicable to ordinary income provided that certain holding period requirements are met. A non-United
States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or
the preceding taxable year) will generally be considered to be a qualified foreign corporation (i) if it is eligible for
the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines
is satisfactory for purposes of this provision and which includes an exchange of information program, or (ii) with respect
to any dividend it pays on stock which is readily tradable on an established securities market in the United States. Thus, the
dividends we pay on our ordinary shares are expected to satisfy the conditions required for the reduced tax rates, but there can
be no assurance that our ordinary shares will continue to be considered readily tradable on an established securities market in
later years. However, in the event we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law (see
“People’s Republic of China Taxation” above), we may be eligible for the benefits of the United States-PRC income
tax treaty. If we are eligible for such benefits (which the Secretary of the Treasury of the United States has determined is satisfactory
for this purpose), dividends we pay on our ordinary shares would be eligible for the reduced rates of taxation. U.S. Holders are
urged to consult their tax advisors regarding the availability of the reduced tax rate on dividends with respect to our ordinary
shares in their particular circumstances. Dividends received on our ordinary shares will not be eligible for the dividends-received
deduction allowed to corporations.
Dividends
will generally be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute
passive category income. In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law,
a U.S. Holder may be subject to PRC withholding taxes on dividends paid on our ordinary shares. Depending on the U.S. Holder’s
individual facts and circumstances, a U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign
tax credit not in excess of any applicable treaty rate in respect of any foreign withholding taxes imposed on dividends received
on our ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim
a deduction, for United States federal income tax purposes, in respect of such withholding, but only for a year in which such
holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex and their
outcome depends in large part on the U.S. Holder’s individual facts and circumstances. Accordingly, U.S. Holders are urged
to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Sale
or Other Disposition of Ordinary Shares
Subject
to the discussion below under “Passive Foreign Investment Company Rules,” a U.S. Holder will generally recognize capital
gain or loss upon the sale or other disposition of ordinary shares in an amount equal to the difference between the amount realized
upon the disposition and the U.S. Holder’s adjusted tax basis in such ordinary shares. Any capital gain or loss will be
long-term if the ordinary shares have been held for more than one year and will generally be United States-source gain or loss
for United States foreign tax credit purposes. Long-term capital gains of non-corporate taxpayers are currently eligible for reduced
rates taxation. In the event that gain from the disposition of the ordinary shares is subject to tax in the PRC, such gain may
be treated as PRC-source gain under the United States-PRC income tax treaty. The deductibility of a capital loss may be subject
to limitations. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed
on a disposition of our ordinary shares, including the availability of the foreign tax credit under their particular circumstances.
Passive
Foreign Investment Company Rules
If
we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares, and unless the U.S. Holder
makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules that have
a penalizing effect, regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder
(which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average
annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the
ordinary shares), and (ii) any gain realized on the sale or other disposition, including a pledge, of ordinary shares. Under
the PFIC rules:
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the
excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares;
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the
amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the
first taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary
income;
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the
amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in
effect applicable to the U.S. Holder for that year; and
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an
additional tax equal to the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable
to each prior taxable year, other than a pre-PFIC year.
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If
we are a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares and any of our subsidiaries is also a
PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes
of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC
rules to any of our subsidiaries.
Because
a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject
to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as
an equity interest in a PFIC for United States federal income tax purposes.
We
do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available,
would result in tax treatment different from the general tax treatment for PFICs described above.
If
a U.S. Holder owns our ordinary shares during any taxable year that we are a PFIC, the U.S. Holder must generally file an annual
IRS Form 8621 or such other form as is required by the United States Treasury Department. Each U.S. Holder is urged to consult
its tax advisor concerning the United States federal income tax consequences of holding and disposing ordinary shares if we are
or become treated as a PFIC, including the possibility of making a mark-to-market election and the unavailability of the election
to treat us as a qualified electing fund.
Information
Reporting
Certain
U.S. Holders are required to report information to the IRS relating to an interest in “specified foreign financial assets,”
including shares issued by a non-United States corporation, for any year in which the aggregate value of all specified foreign
financial assets exceeds US$50,000 (or a higher dollar amount prescribed by the IRS), subject to certain exceptions (including
an exception for shares held in custodial accounts maintained with a United States financial institution). These rules also impose
penalties if a U.S. Holder is required to submit such information to the IRS and fails to do so.
In
addition, U.S. Holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale
or other disposition of our ordinary shares. Each U.S. Holder is advised to consult with its tax advisor regarding the application
of the United States information reporting rules to their particular circumstances.
The
discussion above is not intended to constitute a complete analysis of all tax considerations applicable to an investment in ordinary
shares. You should consult with your own tax advisor concerning the tax consequences to you in your particular situation.
F. Dividends
and Paying Agents
We
currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate
paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion
of our Board and will depend on our financial condition, results of operations, capital requirements, general business conditions
and other factors that our Board may deem relevant.
G. Statement
by Experts
Not
applicable.
H. Documents
on Display
Publicly
filed documents concerning our Company which are referred to in this Annual Report may be inspected and copied at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials can also be obtained
from the Public Reference Room at the SEC’s principal office, 100 F Street, N.E., Washington D.C. 20549, after payment of
fees at prescribed rates.
The
SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding
registrants that make electronic filings through its Electronic Data Gathering, Analysis, and Retrieval or EDGAR, system. We have
made all our filings with SEC using the EDGAR system.
For
further information on the Public Reference Room, please call the SEC at 1-800-SEC-0330. Our SEC filings, including the Annual
Report, are also available to you on the SEC’s website at
http://www.sec.gov
.
Information
may also be found on the Investor Relations section of our website at http://ir.stockpr.com/cbdenergy/sec-filings
I. Subsidiary
Information
All
of our subsidiaries are described in “Item 4. Information on the Company” or elsewhere in this annual report on Form
20-F and are incorporated herein by reference.
PART
III
Item
17. Financial Statements.
See
“Item 18 – Financial Statements”
Item
18. Financial Statements.
The
following financial statements are filed as part of this Annual Report, together with the report of the independent registered
public accounting firms:
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Report
of Independent Registered Public Accounting Firm
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Consolidated
statements of income/(loss) and comprehensive income/(loss)
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Consolidated
balance sheets
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Consolidated
statements of changes in equity
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Consolidated
statements of cash flows
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Notes
to the Consolidated Financial Statements
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INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and
Shareholders
of Anpulo Food Inc. and Subsidiaries
We
have audited the accompanying consolidated balance sheets of Anpulo Food Inc. and Subsidiaries (the "Company") as of
December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2015 and 2014 and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The Company has incurred operating losses and negative working capital as more fully described in Note 2. These issues raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Forest
Hills, New York
May
16, 2016
Anpulo
Food Inc. and Subsidiaries
Consolidated
Balance Sheets
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December 31,
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2015
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2014
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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680,877
