UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2020

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                     

 

Commission file number: 001-38857

 

China Xiangtai Food Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

Xinganxian Plaza, Building B, Suite 21-1

Lianglukou, Yuzhong District 

Chongqing, People’s Republic of China 400800

(Address of principal executive offices)

 

Zeshu Dai, Chief Executive Officer

+86 (023) 86330158 

ir@cqplinfood.com

Xinganxian Plaza, Building B, Suite 21-1 

Lianglukou, Yuzhong District

Chongqing, People’s Republic of China 400800 

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
Ordinary shares, par value $0.01 per share   PLIN   The NASDAQ Stock Market LLC

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 23,971,084 ordinary shares issued and outstanding as of June 30, 2020.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

¨  Yes  x  No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

¨  Yes  x  No

 

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.

 

x  Yes  ¨  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). 

 

x  Yes  ¨  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  x
    Emerging growth company  x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  x   International Financial Reporting Standards as issued   Other  ¨
    by the International Accounting Standards Board ¨    

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

¨  Item 17  ¨  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

¨  Yes  x  No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

¨  Yes  ¨  No

 

 

 

 

 

  

Table of Contents

 

    Page   
PART I    
Item 1. Identity of Directors, Senior Management and Advisers 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 1
Item 4. Information on the Company 24
Item 4A. Unresolved Staff Comments 45
Item 5. Operating and Financial Review and Prospects 46
Item 6. Directors, Senior Management and Employees 66
Item 7. Major Shareholders and Related Party Transactions 72
Item 8. Financial Information 73
Item 9. The Offer and Listing 74
Item 10. Additional Information 75
Item 11. Quantitative and Qualitative Disclosures About Market Risk 86
Item 12. Description of Securities Other than Equity Securities 86
     
PART II    
Item 13. Defaults, Dividend Arrearages and Delinquencies 87
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 87
Item 15. Controls and Procedures 87
Item 15T. Controls and Procedures 88
Item 16. [Reserved] 88
Item 16A. Audit Committee Financial Expert 88
Item 16B. Code of Ethics 88
Item 16C. Principal Accountant Fees and Services 88
Item 16D. Exemptions from the Listing Standards for Audit Committees 89
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 89
Item 16F. Change in Registrant’s Certifying Accountant 89
Item 16G. Corporate Governance 89
Item 16H. Mine Safety Disclosure 90
     
PART III    
Item 17. Financial Statements 91
Item 18. Financial Statements 91
Item 19. Exhibits 91

 

 

 

 

Conventions Used in this Annual Report

 

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only, “we”, “us”, “our company”, “Company” and “our” refer to:

 

  · China Xiangtai Food Co., Ltd., a Cayman Islands exempted company (“Xiangtai Cayman” or the “Company” when individually referenced);

 

  · WVM Inc., a British Virgin Islands company (“Xiangtai BVI” when individually referenced)

 

  · CVS Limited (“Xiangtai HK” when individually referenced), a Hong Kong company that is a wholly owned subsidiary of Xiangtai BVI;

 

  · Chongqing Jinghuangtai Business Management Consulting Co., Ltd. (also known as “重庆精煌泰企业管理咨询有限公司”) “Xiangtai WFOE” when individually referenced), a PRC wholly foreign-owned enterprise and a wholly owned subsidiary of Xiangtai HK;

 

  · Guangan Yongpeng Food Co., Ltd. (also known as “广安勇鹏食品有限公司”) (“GA Yongpeng” when individually referenced), a PRC company and a wholly owned subsidiary of Xiangtai WFOE;

 

  · Chongqing Penglin Food Co., Ltd. (also known as “重庆鹏霖食品有限公司”) (“CQ Penglin” when individually referenced), a PRC company and a variable interest entity (“VIE”) contractually controlled by Xiangtai WFOE;

 

  · Chongqing Pengmei Supermarket Co., Ltd. also known as “重庆鹏美超市有限公司”) (“CQ Pengmei” when individually referenced), a PRC company and a wholly owned subsidiary of Xiangtai WFOE;

 

  ·

Chongqing Ji Mao Cang Feed Co., Ltd. (also known as “重庆集茂仓饲料有限公司”) (“JMC” when individually referenced), a PRC company and a VIE contractually controlled by Xiangtai WFOE;

 

  · Xiangtai WFOE, CQ Penglin, GA Yongpeng, CQ Pengmei and JMC are collected referred to as the “PRC entities” hereafter.

 

This annual report on 20-F contains translations of certain RMB amounts into U.S. dollar amounts at specified rates solely for the convenience of the reader. The relevant exchange rates are listed below:

 

    For the Year Ended
June 30, 2020
    For the Year Ended
June 30, 2019
    For the Year
Ended June 30, 2018
    For the Year
Ended June 30, 2017
  For the Year
Ended June 30, 2017
 
Period Ended RMB: USD exchange rate   7.07     6.87     6.62     6.78   6.64  
Period Average RMB: USD exchange rate   7.03     6.83     6.51     6.81   6.43  

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. Except where otherwise stated, all ordinary share accounts provided herein are on a pre-share-increase basis.

 

 

 

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under “Item 3—Key Information—Risk Factors,” “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects,” and elsewhere in this report, as well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission (the “SEC”) or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.

 

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

 

 

 

 

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable for annual reports on Form 20-F.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable for annual reports on Form 20-F.

 

Item 3. Key Information

 

A. Selected Financial Data

 

The following table presents the selected consolidated financial information for our company. The selected consolidated statements of income and comprehensive income data for the years ended June 30, 2020, 2019, and 2018 and the selected consolidated balance sheets data as of June 30, 2020 and 2019 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. The selected consolidated statements of income and comprehensive income data for the year ended June 30, 2017 and 2016 and the selected consolidated balance sheets data as of June 30, 2018, 2017 and 2016 are derived from our audited consolidated financial statements include in our registration statement (File Number 333-226990) initially filed with the SEC on August 24, 2018. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

 

The following table presents our summary consolidated statements of income and comprehensive income data:

 

    For the Years Ended June 30,  
    2020     2019     2018     2017     2016  
Supermarket and grocery store revenues   $ 5,827,319     $ 3,856,358     $ 3,750,904     $ 4,451,149     $ 7,836,968  
Farmers’ market revenues     80,473,936       95,222,909       97,353,320       58,825,330       26,792,383  
Feed raw material     24,250,247       -       -       -       -  
    Total revenues     110,551,502       99,079,267       101,104,224       63,276,479       34,629,351  
Cost of supermarket and grocery store revenues     4,961,552       3,256,439       3,193,830       3,011,400       5,200,859  
Cost of farmers’ market revenues     76,192,444       87,172,588       88,258,923       55,198,004       24,476,853  
Cost of feed raw material     22,219,528       -       -       -       -  
    Total cost of revenues     103,373,524       90,429,027       91,452,753       58,209,404       29,677,712  
Gross profit     7,177,978       8,650,240       9,651,471       5,067,075       4,951,639  
Selling expenses     (794,193 )     (550,574 )     (708,531 )     (854,643 )     (1,359,022 )
General and administrative expenses     (4,167,587 )     (1,277,820 )     (981,347 )     (515,596 )     (655,667 )
Provision for doubtful accounts     (770,192 )     (743,986 )     (918,940 )     (175,317 )     (207,892 )
Stock compensation expense     (930,223 )     -       -       -       -  
Income from operations     515,783       6,077,860       7,042,653       3,521,519       2,729,058  
Other (expense) income, net     (2,895,906 )     (837,999 )     (2,560,168 )     (190,908 )     182,720  
Provision for income taxes     (223,173 )     (213,649 )     (714,376 )     (875,737 )     (727,945 )
Net (loss) income from continuing operations     (2,603,296 )     5,026,212       3,768,109       2,454,874       2,183,833  
Net loss from discontinued operations     (1,796,237 )     (662,621 )     -       -       -  
Net (loss) income     (4,399,533 )     4,363,591       3,768,109       2,454,874       2,183,833  
Less: Net income attributable to non-controlling interest from continuing operations     477,409       -       -       -       -  
Net (loss) income attributable to China Xiangtai Food Co., Ltd.   $ (4,876,942 )   $ 4,363,591     $ 3,768,109     $ 2,454,874     $ 2,183,833  
(Loss) earnings per share, basic and diluted – continuing operations   $ (0.14 )   $ 0.24     $ 0.19     $ 0.12     $ 0.11  
(Loss) earnings per share, basic and diluted – discontinued operations   $ (0.08 )   $ (0.03 )   $ -     $ -     $ -  
Weighted average Ordinary Shares outstanding - Basic     22,417,524       20,319,723       20,000,000       20,000,000       20,000,000  
Weighted average Ordinary Shares outstanding - Diluted     22,417,524       20,944,951       20,083,151       20,000,000       20,000,000  

 

 

1

 

 

The following table presents our summary consolidated balance sheet data:

  

    As of June 30,  
    2020     2019     2018     2017     2016  
Cash and cash equivalents and restricted cash   $ 1,533,237     $ 3,916,990     $ 319,093     $ 21,530     $ 51,848  
Accounts receivables, net (including related party)     40,572,757       39,522,737       24,421,074       13,163,236       4,597,105  
Other current assets of continuing operations     8,106,755       2,804,721       4,304,568       8,942,015       2,994,392  
Other current assets of discontinued operations     63,185       174,467       -       -       -  
Plant and equipment, net     3,455,993       3,335,229       3,962,455       4,293,063       4,900,721  
Other long-term assets of continuing operations     9,038,055       472,335       722,503       596,104       2,870,199  
Other long-term assets of discontinued operations     579,452       1,844,838       -       -       -  
Total assets   $ 63,349,434     $ 51,351,317     $ 33,729,693     $ 27,015,948     $ 15,414,265  
Total liabilities   $ 36,522,598     $ 26,826,103     $ 17,896,158     $ 16,884,075     $ 7,885,872  
Total mezzanine equity   $ -     $ -     $ 1,800,000     $ -     $ -  
Total shareholders’ equity   $ 26,826,836     $ 24,525,214     $ 14,033,535     $ 10,131,873     $ 7,528,393  

 

Exchange Rate Information

 

Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”, which was subsequently codified within Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity.

 

Translation adjustments included in accumulated other comprehensive loss amounted to $(856,218) and $(308,571) as of June 30, 2020 and 2019, respectively. The balance sheet amounts, with the exception of shareholders’ equity at June 30, 2020 and 2019 were translated at 7.07 RMB and 6.87 RMB to $1.00, respectively. The shareholders’ equity accounts were stated at their historical rate. The average translation rates applied to the statement of income accounts for the years ended June 30, 2020, 2019 and 2018 were 7.03 RMB, 6.83 RMB and 6.51 RMB to $1.00, respectively. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

 

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.

 

B. Capitalization and Indebtedness

 

Not applicable for annual reports on Form 20-F.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable for annual reports on Form 20-F.

 

2

 

 

D. Risk Factors

 

Risks Related to Our Business and Industry

 

Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.

 

Our business could be materially and adversely affected by the outbreak of epidemics including but not limited to the 2019 novel coronavirus (COVID-19), swine influenza, avian influenza, middle east respiratory syndrome (MERS-CoV) and severe acute respiratory syndrome (SARS-CoV). Our financial and operating performance may be adversely affected by epidemics such as the on-going novel coronavirus (COVID-19), natural disasters and other catastrophes. As a result of the on-going novel coronavirus, we expect our operation to experience slowdown or temporary suspension in production. Our business could be materially and adversely affected in the event that the slowdown or suspension carries for a long period of time. During such epidemic outbreak, China may adopt certain hygiene measures, including quarantining visitors from places where any of the contagious diseases were rampant. Those restrictive measures adversely affected and slowed down the national economic development during that period. Any prolonged restrictive measures in order to control the contagious disease or other adverse public health developments in China or our targeted markets may have a material and adverse effect on our business operations.

 

Similarly, natural disasters, wars (including the potential of war), terrorist activity (including threats of terrorist activity), social unrest and heightened travel security measures instituted in response, and travel-related accidents, as well as geopolitical uncertainty and international conflict, will affect travel volume and may in turn have a material adverse effect on our business and results of operations. In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be adversely and materially affected, which in turn may harm our reputation.

 

Our business could be materially harmed by the ongoing coronavirus (COVID-19) pandemic.

 

Recently, there is an ongoing outbreak of a novel strain of coronavirus (COVID-19) in China, which has spread rapidly to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in China for the past few months. In March 2020, the World Health Organization declared the COVID-19 as a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of our business operations and our workforce are concentrated in China, we believe there is a substantial risk that our business, results of operations, and financial condition will be adversely affected. Potential impact to our results of operations will also depend on future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or mitigate its impact, almost all of which are beyond our control.

 

The impacts of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following:

 

  Our management and the employees work in the supermarket sector of our business resumed working on February 11, 2020, shortly after the Chinese Lunar New Year holiday. The employees who work in the slaughtering and processing sector of our business resumed working by the end of February. Our supermarket, as an essential business, remained open during the pandemic. We experienced significant increase in supermarket sales in February and March 2020 as compared to the same period last year. However, we experienced a decrease in distribution sales during February and March 2020 as some of our customers, such as farmers’ markets, restaurants, hotels, school cafeterias, were required to temporarily close their businesses to adhere to local policy. These affected customers are slowly resuming business during April 2020 and we expect the demand will recover overtime. For the fiscal years ended June 30, 2020, 2019 and 2018, distribution sales account for 90%, 93% and 96% of the total revenue, respectively. Overall, our revenue and income has been negatively impacted for the fiscal year ended June 30, 2020.

 

  The situation may worsen if the COVID-19 outbreak continues. We will continue to closely monitor the development throughout 2020.

 

  The global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak. It is possible that the price of our ordinary shares will decline significantly after the consummation of this offering, in which case you may lose your investment.

 

Because of the uncertainty surrounding the COVID-19 outbreak, the business disruption and the related financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time.

 

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

 

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our existing solutions, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our ordinary shares. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

 

3

 

 

Changes in consumer preferences could adversely affect our business.

 

The food industry, in general, is subject to changing consumer trends, demands and preferences. Our products compete with other protein sources, such as fish. Trends within the food industry frequently change, and our failure to anticipate, identify or react to changes in these trends could lead to reduced demand and prices for our products, among other concerns, and could have a material adverse effect on our business, financial condition and results of operations.

 

We operate in a highly competitive industry and may face increased competition.

 

We operate in the pork industry in China and face strong competition in terms of distribution, brand recognition, taste, quality, price, availability, and product positioning. The market is highly fragmented, particularly in China, and the resources of our competitors may increase due to mergers, consolidations or alliances, and we may face new competitors in the future. Our main competitors include Shuanghui Group, New Hope Group, Hunan New Wellful Co., Ltd., Huamu Group. Furthermore, we face competition from producers of other animal proteins. In addition, as we seek to expand our market share in the Chinese markets in which we currently distribute our products and to distribute new products and to penetrate into new markets, we may have difficulty competing with local producers due to protectionist efforts by local governments to benefit local companies. From time to time in response to competitive and customer pressures or to maintain market share, we may be forced to reduce our selling prices or increase or reallocate spending on marketing, advertising, or promotions in order to compete. These types of actions could decrease our profit margins. Such pressures may also restrict our ability to increase our selling prices in response to raw material and other cost increases. In light of the strong competition that we currently face, and which may intensify in the future, there can be no assurance that we will be able to increase the sales of our products or even maintain our past levels of sales, or that our profit margins will not be reduced. If we are unable to increase our product sales or to maintain our past levels of sales and profit margins, our business, financial condition, results of operations and prospects may be materially and adversely affected.

 

Our results of operations may fluctuate from period to period due to seasonality.

 

Our business is subject to seasonal fluctuations. There are seasonal patterns for pork production and pork product purchases in China, where consumer purchases of pork products usually peak around the Chinese Lunar New Year and other major holidays. In addition, our hog production segment experiences lower farrowing performance during the winter months and slower animal growth rates during the hot summer months, resulting in a decrease in hog supplies in the summer and an increase in hog supplies in the fall. Due to the seasonality of our business, the results of any period of a year are not necessarily indicative of the results that may be achieved for the full year.

 

We face risks relating to fluctuations in the prices of substitute products.

 

Fluctuations in the market prices of substitutes to our products, especially decreases in the prices of substitute meat products relative to pork, affect the prices of pork products. As a result of decreases in the prices of substitute meat products relative to pork, consumers may purchase less pork. For example, past outbreaks of avian influenza in various parts of the world reduced the global demand for poultry and thus created temporary surpluses of poultry. These poultry surpluses placed downward pressure on poultry prices, which in turn reduced meat prices including pork prices. Even where we are able to adjust our selling prices in relation to decreases in the prices of substitute products, our profit margin may experience contraction, which in turn may have a material adverse impact on our business, financial condition, results of operations and prospects.

 

Outbreaks of livestock diseases may affect our ability to conduct our business and harm demand for our products.

 

Outbreaks of diseases affecting livestock, such as African swine fever, BSE, FMD and various strains of influenza, which may be caused by factors beyond our control, or concerns that these diseases may occur and spread in the future, could lead to cancellation of orders by our customers or governmental restrictions on the import and export of our products to or from our suppliers, facilities or customers. Moreover, outbreaks of livestock diseases could have a significant effect on the livestock we own by requiring us to, among other things, destroy any affected livestock and create negative publicity that may have a material adverse effect on customer demand for our products. In addition, if the products of our competitors become contaminated, the adverse publicity associated with such an event may lower consumer demand for our products.

 

4

 

 

Any perceived or real health risks related to the food industry could adversely affect our ability to sell our products. If our products become contaminated, we may be subject to product liability claims and product recalls.

 

We are subject to risks affecting the food industry generally, including risks posed by the following:

 

  · food spoilage or food contamination;

 

  · contamination of raw materials;

 

  · consumer product liability claims;

 

  · product tampering;

 

  · product labeling errors;

 

  · the possible unavailability and expense of product liability insurance; and

 

  · the potential cost and disruption of a product recall.

 

Our products may be exposed to contamination by organisms that may produce food borne illnesses, such as E. coli, listeria monocytogenes and salmonella. These organisms are generally found in the environment and, as a result, there is a risk that they could be present in our products. These pathogens can also be introduced to our products through tampering or as a result of improper handling at the further processing, foodservice or consumer level. Once contaminated products have been shipped for distribution, illness or death may result if the products are not properly prepared prior to consumption or if the pathogens are not eliminated in further processing.

 

Our systems designed to monitor food safety risks throughout all stages of our processes may not eliminate the risks related to food safety. As a result, we may voluntarily recall, or be required to recall, our products if they are or may be contaminated, spoiled or inappropriately labeled.

 

We may be subject to significant liability in the jurisdictions in which our products are sold if the consumption of any of our products causes injury, illness or death. Such liability may result from proceedings filed by the government’s attorney’s office, consumer agencies and individual consumers. We may have to pay significant damages to consumers or to the government and such liability may be in excess of applicable liability insurance policy limits. Adverse publicity concerning any perceived or real health risk associated with our products could also cause customers to lose confidence in the safety and quality of our food products, which could adversely affect our ability to sell our products. We could also be adversely affected by perceived or real health risks associated with similar products produced by others to the extent such risks cause customers to lose confidence in the safety and quality of such products generally.

 

Environmental regulation and related litigation and commitments could have a material adverse effect on us.

 

Our past and present business operations and properties are subject to extensive and increasingly stringent laws and regulations in the countries in which we have operations pertaining to protection of the environment, including among others:

 

  · the treatment and discharge of materials into the environment;

 

  · the handling and disposition of manure and solid wastes; and

 

  · the emission of greenhouse gases.

 

Failure to comply with these laws and regulations may result in significant consequences to us, including administrative, civil and criminal penalties, liability for damages and negative publicity. Some requirements applicable to us may also be enforced by citizen groups or other third parties. Natural disasters, such as flooding and hurricanes, can cause the discharge of effluents or other waste into the environment, potentially resulting in our being subject to further liability claims and governmental regulation, as has occurred in the past. See the section headed “Item 4. Information on the Company — Environment” for further discussion of our regulatory compliance as it relates to environmental risk. We have incurred, and will continue to incur, significant capital and operating expenditures to comply with these laws and regulations.

 

In addition, new environmental issues could arise that could cause currently unanticipated investigations, assessments, costs or expenditures. We may be subject to higher compliance costs if environmental protection laws become more stringent. Environmental claims or failure to comply with any present or future environmental protection laws may require us to spend additional funds and may adversely affect our results of operations.

 

PRC laws and regulations require enterprises engaged in manufacturing and construction that may produce environmental waste to adopt measures to effectively control and properly dispose of waste gases, waste water, industrial waste, dust and other environmental waste materials. These laws and regulations also require payments from producers discharging waste substances. If we fail to comply with such laws or regulations and such failure results in environmental pollution, we may be required to pay fines. If the breach is serious, the PRC government may suspend or close any operation failing to comply with such laws or regulations. We cannot assure you that the PRC government will not change existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditure that we may not be able to pass on to our customers through increased product prices.

 

5

 

 

Our financial success is dependent on our continued innovation and successful launch of new products and promoting our brands through marketing investments, and we may not be able to anticipate or make timely responses to changes in the tastes and preferences of consumers.

 

The success of our operations depends on our ability to identify market trends and introduce new or enhanced products in a timely manner that satisfy the tastes and preferences of customers. Customer preferences differ across and within each of our operating regions and shift over time in response to changes in culinary, demographic and social trends, economic circumstances and the marketing efforts of our competitors. There can be no assurance that our existing products will continue to be accepted by our customers or that we will be able to anticipate or respond to changes in consumer tastes and preferences in a timely manner. Our failure to anticipate, identify or react to these particular tastes or changes could adversely affect our sales performance and our profitability. In addition, demand for many of our consumer products is closely linked to consumers’ purchasing power and disposable income levels, which may be adversely affected by unfavorable economic development in the countries in which we operate.

 

We devote significant resources to new product development and product extensions. However, we may not be successful in developing innovative new products, and our new products may not be commercially successful. To the extent we are not able to effectively gauge the direction of our key markets and successfully identify, develop and manufacture new or improved products in these changing markets, our financial results and our competitive position will suffer. Moreover, there are inherent market risks associated with new product introductions, including uncertainties about marketing and consumer acceptance, and there can be no assurance that we will be successful in introducing new products. We may expend substantial resources developing and marketing new products which may not achieve expected sales levels.

 

In addition, we may not be successful in maintaining or strengthening our brand image. We seek to maintain and strengthen our brand image through marketing investments, including advertising, consumer promotions and trade promotions. Maintaining and strengthening our brand image depends on our ability to adapt to a rapidly changing media environment, including on social media other online dissemination of advertising campaigns. If we do not maintain and strengthen our brand image, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

We face competition in our business, which may adversely affect our market share and profitability.

 

The pork, beef and chicken industries are highly competitive. Competition exists both in the purchase of live hogs, and in the sale of pork and meat products. In addition, our pork and meat products compete with other protein sources, such as fish. We face competition from a number of pork producers in Chongqing City and Sichuan province where we operate.

 

The principal competitive factors in the animal protein processing industries are operating efficiency and the availability, quality and cost of raw materials and labor, price, quality, food safety, product distribution, technological innovations and brand loyalty. Our ability to be an effective competitor depends on our ability to compete on the basis of these characteristics. In addition, some of our competitors may have greater financial and other resources than us. We may be unable to compete effectively with these companies, and if we are unable to remain competitive with these meat producers in the future, our market share may be adversely affected.

 

Our growth (organic and inorganic) may require substantial capital and long-term investments.

 

Our competitiveness and growth depend on our ability to fund our capital expenditures. We cannot assure you that we will be able to fund our capital expenditures at reasonable costs due to adverse macroeconomic conditions, our performance or other external factors.

 

We may pursue additional opportunities to acquire complementary businesses, which could further increase leverage and debt service requirements and could adversely affect our financial situation if we fail to successfully integrate the acquired business.

 

We intend to continue to pursue selective acquisitions of complementary businesses in the future. Inherent in any future acquisitions are certain risks such as increasing leverage and debt service requirements and combining company cultures and facilities, which could have a material adverse effect on our operating results, particularly during the period immediately following such acquisitions. Additional debt or equity capital may be required to complete future acquisitions, and there can be no assurance that we will be able to raise the required capital. Furthermore, acquisitions involve a number of risks and challenges, including:

 

  · diversion of management’s attention;

 

  · potential loss of key employees and customers of the acquired companies;

 

6

 

 

  · an increase in our expenses and working capital requirements;

 

  · failure of the acquired entities to achieve expected results;

 

  · our failure to successfully integrate any acquired entities into our business; and

 

  · our inability to achieve expected synergies and/or economies of scale.

 

These opportunities may also expose us to successor liability relating to actions involving any acquired entities, their respective management or contingent liabilities incurred prior to our involvement and will expose us to liabilities associated with ongoing operations, in particular to the extent we are unable to adequately and safely manage such acquired operations. These transactions may also be structured in such a manner that would result in our assumption of obligations or liabilities not identified during our pre-acquisition due diligence.

 

Any of these and other factors could adversely affect our ability to achieve anticipated cash flows at acquired operations or realize other anticipated benefits of acquisitions, which could adversely affect our reputation and have a material adverse effect on us.

 

We are subject to various risks relating to worker safety.

 

Given the nature of our operations, we are subject to various risks relating to worker safety. We conduct training and educational campaigns to improve awareness of risks and safety in the work environment and strive to improve safety conditions in the workplace, but cannot ensure that accidents will not occur. If our efforts to improve worker safety and reduce the frequency and number of workplace accidents are not successful, our business, financial condition and results of operations may be adversely affected.

 

We may fail to comply with legal or regulatory requirements or to obtain or adhere to requirements under relevant licenses or permits.

 

Our manufacturing and other production facilities, including hog farming, as well as the processing, packaging, storage, distribution, advertising and labeling of our products, are subject to extensive legal and regulatory food safety requirements, including regular government inspections and governmental food processing controls, in the countries in which we operate. In China, under applicable laws and regulations, we are required to obtain and maintain various licenses and permits in order to operate our hog farming and slaughtering operations. These include, amongst others, “Livestock and Poultry Breeders Production Operation Permit”, “Certificate for Animal Epidemic Disease Prevention” and “Certificate of Designated Location of Slaughterhouse for Hogs”. We are also required to obtain various government approvals and comply with applicable hygiene and food safety standards in relation to our production processes, premises and products. Loss of or failure to obtain necessary permits and licenses could delay or prevent us from meeting current product demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect our operating results. If we are found not to be in compliance with applicable laws and regulations, particularly if it relates to or compromises food safety, we could be subject to civil remedies, including fines, injunctions, recalls or asset seizures, as well as potential criminal sanctions, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, future material changes in food safety regulations could result in increased operating costs or affect our ordinary operations, which could also have a material adverse effect on our operations and our financial results.

 

We rely substantially on external suppliers for hogs, beef, lamb, chicken, duck, rabbit meat and other raw materials.

