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 June 30, 2018

 

¨	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

 

 

RENMIN 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 August 10, 2018, the Registrant had outstanding 7,983,745 shares of common stock, par value $0.004 per share.

 

  

RENMIN TIANLI GROUP, INC.

FORM 10-Q

 

INDEX

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS				2
PART I    FINANCIAL INFORMATION				3
Item 1.		Financial Statements.		3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.		Quantitative and Qualitative Disclosures about Market Risk.		33
Item 4.		Controls and Procedures		33
PART II    OTHER INFORMATION				34
Item 1A.		Risk Factors		34
Item 6.		Exhibits		34

 

 

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, 2017 filed on March 28, 2018.

 

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.

 

RENMIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(AMOUNTS EXPRESSED IN US DOLLARS)

 

		June 30,				December 31,
		2018				2017
			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	62,861,569			$	62,636,484
Accounts receivable, net			39,314				52,276
Inventories, net			5,942,313				5,633,005
Prepaid expenses			53,151				3,038
Other receivables, net			304,502				308,454
Total Current Assets			69,200,849				68,633,257
Long-term prepaid expenses, net			1,177,439				1,246,726
Plant and equipment, net			18,615,835				20,033,880
Biological assets, net			1,476,722				1,821,780
Intangible assets, net			2,181,139				2,324,787
Total Assets		$	92,651,984			$	94,060,430
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term loans		$	2,115,123			$	2,142,573
Accounts payable and accrued payables			17,762				3,956
Due to related party			67,525				—
Other payables			1,337,906				1,370,305
Total Current Liabilities			3,538,316				3,516,834
Stockholders' Equity:
Common stock ($0.004 par value, 25,000,000 shares authorized, 7,983,745 shares issued and outstanding as of June 30, 2018 and December 31, 2017)			31,934				31,934
Additional paid in capital			61,485,162				61,395,579
Statutory surplus reserves			2,416,647				2,416,647
Retained earnings			27,583,802				27,944,383
Accumulated other comprehensive income			(2,403,877	)			(1,244,947	)
Total Stockholders' Equity			89,113,668				90,543,596
Total Liabilities and Stockholders' Equity		$	92,651,984			$	94,060,430

 

See accompanying notes to consolidated financial statements.

 

 

RENMIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(AMOUNTS EXPRESSED IN US DOLLARS)

(UNAUDITED)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2018				2017				2018				2017
Revenues		$	6,178,554			$	6,222,160			$	13,408,085			$	12,903,151
Cost of goods sold			5,990,615				5,387,139				12,050,218				11,130,023
Gross profit			187,939				835,021				1,357,867				1,773,128
Operating expenses:
General and administrative expenses			545,471				701,029				1,595,555				1,532,989
Selling expenses			79,085				78,580				159,958				156,328
Total operating expenses			624,556				779,609				1,755,513				1,689,317
Income (loss) from operations			(436,617	)			55,412				(397,646	)			83,811
Other income:
Interest income, net			17,421				7,845				34,866				11,669
Other income, net			1,098				1,165				2,199				2,036
Total other income			18,519				9,010				37,065				13,705
Income (loss) before income taxes			(418,098	)			64,422				(360,581	)			97,516
Income taxes			—				—				—				—
Net income (Loss)			(418,098	)			64,422				(360,581	)			97,516
Other comprehensive income (loss):
Unrealized foreign currency translation adjustment			(4,816,499	)			1,423,687				(1,158,930	)			2,080,452
Comprehensive income (loss)		$	(5,234,597	)		$	1,488,109			$	(1,519,511	)		$	2,177,968
Earning (loss) per share - basic and diluted:
Weighted-average shares outstanding, basic and diluted			7,983,745				7,987,495				7,983,745				7,987,870
Basic & diluted		$	(0.05	)		$	0.01			$	(0.05	)		$	0.01

 

See accompanying notes to consolidated financial statements. 

