2 Significant Accounting Policies | 2 SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Companys functional currency is the Chinese Renminbi (RMB); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (USD). Use of estimates in the preparation of financial statements The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates reflected in the consolidated financial statements include, but are not limited to, the recoverability of the carrying amount and estimated useful lives of long-lived assets, allowance for accounts receivable, realizable values for inventories, valuation allowance of deferred tax assets, impairment assessment of goodwill, and share-based compensation expenses. Management makes these estimates using the best information available at the time the estimates are made; however, actual results when ultimately realized could differ significantly from those estimates. Cash and cash equivalents The Company maintains cash and cash equivalents with financial institutions in the PRC which are not insured or otherwise protected. Should any of these institutions holding the Companys cash become insolvent, or if the Company is unable to withdraw funds for any reason, the Company could lose the cash on deposit with that institution. Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Accounts Receivable Accounts receivables represent customer accounts receivables. The allowance for doubtful accounts is based on a combination of current sales, historical charge-offs and specific accounts identified as high risk. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted. Such allowances, if any, would be recorded in the period the impairment is identified. The balances of allowance for doubtful accounts are $1,364,330 and $1,562,109 at June 30, 2015 and 2014 respectively. The Company recorded bad debt written back of $204,597 for the year ended June 30, 2015 and bad debt expense of $896,441 for the year ended June 30, 2014, respectively. Inventories, net Inventories are stated at the lower of cost, determined using the weighted average cost method, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The Company charged $108,601 against allowance for obsolete inventory during the year ended June 30, 2015. The Company wrote-off $83,454 of obsolete inventory during the years ended June 30, 2014. For the years ended June 30, 2015 and 2014, the Companys allowance for obsolete inventory is $633,948 and $471,487, respectively. Advances to Suppliers The Company makes advances to certain vendors for purchase of its material and equipment. The advances to suppliers are interest free. Property and equipment Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method for financial reporting purposes. Construction in progress is stated at cost, which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction. All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Companys land purchases in the PRC are considered to be leasehold land and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and they will expire in 2053. Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized. Estimated useful lives are as follows: Right to use land 50 years Building and building improvements 35 years Machinery and equipment 10 years Furniture and office equipment 5 years Automobiles 8 years Intangible assets Definite lived intangible assets include drug permits recorded at cost less accumulated amortization and any recognized impairment loss. The drug permits were acquired in 2008 when the Company purchased LRT and are amortized over their estimated useful life of 15 years on a straight-line basis. An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with the Impairment or Disposal of Long-Lived Assets ASC 360-10. In accordance with Accounting Standards Codification (ASC) Topic 360-10-5, Impairment or Disposal of Long-Lived Assets, the Company performs an intangible asset impairment test for its definite-lived intangibles whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The intangible assets balance as of June 30, 2015 and June 30, 2014 are $484,857 and $546,114 respectively. Revenue Recognition In accordance with the ASC Topic 605, Revenue Recognition The Company derives revenues from the sale of pharmaceutical products. The Company recognizes its revenues net of value-added taxes (VAT). The Company is subject to VAT which is levied on the majority of the products at the rate 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. The Company recognizes revenue from the sale of products upon customers receipt of the shipment at the customers facility or upon when the transfer of title and risk of loss has transferred to the customer. The Company has distributor arrangements with certain parties for sale of its pharmaceutical products. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. Research and Development Research and development is charged to expense as incurred. Share-Based Compensation Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. The Companys policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Impairment of long lived assets In accordance with the provisions of ASC Topic 360-10-5, Impairment or Disposal of Long-Lived Assets, Income taxes The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, Income Taxes ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented. Non-controlling interest Non-controlling interests in our subsidiaries are recorded in accordance with the provisions of ASC Topic 810, Consolidation Under ASC 810-10-45-21, losses attributable to the parent and the non-controlling interest in a subsidiary may exceed their interests in the subsidiarys equity. The excess, and any further losses attributable to the parent and the non-controlling interest, shall be attributed to those interests. That is, the non-controlling interest shall continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance. Currency translation Since the Company operates primarily in the PRC, the Companys functional currency is the Chinese Yuan (RMB). Revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a separate component of shareholders equity. Gains and losses from foreign currency transactions are recognized in current operations. 2015 2014 Year ended RMB: US$ exchange rate 6.1288 6.1577 Average yearly RMB: US$ exchange rate 6.1452 6.1467 The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation. Fair value of financial instruments The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The carrying amount of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short term nature of these items. As of June 30, 2015, the Company does not have any assets or liabilities that are measured on a recurring basis at fair value. The Companys short-term borrowings, loans payable, related party notes payable and unrelated party notes payable that are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of June 30, 2015. As of June 30, 2015, the Company does not have any level 3 financial instruments. The Company uses the discounted cash flow approach when determining fair values of its non-recurring fair value measurements when required. We determine the fair value of our goodwill for purposes of comparing to the carrying value on at least an annual basis. Our goodwill would be adjusted to fair value if it is deemed to be impaired. Certain unobservable units for these assets are offered quotes, lack of marketability, long-term revenue growth rates and discounts rates. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement. In general, a change in the long-term growth rate of our Hebei Aoxing business unit could negatively affect the fair value of our goodwill. Comprehensive income ASC Topic 220, Comprehensive Income, Earnings per share Basic earnings per common share are computed on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed on the basis of the weighted average number of common shares and dilutive securities (such as warrants and convertible preferred stock) outstanding. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation. Statement of cash flows In accordance with the provisions of Accounting Standards Codification on Statement of Cash Flows, cash flows from the Companys operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Segment reporting ASC Topic 280, Segment Reporting Recent accounting pronouncements The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations. In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory In April 2015, the FASB issued ASU 2015-03, " Interest -Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern In June 2014, FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718); Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on its results of operations, cash flows or financial condition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers |