SEC Filings

Form 10-Q dated May 14 2015
Author:Aoxin Tianli Date:May/14/2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

x

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

 

For the quarterly period ended March 31, 2015

 

o

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

 

For the transition period from                      to                     .

 

Commission File Number 001-34799

 


 

AOXIN TIANLI GROUP, INC.

(Exact name of registrant as specified in its charter)

 


 

British Virgin Islands

 

Not applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

 

SuiteK, 12th Floor, Building A, Jiangjing Mansion

228 Yanjiang Ave., Jiangan District, Wuhan City

Hubei Province, China 430010

(Address of principal executive offices and zip code)

 

(+86) 27 8274 0726

(Registrant’s telephone number, including area code)

 

TIANLI AGRITECH, INC.

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

    Yes  x    No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer

o

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

x

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of May 13, 2015, the Registrant had outstanding 33,183,000 shares of common stock, par value $0.001 per share.

 

 

1


 

 

AOXIN TIANLI GROUP, INC.

FORM 10-Q

 

INDEX

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

2

PART I    FINANCIAL INFORMATION

 

4

      Item 1.

 

Financial Statements.

 

4

      Item 2.

 

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

 

37

      Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

 

56

      Item 4.

 

Controls and Procedures

 

56

PART II    OTHER INFORMATION

 

59

      Item 1A.

 

Risk Factors

 

59

      Item 6.

 

Exhibits

 

59

 

 

i


Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to those set forth herein and in our Annual Report on Form 10-K for the fiscal year ended  December 31, 2014 filed on March 18, 2015.

 

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

 

NASDAQ CORPORATE GOVERNANCE

 

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

 

Shareholder Approval Requirements

 

NASDAQ Marketplace Rule 5635 requires each issuer to obtain shareholder approval prior to certain dilutive events, including a transaction other than a public offering involving the sale of 20% or more of the issuer’s common shares outstanding prior to the transaction for less than the greater of book or market value of the stock and a transaction that would result in a change in control of the issuer. There are no comparable provisions under the laws of the BVI and we have determined to not follow these NASDAQ Marketplace Rules.

 

NASDAQ Marketplace Rule 5635(a)(2) requires each issuer to obtain shareholder approval prior to the issuance of its shares in connection with the acquisition of the stock or assets of another company if any director, officer or Substantial Shareholder (as defined by NASDAQ Marketplace Rule 5635(e)(3)) of the issuer has a 5% or greater interest (or such persons collectively have a 10% or greater interest) directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in common shares or voting power of 5% or more. The presence of this rule would preclude us from issuing shares of our common stock, or securities convertible into or exercisable for common stock, in connection with an acquisition if the issuance would result in an increase in common shares or voting power of 5% or more, and any of our directors or officers, or any shareholder owning 5% or more or group of shareholders owning 10% or more of our outstanding shares, had a 5% or greater interest in the company or assets to be acquired or the consideration to be paid. Our Chairman, Mr. Ping Wang, who currently is a “Substantial Shareholder,” and certain of our other directors hold interests in companies we may choose to acquire or whose assets we may choose to purchase.

 

In the British Virgin Islands, our jurisdiction of organization or home country, shareholder approval is not required for a transaction which would require shareholder approval pursuant to Rule 5635(a)(2), unless the transaction is with an “Interested Shareholder” as that term is defined in Article 23 of our Articles of Association. We have determined that neither Mr. Wang nor any of our other current directors or officers is an Interested Shareholder. Therefore, under the laws of the British Virgin Islands and our constituent documents, we would not be required to obtain shareholder approval if we engaged in a transaction in which one or more of such individuals had an interest in the company or assets to be acquired, or consideration to be paid, even if shareholder approval would be required by Rule 5635(a)(2) and, should we intend to engage in any such transaction, we intend to rely upon the exemption provided by NASDAQ Marketplace Rule 5615 from the requirements of NASDAQ Marketplace Rule 5635(a)(2) rather than put the matter to a shareholder vote.