 

 

RENMIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS EXPRESSED IN US DOLLARS)

(UNAUDITED)

 

		For the Six Months Ended June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(360,581	)		$	97,516
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization			1,509,781				1,418,330
Amortization of prepaid expenses			30,398				94,422
Amortization of long-term prepaid expenses			55,433				51,606
Stock-based compensation			89,583				4,015
Loss from disposal of biological assets			20,735				67,945
Changes in operating assets and liabilities:
Accounts receivable			12,781				(9,194	)
Inventories			(408,517	)			892,224
Prepaid expenses			(82,543	)			(19,756	)
Other receivables			—				3,200
Long-term prepaid expenses			—				(78,683	)
Accounts payable and accrued payables			14,407				14,212
Advances from customers			—				—
Other payables			121,803				105,441
Net cash provided by operating activities			1,003,280				2,641,278
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of biological assets			—				—
Purchase of plant and equipment			(1,649	)			—
Net cash used in investing activities			(1,649	)			—
CASH FLOWS FROM FINANCING ACTIVITIES
Due to (from) related party			67,525				—
Proceeds from short-term loans			—				2,036,317
Repayment of short-term loans			—				(2,618,122	)
Net cash used in financing activities			67,525				(581,805	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(844,071	)			1,373,600
NET INCREASE IN CASH			225,085				3,433,073
CASH, BEGINNING OF PERIOD			62,636,484				54,458,026
CASH, END OF PERIOD		$	62,861,569			$	57,891,099
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest paid		$	63,499			$	72,817
Income tax paid		$	—			$	—
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
Inventories received from prior year prepayments		$	—			$	751,068
Inventories transferred to biological assets		$	11,880			$	421,933
Cancelation of shares related to employees' compensation		$	—			$	18

 

See accompanying notes to consolidated financial statements. 

 

 

RENMIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

 

The consolidated financial statements include the financial statements of Renmin Tianli Group, Inc. (referred to herein as “Renmin Tianli”) (formerly known as “Aoxin Tianli Group, Inc.”); 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”); WFOE’s wholly-owned subsidiary, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“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, Renmin 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”) the remaining 5% equity interest was 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 consummated equity transfer agreements for the sale of its 95% equity interest in OV Orange for a purchase price of RMB 47.5 million ($7.3 million). 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 purchase price of RMB 26 million ($3.9 million). All of Renmin Tianli’s operations are conducted by Fengze and Tianzhili whose results of operations are consolidated into those of Renmin Tianli. HCS, WFOE, Fengze, Tianzhili, and Hang-ao are sometimes referred to as the “subsidiaries”. Renmin Tianli and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

 

Renmin 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 eight production farms in areas around Wuhan City, within Hubei Province, People’s Republic of China (“PRC”). Renmin 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, Renmin 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 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 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. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant intercompany transactions and balances have been eliminated.

 

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, and Tianzhili. All material intercompany accounts and transactions have been eliminated in consolidation.

 

Cash

 

Cash and cash equivalents 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. Restricted cash is excluded from cash and cash equivalents. The Company maintained cash and cash equivalents with various financial institutions in the PRC. As of June 30, 2018 and December 31, 2017, balances in banks in the PRC were $62,861,569 and $62,636,484, 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 accrued no allowance for doubtful accounts at June 30, 2018 and December 31, 2017.

 

 

Inventories

 

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products, are stated at the lower of cost, as determined by the weighted-average method, or market. 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 recorded no inventory reserve at June 30, 2018 and December 31, 2017, respectively.

 

Prepaid Expenses

 

Prepaid expenses at June 30, 2018 and December 31, 2017 totaled $53,151 and $3,038, 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 six months ended June 30, 2018 and 2017, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expense of $30,398 and $94,422, respectively. For the three months ended June 30, 2018 and 2017, the amortization of prepaid expenses was $23,628 and $44,224, respectively.

 

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 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 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 breeding hogs have completed their production life of breeding, they are transferred into inventory as the vast majority of breeding hogs are then 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 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 six months ended June 30, 2018 and 2017, 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.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Topic 606, using the modified retrospective transition method applied to any contracts which were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 605. There was no impact to revenue and to cost of revenue for the six months ended June 30, 2018 compared to the same period in 2017. There was no adjustment to beginning retained earnings on January 1, 2018.

 

 

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.

 

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. 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.

 

We determine revenue recognition through the following steps:

 

•

identification of the contract, or contracts, with a customer;

•

identification of the performance obligations in the contract;

•

determination of the transaction price;

•

allocation of the transaction price to the performance obligations in the contract; and

•

recognition of revenue when, or as, we satisfy a performance obligation.

 

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.

 

As of June 30, 2018 and December 31, 2017, 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 June 30, 2018 and December 31, 2017.

 

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. Renmin 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. 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

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal 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 six month periods ended June 30, 2018 and 2017. The calculation of basic and diluted earnings per share is net of tax.

 

Foreign Currency Translation

 

As of June 30, 2018 and December 31, 2017, the accounts of Renmin 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 6.619 and RMB 6.534 per US dollar as of June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018 and 2017, the transactions of Renmin Tianli were denominated and recorded in RMB and are translated at the average rates of exchange for the period. These rates were RMB 6.366 and RMB 6.889 per US dollar for the six months ended June 30, 2018 and 2017, 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.

 

Stock Based Compensation

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant. For the six month periods ended June 30, 2018 and 2017, the Company recorded $89,583 and $4,015 as its stock-based compensation. .For the three months ended June 30, 2018 and 2017, the Company had $89,583 and $2,007 as stock based compensation.

 

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 June 30, 2018 and December 31, 2017, 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 May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605). The Company adopted Topic 606 as of January 1, 2018. The new standard did not have a material impact on its condensed consolidated financial statements

 

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies 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. The Company adopted the new standard effective January 1, 2018. The new standard did not have a material impact on its condensed consolidated financial statements.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted the new standard effective January 1, 2018. The new standard did not have a material impact on its condensed consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The Company adopted the new standard effective January 1, 2018 on a prospective basis. The new standard did not have a material impact on its condensed consolidated financial statements.

 

 

NOTE 3—ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

		June 30,				December 31,
		2018				2017
Accounts receivable		$	39,314			$	52,276
Less: Allowance for doubtful accounts			—				—
		$	39,314			$	52,276

 

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 six months ended June 30, 2018 and 2017, the Company reported no allowance for doubtful accounts.

 

NOTE 4—INVENTORIES

 

Inventories consisted of the following:

 

		June 30,				December 31,
		2018				2017
Raw materials—hogs		$	548,067			$	477,436
Work in process—biological assets			2,746,535				2,587,512
Infant hogs			2,647,711				2,568,057
Less: inventory reserve			—				—
		$	5,942,313			$	5,633,005

 

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 June 30, 2018 and December 31, 2017, the Company did not write down the value of its inventories. For the six months ended June 30, 2018 and 2017, 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—OTHER RECEIVABLES

 

At June 30, 2018 and December 31, 2017, the Company reported other receivables of $304,502 and $308,454, respectively, including no allowance for doubtful receivables. The balances as of June 30, 2018 and December 31, 2017 included a deposit of $302,160 and $306,082 to a professional loan guarantee service company for short-term bank loans. During the six months ended June 30, 2018 and 2017, the Company reported no bad debt expense from the allowance for doubtful accounts.

 

NOTE 6—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 expenses are being amortized using the straight-line method over the lease term of 21.33 years.

 

Long-term prepaid expenses at June 30, 2018 and December 31, 2017 are as follows:

 

		June 30,				December 31,
		2018				2017
Prepaid rental expenses		$	1,776,177			$	1,844,537
Less: Accumulated amortization			(598,738	)			(597,811	)
		$	1,177,439			$	1,246,726

 

 

Amortization expense for the six months ended June 30, 2018 and 2017 was $55,433 and $51,606, respectively. Amortization expense for the three months ended June 30, 2018 and 2017 was $27,682 and $25,856, respectively. The estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter is $110,866 per annum.

 

NOTE 7—PLANT AND EQUIPMENT

 

Plant and equipment consist of the following:

 

		June 30,				December 31,
		2018				2017
Buildings		$	27,206,725			$	27,559,810
Vehicles			443,493				449,248
Office equipment			473,309				477,843
Production equipment			5,163,253				5,230,262
			33,286,780				33,717,163
Less: Accumulated depreciation			(14,670,945	)			(13,683,283	)
		$	18,615,835			$	20,033,880

Depreciation expense was $1,209,185 and $1,149,093 for the six month periods ended June 30, 2018 and 2017. Depreciation expense was $603,670 and $573,459 for the three months ended June 30, 2018 and 2017, respectively.

 

NOTE 8—BIOLOGICAL ASSETS

 

Biological assets consist of the following:

 

		June 30,				December 31,
		2018				2017
Breeding hogs		$	2,970,129			$	3,050,446
Less: Accumulated amortization			(1,493,407	)			(1,228,666	)
		$	1,476,722			$	1,821,780

As of June 30, 2018 and December 31, 2017, $214,026 and $263,580 of breeding hogs was a breed of black hogs. Amortization of the biological assets, included as a component of inventory, for the six month periods ended June 30, 2018 and 2017 was $325,649 and $306,525, respectively. Amortization of the biological assets for the three month periods ended June 30, 2018 and 2017 was $159,720 and $159,503, respectively.

 

NOTE 9—INTANGIBLE ASSETS

 

Included in the intangible assets are land use rights and an 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 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. As of June 30, 2018 and December 31, 2017, the Company reported no impairment reserve for its intangible assets, respectively.

 

 

Intangible assets at June 30, 2018 and December 31, 2017 are as follows:

 

		June 30,				December 31,
		2018				2017
Land use rights		$	1,601,723			$	1,622,509
Distribution network			1,791,431				1,814,680
Less: Accumulated amortization			(1,212,015	)			(1,112,402	)
		$	2,181,139			$	2,324,787

 

Amortization expense for the six month periods ended June 30, 2018 and 2017 was $118,389 and $94,908, respectively. Amortization expense for the three month periods ended June 30, 2018 and 2017 was $59,305 and $40,379, respectively.

 

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

 

Year				Amount
	2018 (remaining)			$	117,903
	2019			$	236,293
	2020			$	236,293
	2021			$	236,293
	2022			$	236,293
	Thereafter			$	1,118,064

 

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

 

		Hog Farming				Retail				Total
Land use rights		$	1,601,723			$	—			$	1,601,723
Distribution network			—				1,791,431				1,791,431
Less: accumulated amortization			(450,655	)			(761,360	)			(1,212,015	)
Balance as of June 30, 2018		$	1,151,068			$	1,030,071			$	2,181,139

 

		Hog Farming				Retail				Total
Land use rights		$	1,622,509			$	—			$	1,622,509
Distribution network			—				1,814,680				1,814,680
Less: accumulated amortization			(431,897	)			(680,505	)			(1,112,402	)
Balance as of December 31, 2017		$	1,190,612			$	1,134,175			$	2,324,787

 

NOTE 10—SHORT-TERM LOANS

 

As of June 30, 2018 and December 31, 2017, the short-term loans are as follows:

 

		June 30, 2018				December 31, 2017
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 5.66%, due by June 21, 2018, guaranteed by Wuhan Agriculture Guarantee Co., Ltd. (As of the date of this report, the loan was still in the renewing process.)		$	1,057,562			$	1,071,286
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 5.66%, due by June 22, 2018, guaranteed by Wuhan Agriculture Guarantee Co., Ltd. (As of the date of this report, the loan was still in the renewing process.)			1,057,561				1,071,287
		$	2,115,123			$	2,142,573

 

 

No guarantee service charges were recorded as interest expense for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018 and December 31, 2017, the Company made a cash deposit of $302,160 and $306,082 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 11—OTHER PAYABLES

 

Other payables at June 30, 2018 and December 31, 2017 were $1,337,906 and $1,370,305, respectively. Included in other payables as of June 30, 2018 and December 31, 2017 were mainly deposit payables of $1,113,603 and $1,267,805 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 June 30, 2018 and December 31, 2017, deposits from farmers were $1,113,603 and $1,267,805, 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.

 

For the six months ended June 30, 2018 and 2017, the amortization of deposit payables was $143,442 and $132,196, respectively. The amortization of deposit payables for the three months ended June 30, 2018 and 2017 was $71,631 and $66,543. The following table sets forth the aggregate future amortization expected for the next five years:

 

				Amortization
	2018 (remaining)			$	143,442
	2019			$	286,884
	2020			$	286,884
	2021			$	286,884
	2022			$	109,509

 

NOTE 12—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. As of June 30, 2018 and December 31, 2017, the Company had due to related party of $67,525 and $0, respectively.

 

NOTE 13—CAPITAL STOCK

 

The Company is authorized to issue 25,000,000 shares of common stock, $0.004 par value, and as of June 30, 2018 and December 31, 2017, it had 7,983,745 shares outstanding, respectively.

 

 

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 six months ended June 30, 2018 and 2017, the Company reported an amortization expense of $0 and $4,015, respectively. For the three month periods ended June 30, 2018 and 2017, the amortization expense was $0 and $2,007.

 

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 six months ended June 30, 2018 and 2017, the Company reported no amortization expense.

 

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 and warrants outstanding as of June 30, 2018 and December 31, 2017 and the activity during the six months ended June 30, 2018.

 

				Options				Weighted Average Exercise Price
	Outstanding as of December 31, 2017				15,750			$	10.00
	Granted				—				—
	Exercised				—				—
	Forfeited				—				—
	Outstanding at June 30, 2018				15,750			$	10.00
	Exercisable at June 30, 2018				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 3.25 years. The market value of the Company’s common stock was $2.81 and $2.95 as of June 30, 2018 and December 31, 2017, respectively. The intrinsic value of the outstanding options as of June 30, 2018 and December 31, 2017 was $0.

