| BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Basis of Presentation The accompanying consolidated financial statements have been
prepared in conformity with US GAAP. This basis of accounting differs from that used in the statutory accounts of the Company,
which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s functional
currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated
and presented in United States Dollars (“USD”). All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of these financial statements in conformity
with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements
and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ
from these estimates. Significant estimates include the useful lives of property and equipment, land use rights and biological
assets, and assumptions used in assessing impairment for long-term assets. Principles of Consolidation We consolidate wholly-owned subsidiaries, HCS, WFOE, Fengze,
Tianzhili, as well as Hang-ao and OV Orange. All material intercompany accounts and transactions have been eliminated in consolidation.
The 12% equity interest holders in Hang-ao and the 5% equity interest holder of OV Orange will be accounted as non-controlling
interest in the CompanyÂ’s consolidation financial statements. Cash and Cash Equivalents Cash and cash equivalents consist of all cash balances and
highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments,
the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents. The Company maintained
cash and cash equivalents with various financial institutions in the PRC. As of June 30, 2015 and December 31, 2014, balances in
banks in the PRC were $46,806,712 and $39,123,869, respectively. Notes Receivable Notes receivable represents trade accounts receivable due
from customers where the customersÂ’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing
and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The CompanyÂ’s
notes receivable totaled $4,927 and $16,291 at June 30, 2015 and December 31, 2014, respectively. Accounts Receivable Accounts receivable is stated at cost, net of an allowance
for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of
customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, the customerÂ’s payment history, its current credit-worthiness
and current economic trends. Management accrued allowance for doubtful accounts of $57,949 and $62,328 at June 30, 2015 and December
31, 2014. Accounts receivable consisted of the following:
June 30, December 31,
2015 2014
Accounts receivable $ 1,392,025 $ 2,300,122
Less: Allowance for doubtful accounts (57,949 ) (62,328 )
$ 1,334,076 $ 2,237,794 Inventories Inventories are stated at the lower of cost, as determined
by the weighted-average method, or market. Management compares the cost of inventories with the market value, and allowance is
made for writing down the inventories to their market value if that is lower. Costs of raised animals include proportionate costs
of breeding, including amortization of the breeding herd or biological assets, plus the costs of feed and other maintenance costs
through the balance sheet date. Management inspects and monitors inventory on a continual basis. The Company recorded an inventory
reserve of $86,218 and $85,518 at June 30, 2015 and December 31, 2014, respectively. Inventories consisted of the following:
June 30, December 31,
2015 2014
Raw materials—hogs $ 537.145 $ 984,045
Work in process—biological assets 2.793,129 3,603,752
Infant hogs 3,530,874 4,195,792
Finished goods—specialty pork products 26,150 128,944
Raw materials 275,147 236,015
Work in process 1,598,766 1,343,440
Finished goods 428,216 609,293
Less: inventory reserve (86,218 ) (85,518 )
$ 9,103,209 $ 11,015,763 The term “Work in process—biological assets”
has the meaning set forth below in Biological Assets. Prepaid Expenses Prepaid expenses at June 30, 2015 and December 31, 2014 totaled $ Advances to Suppliers Advances to suppliers
at June 30, 2015 and December 31, 2014 totaled and $1,051,259,
respectively, and includes prepayments to suppliers for merchandise and raw materials that had not yet been shipped to us. We recognize
prepayments as inventory or expense as suppliers make delivery of goods in compliance with our accounting policy. As of June 30,
2015, the prepayments to the CompanyÂ’s feed suppliers and one of OV OrangeÂ’s raw material suppliers were and .
Included in advances to suppliers as of December 31, 2014, we had prepaid $512,049 to the CompanyÂ’s premix feed supplier
and $309,736 to one of OV OrangeÂ’s raw material suppliers. Restricted Cash Restricted cash consists
of cash deposits held by a bank and a guarantee service provider to secure bank acceptance notes payable. At June 30, 2015 and December 31, 2014, the Company reported
restricted assets of $3,284,719 and $0, respectively. Restricted assets consist of cash deposits held by a bank and a guarantee
service provider to secure bank acceptance notes payable. Plant and Equipment The Company states plant
and equipment at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to operations as incurred;
additions, renewals and betterments are capitalized. When plant and equipment assets are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the respective accounts, and any resulting gain or loss is recorded
as an operating expense. In accordance with US GAAP, the Company examines the possibility of decreases in the value of plant and
equipment when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company
computes depreciation using the straight-line method over the estimated useful lives of the assets with a residual value of 5%
of plant and equipment. Estimated useful lives
of the CompanyÂ’s assets are as follows:
Useful Life
Buildings 20 years
Vehicles 5-10 years
Office equipment 3-5 years
Research equipment 3-20 years
Production equipment 3-20 years Construction in Progress Construction in progress
consists of amounts expended for building construction of new breeding and animal rearing facilities. Once the building construction
is completed and the facilities are approved for breeding and animal rearing activity, the construction in progress assets are
categorized as buildings and production equipment and are then accounted for in plant and equipment. Assets accounted for as plant
and equipment are used in the CompanyÂ’s production process, whereupon they are depreciated over their estimated useful lives. As of June 30, 2015 and December 31, 2014, construction in
progress was $715,924 and $710,128, respectively. Included in construction in progress, were $90,137 for upgrading the feed processing
facility and $662,226 for optical fiber equipment purchases. Biological Assets Biological assets consist
primarily of hogs purchased or selected from the CompanyÂ’s own production for breeding and farrowing, which management believes
will produce piglets that grow faster and have better quality breeding capabilities and carcasses with a high percentage of meat
and a small quantity of fat. The costs to purchase and cultivate these breeding hogs and the expenditures related to labor and
materials to feed the breeding hogs until they become commercially productive and breedable are capitalized. When these breeding
hogs are entered into breeding and farrowing production, amortization of the costs of these breeding hogs commences. The estimated
production life for breeding hogs is three years, and the costs are amortized to a residual value of $76 (RMB 500). After breeding
hogs have completed their production life of breeding, they are transferred into inventory as the vast majority will be sold for
meat processing. Expenses incurred maintaining breeding hogs during gestation until piglets are weaned are capitalized into inventory
and included in Work in process—biological assets, a component of inventories. If a breeding hog produce piglets which are
deemed appropriate for internal breeding purposes, the gestation and raising costs until these piglets are weaned are allocated
into biological assets. Amortized expenses pertaining
to biological assets are included in inventory costs for those piglets to be sold and ultimately become a component of cost of
goods sold. Biological assets consist of the following:
June 30, December 31,
2015 2014
Breeding hogs $ 6,191,272 $ 6,712,355
Less: Accumulated amortization (4,599,383 ) (4,675,532 )
$ 1,591,889 $ 2,036,823 As of June 30, 2015 and December 31, 2014, $924,162 and $982,172
of breeding hogs was a breed of black hogs. Amortization of the biological assets, included as a component of inventory, for the
three month periods ended June 30, 2015 and 2014 was $165,506 and $325,935, respectively. Amortization of the biological assets,
included as a component of inventory, for the six month periods ended June 30, 2015 and 2014 was $342,471 and $726,858, respectively. Impairment of Long-lived Assets In accordance with US
GAAP, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as
the difference between the assetÂ’s estimated fair value and its book value. For the six months ended June 30, 2015 and 2014,
the Company had recorded no impairment charges at its long-lived assets. Fair Value of Financial Instruments Effective January 1,
2008, the Company adopted ASC 820, Fair Value Measurements and Disclosure (“ASC 820”) for assets and liabilities measured
at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally
accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value
and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the CompanyÂ’s
financial position or operating results, but did expand certain disclosures. ASC 820 defines fair
value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use
of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below: Level
1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities Level
2: Observable market-based inputs or unobservable inputs that are corroborated by market data Level
3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entityÂ’s own assumptions. The Company did not
identify any assets and liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance
with the relevant accounting standards. The carrying values
of cash and cash equivalents, trade receivables and payables, and short-term bank loans and debts approximate their fair values
due to the short maturities of these instruments. Deferred Income Included in deferred
income are the subsidy income payments due from the Chinese government to support the CompanyÂ’s research projects. Those
financial supports will be recognized as subsidy income based on the progress of CompanyÂ’s research projects. The Company
is using the percentage of completion method to account for its subsidy income from deferred incomes. As of June 30, 2015 and December
31, 2014, the Company reported deferred income of and $260,058, respectively.
During the six months ended June 30, 2015 and 2014, the Company recognized subsidy income of from
its deferred incomes. Special Payables Special payables are
the portion of certain subsidies received from the Chinese government which should be paid to cooperative organizations, individuals,
or companies who participate in the Company’s research projects. Those payables are “Pass through” payments.