 

NASDAQ Stock Market IM-5615 requires each issuer to establish certain procedures and take certain actions to evaluate conflicts of interest that may arise involving members of the Company’s Board of Directors. The Company has determined that it will follow the laws of the British Virgin Islands, its home country, in connection with conflicts of interest on the part of directors.  Under the laws of the British Virgin Islands if a director of the Company has disclosed any interest he may have in a transaction to all other directors of the Company, that director may: (a) vote on a matter relating to the transaction; (b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (c) sign a document on behalf of the Company, or do any other thing in his or her capacity as a director, that relates to the transaction.

 

NASDAQ Stock Market IM-5615 requires each issuer to establish certain procedures and taken certain action to evaluate conflicts of interest that may arise involving members of the Company’s Board of Directors. The Company has determined that it would follow the laws of the British Virgin Islands, its home country, in connection with conflicts of interest on the part of directors if a director of the Company has disclosed any interest he may have in a transaction to all other directors of the Company, that director may: (a) vote on a matter relating to the transaction; (b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (c) sign a document on behalf of the Company, or do any other thing in his or her capacity as a director, that relates to the transaction.

 

From time to time we may consider whether it is appropriate to follow other requirements of the 5600 Series of the NASDAQ Marketplace Rules.  Should we determine not to follow one or more of such Rules in favor of the laws of the BVI, we will advise our shareholders before doing so.

 

 

2


Table of Contents

 

PART I     FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(AMOUNTS EXPRESSED IN US DOLLARS)

 

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,905,864

 

 

$

39,123,869

 

Notes receivable

 

 

-

 

 

 

16,291

 

Accounts receivable, net

 

 

2,761,243

 

 

 

2,237,794

 

Accounts receivable – related party

 

 

28,798

 

 

 

19,875

 

Inventories

 

 

10,368,154

 

 

 

11,015,763

 

Advances to suppliers

 

 

6,157,140

 

 

 

1,051,259

 

Prepaid expenses

 

 

189,997

 

 

 

238,875

 

Other receivables

 

 

146,312

 

 

 

241,666

 

Loan receivable – related party

 

 

-

 

 

 

1,629,062

 

Due from related party

 

 

79,177

 

 

 

78,195

 

Restricted cash

 

 

3,598,946

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total Current Assets

 

 

64,235,631

 

 

 

55,652,649

 

 

 

 

 

 

 

 

 

 

Long-term prepaid expenses

 

 

3,625,057

 

 

 

2,832,996

 

Plant and equipment, net

 

 

35,913,716

 

 

 

36,525,169

 

Construction in progress

 

 

713,102

 

 

 

710,128

 

Biological assets, net

 

 

1,818,231

 

 

 

2,036,823

 

Intangible assets, net

 

 

5,667,428

 

 

 

5,795,759

 

Total Assets

 

$

111,973,165

 

 

$

103,553,524

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Short-term loans

 

$

2,421,110

 

 

$

2,411,012

 

Bank acceptance notes payable

 

 

6,543,539

 

 

 

-

 

Accounts payable and accrued liabilities

 

 

1,724,223

 

 

 

1,506,703

 

Advances from customers

 

 

117,601

 

 

 

83,304

 

Advances from customers – related party

 

 

59,869

 

 

 

58,451

 

Deferred income

 

 

342,941

 

 

 

260,058

 

Special payables

 

 

183,252

 

 

 

182,488

 

Other payables

 

 

2,821,972

 

 

 

2,991,109

 

Other payables – related party

 

 

181,213

 

 

 

180,457

 

Due to related party

 

 

381,042

 

 

 

455,232

 

Total Liabilities

 

 

14,776,762

 

 

 

8,128,814

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value, 100,000,000 shares authorized, 33,183,000 shares and 32,373,000 shares issued and outstanding on March 31, 2015 and December 31, 2014)

 

 

33,183

 

 

 

32,373

 

Additional paid in capital

 

 

64,455,074

 

 

 

63,022,184

 

Statutory surplus reserves

 

 

2,552,070

 

 

 

2,532,813

 

Retained earnings

 

 

23,846,264

 

 

 

24,105,472

 

Accumulated other comprehensive income

 

 

4,643,960

 

 

 

4,079,896

 

Stockholders’ Equity – Aoxin Tianli Group, Inc., and Subsidiaries

 

 

95,530,551

 

 

 

93,772,738

 

Noncontrolling interest

 

 

1,665,852

 

 

 

1,651,972

 

Total Stockholders’ Equity

 

 

97,196,403

 

 

 

95,424,710

 

 Total Liabilities and Stockholders’ Equity

 

$

111,973,165

 

 

$

103,553,524

 

 

See notes to financial statements.