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$
|
740,532
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Investment - held for trading
|
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21,517
|
|
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22,755
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Accounts receivable, net
|
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3,994,461
|
|
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2,564,119
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Inventories
|
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|
1,784,995
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|
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1,260,575
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Advances to suppliers
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76,472
|
|
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278,257
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Advance for real estate purchase
|
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-
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81,453
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Prepaid expenses
|
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15,404
|
|
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|
64,049
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Due from related party
|
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341,316
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|
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1,090,660
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Other receivables, net
|
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35,264
|
|
|
|
153,704
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|
Restricted assets
|
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865,681
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|
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1,368,412
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Other current assets
|
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1,004,650
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|
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1,030,666
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Total Current Assets
|
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8,820,637
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8,655,182
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Long-term prepaid expenses, net
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320,027
|
|
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|
357,330
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Plant and equipment, net of accumulated depreciation
|
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6,173,846
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|
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|
7,165,339
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|
Construction in progress
|
|
|
-
|
|
|
|
53,955
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|
Intangible assets, net
|
|
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3,170,716
|
|
|
|
3,434,607
|
|
|
|
|
|
|
|
|
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Total Assets
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$
|
18,485,226
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|
$
|
19,666,413
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LIABILITIES AND STOCKHOLDERS' EQUITY
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|
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|
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Current Liabilities:
|
|
|
|
|
|
|
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Short-term loans
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|
$
|
11,234,345
|
|
|
$
|
13,912,194
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Accounts payable and accrued payables
|
|
|
991,304
|
|
|
|
733,744
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Advances from customers
|
|
|
48,842
|
|
|
|
36,959
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|
Due to related party
|
|
|
23,978
|
|
|
|
742,399
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Other payables
|
|
|
356,391
|
|
|
|
960,940
|
|
Total Current Liabilities
|
|
|
12,654,860
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|
|
|
16,386,236
|
|
|
|
|
|
|
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|
Long-term loans
|
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1,103,021
|
|
|
|
-
|
|
|
|
|
|
|
|
|
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Total Liabilities
|
|
|
13,757,881
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|
|
|
16,386,236
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Stockholders' Equity:
|
|
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|
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Preferred stock ($0.001 par value, 500,000,000 shares authorized, 11,630,000 shares and 90,000,000 shares issued and outstanding as of December 31, 2015 and 2014, respectively)
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|
11,630
|
|
|
|
90,000
|
|
Common stock ($0.001 par value, 1,000,000,000 shares authorized, 184,126,166 shares and 123,000,000 shares issued and outstanding as of December 31, 2015 and 2014, respectively)
|
|
|
184,126
|
|
|
|
123,000
|
|
Additional paid in capital
|
|
|
6,970,845
|
|
|
|
5,413,172
|
|
Accumulated deficit
|
|
|
(3,085,757
|
)
|
|
|
(3,197,042
|
)
|
Accumulated other comprehensive income
|
|
|
646,501
|
|
|
|
851,047
|
|
Total Stockholders' Equity
|
|
|
4,727,345
|
|
|
|
3,280,177
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
18,485,226
|
|
|
$
|
19,666,413
|
|
See
accompanying notes to consolidated financial statements
Anpulo
Food Inc. and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
26,369,680
|
|
|
$
|
17,530,874
|
|
|
$
|
20,206,497
|
|
Cost of goods sold
|
|
|
22,508,894
|
|
|
|
14,485,524
|
|
|
|
16,479,281
|
|
Gross profit
|
|
|
3,860,786
|
|
|
|
3,045,350
|
|
|
|
3,727,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,809,322
|
|
|
|
1,400,687
|
|
|
|
1,678,087
|
|
Selling expenses
|
|
|
2,672,833
|
|
|
|
2,468,163
|
|
|
|
2,270,488
|
|
Total operating expenses
|
|
|
4,482,155
|
|
|
|
3,868,850
|
|
|
|
3,948,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(621,369
|
)
|
|
|
(823,500
|
)
|
|
|
(221,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(685,817
|
)
|
|
|
(1,026,734
|
)
|
|
|
(875,250
|
)
|
Interest income – related party
|
|
|
52,561
|
|
|
|
-
|
|
|
|
-
|
|
Subsidy income - Interest expense
|
|
|
168,842
|
|
|
|
638,875
|
|
|
|
58,154
|
)
|
Subsidy income
|
|
|
904,046
|
|
|
|
110,626
|
|
|
|
118,440
|
|
Gain from loan restructuring
|
|
|
293,452
|
|
|
|
-
|
|
|
|
-
|
|
Other income (expense)
|
|
|
(430
|
)
|
|
|
(28,663
|
)
|
|
|
45,184
|
|
Total other income (expense)
|
|
|
732,654
|
|
|
|
(305,896
|
)
|
|
|
(653,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
111,285
|
|
|
|
(1,129,396
|
)
|
|
|
(874,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
|
111,285
|
|
|
|
(1,129,396
|
)
|
|
|
(874,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency translation adjustment
|
|
|
(204,546
|
)
|
|
|
(21,293
|
)
|
|
|
150,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(93,261
|
)
|
|
$
|
(1,150,689
|
)
|
|
$
|
(724,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and diluted
|
|
|
152,475,667
|
|
|
|
123,000,000
|
|
|
|
122,916,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share - Basic & diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
See
accompanying notes to consolidated financial statements
Anpulo
Food Inc. and Subsidiaries
Consolidated
Statements of The Stockholders' Equity
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
Balance, January 1, 2012
|
|
|
-
|
|
|
$
|
-
|
|
|
|
122,900,000
|
|
|
$
|
122,900
|
|
|
$
|
5,514,599
|
|
|
$
|
(1,422,947
|
)
|
|
$
|
682,037
|
|
|
$
|
4,896,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
230,132
|
|
|
|
-
|
|
|
|
230,132
|
|
Unrealized foreign currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,872
|
|
|
|
39,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
122,900,000
|
|
|
|
122,900
|
|
|
|
5,514,599
|
|
|
|
(1,192,815
|
)
|
|
|
721,909
|
|
|
|
5,166,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
|
|
90,000,000
|
|
|
|
90,000
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
(101,427
|
)
|
|
|
|
|
|
|
-
|
|
|
|
(11,327
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(874,831
|
)
|
|
|
-
|
|
|
|
(874,831
|
)
|
Unrealized foreign currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,431
|
|
|
|
150,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
90,000,000
|
|
|
|
90,000
|
|
|
|
123,000,000
|
|
|
|
123,000
|
|
|
|
5,413,172
|
|
|
|
(2,067,646
|
)
|
|
|
872,340
|
|
|
|
4,430,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,129,396
|
)
|
|
|
-
|
|
|
|
(1,129,396
|
)
|
Unrealized foreign currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,293
|
)
|
|
|
(21,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2014
|
|
|
90,000,000
|
|
|
|
90,000
|
|
|
|
123,000,000
|
|
|
|
123,000
|
|
|
|
5,413,172
|
|
|
|
(3,197,042
|
)
|
|
|
851,047
|
|
|
|
3,280,177
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
61,126,166
|
|
|
|
61,126
|
|
|
|
6,662,752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,723,878
|
|
Capital contribution in
a Chinese subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,540,429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,540,429
|
|
Buy-back of preferred stock
|
|
|
(78,370,000
|
)
|
|
|
(78,370
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,645,508
|
)
|
|
|
|
|
|
|
-
|
|
|
|
(6,723,878
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111,285
|
|
|
|
-
|
|
|
|
111,285
|
|
Unrealized foreign currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(204,546
|
)
|
|
|
(204,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2015
|
|
|
11,630,000
|
|
|
$
|
11,630
|
|
|
|
184,126,166
|
|
|
$
|
184,126
|
|
|
$
|
6,970,845
|
|
|
$
|
(3,085,757
|
)
|
|
$
|
646,501
|
|
|
$
|
4,727,345
|
|
See
accompanying notes to consolidated financial statements
Anpulo
Food Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
111,285
|
|
|
$
|
(1,129,396
|
)
|
|
$
|
(874,831
|
)
|
Adjustments to reconcile
net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
809,490
|
|
|
|
839,583
|
|
|
|
804,731
|
|
Amortization of prepaid
expenses
|
|
|
138,848
|
|
|
|
152,863
|
|
|
|
-
|
|
Amortization of discount
of long-term loans
|
|
|
44,247
|
|
|
|
-
|
|
|
|
-
|
|
Bad debt expense, net
|
|
|
206,931
|
|
|
|
