UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC20549

 

 

FORM 10-Q

 

 

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2017

 

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                     .

 

Commission File Number 001-34799

 

 

AOXIN TIANLI GROUP, INC.

(Exact name of registrant as specified in its charter)

 

British Virgin Islands		Not applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

 

Suite K, 12^th Floor, Building A, Jiangjing Mansion 

228 Yanjiang Ave., Jiangan District, Wuhan City

Hubei Province, China 430010

(Address of principal executive offices and zip code)

 

(+86) 27 8274 0726

(Registrant’s telephone number, including area code)

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   ¨

 

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  x    No  ¨

 

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		¨				Accelerated filer		¨
Non-accelerated filer		¨		(Do not check if a smaller reporting company)		Smaller reporting company		x
						Emerging growth company		¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 12, 2017, the Registrant had outstanding 7,983,745 shares of common stock, par value $0.004 per share.

 

  

AOXIN TIANLI GROUP, INC.

 

FORM 10-Q

 

INDEX

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS				2
PART I    FINANCIAL INFORMATION				4
Item 1.		Financial Statements.		4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.		Quantitative and Qualitative Disclosures about Market Risk.		37
Item 4.		Controls and Procedures		37
PART II    OTHER INFORMATION				39
Item 1A.		Risk Factors		39
Item 6.		Exhibits		39

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to those set forth herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed on March 14, 2017.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by the federal securities laws, the Company undertakes no obligation to update forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

 

 

NASDAQ CORPORATE GOVERNANCE

 

We are a foreign private issuer, having been organized under the laws of the British Virgin Islands (“BVI”). Nasdaq Marketplace Rule 5615(a)(3) permits a foreign private issuer to follow its home country practice in lieu of most of the requirements of the 5600 Series of the NASDAQ Marketplace Rules. In order to claim such an exemption, we must disclose the significant differences between our corporate governance practices and those required to be followed by U.S. domestic issuers under NASDAQ’s corporate governance requirements.

 

From time to time we may consider whether it is appropriate to follow requirements of the 5600 Series of the NASDAQ Marketplace Rules. Should we determine not to follow one or more of such Rules in favor of the laws of the BVI, we will advise our shareholders before doing so. Please refer to the disclosure contained in our Annual Report for the year ended December 31, 2014, and our Quarterly Report for the quarter ended March 31, 2015, for a discussion of those home country practices we have elected to follow in lieu of the corresponding requirements of the 5600 Series of the NASDAQ Marketplace Rules.

 

On September 1, 2016, we effected a reverse stock split of our common stock (the “Reverse Split”). As a result of the Reverse Split, every four shares of common stock outstanding were consolidated into one share. All share and per share information in this Form 10-Q has been retroactively adjusted to reflect the Reverse Split.

 

 

PART I     FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

(AMOUNTS EXPRESSED IN US DOLLARS)

 

		March 31,				December 31,
		2017				2016
			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	56,519,096			$	54,458,026
Accounts receivable			65,243				60,283
Inventories, net			4,960,505				5,506,085
Advances to suppliers			855,595				1,129,477
Prepaid expenses			78,824				112,676
Other receivables			292,476				293,377
Total Current Assets			62,771,739				61,559,924
Long-term prepaid expenses, net			1,180,599				1,196,989
Plant and equipment, net			20,703,352				21,113,840
Biological assets, net			1,977,795				1,901,744
Intangible assets, net			2,367,905				2,403,637
Total Assets		$	89,001,390			$	88,176,134
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term loans		$	2,612,044			$	2,591,793
Accounts payable and accrued payables			20,659				5,327
Other payables			1,564,978				1,465,164
Total Current Liabilities			4,197,681				4,062,284
Stockholders' Equity:
Common stock ($0.004 par value, 25,000,000 shares authorized, 7,983,745 shares issued and outstanding as of March 31, 2017 and 7,988,245 shares issued and outstanding as of December 31, 2016)			31,934				31,952
Additional paid in capital			61,395,579				61,395,561
Statutory surplus reserves			2,416,647				2,416,647
Retained earnings			26,868,679				26,835,585
Accumulated other comprehensive income			(5,909,130	)			(6,565,895	)
Total Stockholders' Equity			84,803,709				84,113,850
Total Liabilities and Stockholders' Equity		$	89,001,390			$	88,176,134

 

See accompanying notes to unaudited consolidated financial statements

 

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(AMOUNTS EXPRESSED IN US DOLLARS) 

(UNAUDITED)

 

		For the Three Months Ended March 31,
		2017				2016
Revenues		$	6,680,991			$	9,059,268
Cost of goods sold			5,742,884				6,958,752
Gross profit			938,107				2,100,516
Operating expenses:
General and administrative expenses			831,960				943,935
Selling expenses			77,748				102,288
Total operating expenses			909,708				1,046,223
Income from operations			28,399				1,054,293
Other income (expense):
Interest income, net			3,824				81,843
Other income (expense), net			871				459
Total other income			4,695				82,302
Income before income taxes			33,094				1,136,595
Income taxes			—				—
Net income from continuing operations			33,094				1,136,595
Discontinued operations:
Loss from operations of discontinued component, net of taxes			—				(1,410,787	)
Net income (loss)			33,094				(274,192	)
Net loss attributable to noncontrolling interest			—				169,294
Net income (loss) attributable to Aoxin Tianli Group Inc. common stockholders			33,094				(104,898	)
Other comprehensive income:
Unrealized foreign currency translation adjustment			656,765				608,263
Comprehensive income		$	689,859			$	503,365
Earnings (losses) per share attributable to Aoxin Tianli Group Inc. common stockholders - basic and diluted:
Weighted-average shares outstanding, basic and diluted			7,987,495				8,280,417
Continuing operations - Basic & diluted		$	*			$	0.14
Discontinued operations - Basic & diluted		$	—			$	(0.17	)

*Less than $0.01

See accompanying notes to unaudited consolidated financial statements

 

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS EXPRESSED IN US DOLLARS)

(UNAUDITED)

 

		For the Three Months Ended March 31,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from continuing operations		$	33,094			$	1,136,595
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization			711,532				550,631
Amortization of prepaid expenses			50,198				55,496
Amortization of long-term prepaid expenses			25,750				26,977
Stock-based compensation			2,008				75,348
Loss from disposal of biological assets			40,085				185,099
Changes in operating assets and liabilities:
Accounts receivable			(4,491	)			125,558
Inventories			623,252				1,195,471
Prepaid expenses			(17,903	)			(9,828	)
Other receivables			3,193				605
Accounts payable and accrued payables			14,679				16,092
Other payables			154,000				—
Total adjustments			1,602,303				2,221,449
Net cash provided by operating activities from continuing operations			1,635,397				3,358,044
Net cash used in operating activities from discontinued operations			—				(121,221	)
Net cash provided by operating activities			1,635,397				3,236,823
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment			—				(1,610,201	)
Net cash used in investing activities from continuing operations			—				(1,610,201	)
Net cash provided by investing activities from discontinued operations			—				—
Net cash provided by (used in) investing activities			—				(1,610,201	)
CASH FLOWS FROM FINANCING ACTIVITIES
Restricted cash received from (deposited to) banks			—				6,115,787
Repayment of short-term loans			—				(6,115,787	)
Net cash used in financing activities from continuing operations			—				—
Net cash provided by financing activities  from discontinued operations			—				—
Net cash used in financing activities			—				—
EFFECT OF EXCHANGE RATE CHANGES ON CASH			425,673				435,937
NET INCREASE IN CASH			2,061,070				2,062,559
CASH, BEGINNING OF PERIOD			54,458,026				49,656,897
CASH, END OF PERIOD		$	56,519,096			$	51,719,456
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest paid		$	37,554			$	—
Income tax paid		$	—			$	—
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
Inventories received from prior year prepayments		$	282,791			$	1,998,318
Inventories transferred to biological assets		$	248,316			$	409,197
Cancelation of shares related to Hang-ao acquisition		$	—			$	1,047
Cancelation of shares related to employees' compensation		$	18			$	361,080

 

See accompanying notes to unaudited consolidated financial statements

 

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

 

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

 

The consolidated financial statements include the financial statements of Aoxin Tianli Group, Inc. (referred to herein as “Aoxin Tianli”); its wholly-owned subsidiary, HC Shengyuan Limited, a Hong Kong limited liability company (“HCS”); HCS’s wholly-owned subsidiary, Wuhan Aoxin Tianli Enterprise Investment Management Co., Ltd., a Chinese limited liability company and a wholly foreign owned entity (“WFOE”) formerly known as Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd.; WFOE’s wholly-owned subsidiary, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“Fengze”), which had been controlled by WFOE through a series of contractual control agreements which were terminated on July 2, 2014, when WFOE acquired 100% of the equity interest of Fengze; and Fengze’s wholly-owned subsidiary, Hubei Tianzhili Breeder Hog Co., Ltd., a Chinese limited liability company (“Tianzhili”). On July 15, 2014, the Company acquired Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. (“Hang-ao”), a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao. Hang-ao was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. (“Sanqiang”) and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. On August 26, 2014, the Company entered into and consummated a stock purchase agreement whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”). As a result of the completion of the transaction, OV Orange became a 95% owned subsidiary of the Company, with the remaining 5% equity interest owned by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Mr. Ping Wang, the Company’s former Chairman and Chief Executive Officer. OV Orange is focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry and is also a sole shareholder of Wuhan Orange Optical Networking Technology Development Co., Ltd. (“Optical Networking”). During the fourth quarter of 2015, the Company determined to sell  Hang-ao and OV Orange. Subsequently, on December 29, 2015, the Company entered into equity transfer agreements for the sale of its 95% equity interest in OV Orange for a selling price of RMB 47.5 million ($7.3 million). The equity transfer agreement for the sale of OV Orange was completed with the former shareholders of OV Orange, Mr. Jin Wu, Ms. Lina Deng, and Mr. Deming Liu. On December 23, 2016, the Company completed equity transfer agreements with Zhongbicheng Holdings Co., Ltd. for the sale of its 88% equity interest in Hang-ao for a selling price of RMB 26 million ($3.9 million).  All of Aoxin Tianli’s operations are conducted by Fengze and Tianzhili. Fengze and Tianzhili’s results of operations are consolidated into those of Aoxin Tianli. The results of operations of Hang-ao and OV Orange are reflected in the Company’s consolidated financial statements as discontinued operations. HCS, WFOE, Fengze, Tianzhili, Hang-ao, and OV Orange are sometimes referred to as the “subsidiaries”. Aoxin Tianli and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

 

Aoxin Tianli  was incorporated in the British Virgin Islands on November 9, 2009 as a limited liability company under the name Tianli Agritech, Inc. The Company is engaged in the business of breeding, raising, and selling hogs for use in China’s pork meat production and hog breeding by other hog producers. The Company also sells pork products directly to certain outlets. The Company operates seven production farms in Wuhan area and one in Enshi Area, within Hubei Province, People’s Republic of China (“PRC”). On July 18, 2014, Aoxin Tianli’s wholly-owned subsidiary, HCS, was incorporated in Hong Kong on November 24, 2009 as a limited liability company. Other than its equity interest in HCS, Aoxin Tianli does not own any assets or conduct any operations.

 

WFOE was incorporated in Wuhan City on June 2, 2005. On November 26, 2009, HCS entered into a stock purchase agreement with WFOE whereby HCS acquired 100% of the equity interest of WFOE. On January 19, 2010, the Wuhan Municipal Commission of Commerce approved the ownership change. On January 27, 2010, the ownership change was declared effective by the Wuhan Administrator for Industry & Commerce and HCS became the holder of 100% of the equity interest of WFOE, and WFOE effectively became a wholly-owned subsidiary of the Company. Other than the equity interest in WFOE, HCS does not own any assets or conduct any operations.

 

 

On June 6, 2014, WFOE changed its name from “Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd.” to “Wuhan Aoxin Tianli Enterprise Investment Management Co., Ltd.” and entered into a share purchase agreement with Fengze’s Principal Stockholders whereby WFOE acquired 100% of the equity interest of Fengze. On June 20, 2014, the Wuhan Municipal Commission of Commerce approved the ownership change, it was declared effective by the Wuhan Administrator for Industry & Commerce and WFOE became the holder of 100% of the equity interest of Fengze, and Fengze effectively became a wholly-owned subsidiary of the Company.

 

On June 20, 2014, WFOE, Fengze, and Fengze’s former Principal Stockholders entered into a termination agreement to terminate the Entrusted Management Agreement, Pledge of Equity Agreement, and Option Agreement made on December 1, 2009.

 

On November 5, 2012, XMRJ LLP (“XMRJ”), a limited partner enterprise formed under Chinese law that engages in equity investments in China, agreed to invest RMB 10,000,000, or approximately $1,600,000, in Tianzhili. Until such investment, Tianzhili was a wholly-owned subsidiary of Fengze. Tianzhili conducts our black hog breeding operations. In consideration for its commitment to make the investment and an interest free loan, XMRJ received a 40% equity interest in Tianzhili. As of December 31, 2012, Tianzhili received $1,057,636 or RMB 6,666,700 from XMRJ. On March 22, 2014, Fengze entered into an equity purchase agreement with XMRJ to purchase the 40% minority equity interest in Tianzhili for RMB 6,666,700 or $1,083,100. As a result of this purchase, Tianzhili became the wholly owned subsidiary of the Company.

 

On July 15, 2014, the Company acquired Hang-ao. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 261,750 common shares of Aoxin Tianli.  On December 23, 2016, the Company entered into equity transfer agreements with Zhongbicheng Holdings Co., Ltd. for the sale of its 88% equity interest in Hang-ao for a selling price of RMB 26 million ($3.9 million).

 

On August 26, 2014, the Company entered into and consummated a stock purchase agreement (the “Stock Purchase Agreement”) whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”), from certain shareholders of OV Orange in exchange for 638,000 of the Company’s common shares, of which 100,750 shares were deposited in escrow to be issued to Mr. Hai Liu, CEO of OV Orange and the former beneficial owner of 7,500,000 (representing 15% of the outstanding) OV Orange shares (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets for the years ended December 31, 2014, 2015 and 2016.

 

OV Orange was sole shareholder of Optical Networking. On November 10, 2014, OV Orange entered into a share sale agreement with Mr. Deming Liu and Hubei Aoxin Science & Technology Group Co. Ltd. to sell 100% of the equity of Optical Networking for consideration of RMB 1,000,000 or $161,030. On November 12, 2014, the consideration of RMB 1 million or $161,030 had been collected.

 

On December 29, 2015, the Company entered into equity transfer agreements with the former shareholders of OV Orange, Mr. Jin Wu, Ms. Lina Deng, and Mr. Deming Liu, for the sale of its 95% equity interest in OV Orange for a purchase price of RMB 47.5 million ($7.3 million), as a condition of the sale, the 100,750 “earn-out” shares deposited in escrow and issued to Mr. Hai Liu, CEO and the former beneficial owner of OV Orange will be released to him at the end of March, 2017 as previously stipulated  in the acquisition agreement.

 

On September 1, 2016, the Company effected a reverse stock split of the Company's common stock (the “Reverse Split”). Under the laws of the British Virgin Islands and the Amended and Restated Memorandum and Articles of Association, shareholder approval of the Reverse Split was not required. As a result of the Reverse Split, every four shares of common stock outstanding were consolidated into one share. All share and per share information in these notes and the accompanying consolidated financial statements has been retroactively adjusted to reflect the Reverse Split.

 

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP. This 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.

 

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 biological assets, and assumptions used in assessing impairment for long-term assets.

 

Principles of Consolidation

 

We consolidate wholly-owned subsidiaries, HCS, WFOE, Fengze, Tianzhili, and for the periods prior to their sales, Hang-ao and OV Orange. All material intercompany accounts and transactions have been eliminated in consolidation.

 

Cash

 

Cash consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value.The Company maintained cash and cash equivalents with various financial institutions in the PRC. As of March 31, 2017 and December 31, 2016, balances in banks in the PRC were $56,519,096 and $54,458,026, respectively.

 

Accounts Receivable

 

Accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where 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, the customer’s payment history, its current credit-worthiness and current economic trends. Management did not accrueany allowance for doubtful accounts at March 31, 2017 and December 31, 2016.

 

Inventories

 

Inventories are stated at the lower of cost, as determined by the weighted-average method, or market value. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value if that is lower. Costs of raised animals include proportionate costs of breeding, including amortization of the breeding herd or biological assets, plus the costs of feed and other maintenance costs through the balance sheet date. Management inspects and monitors inventory on a continual basis. The Company did not record any inventory reserve at March 31, 2017 and December 31, 2016, respectively.

 

 

Prepaid Expenses

 

Prepaid expenses at March 31, 2017 and December 31, 2016 totaled $78,824 and $112,676, respectively, and includes prepayments to suppliers for services that had not yet been provided to us. We recognize prepayments as expense as suppliers provide services, in compliance with our accounting policy. For the three months ended March 31, 2017 and 2016, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expense of $48,190 and $130,844, respectively.

 

Advances to Suppliers

 

Advances to suppliers are stated at cost, net of an allowance for doubtful accounts and include prepayments to suppliers for merchandise and raw materials that had not yet been shipped to us. We recognize prepayments as inventory or expense as suppliers make delivery of goods in compliance with our accounting policy. The Company maintains allowances for doubtful accounts for estimated losses resulting from prepayments without future economic benefits to the Company. The Company reviews the advances to suppliers on a periodic basis and makes allowances where there is doubt as to the future economic benefits of individual balances. Advances to suppliers at March 31, 2017 and December 31, 2016 totaled $855,595 and $1,129,477, respectively, which represented prepayments to the Company’s feed suppliers. Management did not accrue any allowance for doubtful accounts at March 31, 2017 and December 31, 2016.

 

Plant and Equipment

 

The Company states plant and equipment at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to operations as incurred; additions, renewals and betterments are capitalized. When plant and equipment assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any resulting gain or loss is recorded as an operating expense. In accordance with US GAAP, the Company examines the possibility of decreases in the value of plant and equipment when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets with a residual value of 5% of plant and equipment.