 

 

3


Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(AMOUNTS EXPRESSED IN US DOLLARS)

(UNAUDITED)

 

 

 

For the Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

Revenue

 

$

11,324,120

 

 

$

9,716,629

 

Revenue – related party

 

 

25,716

 

 

 

-

 

Revenue

 

 

11,349,836

 

 

 

9,716,629

 

Cost of goods sold

 

 

9,099,495

 

 

 

8,254,511

 

Gross profit

 

 

2,250,341

 

 

 

1,462,118

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

2,063,798

 

 

 

773,411

 

Selling expenses

 

 

268,474

 

 

 

282,767

 

Operating expenses

 

 

2,332,272

 

 

 

1,056,178

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(81,931

)

 

 

405,940

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income (expense) and bank charges

 

 

9,303

 

 

 

(89,676

)

Other income (expense)

 

 

(56,765

)

 

 

(15,239

)

Total other income (expense)

 

 

(47,462

)

 

 

(104,915

)

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(129,393

)

 

 

301,025

 

Income taxes

 

 

87,119

 

 

 

-

 

Net income (loss)

 

 

(216,512

)

 

 

301,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

Net (income) loss attributable to the noncontrolling interest

 

 

(23,439

)

 

 

127,017

 

Net income (loss) attributable to Aoxin Tianli Group, Inc. and Subsidiaries

 

$

(239,951

)

 

$

428,042

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share attributable to the stockholders of Aoxin Tianli Group, Inc. and Subsidiaries – Basic and Diluted

 

$

(0.01

)

 

$

0.03

 

Weighted average shares outstanding – Basic and Diluted

 

 

32,913,000

 

 

 

13,964,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net income (loss) attributable to Aoxin Tianli Group, Inc. and Subsidiaries

 

$

(239,951

)

 

$

428,042

 

Unrealized foreign currency translation adjustment

 

 

13,625

 

 

 

(365,368

)

Comprehensive income (loss)

 

$

(226,326

)

 

$

62,674

 

 

See notes to financial statements.

 

 

4


Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS EXPRESSED IN US DOLLARS)

(UNAUDITED)

 

 

 

For the Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

(216,512

)

 

$

301,025

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

996,036

 

 

 

884,027

 

Amortization of prepaid expenses

 

 

86,740

 

 

 

88,823

 

Amortization of long-term prepaid expenses

 

 

653,292

 

 

 

21,493

 

Provision for doubtful accounts

 

 

179,866

 

 

 

8,486

 

Loss from inventory valuation

 

 

-

 

 

 

86,917

 

Loss from farm shutdown

 

 

12,017

 

 

 

-

 

Loss from disposal of biological assets

 

 

68,594

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Notes receivable

 

 

16,297

 

 

 

-

 

Accounts receivable

 

 

(555,138

)

 

 

64,678

 

Accounts receivable – related party

 

 

(8,806

)

 

 

-

 

Inventories

 

 

691,115

 

 

 

1,326,872

 

Advances to suppliers

 

 

1,301,522

 

 

 

(534,902

)

Prepaid expenses

 

 

(37,346

)

 

 

(39,488

)

Other receivables

 

 

94,226

 

 

 

896,107

 

Accounts payable and accrued liabilities

 

 

210,411

 

 

 

(41,301

)

Advances from customers

 

 

33,820

 

 

 

-

 

Advances from customers – related party

 

 

1,169

 

 

 

-

 

Deferred income

 

 

81,485

 

 

 

-

 

Other payables

 

 

(86,089

)

 

 

(40,578

)

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

3,522,699

 

 

 

3,022,159

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Cash paid for purchase of noncontrolling interest

 

 

-

 

 

 

(1,090,114

)