As of June 30, 2015 and December 31, 2014, the Company reported special payables of and
$182,488, respectively. Non-controlling Interest Non-controlling interests
in the CompanyÂ’s subsidiaries are recorded in accordance with the provisions of ASC 810 and are reported as a component of
equity, separate from the parentÂ’s equity. Purchase or sale of equity interests that do not result in a change of control
are accounted for as equity transactions. Results of operations attributable to the non-controlling interest are included in our
consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be
reported at fair value with any gain or loss recognized in earnings. Revenue Recognition Pursuant to the guidance of ASC Topic 605 and ASC Topic 360,
the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the purchase price is fixed or determinable and collectability is reasonably assured. The Company generates revenues from (1) the
business of breeding, raising, and selling hogs for use in Chinese pork meat production, the sale of hogs for breeding by other
hog producers, and the wholesale of distribution of specialty pork products, (2) selling electro-hydraulic servo devices and providing
maintenance services, and (3) delivering optical fiber hardware and software solutions for the security and protection industry. Revenues generated from the sales of breeding and meat hogs
and specialty pork are recognized when these products are delivered to customers in accordance with previously agreed upon pricing
and delivery arrangements, and the collectability of these sales is reasonably assured. Cash payment, which sometimes is in the
form of wired cash transfers to the CompanyÂ’s bank account, is usually received by the Company at the time hogs are sold.
Hogs and specialty pork are not returnable and accordingly, no provision has been made for returnable goods. The customers are
responsible for shipping the hogs purchase. Revenues generated from sales of electro-hydraulic servo devices,
maintenance services, and sales of optical fiber hardware and software solutions are recognized upon shipment and transfer of title
or performance of the maintenance service. Electro-hydraulic servo devices generally are sold with a one-year warranty. Maintenance
service revenue is based on an estimate of the number of service person hours necessary to render a service and recognized when
the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the
delivery of the equipment. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms. Segment Information The Company follows FASB ASC 280-Segment Reporting, which
requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and
evaluates their performance. Starting from the second quarter of 2013, the Company entered
into distribution agreements with supermarkets whereby the Company is permitted to sell specialty pork products in the supermarketsÂ’
retail facilities. Consequently, management has determined that as of the end of the second quarter of 2013, the Company is operating
in two segments, hog farming and retail. However, after completion of the Hang-ao and OV Orange acquisitions, the Company has determined
to establish two more segments, the Servo segment and the Security & Protection segment, in which it includes its operations
in electro-hydraulic servo control and optical fiber hardware and software solutions. As of June 30, 2015, the Company is operating
in four segments, Hog Farming, Retail, Servo and Security & Protection. Income Taxes The Company accounts for income taxes under the provisions
of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized
in its financial statements or tax returns. The Company did not have any deferred tax assets or liabilities as of June 30, 2015
and December 31, 2014. The Company is subject to the Enterprise Income Tax law (“EIT”)
of the PeopleÂ’s Republic of China. However, according to the EIT, companies that are engaged in the agricultural business
and primary processing of agricultural products are exempt from the 25% enterprise income tax. The CompanyÂ’s operations in
breeding, raising, and selling hogs for use in Chinese pork meat production and hog breeding, are exempt from the Chinese income
tax. However, the CompanyÂ’s operations in servo-valve products and optical fiber products and services, are subject to the
25% enterprise income tax. Since OV Orange is certified as a new high technology company, OV Orange is enjoying a 15% preferential
enterprise income tax rate until the end of 2015. Aoxin Tianli is incorporated in the British Virgin Islands. Under the current
tax laws of the British Virgin Islands, the Company is not subject to income taxes. In addition the CompanyÂ’s hog sales are not subject
to the PRCÂ’s 17% VAT tax or the 5% business tax levied on income from services rendered. However, the CompanyÂ’s operations
in servo-valve products and optical fiber products are subject to such taxes. According to the PRC tax regulations, companies engaged
in the agricultural business are exempt from these taxes. The CompanyÂ’s operations in breeding, processing, and distributing
black hogs and black hog meats are exempt from VAT taxes and corporate income tax as well. Related parties A party is considered to be related to the Company if the
party, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with
the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of
principal owners and management and other parties with which the Company may deal with if one party controls or can significantly
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded
at fair value of the goods or services exchanged. Basic and Diluted Earnings per Share The Company reports earnings per share in accordance with
FASB ASC 260 “Earnings per share”. The Company’s basic earnings per share are computed using the weighted average
number of shares outstanding for the periods presented. Diluted earnings per share are computed based on the assumption that any
dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under
this method, the CompanyÂ’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to
be used to purchase common stock at the average market price during the period. There were no dilutive instruments outstanding
during the six month periods ended June 30, 2015 and 2014. Foreign Currency Translation As of March 31, 2015 and December 31, 2014, the accounts of
Tianli were maintained and its financial statements were expressed in Chinese Renminbi (RMB). Such financial statements were translated
into United States Dollars (USD) in accordance with US GAAP, with the RMB as the functional currency. All assets and liabilities