 

Estimated useful lives of the Company’s assets are as follows:

 

	Useful Life
Buildings	20 years
Vehicles	5-10 years
Office equipment	3-5 years
Research equipment	3-20 years
Production equipment	3-20 years

Biological Assets

 

Biological assets consist primarily of hogs purchased or selected from the Company’s own production for breeding and farrowing, which management believes will produce piglets that grow faster and have better quality breeding capabilities and carcasses with a high percentage of meat and a small quantity of fat. The costs to purchase and cultivate these breeding hogs and the expenditures related to labor and materials to feed the breeding hogs until they become commercially productive and breedable are capitalized. When these breeding hogs are entered into breeding and farrowing production, amortization of the costs of these breeding hogs commences. The estimated production life for breeding hogs is three years, and the costs are amortized to a residual value of $76 (RMB 500). After the breeding hogs have completed their production life of breeding, these breeding hogs are then transferred into inventory as the vast majority of these breeding hogs will then be sold for meat processing. Expenses incurred maintaining breeding hogs during gestation until piglets are weaned are capitalized into inventory and included in Work in process—biological assets, a component of inventories. If these breeding hogs produce piglets which are deemed appropriate for internal breeding purposes, the gestation and raising costs until weaned for these piglets are then allocated into biological assets.

 

 

Amortized expenses pertaining to biological assets are included in inventory costs for those piglets to be sold and ultimately become a component of cost of goods sold.

 

Intangible Assets

 

Included in the intangible assets are land use rights and distribution networks. According to the laws of the PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Intangible assets are being amortized using the straight-line method over their lease terms or estimated useful life.

 

The Company carries intangible assets at cost less accumulated amortization. In accordance with US GAAP, the Company examines the possibility of decreases in the value of intangible assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes amortization using the straight-line method over the 50 year life of the land use rights and 10 year life of acquired distribution network.

 

Impairment of Long-lived Assets

 

In accordance with US GAAP, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. 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. For the three months ended March 31, 2017 and 2016, the Company did not record impairment charges against its plant and equipment.

 

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 Company did not identify any assets and liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with the relevant accounting standards.

 

The carrying values of cash and cash equivalents, trade receivables and payables, and short-term bank loans and debts approximate their fair values due to the short maturities of these instruments.

 

 

Non-controlling Interest

 

Non-controlling interests in the Company’s subsidiaries are recorded in accordance with the provisions of ASC 810 and are reported as a component of equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

 

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 generates revenues from the business of breeding, raising, and selling hogs for use in Chinese pork meat production and the sale of hogs for breeding by other hog producers. The Company also sells specialty pork products to retailers and direct to consumers through the internet.

 

Revenues generated from sales of breeding and meat hogs and specialty pork are recognized when these products are delivered to customers in accordance with previously agreed upon pricing and delivery arrangements, and the collectability of these sales is reasonably assured. Cash payment, which sometimes is in the form of wired cash transfers to the Company’s bank account, is usually received by the Company at the time hogs are sold. Sold hogs and specialty pork are not returnable and accordingly, no provision has been made for returnable goods. The customers are responsible for shipping the hogs they purchase.

 

Segment Information

 

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.

 

In the second quarter of 2013, the Company entered into distribution agreements with supermarkets whereby the Company is permitted to sell specialty pork products in the supermarkets’ retail facilities. Consequently, management determined that as of the end of the second quarter of 2013, the Company was engaged in the retail business. As of March 31, 2017 and December 31, 2016, the Company was operating in two segments, Hog Farming and Retail.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The Company did not have any deferred tax assets or liabilities as of March 31, 2017 and December 31, 2016.

 

The Company is subject to the Enterprise Income Tax law (“EIT”) of the People’s Republic of China. However, according to the EIT, companies that are engaged in the agricultural business and primary processing of agricultural products are exempt from the 25% enterprise income tax. The Company’s operations in breeding, raising, and selling hogs for use in Chinese pork meat production and hog breeding, are exempt from the Chinese income tax. However, the Company’s operations in servo-valve products, which are conducted through Hang-ao and included in the Company’s discontinued operations, are subject to the 25% enterprise income tax. Aoxin Tianli is incorporated in the British Virgin Islands.Under the current tax laws of the British Virgin Islands, the Company is not subject to income taxes.

 

 

In addition the Company’s hog sales are not subject to the PRC’s 17% VAT tax or the 5% business tax levied on incomes from services rendered. However, the Company’s operations in servo-valve products, conducted through Hang-ao, are subject to such taxes. According to the PRC tax regulations, companies engaging in the agricultural business are exempt from these taxes. With respect to the Company’s operations in retail, the Company is engaged in breeding, processing, and distributing black hogs and black hog meats which are exempt from VAT taxes and corporate income tax as well.

 

Related parties

 

A party is considered to be related to the Company if the party, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is 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 and management and other parties with which the Company may deal with 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.

 

Basic and Diluted Earnings per Share

 

The Company reports earnings 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 three month periods ended March 31, 2017 and 2016.

 

Foreign Currency Translation

 

As of March 31, 2017 and December 31, 2016, the accounts of Aoxin Tianli were maintained and its financial statements were expressed in Chinese Renminbi (RMB). Such financial statements were translated into United States Dollars (USD) in accordance with US GAAP, with the RMB as the functional currency. All assets and liabilities are translated at the current exchange rates as of the balance sheet dates. These rates were RMB 6.891 and RMB 6.945 per US dollar as of March 31, 2017 and December 31, 2016, respectively. Stockholders’ equity is translated at the historical rates and items in the statements of operations and cash flows are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with US GAAP as a component of stockholders’ equity.

 

During the three months ended March 31, 2017 and 2016, the transactions of Aoxin Tianli were denominated and recorded in RMB and are translated at the average rates of exchange for the period. These rates were RMB6.8891 and RMB 6.5405 per US dollar for the three months ended March 31, 2017 and 2016, respectively. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled. 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.

 

Contingencies

 

Certain conditions may exist as of the date 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.

 

Accrual of Environmental Obligations

 

ASC Section 410-30-25 “Recognition” of environmental obligations requires the accrual of a liability if both of the following conditions are met:

 

a)

Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.

 

b)

The amount of the loss can be reasonably estimated.

 

As of March 31, 2017 and December 31, 2016, the Company did not have any environmental remediation obligations, nor did it have any asset retirement obligations under ASC 410. Furthermore, the Company did not have any environmental remediation loss contingencies requiring recognition or disclosure in its financial statements.

 

Recently Issued Accounting Pronouncements

 

In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. This guidance is effective for us beginning July 1, 2018, with early adoption permitted beginning July 1, 2017. We plan to adopt the guidance effective July 1, 2018. Adoption of the guidance will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under current U.S. GAAP. We are currently evaluating the impact of the guidance on our consolidated financial statements, including accounting policies, processes, and systems.

 

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

 

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

 

 

The standard will be effective for us beginning January 1, 2019, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems. We anticipate this standard will have a material impact on our consolidated balance sheets. However, we do not expect adoption will have a material impact on our consolidated income statements. While we are continuing to assess potential impacts of the standard, we currently expect the most significant impact will be the recognition of ROU assets and lease liabilities for operating leases.ROU assets and lease liabilities for operating leases are expected to increase when we adopt the new standard primarily due to the land of our hog farms which were leased from the third parties.

 

In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). The standard will be effective for us beginning January 1, 2018. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

 

In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The standard will be effective for us beginning January 1, 2018, with early adoption permitted as of the original effective date of July 1, 2017. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

 

Reclassification

 

Certain prior year balances were reclassified to conform to the current year's presentation with consideration of reflecting two of the Company’s subsidiaries, Hang-ao and OV Orange, as discontinued operations. None of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented.

 

Acquisitions

 

On July 15, 2014, the Company acquired Hang-ao, a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 261,750 common shares of Aoxin Tianli. Hang-ao, at the time of the acquisition, was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. The acquisition agreement includes a three year “earn out payment” provision which requires Hang-ao to reach certain levels of net income for the years 2014, 2015, and 2016 for the sellers to retain the 261,750 common shares of Aoxin Tianli. The net income targets are RMB 4.5 million ($733,000), RMB 9 million ($1.5 million), and RMB 15 million ($2.4 million) for the years 2014, 2015, and 2016.

 

 

The following is a reconciliation of the purchase:

 

		Shares				Price per Share				Amount
Fair value of the Company’s stock issued			261,750			$	8.52			$	2,230,110
Cash											6,825,495
Total purchase price										$	9,055,605
Acquired assets and liabilities:
Cash										$	215,236
Current assets											8,121,512
Fixed assets											2,036,448
Intangible assets											3,684,084
Liabilities											(3,766,820	)
											10,290,460
Percentage of acquired equity											88	%
88% of acquired assets and liabilities											9,055,605
Purchase price											9,055,605
Goodwill										$	—

 

										Amount
Acquired assets and liabilities, net										$	10,290,460
Percentage of equity											12	%
Noncontrolling Interest										$	1,234,855

 

On August 26, 2014, the Company entered into and consummated a stock purchase agreement (the “Stock Purchase Agreement”) whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”), from certain of the former shareholders of OV Orange in exchange for 638,000 of the Company’s common shares, of which 100,750 shares were deposited in escrow to be issued to Mr. Hai Liu, CEO of OV Orange and the former beneficial owner of 7,500,000 (representing 15% of the outstanding) OV Orange shares (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets for the years ended December 31, 2014, 2015 and 2016.

 

The following is a reconciliation of the purchase:

 

		Shares				Price per Share				Amount
Fair value of the Company’s stock issued			638,000			$	7.80			$	4,976,400
Acquired assets and liabilities:
Cash										$	690,990
Current assets											3,881,918
Fixed assets											376,075
Long-term prepaid expense											1,282,037
Intangible assets											2,699,753
Liabilities											(989,226	)
											7,941,547
Discount from bargain purchase											(2,703,232	)
											5,238,315
Percentage of acquired equity											95	%
95% of acquired assets and liabilities											4,976,400
Purchase price											4,976,400
Goodwill										$	—

 

										Amount
Acquired assets and liabilities, net										$	5,238,315
Percentage of equity											5	%
Noncontrolling Interest										$	261,915

 

 

Before Aoxin Tianli acquired OV Orange, 45% of OV Orange’s equity interest was held by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Mr. Ping Wang, the same as Aoxin Tianli. Therefore, the acquisition of OV Orange is a related party transaction and the discount of $2,703,232 from this bargain purchase was recorded as part of additional paid-in capital.

 

Deconsolidation

 

On December 29, 2015, the Company sold 95% of OV Orange’s equity interest for $7,317,036 in cash. Aoxin Tianli recognized a gain of $2,144,226 from this transaction.

 

The following is a reconciliation of the deconsolidation:

 

		Amount
Selling price		$	7,317,036
Disposed assets and liabilities:
Cash			65,446
Current assets			2,202,581
Long-term prepaid expenses			1,103,974
Fixed assets and construction in progress			925,524
Intangible assets			2,190,288
Liabilities			(1,315,003	)
			5,172,810
Gain from disposal of subsidiaries, net of income tax		$	2,144,226

 

 

On December 23, 2016, the Company sold 88% of Hang-ao’s equity interest for $3,913,894 in cash. Aoxin Tianli recognized a gain of $70,820 from this transaction.

 

The following is a reconciliation of the deconsolidation:

 

		Amount
Selling price		$	3,913,894
Disposed assets and liabilities:
Cash			17
Current assets			1,554,722
Fixed assets			4,581,775
Intangible assets			—
Liabilities			(2,293,440	)
			3,843,074
Gain from disposal of subsidiaries, net of income tax		$	70,820

 

 

NOTE 3—ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

		March 31,				December 31,
		2017				2016
Accounts receivable		$	65,243			$	60,283
Less: Allowance for doubtful accounts			—				—
		$	65,243			$	60,283

 

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where 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, the customer’s payment history, its current credit-worthiness and current economic trends. During the three months ended March 31, 2017 and 2016, the Company reported no allowance for doubtful accounts.

 

NOTE 4—INVENTORIES

 

Inventories consisted of the following:

 

		March 31,				December 31,
		2017				2016
Raw materials—hogs		$	443,233			$	859,161
Work in process—biological assets			2,214,183				2,269,269
Infant hogs			2,303,089				2,377,655
Less: inventory reserve			—				—
		$	4,960,505			$	5,506,085

 

Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower. As of March 31, 2017 and December 31, 2016, the Company did not write down the value of its inventories. For the three months ended March 31, 2017 and 2016, the Company did not report any recovery gain from its impairment loss reserve. The term “Work in process—biological assets” has the meaning set forth above in Note 2—Biological Assets.

 

NOTE 5—ADVANCES TO SUPPLIERS

 

The Company makes advances for materials or services the Company uses in its operations. Advances to suppliers mainly consisted of prepayments to suppliers for merchandise and raw materials which were mainly comprised of premix feeds. As of March 31, 2017 and December 31, 2016, advances to suppliers amounted to $855,595 and $1,129,477, respectively. Included in advances to suppliers as of March 31, 2017 and December 31, 2016, we had prepaid $855,595 and $1,129,477 to the Company’s feed suppliers. During the three months ended March 31, 2017 and 2016, the Company did not report bad debt expense over its advances to suppliers.

 

NOTE 6—OTHER RECEIVABLES

 

At March 31, 2017 and December 31, 2016, the Company reported other receivables of $292,476 and $293,377, respectively, including no allowance for doubtful receivables.The balances as of March 31, 2017 and December 31, 2016 included a deposit of $290,227 and $287,977 to a professional loan guarantee service company for short-term bank loans. During the three months ended March 31, 2017 and 2016, the Company reported no bad debt expense.

 

NOTE 7—LONG-TERM PREPAID EXPENSES

 

Long-term prepaid expenses primarily consist of prepaid rental expenses for three parcels of land comprising the Company’s farm located in Enshi Prefecture. The prepaid rental expensesare being amortized using the straight-line method over the lease term of 21.33 years.

 

Long-term prepaid expenses at March 31, 2017 and December 31, 2016 are as follows:

 

		March 31,				December 31,
		2017				2016
Prepaid rental expenses		$	1,748,992			$	1,735,431
Less: Accumulated amortization			(568,393	)			(538,442	)
		$	1,180,599			$	1,196,989

 

 

Amortization expense for the three months ended March 31, 2017 and 2016 was $25,750 and $26,977, respectively. The estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter is $103,002 per annum.

 

NOTE 8—PLANT AND EQUIPMENT

 

Plant and equipment consist of the following:

 

		March 31,				December 31,
		2017				2016
Buildings		$	26,132,241			$	25,929,635
Vehicles			425,978				422,675
Office equipment			453,091				449,578
Production equipment			4,959,338				4,920,889
			31,970,648				31,722,777
Less: Accumulated depreciation			(11,267,296	)			(10,608,937	)
		$	20,703,352			$	21,113,840

a)

Depreciation expense was $575,634 and $444,617 for the three months ended March 31, 2017 and 2016, respectively.

 

b)

Flood damage

In early July 2016, the city of Wuhan had a record weekly rainfall of 22.6 inches. The rain collapsed more than 40,000 houses and forced the evacuation of nearly 1.5 million people in 11 regions. The Company estimated its total economic losses at $2,496,892, including $1,375,629 relating to our facilities, estimated damage compensation of $295,191 to local farmers, and $662,792 and $163,280 relating to our marketable hogs and breeder hogs, respectively, which were reported as part of cost of goods sold.

 

NOTE 9—BIOLOGICAL ASSETS

 

Biological assets consist of the following:

 

		March 31,				December 31,
		2017				2016
Breeding hogs		$	2,716,195			$	2,777,870
Less: Accumulated amortization			(738,400	)			(876,126	)
		$	1,977,795			$	1,901,744

As of March 31, 2017 and December 31, 2016, $390,277 and $424,524 of breeding hogs was a breed of black hogs. Amortization of the biological assets, included as a component of inventory, for the three month periods ended March 31, 2017 and 2016 was $147,022 and $48,578, respectively.

 

NOTE 10—INTANGIBLE ASSETS

 

Included in the intangible assets are land use rights and acquired distribution network. According to the laws of the PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Intangible assets are being amortized using the straight-line method over their lease terms or estimated useful life.

 

The Company carries intangible assetsat cost less accumulated amortization. In accordance with US GAAP, the Company examines the possibility of decreases in the value of intangible assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes amortization using the straight-line method over the 50 year life of the land use rights and 10 year life of acquired distribution network.

 

 

Intangible assets at March 31, 2017 and December 31, 2016 are as follows:

 

		March 31,				December 31,
		2017				2016
Land use rights		$	1,538,465			$	1,526,537
Distribution network			1,720,681				1,707,340
Less: Accumulated amortization			(891,241	)			(830,240	)
		$	2,367,905			$	2,403,637

 

Amortization expense for the three month periods ended March 31, 2017 and 2016 was $54,529 and $57,436, respectively.

 

The estimated amortization expense of intangible assets for the next five years is as follow:

 

Year				Amount
	2017			$	218,117
	2018			$	218,117
	2019			$	218,117
	2020			$	218,117
	2021			$	218,117
	Thereafter			$	1,113,733

 

Activity related to intangible assets by business segments was as follows:

 

		Hog Farming				Retail				Total
Land use rights		$	1,538,465			$	—			$	1,538,465
Distribution network			—				1,720,681				1,720,681
Less: accumulated amortization			(375,036	)			(516,205	)			(891,241	)
Balance as of March 31, 2017		$	1,163,429			$	1,204,476			$	2,367,905

 

		Hog Farming				Retail				Total
Land use rights		$	1,526,537			$	—			$	1,526,537
Distribution network			—				1,707,340				1,707,340
Less: accumulated amortization			(360,722	)			(469,518	)			(830,240	)
Balance as of December 31, 2016		$	1,165,815			$	1,237,822			$	2,403,637

 

NOTE 11—SHORT-TERM LOANS

 

As of March 31, 2017 and December 31, 2016, the short-term loans are as follows:

 

		March 31, 2017				December 31, 2016
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 5.66%, due by June 22, 2017, guaranteed by Wuhan Agriculture Guarantee Co., Ltd.		$	1,160,908			$	1,151,908
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 5.66%, due by June 24, 2017, guaranteed by Wuhan Agriculture Guarantee Co., Ltd.			1,451,136				1,439,885
		$	2,612,044			$	2,591,793

 

 

In the second quarter of 2016, the Company paid $67,906 to a guarantee service provider for providing a guarantee of the loans from Shanghai Pudong Development Bank. No guarantee service charges were recorded as interest expense for the three months ended March 31, 2017 and 2016, respectively. As of December 31, 2016, the Company also made a cash deposit of $287,977 to Wuhan Agriculture Guarantee Co., Ltd. as collateral to secure the short-term bank loans. The deposit was reported as part of other receivables and will be returned when the Company repays the loans to Shanghai Pudong Development Bank.

 

NOTE 12—OTHER PAYABLES

 

Other payables at March 31, 2017 and December 31, 2016 were $1,564,978 and $1,465,164, respectively. Included in other payables as of March 31, 2017 and December 31, 2016 were mainly deposit payables of $1,400,899 and $1,455,165 for joint development agreements with cooperatives in Enshi Autonomous Prefecture.

 

Since the year ended December 31, 2011, the Company signed 7 joint development agreements with 7 local cooperatives in the Enshi Autonomous Prefecture in Hubei Province. Under these agreements, the Company provides funding to local independent farmers to construct small-scale hog farms in which the farmers will grow black hogs for sale to the Company. According to the joint development agreements, each participating farmer paid a deposit of approximately one-third of the construction cost of the hog farm to the Company upon completion of the respective hog farm. The deposit is amortized against the depreciation expense over a period of 10 years. Should the farmer withdraw from the program within this period, the deposit will be refunded proportionately. As of March 31, 2017 and December 31, 2016, deposits from farmers were $1,400,899 and $1,455,165, respectively.

 

In early July 2016, the city of Wuhan had a record weekly rainfall of 22.6 inches. The rain collapsed more than 40,000 houses and forced the evacuation of nearly 1.5 million people in 11 regions, including the Enshi Autonomous Prefecture. The rain caused unrecoverable damage at 172 small-scale hog farms the Company had constructed for local independent farmers. The Company estimated its total economic losses at $2,496,892, including $1,375,629 relating to its facilities, damage compensation of $295,191 to local farmers, and $662,792 and $163,280 relating to its marketable hogs and breeder hogs, respectively, which were reported as part of its cost of goods sold. The cooperation agreements with the 172 damaged small-scale hog farms were terminated and the Company returned the relevant deposit payables of approximately $757,000 to the farmers.

  

The amortization of deposit payables for the three months ended March 31, 2017 and 2016 was $65,653 and $115,074. The following table sets forth the aggregate future amortization expected for the next five years:

 

				Amortization
	2017			$	262,608
	2018			$	262,608
	2019			$	262,608
	2020			$	262,608
	2021			$	262,608
	Thereafter			$	241,859

 

 

NOTE 13—RELATED PARTY TRANSACTIONS

 

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

 

Due to related party

 

In connection with the disposal of Hang-ao on December 23, 2016, the Company paid $2,090,379 to Hang-ao in satisfaction of amounts borrowed from Hang-ao in prior years.

 

Issuance of common stock

 

On February 6, 2015, the Company issued 202,500 common shares to 7 employees, including the Company’s former CEO, former CFO,and a director, as stock awards pursuant to its 2014 Share Incentive Plan. Those shares have been registered under the Securities Act of 1933, asamended. However, 4 of the mentioned employees resigned, including Mr. Ping Wang, and the relevant stock awards of 51,000 shares and 4,500 shares of common shares had been canceled on March 8, 2016 and March 13, 2017, respectively.

 

NOTE 14—CAPITAL STOCK

 

The Company is authorized to issue 25,000,000 shares of common stock, $0.004 par value, and as of March 31, 2017 and December 31, 2016, it had 7,983,745 and 7,988,245 shares outstanding, respectively.

 

On December 6, 2010 the Company granted 6,500 options with an exercise price of $24.00 to a director with vesting of one-third as of the date of grant, one-third vesting in December 2011, and the final one-third vesting in December 2012, contingent on the director continuing to serve as a board member. The option can be exercised through January, 2017. The Company recognizes the compensation cost over the award’s service period based on a Black Scholes valuation of the options as of the date of the grant. The 6,500 options were given up when new options were granted on October 1, 2014.

 

On October 1, 2014, the Company granted 17,500 options with an exercise price of $10 to the non-employee directors with vesting of 5,750 options as of the date of grant, 6,000 options vesting in December 2015, and the final 5,750 options vesting in December 2016, contingent on the directors continuing to serve as board members. The options can be exercised through October 1, 2021. The Company recognizes the compensation cost over the recipients’ service period based on a Black Scholes valuation of the options as of the date of the grant. On July 2, 2015, one of the non-employee directors resigned. As a result, 1,750 of the 17,500 options were canceled. For the three months ended March 31, 2017 and 2016, the Company reported an amortization expense of $2,008 and $6,023, respectively.

 

On February 6, 2015, the Company issued 202,500 of its common shares to 7 employees pursuant to the Company’s 2014 Share Incentive Plan. Those shares were valued at $1,433,700; 81,000 shares vested as of the date of grant, 60,750 shares vested in December 2015, and 60,750 common shares vest in December 2016. The Company will recognize the compensation cost over the employees’ service period. During the years ended December 31, 2016 and 2015, 4 of the 7 employees, including the Company’s former CEO, resigned and the relevant unvested 51,000 shares and 4,500 shares were canceled on March 8, 2016 and March 13, 2017, respectively. For the three months ended March 31, 2017 and 2016, the Company reported an amortization expense of $0 and $69,325, respectively.

 

The table below provides the estimated fair value of the director options, and the significant assumptions used to determine their values.

 

		Director Options
Estimated Fair Value Per Option		$4.82
Stock Price at Date of Grant		$8.00
Assumptions:
Dividend Yield		0%
Stock Price Volatility		105.24%
Risk-Free Interest Rate		1.00%

 

 

The following table summarizes the stock options outstanding as of March 31, 2017 and December 31, 2016 and the activity during the three months ended March 31, 2017.

 

				Options				Weighted Average Exercise Price
	Outstanding as of December 31, 2016				15,750			$	10.00
	Granted				—				—
	Exercised				—				—
	Forfeited				—				—
	Outstanding at March 31, 2017				15,750			$	10.00
	Exercisable at March 31, 2017				15,750			$	10.00

 

The fair value of the director options were estimated as of the grant date using the Black Scholes options pricing model. The determination of the fair value is affected by the price of the Company’s common stock at the grant date as well as assumptions made regarding the expected price volatility of the common stock over the terms of the grant, the risk-free interest rate and any expected dividends.

 

The weighted average remaining contractual life for the options is 4.5 years. The market value of the Company’s common stock was $2.3 and $3.62 as of March 31, 2017 and December 31, 2016, respectively. The intrinsic value of the outstanding options as of March 31, 2017 and December 31, 2016 was $0.

 

NOTE 15—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 shareholdings 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.

 

In accordance with the Chinese Company Law, the Company has allocated 10% of its net income as the statutory reserve contribution. The reserve amounted to $2,416,647 and $2,416,647 as of March 31, 2017 and December 31, 2016.

 

Credit risk and major customers

 

As of March 31, 2017 and December 31, 2016, all of the Company’s cash including cash on hand and deposits in accounts were maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of a bank’s failure. However, the Company has not experienced any such losses and believes it is not exposed to any significant risks on its cash in bank accounts.

 

 

The Company’s key customers are located in the PRC. The Company has not entered into long-term supply contracts with any of these major customers. During the three months ended March 31, 2017 and 2016, there were no customers that accounted for more than 10% of the Company’s revenue.

 

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.

 

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 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 March 31, 2017 and December 31, 2016.

 

Lease obligations

 

The Company leases office space pursuant to a lease that has a remaining term of nine years. As the holder of land use rights for its hog farms, the Company makes rental payments to the government over the term of the land use rights, which range from 19 years to 50 years. 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 three month periods ended March 31, 2017 and 2016 was $23,556 and $18,849, respectively.

 

The following table sets forth the aggregate minimum future annual rental commitments at March 31, 2017 under all non-cancelable leases for years ending December 31:

 

				Operating Leases
	2017			$	70,487
	2018			$	49,952
	2019			$	49,952
	2020			$	49,952
	2021			$	49,952
	Thereafter			$	1,209,744

 

NOTE 17—SEGMENT INFORMATION

 

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluates their performance. As of March 31, 2017, the Company has two operating segments, “Hog Farming” and “Retail.” The Hog Farming segment consists of sales of breeder hogs and market hogs raised by the Company and participants in the black hog program. The Company’s Retail segment consists of selling specialty pork products through supermarkets and other outlets. The Company primarily evaluates performance based on income before income taxes excluding non-recurring items.

 

 

Condensed financial information with respect to these reportable business segments for the three months ended March 31, 2017 and 2016 is set forth below. The results of operations of Hang-ao and OV Orange are reflected as discontinued operations in the Company’s consolidated financial statements.