 

 

NOTE 14—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 as of June 30, 2018 and December 31, 2017.

 

Credit risk and major customers

 

As of June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018 and 2017, 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 15—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 has been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred. The Company has not accounted for any loss contingencies as of June 30, 2018 and December 31, 2017.

 

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 six month periods ended June 30, 2018 and 2017 was $74,285 and $47,208, respectively.

 

 

The following table sets forth the aggregate minimum future annual rental commitments at June 30, 2018 under all non-cancelable leases for years ending December 31:

 

				Operating Leases
	2018 (remaining)			$	74,285
	2019			$	153,296
	2020			$	158,258
	2021			$	54,057
	2022			$	54,057
	Thereafter			$	1,212,035

 

NOTE 16—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 June 30, 2018, 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 six months and three months ended June 30, 2018 and 2017 is set forth below.

 

Six Months Ended June 30, 2018		Hog Farming				Retail				Consolidated
Segment revenues		$	12,556,229			$	851,856			$	13,408,085
Inter-segment revenues			—				—				—
Revenues from external customers		$	12,556,229			$	851,856			$	13,408,085
Segment income (loss)		$	(22,672	)		$	25,018			$	2,346
Unallocated corporate loss											(362,927	)
Loss before income taxes											(360,581	)
Income taxes											—
Net loss										$	(360,581	)
Other segment information:
Depreciation and amortization		$	1,403,006			$	106,775			$	1,509,781

 

Six Months Ended June 30,  2017		Hog Farming				Retail				Consolidated
Segment revenues		$	11,534,944			$	1,368,207			$	12,903,151
Inter-segment revenues			—				—				—
Revenues from external customers		$	11,534,944			$	1,368,207			$	12,903,151
Segment income		$	258,202			$	253,162			$	511,364
Unallocated corporate loss											(413,848	)
Income before income taxes from continuing operations											97,516
Income taxes											—
Net income										$	97,516
Other segment information:
Depreciation and amortization		$	1,321,201			$	97,129			$	1,418,330

 

 

Three Months Ended June 30, 2018		Hog Farming				Retail				Consolidated
Segment revenues		$	5,889,001			$	289,553			$	6,178,554
Inter-segment revenues			—				—				—
Revenues from external customers		$	5,889,001			$	289,553			$	6,178,554
Segment loss		$	(424,919	)		$	(21,648	)		$	(446,567	)
Unallocated corporate income											28,469
Loss before income taxes											(418,098	)
Income taxes											—
Net loss										$	(418,098	)
Other segment information:
Depreciation and amortization		$	704,574			$	46,490			$	751,064

 

Three Months Ended June 30, 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

 

Condensed financial status with respect to these reportable business segments as of June 30, 2018 and December 31, 2017 is as follows:

 

As of June 30, 2018		Hog Farming				Retail				Consolidated
Total segment assets		$	91,413,065			$	1,232,519			$	92,645,584
Other unallocated corporate assets											6,400
										$	92,651,984
Other segment information:
Expenditures for segment assets		$	1,649			$	—			$	1,649
As of December 31, 2017
Total segment assets		$	92,683,533			$	1,370,283			$	94,053,816
Other unallocated corporate assets											6,614
										$	94,060,430
Other segment information:
Expenditures for segment assets		$	103,676			$	—			$	103,676

 

 

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, 2017. 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.

 

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 slaughter houses 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.

 

0Taxes. 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

 

Comparison of the Results of Operations for the Six Months Ended June 30, 2018 and 2017

 

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

 

		For Six Months Ended June 30,												Percentage of
		2018				2017				Net Change				Change
Revenues		$	13,408,085			$	12,903,151			$	504,934				3.91%
Cost of goods sold			12,050,218				11,130,023				920,195				8.27%
Gross profit			1,357,867				1,773,128				(415,261	)			(23.42%)
Selling, general and administrative  expenses			1,755,513				1,689,317				66,196				3.92%
Income (loss) from operations			(397,646	)			83,811				(481,457	)			(N/A)
Interest income, net			34,866				11,669				23,197				198.79%
Other income, net			2,199				2,036				163				8.01%
Total other income			37,065				13,705				23,360				170.45%
Income (loss) before income taxes			(360,581	)			97,516				(458,097	)			(N/A)
Income taxes			—				—				—				n/a
Net income (loss)		$	(360,581	)		$	97,516			$	(458,097	)			(N/A)

 

The following table sets forth information as to the gross margin for our business segments for the six months ended June 30, 2018 and 2017 (dollars in thousands).

