UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from                      to                      

 

Commission File Number: 000-54216

 

Anpulo Food, Inc.

(Exact name of registrant as specified in its charter)

 

British Virgin Islands		N/A
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

 

Hangkonglu, Xiangfengzhen, Laifengxian, Hubei, China		N/A
(Address of principal executive offices)		(Zip Code)

 

(86) 718 628 8576

(Registrant’s telephone number, including area code)

 

 Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes  o    No    x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer	o			Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)		Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: the registrant had 123,000,000 ordinary shares, par value $0.001 per share, issued and outstanding at August 13, 2014.

 

 

 

ANPULO FOOD, INC.

QUARTERLY REPORT ON FORM 10-Q

June 30, 2014

 

Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		2
PART I     FINANCIAL INFORMATION		F-2
Item 1.	Financial Statements.	F-2 - F-23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	3
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	13
Item 4.	Controls and Procedures.	13
PART II    OTHER INFORMATION		14
Item 1.	Legal Proceedings.	14
Item 1A.	Risk Factors.	14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	14
Item 3.	Defaults Upon Senior Securities.	14
Item 4.	Mine Safety Disclosures.	14
Item 5.	Other Information.	14
Item 6.	Exhibits.	14
SIGNATURE		15

 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q contains “forward-looking statements”. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

CERTAIN TERMS USED IN THIS QUARTERLY REPORT ON FORM 10-Q

 

In this 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”), and our variable interest entity Laifeng Anpulo (Group) Food Development Co., Ltd. (“Anpulo Laifeng”).

 

 

PART I     FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

  

Anpulo Food Inc. and Subsidiaries

Consolidated Balance Sheets

 

		June 30,				December 31,
		2014				2013
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,589,144			$	667,024
Investment - held for trading			32,675				32,914
Accounts receivable, net			2,070,107				2,926,323
Inventories			998,199				1,226,176
Advances to suppliers			262,832				255,879
Advance for real estate purchase			81,232				-
Prepaid expenses			-				57,989
Due from related party			1,214,241				152,371
Other receivables, net			39,662				499,303
Restricted assets			64,986				130,924
Other current assets			2,608,246				729,355
Total Current Assets			8,961,324				6,678,258
Long-term prepaid expenses, net			365,780				377,950
Plant and equipment, net of accumulated depreciation			7,460,495				7,792,943
Construction in progress			28,431				2,142,989
Intangible assets, net			3,465,904				3,532,230
Total Assets		$	20,281,934			$	20,524,370
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term loans			15,629,062			$	15,416,339
Accounts payable and accrued payables			424,711				415,504
Advances from customers			90,515				59,784
Due to related party			24,029				-
Other payables			179,368				201,877
Total Current Liabilities			16,347,685				16,093,504
Stockholders' Equity:
Preferred stock ($0.001 par value, 500,000,000 shares authorized, 90,000,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)			90,000				90,000
Common stock ($0.001 par value, 1,000,000,000 shares authorized, 123,000,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively)			123,000				123,000
Additional paid in capital			5,413,172				5,413,172
Statutory surplus reserves			-				-
Accumulated deficit			(2,532,486	)			(2,067,646	)
Accumulated other comprehensive income			840,563				872,340
Total Stockholders' Equity			3,934,249				4,430,866
Total Liabilities and Stockholders' Equity		$	20,281,934			$	20,524,370

 

See accompanying notes to consolidated financial statements

 

 

Anpulo Food Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2014				2013				2014				2013
Sales		$	3,519,231			$	4,238,137			$	7,896,072			$	8,772,014
Cost of goods sold			2,743,732				3,361,782				6,232,633				7,062,253
Gross profit			775,499				876,355				1,663,439				1,709,761
Operating expenses:
General and administrative expenses			418,369				597,262				1,023,183				1,002,817
Selling expenses			571,874				537,032				1,219,321				1,049,752
Total operating expenses			990,243				1,134,294				2,242,504				2,052,569
Loss from operations			(214,744	)			(257,939	)			(579,065	)			(342,808	)
Other income (expense):
Interest expense			(220,497	)			(220,862	)			(448,947	)			(417,965	)
Subsidy income - Interest expense			57,557				-				524,080				-
Subsidy income			-				13,445				27,623				117,509
Other income (expense)			13,671				(3,454	)			11,469				21,713
Total other income (expense)			(149,269	)			(210,871	)			114,225				(278,743	)
Loss before income taxes			(364,013	)			(468,810	)			(464,840	)			(621,551	)
Income taxes			-				-				-				-
Net loss			(364,013	)			(468,810	)			(464,840	)			(621,551	)
Other comprehensive income:
Unrealized foreign currency translation adjustment			5,761				72,175				(31,777	)			100,370
Comprehensive loss		$	(358,252	)		$	(396,635	)		$	(496,617	)		$	(521,181	)
Loss per share - basic and diluted:
Weighted-average shares outstanding, basic and diluted			123,000,000				122,900,000				123,000,000				122,900,000
Loss per share - Basic & diluted		$	-			$	-			$	-			$	(0.01	)

 

See accompanying notes to consolidated financial statements

 

 

Anpulo Food Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(UNAUDITED)

 