 

Three Months Ended March 31, 2017		Hog Farming				Retail				Consolidated
Segment revenues		$	5,973,539			$	707,452			$	6,680,991
Inter-segment revenues			—				—				—
Revenues from external customers		$	5,973,539			$	707,452			$	6,680,991
Segment income		$	187,121			$	82,100			$	269,221
Unallocated corporate loss											(236,127	)
Income before income taxes from continuing operations											33,094
Income taxes											—
Net income										$	33,094
Other segment information:
Depreciation and amortization		$	655,894			$	55,638			$	711,532

 

Three Months Ended March 31, 2016		Hog Farming				Retail				Consolidated
Segment revenues		$	8,639,062			$	420,206			$	9,059,268
Inter-segment revenues			—				—				—
Revenues from external customers		$	8,639,062			$	420,206			$	9,059,268
Segment income (loss)		$	1,336,766			$	(17,539	)		$	1,319,227
Unallocated corporate loss											(182,632	)
Income before income taxes from continuing operations											1,136,595
Income taxes											—
Net income from continuing operations											1,136,595
Discontinued operations:
Loss from operations of discontinued component, net of income taxes											(1,410,787	)
Net loss										$	(274,192	)
Other segment information:
Depreciation and amortization		$	492,027			$	58,604			$	550,631

 

 

Condensed financial status with respect to these reportable business segments as of March 31, 2017 and December 31, 2016 is as follows:

 

As of March 31, 2017		Hog Farming				Retail				Consolidated
Total segment assets		$	87,509,481			$	1,443,028			$	88,952,509
Other unallocated corporate assets											48,881
										$	89,001,390
Other segment information:
Expenditures for segment assets		$	—			$	—			$	—
As of December 31, 2016
Total segment assets		$	86,647,382			$	1,459,273			$	88,106,655
Other unallocated corporate assets											69,479
										$	88,176,134
Other segment information:
Expenditures for segment assets		$	2,960,399			$	—			$	2,960,399

 

NOTE 18—DISCONTINUED OPERATIONS

 

Discontinued operations primarily included our servo-valve business and our security and protection business which were conducted via two of our disposed subsidiaries, Hang-ao and OV Orange. Results of operations, financial position and cash flows for these businesses are separately reported as discontinued operations for all periods presented.

 

During the fourth quarter of 2015, the Company determined to sell two of its subsidiaries, Hang-ao and OV Orange. Subsequently, on December 23, 2016 and December 29, 2015, the Company entered into equity transfer agreements for the sales of its 88% equity interest in Hang-ao and 95% equity interest in OV Orange for a purchase price of RMB 26 million ($3.9 million) and RMB 47.5 million ($7.3 million), respectively. The equity transfer agreement for the sale of OV Orange was completed with the former shareholders of OV Orange, Mr. Jin Wu, Ms. Lina Deng, and Mr. Deming Liu. The equity transfer agreement for the sale of Hang-ao was completed with Zhongbicheng Holdings Co., Ltd.

 

Financial Information for Discontinued Operations

 

As of March 31, 2017 and December 31, 2016, the Company reported no assets and liabilities held for its discontinued operations. The results of operations from the discontinued operations for the three months ended March 31, 2016 were listed as follow:

 

		For the Three Months Ended March 31, 2016
		Hang-ao				OV Orange				Total
Operations
Revenues and other incomes		$	22,795			$	—			$	22,795
Costs and expenses			1,433,582				—				1,433,582
Loss before taxes			(1,410,787	)			—				(1,410,787	)
Income taxes			—				—				—
Loss from discontinued operations, net of taxes		$	(1,410,787	)		$	—			$	(1,410,787	)

 

 

Item 2.

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

 

The following discussion and analysis of our Company’s financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in this report and with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements.

 

Overview

 

Our Company is in the business of breeding, raising, and selling hogs in the Wuhan City area of the PRC, and distributes specialty processed black hog products through supermarkets and other outlets and direct to consumers via the internet. In an effort to significantly increase the scale of our operations, in 2012 we concluded the Exclusivity Agreements, whereby we were granted the exclusive right to breed and sell Enshi black hogs in Enshi Autonomous Prefecture in Hubei Province. The agreements call for the joint development, funding and operation of local cooperatives in the Enshi Autonomous Prefecture in Hubei Province whereby the Company, the relevant governmental agencies and the cooperatives will assist participating farmers to breed and raise Enshi black hogs which will be purchased by the Company for resale as meat hogs or retained or sold as breeders at the Company’s discretion. This program allows us to profit from the black hogs grown by the participating farmers who purchase feed, vaccines and other supplies from us and then sell us their hogs at a price which is comparable to the costs at which we currently grow our own hogs.

 

By the end of the first quarter of 2014 we had funded and completed the construction of 798 farms for local farmers. After providing the financing necessary for completion of the construction for 798 farms, we decided to stop providing capital to the program and focus on our black hog retail operations. Due to the extensive damages suffered by 172 farms as a result of record rainfall in Wuhan last July, the cooperation agreements with 172 damaged small-scale hog farms were terminated.

 

In July 2014, our management determined to diversify our operations by acquiring various emerging high technology companies. In accordance with such plan, in July 2014, we acquired 88% of the equity of Hang-ao for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 261,750 of our common shares.  In addition, in August 2014, we consummated a stock purchase agreement whereby we acquired 95% of the outstanding equity of OV Orange for consideration of 638,000 of the Company’s common shares.

 

However, in early 2015, due to disruptions in the Chinese economy we began to reconsider this strategy. In the fourth quarter of 2015, we determined to focus on the Agricultural industry and sell Hang-ao and OV Orange. In December 2015, we sold our 95% of the equity of OV Orange for RMB 47.5 million or approximately $7.3 million in cash, as a condition of the sale, the 100,750 “earn-out” shares deposited in escrow and issued to Mr. Hai Liu, CEO and the former beneficial owner of OV Orange would be released to him at the end of March, 2017 as previously stipulated in the acquisition agreement.  On December 23, 2016, we completed equity transfer agreements with Zhongbicheng Holdings Co., Ltd. for the sale of our 88% equity interest in Hang-ao for a selling price of RMB 26 million ($3.9 million).

 

For the 2016 operating results of Hang-ao, were reflected in the Company’s financial statements as discontinued operations.

 

Principal Factors Affecting our Results of Operations

 

Revenues

 

In our hog farming segment, we derive the bulk of our revenues from the sale of hogs to other hog farms for breeding purposes, to brokers who sell our hogs both to other hog farms for breeding purposes and to slaughterhouses, and directly to slaughterhouses. We breed and raise hogs that are eventually sold as either breeder or market hogs which will be sold to slaughterhouses for conversion into pork products. Some of the hogs are bred and raised for sale as market hogs, while others become market hogs because customers do not select them as breeder hogs. Also very few boars are required for breeding purposes, so most males are sold as market hogs. The average sales price for a breeder is significantly higher than that of a market hog, and since breeder hogs are sold at a younger age than market hogs and usually weigh about 110 pounds at the date they are sold, as compared to the average weight of about 220 pounds for a market hog on sale date, the direct cost of feeding and otherwise raising a breeder hog is less than a market hog. Thus, the gross margin for breeder hogs is substantially higher than that of market hogs. Consequently, the Company has focused its operations to increase the proportion of its sales represented by breeder hogs, and its success in so doing has been a major contribution to its operating profit.

 

 

In our retail segment, we generate our revenues from selling black hog meat products through supermarkets, other direct sale outlets and the internet.

 

We receive subsidies from the government for operating our farms, as well as financial support from the government for some of our research projects. Some of these subsidies are non-recurring, such as the payment we receive when farms reach specified annual production capacities, for the acquisition of certain operating equipment, or for specific research projects. Others, such as subsidies for breeder hog insurance, are ongoing so long as we qualify. Of course, there is no assurance the government will continue any of its policies for granting subsidies.

 

Factors Affecting Revenues and Profitability

 

The following factors, among others, affect the revenues and profitability that we derive from our operations.

 

Consumer demand for pork products. Consumer demand for pork products is closely linked to the performance of the general Chinese economy and is sensitive to business and personal discretionary spending levels.

 

Declines in consumer demand may occur as a result of adverse general economic conditions. Lower consumer confidence and changes in consumer preferences for pork as compared with other meats can lower the revenues and profitability of our operations. As a result, changes in consumer demand and general business cycles can subject our revenues to volatility.

 

Revenues resulting from the sale of breeder hogs. A significant amount of our revenues and operating margin result from the sale of young breeder hogs for use by other hog farmers. Because these breeder hogs command a price significantly higher than market hogs, and are sold at a younger age, thus incurring less feed and related finishing expenses, the profitability of the sale of a breeder hog is higher than that for the sale of a market hog. A significant reduction in the proportion of our sales that are breeder hogs would very likely significantly reduce our overall profit margin.

 

Government action in our industry. Because pork occupies such a central role in the Chinese diet, the government has occasionally taken action to prevent the price of pork from dropping below specified levels and has provided subsidies to companies engaged in hog farming. We benefit from this protection, and we could be harmed if the government terminated such practices. In addition, the government has taken actions to prevent the spread of diseases among livestock, including mandatory culls of affected animals. These actions have occasionally resulted in relative shortages, which tend to lead to higher prices for healthy animals, and could result in a reduction of our stock, thus reducing revenues and profit. Likewise it is possible that the government could implement some form of price controls that adversely impact our ability to price our products so as to recover increases in costs such as feed.

 

Competition and subsidies. While the hog farming industry in Hubei province and the Wuhan City area includes a large number of farms, many of those farms are smaller farms that sell relatively few hogs per year. We believe the incentives being given to farms that reach specified annual production capacities are likely to result in a consolidation of the industry. Our ability to increase our production capacity and thus to qualify for these incentives for our operations allows us to receive non-recurrent benefits from these subsidies, as well as to benefit from increased economies of scale in our operations.

 

 

Expansion. We believe we must further strengthen our livestock business by developing more diversified retail channels or developing our own pork processing business. If we fail to develop more diversified retail channels or create our own pork processing business, our revenue growth could slow.