 

We purchase live hogs and fresh pork, beef, lamb, chicken, duck, and rabbit meat from external distributors for use in our production of processed products. For the fiscal year ended June 30, 2020, we had five suppliers that accounts for more than 10% of our purchases. The five suppliers accounted for 19.6%, 17.4%, 16.4%, 15.8% and 14.0% of our purchases, respectively. We had four suppliers accounted for a total of 80.7% and 87.5% of our purchases for the fiscal years ended June 30, 2019 and 2018, respectively. A continuous and stable supply of ordinary live hogs and other meat that meet our standards is crucial to our operations. We expect to continue to rely on external suppliers for all of live hogs, fresh pork, beef, lamb, chicken, duck, and rabbit meat production requirements. We also rely on external suppliers for other key raw materials, including seasonings. There can be no assurance that we will continue to be able to source live hogs, fresh pork, beef, lamb, chicken, duck, rabbit meat, seasonings, or other raw materials meeting our requirements on reasonable prices or terms or at all. In the event that our supply of the raw materials is interrupted for whatever reason, our business, financial condition, results of operations and prospects may be materially and adversely affected.

 

The loss of one or more of our largest customers, or changes in the trade terms required by such customers could adversely affect our business, financial condition and results of operations.

 

Our business could suffer significant setbacks in sales and operating income if our customers’ business plans or markets change significantly or if we lose one or more of our largest customers. While, we do not have any customers that accounts for more than 10% of our total revenue for the years ended June 30, 2020, 2019 and 2018. Moreover, consolidation within the retail industry is likely to continue in China, including among supermarkets, warehouse clubs and food distributors, which would result in us having an increasingly concentrated retail base and increased credit exposure to certain customers. Furthermore, as the retail branded food and foodservice industries continue to consolidate, our large customers may seek to use their position to improve their profitability through improved inventory efficiency, lower pricing, increased promotional programs and increased emphasis on private label products. If we are unable to use our scale, marketing expertise, product innovation and category leadership positions to effectively respond, our profitability or volume growth could be negatively affected. To the extent we provide concessions or trade terms that are more favorable to our customers, our margins would be reduced. The loss of a significant customer or a material reduction in sales to, or adverse change to trade terms with, a significant customer could materially and adversely affect our product sales, financial condition, results of operations and prospects.

 

7

 

 

Our operations are subject to the general risks of litigation.

 

We are involved in an ongoing basis in litigation arising in the ordinary course of business or otherwise. Trends in litigation may include class actions involving consumers, shareholders, employees or injured persons, and claims related to commercial, labor, employment, antitrust, securities or environmental matters. Moreover, the process of litigating cases, even if we are successful, may be costly, and may approximate the cost of damages sought. These actions could also expose us to adverse publicity, which might adversely affect our brands, reputation and/or customer preference for our products and distract our management from other tasks. Litigation trends and expenses and the outcome of litigation cannot be predicted with certainty and adverse litigation trends, expenses and outcomes could adversely affect our financial results. Please see the section headed “Item 4. Information on the Company — Legal Proceedings” for details of our material litigation and proceedings.

 

The consolidation of our customers could adversely affect our business.

 

Our customers, such as supermarkets and farmers’ markets, have consolidated in recent years, and consolidation is expected to continue. These consolidations have produced large, sophisticated customers with increased buying power who are more capable of operating with reduced inventories, opposing price increases, and demanding lower pricing, increased promotional programs and specifically tailored products. These customers also may use shelf space currently used for our products for their own private label products. If we fail to respond to these trends, our volume growth could slow or we may need to lower prices or increase promotional spending for our products, any of which would adversely affect our financial results.

 

Macroeconomic conditions could have a material adverse effect on our business, results of operations, financial condition and stock price.

 

Key macroeconomic conditions are likely to affect our business, results of operations and financial condition. Consumer confidence, energy price, labor cost, prices, unemployment are among the factors that often impact the borrowing behavior of our customers. Poor economic conditions reduce the demand for consumption of pork and pork products.

 

While certain economic conditions in China have shown signs of improvement following the recent global economic crisis, economic growth has been slow and uneven as consumers continue to face domestic concerns, as well as economic and political conditions in the global markets. A prolonged period of slow economic growth or a significant deterioration in economic conditions would likely affect our customers’ activity levels and the ability and willingness of customers to obtain financing from us or to pay amounts already owed to us, and could have a material adverse effect on our business, results of operations and financial condition.

 

If we are not able to continue to innovate or if we fail to adapt to changes in our industry, our business, financial condition and results of operations would be materially and adversely affected.

 

Although the livestock industry is not directly affected by the rapidly changing technology, evolving industry standards, new service and product introductions and changing customer demands have changed the way we and our competitors do business over the years. Furthermore, our competitors are constantly developing innovations in online marketing, communications, social networking and other services to expand the basis of suppliers and customers. We continue to invest significant resources in our infrastructure, research and development and other areas in order to enhance our quality control, information technology, and our existing products and services. The changes and developments taking place in our industry may also require us to re-evaluate our business model and adopt significant changes to our long-term strategies and business plan. Our failure to innovate and adapt to these changes would have a material adverse effect on our business, financial condition and results of operations.

 

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

 

We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing customers. Successful promotion of our brand and our ability to attract customers depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our services. It is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.

 

8

 

 

New lines of business or new products and services may subject us to additional risks.

 

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new services could have a material adverse effect on our business, results of operations and financial condition.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

 

We regard our trademarks, copyrights, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. We own certain intellectual properties. See “Item 4. Information on the Company —Description of Property — Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

 

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

 

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

 

9

 

 

Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this prospectus. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

 

Increases in labor costs in the PRC may adversely affect our business and results of operations.

 

The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. The number of our employees have surged due to the fast expansion of our business. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

 

Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.

 

We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

 

In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve our clients could diminish, resulting in a material adverse effect to our business.

 

A lack of insurance could expose us to significant costs and business disruption.

 

We have not yet purchased insurance to cover our assets and property of our business, which could leave our business inadequately protected from loss. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected. Furthermore, Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

 

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products.

 

Our business could also be adversely affected by the effects of African swine fever, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

 

10

 

 

We may incur financial obligation by serving as guarantor for loan borrowed by a related entity.

 

On December 26, 2017, Chongqing Mingwen Food Co., Ltd, (“CQ Mingwen”), whose president is the daughter-in-law of our CEO, entered into a one-year loan agreement with bank to borrow RMB 9 million (approximately $1.4 million) for working capital needs, which has been extended for an additional 12 months. The loan bears variable interest rate based on the prevailing interest rates set by the People's Bank of China at the time of borrowing, plus 98 basis points. The effective rate is 8.613% per annum. In connection with CQ Mingwen’s bank borrowing, the Company’s CEO, her husband and a son, CQ Penglin, CQ Mingwen’s legal representative and an unrelated third party, Chongqing Education Guaranty Co., Ltd. each served as a guarantor of the loan. Chongqing Education Guaranty Co. Ltd. was also required to deposit RMB 450,000 (approximately $69,000) as restricted cash with the bank to secure the loan. In addition, GA Yongpeng pledged a land use right recorded at RMB 10,198,100 (approximately $1.5 million) and building property recorded at RMB 12,268,800 (approximately $1.8 million) as collateral to further safeguard this loan. If CQ Mingwen is unable to repay the loan upon maturity date, assets by GA Yongpeng may be liquidated to pay back the loan. CQ Penglin and our CEO will also incur obligation to repay the loan as guarantors. CQ Mingwen’s inability to repay the loan may therefore have a material adverse impact on the operation and financial results of our company.

 

Crop disease, severe weather, natural disasters and other conditions affecting the environment, including the effects of climate change, could result in decline in supply and weaken our financial condition.

 

Crop disease, severe weather conditions, such as floods, droughts, windstorms and hurricanes, and natural disasters, may adversely affect the supply of JMC’s products, reduce our sales volumes, increase our unit production costs or prevent or impair our ability to ship products as planned. Production volume declines of our suppliers due to production interruptions or other factors could result in increases in material costs, which could result in substantial losses and weaken our financial condition.

 

Severe weather conditions may occur with higher frequency or may be less predictable in the future due to the effects of climate change. An occurrence of such an event might result in material disruptions to our operations, to the operations of our customers or suppliers, resulting in a decline in the agriculture industry. There can be no assurance that our facilities or products will not be affected by any such occurrence in the future, which occurrence may lead to adverse conditions to our operations and financial results.

 

Prices of agricultural products and feed raw materials are subject to supply and demand, a market condition which is not predictable.

 

We purchase agricultural products and feed raw materials, and we are not able to predict with certainty what price we will receive for our products. Additionally, the growth cycle of such products in many instances dictates when such products must be marketed to achieve the maximum profitability. Excessive supplies tend to cause severe price competition and lower prices throughout the industry affected. Conversely, shortages may drive the prices higher. Shortages often result from adverse growing conditions which can reduce the availability of the agricultural products and feed raw materials affected. Since multiple variables can affect supply and demand, we cannot accurately predict or control from year to year what prices, either favorable or unfavorable, we will receive from the market.

 

In addition, general public perceptions regarding the quality, safety or health risks associated with particular food products could reduce demand and prices for some of our products. To the extent that consumer preferences evolve away from products that we produce for health or other reasons, and we are unable to modify our products or to develop products that satisfy new consumer preferences, there will be a decreased demand for our products. However, even if market prices are unfavorable, some of our agricultural products and feed raw materials which are ready to be, or have been, harvested must be brought to market promptly. A decrease in the selling price received for our products due to the factors described above could have a material adverse effect on our business, results of operations and financial condition.

 

Risks Related to Our Corporate Structure and Operation

 

If the PRC government deems that the contractual arrangements in relation to CQ Penglin and JMC, our consolidated variable interest entities, do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

We are a Cayman Islands exempted company and our PRC subsidiaries are considered foreign-invested enterprises. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into among Xiangtai WFOE and CQ Penglin and its shareholders and among Xiangtai WFOE and JMC and its shareholders. As a result of these contractual arrangements, we exercise control over CQ Penglin and JMC and consolidate their respective operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see “Corporate History and Structure.”

 

In the opinion of our PRC counsel, AllBright Law Offices, our current ownership structure, the ownership structure of Xiangtai WFOE, our PRC subsidiary, and CQ Penglin and JMC, our consolidated variable interest entities, the contractual arrangements between Xiangtai WFOE and CQ Penglin and JMC are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, our PRC counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.

 

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or MOC, published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. See “— Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations” below. If the ownership structure, contractual arrangements and business of our company, Xiangtai WFOE, CQ Penglin or JMC are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of Xiangtai WFOE, CQ Penglin and JMC, revoking the business licenses or operating licenses of Xiangtai WFOE, CQ Penglin or JMC, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from our initial public offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of CQ Penglin and JMC, and/or our failure to receive economic benefits from CQ Penglin and JMC, we may not be able to consolidate their results into our consolidated financial statements in accordance with U.S. GAAP.

 

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We rely on contractual arrangements with CQ Penglin and JMC, our consolidated variable interest entities for a portion of our business operations, which may not be as effective as direct ownership in providing operational control.

 

We have relied and expect to continue to rely on contractual arrangements with CQ Penglin and JMC and their respective shareholders to operate our business. For a description of these contractual arrangements, see “Item 4. Information on the Company — Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entities. For example, CQ Penglin and JMC and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.

 

If we had direct ownership of CQ Penglin and JMC, we would be able to exercise our rights as a shareholder to effect changes in the respective board of directors of CQ Penglin and JMC, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by CQ Penglin and JMC, and their respective shareholders of their obligations under the contracts. The shareholders of CQ Penglin and JMC may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with CQ Penglin and JMC. Although we have the right to replace any shareholder of CQ Penglin and JMC under their respective contractual arrangements, if any shareholder of CQ Penglin or JMC is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “— Any failure by CQ Penglin or JMC, our consolidated variable interest entities, or their respective shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business” below. Therefore, our contractual arrangements with CQ Penglin and JMC, our consolidated variable interest entities, may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

Any failure by CQ Penglin or JMC, our consolidated variable interest entities, or their respective shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

If CQ Penglin or JMC, our consolidated variable interest entities, or their respective shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of CQ Penglin or JMC were to refuse to transfer their equity interest in CQ Penglin or JMC to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated variable interest entities, and our ability to conduct our business may be negatively affected.

 

The respective shareholders of CQ Penglin and JMC, our consolidated variable interest entities, may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The respective shareholders of CQ Penglin may differ from the interests of our company as a whole. These shareholders may breach, or cause CQ Penglin or JMC to breach, the existing contractual arrangements we have with them and CQ Penglin or JMC, which would have a material adverse effect on our ability to effectively control CQ Penglin or JMC and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with CQ Penglin or JMC to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive option agreement with these shareholders to request them to transfer all of their equity interests in CQ Penglin or JMC to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of CQ Penglin or JMC, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

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Contractual arrangements in relation to CQ Penglin and JMC, our consolidated variable interest entities, may be subject to scrutiny by the PRC tax authorities and they may determine that we or CQ Penglin or JMC owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between Xiangtai WFOE, our wholly-owned subsidiary in China, CQ Penglin and JMC, our consolidated variable interest entities in China, and the respective shareholders of CQ Penglin and JMC, were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust Xiangtai WFOE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by CQ Penglin and JMC for PRC tax purposes, which could in turn increase its tax liabilities without reducing Xiangtai WFOE’s tax expenses. In addition, if Xiangtai WFOE requests the shareholders of CQ Penglin and JMC, as the case may be, to transfer their equity interests in CQ Penglin and JMC, as the case may be, at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject Xiangtai WFOE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on CQ Penglin and JMC for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our consolidated variable interest entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

 

We may lose the ability to use and benefit from assets held by CQ Penglin and JMC, our consolidated variable interest entities, that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

 

CQ Penglin and JMC, our consolidated variable interest entities, holds certain assets that are material to the operation of our business, including domain names and an ICP license. Under the contractual arrangements, our consolidated variable interest entities may not and their respective shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event CQ Penglin’s or JMC’s shareholders breach these contractual arrangements and voluntarily liquidate CQ Penglin or JMC, or CQ Penglin or JMC declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If CQ Penglin or JMC undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

If the chops of Xiangtai WFOE, GA Yongpeng and CQ Pengmei, our PRC subsidiaries, CQ Penglin and JMC, our consolidated variable interest entities, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of Xiangtai WFOE, GA Yongpeng and CQ Pengmei, our PRC subsidiaries, and CQ Penglin and JMC, our consolidated variable interest entities are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

 

Risks Related to Doing Business in the People’s Republic of China

 

Changes in political, social and economic policies in any of China, the U.S. or Europe may materially and adversely affect our business, financial condition, results of operations and prospects.

 

Our business operations are primarily conducted in China. Accordingly, we are affected by the economic, political and legal environment in China.

 

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In particular, China’s economy differs from the economies of most developed countries in many respects, including the fact that it:

 

  · has a high level of government involvement;

 

  · is in the early stages of development of a market-oriented economy;

 

  · has experienced rapid growth; and

 

  · has a tightly controlled foreign exchange policy.

 

China’s economy has been transitioning from a planned economy towards a more market-oriented economy. However, a substantial portion of productive assets in China remain state-owned and the PRC government exercises a high degree of control over these assets. In addition, the PRC government continues to play a significant role in regulating industrial development by imposing industrial policies. For the past three decades, the PRC government has implemented economic reform measures to emphasize the utilization of market forces in economic development.

 

China’s economy has grown significantly in recent years; however, there can be no assurance that such growth will continue. The PRC government exercises control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall economy of China, but may also have a negative effect on our business. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. As such, our future success is, to some extent, dependent on the economic conditions in China, and any significant downturn in market conditions may materially and adversely affect our business prospects, financial condition, results of operations and prospects.

 

China’s legal system is evolving and has inherent uncertainties that could limit the legal protection available to you.

 

We have all of our operations in China. The legal system of China is a civil law system based on written statutes. Unlike common law systems, it is a system in which prior court decisions have limited value as precedents. Since 1979, the PRC government has promulgated laws and regulations governing economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not developed a fully integrated legal system. Recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these newer laws and regulations involve greater uncertainties than those in jurisdictions available to you. In addition, China’s legal system is based in part on government policies and administrative rules and many have retroactive effects. We cannot predict the effect of future developments in China’s legal system, including the promulgation of new laws, changes to existing laws, or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws.

 

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us.

 

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

 

We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company incorporated in the Cayman Islands, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require WOFE to adjust its taxable income under the contractual arrangements they currently have in place with our consolidated variable interest entities in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us. See “— Risks Related to Our Corporate Structure — Contractual arrangements in relation to CQ Penglin and JMC, our consolidated variable interest entities, may be subject to scrutiny by the PRC tax authorities and they may determine that we, or our PRC consolidated variable interest entities, owe additional taxes, which could negatively affect our financial condition and the value of your investment.”

 

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Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “— If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”

 

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our ordinary shares.

 

Substantially all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiaries and consolidated variable interest entities is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. However, the PBOC regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. Since October 1, 2016, Renminbi has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2019, the RMB has depreciated significantly in the backdrop of the trade war between the U.S. and China and of the weak performance of Chinese stock market as compared with U.S. indexes. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ordinary shares in U.S. dollars.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on the price of our ordinary shares.

 

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Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company in the Cayman Islands relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.

 

In light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

 

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

 

We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations.

 

Currently, we are making contributions to the plans based on the minimum standards although the PRC laws required such contributions to be based on the actual employee salaries up to a maximum amount specified by the local government. Therefore, in our consolidated financial statements, we have made an estimate and accrued a provision in relation to the potential make-up of our contributions for these plans as well as to pay late contribution fees and fines. If we are subject to late contribution fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.

 

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

Ms. Zeshu Dai entered into an entrustment agreement with Magic Pace Limited, who is currently the sole shareholder of China Meitai Food Co., Ltd. According to the Entrustment Agreement, Magic Pace Limited entrusted its voting power, personnel appointment power and other power related to operating and managing of China Meitai Food Co., Ltd., and therefore effectively the control of our company, to Ms. Dai to the extent permitted by the laws of the British Virgin Islands.

 

Ms. Dai also entered into a call option agreement with Magic Pace Limited. Pursuant to the call option agreement, Magic Pace Limited granted Ms. Dai an option to acquire 97.74% of the shares of China Meitai Food Co., Ltd. exercisable from the closing date of the initial public offering of the Company. Upon excising the option Ms. Dai will own 62.73% shares of the Company through China Meitai Food Co., Ltd.

 

Because there are no guidelines or rulings in respect of the arrangements under the call option agreement and the entrustment agreement between Magic Pace Limited and Ms. Dai, our PRC lawyer suggested it may not be deemed as associated with the acquisition of the special purpose vehicle (“SPV”) and Ms. Dai has no liability to register the arrangements according to Circular 37 with a qualified local bank. However, if the local SAFE dissented our PRC counsel’s opinion on the arrangement Magic Pace Limited and Ms. Dai, Ms. Dai may be requested by local SAFE to register retrospectively pursuant to Circular 37 and may be subject to administrative punishment pursuant to the related law.

 

However, we may not be informed of the identities of all the PRC residents or entities holding a direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

 

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

 

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We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Item 10. Additional Information – E. Taxation – People’s Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that China Xiangtai Food Co., Ltd. or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then China Xiangtai Food Co., Ltd. or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on the investment in our ordinary shares.

 

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiaries.

 

We are an exempted company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in August 2015, require non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file relevant report and materials with the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. See “Item 10. Additional Information — E. Taxation — People’s Republic of China Taxation.” As of June 30, 2020 and 2019, we did not record any withholding tax on the retained earnings of our subsidiaries in the PRC as we intended to re-invest all earnings generated from our PRC subsidiaries for the operation and expansion of our business in China, and we intend to continue this practice in the foreseeable future. Should our tax policy change to allow for offshore distribution of our earnings, we would be subject to a significant withholding tax. We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant tax authority or we will be able to complete the necessary filings with the relevant tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to Keen Point and Fortunes Capital HK, our Hong Kong subsidiaries.

 

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective in February 2015.

 

Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

 

In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

 

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We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

 

Risks Related to Ownership of Our Ordinary Shares

 

Our Chief Executive Officer Zeshu Dai has significant influence over us, including control over decisions that require the approval of shareholders, which could limit your ability to influence the outcome of matters submitted to shareholders for a vote.

 

Zeshu Dai beneficially owns 13,300,000 shares of our ordinary shares through China Meitai Food Co., Ltd., a British Virgin Islands company. Zeshu Dai beneficially owns 45.88% of our issued and outstanding ordinary shares as of October 31, 2020. As long as Zeshu Dai owns or control a significant amount of our outstanding voting power, she has the ability to exercise substantial control over all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including:

 

  the election and removal of directors and the size of our board of directors;

 

  any amendment of our memorandum or articles of association; or

 

  the approval of mergers, consolidations and other significant corporate transactions, including a sale of substantially all of our assets.

 

Moreover, beneficial ownership of our ordinary shares by Zeshu Dai may also adversely affect the trading price for our ordinary shares to the extent investors perceive disadvantages in owning shares of a company with a controlling shareholder.

 

We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity.

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules and regulations implemented by the SEC and the Nasdaq Capital Market require significantly heightened corporate governance practices for public companies. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a result of becoming a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our ordinary shares could decline.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

As a publicly listed company, we are required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.

 

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We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differs from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our ordinary shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following June 30. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our stock price may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of the provision that allow us to delay adopting new or revised accounting standards and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

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In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

The market price of our ordinary shares may be volatile or may decline regardless of our operating performance.

 

The market price of our ordinary shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  · actual or anticipated fluctuations in our revenue and other operating results;

 

  · the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

  · actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

  · announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  · price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

  · lawsuits threatened or filed against us; and

 

  · other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

21

 

 

Future issuances or sales, or perceived issuances or sales, of substantial amounts of Shares in the public market could materially and adversely affect the prevailing market price of the Shares and our ability to raise capital in the future.

 

The market price of our Shares could decline as a result of future sales of substantial amounts of Shares or other securities relating to the Shares in the public market, including by the Company’s substantial shareholders, or the issuance of new Shares by the Company, or the perception that such sales or issuances may occur. Future sales, or perceived sales, of substantial amounts of the Shares could also materially and adversely affect our ability to raise capital in the future at a time and at a price favorable to us, and our Shareholders will experience dilution in their holdings upon our issuance or sale of additional securities in the future.

 

Future financing may cause a dilution in your shareholding or place restrictions on our operations.

 

We may need to raise additional funds in the future to finance further expansion of our capacity and business relating to our existing operations, acquisitions or strategic partnerships. If additional funds are raised through the issuance of new equity or equity-linked securities of the Company other than on a pro rata basis to existing Shareholders, the percentage ownership of such Shareholders in the Company may be reduced, and such new securities may confer rights and privileges that take priority over those conferred by the Shares. Alternatively, if we meet such funding requirements by way of additional debt financing, we may have restrictions placed on us through such debt financing arrangements which may:

 

  · further limit our ability to pay dividends or require us to seek consents for the payment of dividends;

 

  · increase our vulnerability to general adverse economic and industry conditions;

 

  · require us to dedicate a substantial portion of our cash flows from operations to service our debt, thereby reducing the availability of our cash flow to fund capital expenditure, working capital requirements and other general corporate needs; and

 

  · limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our ordinary shares if the market price of our ordinary shares increases.

 

We have material weaknesses in our internal control over financial reporting. If any material weakness persists or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report its financial results could be adversely affected.

 

In connection with the preparation of the financial statement for the Company’s Annual Report on Form 20-F for the year ended June 30, 2020, our management evaluated the effectiveness of our internal control over financial reporting as of June 30, 2020 and determined they were not effective as described in Part II. Item 15. “Controls and Procedures” of this Annual Report. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

There can be no assurance that any of our efforts we are implementing, or our internal control over financial reporting generally, will remediate any material weakness or avoid future weaknesses or deficiencies. Any failure to remediate the material weakness and any future weaknesses or deficiencies or any failure to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet its reporting obligations or result in material misstatements in its financial statements. If we are unable to remediate its material weaknesses, our management may not be able to conclude that its disclosure controls and procedures or internal control over financial reporting are effective, which could result in investors losing confidence in its reported financial information and may lead to a decline in the stock price.

 

Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult, impractical or impossible for you to effect service of process within the United States upon us or these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

 

22

 

 

Any judgment obtained in the federal or state courts of the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands (the “Grand Court”) if (a) the judgment was given by a foreign court of competent jurisdiction, (b) our company either submitted to the jurisdiction of the foreign court or was resident and carrying on business in the jurisdiction and was duly served with process, (c) the judgment was final and conclusive, (d) the judgment was not in respect of taxes, a fine or a penalty or similar fiscal or revenue obligations imposed on our company, and (e) the judgment was not obtained by fraud and is not of a kind the recognition and enforcement of which would be contrary to the principles of natural justice or public policy in the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. It is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

 

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our director and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

 

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands (the “Cayman Islands Companies Law”) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands (other than decisions of the Privy Council in appeals from the Cayman Islands courts). The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.

 

There can be no assurance that we will not be passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ordinary shares to significant adverse United States income tax consequences.

 

We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat CQ Penglin and JMC as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of these entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of CQ Penglin and JMC for United States federal income tax purposes, and based upon our income and assets, including goodwill, and the value of our ordinary shares, we do not believe that we were a PFIC for the taxable years ended June 30, 2020, 2019, and 2018 and do not anticipate becoming a PFIC in the foreseeable future.

 

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ordinary shares, fluctuations in the market price of our ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of CQ Penglin and JMC for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

 

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If we are a PFIC in any taxable year, a U.S. holder (as defined in “Item 10. Additional Information — E. Taxation — United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ordinary shares and on the receipt of distributions on the ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. holder holds our ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ordinary shares. For more information see “Item 10. Additional Information — E. Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Considerations.”

 

Item 4. Information on the Company

 

Overview

 

China Xiangtai Food Co., Ltd. is a Cayman Islands exempted company and conduct business in China through subsidiaries and variable interest entities in China. We are primarily a pork processing company that has operations across key sections of the industry value chain, including slaughtering, packing, distribution, wholesale, and retail of a variety of fresh pork meat and parts. We are committed to provide consumers with high-quality, nutritious and tasty products through our portfolio of trusted and well-known brands and to driving consumption trends, while setting a high industry standard in product quality and food safety. We can efficiently match supply with demand and benefit from the strong industry trends in China.

 

Maintaining the highest industry standards for food safety, product quality and sustainability is one of our core values. We have food circulation permit and national industrial production certificate. We have strict quality control systems in each segment of our value chain, from production through sales and distribution. These objectives are grounded in our sustainability program, which focuses on key areas such as animal care, employee welfare, the environment, food safety and quality, helping communities and value creation.

 

We purchase live hogs through distributors who purchase hogs from local hog farms located in different cities in southern China. We use an automated standard modern production line to slaughter the hogs and pack the fresh pork and byproducts. We deliver the fresh pork to local distributors who then resold the fresh pork to smaller distributors and individual vendors from the local farmers’ market. We also purchase fresh, chilled and frozen pork, beef, lamb, chicken, duck, and rabbit meat from external distributors. We process some fresh pork, beef, lamb, chicken, duck, and rabbit meat into processed products. We sell fresh, chilled and frozen pork, beef and lamb, and processed meat products at our supermarket and to other local grocery stores in Chongqing. We have received many awards and honors including "Honest and Trustworthy Seller", “Annual Sales Star”, “Best Partner,” and “First Place in Fresh Grocery” from New Century Department Store, “Industrial Leading Enterprise” from Chongqing City Fuling District government, “Vice President Entity” from Chongqing Tongchuan Chamber of Commerce. We won these awards and honors because we have had a close and successful working relationship with big supermarkets and department stores, that we have effectively discharged our sales and marketing effort, and that we penetrated deep into the meat market in Chongqing City.