Proceeds from collection of loan receivable from related party

 

 

1,629,700

 

 

 

-

 

Purchase of biological assets

 

 

(587

)

 

 

-

 

Purchase of plant and equipment

 

 

(10.929

)

 

 

(3,467

)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

 

 

1,618,184

 

 

 

(1,093,581

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Increase at restricted assets

 

 

(3,585,339

)

 

 

-

 

Proceeds from capital contribution

 

 

-

 

 

 

6,000,000

 

Due (from) related party

 

 

(75,819

)

 

 

(10,990

)

Repayments of short-term loans

 

 

(1,629,700

)

 

 

-

 

Proceeds from short-term loans

 

 

1,629,700

 

 

 

1,635,163

 

Net cash provided by (used in) financing activities

 

 

(3,661,158

)

 

 

7,624,173

 

 

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

302,270

 

 

 

(109,423

)

NET INCREASE IN CASH

 

 

1,781,995

 

 

 

9,443,328

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

39,123,869

 

 

 

10,087,694

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

40,905,864

 

 

$

19,531,022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest expense paid

 

$

28,216

 

 

$

146,661

 

Income tax paid

 

$

87,119

 

 

$

-

 

 

 

 

 

 

 

 

 

 

NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Prepayments for raw material purchases made with bank acceptance notes

 

$

6,518,799

 

 

$

-

 

Shares issued to employees

 

$

1,433,700

 

 

$

-

 

 

See notes to financial statements.

 

 

5


Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

 

The consolidated financial statements include the financial statements of Aoxin Tianli Group, Inc. (referred to herein as “Aoxin Tianli”) (formerly known as Tianli Agritech, Inc.); its wholly-owned subsidiary, HC Shengyuan Limited, a Hong Kong limited liability company (“HCS”); HCS’s wholly-owned subsidiary, Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company and a wholly foreign owned entity (“WFOE”) which changed its name to “Wuhan Aoxin Tianli Enterprise Investment Management Co., Ltd.” on June 6, 2014; WFOE’s wholly-owned subsidiary, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“Fengze”), which had been controlled by WFOE through a series of contractual control agreements which were terminated on July 2, 2014, when WFOE acquired 100% of the equity interest of Fengze; and Fengze’s wholly owned subsidiary, Hubei Tianzhili Breeder Hog Co., Ltd., a Chinese limited liability company (“Tianzhili”). On July 15, 2014, the Company acquired Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. (“Hang-ao”), a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao. Hang-ao was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. (“Sanqiang”) and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. On November 10, 2014, the Company entered into a share sale agreement with Mr. Fawei Qiu who held 12% of the equity of Hang-ao, to sell 100% of the equity of Sanqiang for RMB 24 million or $3.9 million. On August 26, 2014, the Company consummated a stock purchase agreement whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”). As a result of the completion of the transaction, OV Orange became a 95% owned subsidiary of the Company, with the remaining 5% equity interest owned by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Ping Wang, the Company’s Chairman and CEO. OV Orange is focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry and is the sole shareholder of Wuhan Orange Optical Networking Technology Development Co., Ltd. (“Optical Networking”). On November 10, 2014, OV Orange entered into a share sale agreement with Mr. Deming Liu and Hubei Aoxin Science & Technology Group Co. Ltd. to sell 100% of the equity of Optical Networking for consideration of RMB 1,000,000 or $161,030. All of Aoxin Tianli’s operations are conducted by Fengze, Tianzhili, Hang-ao, and OV Orange. Fengze,Tianzhili, Hang-ao and OV Orange’s results of operations are consolidated into those of Aoxin Tianli. HCS, WFOE, Fengze, Tianzhili, Hang-ao, and OV Orange are sometimes referred to as the “subsidiaries”. Aoxin Tianli, its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

 

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

 

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

 

 

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Table of Contents

 

 AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

 

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

 

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

 

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

 

On January 16, 2013, Tianzhili established Hubei Tianzhili (Hefeng) Breeder Hog Co., Ltd (“Hefeng”), a wholly owned subsidiary of Tianzhili, in Enshi Tujia and Miao Autonomous Prefecture of Hubei Province, as a limited liability company. Hefeng will be engaged in managing black hog farming and operations in Hefeng county of Enshi Tujia and Miao Autonomous Prefecture. On November 18, 2014, Hefeng was dissolved and its business registration terminated.