 

Epidemic outbreaks. The outbreak of animal diseases could adversely affect our revenues. An occurrence of serious animal diseases, such as foot-and-mouth disease, or any outbreak of other epidemics in the PRC affecting animals or humans might result in material disruptions to our sales.

 

Taxes. We believe that the provisions of the PRC’s Enterprise Income Tax law currently provide our hog breeding operations with an exemption from PRC income taxes, VAT taxes and business service taxes. If this understanding is incorrect or if the law or interpretations of the law change, this could significantly impact the Company’s net operating results.

 

Costs and Expenses

 

We primarily incur the following costs and expenses:

 

Costs of goods sold. In raising hogs for sale, we incur a number of costs that represent the costs of goods sold. We must purchase hog feed, premix components, medicines and other supplies to grow our hogs and keep them healthy. In addition to these items, cost of goods sold includes expenses such as the amortization of the sows (referred to as biological assets), farm employee wages, water, electricity, equipment depreciation expense, maintenance expense, quarantine expense, equipment costs, insurance expense, and sewage charges.

 

General and administrative expenses. General and administrative expenses consist primarily of compensation expense for our corporate staff, professional fees (including consulting, audit and legal fees), communication costs, research and development costs, gasoline, welfare expenses, education expenses, travel and business hospitality expenses, land rent, and other office administrative and related expenses.

 

Sales and marketing costs. Sales and marketing costs include salaries, wages, and promotion expenses.

 

Factors Affecting Expenses

 

Supplies and commodity prices. The largest component of our expenses relates to the price of materials required to breed and raise hogs for sale. Specifically, while we ordinarily breed our own hogs, we periodically purchase breeding stock to improve our genetic breeding pool. Similarly, the prices of corn and soybean husks in China are important to our operations, because corn and soybean husks are the primary component of the hogs’ diet. To the extent the prices of these materials vary, our cost of goods will fluctuate, and we may not be able to recover higher costs by charging higher prices for our products. For this reason, we may be affected by droughts, floods, crop diseases and the like, which tend to make feed scarcer and thus more expensive.

 

Number of customers. The more customers we have, the greater the likelihood that related selling expenses, travel expenses and other similar costs will increase. At present, we sell substantially all of our hogs to a relatively small number of customers. We believe this concentration of customers in our hog sales has allowed us to focus our marketing and selling efforts.  

 

Number of farms we operate. We have acquired or constructed a number of hog farms in the last several years. As we operate more farms, our administrative expenses tend to increase in dollars terms.

 

Retail expenses. As we pursue a strategy of providing our branded product to retail outlets, we expect that we will face additional costs such as promotion and advertising expenses to establish our brand image and retail recognition.

 

 

In connection with the Enshi Black Hog program, we have agreed to incur various costs and contribute various amounts to cover the costs of different aspects of the program. Since 2011, we signed 7 joint development agreements, generally for periods of 10 years, whereby the Company, the relevant governmental agencies and the cooperatives will assist participating farmers to breed and raise Enshi black hogs which will be purchased by us for resale as meat hogs or retained or sold as breeders at our discretion. Under these agreements, we provided funding to local independent farmers to construct small-scale hog rearing facilities on which the farmers grow black hogs for sale to us. Pursuant to these joint development agreements, title to these small-scale hog rearing facilities belongs to us and the local cooperatives (and the individual farmers) have the right to use them. We have constructed or purchased $11.24 million dollars of hog rearing facilities and equipment that has been completed and is operational and included in plant and equipment. After providing the financing necessary for completion of the construction for 798 farms, we decided to temporarily stop providing capital to the program and focus on our black hog retail operations. The heavy rainfall in Wuhan in July 2016 damaged a number of these farms and as the result, the cooperation agreements with 172 damaged small-scale hog farms were terminated.

 

Results of Operations

 

The results of operations of Hang-ao, were reclassified as discontinued operations in the Company’s financial statements for the three months ended March 31, 2017 and 2016 based on the Company’s decision to focus on the hog industry and the sale of Hang-ao was made on December 23, 2016.

 

Comparison of the Results of Operations for the Three Months Ended March 31, 2017 and 2016

 

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

 

		For Three Months Ended March 31,												Percentage of
		2017				2016				Net Change				Change
Revenues		$	6,680,991			$	9,059,268			$	(2,378,277	)			(26.25	%)
Cost of goods sold			5,742,884				6,958,752				(1,215,868	)			(17.47	%)
Gross profit			938,107				2,100,516				(1,162,409	)			(55.34	%)
Selling, general and administrative  expenses			909,708				1,046,223				(136,515	)			(13.05	%)
Income from operations			28,399				1,054,293				(1,025,894	)			(97.31	%)
Interest income, net			3,824				81,843				(78,019	)			(95.33	%)
Other income (expenses), net			871				459				412				89.76	%
Total other income (expense)			4,695				82,302				(77,607	)			(94.30	%)
Income before income taxes			33,094				1,136,595				(1,103,501	)			(97.09	%)
Income taxes			—				—				—				n/a
Net income from continuing operations			33,094				1,136,595				(1,103,501	)			(97.09	%)
Loss from operations of discontinued component, net of taxes			—				(1,410,787	)			1,410,787				(100.00	%)
Net income (loss)		$	33,094			$	(274,192	)		$	307,286				(112.07	%)

 

The following table sets forth information as to the gross margin for our two business segments for the three months ended March 31, 2017 and 2016 (dollars in thousands).

 

		Three Months Ended March 31, 2017
		Hog Farming				Retail				Total
Revenues		$	5,974			$	707			$	6,681
Cost of goods sold		$	5,264			$	479			$	5,743
Gross profit		$	710			$	228			$	938
Gross margin %			12	%			32	%			14	%

 

		Three Months Ended March 31, 2016
		Hog Farming				Retail				Total
Revenues		$	8,639			$	420			$	9,059
Cost of goods sold		$	6,645			$	314			$	6,959
Gross profit		$	1,994			$	106			$	2,100
Gross margin %			23	%			25	%			23	%

 

 

Revenues. For the three months ended March 31, 2017, we had revenues of $6,680,991, as compared to revenues of $9,059,268 for the same period of 2016. Our revenues decreased by $2,378,277 or approximately 26.25%. This reduction in revenues reflected the impacts from the ongoing weak demands at the regular breeder hogs, reducing hog price at regular hogs and black hogs, and fewer black hogs available for sale after 2016 flood damage.

 

The tables below illustrate our sales of breeder hogs, market hogs, black hogs and specialty pork products for the three months ended March 31, 2017 and 2016.

 

Sales by Products

 

		Three Months Ended March 31,
		2017												2016
		No. of Hogs Sold				Average Price/Hog				Sales				No. of Hogs Sold				Average Price/Hog				Sales
Breeder Hogs– regular hogs			2,837			$	245			$	696,172				4,340			$	252			$	1,094,930
Market Hogs– regular hogs			16,792			$	169				2,845,478				15,930			$	219				3,481,052
Market Hogs– black hogs			10,588			$	230				2,431,889				14,842			$	274				4,063,080
Total			30,217			$	198			$	5,973,539				35,112			$	246			$	8,639,062

 

		Three Months Ended March 31,
		2017												2016
		Kilogram				Average Price/kg				Sales				Kilogram				Average Price/kg				Sales
Market Hogs–specialty black hog pork products			136,682			$	5			$	707,452				87,384			$	5			$	420,206
Total			136,682			$	5			$	707,452				87,384			$	5			$	420,206

 

As can be seen from the above, the number of “regular breeder hogs” and “black market hogs” decreased 35% and 29% in the year over year period. As the average price per hog decreased (3%) and (16%), respectively, our revenues from the sale of regular breeder hogs and black market hogs decreased $398,758 and $1,631,191. As also can be seen from the above, during the three months ended March 31, 2017 the number of regular market hogs sold slightly increased from the number sold in 2016, but the average price per hog decreased 23% year over year.

 

Starting in the fourth quarter of 2016, hog prices in China began a downtrend cycle mainly as a result of increasing numbers of large stated owned companies and Chinese publicly listed companies engaged in the hog farming industry which brought pressure on hog and pork prices and inflate the feed supply costs. We anticipate that the growth in the number of large well capitalized farms will increase competition pressure on small and mid-size hog farms. As the result, the numbers of small or mid-size hog farms may reduce which directly affect the demands for our breeder hogs. In addition, the 2016 flood brought significant damage to the area where hogs are raised in Enshi from which the local farmers have not recovered which will limit the number of black market hogs available for sale.

 

 

During the three months ended March 31, 2017, 136,682 kilograms of black hog meat were used to produce specialty pork products sold in our retail business a 56%increase from the comparable period of the prior year. This increase in volume coupled with stable prices for specialty pork products resulted in a 68% year over year increase in our revenues. The increase in our specialty black hog pork products was mainly from a new customer engaged in the electronic commercial platform selling various agricultural products to the public.

 

Cost of goods sold. For the three months ended March 31, 2017, cost of goods sold was $5,742,884 as compared to $6,958,752 for the same period of 2016, a decrease of $1,215,868, or 17.47%. The decrease in cost of goods sold primarily results from lower sale volume during the period, which was partly offset by increased feed costs.