 

Through the acquisition of CQ Pengmei consummated in July 2018, we have two supermarkets in Chongqing that offers a variety of products, including meats, fish and seafood, fresh produces, frozen foods, breads and bakery products, alcoholic and nonalcoholic beverages, housewares products, house-clean products and laundry products, etc. The operations of these two supermarkets started in November 2017. One of the supermarkets has temporarily stopped operation since August 2018 due to landlord’s failure to meet the fire safety requirements. We have filed a lawsuit against the landlord for breach of the store operating lease. The lawsuit is still ongoing. In February 2020, we discontinued our grocery stores business as we have been operating at losses in this business. As a result, the results of operations for our grocery stores business are reported as discontinued operations under the guidance of Accounting Standards Codification 205.

 

On April 3, 2020, China Xiangtai and Xiangtai WFOE entered into a Share Purchase Agreement with JMC and the shareholders of JMC. Pursuant to the Share Purchase Agreement the Company agreed to issue to the shareholder who owns 51% of JMC’s equity interest a total of 2,000,000 duly authorized, fully paid and nonassessable ordinary shares of the Company, valued at a price of $3.71 per share, which was the closing price of the Company’s ordinary share on February 4, 2020, for an aggregate purchase price of $7,420,000, subject to the milestones as specified in the Share Purchase Agreement, in exchange for JMC’s shareholders’ agreement to cause JMC to enter into certain VIE agreements with Xiangtai WFOE. These VIE agreements were entered into on April 3, 2020, through which Xiangtai WFOE has the right to control, manage and operate JMC in return for a service fee equal to 51% of JMC’s after-tax net income. Through our acquisition of JMC consummated in April 2020, we expanded our business to the feed industry in China, a rapidly growing industry as a result of an increased domestic demand for pork and beef.

 

We have 154 employees. In our slaughterhouse and processing facility, we have a standardized and automatic production line for hog slaughtering and meat packing. We also have meat processing rooms and standardized freezers to process and store processed meat product. Additionally, we have established environment protection facilities, such as sewage treatment, harmless treatment and incineration treatment.

 

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Our Products

 

Meat processing, distribution and retail

 

Fresh Series. We have established the processing and marketing channels of pork and meat products over the years. After slaughter and cleaning, the acid in pork is eliminated in a 0-4 °C environment. The pork is mainly sold as whole pieces without being cut into pieces. A very minimal amount would be cut into different parts and cuts in our sterile room. Fresh pork sell at supermarkets are mainly purchased from the market and supplied by contracted vendors. Fresh beef, lamb, chicken and rabbit meat are also purchased from the market and supplied by contracted vendors.

 

Chilled Series. In order to make sure that we can meet and take advantage of fluctuating demand from consumers, we purchase fresh pork and store them in our refrigerated storage. For that purpose, we have established a cold supply chain that supports the storage, distribution and sale of chilled meat. We are able to store meat for a much longer period. We can keep the chilled series fresh for up to10 days and the frozen series fresh for up to one year. As the supply of pork in China decreases while the demand remains the same, having longer storage time allows us to provide a steady stream of supply whenever the market demand rises. It also expands our supply channels, allowing us to purchase meat from cities and countries far away from Chongqing.

 

Frozen Series. We also purchase frozen pork to produce sliced and ground pork. We purchase specific cuts of pork with optimal composition of fat to lean meat ratio. The sliced and ground pork are mainly for retails in supermarkets.

 

Processed Series. In order to accommodate people’s busy working lifestyle, we introduced processed products that can be easily prepared at home. Through the low-temperature and quick-freezing treatment, the freshness, flavor and the nutrition of the meat can be maintained to the utmost extent, and food bacteria can be effectively eliminated. While mixing the ingredients, the content of fat, calorie and cholesterol are controlled by different combinations of raw materials to suit the needs of different consumers. We add seasonings, spices, and vegetables in the package so consumers can easily cook the food at home. During peak season, which typically would be around the Chinese New Year, our processed products are in high demand as households prefer to buy food that are ready to be cooked.

 

Feed and cooking oil distribution

 

Through JMC, our variable interest entity, we also engage in distributing feed raw material and cooking oil. JMC has entered strategic alliances with large grain and oil companies such as Sinograin, and has obtained general distributorship in Chongqing, Sichuan, and neighboring area in China. We do not process the feed and cooking oil procured from the suppliers.

 

Our Facility

 

Our slaughtering plant in Linshui Industrial Park, Sichuan Province covers an area of 27,000 square meters, with a construction area of 8,500 square meters, a slaughtering area of 3,000 square meters, 9 large refrigeration houses of 4,500 square meters, office and dormitory of 1,500 square meters, and a boiler room of 200 square meters.

 

We also have a processing factory in Fuling, Chongqing, covering an area of 8,000 square meters, with a construction area of 11,000 square meters, a processing area of 4,000 square meters, 7 large refrigeration houses of 2,200 square meters, offices and dormitories of 3,000 square meters, and boiler rooms of 200 square meters. There are sausage and bacon production line, canned meat (ham) production line, salty braised pork production line, and soy sauce stewed products production line.

 

Additionally, we have rented a processing space in Dadukou, Chongqing, covering over 1,900 square meters. The space is under renovation as of the date of this annual report. We plan to use 1,600 square meters of space as a processing workshop and 300 square meter of space as a cold storage for our meat products.

 

Our Production Cycle

 

We source all of our live hogs from our suppliers. It usually takes less than 24 hours to transfer the hogs from the purchasing point to the slaughterhouse, and only 2-3 hours to slaughter and cut into pieces, which can then be sold. Fresh pork is the main source of protein for Chinese consumers in daily life. Our factories operate year-round. Generally, the sales season is from the winter solstice to the spring of the next year.

 

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For our processed products such as sausage and bacon, it usually takes more than two weeks to process from fresh pork. Lamb offal are sourced from suppliers. We are able to process them within 2-3 hours. These processed products are seasonal, generally due to the demand for meats before and after the Chinese New Year period.

 

Raw Material

 

Live hogs. We signed contracts with live hog distributors to purchase the live hogs from large and medium-sized hog farmers in the southern region. The quality of the hogs is specified in the contracts and must comply with the national health and quarantine standards. We have signed six suppliers to meet the daily supply. For the fiscal year ended June 30, 2020, we relied on 4 main suppliers who aggregately accounts for approximately 83.72% of our operating expenses for purchasing live hogs.

 

Pork, Beef, lamb, chicken, duck and rabbit meat. We source pork, beef, lamb, chicken and rabbit meat from many suppliers, who provide us the meat cuts. We do not purchase live animals from them.

 

Seasonings. They are mainly used for meat products processing. We purchase on an annual basis 1,000 kg Chinese red pepper, 2,000 kg marinating spice, 3,000 kg chili pepper, 2,000 kg refined salt, and 2,000 kg chicken bouillon and other seasonings.

 

Industry Overview

 

The rapid growth of the PRC pork industry has been driven largely by robust economic growth, continued urbanization and rising disposable income. China is the largest pork production and consumption market in the world, comprising 49.25% and 50.2% of the global production and consumption markets respectively in 2015. Pork is deeply rooted in Chinese culture and diet, and comprised 61.9% of China’s meat consumption in 2015. Although PRC pork production volume has historically grown at a steady rate, a gap has consistently existed between the supply and demand of pork. Pork consumption is expected to grow at a comparatively faster CAGR of 3.08% compared to pork production with a CAGR of 3.01% from 2012 to 2018, leading to a widening supply shortfall. Therefore, it is expected that the volume of PRC pork imports will continue to rise.

 

Since 2018, China has witnessed a severe epidemic of African swine fever. China produced 24.7 million tons of pork in the first six months of 2019, down 5.5% from a year earlier, according to figures from the National Bureau of Statistics. Retail pork prices reached 26.45 yuan per kg in the final week of June, up 33% on the year, according to weekly data from the Ministry of Agriculture and Rural Affairs, but still some way off the record of 31.56 yuan in June 2016.

 

Due to the robust restocking efforts in 2020 and fewer losses to African swine fever, the decline in herd inventory is estimated to reverse, and year-end 2020 inventories are forecast to grow by 9%. Total hogs slaughtered and pork production in 2020 is both estimated to decrease further by 24% and 20%, respectively, from the previous year. In 2019, China’s Ministry of Agriculture and Rural Affairs (MARA) implemented a three-year mission plan for stabilizing swine production and supply. By the end of 2019, MARA had implemented a program called Large Agricultural Enterprises Lead 10,000 Households on Swine Farming to Alleviate Poverty in 16 less developed cities in provinces including Hubei and Sichuan. With an investment of US$7.1bn (RMB50 billion) by 15 large agricultural enterprises, the program is expected to add 22 million slaughtered hogs per year.

 

The key drivers of the PRC pork industry can be analyzed in terms of demand and supply. The growing demand for fresh pork and packaged pork products is attributable to the rise in disposable income and living standards, continuing urbanization, expansion of middle class, the important role of animal protein in food consumption, the importance of pork as a source of animal protein and increasing demand for high quality and safe products. As a result of changing consumer behavior and growing demand, producers are experiencing accelerated industry concentration and a trend toward vertical integration.

 

The key drivers of the PRC pork industry have given rise to a number of key trends. In the fresh pork market, chilled fresh pork is expected to become a key product category, driven by its perceived higher quality. In addition, modern retailers in the PRC, such as supermarkets and hypermarkets, are expected to gradually increase in significance in food retail markets, especially in more developed urban areas, as a result of better hygiene and a more comfortable environment compared to traditional farmers’ markets. Brand image is playing a more important role in the pork industry, particularly as it relates to the perception of better food safety and higher product quality. The demand for packaged pork products has increased, driven by the improvements in the PRC economy and greater influence of western dietary habits. Consumers are placing greater importance on product safety, nutrition, convenience and diversification, which can be better satisfied by packaged pork products.

 

The increased consumption of pork also accelerates the growth of the feed industry. According to the Report of China Animal Feed Market- Forecasts from 2020 to 2025. Another aspect of the livestock farming that is poised throttle the growth of China animal feed sector is the longer lifecycle of beef production, the overall cattle inventory will remain stable and is expected to grow with government stimulus, relaxation of environmental standards, and higher profits will possibly incentivize some larger operations to invest in long-term expansion. It is also estimated that China's cattle herd inventory will increase by 2% to 91 million in 2020.

 

Barriers to entry for competitors include substantial investment required in branding, food safety control and production scale, as well as a strong understanding of consumer preferences.

 

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Corporate History and Structure

 

The following diagram illustrates our corporate structure:

 

 

 

Incorporated on January 23, 2018 China Xiangtai Food Co., Ltd. (“Xiangtai Cayman” or the “Company”) is a Cayman Islands exempted company. We conduct our business in China through our subsidiaries and VIE. Zeshu Dai currently has majority interest and control over our subsidiaries and VIE.

 

Under our memorandum of association, we are authorized to issue 50,000,000 ordinary shares with a par value of $0.01 per share. Upon incorporation of our company, the subscriber received 1 ordinary share as incorporation founder. The founder share was later transferred to China Meitai Food Co., Ltd., which is controlled by Zeshu Dai through a call option agreement and an entrustment agreement with Magic Pace Limited, the sole shareholder of China Meitai Food Co., Ltd. As of October 31, 2020, there were 28,988,864 ordinary shares issued and outstanding, and China Meitai Food Co., Ltd owns 13,300,000 ordinary shares. As a result, Zeshu Dai beneficially owns 13,300,000 ordinary shares and thus has controlling interest of our Company.

 

We do not foresee any conflict of interest between China Meitai Food Co., Ltd. and Xiangtai Cayman, because China Meitai Food Co., Ltd. is a holding company and do not have business operations.

 

Direct and indirect subsidiaries

 

Xiangtai BVI was incorporated on February 11, 2015. It is a wholly owned subsidiary of Xiangtai Cayman. Xiangtai BVI is currently not engaging in any active business and merely acting as a holding company.

 

Xiangtai HK was incorporated on March 4, 2015 under the law of Hong Kong SAR. It is a wholly owned subsidiary of Xiangtai BVI. Xiangtai HK is currently not engaging in any active business and merely acting as a holding company.

 

Xiangtai WFOE is a PRC wholly foreign owned entity incorporated on September 1, 2017 in Chongqing under the laws of the People’s Republic of China. It is a wholly-owned subsidiary of CVS Limited and a wholly foreign-owned entity under the PRC laws. Xiangtai WFOE is currently not engaging in any active business and merely acting as a holding company.

 

GA Yongpeng was incorporated on May 10, 2008 in Chongqing under the laws of the People’s Republic of China. GA Yongpeng engages in the purchase of livestock and poultry, breeding, slaughtering, processing, sale and retail of fresh livestock and poultry meat and meat products (preserved meat products, sauce, meat products, smoked sausage, ham products, etc.). It is a wholly owned subsidiary of Xiangtai WFOE.

 

CQ Pengmei was incorporated on July 27, 2017 in Chongqing under the laws of the People’s Republic of China. CQ Pengmei engages in sales of cosmetics, agricultural produce, aquatic products, consumer products, clothing, toys, furniture, electronic appliance and devices, storage, etc. It is a wholly owned subsidiary of Xiangtai WFOE.

 

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Contractual Arrangements with CQ Penglin and JMC

 

CQ Penglin was incorporated on November 3, 2005 in Chongqing under the laws of the People’s Republic of China. CQ Penglin primarily engages in the wholesale and retail of pre-packaged food, live hog slaughtering, purchase of livestock and poultry, processing and sale of fresh livestock and poultry meat, process and retail of meat products (preserved meat products, sauce, meat products, smoked sausage, ham products, etc.).

 

JMC was incorporated on March 14, 2012 in Chongqing under the laws of the People’s Republic of China. JMC is primarily engaged in the sales and distribution of feed raw material and cooking oil. JMC has entered strategic alliances with large grain and oil companies such as Sinograin, and has obtained general distributorship in Chongqing, Sichuan, and neighboring area in China. JMC does not process the feed and cooking oil procured from the suppliers.

 

CQ Penglin and JMC deemed as our variable interest entities.

 

We conduct our business through our variable interest entities, which we effectively control through a series of contractual arrangements. These contractual arrangements allow us to:

 

  · exercise effective control over our variable interest entities;

 

  · receive substantially all of the economic benefits of our variable interest entities; and

 

  · have an exclusive option to purchase all or part of the equity interests in our variable interest entities when and to the extent permitted by PRC law.

 

As a result of these contractual arrangements, we have become the primary beneficiary of CQ Penglin and JMC, and we treat CQ Penglin and JMC as our variable interest entity under U.S. GAAP. We have consolidated the financial results of CQ Penglin and JMC in our consolidated financial statements in accordance with U.S. GAAP.

 

Contractual Arrangements between Wiangtai WFOE and CQ Penglin

 

The following is a summary of the currently effective contractual arrangements by and among Xiangtai WFOE, CQ Penglin, and the shareholders of CQ Penglin.

 

Equity Pledge Agreement

 

Pursuant to the equity pledge agreements, as amended, among the shareholders who collectively owned all of CQ Penglin, pledge all of the equity interests in CQ Penglin to Xiangtai WFOE as collateral to secure the obligations of CQ Penglin under the exclusive consulting services and operating agreement. These shareholders may not transfer or assign transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Xiangtai WFOE’s interests, without Xiangtai WFOE’s prior approval. In the event of default, Xiangtai WFOE as the pledgee will be entitled to certain rights and entitlements, including the priority in receiving payments by the evaluation or proceeds from the auction or sale of whole or part of the pledged equity interests of CQ Penglin. The agreement will terminate at the date these shareholders have transferred all of their pledged equity interests pursuant to the equity option agreement.

 

Voting Rights Proxy and Financial Supporting Agreement

 

Pursuant to the voting rights proxy and financial supporting agreements, as amended, the shareholders of CQ Penglin give Xiangtai WFOE an irrevocable proxy to act on their behalf on all matters pertaining to CQ Penglin and to exercise all of their rights as shareholders of CQ Penglin, including the right to attend shareholders meeting, to exercise voting rights and to transfer all or a part of their equity interests in CQ Penglin. In consideration of such granted rights, Xiangtai WFOE agrees to provide the necessary financial support to CQ Penglin whether or not CQ Penglin incurs loss, and agrees not to request repayment if CQ Penglin is unable to do so. The agreements shall remain in effect for 30 years until October 8, 2047.

 

Technical Consultation and Services Agreement

 

Pursuant to the technical consultation and services agreement between Xiangtai WFOE and CQ Penglin, as amended, Xiangtai WFOE is engaged as exclusive provider of management consulting services to CQ Penglin. For such services, CQ Penglin agree to pay service fees determined based on all of their net income to Xiangtai WFOE or Xiangtai WFOE has obligation to absorb all of the losses of CQ Penglin.

 

The technical consultation and services agreement, as amended, remains in effect for 30 years until October 8, 2047. The agreement can be extended only if Xiangtai WFOE gives its written consent of extension of the agreement before the expiration of the agreement and CQ Penglin then may extend without reservation.

 

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Business Cooperation Agreement

 

Pursuant to the business cooperation agreement between Xiangtai WFOE and CQ Penglin, as amended, Xiangtai WFOE has the exclusive right to provide CQ Penglin with technical support, business support and related consulting services, including but not limited to technical services, business consultations, equipment or property leasing, marketing consultancy, system integration, product research and development, and system maintenance. In exchange, Xiangtai WFOE is entitled to a service fee that equals to all of the net income of CQ Penglin determined by U.S. GAAP. The service fees may be adjusted based on the services rendered by Xiangtai WFOE in that month and the operational needs of CQ Penglin.

 

The business cooperation agreement, as amended, remains in effect unless Xiangtai WFOE commits gross negligence, or a fraudulent act, against CQ Penglin. Nevertheless, Xiangtai WFOE shall have the right to terminate this agreement upon giving 30 days’ prior written notice to CQ Penglin at any time.

 

Equity Option Agreement

 

Pursuant to the equity option agreements, as amended, among Xiangtai WFOE, CQ Penglin and its shareholders. CQ Penglin’s shareholders jointly and severally grant Xiangtai WFOE an option to purchase their equity interests in CQ Penglin. The purchase price shall be the lowest price then permitted under applicable PRC laws. If the purchase price is greater than the registered capital of CQ Penglin, these shareholders of CQ Penglin are required to immediately return any amount in excess of the registered capital to Xiangtai WFOE or its designee of Xiangtai WFOE. Xiangtai WOFE may exercise such option at any time until it has acquired all equity interests of CQ Penglin, and may transfer the option to any third party. The agreements will terminate at the date on which all of these shareholders’ equity interests of CQ Penglin has been transferred to Xiangtai WFOE or its designee.

 

Contractual Arrangements between Wiangtai WFOE and JMC

 

The following is a summary of the currently effective contractual arrangements by and among Xiangtai WFOE, JMC, and the shareholders of JMC.

 

Equity Pledge Agreement

 

Under the equity pledge agreement among Xiangtai WFOE, JMC and the shareholders of JMC dated April 3, 2020, a shareholder who owned 51% equity interest of JMC pledged his 51% equity interests in JMC to Xiangtai WFOE to guarantee JMC’s performance of relevant obligations and indebtedness under the technical consultation and services agreement. In addition, the 51% shareholder of JMC completed the registration of the equity pledge under the agreement with the competent local authority. If JMC breaches its obligation under the technical consultation and services agreement, Xiangtai WFOE, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. This pledge will remain effective until all the guaranteed obligations are performed.

 

Voting Rights Proxy and Financial Support Agreement

 

Under the voting rights proxy and financial support agreement among Xiangtai WFOE, JMC and a shareholder who owned 51% equity interest of JMC dated April 3, 2020, the 51% JMC Shareholder irrevocably appointed Xiangtai WFOE as its attorney-in-fact to exercise on such shareholder’s behalf any and all rights that such shareholder has in respect of his 51% equity interests in JMC, including but not limited to the power to vote on its behalf on all matters of JMC requiring shareholder approval in accordance with the articles of association of JMC. The proxy agreement is for a term of 20 years and can be extended by Xiangtai WFOE unilaterally by prior written notice to the other parties.

 

Technical Consultation and Services Agreement

 

Pursuant to the technical consultation and services agreement between JMC and Xiangtai WFOE dated April 3, 2020, Xiangtai WFOE has the exclusive right to provide consultation services to JMC relating to JMC’s business, including but not limited to business consultation services, human resources development, and business development. Xiangtai WFOE exclusively owns any intellectual property rights arising from the performance of this agreement. For such services, JMC agrees to pay service fees determined based on 51% of their net income to Xiangtai WFOE or Xiangtai WFOE has the obligation to absorb 51% of the losses of JMC. This agreement will be effective for 20 years, and can be extended if Xiangtai WFOE gives its written consent of the extension of this agreement before the expiration of this agreement and JMC shall agree with this extension without reserve. Xiangtai WFOE may terminate this agreement at any time by giving a 30 days’ prior written notice to JMC.

 

Equity Option Agreement

 

Under the equity option agreement among Xiangtai WFOE, JMC and a shareholder owned 51% equity interest of JMC dated April 3, 2020, each of the shareholders of JMC irrevocably granted to Xiangtai WFOE or its designee an option to purchase at any time, to the extent permitted under PRC law, all or a portion of his 51% equity interests in JMC. Also, Xiangtai WFOE or its designee has the right to acquire any and all of its 51% assets of JMC. Without Xiangtai WFOE’s prior written consent, JMC’s shareholders cannot transfer their equity interests in JMC and JMC cannot transfer its assets. The acquisition price for the shares or assets will be the minimum amount of consideration permitted under the PRC law at the time of the exercise of the option. This pledge will remain effective until all options have been exercised.

 

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Entrustment Agreement and Call Option Agreement

 

China Meitai Food Co., Ltd. currently holds 13,300,000 of the issued and outstanding ordinary shares of the Company in a total of 21,964,027 ordinary shares. Magic Pace Limited is currently the sole shareholder of China Meitai Food Co., Ltd.

 

Ms. Zeshu Dai entered into an entrustment agreement with Magic Pace Limited, according to which Magic Pace Limited entrusted its voting power, personnel appointment power and other power related to operating and managing of China Meitai Food Co., Ltd., and therefore effectively the control of our company, to Ms. Dai to the extent permitted by the laws of the British Virgin Islands.

 

Ms. Dai has also entered into a call option agreement with Magic Pace Limited. Pursuant to the call option agreement, Magic Pace Limited granted Ms. Dai an option exercisable from the closing date of the initial public offering of the Company. Ms. Dai can exercise the option to acquire 97.74% of the shares of China Meitai Food Co., Ltd for consideration. Upon excising the option shares in China Meitai Food Co., Ltd., Ms. Dai will own 45.88% shares of the Company through China Meitai Food Co., Ltd.

 

If Ms. Dai elects not to exercise such option, Ms. Dai remains to have control of the company through the entrustment agreement with Magic Pace Limited and ordinary shares held by Magic Pace Limited.

 

Sales Channels and Long Term Opportunities

 

We currently focus our market in Chongqing and nearby cities. We plan to expand the existing market to cover the entire Southwest China. Our sales channels are consisted of:

 

Farmers’ market wholesale. Ordinary fresh pork is mainly sold through farmers’ market wholesale, which accounts for 90%, 93% and 96% of the total revenue for the year ended June 30, 2020, 2019 and 2018.

 

Sales in supermarkets. Fresh and frozen ordinary pork, beef, lamb, chicken, duck, rabbit meat and processed products are sold in supermarkets.

 

We have been working closely with online retailers and social media influencers to promote and sell our products. We are also in the process of negotiation with a national supermarket chain to supply them our meat, meat products, vegetable and fruit.

 

Customers and Suppliers

 

We sell fresh killed pork to farmers’ markets through distributors. The distributors then sell the fresh killed pork to individual pork vendors at the farmers’ markets. Farmers’ markets are where most people get fresh produce and meat. We also sell pork and processed meat in our supermarkets and to other supermarkets, such as Lotte Mart and Carrefour. For the fiscal years ended June 30, 2020, 2019 and 2018, we do not have any customers who accounted for more than 10% of our revenue.

 

We source live ordinary hogs from live hog distributors and fresh pork, beef, lamb, chicken, duck, rabbit meat, and seasonings from various suppliers. For the fiscal year ended June 30, 2020, we had five suppliers that accounts for more than 10% of our purchases. The five suppliers accounted for 19.6%, 17.4%, 16.4%, 15.8% and 14.0% of our purchases, respectively. For the fiscal year ended June 30, 2019, we had four suppliers that accounts for more than 10% of our purchases. The four suppliers accounted for 29.8%, 17.6%, 16.8% and 16.5% of our purchases, respectively. The same four suppliers also accounted for 29.0%, 24.5%, 21.2% and 12.8% of our purchases, for the fiscal year ended June 30, 2018, respectively.

 

Even though our purchases during the past three fiscal years have mainly be from four primary suppliers, we believe live hogs and other raw materials with the same quality are widely available. If we were unable to purchase from our primary suppliers, we do not expect to face difficulties in locating another supplier at substantially the same price. We have secure and efficient access to all the raw materials necessary for the production of our products. We believe our relationships with the suppliers of these raw materials are strong. While the prices of such raw materials may vary greatly from time to time, we believe we could hedge such risk by adjusting our price, or absorb the higher cost at times if necessary. See “Risk Factors – Risk Related to Our Business and Industry – We rely substantially on external suppliers for hogs, beef, lamb, chicken, duck, rabbit meat and other raw materials and – The loss of one or more of our largest customers, or changes in the trade terms required by such customers could adversely affect our business, financial condition and results of operations.”

 

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Environment

 

We are a food-processing company that concerns the environment we operate in. Our main concerns are noise and wastewater discharges. In order to meet the government requirements, the factory plant is located more than 5 kilometers away from densely populated areas. In the construction of processing area and supporting facilities, double-layer windows and the wall material with good performance are used for rooms with high-noise equipment. The Company chooses the low noise equipment and the motor of the pump type equipment have been equipped with the muffler. The pump units have been equipped with sound insulation cover; vibration isolation and vibration reduction measures have been adopted for the unit foundation; sound insulation door and window have been installed for blower room. Solid waste in the slaughtering plant and the areas are cleaned daily, and the floors of the area are washed and sterilized every day. The slaughtering plant and the areas are equipped with ventilators to dismiss exhaust gas. The exhaust gas is discharged from the area and is rapidly diffused after mixing with the atmosphere. We clean the sludge from the sewage station in a timely manner, and regularly sprays the biological deodorant to the sewage treatment station and waste collection station. Slaughtering wastewater, ground washing waste water and domestic sewage enter the sewage treatment station of the factory, which are treated by the “hydrolytic acidification plus aerobic” treatment. A pool body such as a shed, a hydrolytic acidification tank, a sedimentation tank, a sludge tank and the like is capped. At the same time, an activated carbon adsorption device is provided at the exhaust port of the draught fan, so that the exhaust gas is discharged after adsorption by the activated carbon.

 

In accordance with the above measures, the noise emitted by the factory plant is in accordance with Class 2 standards in “Emission Standard for Industrial Enterprises Noise at Boundary” (GB12348-2008). The treated wastewater meets the level III standards of the “Discharge Standard of Water Pollutants for Meat Packing Industry” (GB13457-1992) and the “Sewage Discharged into the City Sewer Water Quality Standards” (CJ343-2010).

 

Quality Control

 

Our operations comply with international standards and we have obtained a series of certifications, such as ISO9001, ISO22000 and HACCP. We obtained such certifications by applying to and passing documentary and on-site inspections by independent accreditation bodies. Our accredited production facilities have implemented various control procedures in accordance with the requirements of such quality standards and certifications. As part of maintaining such certifications, our operations are subject to annual inspections by accreditation bodies. We also conduct our own annual evaluations and internal audits to monitor the effectiveness of such control procedures and to ensure strict compliance of our operations with the relevant standards.

 

The main raw material used in our production of fresh pork products in China is live hogs, while the main raw material used in our production of processed and packaged products are fresh pork and other meats. All live hogs we purchase must have passed government quarantine inspections. The suppliers must provide quarantine inspection certifications, and we verify the information indicated in the certifications against the actual goods delivered. We conduct onsite inspections with respect to all live hogs delivered to our slaughtering facilities in accordance with applicable PRC law. Such onsite inspections involve checking for any disease symptoms and the presence of defects such as lameness. We also conduct testing for any residue in the hogs of a group of chemicals generally known as lean meat powder in China, including clenbuterol hydrochloride and ractopamine. We continuously monitor the quality of raw materials provided by each supplier. In the event of sub-standard supplies, we may temporarily or permanently suspend procurement from the vendor or supplier.

 

We follow standardized production procedures and comply with our strict internal quality standards. We conduct multiple testing at key stages in our hog processing operations to prevent contamination. Before our fresh pork products can be sold to our customers every day, we conduct sample inspection and testing to ensure the quality of the products that will be delivered to the customers. Each product is marked with the batch code, product code, the food production license number, and the QS mark. The qualified rate of the company's products is 100%, and that of sanitary inspection is more than 99%.

 

Since the establishment of the company, there has not been any violation of laws and regulations related to the quality of products and services and technical supervision, and no major legal actions with the customer due to product quality problems.

 

Description of Property

 

Intellectual Property

 

We rely on certain intellectual property to protect our domestic business interests and ensure our competitive position in our industry.

 

31

 

 

Trademark

 

We have registered the following trademarks in the PRC.

 

No.  Registrant  Trademark  Certificate
Code
  Category  Application Area
1  CQ Penglin    17654023  29  Meat, preserved meat, canned meat, preserved fish, preserved vegetable, egg, milk, edible oil, dried edible mushroom
                
2  CQ Penglin    17654506  30  Tea drink, bread, bun, flour, dough, cornflower, powered bean, food starch, seasonings, yeast
                
3  CQ Penglin    17653798  30  Bread, bun, flour, dough, cornflower, powered bean, food starch, seasonings, yeast, edible fragrance
                
4  CQ Penglin    16422730  35  Display of goods on the communications media for retail purposes; advertising; franchise business management; marketing; marketing for others; recruitment; commercial enterprise relocation; invoicing; accounting
                
5  CQ Penglin    14682870  29  Pickled fruits; pickled vegetables; edible oils; processed nuts; tofu
                
6  CQ Penglin     21694920  29  Meat, preserved meat, meat product, preserved fish, canned meat, pickled vegetable, egg, milk, edible oil, dried edible mushroom.
                
7  CQ Penglin  鹏霖鲜生活  29872152  29  Canned meat, pork food, sausage, fish food, dried edible fungi, edible oil, eggs, processed nuts, pickled vegetables, tofu products
                
8  CQ Penglin  鹏霖鲜生活  29889311  30  Soy flour, edible fragrance, bread, seasoning (condiment), yeast, tea, sugar, honey, flour, casserole
                
9  CQ Penglin  鹏霖鲜生活  29889332  31  Wheat, cereals (cereals), plants, live fish, live poultry, fresh fruits, fresh vegetables, strains, feed, brewing malt
                
10  CQ Penglin  鹏霖  31480094  31  Wheat, cereals (cereals), plants, live fish, live poultry, fresh fruits, fresh vegetables, strains, feed, brewing malt
                
11  CQ Penglin  鹏霖  31474511  32  Beer, wort (fermented into beer), juice, tomato juice (beverage), non-alcoholic beverages, non-alcoholic cider, ebony juice (alcohol-free), bean juice, almond syrup, powder for sparkling beverages
                
12  CQ Penglin  鹏霖鲜生活  29886736  35  Post advertisements, find sponsorships, import and export agents, sell for others, provide online market for buyers and sellers of goods and services, franchise business management, personnel management consulting, computer database information systemization, drawing bills, accounting statements, medical supplies retail Or wholesale service
                
13  CQ Penglin    29100909  35  Posting advertisements to provide online marketplaces for buyers and sellers of goods and services, looking for sponsorship, marketing for others, retail or wholesale services for medical supplies, business management for franchising, computerized database information, personnel management consulting, billing, account statements, Import and export agent

 

32

 

 

We have submitted applications for the following trademarks in the PRC. We cannot guarantee you that all the application will be approved.

 

No.  Applicant  Trademark  Application
Number
  Category  Application Date
1  CQ Penglin  鹏霖  31457719  16  June 11, 2018
                
2  CQ Penglin  鹏霖  31462411  33  June 11, 2018
                
3  CQ Penglin  鹏霖  31462446  40  June 11, 2018
                
4  CQ Penglin  鹏霖鲜生  31462701  31  June 11, 2018
                
5  CQ Penglin   鹏霖鲜生  31462713  35  June 11, 2018
                
6  CQ Penglin  鹏霖  31467098  43  June 11, 2018
                
7  CQ Penglin  鹏霖鲜生  31469596  29  June 11, 2018
                
8  CQ Penglin  鹏霖  31470642  44  June 11, 2018
                
9  CQ Penglin  鹏霖  31474545  35  June 11, 2018

 

10  Xiangtai Cayman     32553027  29  July 28, 2018
                
11  Xiangtai Cayman     32552293  29  July 28, 2018
                
12  Xiangtai Cayman    32551279  30  July 28, 2018
                
13  Xiangtai Cayman     32550147  30  July 28, 2018
                
14  Xiangtai Cayman     32549724  31  July 28, 2018

 

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15  Xiangtai Cayman     32548992  31  July 28, 2018
                
16  Xiangtai Cayman     32551408  35  July 28, 2018
                
17  Xiangtai Cayman     32551412  35  July 28, 2018

 

18  Xiangtai Cayman     32550941  39  July 28, 2018
                
19  Xiangtai Cayman     32550945  39  July 28, 2018
                
20  Xiangtai Cayman     32551438  40  July 28, 2018
                
21  Xiangtai Cayman     32549762  40  July 28, 2018
                
22  Xiangtai Cayman    32549935  44  July 28, 2018
                
23  Xiangtai Cayman     32550957  44  July 28, 2018

 

Domain

 

We have the right to use the following domain registrations issued in the PRC.

 

No.   Domain Name  Owner
 1   plinfood.com  CQ Penglin
 2   plinfood.top  CQ Penglin
 3   plinfood.cn  CQ Penglin
 4   plinfood.cc  CQ Penglin

 

Real Property

 

Purpose  Duration of Land
Use
  Address  Space (square
meters)
  Ground Floor
Area
  Purpose
Industrial  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building A, Fulin, Chongqing  113.45     Processing area, freezer
Office  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building B, Fulin, Chongqing  752.77     Office
Residential  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building C, Floor 1, Fulin, Chongqing  1,057.54     Staff dormitory
Residential  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building G, Fulin, Chongqing  16.28  6,814.4  Staff dormitory
Industrial  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building H, Fulin, Chongqing  61.17     Processing area, freezer
Industrial  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building K, Fulin, Chongqing  161.32     Processing area, freezer
Industrial  September 14, 2006 to April 15, 2055  128 Xinyuan Road, Building L, Fulin, Chongqing  2,807.06     Processing area, freezer
Industrial  October 9,2009 to August 23,2059  Dafuosi Industrial Develpoment Zone 2, Disctrict No. 5, Dingping Town South, Linshui, Sichuan Province  8,498.7  26,837   Slaughterhouse

 

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Equipment

 

For the year ended June 30, 2020, we had $621,819 depreciation expense, of which, $496,562 was from continuing operations. As of June 30, 2020, the total value of property, plant and equipment was $3,481,745, of which, $3,455,993 was from continuing operations. For the year ended June 30, 2019, we had $677,387 depreciation expense, of which, $509,778 was from continuing operations. As of June 30, 2019, the total value of property, plant and equipment was $4,549,212, of which, $3,335,229 was from continuing operations. For the year ended June 30, 2018, we had $529,442 depreciation expense. As of June 30, 2018, the total value of the property, plant and equipment was $3,962,455.

 

Lease commitment

 

Lease Term  Address  Space (square
meters)
   Monthly Rent
(RMB)
   Purpose
July 2, 2015 to July 15, 2021  Xinganxian Plaza, Building B, Suite 21-1, Lianglukou, Yuzhong District, Chongqing   172.75    9,000   Office
September 9, 2019 to September 8, 2024  Xinganxian Plaza, Building B, Suite 19.3, Lianglukou, Yuzhong District, Chongqing   418    20,000   Office
May 20, 2017 to May 20, 2021  30 Changjiang No.1 Road, 1-7-2, Chongqing   179.9    2,500   Employee’s dormitory
August 18, 2017 to February 18, 2028  B2, No.96 and No.98 Jinhe Road, Beibei District, Chongqing   3,560    56,960   Grocery store (1)
May 26, 2019 to May 25, 2021  30 Changjiang No.1 Road, Unit 1-8-5   87.4    1,500   Employee’s dormitory
February 18, 2020 to February 17, 2030  1048 Songqing Road, Dadukou District, Chongqing, West Wing, 1st Floor   306.43    2,757.87(2)  Storage
February 17, 2020 to February 16, 2030  1048 Songqing Road, Dadukou District, Chongqing, Unit 1-2-45 and 1-21   1,610    37,030   Processing workshop
April 15,2020 to April 14, 2034  Xishanping, Beibei, Chongqing   333,333    83,333   Farm

 

  (1) This lease has been suspended due to landlord’s failure to meet the fire safety requirement. The Company is not currently paying rent under this lease.

 

  (2) The monthly rent will increase by 5% every two years starting on the third year of the lease term.

 

Our Employees

 

Department   Number of Employees     % of Total  
Management     8       5.2 %
Marketing and Sales     96       62.3 %
Administrative     21       13.6 %
Procurement     9       5.8 %
Processing     17       11.0 %
Warehouseman     3       2.1 %
Total     154       100 %

  

Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. As required by regulations in China and according to local government’s requirements, we participate in various employee social security plans that are organized by local governments. We pay social insurance for some of our employees, covering all five types of social insurance, including pension, medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance.

 

Legal Proceedings

 

Our subsidiaries and variable interest entities, CQ Penglin, CQ Pengmei and GA Yongpeng are subject to various legal proceedings and claims, including contractual disputes and other commercial disputes, including as described below. Although it is not feasible to predict the outcome of these matters, we believes, unless otherwise indicated below, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.

 

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Chongqing Puluosi Small Mortgage Co., Ltd. v. Chongqing Penglin Food Co., Ltd.

 

On January 2, 2018, CQ Penglin and Chongqing Puluosi Small Mortgage Co., Ltd. (“PLS”) entered into a loan agreement (the “PLS Loan Agreement”), pursuant to which PLS agrees loan CQ Penglin RMB 20,000,000 (the “PLS Loan”) for a term of one year with annual interest rate of 12% and penalty of 50% of the interest due.

 

On the same day, GA Yongpeng, Zeshu Dai, CEO and Chairwoman of the Company. and her husband, Mingwen Wang, signed a guarantee agreement with PLS, guaranteeing the PLS Loan.

 

On April 8, 2019, Chongqing Puluosi Small Mortgage Co., Ltd. (“PLS”) filed a civil complaint at Chongqing Yubei District People’s Court (the “Yubei Court”) and complained that CQ Penglin should repay principal RMB 10,000,000 (the “First Debt”) with an interest of RMB 183,333.33 and penalty since November 14, 2018 until the pay-off date.

 

CQ Penglin defended that pursuant to a supplement agreement executed by PLS, CQ Penglin and other parties in May 2017 and a power of guarantee executed by GLP Finance Leasing (Shanghai) Co., Ltd. (“GLP”), an affiliate of PLS, the First Debt should be escrowed in the account under the control of Chongqing Bentong Technology Co., Ltd. (“Chongqing Bentong”), designated by GLP, as a guarantee. When the PLS Loan expired, Chongqing Bentong should wire back the First Debt to Penglin which should be used to repay PLS. However, CQ Penglin had not received the First Debt from Chongqing Bentong and therefore did not repay the First Debt to PLS.

 

The case was heard by the Yubei Court on June 19, 2019. On November 13, 2019, the Yubei Court issued a civil mediation letter. The Yubei Court confirmed that CQ Penglin owed PLS principal of RMB 8,500,000, interest of RMB 183,333.33, interest penalty (the interest penalty should be calculated based on RMB 8.5 million with 12% interest per year plus 50% from November 14 to the pay-off date) and compound interest (from November 14 to the pay-off date, calculating based on outstanding interest and interest penalty with 12% interest per year plus 50% ). Accordingly, RMB 2 million of principal would be due before December 31, 2019, RMB 2 million of principal would be due before March 31, 2020, RMB 2 million of principal would be due before May 31, 2020, RMB 2.5 million of principal, RMB 183,333.33 interest, the total of outstanding interest penalty and compound interest would be due before August 31, 2020 by CQ Penglin to PLS and GA Yongpeng, Mingwen Wang and Zeshu Dai should undertake joint liability for the repayment of the First Debt. CQ Penglin also be required to pay PLS’s attorney fee RMB 250,000, property guarantee fee RMB 13,800 and court fee RMB 43,900 to PLS before August 31, 2020.

 

As of October 27, 2020, CQ Penglin has paid RMB 2,250,000 to PLS for the First Debt.

 

In June 2019, CQ Penglin, GA Yongpeng and other defendants received another civil complaint from PLS, in which PLS complained that CQ Penglin should repay principal RMB 20,000,000 (the “Second Debt”) with an interest and penalty until the pay-off date.

 

On November 14, 2019, the Intermediate Court issued a civil mediation letter, according to which the Intermediate Court confirmed that CQ Penglin owed PLS principal of RMB 20,000,000, interest of RMB 893,333.33 as of January 2, 2019, compound interest RMB 22,400 within the loan period (the interest should be calculated based on RMB 20 million with 18% compound interest per year since January 3, 2019), PLS’s attorney fee RMB 500,000, court fee RMB 74,775 and property guarantee fee RMB 22,600. Accordingly, RMB 3 million of principal would be due before December 31, 2019, RMB 3 million of principal would be due before March 31, 2020, RMB 3 million of principal would be due before May 31, 2020, all the remaining balance would be due before August 31, 2020 by CQ Penglin to PLS and GA Yongpeng, Mingwen Wang and Zeshu Dai should undertake joint liability for the repayment of the Second Debt.

 

As of the date of this annual report, 2020, for the Second Debt, Zeshu Dai has paid off RMB 849,990.35 to PLS, Mingwen Wang has paid off RMB 337,118.66 to PLS and the Intermediate Court has ordered to enforced RMB 31,712.25 from CQ Penglin’s account as part of the Second Debt’s repayment.

 

Yong Li v. Chongqing Fu Yong Sheng Food Supermarket Co., Ltd. & Guang’an Yongpeng Food Co., Ltd.

 

On May 7, 2018, Chongqing Fu Yong Sheng Food Supermarket Co., Ltd. (“FYS Supermarket”), GA Yongpeng and Yong Li signed an agreement (the “Agreement”), according to which, FYS Supermarket agreed to buy supermarket equipment owned by Yong Li, for a total price of approximately RMB 1.8 million. FYS Supermarket paid Yong Li RMB 100,000 upon signing the Agreement and agreed to pay the remaining RMB 1.7 million before October 18, 2018, with interest at a rate of 1.5% per month for any balance paid thereafter. GA Yongpeng, an indirect subsidiary of the Company, served as the guarantor for FYS Supermarket in the Agreement.

 

After the Agreement was signed, Chongqing Yangshida Real Estate Development Co., Ltd. (“Yang Shi Da”) provided FYS Supermarket with a copy of a leasing agreement between itself and Yong Li dated July 4, 2017, claiming that it was the actual owner of the equipment and that Yong Li only had the right to use and not the legal titles to the equipment. Accordingly, Yang Shi Da advised FYS Supermarket to hold the payment to Yong Li. Yang Shi Da also agreed that FYS Supermarket could use the equipment for free.

 

After FYS Supermarket suspension of the payment, Yong Li filed for pretrial property preservation to the Chongqing Nan’an District People’s Court (the “Nan’an Court”) and Nan’an Court granted pretrial property preservation on November 6, 2018 to freeze GA Yongpeng’s bank account in the amount of RMB 42,920.92. Subsequently, Yong Li filed a lawsuit to the Nan’an Court, requesting FYS Supermarket to pay RMB 1,805,000 yuan, and GA Yongpeng to assume joint liability.

 

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On March 18, 2019, FYS Supermarket and GA Yongpeng sued Yong Li to revoke the agreement on the grounds of Yong Li’s alleged fraudulent representation. On March 21, 2019, FYS Supermarket and GA Yongpeng applied to the Nan’an Court to suspend Yong Li's lawsuit against them.

 

On June 11, 2020, Nan’an Court ruled to dismiss the FYS Supermarket and GA Yongpeng’s claim against Yong Li and ruled that FYS Supermarket shall pay Yong Li RMB1,700,000 and the monthly interests rate at 1.5% for the transfer fee and the losses, and Yong Li’s attorney fee in the amount of RMB 20,000. GA Yongpeng shall bear joint and several liability for the above repayment. FYS Supermarket and GA Yongpeng were also required to pay property guarantee fee in the amount of RMB 5,000 and court fee in the amount of RMB 21,045.

 

Yonghong Chen v. Chongqing Pengmei Supermarket Co., Ltd. v. Hong Zhou & Qingfu Liu

 

On January 2, 2019, Yonghong Chen sued CQ Pengmei regarding a lease dispute where CQ Pengmei was the lessor and Yonghong Chen was the lessee. In the complaint, Yonghong Chen sought damages in the amount of RMB110,000. CQ Pengmei added Hong Zhou and Qingfu Liu, who leased the property to CQ Pengmei, as third parties to this case.

 

On April 28, 2020, Chongqing City Beibei District People’s Court (“Beibei Court”) issued a judgement that CQ Pengmei shall return the Performance Bond of RMB 3,750 back to Yonghong Chen; CQ Pengmei shall return the rent of RMB 2,022.22 back to Yonghong Chen; CQ Pengmei shall compensate Yonghong Chen for the loss of RMB 13,882.86 in commodity extrusion, RMB 5,408 in decoration and decoration advertising expenses, and RMB 16,500 for the loss of work, which totals RMB 35,790.86; and CQ Pengmei shall also be responsible for RMB 840 out of RMB 1,250 of the litigation costs.

 

On May 19, 2020, CQ Pengmei has appealed the case to the Intermediate Court. On July 8, 2020, the Intermediate Court made a judgement that CQ Pengmei shall return the Performance Bond of RMB 3,750 back to Yonghong Chen; CQ Pengmei shall return the rent of RMB 2,022.22 back to Yonghong Chen; CQ Pengmei shall compensate Yonghong Chen for the loss of RMB 13,882.86 in commodity extrusion, RMB 5,408 in decoration and decoration advertising expenses, which totals RMB 19,290.86.

 

On December 27, 2018, Hong Zhou and Qingfu Liu sued CQ Pengmei regarding a lease dispute and sought damages in the amount of RMB 797,440 with interests and RMB 10,000 the use of a transformer. Hong Zhou and Qingfu Liu was the lessor and CQ Pengmei was the lessee. On June 18, 2019, CQ Pengmei counterclaimed Hong Zhou and Qingfu Liu for breach of the lease agreement and asked for a total compensation of RMB 2,106,813. On August 28, 2020, Beibei Court ruled to dismiss CQ Pengmei’s counterclaim against Hong Zhou and Qingfu Liu and made the judgement that the lease agreement between CQ Pengmei and Hong Zhou and Qingfu Liu should have terminated on December 31, 2018; CQ Pengmei shall pay the rent of RMB 233,536 to Hong Zhou and Qingfu Liu; CQ Pengmei shall pay occupancy expenses of RMB 11,392 to Hong Zhou and Qingfu Liu; CQ Pengmei shall pay liquidated damages to Hong Zhou and Qingfu Liu, which shall be calculated with RMB 233,536 as the principal and 15% annual interest rate starting from January 2, 2019 until the rent is paid off.

 

On September 22, 2020, CQ Pengmei has appealed the case to the Intermediate Court. As of the date of this annual report, the Intermediate Court has not scheduled a trial.

 

Chongqing Beibei Chouzhou Town Bank Co. Ltd. v. Penglin Wang, Mingwen Wang, Chongqing Pengmei Supermarket Co., Ltd., Chongqing Penglin Food Co., Ltd., and Chongqing Education Financing Guarantee Co. Ltd.

 

On June 4, 2020, Chongqing Beibei Chouzhou Town Bank Co. Ltd.(“Chouzhou Town Bank”) sued CQ Pengmei to repay the loan of Chouzhou Town Bank RMB2,395,058.92 in principal and RMB 20,142.45 in interest.

 

On September 25, 2020, the Beibei Court issued a civil mediation letter, according to which CQ Pengmei shall repay Chouzhou Town Bank the principal of RMB 2,380,064.92 and RMB 20,142.45 in interest. Accordingly, RMB110,000 of principal and RMB93,446.25 of the interest will be due before October 21, 2020, all the remaining balance shall be repaid for at least RMB100,000 at 21th of each month since November 2020, the repayment shall be completed no later than May 21, 2022. Since November 2020 to May 2022, the interest rate of CQ Pengmei shall pay to Chouzhou Town Bank rises by 50%, which shall be paid before 21th of each month. Penglin Wang, Mingwen Wang, Zeshu Dai, Chongqing Education Financing Guarantee Co. Ltd. and CQ Penglin shall bear joint and several liability for the above repayment.

 

As of the date of this annual report, CQ Pengmei has paid off RMB114,939.20 to Chouzhou Town Bank as part of the repayment.

 

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Chongqing Dadukou Rongxing Town Bank Co. Ltd. v. Penglin Wang, Mingwen Wang, Chongqing Mingwen Food Co., Ltd., Chongqing Penglin Food Co., Ltd., Yong Wang, Chongqing Fu Yong Sheng Food Supermarket Co., Ltd., Guang’an Yongpeng Food Co., Ltd., Zeshu Dai, and Chongqing Pengmei Supermarket Co., Ltd.

 

On August 12, 2020, Chongqing Dadukou Rongxing Town Bank Co. Ltd. (“Dadukou Rongxing”) sued CQ Penglin at the Chongqing Dadukou District People’s Court (the “Dadukou Court”) in connection with a loan agreement dated September 20, 2018 between Dadukou Rongxing and CQ Penglin. In the complaint, Dadukou Rongxin requested CQ Penglin to repay the loan of Dadukou Rongxing in the amount of RMB6, 629,447.34, which consists of RMB5,493,839.49 of principal and RMB1,135,607.85 of interest. Penglin Wang, a director of the Company, Mingwen Wang, Chongqing Mingwen Food Co., Ltd., FYS Supermarket, GA Yongpeng, Zeshu Dai, and CQ Pengmei shall bear joint and several liability for the above repayment.

 

As of the date of this annual report, the Chongqing Dadukou District People’s Court (the “Dadukou Court”) has not scheduled a trial.

 

Chongqing Puluosi Small Mortgage Co., Ltd. v. Zili Zhang and Chongqing Pengmei Supermarket Co., Ltd.

 

On August 4, 2020, PLS sue Zili Zhang in connection with a loan agreement between nPLS and Zili Zhang dated December 21, 2017. In the complaint, PLS requested Zili Zhang to repay the principal of RMB2,550,000 and the interest of RMB703,870 and CQ Pengmei to bear joint and several liability for the above repayment. CQ Pengmei has moved to dismiss the case based on lack of jurisdiction. As of the date of this annual report, the court has not ruled on the motion.

 

Regulation

 

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.

 

Laws and Regulations Relating to Hog Production and Slaughtering

 

Animal Epidemic Prevention Requirement

 

According to the Animal Epidemic Prevention Law of the PRC, which were promulgated by the Standing Committee on July 3, 1997, amended on August 30, 2007 and June 29, 2013, and became effective on January 1, 2008, and Censoring Measures on Conditions for Animal Epidemic Prevention, building an animal breeding farm (small breeding plot) or isolation place, animal slaughtering and processing house, or a place where animals and animal products are given innocuous treatment requires the Certificate of Conformity to the Conditions for Animal Epidemic Prevention from the administrative department for veterinary medicine. Before slaughtering, selling or transporting animals, or selling or transporting animal products, the owner shall submit an application to the local animal health supervision institution for quarantine. Quarantine Certificates will be issued for and quarantine marks will be attached to the animals and animal products that have passed the quarantine. Measures for the Administration of Animal Quarantine, which were promulgated by the MOA on January 21, 2010 and became effective on March 1, 2010, further provide that an examination must be conducted by local authorities on animal-related products, and an Animal Quarantine Certificate must be obtained before distributing such products.

 

Veterinary Drugs Supervision

 

According to Regulations on Administration of Veterinary Drugs, which were promulgated by the State Council on April 9, 2004 and became effective on November 1, 2004, it is prohibited to add in animal feedstuffs or drinking water any hormonal drug or other prohibited drugs specified by the administrative department for veterinary medicine under the State Council, administer human medicine to animals, or to sell animal food products that contain illicit drugs or in which the residual amount of veterinary drugs exceeds the limits. The drugs prohibited to be added in animal feedstuffs or drinking water are listed in detail in the List of Drugs Forbidden to be Used in Feeds or Drinking Water of Animals co-promulgated by the MOA, the Ministry of Health, and the State Food and Drug Administration (formerly known as “State Drug Administration”) on March 21, 2002.

 

Hog Slaughtering Requirement

 

According to Regulations on Administration of Hog Slaughtering, which were promulgated, amended by the State Council on December 19, 1997 and December 19, 2007, respectively, and became effective on August 1, 2008, and Implementing Measures for Regulations on Administration of Hog Slaughtering, the PRC government implements a system that requires hogs to be slaughtered by designated hog slaughtering plants (houses) and quarantined in a centralized manner. The governments of prefecture-level cities are responsible for issuing the permits and signboards of designated hog slaughtering plants (houses) to the designated plants. A designated hog slaughtering plant (house) is required to:

 

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  (1) have a source of water supply that is commensurate with the operation scale of the slaughter and meet the standards for water quality set by the national government authorities;

 

  (2) have stand-by slaughter rooms, slaughter rooms, emergency slaughter rooms, hog slaughter equipment and means of transportation which conform to the requirements prescribed by the national government authorities;

 

  (3) have the technical staff for hog slaughter who have obtained health certificates;

 

  (4) have qualified meat product quality inspectors;

 

  (5) have inspection equipment and sterilization facilities that conform to the requirements prescribed by the government, and the facilities for pollution prevention and control that conform to the environmental protection requirements;

 

  (6) have the facilities for innocuous disposal of diseased hogs and hog products derived therefrom; and

 

  (7) obtain a qualification certificate of animal epidemic prevention.

 

A designated hog slaughtering plant (house) is required to establish a stringent inspection system controlling meat product quality. Inspection of meat product quality must be carried out simultaneously with hog slaughtering, and the inspection results must be recorded truthfully. The records of inspection results must be retained for at least two years. Hog products of a designated hog slaughtering plant (house) shall not leave the plant (house) before they have undergone the inspection process or if they fail such inspection.

 

Under the above-mentioned laws and regulations, livestock and poultry labels and codes for breeding farms for livestock and poultry and permits and signboards for designated hog slaughtering plants (houses) for hog slaughtering plants (houses) as well as a Certificate of Conformity to the Conditions for Animal Epidemic Prevention are required. Operators are also required to abide by the relevant requirements with respect to the operation of breeding farms and designated hog slaughtering plants. Violation of these requirements or failure to obtain relevant permits would lead to a series of penalties, including confiscation of the products, instruments and earnings, imposition of fines, revocation of the permits, and/or even criminal liabilities.

 

Laws and Regulations Relating to the Food Industry in General

 

Food Safety in General

 

According to the Food Safety Law of the PRC (the “Food Safety Law”), which was promulgated by the Standing Committee on February 28, 2009 and became effective on June 1, 2009, and the Implementing Regulations for the Food Safety Law of the PRC, which were promulgated by the State Council on July 20, 2009 and became effective on the same day, the quality supervision authorities and the industry and commerce administration authorities under the State Council are responsible for supervising and administering food production and distribution, respectively. The public health authority under the State Council is responsible for the formulation and publication of national food-safety standards. The Food Safety Law and its implementing regulations require:

 

  (1) food producers and distributors to apply for the food production licenses and food distribution licenses, respectively, provided that a food producer who has obtained a food production licenses does not need to obtain a food distribution license for selling the food produced by it at its production facilities;

 

  (2) food production and operation to comply with food-safety standards and certain other requirements. Food producers shall not purchase or use raw food materials, food additives or food related products which do not meet food-safety standards;

 

  (3) each food producer or trader to establish and implement a personnel health management system. Each worker who engages in food production or trading worker is required to take a physical examination each year and obtain health certificate prior to working;

 

  (4) food producers to check the licenses and food eligibility certification documents of their suppliers before purchasing raw food materials, food additives and food-related products from them. Each food production enterprise shall establish a procurement check record system and a food ex-factory check record system and ensure the records are authentic and retained for at least two years; and

 

  (5) the packages of pre-packed food to bear labels. The labels shall state matters including the name, specifications, net content, date of production, list of ingredients or components, producer’s name, address and contact information, shelf life, product standard code, storage conditions, the general name of the food additives used in the national standards, category number of the food production license, and other content acquired by laws, regulations or food safety standards.

 

The PRC has established a food recall system. When a food producer finds that the food produced by it does not comply with food safety standards, it shall immediately stop production, recall the food on the market, notify the relevant producers, traders and consumers, and record the recall and notification. When a food trader finds that the food traded by it does not comply with food safety standards, it shall immediately stop trading such food, notify the relevant producers, traders and consumers, and record the cessation of trading and the notification. The food producers shall take measures to safely recall and destroy the affected food, and report the recall and treatment of the recalled food to the quality supervision authority at or above the county level. Where the food producers or traders fail to recall or stop producing or trading the food which are not in compliance with food safety standards under Article 53 of the Food Safety Law, the quality supervision, administration for industry and commerce, food and drug supervision and administration authorities at or above the county level shall order them to recall or stop production or trading.

 

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In the event of any breach of the Food Safety Law, relevant authorities may confiscate any illegal gains and food products, issue warnings and impose rectification orders and monetary penalties ranging from two to ten times the value of the illegal products, as well as revoke the food safety certificate and impose criminal liability in severe cases.

 

Food Production License

 

In accordance with Measures for the Administration of Food Production Licensing, which were issued by General Administration of Quality Supervision, Inspection and Quarantine of the PRC (the “GAQSIQ”) on April 7, 2010 and became effective on June 1, 2010, no enterprise shall engage in food production activities without a Food Production License or engage in any food production activities outside the scope set forth in the Food Production License, and no foods can be sold without bearing the serial number or mark of the Food Production License.

 

The Implemental Rules on the Supervision and Administration of the Quality Safety of Food Production and Processing Enterprises (Provisional), which were issued by the GAQSIQ on September 1, 2005 and became effective on the same day, adopts a market admittance system relating to food quality and safety. Enterprises that produce or process food shall maintain necessary production conditions to guarantee the food quality and safety, and obtain the Production Licenses for Industrial Products in accordance with relevant procedures. No food products may be distributed into the market without passing the inspection and being stamped with the market admittance symbols.

 

According to the Regulations on the Administration of Production Licenses for Industrial Products of the PRC, which were promulgated by the State Council on July 9, 2005 and became effective on September 1, 2005, and the Implementing Measures for Regulations on the Administration of Production Licenses for Industrial Products of the PRC, which were issued by the GAQSIQ on September 15, 2005, became effective on November 1, 2005 and were amended on April 21, 2010, the PRC implements a production license system in respect of the manufacturing of important industrial products, including meat, beverage, rice, wine and other food directly affecting human health.

 

Food Distribution Permits

 

According to the Measures for the Supervision and Administration of Food Safety in the Distribution Sector and the Administrative Measures for Food Distribution Permits both issued by State Administration for Industry and Commerce (the “SAIC”), the administrative authority for industry and commerce is responsible for supervising and administering food safety in the distribution sector. Operators that engage in the food distribution business are required to acquire Food Distribution Permits before applying for business licenses. A Food Distribution Permit is valid for three years and may be renewed by filing an application within 30 days prior to the expiration date.

 

Under the above-mentioned laws and regulations relating to food production and food distribution, a Food Production License is required for operating a food production business and a Food Distribution Permit is required for operating a food distribution business. In addition, the laws and regulations require that operations comply with various requirements relating to food safety. Non-compliance may lead to a series of penalties, including warnings, monetary penalties, confiscation of illegal gains, revocation of the certificates, and/or even criminal liabilities.

 

Laws and Regulations Relating to Product Quality

 

The Product Quality Law of the PRC

 

Pursuant to the Product Quality Law of the PRC, which was promulgated on February 22, 1993, became effective on September 1, 1993, and was subsequently amended on July 8, 2000, producers are liable for the quality of the products they produce. Where anyone produces or sells products that do not comply with the relevant national or industrial standards safeguarding the health and safety of the persons and property, the relevant authority will order such person to suspend the production or sales, confiscate the products, impose a fine of an amount higher than the value of the products and less than three times of the value of the products, confiscate illegal gains (if any) as well as revoke the business license in severe cases. Where the activities constitute a crime, the offender will be prosecuted.

 

The Agricultural Products Safety Law of the PRC

 

According to the Agricultural Products Quality Safety Law of the PRC, which was promulgated by the State Council on April 29, 2006 and became effective on November 1, 2006, producers of agricultural products shall use chemical products reasonably and avoid contaminating agricultural production sites. Agricultural producers shall also ensure that the preservatives, additives and other chemicals used in the process of the packaging, preservation, storage and transportation of agricultural products shall conform with the relevant mandatory technical specifications set by the State.

 

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Product Liabilities

 

Manufacturers and distributors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General Principles of the Civil Laws of the PRC, which became effective on 1 January 1987, and the Law on the Protection of Consumer Rights and Interests of the PRC, which was promulgated on October 31, 1993, became effective on January 1, 1994 and was amended on August 27, 1999 and October 25, 2013, the manufacturers and distributors will be held liable for losses and damages suffered by consumers caused by the defective products manufactured or distributed by them.

 

Under the above-mentioned laws and regulations, we are required to ensure that products which we produce and sell meet the requirements for safeguarding human health and ensuring human and property safety. Failing to do so will lead to a series of penalties, including the suspension of production and sale, confiscation of the products and earnings, imposition of fines, revocation of business licenses, and/or even criminal liabilities. In addition, if the products cause personal injuries or other form of torts, the manufacturers and distributors of the products may be subject to tort liability.

 

Laws and Regulations Relating to Transportation

 

According to Regulations on Road Transportation of the PRC, which were promulgated by the State Council on April 30, 2004 and became effective on July 1, 2004, an enterprise that engages in freight transportation business is required to, among other things:

 

  (1) have vehicles that are commensurate with its operations and have passed relevant tests;

 

  (2) have drivers who meet the requirements specified in Article 23 of these Regulations; and

 

  (3) maintain a sound work safety management system.

 

Enterprises that engage in the freight transportation business are required to obtain road transportation operator licenses before operating transportation business. Enterprises that engage in the freight transportation business are also required to maintain good condition of and inspect the transporting vehicles regularly. Violation of these rules or failure to obtain road transportation operator licenses before commencing operations will lead to a series of penalties, including confiscation of earnings, imposition of fines or even revocation of the licenses.

 

Laws and Regulations Relating to Environmental Protection and Water-Drawing

 

Environmental Protection

 

According to the Environmental Protection Law of the PRC, which was promulgated and became effective on December 26, 1989, entities that cause environmental pollution and other public hazards must incorporate environmental protection work into their plans, establish an environmental protection responsibility system, and adopt effective measures to prevent and control pollution and other environmental harms caused to the environment by waste gases, wastewater, waste residues, dust, malodorous gases, radioactive substances, noise, vibration and electromagnetic radiation generated in the course of the production, construction or other activities. In addition, entities that discharge pollutants must register with the relevant environmental protection authorities.

 

On November 29, 1998, the State Council promulgated the Regulations on the Administration of Environmental Protection of Construction Project. On October 28, 2002, the Standing Committee approved the Law on Appraising of Environment Impact of the PRC which became effective on September 1, 2003. According to the aforesaid laws, the construction units responsible for the construction projects must submit corresponding environmental impact appraisal documents to the relevant administrative departments of environmental protection for examination and approval and obtain approvals from such administrative departments of environmental protection before they commence construction. Environmental protection facilities shall be designed, built and commissioned together with the whole construction project. No permission shall be given for a construction project to be commissioned until its environmental protection facilities have been examined and assessed and determined to be up to standard by the relevant department of the environmental protection administration that is responsible for examining and approving the environmental impact statement of the applicant.

 

Pursuant to the requirements under the amended Law on Prevention of Water Pollution of the PRC, which became effective as of June 1, 2008, the amended Law on Prevention of Air Pollution of the PRC, which became effective as of September 1, 2000, and Administrative Regulations on Levy and Utilization of Sewage Charge, which became effective as of July 1, 2003, enterprises which discharge water or air pollutants must pay discharge fees based on the types and volumes of the pollutants discharged. The discharge fees are calculated by the local environmental protection authority, which will review and verify the types and volumes of pollutants discharged. In addition, the Law on Prevention and Control of Environmental Noise Pollution of the PRC, which was promulgated on October 29, 1996, regulates the prevention and control of noise pollution. Under the amended Law on Prevention of Environmental Pollution Caused by Solid Waste of the PRC, which became effective as of April 1, 2005 and was amended on June 29, 2013, entities and individuals that collect, store, transport, utilize or dispose of solid waste must take precautions against the spread, loss and leakage of such solid waste and adopt other measures to prevent solid waste from polluting the environment.

 

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The Administrative Measures on the Prevention and Cure of Pollution Caused by Breeding of Livestock and Poultry set out the requirements for the prevention and ratification of pollution caused by or contaminants emitted during the breeding of livestock and poultry. In the event of violation of such administrative measures, the relevant authorities of environment protection can impose orders to stop by production and to rectify the violation.

 

Under the above-mentioned laws and regulations, we are required to abide by various provisions regarding the environmental protection and prevention of pollution. We are required to complete the environmental impact evaluation process prior to commencing a construction project. We are also required to obtain discharge permits and pay discharge fees for the discharge of pollutants. Failing to comply with environmental protection laws and regulations would subject us to a range of penalties varying from warnings, fines and suspension of the production or operation to other administrative sanctions, depending on the degree of damage or adverse consequences. The responsible person of the breaching entity may be subject to criminal liabilities for serious breaches which result in significant damages to private or public property or personal injury or death.

 

Water-drawing Laws and Regulations

 

According to the amended Water Law of the PRC, which was promulgated by the Standing Committee on January 21, 1988, amended on August 29, 2002 and became effective on October 1, 2002, any entities and individuals that draw water directly from rivers, lakes or underground shall apply to the water administrative departments or the drainage management departments for a Water-Drawing Permit and pay water resource fees in order to obtain water-drawing rights in accordance with the national water-drawing permit system and the water resource fee system. Failure to comply with these provisions would result in the fines or even revocation of the Water-Drawing Permits.

 

Laws and Regulations Relating to Property

 

The Land Administration Law of the PRC was promulgated by the Standing Committee on June 25, 1986, became effective on January 1, 1987 and was amended on December 29, 1988, August 29, 1998 and August 28, 2004. The Regulations for the Implementation of the Land Administration Law of the PRC were promulgated by the State Council on December 27, 1998 and became effective on January 1, 1999 (collectively, the “Land Administration Law”). Under the Land Administration Law, the national government implements a land registration and certification system. Lawfully registered land ownership and land use rights are protected by law and may not be infringed upon by any units or individuals.

 

Laws and Regulations Relating to Labor and Social Security

 

Employment Contracts

 

Pursuant to the Labor Law of the PRC, which was promulgated on July 5, 1994 and became effective on 1 January 1995, and the Labor Contract Law of the PRC, which became effective on 1 January 2008 and was amended on December 28, 2012, labor contracts shall be concluded in writing if labor relationships are to be or have been established between enterprises or entities on one hand and the laborers on the other hand.

 

Employee Funds

 

As required under the Regulation of Insurance for Labor Injury, implemented on January 1, 2004, the Provisional Measures for Maternity Insurance of Employees of Corporations, implemented on January 1, 1995, the Decisions on the Establishment of a Unified Program for Old-Aged Pension Insurance of the State Council, issued on July 16, 1997, the Decisions on the Establishment of the Medical Insurance Program for Urban Workers of the State Council, promulgated on December 14, 1998, the Unemployment Insurance Measures, promulgated on January 22, 1999, and the Social Insurance Law of the PRC, implemented on July 1, 2011, enterprises are obliged to provide their employees in the PRC with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, labor injury insurance and medical insurance. Enterprises must apply for social insurance registration with local social insurance agencies and pay premiums for their employees. If an enterprise fails to pay the required premiums on time or in full amount, the authorities in charge will demand the enterprise to settle the overdue amount within a stipulated time period and impose a 0.05% overdue fine. If the overdue amount is still not settled within the stipulated time period, an additional fine with an amount of three to five times of the overdue amount will be imposed.

 

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According to the Regulation on Management of Housing Provident Fund, which was promulgated by the State Council on April 3, 1999, became effective on the same day and was amended on March 24, 2002, enterprises must register with the competent managing center for housing funds and, upon the examination by such managing center of housing fund, complete procedures for opening an account at the relevant bank for the deposit of employees’ housing funds. Employers are required to contribute, on behalf of their employees, to housing accumulation funds. The payment is required to be made to local administrative authorities. Any employer who fails to contribute may be fined and ordered to make good the deficit within a stipulated time limit.

 

Laws and Regulations Relating to Occupation Safety

 

The Production Safety Law of the PRC, (the “Production Safety Law”), which was promulgated by the Standing Committee on June 29, 2002, amended on August 27, 2009 and became effective on November 1, 2002, requires production entities to meet the relevant legal requirements, such as providing their staff with training and handbooks on production safety and providing safe working conditions in compliance with relevant laws, rules and regulations.

 

Regulations on Intellectual Property Rights

 

Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.

 

Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.

 

Trademark. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.

 

Domain Names. Domain name registrations are handled through domain name service agencies established under the relevant regulations, and applicants become domain name holders upon successful registration.

 

Regulations Relating to Dividend Withholding Tax

 

Pursuant to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Tax Treaties, or Circular 60, which became effective on November 1, 2015. Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. Accordingly, Fortunes Capital HK and Keen Point, our Hong Kong subsidiaries, may be able to enjoy the 5% withholding tax rate for the dividends they receive from Xiangtai WFOE, our PRC subsidiary, if it satisfies the conditions prescribed under Circular 81 and other relevant tax rules and regulations. However, according to Circular 81 and Circular 60, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.

 

Regulations Relating to Foreign Exchange

 

Regulations on Foreign Currency Exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.

 

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In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. On February 28, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals may apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of SAFE, may directly review the applications and conduct the registration.

 

On March 30, 2015, SAFE promulgated Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both previous Circular 142 and Circular 36 on June 1, 2015. On June 9, 2016, SAFE promulgated Circular 16 to further expand and strengthen such reform. Under Circular 19 and Circular 16, foreign-invested enterprises in the PRC are allowed to use their foreign exchange funds under capital accounts and RMB funds from exchange settlement for expenditure under current accounts within its business scope or expenditure under capital accounts permitted by laws and regulations, except that such funds shall not be used for (i) expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations; (ii) investments in securities or other investments than banks’ principal-secured products; (iii) granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) construction or purchase of real estate for purposes other than self-use (except for real estate enterprises).

 

Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents

 

SAFE issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.

 

We are aware that our PRC resident beneficial owners subject to these registration requirements have registered with the Beijing SAFE branch and/or qualified banks to reflect the recent changes to our corporate structure.

 

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Regulations on Dividend Distribution

 

Under our current corporate structure, China Xiangtai Food Co., Ltd. may rely on dividend payments from Xiangtai WFOE, which is a wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested enterprises include the Foreign-Invested Enterprise Law, as amended in September 2016, and its implementation rules. Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends.

 

Regulations Relating to Employment

 

The PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.

 

Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. Failure to make adequate contributions to various employee benefit plans may be subject to fines and other administrative sanctions.

 

Currently, we are making contributions to the plans based on the minimum standards although the PRC laws required such contributions to be based on the actual employee salaries up to a maximum amount specified by the local government. Therefore, in our consolidated financial statements, we have made an estimate and accrued a provision in relation to the potential make-up of our contributions for these plans as well as to pay late contribution fees and fines. If we are subject to late contribution fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”

 

Item 4A. Unresolved Staff Comments

 

None.

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.” All amounts included in the fiscal years ended June 30, 2020, 2019 and 2018 (“Annual Financial Statements”) are derived from our audited consolidated financial statements included elsewhere in this annual report. These Annual Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.

 

5A. Operating Results

 

Overview

 

We are a meat processing company that has operations across key sectors of the industry value chain involving processing of meat products. We are engaged in slaughtering, processing, packing, and selling various processed meat products. On April 3, 2020, we purchased 51% equity interest of Chongqing Ji Mao Cang Feed Co., Ltd. (“JMC”), which engages in raw feed material and formula solution wholesales business. We are committed to providing consumers with high-quality products through our portfolio of trusted and well-known brands and to driving consumption trends, while setting a high industry standard in product quality and food safety. We can efficiently match supply with demand and benefit from the strong industry trends in the People’s Republic of China (the “PRC” or “China”).

 

Our key operating revenues are driven by three types of market: 1) supermarket and grocery store revenues, 2) farmers’ market revenues and 3) feed raw material revenues. Our supermarket and grocery revenues are mainly driven from four supermarkets or grocery stores or hypermarkets (collectively as “supermarkets” herein) that we have cooperation with, where these supermarkets would provide us with store spaces in the supermarkets to put our fresh killed meats and processed marinated fresh meats products in designated counters for purchase. Some of the large supermarkets in the city of Chongqing and Sichuan province we have entered include Chongqing New Century, Sichuan Yonghui and Chongqing Fuyongsheng. Our famers’ market revenues are mainly driven from our hog production which we purchase live hogs for slaughtering and sell them to wholesale distributors or individual sellers that will ultimately sell them in farmers’ markets. We also separate out the hogs’ byproduct, such as hog hair, hog blood, hog intestines, hog feet and hog heads and sell them separately to the wholesale distributors or individual sellers. To maintain business continuity and stability, we strategically develops towards the upstream of the food supply chain. In April 2020, we started renting a 500 mu hog farm in Chongqing for 15 years, further expanding into hog breeding business and vertically integrating the food supply chain. Our feed raw material revenues are driven from our raw feed material and formula solution wholesales business, which mainly includes two products: soybean meal and soybean oil. We purchased the two products based on current market needs from distributors and resell to small distributors. As one of the leading feed sales companies in southwest China, JMC has more than 200 customers in farm industry and nearly 100 customers in feed production industry. The acquisition of JMC will further enable us to respond to the growing demand for pork in China. We believe that our business will benefit from this expanded vertical integration of the industry supply chain and network.

 

We own the only Level A slaughtering house, the highest rating available, in the county of Linshui, in the Sichuan province, approved and recognized by the Commercial Bureau of Sichuan. In China, only the fresh skilled hogs slaughtered at a Level A slaughtering house can be freely traded at any farmers’ market in China. We ensure that the live hogs that we purchase are originally from well-known big hog farms located in different cities in southern China and use an 80% automated standard modern line to slaughter, process and pack. Every live hog will be examined by the local Food Safety Administration (“FSA”) officers for illness at our slaughtering house before can be slaughtered and throughout the slaughtering process. Dead and ill hogs will be processed by a high-temperature method and buried as soon as discovered. In addition, the whole slaughtering process is also observed and regulated daily by the local FSA officers. Besides the modern slaughtering line, we have a full set of modern recycling system to reduce sewage and harmful waste to the lowest level as we care our environment as much as our business. All our fresh hog products sold at farmers’ market were produced and sold to our wholesale distributors or individual sellers on the same day, the wholesale distributors then resell them to contracted small distributors as soon as they received the products, and the small distributors and individual sellers resell to end buyers also on the same day to keep the freshness.

 

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We have strict quality control systems in each process of our value chain, from production through sales and distribution. These objectives are grounded in our sustainability program, which focuses on key areas such as employee welfare, the environment, food safety and quality, helping communities and value creation. We foster a strong culture of innovation, which allows us to adapt to evolving consumer preferences. We have a proven track record of launching successful new products that help drive our revenue growth and increase our margins in each of our key markets. So far we have received many national or local honors, including "Honest and Trustworthy Seller", “Annual Sales Star”, “Best Partner,” and “First Place in Fresh Grocery” from New Century Department Store, “Industrial Leading Enterprise” from Chongqing City Fuling District government, “Vice President Entity” from Chongqing Tongchuan Chamber of Commerce. We won these awards and honors because we have had a close and successful working relationship with big supermarkets and department stores that we have effectively discharged our sales and marketing effort, and that we penetrated deep into the meat market in Chongqing City.

 

Key Factors that Affect Operating Results

 

PRC Pork Industry

 

The rapid growth of the PRC pork industry has been driven largely by robust economic growth, continued urbanization and rising disposable income. China is the largest pork production and consumption market in the world, comprising 47.92% and 50.06% of the global production and consumption markets respectively in 2016. Pork is deeply rooted in Chinese culture and diet, and comprised 60.0% of China’s meat consumption in 2016. Although PRC pork production volume has historically grown at a steady rate, a gap has consistently existed between the supply and demand of pork. Pork consumption is expected to grow at a comparatively faster compound annual growth rate (“CAGR”) of 3.08% compared to pork production with a CAGR of 3.01% from 2012 to 2018, especially 2019 the pork production decreased 21.3% due to the African swine fever, leading to a widening supply shortfall (Source: https://baijiahao.baidu.com/s?id=1660828715114318892&wfr=spider&for=pc). Therefore, it is expected that the volume of PRC pork imports will continue to rise.

 

The key drivers of the PRC pork industry can be analyzed in terms of demand and supply. The growing demand for fresh pork and packaged pork products is attributable to the rise in disposable income and living standards, continuing urbanization, expansion of middle class, the important role of animal protein in food consumption, the importance of pork as a source of animal protein and increasing demand for high quality and safe products. As a result of changing consumer behavior and growing demand, producers are experiencing accelerated industry concentration and a trend toward vertical integration.

 

The key drivers of the PRC pork industry have given rise to a number of key trends. In the fresh pork market, chilled fresh pork is expected to become a key product category, driven by its perceived higher quality. In addition, modern retailers in the PRC, such as supermarkets and hypermarkets, are expected to gradually increase in significance in food retail markets, especially in more developed urban areas, as a result of better hygiene and more comfortable environment compared to traditional farmers’ markets. Brand image is playing a more important role in the pork industry, particularly as it relates to the perception of better food safety and higher product quality. The demand for packaged pork products has increased, driven by the improvements in the PRC economy and greater influence of western dietary habits. Consumers are placing greater importance on product safety, nutrition, convenience and diversification, which can be better satisfied by packaged pork products.

 

If we are unable to sustain our higher qualify of products, or if our partnered supermarkets or hypermarkets are not able to keep up a better hygiene and more comfortable environment, or if we cannot keep up the perception of better food safety and higher production qualify of our brand image, or if our slaughtering house or our partnered supermarkets or hypermarkets failed any FSA inspections, it may materially reduce the demand for our products and may have a materially adverse effect on its business.

 

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PRC economy

 

Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. According to the PRC National Bureau of Statistics, the annual rate of growth in the PRC declined from 7.7% in 2013 to 7.4% in 2014, 6.9% in 2015, 6.7% in 2016, 6.5% in 2017, 6.6% in 2018 and 6.1% in 2019. A further slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the purchase power of the consumers of our products and lead to the decrease of demand for our products and may have a materially adverse effect on its business.

 

Key Factors

 

Our variable interest entity and our operating subsidiary are incorporated, and their operations and assets are located, in China. Accordingly, our results of operations, financial condition and prospects are affected by China’s economic and regulation conditions in the following factors: (a) an economic downturn in China or any regional market in China; (b) economic policies and initiatives undertaken by the Chinese government; (c) changes in the Chinese or regional business or regulatory environment affecting the purchase power of consumers of our products; (d) changes in the Chinese government policy on livestock slaughtering licenses; (e) changes in the Chinese government policy on food industry; (f) breakout of livestock and human diseases in the PRC, such as BSE, FMD and various strains of influenza and COVID-19. Unfavorable changes could affect demand for products that we sell and for products that we provide and could materially and adversely affect the results of operations.