(150,879
|
)
|
|
|
227,427
|
|
Interest income from related
party loans
|
|
|
(52,561
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain from loan restructuring
|
|
|
(293,452
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss from held for trading
investment
|
|
|
-
|
|
|
|
10,001
|
|
|
|
-
|
|
Loss from disposal of plant
and equipment
|
|
|
-
|
|
|
|
3,345
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,636,110
|
)
|
|
|
274,397
|
|
|
|
(1,203,087
|
)
|
Inventories
|
|
|
(618,034
|
)
|
|
|
(39,982
|
)
|
|
|
(133,831
|
)
|
Advances to suppliers
|
|
|
185,933
|
|
|
|
(23,531
|
)
|
|
|
(216,274
|
)
|
Other receivables
|
|
|
49,216
|
|
|
|
568,076
|
|
|
|
(612,881
|
)
|
Other current assets
|
|
|
(31,330
|
)
|
|
|
(304,416
|
)
|
|
|
(500,639
|
)
|
Prepaid expenses
|
|
|
(73,166
|
)
|
|
|
(159,184
|
)
|
|
|
(46,738
|
)
|
Restricted assets
|
|
|
446,355
|
|
|
|
(1,237,140
|
)
|
|
|
(129,230
|
)
|
Long-term prepaid expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
(374,620
|
)
|
Accounts payable and accrued
payables
|
|
|
287,416
|
|
|
|
319,744
|
|
|
|
(95,375
|
)
|
Advances from customers
|
|
|
14,480
|
|
|
|
(22,534
|
)
|
|
|
(16,833
|
)
|
Other
payables
|
|
|
(575,576
|
)
|
|
|
759,405
|
|
|
|
(21,068
|
)
|
Total
adjustments
|
|
|
(1,097,313
|
)
|
|
|
989,748
|
|
|
|
(2,318,418
|
)
|
Net
cash used in operating activities
|
|
|
(986,028
|
)
|
|
|
(139,648
|
)
|
|
|
(3,193,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in held for sale
investment
|
|
|
-
|
|
|
|
-
|
|
|
|
(32,488
|
)
|
Prepayment for real estate
purchase
|
|
|
-
|
|
|
|
(81,391
|
)
|
|
|
-
|
|
Increase in construction
in progress
|
|
|
-
|
|
|
|
(89,169
|
)
|
|
|
(1,455,217
|
)
|
Proceeds from disposal of
construction in progress
|
|
|
-
|
|
|
|
1,953,379
|
|
|
|
-
|
|
Proceeds from disposal of
plant and equipment
|
|
|
-
|
|
|
|
586
|
|
|
|
-
|
|
Purchase
of plant and equipment
|
|
|
(102,182
|
)
|
|
|
(97,674
|
)
|
|
|
(873,035
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
(102,182
|
)
|
|
|
1,685,731
|
|
|
|
(2,360,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from related party
|
|
|
555,338
|
|
|
|
(788,684
|
)
|
|
|
3,697,656
|
|
Due to related party
|
|
|
(603,491
|
)
|
|
|
741,831
|
|
|
|
-
|
|
Capital contribution
|
|
|
1,540,429
|
|
|
|
-
|
|
|
|
-
|
|
Repayment of long-term loans
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,946,127
|
)
|
Repayment of short-term
loans
|
|
|
(12,394,041
|
)
|
|
|
(18,068,759
|
)
|
|
|
(6,364,591
|
)
|
Proceeds
from short-term loans
|
|
|
11,612,189
|
|
|
|
16,636,281
|
|
|
|
15,410,710
|
|
Net
cash provided by (used in) financing activities
|
|
|
710,424
|
|
|
|
(1,479,331
|
)
|
|
|
5,797,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
318,131
|
|
|
|
6,756
|
|
|
|
16,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE)
IN CASH
|
|
|
(59,655
|
)
|
|
|
73,508
|
|
|
|
259,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF YEAR
|
|
|
740,532
|
|
|
|
667,024
|
|
|
|
407,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
END OF YEAR
|
|
$
|
680,877
|
|
|
$
|
740,532
|
|
|
$
|
667,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
708,586
|
|
|
$
|
1,043,053
|
|
|
$
|
858,799
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
$
|
6,723,878
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Buy-back
of preferred stock
|
|
$
|
6,723,878
|
|
|
$
|
-
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS
Anpulo
Food, Inc. (referred to herein as “Anpulo” or the “Company”) is a holding company incorporated under the
laws of the State of Nevada on July 30, 2010. The Company’s business operations consist of processing and distributing pork
products. The Company also engages in the research and development, manufacturing and distribution of chilled pork, frozen pork
and prepared meats. The Company distributes its products to the clients mainly in Hubei and Hunan Provinces in the People’s
Republic of China, (the “PRC” or “China”).
The
consolidated financial statements include the financial statements of Anpulo; its wholly-owned subsidiary, Anpulo International
Limited, a Hong Kong limited liability company (“Anpulo HK”); Anpulo HK’s wholly-owned subsidiary, Guangxiang
Investment Consulting Co., Ltd., a Chinese limited liability company and a wholly foreign owned entity (“Anpulo WFOE”);
Anpulo WFOE’s variable interest entity, Laifeng Anpulo (Group) Food Development Co., Ltd., a Chinese limited liability company
(“Anpulo Laifeng” or the “VIE”), where Anpulo WFOE is deemed the primary beneficiary. All of Anpulo’s
operations are conducted by Anpulo Laifeng whose results of operations are consolidated into those of Anpulo. Anpulo HK and Anpulo
WFOE are sometimes referred to as the “subsidiaries”. Anpulo, its consolidated subsidiaries and Anpulo Laifeng are
collectively referred to herein as the “Company”, “we” and “us”, unless specific reference
is made to an entity.
On
June 25, 2012, the Company redomiciled from the State of Nevada to British Virgin Islands. The Company is engaged in processing,
distributing and marketing fresh pork and cured pork products in China. The Company does not raise hogs, but instead purchase
live hogs from farms or individual pig farmers in Laifeng County and its neighboring area in China for slaughtering, processing
and curing. Its wholly owned subsidiary, Anpulo HK, was incorporated in Hong Kong in May 2012 as a limited liability company.
Other than its equity interest in Anpulo HK, Anpulo does not own any assets or conduct any operations.
In
June 2013, Anpulo HK established a wholly owned subsidiary, Guangxiang Investment Consulting Co., Ltd. (“Anpulo WFOE”),
in Shanghai, China. Other than the equity interest in Anpulo WFOE, Anpulo HK does not own any assets or conduct any operations.
Anpulo
WFOE conducts its business through Anpulo Laifeng, which is consolidated as a variable interest entity, as discussed below.
Anpulo
Laifeng was registered as a privately owned company on March 3, 2005 in the People’s Republic of China (the “PRC”).
Chinese laws and regulations currently do not prohibit or restrict foreign ownership in hog breeding businesses. However, Chinese
laws and regulations do prevent direct foreign investment in certain industries. On December 1, 2009, to protect the Company’s
stockholders from possible future foreign ownership restrictions, Anpulo Laifeng and all of the stockholders of Anpulo Laifeng
(“Principal Stockholders”) entered into an Entrusted Management Agreement (the “EMA”) with Anpulo WFOE,
which provides that Anpulo WFOE will be fully and exclusively responsible for the management of Anpulo Laifeng. Anpulo WFOE is
also entitled to receive the residual return of Anpulo Laifeng. As a result of the agreement, Anpulo WFOE will absorb 100% of
the expected losses and gains of Anpulo Laifeng, which results in Anpulo WFOE being the primary beneficiary of Anpulo Laifeng.
Anpulo
WFOE also entered into a Pledge of Equity Agreement (the “PEA”) with the Principal Stockholders, who pledged all their
equity interest in these entities to Anpulo WFOE. The PEA, which was entered into by each Principal Shareholder, pledged each
of the Principal Stockholders’ equity interest in Anpulo WFOE as a guarantee for the entrustment payment under the EMA.
In
addition, Entrusted Management WFOE entered into an Option Agreement (the “OA”) to acquire the Principal Stockholders’
equity interest in these entities if or when permitted by the PRC laws.
Collectively,
the EMA, PEA and OA are referred to as the Exclusive Agreements, based upon which the Company consolidates the variable interest
entity, Anpulo Laifeng, as required by generally accepted accounting principles in the United States (“US GAAP”),
because the Company is the primary beneficiary of the VIE. The profits and losses of Anpulo Laifeng are allocated to Anpulo WFOE
and thus to the Company based upon the EMA.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
On
November 18, 2012, the Company entered into a cooperation agreement with the government of Laifeng County to build and operate
a high end hotel. According to such agreement, we shall invest no less than RMB 30 million or approximate $4,760,000 in building
a hotel in Laifeng County and, after the hotel is built we are entitled to operate the hotel and profit from the hotel operation
for 20 years from October 1, 2012 to September 30, 2032. After September 30, 2032, the title of the hotel shall be transferred
to the Laifeng County and the Laifeng County shall not be liable for any debts associated with the hotel. As of April 20, 2014
(disposal date) and December 31, 2013, the Company had invested $2,761,893 (or RMB 17 million) and $2,142,989 in the hotel construction
and may need additional $2.95 million capital to complete this construction. On April 20, 2014, the Company assigned and transferred
all of our rights and obligations under the cooperation agreement to Laifeng Fengming Manor Hotel Management Co., Ltd. (“Fengming”)
for approximately $2.7 million or RMB 17 million. No gain or loss was recognized from this transaction. Fengming is owned by Mr.
Junyi Luo, Mr. Wenping Luo’s son. Mr. Wenping Luo does neither have any direct or indirect investment in Fengming nor hold
any management position in Fengming. The Company had collected RMB 12 million or $1,954,493 from Fengming on May 2014. The remaining
balance of RMB 5 million or $848,924 is scheduled to be collected before April 30, 2015. Until the date of this report, the remaining
balance of RMB 5 million or $848,924 was still outstanding.
On
December 29, 2015, Anpulo Laifeng established a wholly-owned subsidiary, Anpulo Group Hefeng Muye Development Co., Ltd. (“Anpulo
Muye”), a limited liability company in PRC, to develop and raise special stains of local hogs.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs
from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the
PRC (“PRC GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the
accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).
All significant intercompany transactions and balances have been eliminated.
As
reflected in the accompanying financial statements, the Company has accumulated deficit of $3,085,757 a working capital deficit
and cash outflow from operating activities of $3,834,223 and $986,028 at December 31, 2015. This raises substantial doubt about
its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s
ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern. Management intends to provide the Company with additional
loans as needed and is seeking a merger target to implement its strategic plans. Management feels these actions provide the opportunity
for the Company to continue as a going concern.
Use
of Estimates
The
preparation of the unaudited financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and
the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially
differ from these estimates. Significant estimates for the years ended December 31, 2015, 2014, and 2013 include the allowance
for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets,
assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, and accruals for taxes due.
Principles
of Consolidation
Pursuant
to US GAAP, Anpulo Laifeng and Anpulo Muye is the VIEs of the Company and the Company is the primary beneficiary of the VIEs.
Accordingly, the VIEs have been consolidated in the Company’s financial statements.
Based
on various VIE agreements, the Company is able to exercise control over the VIEs, and obtain the financial interests such as the
periodic income of the VIEs through the EMA, PEA, and OA and to acquire the net assets of VIEs through purchase of their equities
at essentially no cost. The Company therefore concluded that its interest in the VIEs is not a non-controlling interest and therefore
is not classified as such. Based on the Exclusive Agreements the amount of controlling interest of the Anpulo Laifeng shareholders,
who are holding shares of the VIEs for the Company, is zero. They exercise no controls over the VIEs and no financial interests
of ownership are due to them either for periodic income or the net assets.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Cash
and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three
months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various
financial institutions mainly in the PRC and the U.S. As of December 31, 2015 and 2014, balances in banks in the PRC of $680,877
and $740,532, respectively, are uninsured.
Fair
Value of Financial Instruments
The
Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following tables present information about investment held for trading measured at fair value on a nonrecurring basis as of December
31, 2015 and 2014:
|
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Balance at December 31, 2015
|
|
|
Gain (Loss)
|
|
Investment in gold held for trading
|
|
$
|
21,517
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,517
|
|
|
$
|
-
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
Balance at December 31, 2014
|
|
|
Gain (Loss)
|
|
Investment in gold held for trading
|
|
$
|
22,755
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
22,755
|
|
|
$
|
(10,001
|
)
|
The
Company conducted an impairment assessment on the investment held for trading based on the guidelines established in FASB ASC
Topic 360 to determine the estimated fair market value of the investment as of December 31, 2015 and 2014. Upon completion of
its 2014 impairment analysis, the Company determined that the carrying value exceeded the fair market value on the investment
which is held for sale. The Company recorded impairment charge of $0 and $10,001 at December 31, 2015 and 2014.
The
carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, inventories, advances to suppliers,
prepaid expenses and other, short-term loans, accounts payable, accrued expenses, advances from customers, VAT and service taxes
payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments.
ASC
Topic 825-10 “
Financial Instruments
” allows entities to voluntarily choose to measure certain financial assets
and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and
is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and
losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply
the fair value option to any outstanding instruments.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Accounts
Receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. At December 31,
2015 and 2014, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amounts of $125,103 and $132,301, respectively.
Investment
in Gold – Held for Trading
Marketable
investment instruments are generally designated as investment held for trading. Investments held for trading are measured at fair
value, whereby gains and losses resulting from changes in fair value are recognized to profit or loss. The Company holds investments
in gold for trading purposes. As of December 31, 2015 and 2014 the Company holds investment for trading of $21,517 and $22,755,
respectively. The Company reported losses of $0, $10,001, and $0 resulting from changes in fair value during the years of 2015,
2014, and 2013.
Inventories
Inventories,
consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower
of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories
may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand,
the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on
estimates. The Company did not record inventory reserve at December 31, 2015 and 2014.
Advances
to Suppliers
Advances
to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended
to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $76,472 and $278,257 as of December
31, 2015 and 2014, respectively.
Other
Current Assets
Other
current assets represent the cash held in personal bank accounts. Most of the Company’s business activities are with peasant
farmers and of necessity such transactions are carried out in cash. Corporate bank accounts in the PRC generally have cumbersome
procedures for cash deposits and withdrawals. However, such cumbersome procedures are not applicable to personal bank accounts.
For this reason, many companies that deal with a significant volume of cash activities often arrange to have a personal bank account
established in the name of a trusted employee to facilitate such transactions. The Company’s rights to its funds held in
such account are documented through a formal agreement with the individual nominally listed as the account owner. Since 2005,
the Company kept a certain amount of cash in personal bank accounts established in the names of its cashiers, accountants, and
Chief Executive Officer for the purpose of cash maintenance and management. The Company’s cashier, accountants, and Chief
Executive Officer were maintaining and managing cash of $1,004,650 and $1,030,666 on behalf of the Company as of December 31,
2015 and 2014.
Plant
and Equipment
Plant
and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets
are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets
when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Included
in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation
and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance
these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress
until such time as the relevant assets are completed and ready for their intended use.
Estimated
useful lives of the Company’s assets are as follows:
|
|
Useful Life
|
Buildings
|
|
20 years
|
Vehicles
|
|
5 ~ 8 years
|
Office equipment
|
|
5 years
|
Operating equipment
|
|
4 ~ 10 years
|
Impairment
of Long-lived Assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did
not record any impairment charge for the years ended December 31, 2015, 2014, and 2013.
Advances
from Customers
Advances
from customers at December 31, 2015 and 2014 amounted to $48,842 and $36,959, respectively, and consist of prepayments from customers
for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of
the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.
Revenue
Recognition
Pursuant
to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is
reasonably assured. The Company recognizes revenues from the sale of its pork products upon shipment and transfer of title.
Income
Taxes
The
Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts
for income taxes using the liability method prescribed by ASC Topic 740, “
Income Taxes
.” Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets
and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse.
The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates
is recognized as income or loss in the period that includes the enactment date.
The
Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods
remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute
of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such
adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part,
upon the results of operations for the given period. As of December 31, 2015 and 2014, the Company had no uncertain tax positions,
and will continue to evaluate for uncertain positions in the future.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Shipping
and Handling Costs
Shipping
costs are included in selling expenses and totaled $335,050, $264,168, and $264,483 for the years ended December 31, 2015, 2014,
and 2013, respectively.
Employee
Benefits
The
Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s
health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws. The costs of these
payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee
benefit costs totaled $370,985, $243,493, and $109,460 for the years ended December 31,
2015,
2014, and 2013
, respectively.
Advertising
Costs
Advertising
is expensed as incurred and is included in selling, general and administrative expenses on the accompanying statements of income
and comprehensive income and totaled $83,612, $196,412, and $127,911 for the years ended December 31, 2015, 2014, and 2013, respectively.
Foreign
Currency Translation
The reporting
currency of the Company is the U.S. dollar. The functional currency of the Company is the Chinese Renminbi (“RMB”).
Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated
at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts
relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the
corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment
and effect of exchange rate changes on cash for the years ended December 31,
2015, 2014,
and 2013
was $318,131, $6,756, and $16,042, respectively. Transactions denominated in foreign currencies are translated
into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in
foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with
any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as incurred.
All
of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter into any material
transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on
the results of operations of the Company.
Asset
and liability accounts at December 31, 2015 and 2014 were translated at 6.4917 RMB to $1.00 and 6.1385 RMB to $1.00, respectively,
which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation
rates applied to the statements of income for the years ended December 31,
2015, 2014, and
2013
were 6.2288 RMB, 6.1432 RMB, and 6.1905 RMB to $1.00, respectively. Cash flows from the Company’s operations
are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and
liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
Related
Parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Share
Buyback from Principal Stockholder
During
the year of 2015, we had issued 61,126,166 shares of our common stock to various people in China for the purchase price of $0.11
per share. We were planning to issue 70 million shares of our common stock in total and raised approximately $7.7 million from
the issuances. The capital collected from new share issuances would be used to buy back our outstanding preferred stock at approximately
$0.09 per share. As the result of the issuances of our common stock and buy back transaction, we had bought back and canceled
78,370,000 shares of preferred stock as of December 31, 2015.
Personal
Loans from Officer, Director and Principal Stockholder
During
2015, we obtained an aggregate financial supports of approximately $18,000 from Wuhan ShanqingMeiyao Trading Co., Ltd., whose
the principal stockholder is the relative of Mr. Wenping Luo, for the Company’s working capital purpose. We had repaid approximately
$32,000 during the year 2015. In addition, at December 31, 2015, we reported a payable of $13,560 to Wuhan ShanqingMeiyao Trading
Co., Ltd. These loans were due upon demand and no interest was charged.
During
2015, we obtained an aggregate financial supports of approximately $90,000 from Linhao Tuweicai Restaurant, whose the principal
stockholder is the relative of Mr. Wenping Luo, for the Company’s working capital purpose. We had repaid approximately $44,000
during the year 2015. In addition, at December 31, 2015, we reported a payable of $6,105 to Wuhan ShanqingMeiyao Trading Co.,
Ltd. These loans were due upon demand and no interest was charged.