 

Profit Margins. Our gross margin decreased to 14% in the three months ended March 31, 2017 from 23% in 2016. Our gross profit was $938,107 for 2017 as compared to $2,100,516 for 2016. This decrease in our gross profit reflected a decrease in gross profit of approximately $1.3 million at our Hog Farming segment, especially in our regular market hogs.

 

Our gross margins from our Hog Farming and Retail segments were 12% and 32%, respectively, in the first quarter of 2017 as compared to 23% and 25% in the comparable period of 2016. The reduction in our gross margin from our Hog Farming segment was due to the increased numbers of large regular market hogs, over 100 kilograms per hog, sold during the period. Large hogs normally require more feed to maintain their daily diet and are sold to pork dealers directly. During the first quarter of 2017, we sold more large regular market hogs to pork dealers than the same period in 2016. However, the reduced sale prices of regular market hogs and increased feed costs for maintaining large market hogs caused our gross margin to decrease. The improvement in our gross profit from the Retail segment was primarily the result of higher sale prices charged to our new customer.

 

Expenses. Selling, general and administrative expenses decreased by $136,515 in the first quarter of 2017 as compared to 2016. The decrease was primarily the result of cost control over employee payrolls.

 

Net Other Income(Expense).We had net other income of $4,695 during the three months ended March 31, 2017, compared to $82,302 in the first quarter of 2016, a decrease of $77,607, which was primarily due to an increase of $37,554 in interest expense.

 

Income Taxes.As an agricultural business, the Company is exempt from the Chinese income tax and our hog farming operations are exempt from VAT. With respect to our wholesale operations, we are engaged in breeding, processing, and distributing black hogs and black hog meats which are exempt from VAT taxes and corporate income tax as well.

 

Net Income (Loss). Our net income for the first quarter of 2017 and 2016 was $33,094 and ($274,192), respectively. Our net income from continuing operations, our Hog Farming and Retail segments, showed significant recession with a decrease of $1.1 million year over year. The operating results of our discontinued operations, Hang-ao, significantly generated a net loss of $1,410,787 in the first quarter of 2016 more than offsetting the performance of our 2016 continuing operations.

 

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 March 31, 2017 our working capital was $58,574,058 as compared to $57,497,640 at December 31, 2016.These funds are deposited in financial institutions located as follows:

 

		March 31, 2017								December 31, 2016
Country		Dollar				%				Dollar				%
United States		$	—				—			$	—				—
China			56,519,096				100	%			54,458,026				100	%
		$	56,519,096				100	%		$	54,458,026				100	%

 

 

Consolidated Statement of Cash Flows

 

		Three Months Ended March 31,
		2017				2016
Net cash provided by operating activities		$	1,635,397			$	3,236,823
Net cash used in investing activities			—				(1,610,201	)
Net cash used in financing activities			—				—
Exchange rate effect on cash			425,673				435,937
Net cash inflow		$	2,061,070			$	2,062,559

 

Cash Provided by Operating Activities

 

Net cash provided by operating activities in the three months ended March 31, 2017 totaled $1,635,397. Cash flow pertaining to operating activities benefited from net income of $33,094 depreciation and amortization of $0.7 million, amortization of prepaid expenses and long-term prepaid expenses of $50,198 and $25,750, a loss of $40,085 from the disposal of biological assets, a decrease in inventory of $623,252 and an increase in other payables of $154,000.

 

Cash from operating activities in the three months ended March 31, 2016 mainly consisted of our net income of $1,136,595 for the first quarter of 2016, supplemented by non-cash expenses of depreciation and amortization of $0.6 million, amortization of prepaid expenses and long-term prepaid expenses of $55,496 and $26,977, a loss of $185,099 from the disposal of biological assets, a decrease of $1,195,471 in inventories and a decrease of 125,558 in accounts receivable. In addition, we also reported net cash of $121,221 used in operating activities from discontinued operations.

 

Cash Provided by (Used in) Investing Activities

 

No cash was used or generated in our investment activities during the first quarter of 2017.

 

Net cash used by investing activities for the first quarter of 2016 totaled $1,610,201, primarily purchases of new equipment for our hog farms.

 

Cash Provided by (Used in) Financing Activities

 

No cash was used in or generated by financing activities in the three months ended March 31, 2017.

 

Financing activities in the first quarter of 2016 consisted of restricted cash of $6,115,787 returned from banks offset by the repayment of short-term loans in the same amount. The restricted cash was collateral for the issuance of bank acceptance notes.

 

Commitments for Capital Expenditures

 

Our anticipated capital requirements for the next twelve months relate to purchasing breeder hogs as well as additional investment in our retail segment to expand our marketing and distribution channels. We also expect to incur modest expenses in maintaining our hog farms. We believe that our cash flow from operations will be sufficient to meet our anticipated cash requirements for the next twelve months.

 

 

Contractual Obligations and Off Balance Sheet Items

 

Contractual Obligations

 

We have certain fixed contractual obligations for which we have estimated our future payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may cause actual payments to differ from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of March 31, 2017 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows 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		$	2,612			$	2,612			$	—			$	—			$	—
Others			—				—				—				—				—
		$	2,612			$	2,612			$	—			$	—			$	—

 

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 upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we 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. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial statements and our management’s discussion and analysis.

 

 

Accounts Receivable

 

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

As a basis for estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Inventories

 

Inventories, consisting principally of our hogs held for sale, are stated at the lower of cost, as determined by the weighted-average method, or market value. We compare the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value if that is lower. Costs of raised animals include proportionate costs of breeding, including amortization of the breeding herd or biological assets, plus the costs of feed and other maintenance. The price of hogs could fluctuate upward or downward. If prices were to decrease below the amounts we use in determining the carrying value of our inventory, any profit we might achieve on the sale of our inventories would be less than anticipated. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

 

Plant and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

 

Estimated useful lives of the Company’s assets are as follows:

 

		Useful Life
Buildings		20 years
Vehicles		5-10 years
Office equipment		3-5 years
Research equipment		3-20 years
Production equipment		3-20 years

 

 

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 disposition.

 

We examine 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. We recognize 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

 

Biological Assets

 

Biological assets consist primarily of hogs purchased or selected from the Company’s own production for breeding and farrowing.The costs to purchase and cultivate breeding hogs and the expenditures related to labor and materials to feed breeding hogs until they become commercially productive and breedable are capitalized. When breeding hogs are entered into breeding and farrowing, amortization of the costs incurred until they became commercially productive commences. The estimated production life for breeding hogs is three years, and the costs are amortized to a residual value, currently $76 (RMB 500). After the breeding hogs have completed their production life of breeding, these breeding hogs are then transferred into inventory as the vast majority of these breeding hogs will then be sold for meat processing. Expenses incurred maintaining breeding hogs during gestation until piglets are weaned are capitalized into inventory and included in Work in process—biological assets, a component of inventories. If these breeding hogs produce piglets which are deemed appropriate for internal breeding purposes, the gestation and raising costs until weaned for these piglets are then allocated into biological assets.

 

Amortized expenses pertaining to biological assets are included in inventory costs for those piglets to be sold and ultimately become a component of cost of goods sold.  Similar to other assets, the failure of our biological assets to be serviceable over the entirety of their anticipated useful lives or to be sold at their anticipated residual value, will negatively impact our operating results.

 

Intangible Assets

 

Included in the intangible assets are our land use rights and acquired distribution network. According to the laws of the PRC, the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Intangible assets are being amortized using the straight-line method over their lease terms or estimated useful life.

 

The Company carries intangible assetsat cost less accumulated amortization. In accordance with US GAAP, the Company examines the possibility of decreases in the value of intangible assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company computes amortization using the straight-line method over the 50 year life of the land use rightsand 10 year life of acquired distribution network.

 

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 generates revenues from the business of breeding, raising, and selling hogs for use in Chinese pork meat production and the sale of hogs for breeding by other hog producers.

 

 

Revenues generated from the sales of breeding and meat hogs and specialty pork are recognized when these products are delivered to customers in accordance with previously agreed upon pricing and delivery arrangements, and the collectability of these sales is reasonably assured. Cash payment, which sometimes is in the form of wired cash transfers to the Company’s bank account, is usually received by the Company at the time the hogs are sold. Sold hogs and specialty pork are not returnable and accordingly, no provision has been made for returnable goods. The customers are responsible for the shipping of the hogs that they have purchased.

 

Currency Exchange Rates

 

Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries is the RMB. All of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

 

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiaries. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

 

Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.

 

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.   Not applicable as the Company is a smaller reporting company.

Item 4.

Controls and Procedures

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Co-Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including the Co-Chief Executive Officers and Chief Financial Officer, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also 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 upon their evaluation, our management, including the Co-Chief Executive Officers and Chief Financial Officer, has concluded that our Disclosure Controls are effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II     OTHER INFORMATION

 

Item 1A.

Risk Factors

 

Our business is subject to numerous risks and uncertainties including but not limited to those discussed in "Risk Factors" in our Annual Report on Form 10-K for fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on March 14, 2017 which are incorporated by reference into this report.

 

Item 6.

Exhibits

 

The following exhibits are filed herewith:

 

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		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				Aoxin Tianli Group, INC.
May 12, 2017				By:		/s/ Wocheng Liu
						Wocheng Liu Co-Chief Executive Officer
May 12, 2017				By:		/s/ Chun Choi Law
						Chun Choi Law Chief Financial Officer (Principal Financial and Accounting Officer)

 

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