		For the Six Months Ended June 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(464,840	)		$	(621,551	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			476,946				412,711
Bad debt expense			169,511				97,201
Written of advances to suppliers			-				13,814
Changes in operating assets and liabilities:
Accounts receivable			667,515				2,747
Inventories			219,606				31,106
Advances to suppliers			(8,838	)			(322,678	)
Other receivables			457,158				(2,385,275	)
Other current assets			(1,888,956	)			(353,087	)
Prepaid expenses			-				(24,040	)
Restricted assets			65,150				-
Accounts payable and accrued payables			11,547				(175,801	)
Advances from customers			31,245				(9,065	)
Other payables			(21,093	)			(19,671	)
Total adjustments			179,791				(2,732,038	)
Net cash used in operating activities			(285,049	)			(3,353,589	)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in held for sale investment			-				(32,233	)
Prepayment for real estate purchase			(81,437	)			-
Increase in construction in progress			(761,839	)			(323,265	)
Proceeds from disposal of construction in progress			1,954,493				-
Purchase of plant and equipment			(28,772	)			(353,075	)
Net cash provided by (used in) investing activities			1,082,445				(708,573	)
CASH FLOWS FROM FINANCING ACTIVITIES
Due from related party			(251,291	)			3,829,239
Due to related party			24,089				38,370
Repayment of short-term loans			(5,374,855	)			(2,307,877	)
Proceeds from short-term loans			5,700,604				3,590,031
Net cash provided by financing activities			98,547				5,149,763
EFFECT OF EXCHANGE RATE CHANGES ON CASH			26,177				20,119
NET INCREASE IN CASH			922,120				1,107,720
CASH, BEGINNING OF YEAR			667,024				407,323
CASH, END OF YEAR		$	1,589,144			$	1,515,043
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest paid		$	456,495			$	423,577
Income tax paid		$	-			$	-

 

See accompanying notes to consolidated financial statements

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 1—ORGANIZATION, BUSINESS AND OPERATIONS

 

Laifeng Anpulo (Group) Food Development Co., Ltd. (the “Company” or “Laifeng Anpulo”) was registered as a privately owned company on March 3, 2005 in the People’s Republic of China (the “PRC”). 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 Province.

 

The consolidated financial statements include the financial statements of Anpulo Food, Inc. (referred to herein as “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.

 

Anpulo is a holding company incorporated under the laws of the State of Nevada on July 30, 2010. 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 the People’s Republic of China, (the “PRC” or “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.

 

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.

 

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 $845,595 is scheduled to be collected before April 30, 2015.

 

   

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

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 $2,532,486, a working capital deficit and cash outflow from operating activities of $7,386,361 and $285,049 at June 30, 2014. 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.

 

Interim Financial Statements

 

These unaudited financial statements as of and for the six months ended June 30, 2014 and 2013 reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.

 

These interim financial statements should be read in conjunction with the Company’s financial statements and notes thereto for the years ended December 31, 2013 and 2012 included in the Company’s Form 10-K filed with the United States Securities and Exchange Commission on March 14, 2014. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the six month period ended June 30, 2014 are not necessarily indicative of results for the entire year ending December 31, 2014.

 

Use of Estimates

 

The preparation of these financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. Significant estimates include the useful lives of property and equipment, land use rights, and assumptions used in assessing impairment for long-term assets.

 

Principles of Consolidation

 

Pursuant to US GAAP, Anpulo Laifeng is the VIE of the Company and the Company is the primary beneficiary of the VIE. Accordingly, the VIE has been consolidated in the Company’s financial statements.

 

Based on various VIE agreements, the Company is able to exercise control over the VIE, and obtain the financial interests such as the periodic income of the VIE through the EMA, PEA, and OA and to acquire the net assets of VIE through purchase of their equities at essentially no cost. The Company therefore concluded that its interest in the VIE 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 VIE for the Company, is zero. They exercise no controls over the VIE and no financial interests of ownership are due to them either for periodic income or the net assets.

 

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 June 30, 2014 and December 31, 2013, balances in banks in the PRC of $1,589,144 and $667,024, respectively, are uninsured.

 

Basic and Diluted Loss per Share

 

The Company reports loss per share in accordance with FASB ASC 260 “Earnings per share”. The Company’s basic earnings per share are computed using the weighted average number of shares outstanding for the periods presented. Diluted earnings per share are computed based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, the Company’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period. There were no dilutive instruments outstanding during the six months ended June 30, 2014 and 2013. However, if present, a separate computation of diluted loss per share would not have been presented, as these common stock equivalents would have been anti-dilutive due to the Company's net loss. 

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

 

Effective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements and Disclosure (“ASC 820”) for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The following tables present information about investment held for trading measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013:

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Balance at June 30, 2014				Gain (Loss)
Investment in gold held for trading		$	32,675			$	-			$	-			$	32,675			$	-

  

		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, 2013				Gain (Loss)
Investment in gold held for trading		$	32,914			$	-			$	-			$	32,914			$	-

 

The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, inventories, advances to suppliers, prepaid expenses, short-term loans, accounts payable, accrued expenses, advances from customers, taxes payable approximate their fair market value based on the short-term maturity of these instruments.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 June 30, 2014 and December 31, 2013, the Company holds investment for trading of $32,675 and $32,914, respectively. The loss resulting from changes in fair value are recognized to profit or loss during the six months ended June 30, 2014 and 2013was $0, respectively.

 

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 June 30, 2014 and December 31, 2013, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $227,026 and $58,367, respectively.

 

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 June 30, 2014 and December 31, 2013.

 

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 $262,832 and $255,879 as of June 30, 2014 and December 31, 2013, 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 $2,608,246 and $729,355 on behalf of the Company as of June 30, 2014 and December 31, 2013. 

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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 six months ended June 30, 2014 and 2013.

 

Advances from Customers

 

Advances from customers at June 30, 2014 and December 31, 2013 amounted to $90,515 and $59,784, 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.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 June 30, 2014 and December 31, 2013, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

 

Shipping and Handling Costs

 

Shipping costs are included in selling expenses and totaled $134,565 and $121,126 for the six months ended June 30, 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 $144,622 and $67,750 for the six months ended June 30, 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 $92,760 and $24,703 for the six months ended June 30, 2014 and 2013, respectively. 

 

  

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 six months ended June 30, 2014 and 2013 was $26,177 and $20,119, 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 June 30, 2014 and December 31, 2013 were translated at 6.1552 RMB to $1.00 and 6.1104 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 six months ended June 30, 2014 and 2013 were 6.1397 RMB and 6.2395 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.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

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 June 30, 2014 and December 31, 2013, the Company’s cash balances by geographic area were as follows:

 

		June 30, 2014								December 31, 2013
Country:
United States		$	-				-			$	-				-
China			1,589,144				100	%			667,024				100	%
Total cash and cash equivalents		$	1,589,144				100	%		$	667,024				100	%

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

Due from Related Party

 

The amount due from related party was $1,214,241 and $152,371 as of June 30, 2014 and December 31, 2013, respectively.