During
2015 and 2014, we had Ms. Jinfeng Hu, who is Mr. Wenping Luo’s wife, paid approximately $160,000 and $80,579 on behalf of
the Company to our suppliers. As of December 31, 2015 and 2014, we reported a payable of $4,313 and $80,579 to Ms. Jinfeng Hu,
respectively. The loan was due upon demand and no interest was charged.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
During
2014, we obtained an aggregate financial supports of approximately $5,937,000 from Mr. Wenping Luo, the principal stockholder
and President and Chief Executive Officer and a director of the Company, for the Company’s working capital purpose. We had
repaid approximately $5,275,000 during the year 2014. In addition, at December 31, 2014, we reported a payable of $661,820 to
Mr. Wenping Luo. These loans were repaid in 2015 and no interest was charged.
Personal
Loans to Officer, Director and Principal Stockholder
During
2015, we loaned an aggregate of approximately $31,657,010 to Wenping Luo, the principal stockholder and President and Chief Executive
Officer and a director of the Company, for his personal use. $31,329,000 of these loans had been collected by 2015 and the amount
due from Mr. Luo to the Company at December 31, 2015 was $328,376. These loans were due upon demand and had been charged interest
expensed at 4.35% annually.
During
2015, we loaned an aggregate of approximately $2,700 to Junyi Luo, a relative of Mr. Wenping Luo, for his personal use. The amount
due from Mr. Junyi Luo to the Company at December 31, 2015 was $2,619. These loans were due upon demand and no interest was charged.
During
2015, we loaned an aggregate of approximately $481,000 to Laifeng Anpulo Yunxing Transportation Co., Ltd., whose major shareholder
is Mr. Wenping Luo, for working capital purpose. $477,000 of these loans had been collected by 2015 and the amount due from Laifeng
Anpulo Yunxing Transportation Co., Ltd. to the Company at December 31, 2015 was $10,321. These loans were due upon demand and
no interest was charged.
The
above loans would be in violation of the Sarbanes-Oxley Act of 2002, including Section 402’s prohibition against personal
loans to directors and executive officers, either directly or indirectly, had they occurred after Anpulo Laifeng became a variable
interest entity of our Company. Management is aware of the ramifications, and has committed to avoiding it by implementing controls
that will prevent this type of violation from happening in the future. Please see “Policies and Procedures for Review, Approval
or Ratification of Transactions with Related Persons.”
Sales
to Related Parties
In
2015, the Company made sales of pork products to each of Laifeng Anpulo Yunxing Transportation Co., Ltd., Laifeng Fangchi Hotel,
Laifeng Fengming Manor Hotel, and Wuhan Shanqing Meiyao Trading Co., Ltd. The major shareholder of the foregoing four companies,
in each case, is Mr. Wenping Luo, the principal stockholder and President and Chief Executive Officer and a director of the Company.
As of December 31, 2015, the Company had receivables from these three companies as set forth below:
|
●
|
$8,557
from Laifeng Anpulo Yunxing Transportation Co., Ltd.
|
|
|
|
|
●
|
$38,995
from Laifeng Fangchi Hotel.
|
|
|
|
|
●
|
$22,231
from
Laifeng Fengming Manor Hotel
|
|
|
|
|
●
|
$42,232
from
Wuhan Shanqing Meiyao Trading Co., Ltd.
|
In
2014, the Company made sales of pork products to each of Laifeng Anpulo Yunxing Transportation Co., Ltd., Laifeng Fangchi Hotel,
Linhao Tuweicai Restaurant, and Wuhan Shanqing Meiyao Trading Co., Ltd. The major shareholder of Laifeng Anpulo Yunxing Transportation
Co., Ltd. and Laifeng Fangchi Hotel is Wenping Luo, the principal stockholder and President and Chief Executive Officer and a
director of the Company. The major shareholders of Linhao Tuweicai Restaurant and Wuhan ShanqingMeiyao Trading Co., Ltd. are Wenping
Luo’s relatives. As of December 31, 2014, the Company had receivables from these four companies as set forth below:
|
●
|
$16,366
from Laifeng Anpulo Yunxing Transportation Co., Ltd.
|
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
●
|
$166,697
from Laifeng Fangchi Hotel.
|
|
|
|
|
●
|
$18,939
from
Wuhan ShanqingMeiyao Trading Co., Ltd
.
|
|
|
|
|
●
|
$39,734
from
Linhao Tuweicai
Restaurant.
|
On
November 18, 2012, the Company entered into a cooperation agreement with the government of Laifeng County to build and operate
a high end hotel. As of April 20, 2014 (disposal date) and December 31, 2013, the Company had invested $2,761,893 (or RMB 17 million)
and $2,142,989 in the hotel construction and may need additional $2.95 million capital to complete this construction. On April
20, 2014, the Company assigned and transferred all of its rights and obligations under the cooperation agreement to Laifeng Fengming
Manor Hotel Management Co., Ltd. (“Fengming”) for approximately $2.7 million or RMB 17 million. No gain or loss was
recognized from this transaction. Fengming is owned by Mr. Junyi Luo, Mr. Wenping Luo’s son. Mr. Wenping Luo does neither
have any direct or indirect investment in Fengming nor hold any management position in Fengming. The Company had collected RMB
12 million or $1,953,379 from Fengming on May 2014. The remaining balance of $848,924 had been collected in 2015.
Accumulated
Other Comprehensive Income
Comprehensive
income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments
by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the years
ended December 31, 2015, 2014, and 2013 included net income (loss) and unrealized gains from foreign currency translation adjustments.
Segment
Information
The
Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes
decision about allocating resources to segments and evaluating their performance. The Company’s management has determined
that as of December 31, 2015 and 2014 their operations are in one segment, that of pork retailing business.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess
such contingent liabilities, and such assessments inherently involve an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable
and material would be disclosed.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Loss
contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case
the guarantee would be disclosed.
Restrictions
of Transfer of Assets Out of the PRC
Dividend
payments by Laifeng Anpulo are limited by certain statutory regulations in the PRC. No dividends may be paid by Laifeng Anpulo
without first receiving prior approval from the Foreign Currency Exchange Management Bureau. Dividend payments are restricted
to 90% of profits, after tax.
Control
by Principal Stockholders
Our
directors and executive officers and their affiliates or related parties own, beneficially and in the aggregate, the majority
of the voting power of the outstanding shares of our common stock. Accordingly, if our directors and executive officers and their
affiliates or related parties vote their shares uniformly, they would have the ability to control the
approval
of most corporate actions, including increasing our authorized capital stock and the dissolution or merger of our company or the
sale of our assets.
Concentrations
of Credit Risks
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s
economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically
associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things.
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts
receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these
deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed
to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily
to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations
of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs
ongoing credit evaluations of its customers to help further reduce credit risk.
At
December 31, 2015 and 2014, the Company’s cash balances by geographic area were as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
China
|
|
|
680,877
|
|
|
|
100
|
%
|
|
|
740,532
|
|
|
|
100
|
%
|
Total cash and cash equivalents
|
|
$
|
680,877
|
|
|
|
100
|
%
|
|
$
|
740,532
|
|
|
|
100
|
%
|
Recent
Accounting Pronouncement
In
November 2014, the FASB issued ASU 2014-17, "Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB
Emerging Issues Task Force)." ASU 2014-17 provides an acquired entity with an option to apply pushdown accounting in its
separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired
entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs.
This new standard is effective on November 18, 2014. Early application is prohibited. After the effective date, an acquired entity
can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However,
if the financial statements for the period in which the most recent change-in-control event occurred already have been issued
or made available to be issued, the application of this guidance would be a change in accounting principle. The Company has adopted
this new guidance and there's no impact on its consolidated financial statements.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards,
the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition. FASB issued
Accounting Standards Update (“ASU”) No. 2014-9, “Revenue from Contracts with Customers” (“ASU 2014-9”).
ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries
through the application of the following five-step process:
Step
1: Identify the contract(s) with a customer.
Step
2: Identify the performance obligations in the contract.
Step
3: Determine the transaction price.
Step
4: Allocate the transaction price to the performance obligations in the contract.
Step
5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The
updated guidance related to revenue recognition which affects any entity that either enters into contracts with customers to transfer
goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope
of other standards. The guidance requires that an entity recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The guidance is effective for the Company starting on January 1, 2017. The Company is currently evaluating the impact
this guidance will have on its combined financial position, results of operations and cash flows.
In
April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This new guidance requires that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. This new guidance will be effective for us beginning July 1, 2016.
We are currently evaluating the impact of this standard on our consolidated financial statements.
In
September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustment amounts are determined. Entities are currently required to
retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for
fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied
prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted
for financial statements that have not been issued. The Company elected to adopt ASU 2015-16 early, effective in the year ended
December 31, 2015.