 

We have contracts with major distributors that are selling our products to individual customers or small distributors from our hog production. Each of our slaughtered hogs is stamped with the FSA approval stamp after inspection and with the slaughtered house’s approval stamp, which states the name of the slaughtered house and its assigned code. After having these two stamps, FSA will issue an inspection approval certificate, and the slaughtered house will issue another inspection approval certificate. These two certificates go along with the fresh killed hog for anyone selling our fresh killed hog. Then fresh killed hog meat can be sold in markets. Our sales efforts focus on those wholesale distributors which place large recurring orders and present less credit risk to us. During the year ended June 30, 2020, we cooperated with 24 wholesale distributors as compared to 26 wholesale distributors during the year ended June 30, 2019 and 25 wholesale distributors during the year ended June 30, 2018.

 

Our supermarket sales provide a higher profit margin. To obtain the permission of selling our products at a supermarket, we need to compete with many other companies and we compete primarily on the basis of quality and price. If we are unable to compete successfully in our markets, our relative supermarket share and profits could be reduced. In addition, we have less bargain power with the supermarkets on operating charges.

 

Results of Operations

 

Years Ended June 30, 2020 vs. June 30, 2019

 

Revenues

 

Our revenues consist of supermarket and grocery store revenues, farmers’ market revenues and feed raw materials revenues. Total revenues increased by approximately $11.5 million, or 11.6%, to approximately $110.6 million for the year ended June 30, 2020, compared to approximately $99.1 million for the year ended June 30, 2019. The overall increase was primarily attributable to the increase of our feed raw materials revenues as we purchased JMC on April 3, 2020 which offset by the decrease of farmers’ market revenues.

 

Supermarket and grocery store revenues increased by approximately $2.0 million, or 51.1%, to approximately $5.8 million for the year ended June 30, 2020, compared to approximately $3.9 million for the year ended June 30, 2019. The outbreak of COVID-19 has shadowed China and general population in many aspects. In order to ensure that consumers’ basic living needs are met, supermarkets and grocery stores in various places still operated as usual. However, during the Chinese New Year and the COVID-19 outbreak, many food suppliers have raised product prices due to temporary shortage in the supply, so we had to raise our selling prices as well.

 

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Farmers’ market revenues decreased by approximately $14.7 million, or 15.5%, to approximately $80.5 million for the year ended June 30, 2020, compared to approximately $95.2 million for the year ended June 30, 2019. Due to the outbreak of COVID-19, the total supply of fresh hogs largely decreased. The decrease was offset by the increase of unit selling price.

 

Feed raw material revenues was approximately $24.3 million for the year ended June 20, 2020 resulted from our purchase of the 51% equity interest in Chongqing Ji Mao Cang Feed Co., Ltd. (“JMC on April 3, 2020 and we began to engage in raw feed material and formula solution wholesales business.

 

Our revenues from our farmers’ market revenues are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Fresh killed regular hogs  $68,024,318   $81,254,949   $(13,230,631)   (16.3)%
Fresh killed Fragrant hogs   8,428,581    7,905,214    523,367    6.6%
Fresh hog byproducts   3,628,234    6,062,746    (2,434,512)   (40.2)%
Chilled fresh pork   392,803    -    392,803    100.0%
Total farmers’ market revenues  $80,473,936   $95,222,909   $(14,748,973)   (15.5)%

 

Our revenues from fresh killed regular hogs in number of kilograms sold and its average selling price are summarized as follows:

 

   For the Year
ended
June 30,  2020
   For the Year
ended
June 30,  2019
   Change   Change (%) 
Fresh killed regular hogs (kg)   12,941,488    29,700,842    (16,759,354)   (56.4)%
Average selling price (per kg)  $5.26   $2.74   $2.52    92.0%

 

Revenues of fresh killed regular hogs decreased by approximately $13.2 million, or 16.3%, to approximately $68.0 million for the year ended June 30, 2020, compared to approximately $81.2 million for the year ended June 30, 2019. The decrease was primarily attributable to the decrease in quantity of fresh killed regular hogs sold and partially offset by the increase of average selling unit price.

 

During the year ended June 30, 2020, we sold 12,941,488 kg of fresh killed regular hogs as compared to 29,700,842 kg sold during the year ended June 30, 2019. The decrease in quantity sold of 16,759,354 kg or 56.4% during the year ended June 30, 2020 as compared to the same period in 2019 were mainly due to the African swine fever which started to wildly spread in China in late October 2018. Then starting from March 2019, the Chongqing government requires all local slaughtering houses can only purchase fresh hogs from Chongqing hog farms, which decreased of the supply of hogs. In addition, the outbreak of COVID-19 also decreased the supply of hogs.

 

The average selling price increased from $2.74/kg during the year ended June 30, 2019 to $5.26/kg during the year ended June 30, 2020, an increase of $2.52/kg or 92.0%. The increase was mainly due to the supply drop of the fresh regular hogs. Due to the African swine fever, the purchase control of Chongqing government and the COVID-19 outbreak, the supply of regular hogs began to decrease which drove up the unit selling price. However, we did not expect to see a big decrease of fresh regular hog meat demand as the African swine fever has no effect on human health as this animal disease can be fully killed after high temperature. The increase was offset by the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar of 2.9%.

 

Our revenues from fresh killed fragrant hogs in number of kilograms sold and its average selling price are summarized as follows:

 

   For the Year
ended
June 30,  2020
   For the Year
ended
June 30,  2019
   Change   Change (%) 
Fresh killed fragrant hogs (kg)   1,026,513    1,678,375    (651,862)   (38.8)%
Average selling price (per kg)  $8.21   $4.71   $3.50    74.3%

 

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During the year ended June 30, 2020, we sold 1,026,513 kg of fresh killed fragrant hogs as compared to 1,678,375 kg sold during the year ended June 30, 2019. The quantity sold decreased 651,862 kg or 38.8% during the year ended June 30, 2020 as compared to the same period in 2019. The decrease of the supply of fragrant hogs are mainly due to the African swine fever which started to wildly spread in China in late October 2018, the purchase control of Chongqing government and the outbreak of COVID-19 as discussed above.

 

The average selling price increased from $4.71/kg during the year ended June 30, 2019 to $8.21/kg during the year ended June 30, 2020, an increase of $3.50/kg or 74.3%. The supply of fragrant hogs began to decrease which drove up the unit selling price. However, we did not expect to see a big decrease of fresh killed fragrant hog meat demand as the African swine fever has no effect on human health as this animal disease can be fully killed after high temperature. The decrease of unit average selling price also attributable to the depreciation of Chinese Renminbi against U.S. dollar of 2.9%.

 

Our revenues from fresh hog byproducts on numbers of set sold and its average selling price are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Fresh hog byproducts (set)   149,173    327,888    (178,715)   (54.5)%
Average selling price (per set)  $24.32   $18.49   $5.83    31.5%

 

Fresh hog byproducts derived from the hog slaughtering process include hog hair, hog blood, hog intestines, hog feet and hog head. Revenues of fresh hog byproducts decreased by approximately $2.4 million, or 40.2%, to approximately $3.6 million for the year ended June 30, 2020, compared to approximately $6.1 million for the year ended June 30, 2019. The decrease was primarily attributable to our decreased revenues of fresh killed regular hogs. We slaughtered 149,173 hogs during the year ended June 30, 2020 as compared to 327,888 hogs during the year ended June 30, 2019, which is 178,715 less hogs, or 54.5%. Each hog produces a set of byproducts, so less byproducts were produced in 2020 than the same period in 2019.

 

We sell regular hog byproducts and fragrant hog byproducts together at the same price, and sell the byproducts by set with one type of set composed of hog hair, hog blood, hog intestines and hog feet and the other type of set composed of hog heads only. We are connected with two byproducts local distributors, one exclusively purchase our hog heads and the other distributors purchase the remaining hog byproducts who are able to purchase all the byproducts that we produced and are able to resell these byproducts to small distributors or restaurants during the period. During the year ended June 30, 2020, the average selling price increased from $18.49 during the year ended June 30, 2019 to $24.32, an increase of $5.83/kg, or 31.5%.We increased our unit selling price due to lesser supply of these byproducts. The decrease of unit average selling price was also offset by the depreciation of Chinese Renminbi against U.S. dollar of 2.9%.

 

Our revenues from chilled fresh pork in number of kilograms sold and its average agent fee are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Chilled fresh pork (kg)   3,343,529                        -    3,343,529    100.0%
Average agent fee (per kg)  $0.12   $-   $0.12    100.0%

 

As the Chongqing local demand of pork was hard to meet after the purchase control of Chongqing government, we started acting as an agent to trade chilled fresh pork from other provinces in November 2019. We purchase chilled fresh pork from distributors and resell to small distributors directly. The chilled fresh pork stores at a third-party warehouse, and the small distributors go to the warehouse to pick up their orders. We are not responsible for transporting or storing any chilled fresh pork. During the year ended June 30, 2020, we traded 3,343,529 kg chilled fresh pork at an average agent fee of $0.12/kg.

 

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Our revenues from our feed raw material revenues are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Soybean meal  $21,652,844   $                   -   $21,652,844    100.0%
Soybean oil   2,597,403    -    2,597,403    100.0%
Total feed raw material revenues  $24,250,247   $-   $24,250,247    100.0%

 

Our revenues from soybean meal in number of kilograms sold and its average selling price are summarized as follows:

 

    For the Year
ended
June 30,  2020
    For the Year
ended
June 30,  2019
    Change     Change (%)  
Soybean meal (kg)     57,660,570                         -       57,660,570       100.0 %
Average selling price (per kg)   $ 0.38     $ -     $ 0.38       100.0 %

 

We began selling soybean meal business and sold 57,660,570 kg of soybean meals at an average selling price of $0.38/kg after our acquisition of the 51% equity interest in JMC on April 3, 2020. The selling prices are not fixed, and they are floating based on the current local market prices.

 

Our revenues from soybean oil in number of kilograms sold and its average selling price are summarized as follows:

 

   For the Year
ended
June 30,  2020
   For the Year
ended
June 30,  2019
   Change   Change (%) 
Soybean oil (ton)   3,335                          -    3,335    100.0%
Average selling price (per ton)  $778.83   $-   $778.83    100.0%

 

We began selling soybean oil and sold 3,335 tons of soybean oil at an average selling price of $778.83/kg after our acquisition of the 51% equity interest in JMC on April 3, 2020.

 

Cost of Revenues

 

Our cost of revenues consists of cost of direct materials, labor and manufacturing overhead costs. Total cost of revenues increased by approximately $12.9 million, or 14.3%, to approximately $103.4 million for the year ended June 30, 2020, compared to approximately $90.4 million for the year ended June 30, 2019. Our total cost of revenues increased which was in line with the increase of total revenues.

 

Cost of supermarket and grocery store revenues increased by approximately $1.7 million, or 52.4%, to approximately $5.0 million for the year ended June 30, 2020, compared to approximately $3.3 million for the year ended June 30, 2019. Our cost of supermarket and grocery store revenues increased which was in line with the increase of supermarket and grocery store revenues as the purchase price of inventories increased. The increase of the cost of supermarket and grocery store revenues was offset by the depreciation of RMB against U.S. dollar of 2.9%.

 

Cost of farmers’ market revenues decreased by approximately $11.0 million, or 12.6%, to approximately $76.2 million for the year ended June 30, 2020, compared to approximately $87.2 million for the year ended June 30, 2019. The decrease was mainly caused by the decreased volume at farmers’ markets, which was primarily attributable to the decreased revenues brought under the influence of the African swine fever and the COVID-19.

 

Cost of feed raw material revenues was approximately $22.2 million for the year ended June 30, 2020 resulted from our purchase of the 51% equity interest in JMC on April 3, 2020 and we began to engage in raw feed material and formula solution wholesales business.

 

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Our cost of revenues from farmers’ market revenues are summarized as follows:

 

    For the Year ended
June 30,  2020
    For the Year ended
June 30,  2019
    Change     Change (%)  
Fresh killed regular hogs   $ 66,264,028     $ 76,997,355     $ (10,733,327 )     (13.9 )%
Fresh killed fragrant hogs     6,893,681       5,263,496       1,630,185     31.0 %
Fresh hog byproducts     3,034,735       4,911,737       (1,877,002 )     (38.2 )%
Total farmers’ market cost of  revenues   $ 76,192,444     $ 87,172,588     $ (10,980,144 )     (12.6 )%

  

Our volume and unit cost of revenues from fresh killed regular hogs are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Fresh killed regular hogs (kg)   12,941,488    29,700,842    (16,759,354)   (56.4)%
Average production cost (per kg)  $5.12   $2.59   $2.53    97.7%

 

Cost of fresh killed regular hogs decreased by approximately $10.7 million, or 13.9%, to approximately $66.3 million for the year ended June 30, 2020, compared to approximately $77.0 million for the year ended June 30, 2019. The cost of fresh killed regular hogs was part of the cost of purchasing live regular hogs and overhead costs incurred in our own slaughtering house. The decrease was primarily associated with the decrease of sales volume of fresh killed regular hogs and the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar.

 

During the year ended June 30, 2020 we purchased 130,928 regular hogs which produced 12,941,488 kg of fresh killed regular hogs as compared to 298,290 regular hogs which produced 29,700,842 kg of fresh killed regular hogs during the year ended June 30, 2019, a decrease of 16,759,354 kg, or 56.4%. The decrease of quantity produced was associated with the decrease of sales volume as mentioned above in the revenues section.

 

The average unit cost of producing fresh killed regular hogs increased from $2.59/kg in the year ended June 30, 2019 to $5.12/kg during the year ended June 30, 2020, an increase of $2.53/kg, or 97.7%. Due to the African swine fever which started to wildly spread in China in late October 2018, the purchase control of Chongqing government and the outbreak of COVID-19, the supply of regular hogs began to decrease which drove up the unit selling price. The increase was offset by the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar of 2.9%.

 

Our volume and unit cost of revenues from fresh killed fragrant hogs are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Fresh killed Fragrant hogs (kg)   1,026,513    1,678,375    (651,862)   (38.8)%
Average production cost (per kg)  $6.72   $3.14   $3.58    114.0%

 

Cost of fresh killed fragrant hogs increased by approximately $1.6 million, or 31.0%, to approximately $6.9 million for the year ended June 30, 2020, compared to approximately $5.3 million for the year ended June 30, 2019. The cost of fresh killed fragrant hogs was part of the cost of purchasing live fragrant hogs and overhead costs incurred in our own slaughtering house. Due to the African swine fever, the purchase control of Chongqing government and the outbreak of COVID-19, the supply of fragrant hogs began to decrease which drove up the unit selling price. The increase was offset by the decreased sales volume and the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar of 2.9%.

 

During the year ended June 30, 2020, we purchased 18,245 fragrant hogs which produced 1,026,513 kg of fresh killed fragrant hogs as compared to 29,598 fragrant hogs which produced 1,678,375 kg of fresh killed fragrant hogs during the year ended June 30, 2019. The decrease of quantity produced was associated with the decrease of sales volume as mentioned above in the revenues section.

 

The average unit cost of producing fresh killed fragrant hogs increased from $3.14/kg in the year ended June 30, 2019 to $6.72/kg during the year ended June 30, 2020, an increase of $3.58/kg, or 114.0%. Due to the African swine fever, the purchase control of Chongqing government and the outbreak of COVID-19, the supply of fragrant hogs began to decrease which drove up the unit selling price.

 

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Our volume and unit cost of revenues from byproducts are summarized as follows:

 

   For the Year ended
June 30,  2020
   For the Year ended
June 30,  2019
   Change   Change (%) 
Fresh hog byproducts (set)   149,173    327,888    (178,715)   (54.5)%
Average production cost (per set)  $20.34   $14.98   $5.36    35.8%

 

Cost of fresh hog byproducts decreased by approximately $1.9 million, or 38.2%, to approximately $3.0 million for the year ended June 30, 2020, compared to approximately $4.9 million for the year ended June 30, 2019. We allocated total production cost of hogs to our fresh hog byproducts based upon the percentage of selling prices between the fresh killed hogs and the fresh hog byproducts. Due to the lower total production cost of fresh killed hogs during the year ended June 30, 2020 than the cost during the same period in 2019, it resulted in a lower allocation of our total production cost to our fresh hog byproduct.

 

The average unit cost of producing fresh hog byproducts increased from $14.98/set during the year ended June 30, 2019 to $20.34/set during the year ended June 30, 2020, an increase of $5.36/set, or 35.8%. The production cost of byproducts is included in production cost of fresh killed regular hogs. The increase was due to the cost of revenues allocation as discussed above and was offset by the depreciation of RMB against U.S. dollar of 2.9 %.

 

Our cost of revenues from our feed raw material revenues are summarized as follows:

 

    For the Year ended
June 30,  2020
    For the Year ended
June 30,  2019
    Change     Change (%)  
Soybean meal   $ 19,665,423     $                     -     $ 19,665,423       100.0 %
Soybean oil     2,554,105       -       2,554,105       100.0 %
Total cost of feed raw material revenues   $ 22,219,528     $ -     $ 22,219,528       100.0 %

 

Our volume and unit cost of revenues from soybean meal are summarized as follows:

 

    For the Year
ended
June 30,  2020
    For the Year
ended
June 30,  2019
    Change     Change (%)  
Soybean meal (kg)     57,660,570       -       57,660,570       100.0 %
Average selling price (per kg)   $ 0.34     $                         -     $ 0.34       100.0 %

 

We purchased and resold 57,660,570 kg of soybean meals at an average purchase price of $0.34/kg resulted from our purchase of the 51% equity interest in JMC on April 3, 2020 and we began to engage in raw feed material and formula solution wholesales business.

 

Our volume and unit cost of revenues from soybean oil are summarized as follows:

 

    For the Year
ended
June 30,  2020
    For the Year
ended
June 30,  2019
    Change     Change (%)  
Soybean oil (ton)     3,335                             -       3,335       100.0 %
Average selling price (per ton)   $ 765.94     $ -     $ 765.94       100.0 %

 

We purchased and resold 3,335 tons of soybean oil at an average selling price of $765.94/kg resulted from our purchase of the 51% equity interest in JMC on April 3, 2020 and we began to engage in raw feed material and formula solution wholesales business.

 

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Gross Profit

 

Our gross profit from our major revenue categories are summarized as follows:

 

    For the Year ended
June 30,  2020
    For the Year ended
June 30,  2019
    Change     Change (%)  
Supermarket and grocery store revenues                                
Gross profit   $ 865,767     $ 599,919     $ 265,848       44.3 %
Gross margin     14.9 %     15.6 %     (0.7 )%        
                                 
Farmers’ market revenues                                
Gross profit   $ 4,281,492     $ 8,050,321     $ (3,768,829 )     (46.8 )%
Gross margin     5.3 %     8.5 %     (3.1 )%        
                                 
Feed raw material revenues                                
Gross profit   $ 2,030,719       -     $ 2,030,719       100.0 %
Gross margin     8.4 %     - %     8.4 %        
                                 
Total                                
Gross profit   $ 7,177,978     $ 8,650,240     $ (1,472,262 )     (17.0 )%
Gross margin     6.5 %     8.7 %     (2.2 )%        

 

Our gross profit decreased by approximately $1.5 million, or 17.0%, to approximately $7.2 million during the year ended June 30, 2020, from approximately $8.7 million for the year ended June 30, 2019. The decrease in gross profit was primarily due to our decrease of revenues in our farmers’ market and offset by our increase of revenues in our supermarkets and grocery sales and feed raw material sales.

 

For the years ended June 30, 2020 and 2019, our overall gross margin was 6.5% and 8.7%, respectively. The decrease in gross margin was primarily due to the decreased gross margin of both supermarket and grocery store revenues and famers’ market revenues.

 

Our gross margin for supermarket and grocery store revenue slight decreased from 15.6% for the year ended June 30, 2019 to 14.9% for the year ended June 30, 2020 mainly due to the increase of selling prices at a lower rate than the increase of purchase prices as we were making our effort to control the selling prices during the outbreak of COVID-19.

 

Our gross margin for farmers’ market revenues decreased from 8.5% for the year ended June 30, 2019 to 5.3% for the year ended June 30, 2020 mainly due to the gross margin of our fresh killed fragrant hog products decreased from 33.4% for the year ended June 30, 2019 to 18.2% for the year ended June 30, 2020 as we have more competitor of selling fresh killed fragrant hog which driven down our unit selling price as discussed above.

 

Our gross margin for feed raw material revenues was 8.4% for the year ended June 30, 2020 resulted from our purchase of the 51% equity interest in JMC on April 3, 2020 and we began to engage in raw feed material and formula solution wholesales business.

 

Selling Expenses

 

Selling expenses increased by approximately $0.2 million, or 44.2%, from approximately $0.6 million for the year ended June 30, 2019 as compared to approximately $0.8 million for the year ended June 30, 2020. The increase in selling expenses was primarily due to the increase of salary expense of approximately $0.1 million and the increase of shipping and stores decoration fees of approximately $0.1 million. We expect that our overall sales and marketing expenses, including but not limited to, brand promotion, salary, incentive and servicing expense, will continue to increase in the foreseeable future as and if our business further grows.

 

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General and Administrative Expenses

 

General and administrative expenses increased by approximately $2.9 million, or 226.1%, from approximately $1.3 million for the year ended June 30, 2019 as compared to approximately $4.2 million for the year ended June 30, 2020. The increase in general and administrative expenses was primarily due to the increase of salary and insurance expenses of $0.3 million. In addition, the increase also attributable to the increase of business consulting fee of approximately $1.5 million and the promissory note repayment extension penalty of $0.5 million. The increase also attributable to the increase of approximately $0.5 million of legal expense mainly related to our financing and acquisition of JMC activities and the increase of approximately $0.1 million rent expense. We expect our general and administrative expenses, including but not limited to, salaries and business consulting, to continue to increase in the foreseeable future, as our business further grows. We expect our rental expenses to remain consistent unless we need to further expand our administrative office due to lack of office spaces. We expect our legal expenses to decrease in the foreseeable future unless we will have additional potential acquisition or financing transactions that are required of legal services.

 

Provision for Doubtful Accounts

 

Provision for doubtful accounts increased by approximately $26,000, or 3.5% from approximately $0.7 million for the year ended June 30, 2019 as compared to approximately $0.8 million for the year ended June 30, 2020. The change was due to the fact that we had slightly more accounts receivables aged over 6 months as of June 30, 2020 as compared to June 30, 2019.

 

Stock Compensation Expenses

 

We incurred approximately $0.9 million stock compensation expense to pay for certain professional services valued at $650,000 during the year ended June 30, 2020 in connection to the issuance of our ordinary shares in August 2019. We expect this is a one-time expense and we do not expect such expenses will incur in the future period. In addition, we incurred approximately $0.2 million stock compensation expense in relation to the vested portion of the stock options issued to our independent directors. Furthermore, we incurred approximately $67,000 on stock compensation expense in relation to our ordinary shares issued to our business consulting firm for its services performed from March 2020 to June 2020.

 

Income from Operations

 

The income from operations for the year ended June 30, 2020 was approximately $0.5 million, a decrease of approximately $5.6 million, or 91.5%, from approximately $6.1 million for the year ended June 30, 2019. The decrease was mostly attributable to the decrease of farmers’ market sales and the increase of selling expenses, general and administrative expenses and stock compensation expense and offset by the increase in supermarket and grocery store sales and feed raw material sales as the reasons that we mentioned above.

 

Other Income (Expense), Net

 

Our other expense, net, consists of interest income, interest expense, other finance expense, other income (expense), net, estimated litigation charges and provision for doubtful accounts – security deposit. Our total other expense was approximately $2.9 million during the year ended June 30, 2020, an increase of approximately $2.1 million, or 245.6%, as compared to our other expenses of approximately $0.8 million during the year ended June 30, 2019. The increase was mainly due to the increase of interest expense of approximately $0.9 million as we incurred more penalty interest charges for bank loans in default for the year ended June 30, 2020. The increase was also due to the amortization costs of convertible debts of approximately $0.4 million for the year ended June 30, 2020. Additionally, we made an allowance of approximately $0.7 million for the security deposit for a loan during the year ended June 30, 2020. The increased other expense, net of approximately $0.1 million was mainly due to the can food donation we made during the outbreak of COVID-19 during the year ended June 30, 2020.

 

Provision for Income Taxes

 

Provision for income tax was approximately $0.2 million during the year ended June 30, 2020, an increase of approximately $10,000, or 4.5%, as compared to approximately $0.2 million for the year ended June 30, 2019. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. The slight increase in provision for income taxes was mainly to JMC which had taxable income during the year ended June 30, 2020.

 

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Net (Loss) Income from Continuing Operations

 

Our net loss from continuing operations was approximately $2.6 million for the year ended June 30, 2020, decreased by approximately $7.6 million, or 151.8%, from net income from continuing operations of approximately $5.0 million for the year ended June 30, 2019. Such change was the result of the combination of the changes as discussed above.

 

Net (Loss) Income from Discontinued Operations

 

In February 2020, we discontinued its grocery stores business as the business has been operating at losses. As a result, the results of operations for our grocery stores business are reported as discontinued operations under the guidance of Accounting Standards Codification 205. Our net loss from discontinued operations increased by approximately $1.1 million, or 171.1%, to a net loss of approximately $1.8 million for the year ended June 30, 2020, from a net loss of approximately $0.7 million for the year ended June 30, 2019. The increase in loss from discontinued operations was predominantly due to the provision for right-of-use assets of approximately $0.3 million as we early terminated the CQ Pengmei grocery lease, the loss on disposal of long-lived assets of approximately $0.3 million and the impairment of long-lived assets of approximately $0.7 million. In addition, due to the outbreak of COVID-19 in 2020 and lack of effective management, the gross profit also dropped approximately $0.2 million for the year ended June 30, 2020 as compared to the same period in 2019.

 

Net (Loss) Income

 

Our net loss was approximately $4.4 million for the year ended June 30, 2020, decreased by approximately $8.8 million, or 200.8%, from the net income of approximately $4.4 million for the year ended June 30, 2019. Such change was the result of the combination of the changes as discussed above.

 

Years Ended June 30, 2019 vs. June 30, 2018

 

Revenues

 

Our revenues consist of supermarket and grocery store revenues and farmers’ market revenues. Total revenues decreased by approximately $2.0 million, or 2.0%, to approximately $90.4 million for the year ended June 30, 2019, compared to approximately $101.1 million for the year ended June 30, 2018. The overall decrease was primarily attributable to the decrease of farmers’ market revenues.

 

Supermarket and grocery store revenues increased by approximately $0.1 million, or 2.8%, to approximately $3.8 million for the year ended June 30, 2019, compared to approximately $3.7 million for the year ended June 30, 2018 as our sales volume at supermarket was slightly increased during the year ended June 30, 2019.

 

Farmers’ market revenues decreased by approximately $2.1 million, or 2.2%, to approximately $95.2 million for the year ended June 30, 2019, compared to approximately $97.4 million for the year ended June 30, 2018. The African swine fever started to wildly spread in China in late October 2018, so the supply of hogs began to decrease. In addition, more sellers started to sell fresh killed fragrant hogs in the market during the year ended June 30, 2019, so we had to lower our unit selling price to be competitive.