 

Since 2013, the Company made sales of pork products to each of Laifeng Anpulo Yunxing Transportation Co., Ltd., Laifeng Fangchi Hotel and Laifeng Fangchi Paotang Restaurant. The major shareholder of the foregoing three 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 June 30, 2014 and December 31, 2013, the Company had receivables from these three companies as set forth below:

 

		June 30, 2014				December 31, 2013
Laifeng Anpulo Yunxing Transportation Co., Ltd.		$	225,378			$	3,014
Laifeng Fangchi Hotel			140,020				99,724
Laifeng Fangchi Paotang Restaurant			-				49,633
		$	365,398			$	152,371

 

As of June 30, 2014 and December 31, 2013, the Company had a prepaid travel advance of $3,249 and $0 to Ms. Jinfeng Hu who is Mr. Wenping Luo’s wife.

 

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 $1,954,493 from Fengming on May 2014. The remaining balance of RMB 5 million or $845,595 is scheduled to be collected before April 30, 2015.

 

Due to Related Party

 

As of June 30, 2014 and December 31, 2013, the Company had a payable of $24,029 and $0 to its CEO, Mr. Wenping Luo, for some operating expenses paid by Mr. Luo on behalf of the Company.

 

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 six months ended June 30, 2014 and 2013 included net income (loss) and unrealized gains from foreign currency translation adjustments.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued 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 us starting on January 1, 2017. We are currently evaluating the impact this guidance will have on our consolidated financial position, results of operations and cash flows.

 

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard that raises the threshold for disposals to qualify as discontinued operations and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard revised the definition of a discontinued operation to cover only asset disposals that are considered to be a strategic shift with a major impact on an entity's operations and finances, such as the disposal of a major geographic area or a significant line of business. Application of the standard, which is to be applied prospectively, is required for fiscal years beginning on or after December 15, 2014, and for interim periods within that year. The Company currently plans to adopt the standard in January 2015.

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

The Company accrues an allowance for bad debts related to our receivables. The receivable and allowance balances at June 30, 2014 and December 31, 2013 were as follows:

 

		June 30, 2014				December 31, 2013
Accounts receivable		$	2,297,133			$	2,984,690
Less: Allowance for doubtful accounts			(227,026	)			(58,367	)
		$	2,070,107			$	2,926,323

 

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 $169,511 and $97,201 for the six months ended June 30, 2014 and 2013, respectively.

 

NOTE 4 – INVENTORIES

 

At June 30, 2014 and December 31, 2013, inventories consisted of the following:

 

		June 30, 2014				December 31, 2013
Raw materials		$	86,434			$	91,512
Work in process			72,906				167,337
Finished goods			838,859				967,327
			998,199				1,226,176
Less: Reserve for obsolete inventory			-				-
		$	998,199			$	1,226,176

 

For the six months ended June 30, 2014 and 2013, the Company did not make any reserve for obsolete inventory.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 5 – OTHER RECEIVABLES

 

At June 30, 2014 and December 31, 2013, the Company reported other receivables of $39,662 and $499,303, respectively, including an allowance for doubtful receivables of $228,654 and $230,330.

 

The balances of other receivables as of June 30, 2014 and December 31, 2013 included the following:

 

		June 30,  2014				December 31, 2013
Deposits to supermarkets		$	88,069			$	117,661
Loan receivables			129,971				589,159
Travel advances to employees			43,120				21,785
Others			7,156				1,028
			268,316				729,633
Less: Allowance for doubtful accounts			(228,654	)			(230,330	)
		$	39,662			$	499,303

 

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 increased the allowance for doubtful accounts in the amount of $0 and $9,216 for the six months ended June 30, 2014 and 2013.

 

As of June 30, 2014 and December 31, 2013, the Company had a loan receivable of $129,971 and $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 June 30, 2014 and December 31, 2013, the Company reported restricted assets of $64,986 and $130,924, respectively. The restricted asset was a cash collateral to Hubei Xiangyue Professional Guarantee Service Co., Ltd. for providing guarantee at the short-term loans of $1,624,643 from Agricultural Development Bank of China.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

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 June 30, 2014 and December 31, 2013 are as follows:

 

		June 30,  2014				December 31, 2013
Long-term prepaid rental expenses		$	376,769			$	379,531
Less: Accumulated amortization			(10,989	)			(1,581	)
		$	365,780			$	377,950

 

Amortization expense for the six months ended June 30, 2014 and 2013 was $9,443 and $0, respectively.

 

The estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter will be $18,886 per annum.

 

NOTE 8 – PLANT AND EQUIPMENT

 

Plant and equipment at June 30, 2014 and December 31, 2013 consisted of:

 

	Useful Life		June 30, 2014				December 31, 2013
Buildings	20 years		$	7,168,273			$	7,574,580
Operating equipment	4 to 10 years			3,788,745				3,401,535
Office equipment	5 years			126,881				102,897
Vehicles	5 to 8 years			409,273				405,333
				11,493,172				11,484,345
Less: Accumulated depreciation				(4,032,677	)			(3,691,402	)
			$	7,460,495			$	7,792,943

 

For the six months ended June 30, 2014 and 2013, depreciation expense amounted to $369,072 and $358,220, 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 FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 9 – CONSTRUCTION IN PROGRESS

 

Construction in progress consists of amounts expended for the construction of new hotel project which was cooperated with the government of Laifeng County. This project is a “Build-Operate-Transfer” or BOT hotel project. According to the BOT agreement, the Company will 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 will be transferred to the government of Laifeng County. The construction is expected to be completed on August 2014. Once construction is completed and the facilities are approved to be used for the hotel operations, the construction in progress assets are placed into production and transferred into plant and equipment, whereupon they are depreciated over their estimated useful lives. As of April 20, 2014 (disposal date) and December 31, 2013, the construction in progress was $2,761,893 (or RMB 17 million) and $2,142,989, respectively.

 

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 $1,954,493 from Fengming on May 2014. The remaining balance of RMB 5 million or $845,595 is scheduled to be collected before April 30, 2015.

 

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 six months ended June 30, 2014 and 2013, amortization of land use rights amounted to $40,719 and $40,067, respectively. At June 30, 2014 and December 31, 2013, intangible assets consisted of the following:

 

	Useful Life		June 30, 2014				December 31, 2013
Land use rights	50 years		$	4,061,606			$	4,091,385
Others	1 year			6,203				6,248
				4,067,809				4,097,633
Less: accumulated depreciation				(601,905	)			(565,403	)
			$	3,465,904			$	3,532,230

 

The estimated amortization expense of intangible assets over each of the next five years and thereafter will be $81,438.

 

  

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 11 – 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 June 30, 2014 and December 31, 2013, short-term bank loans consisted of the following:

 

		June 30, 2014				December 31, 2013
Loan payable to Bank of China, annual interest rate of 6%, due by November 20, 2014 with buildings and land use rights provided by the shareholders as collateral.		$	4,548,999			$	4,582,351
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by January 29, 2014, guaranteed by Enshi Zhou Nongfa Credit Guarantee Co., Ltd.			—				818,277
Loan payable to Hubei Bank, annual interest rate of 6%, due by March 30, 2014, guaranteed by Hubei Xiangyue Professional Guarantee Service Co., Ltd., a major shareholder, and 2 individuals, Fuming Fan and Yulan Tian			—				1,309,243
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by January 15, 2015 guaranteed by a third party, Enshi Nongfa Credit Guarantee Co., Ltd.			1,624,643				—
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by September 24, 2014 with buildings provided by major shareholder as collateral and guaranteed by the same shareholder.			1,624,643				1,636,554
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by November 21, 2014, with buildings and land use rights provided by Laifeng Anpulo Yunxing Transportation Co., Ltd. as collateral and guaranteed by the major shareholders.			1,624,643				1,636,554
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by September 15, 2014 with buildings and land use rights provided by 2 individuals, Benshuang Yao and Youxiang Zhou as collateral.			2,436,964				2,454,831
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, 2014.			—				196,386
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.			—				572,794
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, 2014.			—				572,794
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.			194,956				—
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 20, 2015.			568,625				—
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.			568,625				—
Loan payable to Laifeng County Finance Bureau without interest burden, due by November 10, 2014.			—				1,636,555
Loan payable to Laifeng County Finance Bureau without interest burden, due by November 1, 2014.			2,436,964				—
		$	15,629,062			$	15,416,339

 

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 12 – CAPITAL STOCK

 

The Company is authorized to issue 500,000,000 shares of preferred stock, $0.001 par value, and as of June 30, 2014 and December 31, 2013, it had 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 June 30, 2014 and December 31, 2013, it had 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.

 

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 June 30, 2014 and December 31, 2013.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

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 six months ended June 30, 2014 and 2013.

 

		For the Six Months Ended June 30,
Customers		2014				2013
A			27	%			25	%
B			13	%			-
			40	%			25	%

 

Suppliers

 

No supplier accounted for 10% or more of the Company’s purchases during the six months ended June 30, 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.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 15 – SUBSIDY INCOME

 

The Company will not recognize the subsidy income until it receives the subsidies. During the six months ended June 30, 2014, the Company received subsidies from the local government of $551,703 in total which included $524,080 for the bank interest expenses and $27,623 for subsidies to companies operating in poverty and minority area. The Company cannot guarantee it will keep receiving subsidies from the government in the future.

 

The subsidies for the bank interest expenses which the Company received in the six months ended June 30, 2014 and related bank loans for its relevant outstanding period over the year ended December 31, 2013 listed as follow:

 

		During the Year Ended December 31, 2013
		Outstanding Loans				Granted Interest Subsidy
Loan payable to Bank of China, annual interest rate of 6%, due by November 5, 2014 which had been repaid in 2013.		$	4,582,351			$	171,285
Loan payable to Bank of China, annual interest rate of 6%, due by November 20, 2014 with buildings and land use rights provided by the shareholders as collateral.			4,582,351				167,936
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by August 24, 2014 which had been repaid in 2013.			1,374,705				29,562
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by October 1, 2014 which had been repaid in 2013.			1,080,126				3,420
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by September 15, 2014 with buildings and land use rights provided by 2 individuals, Benshuang Yao and Youxiang Zhou as collateral.			2,454,831				6,856
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by December 20, 2013.			818,277				88,685
Loan payable to Agricultural Development Bank of China, annual interest rate of 6.56%, due by January 10, 2013.			818,277				16,287
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by September 19, 2013.			1,309,243				12,216
Loan payable to Hubei Bank, annual interest rate of 6%, due by March 30, 2014, guaranteed by Hubei Xiangyue Professional Guarantee Service Co., Ltd., a major shareholder, and 2 individuals, Fuming Fan and Yulan Tian			1,309,243				27,833
		$	18,329,404			$	524,080

 

During the six months ended June 30, 2013, the Company received subsidies from the local government of $117,509 in total which were for subsidies to slaughtering companies and companies operating in poverty and minority area.

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 16 – 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 June 30, 2014 and December 31, 2013.

 

Lease obligations

 

The Company leases office space that has a remaining term of 4 years and expired November 30, 2018. 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 six months ended June 30, 2014 and 2013 was $29,769 and $6,213, respectively.

 

 

The following table sets forth the aggregate minimum future annual rental commitments at June 30, 2014 under all non-cancelable leases for years ending December 31:

 

		Operating Leases
2014		$	59,538
2015		$	59,538
2016		$	59,538
2017		$	59,538
2018		$	59,538
Thereafter		$	-

 

 

ANPULO FOOD, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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.

 

NOTE 17 – GOING CONCERN

 

As reflected in the accompanying financial statements, the Company has accumulated deficit of $2,532,486, a working capital deficit and cash outflow from operating activities of $7,386,361 and $285,049 at June 30, 2014. 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.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.