In
November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Thestandard
requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
Entities are currently required to separate deferred income tax liabilities and assets into current and noncurrent amounts in
a classified statement of financial position. The amendments, which require non-current presentation only (by jurisdiction), are
effective for financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted
as of the beginning of an interim or annual reporting period. The guidance is to be applied either prospectively to all deferred
tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt this standard, effective
as of December 31, 2015. There was no impact from this adoption.
In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments
(except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured
at fair value with changes in fair value recognized in net income. The new guidance also changes certain disclosure requirements
and other aspects of current US GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of
the beginning of the fiscal year of adoption. This standard is effective for fiscal years starting after December 15, 2017, including
interim periods within those fiscal years. The standard does not permit early adoption with the exception of certain targeted
provisions. The Company is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
In
February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations
by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is
the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP.
Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the
amount, timing, and uncertainty of cash flows arising from leases. We anticipate this standard will have a material impact on
our consolidated balance sheets, and we are currently evaluating its impact.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard that changes the accounting for
certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be
recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will
no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us
to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies
that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our
cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The Company is currently
assessing the impact and timing of adopting this guidance on its consolidated financial statements.
Based
on the Company’s initial assessment of the standard, the Company expects that any potential future disposals of individual
hog farms will not be reported as discontinued operations and that the results of operations of any disposed hog farm, including
revenues, costs and any gains or losses on disposal, will be classified as continuing operations within the Consolidated Statements
of Operations and Comprehensive Income for all periods presented through the date of disposition.
NOTE
3 – ACCOUNTS RECEIVABLE
The
Company accrues an allowance for bad debts related to our receivables. The receivable and allowance balances at December 31, 2015
and 2014 were as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accounts receivable
|
|
$
|
4,119,564
|
|
|
$
|
2,696,420
|
|
Less: allowance for doubtful accounts
|
|
|
(125,103
|
)
|
|
|
(132,301
|
)
|
|
|
$
|
3,994,461
|
|
|
$
|
2,564,119
|
|
The
Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to
the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company
increased the allowance for doubtful accounts in the amount of $0, $74,145, and $11,739 for the years ended December 31, 2015,
2014 and 2013, respectively.
NOTE
4 – INVENTORIES
At
December 31, 2015 and 2014, inventories consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Raw materials
|
|
$
|
86,644
|
|
|
$
|
79,776
|
|
Work in process
|
|
|
209,832
|
|
|
|
84,930
|
|
Finished goods
|
|
|
1,488,519
|
|
|
|
1,095,869
|
|
|
|
|
|
|
|
|
1,260,575
|
|
Less: reserve for obsolete inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
1,784,995
|
|
|
$
|
1,260,575
|
|
For
the years ended December 31, 2015, 2014 and 2013, the Company did not make any reserve for obsolete inventory.
NOTE
5 – OTHER RECEIVABLES
At
December 31, 2015 and 2014, the Company reported other receivables of $35,264 and $153,704, respectively, including an allowance
for doubtful receivables of $117,164 and $4,079.
The
balances of other receivables as of December 31, 2015 and 2014 included the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deposits to supermarkets
|
|
$
|
37,913
|
|
|
$
|
130,105
|
|
Interest receivable – related party
|
|
|
50,433
|
|
|
|
-
|
|
Travel advances to employees
|
|
|
62,855
|
|
|
|
16,760
|
|
Others
|
|
|
1,208
|
|
|
|
10,918
|
|
|
|
|
152,409
|
|
|
|
157,783
|
|
Less: allowance for doubtful accounts
|
|
|
(117,164
|
)
|
|
|
(4,079
|
)
|
|
|
$
|
35,264
|
|
|
$
|
153,704
|
|
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
Company reviews the other receivables on a periodic basis and makes general and specific allowances when there is doubt as to
the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company
recognized recovery gains (bad debt expenses) from the allowance for doubtful accounts in the amount of ($118,069), $225,024,
and ($215,688) for the years ended December 31, 2015, 2014 and 2013.
As
of December 31, 2013, the Company had a loan receivable of $589,159 to one of the Company’s suppliers, Mr. Benshuang Yao,
without collateral and interest burden and due on July 31 and March 31, 2014, respectively. The outstanding loan of $589,159 to
Mr. Benshuang Yao at December 31, 2013 was collected in the first quarter of 2014.
NOTE
6 – RESTRICTED ASSETS
At December
31, 2015, the Company reported restricted asset of $865,681. The restricted asset included cash collateral of 61,617 to Enshi
Agricultural Development Credit Guarantee Co., Ltd. for providing guarantee at the short-term loan of $1,540,429 from Agricultural
Development Bank of China and accounts receivable of $804,064 pledged to Shanghai Pudong Development Bank for a short-term loan
of $358,920.
At
December 31, 2014, the Company reported restricted assets of $1,368,412. The restricted assets included cash collateral of $65,162
to Enshi Agricultural Development Credit Guarantee Co., Ltd. for providing guarantee at the short-term loan of $1,629,062 from
Agricultural Development Bank of China. Additionally, included in the restricted assets, the Company reported a security deposit
of $1,303,250 to its loaner, Industrial and Commercial Bank of China, for its short-term loan of $1,172,925.
NOTE
7 – LONG-TERM PREPAID EXPENSES
Long-term
prepaid expenses primarily consist of prepaid rental expenses for a sale office located in Wuhan City. The prepaid rental expenses
are being amortized using the straight-line method over the lease term of 20 years
and expires
on November 30, 2033
.
Long-term
prepaid expenses at December 31, 2015 and 2014 are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Long-term prepaid rental expenses
|
|
$
|
357,239
|
|
|
$
|
377,794
|
|
Less: Accumulated amortization
|
|
|
(37,212
|
)
|
|
|
(20,464
|
)
|
|
|
$
|
320,027
|
|
|
$
|
357,330
|
|
Amortization
expense for the years ended December 31,
2015, 2014 and 2013
was $18,616, $18,875,
and $1,561, respectively.
The
estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter will be $18,616 per
annum.
NOTE
8 – PLANT AND EQUIPMENT
Plant
and equipment at December 31, 2015 and 2014 consisted of:
|
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
2015
|
|
|
2014
|
|
Buildings
|
|
20 years
|
|
$
|
7,045,639
|
|
|
$
|
7,281,818
|
|
Operating equipment
|
|
4 to 10 years
|
|
|
3,475,400
|
|
|
|
3,738,522
|
|
Office equipment
|
|
5 years
|
|
|
127,339
|
|
|
|
131,538
|
|
Vehicles
|
|
5 to 8 years
|
|
|
399,364
|
|
|
|
427,849
|
|
|
|
|
|
|
11,047,742
|
|
|
|
11,579,727
|
|
Less: accumulated depreciation
|
|
|
|
|
(4,873,896
|
)
|
|
|
(4,414,388
|
)
|
|
|
|
|
$
|
6,173,846
|
|
|
$
|
7,165,339
|
|
For
the years ended December 31,
2015, 2014 and 2013
, depreciation expense amounted to
$729,218, $739,317, and $722,401, respectively. Depreciation is not taken during the period of construction or equipment installation.
Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances
will be classified to their respective property and equipment category.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
9 – CONSTRUCTION IN PROGRESS
On
December 31, 2015 and 2014, the construction in progress was $0 and $53,955, respectively. Construction in progress mainly consisted
of amounts expended for the construction of new hotel project which was cooperated with the government of Laifeng County. This
project was a “Build-Operate-Transfer” or BOT hotel project. According to the BOT agreement, the Company would invest
in building a hotel in Laifeng County and own the operating right for 20 years from October 1, 2012 to September 30, 2032. After
September 30, 2032, the title of the hotel would be transferred to the government of Laifeng County.
On
April 20, 2014, the Company assigned and transferred all of its rights and obligations under the cooperation agreement with Laifeng
County to Laifeng Fengming Manor Hotel Management Co., Ltd. (“Fengming”) for approximately $2.7 million or RMB 17
million. Fengming is owned by Mr. Junyi Luo, Mr. Wenping Luo’s son. Mr. Wenping Luo does neither have any direct or indirect
investment in Fengming nor hold any management position in Fengming. The Company had collected RMB 12 million or $1,953,379 from
Fengming on May 2014. The remaining balance of $848,924 had been collected in 2015 and was reported as part of due from related
party.
NOTE
10 – INTANGIBLE ASSETS
There
is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified
terms. The Company’s land use right has a term of 50 years and expires on March 15, 2057. The Company amortizes the land
use rights over the term of the respective land use right. For the years ended December 31, 2015, 2014 and 2013, amortization
of land use rights amounted to $80,272, $81,391, and $80,769, respectively. At December 31, 2015 and 2014, intangible assets consisted
of the following:
|
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
2015
|
|
|
2014
|
|
Land use rights
|
|
50 years
|
|
$
|
3,851,071
|
|
|
$
|
4,072,656
|
|
Others
|
|
1 year
|
|
|
5,881
|
|
|
|
6,220
|
|
|
|
|
|
|
3,856,952
|
|
|
|
4,078,876
|
|
Less: accumulated depreciation
|
|
|
|
|
(686,236
|
)
|
|
|
(644,269
|
)
|
|
|
|
|
$
|
3,170,716
|
|
|
$
|
3,434,607
|
|
The
estimated amortization expense of intangible assets over each of the next five years and thereafter will be $80,272.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
11 – LOANS PAYABLE
Short-term
Loans
Short-term
bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity.
At December 31, 2015 and 2014, short-term bank loans consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Loan payable to Bank of China, annual interest rate of 5.6%, due by November 27, 2015 with buildings and land use rights provided by the shareholders as collateral.
|
|
$
|
-
|
|
|
$
|
4,561,375
|
|
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by January 15, 2015, guaranteed by Enshi Zhou Nongfa Credit Guarantee Co., Ltd. The loan had been repaid in January 6, 2015.
|
|
|
-
|
|
|
|
1,629,062
|
|
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by September 28, 2015, with the Company’s property and equipment as collateral.
|
|
|
-
|
|
|
|
3,095,219
|
|
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by September 9, 2015 with buildings and land use rights provided by 2 individuals, Benshuang Yao and Youxiang Zhou as collateral.
|
|
|
-
|
|
|
|
2,117,782
|
|
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by March 17, 2015 with RMB 8 million as collateral which had been reported as restricted cash. The loan had been repaid in March 17, 2015.
|
|
|
-
|
|
|
|
1,172,925
|
|
|
|
|
-
|
|
|
|
|
|
Loan payable to Laifeng County Small Business Loan Guarantee Company, annual interest rate of 9.72%, due by March 18, 2014 but had been extended to March 18, 2015. The loan was under negotiation with Laifeng County Small Business Loan Guarantee Company for loan extension. Until the date of this report, the negotiation was still in the process.
|
|
|
-
|
|
|
|
195,487
|
|
Loan payable to Laifeng County Small Business Loan Guarantee Company, annual interest rate of 9.72%, due by April 21, 2014 but had been extended to April 21, 2015. The loan was under negotiation with Laifeng County Small Business Loan Guarantee Company for loan extension. Until the date of this report, the negotiation was still in the process.
|
|
|
-
|
|
|
|
570,172
|
|
Loan payable to Laifeng County Small Business Loan Guarantee Company, annual interest rate of 9.72%, due by May 14, 2014 but had been extended to May 14, 2015. The loan was under negotiation with Laifeng County Small Business Loan Guarantee Company for loan extension. Until the date of this report, the negotiation was still in the process.
|
|
|
-
|
|
|
|
570,172
|
|
Loan payable to Bank of China, annual interest rate of 4.35%, due by December 2, 2016 with
property
provided by Laifeng Urban Construction Investment Co., Ltd. and by the shareholders as collaterals and guaranteed by Laifeng Anpulo
Yunxing Transportation Co., Ltd.
|
|
$
|
4,313,200
|
|
|
|
-
|
|
Loan payable to Agricultural Development Bank of China, annual interest rate of 5.6%, due by January 21, 2016,
guaranteed by Enshi Agricultural Development Credit Guarantee Co., Ltd.
and Mr. Wenping Luo. The loan had been repaid in January 21, 2016.
|
|
|
1,540,429
|
|
|
|
-
|
|
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 4.35%, due by March 21, 2016 with Mr.
Wenping Luo as guarantor
and pledged
with Anpulo Laifeng’s accounts receivable of $804,064. The loan had been renewed to June 21, 2016
.
|
|
|
358,920
|
|
|
|
-
|
|
Loan payable to Agricultural Development Bank of China, annual interest rate of 4.6%, due by September 22, 2016
with buildings provided by Anpulo Laifeng as collateral.
|
|
|
2,926,814
|
|
|
|
-
|
|
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 4.6%, due by September 9, 2016
with
property provided by 2 individuals,
Benshuang Yao and Youxiang Zhou as collateral.
|
|
|
2,002,557
|
|
|
|
-
|
|
Loan payable to Laifeng Jiuding Pawn Co., Ltd., annual interest rate of 3.6%, due by April 9, 2016. The loan had been repaid in April 11, 2016
|
|
|
92,425
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,234,345
|
|
|
$
|
13,912,194
|
|
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Long-term
Loans
Long-term
bank loan represents an amount due to a bank that is due more than one year. At December 31, 2015 and 2014, long-term bank loans
consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Long-term loans
|
|
$
|
1,263,151
|
|
|
$
|
-
|
|
Less: Discount of long-term loans
|
|
|
(160,130
|
)
|
|
|
-
|
|
|
|
$
|
1,103,021
|
|
|
$
|
-
|
|
On
December 8, 2015, the Company renewed its outstanding short-term loans of $1,263,151 in total with
Laifeng
County Small Business Loan Guarantee Company to long-term loans with due dates extended from March 18, April 21, and May 14, 2015
to March 19, April 22, and May 15, 2018. In addition, the relevant interest charges are waived during their extended outstanding
periods. As of December 31, 2015, the present value of the long-term loans was $1,103,021 with 6% discount rate. During the year
ended December 31, 2015, the Company reported a gain of $293,452 from loan restructuring and interest expense of $44,247 amortized
from the discount of long-term loans.
NOTE
12 – CAPITAL STOCK
The
Company is authorized to issue 500,000,000 shares of preferred stock, $0.001 par value, and as of December 31, 2015 and 2014 it
had 11,630,000 shares and 90,000,000 shares issued and outstanding, respectively.
The
Company is authorized to issue 1,000,000,000 shares of common stock, $0.001 par value, and as of December 31, 2015 and 2014 it
had 184,126,166 shares and 123,000,000 shares issued and outstanding, respectively.
On
October 30, 2013, Anpulo entered into a Share Exchange Agreement (the “Exchange Agreement”) with Anpulo HK. Pursuant
to the terms of the Exchange Agreement, the shareholders of Anpulo HK transferred to Anpulo all of the Anpulo HK Shares in exchange
for the issuance of 122,900,000 shares of Anpulo’s common stock (the “Share Exchange”). As a result of the Share
Exchange, Anpulo HK became a wholly-owned subsidiary of Anpulo and the shareholders of Anpulo HK acquired approximately 99.92%
of Anpulo’s issued and outstanding common stock. Other than its equity interest in Anpulo HK, Anpulo does not own any assets
or conduct any operations.
During
the year of 2015, we had issued 61,126,166 shares of our common stock to various people in China for the purchase price of $0.11
per share. We were planning to issue 70 million shares of our common stock in total and raised approximately $7.7 million from
the issuances. The capital collected from new share issuances would be used to buy back our outstanding preferred stock at approximately
$0.09 per share. As the result of the issuances of our common stock and buy back transaction, we had bought back and canceled
78,370,000 shares of preferred stock as of December 31, 2015.
NOTE
13 – STATUTORY RESERVES
As
stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has
been made for the following:
|
●
|
Making
up cumulative prior years’ losses, if any;
|
|
●
|
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules
and regulations, until the fund amounts to 50% of the Company’s registered capital;
|
|
●
|
Allocations
to the discretionary surplus reserve, if approved by the stockholders;
|
|
●
|
The
transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding
or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such
issue is not less than 25% of the registered capital.
|
Since
the Company did not realize net income from its operations in the past years, the Company did not allocate any statutory reserve
contributions. The reserves amounted to $0 as of December 31, 2015 and 2014.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
14 – CERTAIN RISKS AND CONCENTRATIONS
Customers
The
following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for
the years ended December 31, 2015, 2014, and 2013.
|
|
Years Ended December 31,
|
|
Customers
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
A
|
|
|
19
|
%
|
|
|
26
|
%
|
|
|
24
|
%
|
B
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
Suppliers
No
supplier accounted for 10% or more of the Company’s purchases during the years ended December 31, 2015, 2014 and 2013.
Risk
arising from operations in foreign countries
Substantially
all of the Company’s operations are conducted 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 restrictions on transfer of funds; changing taxation policies; foreign exchange restrictions; and political conditions
and governmental regulations.
Risk
arising from contractual arrangements with Anpulo Laifeng
The
Company conducts substantially all of its operations, and generates substantially all of its revenues, through contractual arrangements
with Anpulo Laifeng that provide the Company with effective control over Anpulo Laifeng. The Company depends on Anpulo Laifeng
to hold and maintain contracts with its customers. Anpulo Laifeng owns substantially all of the Company’s intellectual property,
facilities and other assets relating to the operation of the Company’s business, and employs the personnel for substantially
all of its business. Neither Anpulo, nor Anpulo HK nor Anpulo WFOE has any ownership interest in Anpulo Laifeng. Although Anpulo
WFOE’s contractual arrangements with Anpulo Laifeng are valid, binding and enforceable under current PRC laws and regulations,
these contractual arrangements may not be as effective in providing the Company with control over Anpulo Laifeng as direct ownership
of Anpulo Laifeng would.
NOTE
15 – SUBSIDY INCOME
During
the year ended December 31, 2015, the Company received subsidies from the local government of $1,072,888 in total which included
$168,842 for bank interest expenses and $904,046 for subsidies to slaughtering companies and companies operating in poverty and
minority area. The Company cannot guarantee it will keep receiving subsidies from the government in the future.
During
the year ended December 31, 2014, the Company received subsidies from the local government of $749,501 in total which included
$638,875 for bank interest expenses and $110,626 for subsidies to slaughtering companies and companies operating in poverty and
minority area. The Company cannot guarantee it will keep receiving subsidies from the government in the future.
During
the year ended December 31, 2013, the Company received subsidies from the local government of $176,594 in total which included
$58,154 for bank interest expenses and $118,440 for subsidies to slaughtering companies and companies operating in poverty and
minority area. . The Company cannot guarantee it will keep receiving subsidies from the government in the future.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
16 –INCOME TAXES
The
Company and each of its subsidiaries file separate income tax returns. The Company accounts for income taxes under FASB Codification
Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25,
the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
British
Virgin Islands
On
June 25, 2012, Anpulo re-domiciled from the State of Nevada to British Virgin Islands. Anpulo is not subject to tax on income
or capital gains. In addition, upon payments of dividends by Anpulo, no British Virgin Islands withholding tax is imposed.
Hong
Kong
Anpulo
International (Hong Kong) Limited (“Anpulo HK”) is incorporated in Hong Kong and is subject to Hong Kong’s profits
tax rate of 16.5% for the years ended December 31, 2015, 2014, and 2013. Anpulo HK did not earn any income that was derived in
Hong Kong for the years ended December 31, 2015, 2014, and 2013. The payments of dividends by Hong Kong companies are not subject
to any Hong Kong withholding tax.
PRC
The
PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to income tax at 25% unless otherwise
specified.
The
components of earnings (losses) before income taxes by jurisdictions are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
BVI
|
|
$
|
(213,792
|
)
|
|
$
|
(178,062
|
)
|
|
$
|
(49,612
|
)
|
PRC
|
|
|
325,077
|
|
|
|
(951,334
|
)
|
|
|
(825,219
|
)
|
|
|
$
|
111,285
|
|
|
$
|
(1,129,396
|
)
|
|
$
|
(874,831
|
)
|
Income
tax expense for the years ended December 31, 2015, 2014, and 2013 is as follow:
|
|
For the Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Income tax (benefit) provision at China Statutory rate
|
|
$
|
(125,000
|
)
|
|
$
|
(238,000
|
)
|
|
$
|
(206,000
|
)
|
Benefits of loss not realized
|
|
|
125,000
|
|
|
|
238,000
|
|
|
|
206,000
|
|
Benefits of NOL realized
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
components of deferred income tax asset are as follow:
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Deferred income tax asset:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
877,000
|
|
|
$
|
752,000
|
|
|
$
|
514,000
|
|
Valuation allowance
|
|
|
(877,000
|
)
|
|
|
(752,000
|
)
|
|
|
(514,000
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2015, the Company has a net operating loss carry forward for tax purposes of approximately $2 million available
to offset future taxable income through 2020.
Changes
in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of
any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations.
FASB
ASC Topic 740, Income Taxes provides that a tax benefit from an uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes,
based on the technical merits. ASC Topic 740 also provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
We
recognize tax liabilities in accordance with ASC Topic 740 and we adjust these liabilities when our judgment changes as a result
of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences
will be reflected as increases or decreases to income tax expense in the period in which they are determined.
NOTE
17 – COMMITMENTS AND CONTINGENCIES
General
The
Company follows ASC 450, Accounting for Contingencies, in determining its accruals and disclosures with respect to loss contingencies.
Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance
of the financial statements indicates that it is probable that a liability could be been incurred and the amount of the loss can
be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not
probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably
possible that a material loss could be incurred. The Company has not accounted for any loss contingencies as of December 31, 2015,
2014, and 2013.
Lease
obligations
The
Company leases office space that has a remaining term of 4 years and expired November 30, 2018 which had been canceled in 2014.
Instead, the Company entered into a new leasing agreement with a rental of $3,250 and will be renewed every 6 months. The Company
does not have capital leases. In most cases, management expects that, in the normal course of business, leases will be renewed
or replaced. Net rental expense relating to the Company’s operating leases for the years ended December 31, 2015, 2014,
and 2013 was $43,828, $41,314, and $26,331, respectively.
Environmental
matters
Environmental
laws and regulations to which the Company is subject mandate additional concerns and requirements of the Company. Failure to comply
with applicable laws, regulations and permits can result in injunctive actions, damages and civil and criminal penalties. The
laws and regulations applicable to the Company's activities change frequently and it is not possible to predict the potential
impact on the Company from any such future changes.
Although
management believes that the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction
in which it operates, no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules
and regulations will not be challenged by governing authorities or private parties, or that such challenges will not lead to material
adverse effects on the Company’s financial position, results of operations, or cash flows.
The
Company is not involved in any legal matters. While incapable of estimation, in the opinion of the management, the individual
regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on
the Company’s financial position, results of operations, or cash flows.
Anpulo
Food Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
NOTE
18 – GOING CONCERN
As reflected in the accompanying financial
statements, the Company has accumulated deficit of $3,085,757, a working capital deficit and cash outflow from operating activities
of $3,834,223 and $986,028 at December 31, 2015. This raises substantial doubt about its ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital
and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Management intends to provide the Company with additional loans as needed and is seeking
a merger target to implement its strategic plans. Management feels these actions provide the opportunity for the Company to continue
as a going concern.
NOTE
19 – SUBSEQUENT EVENT
On
March 6, 2016, the Company issued additional 170,000 shares of its common stock to various individuals for a purchase price of
$0.11.
Item 19. Exhibits.
1.1
|
|
Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 10 filed with the Securities and Exchange Commission on December 10, 2010, as amended.)
|
1.2
|
|
Certificate of Continuation (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
1.3
|
|
Memorandum of Association and Articles of Association (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
3.1
|
|
Shareholders’ Voting Proxy Agreement dated September 22, 2013 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.1
|
|
Share Exchange Agreement dated October 30, 2013(incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.2
|
|
Equity Pledge Agreement dated September 22, 2013 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.3
|
|
Exclusive Option Agreement dated September 22, 2013 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.4
|
|
Entrusted Management Agreement dated September 22, 2013 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.5
|
|
Employment Agreement between Laifeng Anpulo (Group) Food Development Co., Ltd. and Wenping Luo dated December 1, 2013 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.6
|
|
Employment Agreement between
Laifeng Anpulo (Group) Food Development Co., Ltd.
and Maochun Kang dated December 1, 2013 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.7
|
|
Form of Distribution Agreement with Specialty Retail Stores (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of the Company filed on October 31, 2013, as amended, by the Company with the SEC).
|
4.8
|
|
Form of Securities Purchase Agreement.
|
8.1
|
|
List of Subsidiary. (incorporated by reference to Exhibit 8.1 to the Annual Report on Form 20-F of the Company filed on April 20, 2015).
|
12.1
|
|
Rule 13a – 14(a) Certification of Chief Executive Officer of the Company.
|
12.2
|
|
Rule 13a – 14(a) Certification of Chief Financial Officer of the Company.
|
13.1+
|
|
Rule 13a – 14(b) Certification of Chief Executive Officer of the Company.
|
13.2+
|
|
Rule 13a – 14(b) Certification of Chief Financial Officer of the Company.
|
101. INS
|
|
XBRL Instance Document.
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101. SCH
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XBRL Taxonomy Extension Schema Document.
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101. CAL
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XBRL Taxonomy Extension Calculation Linkbase Document.
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101. LAB
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XBRL Taxonomy Extension Label Linkbase Document.
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101. PRE
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XBRL Taxonomy Extension Presentation Linkbase Document.
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101. DEF
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XBRL Taxonomy Extension Definition Linkbase Document.
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In accordance with the SEC Release 33-8238, deemed being furnished and not filed.