are translated at the current exchange rates as of the balance sheet dates. These rates were RMB 6.1128 per US dollar and RMB 6.1385
per US dollar as of June 30, 2015 and December 31, 2014, respectively. StockholdersÂ’ equity is translated at the historical
rates and items in the statements of operations and cash flows are translated at the average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income in accordance with US GAAP as a component of stockholdersÂ’
equity. During the six months ended June 30, 2015 and 2014, the transactions
of Tianli were denominated and recorded in RMB and are translated at the average rates of exchange for the period. These rates
were RMB 6.0888 and RMB 6.14 per US dollar for the six months ended June 30, 2015 and 2014, respectively. Exchange gains and losses
are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled. Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Stock Based Compensation In December 2004, the Financial Accounting Standards Board,
or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required
to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are required to provide services. Share-based compensation
arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share
purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10,
expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and
certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for
public companies. The CompanyÂ’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts,
if any, are amortized over the respective vesting periods or period of service of the option grant. Contingencies Certain conditions may exist as of the date financial statements
are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail
to occur. The CompanyÂ’s management and legal counsel assess such contingent liabilities, and such assessments inherently
involve an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the CompanyÂ’s legal counsel evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. The Company follows ASC 450, Accounting for Contingencies,
in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies
are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In addition, if the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the CompanyÂ’s financial statements. Legal expenses associated with the contingency
are expensed as incurred. If the assessment indicates that a potential material loss contingency is not probable but is reasonably
possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be disclosed. The Company has not accounted for any loss contingencies
as of June 30, 2015 and December 31, 2014. Loss contingencies considered to be remote by management are
generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed. The Company is not involved in any legal matters. While incapable
of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might be involved in the
future are not expected to have a material adverse effect on the CompanyÂ’s financial position, results of operations, or
cash flows. Accrual of Environmental Obligations Environmental laws and regulations to which the Company is
subject mandate additional concerns and requirements. Failure to comply with applicable laws, regulations and permits can result
in injunctive actions, damages and civil and criminal penalties. The laws and regulations applicable to the Company's activities
change frequently and it is not possible to predict the potential impact on the Company from any such future changes. Although management believes that the Company is in material
compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given
that the CompanyÂ’s compliance with the applicable statutes, laws, rules and regulations will not be challenged by governing
authorities or private parties, or that such challenges will not lead to material adverse effects on the CompanyÂ’s financial
position, results of operations, or cash flows. ASC Section 410-30-25 “Recognition” of environmental
obligations requires the accrual of a liability if both of the following conditions are met:
a) Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.
b) The amount of the loss can be reasonably estimated. As of June 30, 2015 and December 31, 2014, the Company did
not have any environmental remediation obligations, nor did it have any asset retirement obligations under ASC 410. Furthermore,
the Company did not have any environmental remediation loss contingencies requiring recognition or disclosure in its financial
statements. Recently Issued Accounting Pronouncements In May 2014, as part of its ongoing efforts to assist in the
convergence of U.S. GAAP and International Financial Reporting Standards, the Financial Accounting Standards Board (“FASB”)
issued a new standard related to revenue recognition. FASB issued Accounting Standards Update (“ASU”) No. 2014-9, “Revenue
from Contracts with Customers” (“ASU 2014-9”). ASU 2014-9 provides for a single comprehensive principles-based
standard for the recognition of revenue across all industries through the application of the following five-step process: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance
obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies
a performance obligation. The updated guidance related to revenue recognition which
affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for
the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance requires that
an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The new standard will be effective for us beginning
July 1, 2018, and adoption as of the original effective date of July 1, 2017 is permitted. The Company is currently evaluating
the impact this guidance will have on its combined financial position, results of operations and cash flows. In April 2015, the FASB issued guidance to simplify the presentation
of debt issuance costs. This new guidance requires that debt issuance costs related to a recognized debt liability be presented
in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This
new guidance will be effective for us beginning July 1, 2016. We are currently evaluating the impact of this standard on our consolidated
financial statements. Based on the CompanyÂ’s initial assessment of the standard,
the Company expects that any potential future disposals of individual hog farms will not be reported as discontinued operations
and that the results of operations of any disposed hog farm, including revenues, costs and any gains or losses on disposal, will
be classified as continuing operations within the Consolidated Statements of Operations and Comprehensive Income for all periods
presented through the date of disposition. |