 

Forward-Looking Statements

 

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  See “Forward-Looking Statements.”  Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 14, 2014.

 

Unless otherwise stated, with the exception of equity at June 30, 2014, we translated balance sheet amounts at June 30, 2014 at RMB 6.1552 to $1.00 as compared to RMB 6.1104 to $1.00 at December 31, 2013. The equity accounts at June 30, 2014 were stated at their historical rate. The average translation rates applied to income statement accounts for the six months ended June 30, 2014 and 2013 were RMB 6.1397 and RMB 6.2395, 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.

 

Overview

 

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. Our current maximum cutting 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 five 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. During the six months ended June 30, 2014, we are selling our chilled pork, frozen pork, and smoked pork through 39 specialty retail stores, 17 supermarket chain store systems, 38 food distributors and 35 schools and restaurants.

 

In 2012, our management decided to explore a business opportunity in real estate development. On November 18, 2012, we entered into a cooperation agreement with the 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 December 31, 2013, we have invested $2,142,989 in the hotel construction and will need additional $3.5 million to complete this construction. On April 20, 2014, we 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. Fengming is owned by Mr. Junyi Luo, Mr. Wenping Luo’s son. Mr. Wenping Luo neither has any equity interest in Fengming, nor hold any management position in Fengming or control Fengming by any contractual arrangement. We had collected RMB 12 million or $1,954,493 from Fengming in May 2014. The remaining balance of RMB 5 million or $845,595  is scheduled to be collected before April 30, 2015.

 

 

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.

 

Results of Operation

 

In fiscal 2014, we continued to focus on implementing 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, seeking outside product research and development collaboration. We will not be able to continue to carry out these plans until additional funding is secured.

 

Going Concern

 

We incurred accumulated deficit of $2.5 million, a working capital deficit of $7.4 million and a cash outflow from operating activities of $0.3 million as of June 30, 2014. In addition, we had outstanding loans as of June 30, 2014 of $15.6 million that are due in the next 12 months and our cash reserve was $4.2 million at the same date. 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Requirements for Additional Funding.” These conditions raise a substantial doubt as to whether we may continue as a going concern.

 

As a result, we will need to seek additional funding in the near future. We plan 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 may also seek to obtain short-term loans from our management or principal shareholders. We will also seek to improve our cash flows from operations by implementing cost control measures, collection of loan receivables, and reducing our inventory purchases.

 

 

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.

 

Comparison of the Results of Operations for the Three Months Ended June 30, 2014 and 2013

 

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

 

		For Three Months Ended June 30,												Percentage of
		2014				2013				Net Change				Change
Sales		$	3,519,231			$	4,238,137			$	(718,906	)			(17	%)
Cost of goods sold			2,743,732				3,361,782				(618,050	)			(18	%)
Gross profit			775,499				876,355				(100,856	)			(12	%)
Selling, general and administrative  expenses			990,243				1,134,294				(144,051	)			(13	%)
Loss from operations			(214,744	)			(257,939	)			43,195				(17	%)
Interest expense			(220,497	)			(220,862	)			365				(0	%)
Subsidy income – Interest expense			57,557				-				57,666				n/a
Subsidy income			-				13,445				(13,445	)			(100	%)
Other income			13,671				(3,454	)			17,125				(496	%)
Net other income (expense)			(149,269	)			(210,871	)			61,602				(29	%)
Loss before income taxes			(364,013	)			(468,810	)			104,797				(22	%)
Income taxes			-				-				-				-
Net loss		$	(364,013	)		$	(468,810	)		$	104,797				(22	%)

 

Revenue. Total revenue decreased from $4.2 million for the second quarter of 2013 to $3.5 million for the same period in 2014, which represented a decrease of $0.7 million, or approximately 17%. The decrease in revenues was primarily due to an apparent decline in the demand in China pork market caused by H7N9 avian flu which temporarily diverted consumption demand for pork to chicken or beef.

 

The following table sets forth our revenues by sales channel for the second quarter of 2014 and 2013.

 

		Sales by Distribution Channel (US dollars in thousands)
		Three Months Ended June 30,
		2014								2013
		Amount				Percent				Amount				Percent
“Branded” retail stores and supermarket stores		$	2,590				73	%		$	3,301				78	%
Food services distributors			759				22	%			767				18	%
Restaurants and non-commercial			170				5	%			170				4	%
		$	3,519				100	%		$	4,238				100	%

 

During the three months ended June 30, 2014, revenue from sales to “branded” retail stores and supermarket stores was $2.6 million, which represented a decrease of $0.7 million, or approximately 22%, as compared to the three months ended June 30, 2013. During the three months ended June 30, 2014, revenue from sales to restaurants and non-commercial customers was $170,000, which was the same with our performance during the three months ended June 30, 2013. As stated above, the decreases in revenues from sales to “branded” retail stores and supermarket stores were primarily due to an apparent decline in the demand in China pork market caused by H7N9 avian flu which temporarily diverted consumption demand for pork to chicken or beef. During the three months ended June 30, 2014, revenue from sales to food service distributors decreased to $8,000, which represented a flat, as compared to the three months ended June 30, 2013.

 

Cost of sales. Cost of sales decreased from $3.4 million for the three months ended June 30, 2013 to $2.7 million for the three months ended June 30, 2014, which represented a decrease of $0.6 million, or approximately 18%. The decrease in cost of sales was in line with the decrease in our revenue for the same period.

 

Gross Profit. The gross profit margin slightly increased from 21% for the three months ended June 30, 2013 to 22% for the same period in 2014. The increase in gross profit margin was primarily attributable to a decrease in the cost of raw materials during the three months ended June 30, 2014.

 

Expenses. Selling, general and administrative expenses decreased by $144,051 in the second quarter of 2014 as compared to the same period in 2013. The decrease was primarily a result of a decrease in bad debt expense of $80,000 accrued over accounts receivable and a decrease of $36,000 in legal service fees.