 

Our revenues from our farmers’ market revenues are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Fresh killed regular hogs  $81,254,949   $80,788,494   $466,455    0.6%
Fresh killed Fragrant hogs   7,905,214    9,426,069    (1,520,855)   (16.1)%
Fresh hog byproducts   6,062,746    7,138,757    (1,076,011)   (15.1)%
Total farmers’ market revenues  $95,222,909   $97,353,320   $(2,130,411)   (2.2)%

 

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Our revenues from fresh killed regular hogs in number of kilograms sold and its average selling price are summarized as follows:

 

   For the Year
ended
June 30,  2019
   For the Year
ended
June 30,  2018
   Change   Change (%) 
Fresh killed regular hogs (kg)   29,700,842    32,878,986    (3,178,144)   (9.7)%
Average selling price (per kg)  $2.74   $2.46   $0.28    11.3%

 

Revenues of fresh killed regular hogs increased by approximately $0.5 million, or 0.6%, to approximately $81.3 million for the year ended June 30, 2019, compared to approximately $80.8 million for the year ended June 30, 2018. The increase was primarily attributable to the increase of average selling unit price and partially offset by the decrease in quantity of fresh killed regular hogs sold.

 

During the year ended June 30, 2019, we sold 29,700,842 kg of fresh killed regular hogs as compared to 32,878,986 kg sold during the year ended June 30, 2018. The decrease in quantity sold of 3,178,144 kg or 9.7% during the year ended June 30, 2019 as compared to the same period in 2018 were mainly due to the African swine fever which started to wildly spread in China in late October 2018, so the supply of hogs began to decrease. Then starting from March 2019, the Chongqing government requires all local slaughtering houses can only purchase fresh hogs from Chongqing hog farms, which also decrease of the supply of hogs.

 

The average selling price increased from $2.46/kg during the year ended June 30, 2018 to $2.74/kg during the year ended June 30, 2019, an increase of $0.28/kg or 11.3%. The increase was mainly due to the supply drop of the fresh regular hogs. Due to the African swine fever which started to wildly spread in China in late October 2018 and the purchase control of Chongqing government, the supply of regular hogs began to decrease which drove up the unit selling price. We did not see a big decrease of fresh regular hog meat demands as the African swine fever has no effect on human health as this animal disease can be fully killed after high temperature. The increase was offset by the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar of 4.7%.

 

Our revenues from fresh killed fragrant hogs in number of kilograms sold and its average selling price are summarized as follows:

 

    For the Year
ended
June 30,  2019
    For the Year
ended
June 30,  2018
    Change     Change (%)  
Fresh killed Fragrant hogs (kg)     1,678,375       1,629,225       49,150       3.0 %
Average selling price (per kg)   $ 4.71     $ 5.79     $ (1.08 )     (18.6 )%

 

During the year ended June 30, 2019, we sold 1,678,375 kg of fresh killed fragrant hogs as compared to 1,629,225 kg sold during the year ended June 30, 2018. The quantity sold increased 49,150 kg or 3.0% during the year ended June 30, 2019 as compared to the same period in 2018. We did not start our fresh killed fragrant hogs business until September 2017. Therefore, we sold more quantity during the year ended June 30, 2019 than the same period in 2018. In addition, we have a stable supply of fresh killed fragrant hogs from Chongqing suppliers and the African swine did not have a big influence on the supply of fresh killed fragrant hogs in Chongqing area.

 

The average selling price decreased from $5.79/kg during the year ended June 30, 2018 to $4.71/kg during the year ended June 30, 2019, a decrease of $1.08/kg or 18.6%. When we started our fresh killed fragrant hogs business, only a few sellers sell fresh killed fragrant hogs in the market. Therefore, we set a higher selling price for our fresh killed fragrant hogs. However, more sellers started to sell fresh killed fragrant hogs in the market during the year ended June 30, 2019, so we had to lower our unit selling price to be competitive. The decrease of unit average selling price also attributable to the depreciation of Chinese Renminbi against U.S. dollar of 4.7%.

 

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Our revenues from fresh hog byproducts on numbers of set sold and its average selling price are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Fresh hog byproducts (set)   327,888    353,917    (26,029)   (7.4)%
Average selling price (per set)  $18.49   $20.17   $(1.68)   (8.3)%

 

Fresh hog byproducts derived from the hog slaughtering process include hog hair, hog blood, hog intestines, hog feet and hog head. Revenues of fresh hog byproducts decreased by approximately $1.0 million, or 15.1%, to approximately $6.1 million for the year ended June 30, 2019, compared to approximately $7.1 million for the year ended June 30, 2018. The decrease was primarily attributable to our decreased revenues of fresh killed regular hogs. We slaughtered 327,888 hogs during the year ended June 30, 2019 as compared to 353,917 hogs during the year ended June 30, 2018, which is 26,029 less hogs, or 7.4%. Each hog produces a set of byproducts, so less byproducts were produced in 2019 than the same period in 2018.

 

We sell regular hog byproducts and fragrant hog byproducts together at the same price, and sell the byproducts by set with one type of set composed of hog hair, hog blood, hog intestines and hog feet and the other type of set composed of hog heads only. We are connected with two byproducts local distributors, one exclusively purchase our hog heads and the other distributors purchase the remaining hog byproducts who are able to purchase all the byproducts that we produced and are able to resell these byproducts to small distributors or restaurants during the period. During the year ended June 30, 2019, the average selling price decreased from $20.17 during the year ended June 30, 2018 to $18.49, a decrease of $1.68/kg, or 8.3%.We did not increase our unit selling price after African swine fever’s spread because people tend to eat less hog byproducts for the healthy eating idea and lead to lesser demand of these byproducts and lower average selling price. The decrease of unit average selling price was also due to the depreciation of Chinese Renminbi against U.S. dollar of 4.7%.

 

Cost of Revenues

 

Our cost of revenues consists of cost of direct materials, labor and manufacturing overhead costs. Total cost of revenues decreased by approximately $1.0 million, or 1.1%, to approximately $90.4 million for the year ended June 30, 2019, compared to approximately $91.4 million for the year ended June 30, 2018. Our total cost of revenues increased which was in line with the decrease of total revenues.

 

Cost of supermarket and grocery store revenues slightly increased by approximately $63,000, or 2.0%, to approximately $3.3 million for the year ended June 30, 2019, compared to approximately $3.2 million for the year ended June 30, 2018. Our cost of supermarket and grocery store revenues increased which was in line with the increase of supermarket and grocery store revenues as we have sold more products during the year ended June 30, 2019. The increase of the cost of supermarket and grocery store revenues was offset by the depreciation of RMB against U.S. dollar of 4.7%.

 

Cost of farmers’ market revenues decreased by approximately $1.1 million, or 1.2%, to approximately $87.2 million for the year ended June 30, 2019, compared to approximately $88.3 million for the year ended June 30, 2018. The decrease was mainly caused by the decreased volume at farmers’ markets, which was primarily attributable to the decreased revenues brought under the influence of the African swine fever.

 

Our cost of revenues from fresh killed regular hogs and byproducts are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Fresh killed regular hogs  $76,997,355   $77,344,030   $(346,675)   (0.4)%
Fresh killed Fragrant hogs   5,263,496    5,268,695    (5,199)   (0.1)%
Fresh hog byproducts   4,911,737    5,646,198    (734,461)   (13.0)%
Total farmers’ market cost of  revenues  $87,172,588   $88,258,923   $(1,086,335)   (1.2)%

 

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Our volume and unit cost of revenues from fresh killed regular hogs are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Fresh killed regular hogs (kg)   29,700,842    32,878,986    (3,178,144)   (9.7)%
Average production cost (per kg)  $2.59   $2.35   $0.24    10.2%

 

Cost of fresh killed regular hogs decreased by approximately $0.3 million, or 0.4%, to approximately $77.0 million for the year ended June 30, 2019, compared to approximately $77.3 million for the year ended June 30, 2018. The cost of fresh killed regular hogs was part of the cost of purchasing live regular hogs and overhead costs incurred in our own slaughtering house. The decrease was primarily associated with the decrease of sales volume of fresh killed regular hogs and the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar and offset by the increase in average production cost.

 

During the year ended June 30, 2019 we purchased 298,290 regular hogs which produced 29,700,842 kg of fresh killed regular hogs as compared to 326,489 regular hogs which produced 32,878,986 kg of fresh killed regular hogs during the year ended June 30, 2018, a decrease of 3,178,144 kg, or 9.7%. The decrease of quantity produced was associated with the decrease of sales volume as mentioned above in the revenues section.

 

The average unit cost of producing fresh killed regular hogs increased from $2.35/kg in the year ended June 30, 2018 to $2.59/kg during the year ended June 30, 2019, an increase of $0.24/kg, or 10.2%. Due to the African swine fever which started to wildly spread in China in late October 2018 and purchase control of Chongqing government, the supply of regular hogs began to decrease which drove up the unit selling price. The increase was offset by the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar of 4.7%.

 

Our volume and unit cost of revenues from fresh killed fragrant hogs are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Fresh killed Fragrant hogs (kg)   1,678,375    1,629,225    49,150    3.0%
Average production cost (per kg)  $3.14   $3.23   $(0.09)   (3.0)%

 

Cost of fresh killed fragrant hogs slightly decreased by approximately $5,200, or 0.1%, to approximately $5.2 million for the year ended June 30, 2019, compared to approximately $5.3 million for the year ended June 30, 2018. The cost of fresh killed fragrant hogs was part of the cost of purchasing live fragrant hogs and overhead costs incurred in our own slaughtering house. The small decrease was because the increase of sales volume of fresh killed fragrant hogs offset by the decrease in average production cost and the depreciation of Chinese Renminbi (“RMB”) against U.S. dollar of 4.7%.

 

During the year ended June 30, 2019, we purchased 29,598 fragrant hogs which produced 1,678,375 kg of fresh killed fragrant hogs as compared to 27,428 fragrant hogs which produced 1,629,225 kg of fresh killed fragrant hogs during the year ended June 30, 2018. The increase of quantity produced was associated with the increase of sales volume as mentioned above in the revenues section.

 

The average unit cost of producing fresh killed fragrant hogs decreased from $3.23/kg in the year ended June 30, 2018 to $3.14/kg during the year ended June 30, 2019, a decrease of $0.09/kg, or 3.0%. The decrease was due to the depreciation of RMB against U.S. dollar of 4.7% and offset by the slight increase of production cost of fresh killed fragrant hogs. The African swine fever had less effect on our purchase price of fragrant hogs than regular hogs because we purchase our fragrant hogs from local fragrant hog farmers and the fever did not spread in the Chongqing area.

 

Our volume and unit cost of revenues from byproducts are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Fresh hog byproducts (set)   327,888    353,917    (26,029)   (7.4)%
Average production cost (per set)  $14.98   $15.95   $(0.97)   (6.1)%

 

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Cost of fresh hog byproducts decreased by approximately $0.7 million, or 13.0%, to approximately $4.9 million for the year ended June 30, 2019, compared to approximately $5.6 million for the year ended June 30, 2018. We allocated total production cost of hogs to our fresh hog byproducts based upon the percentage of selling prices between the fresh killed hogs and the fresh hog byproducts. Due to the average unit selling price of fresh killed hogs during the year ended June 30, 2019 was higher than the average unit selling price during the same period in 2018 while the average unit selling price of our fresh hog byproducts during the year ended June 30, 2019 was lower than the average unit selling price during the same period in 2018, which resulted in lower allocation of our total production cost to our fresh hog byproducts and resulted in a decrease of cost of fresh hog byproducts revenue.

 

The average unit cost of producing fresh hog byproducts decreased from $15.95 during the year ended June 30, 2018 to $14.98 during the year ended June 30, 2019, a decrease of 6.1%. The production cost of byproducts is included in production cost of fresh killed regular hogs. The decrease was due to the cost of revenues allocation as discussed above and was also due to the depreciation of RMB against U.S. dollar of 4.7 %.

 

Gross Profit

 

Our gross profit from our major revenue categories are summarized as follows:

 

   For the Year ended
June 30,  2019
   For the Year ended
June 30,  2018
   Change   Change (%) 
Supermarket and grocery store revenues                    
Gross profit  $599,919   $557,074   $42,845    7.7%
Gross margin   15.6%   14.9%   (0.7)%     
                     
Farmers’ market revenues                    
Gross profit  $8,050,321   $9,094,397   $(1,044,076)   (11.5)%
Gross margin   8.5%   9.3%   (0.8)%     
                     
Total                    
Gross profit  $8,650,240   $9,651,471   $(1,001,231)   (10.4)%
Gross margin   8.7%   9.5%   (0.8)%     

 

Our gross profit decreased by approximately $1.0 million, or 10.4%, to approximately $8.7 million during the year ended June 30, 2019, from approximately $9.7 million for the year ended June 30, 2018. The decrease in gross profit was primarily due to our decrease of revenues in our farmers’ market and offset by our increase of revenues in our supermarkets and grocery sales.

 

For the years ended June 30, 2019 and 2018, our overall gross margin was 8.7% and 9.5%, respectively. The decrease in gross margin was primarily due to the decreased gross margin of famers’ market revenues.

 

Our gross margin for supermarket and grocery store revenue increased slightly from 14.9% for the year ended June 30, 2018 to 15.6% for the year ended June 30, 2019. We have been trying to keep our gross margin consistent and within our reasonable range on our selling prices on our supermarket and grocery products which resulted in a slightly increase of 0.7%.

 

Our gross margin for farmers’ market revenues decreased from 9.3% for the year ended June 30, 2018 to 8.5% for the year ended June 30, 2019 mainly due to the gross margin of our fresh killed fragrant hog products decreased from 44.1% for the year ended June 30, 2018 to 33.4% for the year ended June 30, 2019 as we have more competitor of selling fresh killed fragrant hog which driven down our unit selling price as discussed above.

 

Selling Expenses

 

Selling expenses decreased by approximately $0.2 million, or 22.3%, from approximately $0.7 million for the year ended June 30, 2018 as compared to approximately $0.6 million for the year ended June 30, 2019. The decrease in selling expenses was primarily due to the decrease of automobile, benefit, salary expense and packaging fees of approximately $0.2 million during the year of 2019.

 

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General and Administrative Expenses

 

General and administrative expenses increased by approximately $0.3 million, or 30.2%, from approximately $1.0 million for the year ended June 30, 2018 as compared to approximately $1.3 million for the year ended June 30, 2019. The increase in general and administrative expenses was primarily due to the increase of salary expenses of $0.2 million which we started paying our three officers’, CEO, CFO and President, salaries in January 2018 as well as the increase of our administrative team employees to support our increase volume of operations. In addition, the increase also attributable to the increase of professional fee of approximately $0.1 million.

 

Provision for Doubtful Accounts

 

Provision for doubtful accounts decreased by approximately $0.2 million, or 19.0% from approximately $0.9 million for the year ended June 30, 2018 as compared to approximately $0.7 million for the year ended June 30, 2019. The change was due to the fact that we had less accounts receivables aged over 6 months as well as our better management on accounts receivable collection as of June 30, 2019 as compared to June 30, 2018.

 

Income from Operations

 

The income from operations for the year ended June 30, 2019 was approximately $6.1 million, a decrease of approximately $1.0 million, or 13.7%, from approximately $7.0 million for the year ended June 30, 2018. The decrease was mostly attributable to the decrease of farmers’ market sales and the increase of general and administrative expenses and offset by the increase in supermarket and grocery store sales and the decrease of selling expenses and provision for doubtful accounts as the reasons that we mentioned above.

 

Other Income (Expense), Net

 

Our other expense, net, consists of interest income, interest expense, other finance expense, other income (expense), net, estimated litigation charges and provision for doubtful accounts – loan receivable. Our other expense was approximately $0.8 million during the year ended June 30, 2019, a decrease of approximately $1.7 million, or 67.3%, as compared to our other expenses of approximately $2.6 million during the year ended June 30, 2018. The decrease was mainly due to the decrease of interest expense of approximately $0.4 million as we incurred less bank loans and notes for our working capital needs. Additionally, we did not make any allowance for loan receivable during the year ended June 30, 2019 as compared to an allowance of approximately $1.5 million recorded for Hunan Huade loan receivable during the year ended June 30, 2018. The other expense, net was offset by the decrease of interest income of approximately $0.4 million as we did not loan to outside parties during the year ended June 30, 2019.

 

Provision for Income Taxes

 

Provision for income tax was approximately $0.2 million during the year ended June 30, 2019, a decrease of $0.5 million, or 70.1%, as compared to approximately $0.7 million for the year ended June 30, 2018. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. The decrease in provision for income taxes was mainly to GA Yongpeng Food Co., (GA Yongpeng), a wholly owned subsidiary, obtained income tax credit and obtained tax exemption status in August 2018. As a result, we will not utilize the deferred tax assets of approximately $0.2 million and wrote off the deferred tax assets during the year ended June 30, 2019.

 

Net Income from Continuing Operations

 

Our net income from continuing operations increased by approximately $1.3 million, or 33.4%, to approximately $5.0 million for the year ended June 30, 2019, from approximately $3.8 million for the year ended June 30, 2018. Such change was the result of the combination of the changes as discussed above.

 

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Net Loss from Discontinued Operations

 

Our net loss from discontinued operations was approximately $0.7 million for the year ended June 30, 2019. The net loss from discontinued operations was predominantly due to the selling expenses, general and administrative expenses and other expenses, net of approximately $0.9 million. The net loss from discontinued operations was offset by the gross profit of approximately $0.4 million for the year ended June 30, 2019. We purchased CQ Pengmei on July 1, 2018, so we did not have any discontinued operations during the year ended June 30, 2018.

 

Net Income

 

Our net income was approximately $4.4 million for the year ended June 30, 2019, increased by approximately $0.6 million, or 15.8%, from the net income of approximately $3.8 million for the year ended June 30, 2018. Such change was the result of the combination of the changes as discussed above.

 

5.B. Liquidity and Capital Resources

 

In assessing our liquidity, we monitor and analyze our cash on-hand and its operating expenditure commitments. Our liquidity needs are to meet its working capital requirements and operating expenses obligations. To date, we have financed our operations primarily through cash flows from operations and proceeds from financial institutions or third-party loans.

 

As of June 30, 2020, we had working capital of approximately $17.5 million. We had accounts receivable of approximately $40.6 million, most of them are short-term in nature and can be collected back within our operating cycle to be used to support our working capital requirements. We believe the components of our current working capital is sufficient to support our operations for the next twelve months.

 

We generated net (loss) income from continuing operations of $(2,603,296), $5,026,212 and $3,768,109 from operations for the years ended June 30, 2020, 2019 and 2018, respectively. Our strategy of connecting with major local distributors has helped us not only largely increased our farmers’ market sales but also more easily to collect accounts receivable because of the better credibility of the distributors.

 

As of June 30, 2020, we had approximately $12.9 million of loans and notes from financial institutions, third parties and related parties and approximately $4.8 million of convertible notes. We obtained these loans and notes to fund our daily operations as our business requires significant amount of capital resource to fund our daily operations. For more details about these loans and notes, see Note 11 and Note 14 in our Notes to the consolidated financial statements included in this report.

 

Current foreign exchange and other regulations in the PRC may restrict our PRC entities, Xiangtai WFOE, CQ Penglin, GA Yongpeng, CQ Pengmei and JMC, in their ability to transfer their net assets to the Company and its subsidiaries in Cayman Islands, British Virgin Islands, and Hong Kong. However, these restrictions have no impact on the ability of these PRC entities to transfer funds to the Company as we have no present plans to declare dividend which we plan to retain our retained earnings to continue to grow our business. In addition, these restrictions have no impact on the ability for us to meet our cash obligations as all of our current cash obligations are due within the PRC.

 

Cash Flows

 

The following summarizes the key components of our cash flows for the years ended June 30, 2020, 2019 and 2018.

 

    For the Years Ended June 30,  
    2020     2019     2018  
Net cash used in operating activities from continuing operations   $ (5,660,373 )   $ (5,043,182 )   $ (3,595,031 )
Net cash used in operating activities from discontinued operations     (251,646 )     (224,079 )     -  
Net cash provided by (used in) investing activities from continuing operations     159,062       1,151,310       (89,351 )
Net cash provided by investing activities from discontinued operations     -       42,234       -  
Net cash provided by financing activities from continuing operations     4,269,333       6,829,026       3,992,714  
Net cash used in financing activities from discontinued operations     (192,325 )     (178,500 )     -  
Effect of exchange rate change on cash     (4,296     320,103       (10,769 )
Net change in cash and cash equivalents   $ (1,680,245 )   $ 2,896,912     $ 297,563  

  

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As of June 30, 2020, and 2019, cash in the amount of approximately $1.3 million and $0.6 million, respectively, were all held by our subsidiaries and variable interest entity in the PRC.

 

Operating activities

 

Cash used in operating activities from continuing operations was approximately $5.7 million for the year ended June 30, 2020, which was mainly due to the net loss from continuing operations of approximately $2.6 million, the increase of deferred tax benefit of approximately $0.2 million, the increase of prepayments of approximately $5.6 million, the decrease of accounts payable of approximately $4.2 million, the decrease of customer deposits of approximately $3.3 million. The net cash used in operating activities was mainly offset by non-cash items of depreciation and amortization of plant and equipment and intangible assets of approximately $0.5 million, provision for doubtful accounts of approximately $1.5 million as we had more account receivables aged over one year and we made an allowance for a security deposit of a loan, stock compensation expense of approximately $0.9 million, late payment penalty expense for repayment of our promissory notes of $0.5 million, amortization of convertible debenture issuance cost and discount of approximately $0.4 million, the decrease of accounts receivable of approximately $2.6 million, the decrease of inventories of approximately $0.3 million as we try to minimize our inventory to reduce our storage cost, the decrease of security deposits of approximately $1.4 million, the increase of other payables and accrued liabilities of approximately $1.6 million, and the increase of tax payables of approximately $0.5 million.

 

Cash used in operating activities from continuing operations was approximately $5.0 million for the year ended June 30, 2019, which was mainly due to the increase in accounts receivable of approximately $16.9 million as we are extending more credit on our farmers’ market sales, the increase in other receivables of approximately $0.2 million and the increase of sales performance deposit of approximately $1.5 million. The net cash used in operating activities was mainly offset by the net income from continuing operations of approximately $5.0 million, provision for doubtful accounts of approximately $0.7 million as we had more account receivables aged over one year, depreciation and amortization expenses of plant and equipment and intangible assets of approximately $0.5 million, the write off of deferred tax benefit of approximately $0.2 million, the decrease of prepayments of approximately $0.1 million, the decrease of loan receivable – interest of approximately $0.7 million, the increase of accounts payable of approximately $5.9 million, the increase of other payables and accrued liabilities of approximately $0.2 million, and the increase of customer deposit of $0.1 million as we received more future purchase orders from local food companies.

 

Cash used in operating activities from continuing operations was approximately $3.6 million for the year ended June 30, 2018, which was mainly due to the increase in accounts receivable of approximately $12.0 million due to the increase of our farmers’ market business as we are extending more credit on our sales, and the increase in loan receivables - interest of approximately $0.4 million. The net cash used in operating activities was mainly offset by the net income from continuing operations of approximately $3.8 million, provision for doubtful accounts of approximately $2.4 million as we had more account receivables aged over one year and we made an allowance of our loan receivable interest of approximately $1.5 million, depreciation and amortization expenses of plant and equipment and intangible assets of approximately $0.5 million, the decrease of inventories of approximately $0.3 million as we try to minimize our inventory to improve our storage cost, the decrease of prepayments of approximately $0.2 million, the increase of other payables and accrued liabilities of approximately $0.2 million, the increase of customer deposit of $0.6 million as we received more future purchase orders from local food companies, and the increase of taxes payable of approximately $0.9 million.

 

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Investing activities

 

Cash provided in investing activities from continuing operations was approximately $0.2 million for the year ended June 30, 2020, which was due to approximately $0.9 million of cash held in connection with the acquisition of JMC and offset by purchases of plant and equipment of approximately $0.7 million.

 

Cash provided by investing activities from continuing operations was approximately $1.2 million for the year ended June 30, 2019, which was due to repayments from loan to a third party of approximately $1.2 million and offset by purchases of plant and equipment of approximately $21,000.

 

Cash used in investing activities from continuing operations was approximately $89,000 for the year ended June 30, 2018, which was due to purchases of plant and equipment of approximately $89,000.

 

Financing activities

 

Cash provided by financing activities from continuing operations was approximately $4.3 million for the year ended June 30, 2020, which was mainly due to proceeds from short-term bank loans of approximately $0.5 million, proceeds from short-term third-party loans of approximately $0.8 million, proceeds from long-term third-party loans of approximately $2.0 million, proceeds from long-term related-party loans of approximately $0.5 million and proceeds from convertible debentures of approximately $5.5 million, net of issuance cost of approximately $0.2 million. Cash provided by financing activities from continuing operations for the year ended June 30, 2020 was mainly offset by the repayments of other payables- related parties of approximately $2.0 million, the repayments of short-term bank loans of approximately $1.1 million, and the repayments of short-term third-party loans of approximately $1.6 million.

 

Cash provided by financing activities from continuing operations was approximately $6.8 million for the year ended June 30, 2019, which was mainly due to proceeds from other payables – related parties of approximately $0.7 million, proceeds from issuance of ordinary shares through private placements of $0.2 million, proceeds from completion of initial public offering, net of approximately $4.4 million, proceeds from short-term bank loans of approximately $4.5 million, proceeds from short-term third-party loans of approximately $1.2 million, proceeds from short-term related-party loans of approximately $0.3 million, proceeds from long-term bank loans of approximately $0.9 million and return of security deposit of approximately $0.6 million. Cash provided by financing activities from continuing operations for the year ended June 30, 2019 was mainly offset by the repayments of short-term bank loans of approximately $4.8 million, repayments of short-term third-party loans of approximately $0.3 million, and repayments of long-term bank loan of approximately $1.0 million.

 

Cash provided by financing activities from continuing operations was approximately $4.0 million for the year ended June 30, 2018, which was mainly due to repayments from other receivables – related parties of approximately $2.7 million, proceeds from other payables – related parties of approximately $0.6 million, proceeds from issuance of ordinary shares with redemption rights of $1.8 million, proceeds from short-term bank loans of approximately $6.1 million, proceeds from short-term third-party loans of approximately $11.1 million and return of security deposits of approximately $0.6 million. Cash provided by financing activities from continuing operations for the year ended June 30, 2018 was mainly offset by the repayments of short-term bank loans of approximately $11.4 million, repayments of short-term third-party loans of approximately $6.1 million and repayments of notes payable of approximately $1.5 million.

 

5.C. Research and Development, Patents and Licenses, etc.

 

Research and Development

 

We currently do not have any research and development expenses.

 

5.D. Trend Information

 

Other than as disclosed elsewhere in this annual report and below, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

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Guarantees

 

As of June 30, 2020, CQ Penglin, our CEO, her husband and her elder son, and an unrelated third party Chongqing Education Guaranty Co., Ltd. jointly guaranteed approximately $1.3 million (RMB 9,000,000) loan that a related-party borrowed from the bank:

 

Name of the party being guaranteed  Guaranteed amount   Guarantee expiration date
CQ Mingwen (borrower)  $1,273,795   December 25, 2020

 

We did not, however, accrue any liability in connection with such a guarantee because the borrowers have been current in its repayment obligation and we have not experienced any losses from providing such guarantee. As of the date of this report, we have evaluated the guarantee and has concluded that the likelihood of having to make any payments under the guarantee agreement is remote. If CQ Mingwen is unable to repay the loan upon maturity, assets of GA Yongpeng may be liquated to pay back the loan.