 

		Six Months Ended June 30, 2018
		Hog Farming				Retail				Total
Revenues		$	12,556			$	852			$	13,408
Cost of goods sold		$	11,444			$	606			$	12,050
Gross profit		$	1,112			$	246			$	1,358
Gross margin %			9	%			29	%			10	%

 

		Six Months Ended June 30, 2017
		Hog Farming				Retail				Total
Revenues		$	11,535			$	1,368			$	12,903
Cost of goods sold		$	10,216			$	914			$	11,130
Gross profit		$	1,319			$	454			$	1,773
Gross margin %			11	%			33	%			14	%

 

Revenues. For the six months ended June 30, 2018, we had revenues of $13,408,085, as compared to revenues of $12,903,151 for the same period of 2017. Our revenues increased by $504,934 or approximately 3.91%. This increase in revenues reflected the increase in the volume of hogs sold which offset the decreases in the sales price for market hogs and the reduced volume in the sales to retail of black hog meat products.

 

During the first 6 months of 2018, the sales volume of regular breeder hogs and regular market hogs sold increased 23% and 30%, respectively, over the comparable period of 2017. However, the sales price of regular market hogs and black market hogs decreased 11% and 14% year over year.

 

The tables below illustrates our sales of breeder hogs, market hogs, black hogs and specialty pork products for the six months ended June 30, 2018 and 2017.

 

Sales by Products

 

		Six Months Ended June 30,
		2018												2017
		No. of Hogs Sold				Average Price/Hog				Sales				No. of Hogs Sold				Average Price/Hog				Sales
Breeder Hogs– regular hogs			7,616			$	264			$	2,007,725				6,181			$	246			$	1,522,951
Market Hogs– regular hogs			45,231			$	140				6,312,698				34,716			$	156				5,427,267
Market Hogs– black hogs			23,125			$	183				4,235,806				21,499			$	213				4,584,726
Total			75,972			$	165			$	12,556,229				62,396			$	185			$	11,534,944

 

 

		Six Months Ended June 30,
		2018												2017
		Kilogram				Average Price/kg				Sales				Kilogram				Average Price/kg				Sales
Market Hogs–specialty black hog pork products			172,790			$	5			$	851,856				274,804			$	5			$	1,368,207
Total			172,790			$	5			$	851,856				274,804			$	5			$	1,368,207

 

As can be seen from the above, the number of “regular breeder hogs” and “regular market hogs” increased 23% and 30% in the first 6 months of 2018 over the same period of 2017. As the average price per breeder hog increased 7% and the price per market hog decreased 11%, respectively, our revenues from the sale of regular breeder hogs and regular market hogs increased $484,774 and $885,431. As also can be seen from the above, during the six months ended June 30, 2018 the number of black market hogs sold increased 8% from the number sold in 2017, but the average price per hog decreased 14% in the year over year period.

 

During the six months ended June 30, 2018, 172,790 kilograms of black hog meat were used to produce specialty pork products sold in our retail business a 37% decrease from the comparable period of the prior year. This decrease in volume coupled with the stable trend in the price received for specialty pork products resulted in a 38% year over year decrease in our revenues.

 

Cost of goods sold. For the six months ended June 30, 2018, cost of goods sold was $12,050,218 as compared to $11,130,023 for the same period of 2017, an increase of $920,195, or 8.27%. The increase in cost of goods sold primarily results from increases in feed costs. Cost of goods sold for our Retail segment decreased 34% year over year as a result of the decrease in volume.

 

Profit Margin. Our gross margin decreased to 10% in the six months ended June 30, 2018 from 14% in 2017. Our gross profit was $1,357,867 for 2018 as compared to $1,773,128 for 2017. This decrease in our gross profit mainly reflects the impacts of reduced sales prices and increased feed costs.

 

Our gross margins from our Hog Farming and Retail segments were 9% and 29%, respectively, in the first six months of 2018 as compared to 11% and 33% in the comparable period of 2017. The reduction in our gross profit from our Hog Farming and Retail segments was due to the factors which impacted our profit margin.

 

Expenses. Selling, general and administrative expenses slightly increased by $66,196 in the first six months of 2018 as compared to 2017.

 

Net Other Income. We had net other income of $37,065 during the six months ended June 30, 2018, compared to net income of $13,705 in the same period of 2017, a minor increase of $23,360.