 

 

Interest income (expense). We had interest expense of $220,497 during the second quarter of 2014, which demonstrated minimal change, comparing with the interest expense of $220,862 in the same period of 2013. However, we received $57,557 subsidy income from the local government for our interest expenditures during the second quarter of 2014, comparing $0 for the second quarter of 2013.

 

The details of the gross interest expense and subsidies received from the local government are as follow:

 

		For the Three Months Ended June 30,
		2014				2013
Interest expense		$	(157,291	)		$	(225,521	)
Deduct:
Interest income			5,540				4,659
Subsidy received from the local government			57,557				-
Net balance		$	(220,497	)		$	(220,862	)

 

We have benefitted from government grants and subsidies. In particular, we received (a) one-time subsidy for interest expense of $57,557 and $0 during the three months ended June 30, 2014 and 2013, and (b) subsidies of $0 and $13,445 for supporting agricultural development in minority areas in the second quarter of 2014 and 2013, 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.

 

The subsidies for the bank interest expenses which the Company received in the three months ended June 30, 2014 and related bank loans for its relevant outstanding period over the year ended December 31, 2013 listed as follow:

 

		During the Year Ended December 31, 2013
		Outstanding Loans				Granted Interest Subsidy
Loan payable to Bank of China, annual interest rate of 6%, due by November 20, 2014 with buildings and land use rights provided by the shareholders as collateral.		$	4,582,351			$	57,557
		$	4,582,351			$	57,557

 

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 June 30, 2014, we had a net operating loss carry-forward for Chinese income tax purposes aggregating approximately $2 million which will expire through the year 2018.

 

Comparison of the Results of Operations for the Six Months Ended June 30, 2014 and 2013

 

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

 

		For Six Months Ended June 30,								Net				Percentage of
		2014				2013				Change				Change
Sales		$	7,896,072			$	8,772,014			$	(875,942	)			(10	%)
Cost of goods sold			6,232,633				7,062,253				(829,620	)			(12	%)
Gross profit			1,663,439				1,709,761				(46,322	)			(3	%)
Selling, general and administrative  expenses			2,242,504				2,052,569				189,935				9	%
Loss from operations			(579,065	)			(342,808	)			(236,257	)			69	%
Interest expense			(448,947	)			(417,965	)			(30,982	)			7	%
Subsidy income – Interest expense			524,080				-				524,080				n/a
Subsidy income			27,623				117,509				(89,886	)			(76	%)
Other income			11,469				21,713				(10,244	)			(47	%)
Net other income (expense)			114,225				(278,743	)			392,968				(141	%)
Loss before income taxes			(464,840	)			(621,551	)			156,711				(25	%)
Income taxes			-				-				-				-
Net loss		$	(464,840	)		$	(621,551	)		$	156,711				(25	%)

 

 

Revenue. Total revenue decreased from $8.8 million for the six months ended June 30, 2013 to $7.9 million for the same period in 2014, which represented a decrease of $0.1 million, or approximately 10%. The decrease in revenues was primarily due to an apparent decline in the demand in China pork market caused by H7N9 avian flu which temporarily diverted consumption demand for pork to chicken or beef.

 

The following table sets forth our revenues by sales channel for the six months ended June 30, 2014 and 2013.

 

		Sales by Distribution Channel (US dollars in thousands)
		Six Months Ended June 30,
		2014								2013
		Amount				Percent				Amount				Percent
“Branded” retail stores and supermarket stores		$	5,395				68	%		$	6,484				74	%
Food services distributors			2,001				25	%			1,253				14	%
Restaurants and non-commercial			500				7	%			1,035				12	%
		$	7,896				100	%		$	8,772				100	%

 

During the six months ended June 30, 2014, revenue from sales to “branded” retail stores and supermarket stores was $5.4 million, which represented a decrease of $1.1 million, or approximately 17%, as compared to the six months ended June 30, 2013. During the six months ended June 30, 2014, revenue from sales to restaurants and non-commercial customers decreased to $500,000, which represented a decrease of $535,000, or approximately 52%, as compared to the six months ended June 30, 2013. As stated above, the decreases in both revenues from sales to “branded” retail stores and supermarket stores and revenues from sales to restaurants and non-commercial customers were primarily due to an apparent decline in the demand in China pork market caused by H7N9 avian flu which temporarily diverted consumption demand for pork to chicken or beef. During the six months ended June 30, 2014, revenues from sales to food service distributors increased to $2 million, which represented an increase of $0.7 million, or approximately 60%, as compared to the six months ended June 30, 2013. Food service distributors purchase our pork products and resell them to wholesalers and pork processing factories. The increased orders by food service distributors were driven by their intent to take advantage of the potentially enlarged profit led by the price decline.

 

Cost of sales. Cost of sales decreased from $7.1 million for the six months ended June 30, 2013 to $6.2 million for the six months ended June 30, 2014, which represented a decrease of $0.9 million, or approximately 12%. The decrease in cost of sales was in line with the decrease in our revenue for the same period.

 

Gross Profit. The gross profit margin increased from 19% for the six months ended June 30, 2013 to 21% for the same period in 2014. The increase in gross profit margin was primarily attributable to a decrease in the cost of raw materials during the six months ended June 30, 2014.

 

Expenses. Selling, general and administrative expenses increased by $189,935 in the first half year of 2014 as compared to the same period in 2013. The increase was primarily a result of an increase in bad debt expense of $72,000 accrued over accounts receivable, an increase of $99,000 in payroll related to our expanded sales team and additional entertainment expenditures of $24,000 including various miscellaneous expenses related to business activities, such as payments for courtesy meals and gifts.

 

Interest income (expense). We had interest expense of $448,947 during the six months ended June 30, 2014, which represents an increase of $30,982 or 7%, comparing with the interest expense of $417,965 in the same period of 2013. The increase in interest expense was primarily due to higher balance of bank loans in 2014. However, we also received subsidies of $524,080 from local government for our interest expense during the six months ended June 30, 2014, comparing no such subsidy in the same period of 2013. We do not recognize or accrue the subsidy income until we receive the subsidy.