 

As of June 30, 2020, GA Yongpeng guaranteed approximately aggregated of unpaid loan balance of $0.1 million (RMB 809,220) that that four entities, 1) CQ Mingwen, a related party, 2) Chongqing Gangxinyi Trading Co., Ltd., 3) Chongqing Liangxun Trading Co., Ltd., and 4) Chongqing Fu Yong Sheng Food Supermarket Co., Ltd., borrowed from Sichuan Toucu Financial Information Services Co., Ltd. These loan balances are GA Yongpeng’s property and CQ Pengmei’s 100% equity interest. As of the date of this report, all the loans balance were repaid by the guarantees.

 

Contingencies

 

From time to time, we are a party to various legal actions arising in the ordinary course of business. The majority of these claims and proceedings related to or arise from, lease disputes, commercial disputes, worker compensation complaints, default on guaranteeing third party lease obligations, and default on loans. We first determine whether a loss from a claim is probable, and if it is reasonable to estimate the potential loss, the loss will be accrued. We disclose a range of possible losses, if a loss from a claim is probable but the amount of loss cannot be reasonably estimated.

 

As of June 30, 2020, the amount of potential losses we accrued for are summarized as follows:

 

Dispute matter  Claim amount 
Leases  $45,867 

 

As of June 30, 2020, the amounts of potential losses we did not accrue for are summarized as follows:

 

Dispute matter  Claim amount 
Guarantees  $248,302 

 

We received three complaints related to an approximately $4.6 million (RMB 33,000,000) loan currently in default (See Note 11 – Chongqing Puluosi Small Mortgage Co., Ltd.).

 

Yong Li filed a lawsuit against Chongqing Fu Yong Sheng Food Supermarket Co., Ltd. (“FYS Supermarket”) and GA Yongpeng in connection with FYS Supermarket’s breach of a supermarket equipment purchase agreement signed on May 7, 2018 by failing to pay off the remaining balance of approximately $0.2 million (RMB 1.7 million). On June 11, 2020, Chongqing Nan’an District People’s Court made a judgement that FYS Supermarket should pay Yong the full remaining balance and the monthly interest rate at 1.5% for the transfer fee and the losses and Yong’s attorney fee approximately $3,000 (RMB 20,000). GA Yongpeng shall bear joint and several liability for the above repayment. FYS Supermarket and GA Yongpeng are also required to pay property guarantee fee approximately $700 (RMB 5,000) and court fee approximately $3,000 (RMB 21,045). As of the date of this report, we have evaluated the financial condition of FYS Supermarket and has concluded that the likelihood of having to make any payments is remote. Therefore, we did not accrue any contingent liability as of June 30, 2020.

 

On October 20, 2020, Chongqing Haobangshou Ecommerce Co., Ltd. (“Haobangshou”) filed a lawsuit against Chongqing Penglin in connection with the $1,415,328 (RMB 10,000,000) loan due on March 24, 2023 and a total of $445,828 (RMB 3,150,000) outstanding payments for goods purchased in July 2020. Haobangshou stated that Haobangshou and CQ Penglin made a verbal deal in July 2020 that CQ Penglin will return the whole balance of $1,861,156 (RMB 13,150,000) within three months but CQ Penglin did not make repayments according to the deal. Therefore, Haobangshou asked CQ Penglin to pay off the full balance of $1,861,156 (RMB 13,150,000) and the interest of the whole balance at the annual interest rate of 12% from August 1, 2020 to the repayment date. Currently, the case is still under review and we are expected to receive the verdict on December 10, 2020.

 

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5.E. Off-balance Sheet Arrangements

 

Other than as disclosed elsewhere in this annual report, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in its consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

5.F. Tabular Disclosure of Contractual Obligations

 

The following table summarizes our contractual obligations as of June 30, 2020:

 

   Payments due by period 
Contractual obligations  Total   Less than 1
year
   1 – 3
years
   3 – 5
years
   More than 5 years 
Short term loans - banks  $4,359,210   $4,359,210   $-   $-   $- 
Loans-third parties   7,087,988    5,013,117    2,074,871    -    - 
Long-term loan - bank   777,558    777,558    -    -    - 
Long-term loans – related parties   713,325    -    713,325    -    - 
Operating lease obligations   1,413,078    216,033    471,837    396,459    328,749 
Total  $14,351,159   $10,365,918   $3,260,033   $396,459   $328,749 

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Management

 

The following table provides information regarding our executive officers and directors as of October 31, 2020:

 

Name  Age  Position(s)
Zeshu Dai  53  Chairwoman of the Board and Chief Executive Officer
Xiaohui Wu  43  President and Director
Xia Wang  33  Chief Financial Officer
Penglin Wang  32  Director
Bangquan Ou  65  Independent Director and Chair of the Nomination Committee
Zhaorong Zhu  60  Independent Director and Chair of the Compensation Committee
K. Bryce Toussaint  48  Independent Director and Chair of the Audit Committee
Yun Xia  64  Independent Director
Scott Silverman  51  Independent Director

 

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The business address of each of the officers and directors is Xinganxian Plaza, Building B, Suite 21-1, Lianglukou, Yuzhong District, Chongqing City, PRC 400800.

 

Zeshu Dai. Ms. Dai has been our Chairwoman of the Board and CEO since our inception, January 23, 2018. Ms. Dai graduated from high school in 1982. She worked as a cashier at Qu County Xiandu Operation Cooperative from January 1983 to December 1985. She was the sales manager at Chongqing Liangping Meat Factory from January 1986 to December 2000. From January 2001 to May 2014, Ms Dai was the Vice general manager of Chongqing Mingwen Food Co., Ltd. She has been the director of CQ Penglin and GA Yongpeng since November 2005 and June 2008, respectively. She is familiar with the meat processing industry and has extensive managing experience.

 

Xiaohui Wu. Mr. Wu has been our President since January 23, 2018 and our director since May 8, 2018. He has been the Director and CEO of Geniusland International Capital Ltd. since 2007. Before that, Mr. Wu was the Senior Project Manager at Genesis Equity Partner LLC, where he helped Chinese companies to raise capital in the United States. Prior to that, Mr. Wu had extensive experience with Hong Kong economic affairs while he worked at Hong Kong and Macao Affairs Office of the Ministry of Foreign Affairs of PRC from 1996 to 2006. Mr. Wu acquired his bachelor’s degree in English from Jilin Universtiy in 1996 and his master’s degree in finance from Remin University of China, School of Finance. Mr. Wu is familiar with the capital market in the United States and is experienced in finance and management.

 

Xia Wang. Ms. Wang has been our Chief Financial Officer since January 23, 2018. However, Ms. Wang has been working at CQ Penglin in the accounting department since 2008 after she acquired her bachelor’s degree in environmental science major from Chongqing University of Arts and Science. Ms. Wang started as a clerk at CQ Penglin from 2008 to 2010. She then worked as assistant accountant from 2010 to 2011. She was promoted to accounting supervisor in 2011, and was appointed as CFO in 2014. She oversees our accounting department, which include duties such as reviewing all the accounting functions performed by our accounting staff, maintaining our accounting book and records, reporting to the Board of Directors, managing budget, reviewing cost, etc.

 

Penglin Wang. Mr. Wang has been our Director since May 8, 2018. He has been the Chief Supervisory Offer CQ Penglin since April 2014. Mr. Wang acquired his bachelor’s degree in civil engineering from Chongqing University in 2015. Mr. Wang is familiar with the operation of the company.

 

Bangquan Ou. Mr. Ou has been our Independent Director since May 8, 2018. He has also been working at Chongqing Meat Industry Association as the secretary and executive vice president since June 2004. Mr. Ou was the deputy secretary at Chongqing Refrigeration and Supply Chain Industry Association. From February 1972 to October 2003, Mr. Ou worked at District Food Company and had served as deliveryman, clerk, warehouse manager, business section chief manager, vice president, president, and general secretary throughout the years. Before that, Mr. Ou was a butcher at Chongqing Jiangbei District Food Company. Mr. Ou graduated from Chongqing No.36 High School in 1979. Mr. Ou has also received the “Food Safety Standard Edition System Training Certificate” issued by Chongqing Municipal Bureau of Quality and Technical Supervision in 2005, the occupational qualification certificate of "Cooked Meat Product Processing Technician" issued by Chongqing Vocational Skill Identification Guidance Center in 2006, the "National Qualification Certificate for Slaughtered Technical Staff of Live Pigs Slaughterhouse (Field)" issued by the Livestock and Poultry Management Office of the Ministry of Commerce in 2010 and the “National Professional Skills Competition Referee Certificate” issued by the Occupational Skills Identification Center of the Ministry of Human Resources and Social Security in 2012. Mr. Ou is very experienced with the meat packing and meat processing industry, and is a respected and resourceful figure in the industry.

 

Zhaorong Zhu. Mr. Zhu has been our Independent Director since May 8, 2018. He has also been an assistant professor at Southwest University, School of Animal Science. Before that, from July 2005 to July 2017, Mr. Zhu worked at Southwest University. During which time, he has been the associate professor at Animal Medicine Department, the general secretary and department deputy director of the Fisheries Department, and the deputy director of Technology Industry Department. From September 2001 to July 2005, Mr. Zhu was the associate professor, deputy director at Technology Industry Department at Southwest Agricultural University. He had been an assistant professor, lecturer, and the associate professor at Department of Animal Medicine and deputy director of Department of Science and Technology at Sichuan Animal Husbandry and Veterinary College from 1983 to 2001. Mr. Zhu acquired his bachelor’s degree in Chinese Medicine from Chengdu College of Chinese Medicine in 1986 and associate degree in Animal Medicine from Sichuan Animal Husbandry and Veterinary College in 1983. Mr. Zhu is an expert in Animal Medicine and has received the Chongqin Aquaculture Forensic Qualification Certificate, the Expert certificate of Chongqing Public Safety Technical Expert Committee, and the Ministry of Agriculture Practicing Veterinary Qualification Certificate.

 

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K. Bryce Toussaint. Mr. Toussaint is a highly accomplished, result-driven entrepreneur with more than 20 years of business experience, including extensive work in providing merger and acquisition consulting, raising capital (equity and debt), project and corporate finance, private equity due diligence and accounting systems integration, with an emphasis in the energy (renewable, E&P, and midstream), manufacturing, nutraceutical and technology industries. Mr. Toussaint is well versed on SEC rules and regulations as well as Generally Accepted Accounting Principles (GAAP) promulgated by the Financial Accounting Stands Board. Mr. Toussaint currently serves as the Chairman and Interim CEO of Principal Solar, Inc. a position he has held since September of 2018. Mr. Toussaint formally served as Chief Executive Officer and Board member of Nasdaq listed Corporation MYOS RENS Technology Inc. from December 2015 until 2016. Mr. Toussaint built the foundation of his career at KPMG LLP, where he served both foreign and domestic registrants with reporting, mergers and acquisitions consulting and other capital market engagements from August 1996 to June 2000. In between, he also built a successful consulting practice assisting businesses of various sizes with process improvement and compliance initiatives, developing their management teams, accounting and reporting structure, providing strategic and operational expertise, and raising equity and debt financing, generally serving in an interim management capacity. Mr. Toussaint obtained both his Bachelor of Science in Accounting and his Master of Business Administration degrees from Louisiana State University in Baton Rouge, Louisiana. Mr. Toussaint is also certified as a CPA in the State of Texas. We believe Mr. Toussaint qualifies to be our director due to his financial expertise and public company experience.

 

Yun Xia. Ms. Xia has been our Independent Director since May 8, 2018. She has also been working at Chongqing International Freight Forwarders Association since June 2015, as secretary and deputy secretary. She was an independent director at Chongqing Foreign Economic & Trade (Group) Co. Ltd. from 2012 to 2014. She was the deputy general manager at Chongqing Bonded Port Development Management CO., Ltd. from 2009 to 2012. Before that, Ms. Xia worked as the chief of Chongqing Customs Supervision Department, Customs Clearance Department, and Review Department from 1998 to 2008, as chief personnel officer and deputy director of Personnel Education Department of Chongqing Customs from 1987 to 1998, as clerk at Personnel Education Division at Chongqing Municipal Bureau of Culture from 1985 to 1987, as clerk at Personnel Education Division at Chongqing Publishing Bureau, and as a nurse and assistant military medical officer at Railway Soldiers’ Sixth Division Hospital from 1970 to 1983. Ms. Xia acquired her bachelor’s degree in law (lawyer practice focused) from Southwest China University of Political Science and Law in 2004, an associate degree in Management from Central Party School in 1996, an associate degree in law from Southwest China University of Political Science and Law, an associate degree in Political Science from Chongqing Municipal Party University in 1985, and an associate degree in Anesthesia from Fourth Military Medical University in 1979. Ms. Xia is experienced in trade and is an expert in the legal framework of trade and business.

 

Scott Silverman. Mr. Silverman has over 25 years of business success on national and international levels, with a highly diverse knowledge of financial, legal and operations management; public company management, accounting and SEC regulations. Mr. Silverman specializes in establishing and streamlining back-office policies and procedures and implementing sound financial management and internal controls necessary for enterprise growth and scalability. Mr. Silverman is currently a director nominee of Muliang Viagoo Technology, Inc. Mr. Silverman is also a partner and CFO of VC Capital Holdings, a diversified PE firm with portfolio investments in hospitality, healthcare and construction and engineering. Additionally, Mr. Silverman serves as the CFO of Riverside Miami, a mixed use entertainment, food and beverage project in Miami, FL. He also serves as the CFO of Healthsnap, Inc. a healthcare SaaS platform on the cutting edge of remote patient monitoring and chronic care management. Mr. Silverman is one of the founders, and serves as President and CEO, of EverAsia Financial Group, which grew into a multi-national corporate financial management and advisory firm serving clients in the United States and Asia, and JJL Capital Management, a private equity firm specializing in investing in startup, early- and mid-stage companies. Prior, while serving as the VP of Finance of Itopia, Mr. Silverman was involved in the raise of over $5 million in Series A capital, reduced expenses by more than 40% and participated in a 100% increase in year-over-year top line revenues. Mr. Silverman has orchestrated investor exits for multiple companies, including direct participation in taking 7 companies public. He has also assisted in raising over $35 million for client companies, both public and private. He has a bachelor’s degree in finance from George Washington University and a Master’s degree in accounting from NOVA Southeastern University. We believe Mr. Silverman qualifies to be our director due to his finance expertise.

 

Family Relationships

 

Zeshu Dai and Penglin Wang are mother and son.

 

Board of Directors and Board Committees

 

Our board of directors currently consists of eight (8) directors, five (5) of whom is independent as such term is defined by the Nasdaq Capital Market.

 

The directors will be re-elected at our annual general meeting of shareholders on an annual basis.

 

A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in which he is so interested and may vote on such motion.

 

Board Committees

 

We established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees.

 

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Each committee’s members and functions are described below.

 

Audit Committee. Our Audit Committee consisted of Ms. Yun Xia, Mr. Bangquan Ou Mr. Zhaorong Zhu, Mr. K. Bryce Toussaint and Mr. Scott Silverman. Mr. K. Bryce Toussaint is the chairman of our audit committee. We have determined that Mr. K. Bryce Toussaint, Ms. Yun Xia, Mr. Bangquan Ou, Mr. Zhaorong Zhu and Mr. Scott Silverman satisfy the “independence” requirements of NASDAQ Rule 5605 and Rule 10A-3 under the Securities Exchange Act of 1934. Our board of directors has determined that Mr. Toussaint qualifies as an audit committee financial expert and has the accounting or financial management expertise as required under Item 407(d)(5)(ii) and (iii) of Regulation S-K. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:

 

  appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

 

  reviewing with the independent auditors any audit problems or difficulties and management’s response;

 

  discussing the annual audited financial statements with management and the independent auditors;

 

  reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures;

 

  reviewing and approving all proposed related party transactions;

 

  meeting separately and periodically with management and the independent auditors; and

 

  monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

Compensation Committee. Our compensation committee consists of Mr. Zhaorong Zhu, Ms. Yun Xia, Mr. Bangquan Ou, Mr. K. Bryce Toussaint, and Mr. Scott Silverman. Mr. Zhaorong Zhu is the chairman of our compensation committee. The compensation committee will assist the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee will be responsible for, among other things:

 

  reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers;

 

  reviewing and recommending to the shareholders for determination with respect to the compensation of our directors;

 

  reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and

 

  selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management.

 

Nominating Committee. Our nominating committee consists of Mr. Bangquan Ou, Mr. Zhaorong Zhu, Ms. Yun Xia, Mr. K. Bryce Toussaint and Mr. Scott Silverman. Mr. Bangquan Ou is the chairperson of our nominating committee. The nominating committee will assist the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating committee will be responsible for, among other things:

 

  selecting and recommending to the board nominees for election by the shareholders or appointment by the board;

 

  reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity;

 

  making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and

 

  advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken.

 

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Duties of Directors

 

Under Cayman Islands law, our directors owe to us fiduciary duties, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time. Our company may have the right to seek damages if a duty owed by our directors is breached.

 

Interested Transactions

 

A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.

 

Remuneration and Borrowing

 

All directors hold office until the next annual meeting of shareholders at which their respective class of directors is re-elected and until their successors have been duly elected and qualified. The directors may receive such remuneration as determined by a general meeting of the Company from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses properly incurred in going to attending and returning from meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the business of the Company. The compensation committee will assist the directors in reviewing the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party.

 

Qualification

 

There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by shareholders in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor has any been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Related Party Transactions,” our directors and officers have not been involved in any transactions with us or any of our affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

B. Compensation

 

Director Compensation

 

All directors hold office until the next annual meeting of shareholders at which they are re-elected and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the board of directors. Employee directors are entitled receive compensation for their services. Non-employee directors are entitled to receive a set amount of cash fee for serving as directors. In addition, non-employee directors are entitled to receive compensation for their actual travel expenses for each board of directors meeting attended, and any out-of-pocket expenses incurred by them in connection with their services provided in such capacity. We have entered into agreements with all of our directors.

 

In addition, our employee directors Ms. Zeshu Dai receives compensation for her service as Chief Executive Officerof the Company and Mr. Xiaohui Wu receives compensation for his service as President of the Company. Mr. Dai and Mr. Wu have not received and will not receive compensation as directors of the Company.

 

We have agreed to pay our independent directors an annual cash retainer from $10,000 to $25,000, subject to terms of the definitive agreements. We will also reimburse all directors for any out-of-pocket expenses incurred by them in connection with their services provided in such capacity. In addition, we may provide incentive grants of stock, options or other securities convertible into or exchangeable for, our securities.

 

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Executive Compensation

 

The Compensation Committee of the Board of Directors determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers to our success. And our compensation committee approved our salary and benefit plans. Each of the named officers will be measured by a series of performance criteria by the board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.

 

Summary Compensation Table

 

The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of the named executive officers for services rendered to us for the years ended June 30, 2020, 2019 and 2018.

 

Name and Principal Position   Fiscal Year     Salary
($)(1)
    Bonus
($)
    Stock
Awards 
($)
    All Other
Compensation
($)
    Total
($)
 
Zeshu Dai   2020     $ 120,000                       $ 120,000  
Chief Executive Officer   2019     $ 120,000                       $ 120,000  
    2018     $ 51,945                       $ 51,945  
Xia Wang   2020     $ 80,000                       $ 80,000  
Chief Financial Officer   2019     $ 80,000                       $ 80,000  
    2018     $ 34,630                       $ 34,630  
Xiaohui Wu   2020     80,000                       80,000  
President   2019     80,000                       80,000  
    2018     $ 34,630                       $ 34,630  

 

  (1) Amount reflecting salary paid or accrued to the individuals for services rendered, if any, to our PRC subsidiary and/or VIE.

 

Employment Agreements

 

Our employment agreements with our officers generally provide for employment for a specific term and pay annual salary, health insurance, pension insurance, and paid vacation and family leave time. The agreement may be terminated by either party as permitted by law. In the event of a breach or termination of the agreement by our company, we may be obligated to pay the employee twice the ordinary statutory rate. In the event of a breach or termination causing loss to our company by the employee, the employee may be required to indemnify us against loss. We have executed employment agreements with Zeshu Dai, Xiaohui Wu and Xia Wang.

 

Zeshu Dai

 

We entered into an employment agreement with Zeshu Dai for the position of Chief Executive Officer. The employment is for three years and is effective on January 23, 2018, with an annual compensation of $120,000.

 

Xiaohui Wu

 

We entered into an employment agreement with Xiaohui Wu for the position of President. The employment is for three years and is effective on January 23, 2018, with an annual compensation of $80,000.

 

Xia Wang

 

During the fiscal year ended June 30, 2019 and 2018, we had an employment agreement with Xia Wang for the position of Chief Financial Officer with an annual compensation of $80,000. In June 2020, we entered into a new employment agreement with Xia Wang for three years effective on July 1, 2020, with an annual compensation of 200,000 ordinary shares of the Company, valued at $1.00 per share.

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Item 7. Major Shareholders and Related Party Transactions

 

The following table sets forth information with respect to beneficial ownership of our ordinary shares as of October 31, 20 by:

 

  · Each person who is known by us to beneficially own more than 5% of our outstanding ordinary shares;

 

  · Each of our director, director nominees and named executive officers; and

 

  · All directors and named executive officers as a group.

 

Our company is authorized to issue 50,000,000 ordinary shares of $0.01 par value per share (each an “Ordinary Share”). The number and percentage of ordinary shares beneficially owned are based on 28,988,864 ordinary shares issued and outstanding as of the date of this annual report. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our ordinary shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person has voting or investment power with respect to securities. In computing the number of ordinary shares beneficially owned by a person listed below and the percentage ownership of such person, ordinary shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of the date of this annual report are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all ordinary shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company at Xinganxian Plaza, Building B, Suite 21-1, Lianglukou, Yuzhong District, Chongqing, People’s Republic of China 400800. As of the date of the Prospectus, we have eighty-four (84) shareholders of record.

 

Named Executive Officers and Directors  Amount of
Beneficial
Ownership
   Percentage
Ownership
 
Directors and Named Executive Officers:          
Zeshu Dai, Chairwoman of the Board and Chief Executive Officer (1)   13,300,000    45.88%
Xia Wang, Chief Financial Officer   200,000    0.69%
Xiaohui Wu, President and Director       0%
Penglin Wang, Director       0%
Bangquan Ou, Director       0%
Zhairong Zhu, Director       0%
Yun Xia, Director       0%
K. Bryce Toussaint, Director       0%
Scott Silverman, Director       0%
All directors and executive officers as a group (9 persons)   13,500,000    46.57%
           
5% Beneficial Owners:          
None          

 

  (1) Zeshu Dai beneficially owns 13,300,000 ordinary shares through China Meitai Food Co., Ltd., a British Virgin Islands company. Zeshu Dai is entrusted with the voting and dispositive power of all 13,300,000 shares held by China Meitai Food Co., Ltd. Please see Corporate History and Structure - Entrustment Agreement and Call Option Agreement.

 

Related Party Transactions

 

Related party balances

 

  a. Customer deposit – related party:

 

Name of related party  Relationship  June 30, 2020   June 30, 2019 
CQ Mingwen  Significantly influenced by Penglin  $27,395   $29,643 

 

  b. Other payables – related parties:

 

Other payables – related parties are those nontrade payables arising from transactions between the Company and certain related parties, such as advances made by the related party on behalf of the Company, and related accrued interest payable on the advances. These advances are unsecured and non-interest bearing, except payables to Jiaping Zhou and Jun Zhou with an annual interest rate of 4.35%. Current payables are due on demand.

 

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Name of related party   Name of related party   June 30, 2020     June 30, 2019  
Xia Wang   Chief Financial Officer   $ 153,659     $ 83,619  
Zeshu Dai   CEO     -       659,420  
Penglin Wang   Son of the CEO     248       162,047  
Zili Zhang   CEO of CQ Pengmei     12       429,448  
Jiaping Zhou   Shareholder of JMC     231,268       -  
Jun Zhou   Shareholder of JMC     1,879,639       -  
Total         2,264,826       1,334,534  
Total other payables – related parties – discontinued operations         (29,846 )     (88,670 )
Total other payables – related parties – continuing operations       $ 2,234,980     $ 1,245,864  

  

  c. Short term and long-term loans – related parties:

 

Long-term loans – related parties are those long-term loans from advances made by certain related parties for the daily operations needs of the Company. These loans are unsecured and interest bearing.

 

         Weighted             
         average   Collateral/         
Short term loans  Relationship  Maturities  interest rate   Guarantee   June 30, 2020   June 30, 2019 
Xia Wang  CFO  February 20,2020 (Extended to January 15, 2022)   9.60%   None   $101,904   $104,852 
Penglin Wang  Son of CEO  December 27, 2019 (Extended to December 11, 2024)   9.60%   None    229,283    224,268 
Yong Wang  Son of CEO  July 17, 2022   7.13%   None    268,912    - 
Zeshu Dai  CEO  March 8, 2022   7.13%   None    113,226    - 
Total                   713,325    329,120 
Total current loans from related parties                   -    (329,120)
Total non-current loans from related parties                  $713,325   $- 

 

Interest expense incurred on the above mentioned related party loans amounted to $51,770, $11,403 and $0 for the years ended June 30, 2020, 2019 and 2018, respectively.

 

  d. Guarantee provided to related party loan

 

On December 26, 2017, CQ Mingwen (the “borrower”) entered into a loan agreement with SPD Rural Bank (the lender) to borrow RMB 9 million (approximately $1.3 million) as working capital for one year and was extend for another year to December 26, 2020. GA Yongpeng pledged a land-use right recorded at RMB 10,198,100 (approximately $1.4 million) and building property recorded at RMB 12,268,800 (approximately $1.7 million) as collateral.

 

  e. Loans guarantees by related parties

 

We have various short-term loans guaranteed by our related parties. See Note 11 of the accompanying notes to consolidated financial statements for details.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

Please refer to Item 18.

 

Legal and Administrative Proceedings

 

Please refer to Item 4. Information on the Company – Legal Proceedings.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our ordinary shares. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions and future prospects and other factors the Board of Directors may deem relevant.

 

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Under our articles of association and the Cayman Islands Companies Law, we may only pay dividends (A) out of profits, (B) out of our share premium account, provided that we are able to pay our debts as they fall due in the ordinary course of business immediately after the dividend payment.

 

If we determine to pay dividends on any of our ordinary shares in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries. Dividend distributions from our PRC subsidiaries to us are subject to PRC taxes, such as withholding tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. See “Risk Factors — Risks Related to Doing Business in the People’s Republic of China — We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.”

 

B. Significant Changes

 

We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

 

Item 9. The Offer and Listing

 

A. Offer and listing details

 

Our ordinary shares have been listed on the Nasdaq Capital Market since August 14, 2019 under the symbol “PLIN.” The table below shows, for the periods indicated, the high and low market prices for our shares.

 

   Market Price Per Share 
Quarterly:  High