 

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 (loss) for the six months ended June 30, 2018 and 2017 was ($360,581) and $97,516, respectively.

 

 

Comparison of the Results of Operations for the Three Months Ended June 30, 2018 and 2017

 

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

 

		For Three Months Ended June 30,												Percentage of
		2018				2017				Net Change				Change
Revenues		$	6,178,554			$	6,222,160			$	(43,606	)			(0.70%)
Cost of goods sold			5,990,615				5,387,139				603,476				11.20%
Gross profit			187,939				835,021				(647,082	)			(77.49%)
Selling, general and administrative  expenses			624,556				779,609				(155,053	)			(19.89%)
Income (loss) from operations			(436,617	)			55,412				(492,029	)			(887.95%)
Interest income, net			17,421				7,845				9,576				122.07%
Other income, net			1,098				1,165				(67	)			(5.75%)
Total other income			18,519				9,010				9,509				105.54%
Income (loss) before income taxes			(418,098	)			64,422				(482,520	)			(749.00%)
Income taxes			—				—				—				n/a
Net income (loss)		$	(418,098	)		$	64,422			$	(482,520	)			(749.00%)

 

The following table sets forth information as to the gross margin for our business segments for the three months ended June 30, 2018 and 2017 (dollars in thousands).

 

		Three Months Ended June 30, 2018
		Hog Farming				Retail				Total
Revenues		$	5,889			$	289			$	6,178
Cost of goods sold		$	5,765			$	226			$	5,991
Gross profit		$	124			$	63			$	187
Gross margin %			2	%			22	%			3	%

 

		Three Months Ended June 30, 2017
		Hog Farming				Retail				Total
Revenues		$	5,561			$	661			$	6,222
Cost of goods sold		$	4,951			$	436			$	5,387
Gross profit		$	610			$	225			$	835
Gross margin %			11	%			34	%			13	%

 

Revenues. For the three months ended June 30, 2018, we had revenues of $6,178,554, as compared to revenues of $6,222,160 for the same period of 2017. Our revenues slightly decreased by $43,606 or approximately 0.70%. This decrease in revenues reflected the combined impacts from the increase in the sales volume of our regular hogs and black market hogs offset by the decrease in the sales price of regular and black market hogs.

 

 

The tables below illustrate our sales of breeder hogs, market hogs, black hogs and specialty pork products for the three months ended June 30, 2018 and 2017.

 

Sales by Products

 

		Three Months Ended June 30,
		2018												2017
		No. of Hogs Sold				Average Price/Hog				Sales				No. of Hogs Sold				Average Price/Hog				Sales
Breeder Hogs– regular hogs			3,806			$	262			$	999,044				3,344			$	247			$	826,779
Market Hogs– regular hogs			22,923			$	128				2,928,869				17,924			$	144				2,581,789
Market Hogs– black hogs			11,870			$	165				1,961,088				10,911			$	197				2,152,837
Total			38,599			$	153			$	5,889,001				32,179			$	173			$	5,561,405

 

		Three Months Ended June 30,
		2018												2017
		Kilogram				Average Price/kg				Sales				Kilogram				Average Price/kg				Sales
Market Hogs–specialty black hog pork products			65,319			$	4			$	289,553				138,123			$	5			$	660,755
Total			65,319			$	4			$	289,553				138,123			$	5			$	660,755

 

As can be seen from the above, the number of “regular breeder hogs” and “regular market hogs” increased 14% and 28% in the year over year period. As the average price per breeder hog increased 6% and per marker hog decreased 11%, respectively, our revenues from the sale of regular breeder hogs and regular market hogs increased $172,265 and $347,080. As also can be seen from the above, during the three months ended June 30, 2018 the number of black market hogs sold increased 9% from the number sold in 2017, but the average price per hog decreased 16% in the year over year period.

 

During the three months ended June 30, 2018, 65,319 kilograms of black hog meat were used to produce specialty pork products sold in our retail business a 53% decrease from the comparable period of the prior year. This decrease in volume coupled with the downward trend in the price received for specialty pork products resulted in a 56% year over year decrease in our revenues.

 

Cost of goods sold. For the three months ended June 30, 2018, cost of goods sold was $5,990,615 as compared to $5,387,139 for the same period of 2017, an increase of $603,476, or 11.20%. The increase in cost of goods sold primarily results from the increase in feed costs.

 

Profit Margins. Our gross margin decreased to 3% in the three months ended June 30, 2018 from 13% in the comparable period of 2017. Our gross profit was $187,939 for 2018 as compared to $835,021 for 2017. This decrease in our gross profit mainly reflected the impacts from downward sales prices and increased feed costs.

 

 

Our gross margins from our Hog Farming and Retail segments were 2% and 22%, respectively, in the second quarter of 2018 as compared to 11% and 34% in the comparable period of 2017. The reduction in our gross profit from our Hog Farming and Retail segments was due to reduced sales prices and increased feed costs.

 

Expenses. Selling, general and administrative expenses decreased by $155,053 in the second quarter of 2018 as compared to 2017. The decrease was primarily the result of our cost control over employee payrolls and insurance fees.

 

Net Other Income. We had net other income of $18,519 during the three months ended June 30, 2018, compared to a net other income of $9,010 in the same period of 2017, a minor increase of $9,509.

 

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 (loss) for the second quarter of 2018 and 2017 was ($418,098) and $64,422, respectively.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At June 30, 2018 our working capital was $65,662,533 as compared to $65,116,423 at December 31, 2017. These funds are deposited in financial institutions located as follows:

 

		June 30, 2018								December 31, 2017
Country		Dollar				%				Dollar				%
United States		$	—				—			$	—				—
China			62,861,569				100	%			62,636,484				100	%
		$	62,861,569				100	%		$	62,636,484				100	%

 

Consolidated Statement of Cash Flows

 

		Six Months Ended June 30,
		2018				2017
Net cash provided by operating activities		$	1,003,280			$	2,641,278
Net cash used in investing activities			(1,649	)			—
Net cash provided by (used in) financing activities			67,525				(581,805	)
Exchange rate effect on cash			(844,071	)			1,373,600
Net cash inflow		$	225,085			$	3,433,073

 

Cash Provided by Operating Activities

 

Cash from operating activities mainly consisted of our net loss of ($360,581) for the six months ended June 30, 2018, supplemented by non-cash expenses of depreciation and amortization of $1.5 million, amortization of prepaid expenses and long-term prepaid expenses of $30,398 and $55,433, and an increase of $121,803 in other payables, which were partly offset by an increase of $408,517 in inventories and $82,543 in prepaid expenses.

 

Net cash provided by operating activities in the six months ended June 30, 2017 totaled $2,641,278. Cash flow pertaining to operating activities benefited from depreciation and amortization of $1.4 million, amortization of prepaid expenses and long-term prepaid expenses of $94,422 and $51,606, a decrease in inventory of $892,224, partially offset by a decrease of $2.3 million at our net income.

 

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the six months ended June 30, 2018 totaled $1,649 related to purchases of new office equipment.

 

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

 

Cash Provided by (Used in) Financing Activities

 

Financing activities for the six months ended June 30, 2018 consisted of an increase of $67,525 in the amount due to a related party.

 

For the six months ended June 30, 2017, net cash used in financing activities was $581,805. This was comprised of $2,618,122 of repayments of short-term loans partially offset by proceeds of $2,036,317 from our new short-term loans.

 

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 June 30, 2018 (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		$	2,115			$	2,115			$	—			$	—			$	—
Others			—				—				—				—				—
		$	2,115			$	2,115			$	—			$	—			$	—

 

 

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. 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 our 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 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.

 

Revenue Recognition

 

On January 1, 2018, the Company adopted Topic 606, using the modified retrospective transition method applied to any contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after on or January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 605. There was no impact to revenue and to cost of revenue for the six months ended June 30, 2018 compared to the same period in 2017. There was no adjustment to beginning retained earnings on January 1, 2018.

 

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.

 

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Cash payment, which sometimes is in the form of wired cash transfers to the Company’s bank account, is usually received 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.

 

We determine revenue recognition through the following steps:

 

•

identification of the contract, or contracts, with a customer;

•

identification of the performance obligations in the contract;

•

determination of the transaction price;

•

allocation of the transaction price to the performance obligations in the contract; and

•

recognition of revenue when, or as, we satisfy a performance obligation.

 

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 Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer 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 Chief Executive Officer 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, 2017, filed with the Securities and Exchange Commission on March 28, 2018 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.

 

	Renmin Tianli Group, Inc.
August 17, 2018	By:		/s/Luchang Zhou
			Luchang Zhou Chief Executive Officer
August 17, 2018	By:		/s/Hanying Li
			Hanying Li Chief Financial Officer (Principal Financial and Accounting Officer)