 

The details of the gross interest expense and subsidies received from the local government are as follow:

 

		For the Six Months Ended June 30,
		2014				2013
Interest expense		$	(456,495	)		$	(423,577	)
Deduct:
Interest income			7,548				5,612
Subsidy received from the local government			524,080				-
Net balance		$	75,133			$	(417,965	)

 

 

We have benefitted from government grants and subsidies. In particular, we received (a) one-time subsidy for interest expense of $524,080 and $0 during the six months ended June 30, 2014 and 2013, and (b) subsidies of $27,623 and $117,509 for supporting agricultural development in minority areas in the six months ended June 30, 2014 and 2013, 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.

 

The subsidies for the bank interest expenses which the Company received in the six months ended June 30, 2014 and related bank loans for its relevant outstanding period over the year ended December 31, 2013 listed as follow:

 

		During the Year Ended December 31, 2013
		Outstanding Loans				Granted Interest Subsidy
Loan payable to Bank of China, annual interest rate of 6%, due by November 5, 2014 which had been repaid in 2013.		$	4,582,351			$	171,285
Loan payable to Bank of China, annual interest rate of 6%, due by November 20, 2014 with buildings and land use rights provided by the shareholders as collateral.			4,582,351				167,936
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by August 24, 2014 which had been repaid in 2013.			1,374,705				29,562
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by October 1, 2014 which had been repaid in 2013.			1,080,126				3,420
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by September 15, 2014 with buildings and land use rights provided by 2 individuals, Benshuang Yao and Youxiang Zhou as collateral.			2,454,831				6,856
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by December 20, 2013.			818,277				88,685
Loan payable to Agricultural Development Bank of China, annual interest rate of 6.56%, due by January 10, 2013.			818,277				16,287
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by September 19, 2013.			1,309,243				12,216
Loan payable to Hubei Bank, annual interest rate of 6%, due by March 30, 2014, guaranteed by Hubei Xiangyue Professional Guarantee Service Co., Ltd., a major shareholder, and 2 individuals, Fuming Fan and Yulan Tian			1,309,243				27,833
		$	18,329,404			$	524,080

 

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 June 30, 2014, we had a net operating loss carry-forward for Chinese income tax purposes aggregating approximately $2 million which will expire through the year 2018.

 

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 June 30, 2014 our working capital was ($7,386,361) as compared to ($9,415,246) at December 31, 2013. The increase in working capital reflected a result of an increase of $1.1 million in amount due from related party and an increase of $1.9 million in other current assets at June 30, 2014. These funds are located in financial institutions in the following locations:

 

		June 30, 2014								December 31, 2013
Country		Dollar				%				Dollar				%
United States		$	-				-			$	-				-
China			1,589,144				100	%			667,024				100	%
		$	1,589,144				100	%		$	667,024				100	%

 

 

The components of cash flows are discussed below:

 

		Six Months Ended June 30,
		2014				2013
Net cash used in operating activities		$	(285,049	)		$	(3,353,589	)
Net cash provided by (used in) investing activities			1,082,445				(708,573	)
Net cash provided by financing activities			98,547				5,149,763
Exchange rate effect on cash			26,177				20,119
Net cash inflow		$	922,120			$	1,107,720

 

Cash Used in Operating Activities

 

We have financed our operations over the six months ended June 30, 2014 and 2013 primarily through cash from borrowings under our lines of credit with various lending banks in the PRC and sales of the hotel construction project in Laifeng County.

 

Net cash used in operating activities in the six months ended June 30, 2014 totaled $285,049. Cash flow pertaining to operating activities included depreciation and amortization of $476,946, bad debt expense of $169,511, a decrease from accounts receivable of $667,515, a decrease from inventory of $219,606 and collections from other receivables of $457,158. These favorable factors were offset by an increase over our other current assets of $1,888,956.

 

Net cash used in operating activities in the six months ended June 30, 2013 totaled $3,353,589. Cash flow pertaining to operating activities included depreciation and amortization of $412,711, bad debt expense of $97,201. These favorable factors were offset by the Company’s net loss for the six months ended June 30, 2013 of ($621,551), an increase of $2,385,275 from other receivables, an increase of $322,678 from advances to suppliers, and an increase of $353,087 from our other current assets.

 

Cash Provided by (Used in) Investing Activities

 

Net cash provided by investing activities was $1.1 million in the six months ended June 30, 2014. The investments primarily consisted of our investment in the hotel construction project in Laifeng County of $0.8 million 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 $2 million from the resale.

 

Net cash used in investing activities was $0.7 million in the six months ended June 30, 2013. During the six months ended June 30, 2013, a total of $0.4 million was invested in the purchase of fixed assets and $0.3 million was invested in the hotel construction.

 

Cash Provided by Financing Activities

 

Net cash provided by financing activities was $98,547 in the six months ended June 30, 2014. During the period, cash provided by financing activities consisted of the proceeds from our renewal short-term loans of $5.7 million, offset by repayments of our short-term loans of $5.4 million.

 

Net cash provided by financing activities was $5.1 million in the six months ended June 30, 2013. During the six months ended June 30, 2013, cash provided by financing activities consisted of the net proceeds from short-term loans of $3.6 million and a loan from related party of $3.8 million, offset by a repayment of short-term loan of $2.3 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 June 30, 2014, we had approximately cash reserve of $4.2 million, including $1.6 million cash held by us and $2.6 million cash held by our cashier, accountants and Mr. Wenping Luo, our President, Chief Executive Officer, and a director on behalf of us which was presented as other current assets in our financial statements. We have $15.6 million of bank loans due in the next 12 months and our cash flow from operating activities was $0.3 million outflow for the first half year of 2014. Additionally, we have a negative working capital of $7.4 million as of June 30, 2014.

 

We anticipated that, our cash reserve of $4.2 million at June 30, 2014 will be insufficient to satisfy our short-term loans of $15.6 million due in the next 12 months and, we will need to obtain $11.4 million of additional funding 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 plan 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 may also seek to obtain short-term loans from our management or principal shareholders. We will also seek to improve our cash flows from operations by implementing cost control measures, collection of loan receivables, and reducing our inventory purchases.

 

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.

 

 

Contractual Obligation

 

The following table summarizes our contractual obligations at June 30, 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		$	15,629,062			$	15,629,062			$	-			$	-			$	-
Others			-				-				-				-				-
		$	15,629,062			$	15,629,062			$	-			$	-			$	-

 

* Bank loans consisted of short-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: 

 

		June 30, 2014
Loan payable to Bank of China, annual interest rate of 6%, due by November 20, 2014 with buildings and land use rights provided by the shareholders as collateral.		$	4,548,999
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by January 15, 2015 guaranteed by a third party, Enshi Nongfa Credit Guarantee Co., Ltd.			1,624,643
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by September 24, 2014 with buildings provided by major shareholder as collateral and guaranteed by the same shareholder.			1,624,643
Loan payable to Agricultural Development Bank of China, annual interest rate of 6%, due by November 21, 2014, with buildings and land use rights provided by Laifeng Anpulo Yunxing Transportation Co., Ltd. as collateral and guaranteed by the major shareholders.			1,624,643
Loan payable to Industrial and Commercial Bank of China, annual interest rate of 6%, due by September 15, 2014 with buildings and land use rights provided by 2 individuals, Benshuang Yao and Youxiang Zhou as collateral.			2,436,964
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.			194,956
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 20, 2015.			568,625
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.			568,625
Loan payable to Laifeng County Finance Bureau without interest burden, due by November 1, 2014.			2,436,964
		$	15,629,062

 

Off Balance Sheet Items

 

Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:

 

●

any obligation under certain guarantee contracts,

 

●

any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,

 

	●	any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and
	●	any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

 

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

 

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.

 

Interim Financial Statements

 

These unaudited financial statements as of and for the six months ended June 30, 2014 and 2013 reflect all adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.

 

These interim financial statements should be read in conjunction with our financial statements and notes thereto for the years ended December 31, 2013 and 2012 included in our Form 10-K filed with the United States Securities and Exchange Commission on March 14, 2014. We assumes that the users of the interim financial information herein have read, or have access to, the audited financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the six month period ended June 30, 2014 are not necessarily indicative of results for the entire year ending December 31, 2014.

 

Going Concern

 

We incurred accumulated deficit of $2.5 million as of June 30, 2014. In addition, we had outstanding loans of $15.6 million that are due in the next 12 months and our cash reserves were accounting for $4.2 million at the same date. We also had a negative working capital of $7.4 million as of June 30, 2014. 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, collection of loan receivables, and reducing our inventory purchases.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Anpulo, Anpulo HK, Anpulo WFOE and Anpulo Laifeng. 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

 

We state accounts receivable at cost, net of allowance for doubtful accounts. Based on our past experience and current practice in the PRC, management provides for an allowance for doubtful accounts equivalent to those accounts that are not collected within one year plus 20% of receivables less than six months old, 50% of receivables less than a year old. It is management’s belief that the current bad debt allowance adequately reflects an appropriate estimate based on management’s judgment.

 

 

Inventory Valuation

 

We value our pork inventories at the lower of cost, determined on a weighted average basis, and net realizable value (the estimated market price). When the carcasses are disassembled and transferred from primary processing to various manufacturing departments, we adjust the net realizable value for product specifications and further processing, which becomes the basis for calculating inventory values. In addition, substantially all inventory expenses, packaging and supplies are valued by the weighted average method.

 

Revenue Recognition

 

Our revenue recognition policies are in compliance with Securities Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104 (codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605). Sales revenue is recognized after delivery is complete, customer acceptance of the product occurs and collectability is reasonably assured. Payments received before satisfaction of all relevant criteria for revenue recognition are recorded as unearned revenue. Unearned revenue consists of payments received from customers prior to customer acceptance of our products.

 

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 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

 

We account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes.” We compute our provision for income taxes based on the statutory tax rates and tax planning opportunities available to us in the PRC. Significant judgment is required   in evaluating our tax positions and determining our annual tax position.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4.

Controls and Procedures.

 

Evaluation of our Disclosure Controls

 

Our management, including Wenping Luo, our Chief Executive Officer, and Maochun Kang, our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of June 30, 2014, the end of the period covered by this report. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Based on the evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded, due to the material weaknesses discussed below, our disclosure controls and procedures were not effective such that the information required to be disclosed in our reports filed or submitted under the Exchange Act was: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure as a result of a material weaknesses in our internal control over financial reporting related to our lack of an independent audit committee and the failure to disclose warrants issued in connection with an equity financing in a timely manner.

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of June 30, 2014, the Company determined that there were control deficiencies that constituted the following material weaknesses.

 

o	The Company does not have an independent audit committee in place, which would provide oversight of the Company’s officers, operations and financial reporting function.
o	The Company’s internal accounting staff does not have the U.S. GAAP expertise.
o	There lacks segregation of duties within the Company’s accounting functions.

 

 

In light of this above material weakness, we performed additional analyses and procedures in order to conclude that our financial statements for the quarter ended June 30, 2014 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our material weakness, our consolidated financial statements for the quarter ended June 30, 2014 are fairly stated, in all material respects, in accordance with GAAP.

 

When our financial conditions permit, we plan to take steps to improve our internal controls over financial reporting. Meanwhile, to the extent possible, we are implementing procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the past fiscal quarter that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II    OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A.  Risk Factors.

 

There were no material changes to the Risk Factors disclosed in “Item 1A.  Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013.  

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

 

Exhibit Number		Document
31.1		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+		Certification of the Principal Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.2+		Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 + In accordance with the SEC Release 33-8238, deemed being furnished and not filed.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 

	ANPULO FOOD, INC.
Dated: August 14, 2014	By:	/s/ Wenping Luo
		Wenping Luo
		President and Chief Executive Officer (Principal Executive Officer)

 

Dated: August 14, 2014	By:	/s/ Maochun Kang
		Maochun Kang
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

36