 

On November 6, 2013, the Animal Husbandry and Veterinary Bureau of Caidian District, Wuhan City, directed the Company to close its farm located in the Caidian District (Farm 8). The Company was advised that all agricultural and manufacturing activities in the area of Dacha Lake in the Caidian District were ordered to shut down before the end of 2013 as part of the government's effort to restore the lake to its natural condition. The Company finished its evacuation of this farm during the first quarter of 2014 and received part of the relocation compensation of $987,459 on June 2014. However, the final amount of its evacuation cost and loss from the farm shutdown that will be reimbursed by Caidian District is still undetermined. The Company maintains minimum personnel in the Caidian Farm or Farm 8 awaiting the final determination and reimbursements of its evacuation cost and loss.

 

 

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Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

 

On July 15, 2014, the Company acquired Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. (“Hang-ao”), a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 1,047,000 common shares of Aoxin Tianli. Hang-ao is the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. The acquisition agreement includes a three year “earn out payment” provision which requires Hang-ao to reach certain levels of net income for the years 2014, 2015, and 2016 for the sellers to retain the 1,047,000 common shares of Aoxin Tianli. The net income targets are RMB 4.5 million ($733,000), 9 million ($1.5 million), and RMB 15 million ($2.4 million) for the years 2014, 2015, and 2016.  Hang-ao reported net income of $1,050,636 for its operations in 2014 which achieved the 2014 net income target required in the acquisition agreement.

 

On October 6, 2014, the Company entered into a letter of intent with Mr. Fawei Qiu who held 12% of the equity of Hang-ao, to sell 100% of the equity of Sanqiang for RMB 24 million or $3.9 million. On November 10, 2014, the Company entered into a share sale agreement with Mr. Fawei Qiu and on November 11, 2014, the consideration of RMB 24 million or $3.9 million was collected.

 

On August 26, 2014, the Company entered into and consummated a stock purchase agreement (the “Stock Purchase Agreement”) whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”), from certain of the former shareholders of OV Orange in exchange for 2,552,000 of the Company’s common shares, of which 403,000 shares were deposited in escrow to be issued to Mr. Hai Liu, CEO of OV Orange and the former beneficial owner of 7,500,000 (representing 15%) of the outstanding OV Orange shares (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets for the years ended December 31, 2014, 2015 and 2016. Specifically, Mr. Liu will be entitled to the Escrow Shares only if OV Orange achieves net profits of not less than 90% of RMB 2.6 million, RMB 6.8 million and RMB 10.5 million for the years ending December 31, 2014, 2015, and 2016, respectively. If the net profits of OV Orange in any of the three target years are less than 90% of the target, the number of Escrow Shares to be issued to Mr. Liu will be reduced in accordance with a formula set forth in the Stock Purchase Agreement.  OV Orange reported net income of $1,077,450 for its operations in 2014 which achieved the 2014 net income target required in the acquisition agreement.

 

If the net profit targets set forth in the Stock Purchase Agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 shares of the Company’s common stock issued in exchange for 30% of the OV Orange shares, shall have the right to exchange shares of the Company’s common stock received in the acquisition for up to 7,500,000 and 15,000,000 shares, respectively, of OV Orange purchased by the Company during the three month period (the “Option Period”) commencing March 16 and terminating June 15, 2017. The ratio at which the OV Orange shares may be acquired by Mr. Liu or Mr. Wu is based upon the relative fair market values of the shares of the Company and OV Orange at the time of the re-purchase, except that if the value of the shares of the Company issued to Mr. Liu or Mr. Wu is less than the value of the shares of OV Orange he is entitled to receive, he can receive all of the OV Orange shares by delivering all of his Company shares and will not receive any additional compensation.

 

 

8


Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

 

As a result of the completion of the transaction, OV Orange became a 95% owned subsidiary of the Company, with the remaining 5% equity interest owned by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Ping Wang, the Company’s Chairman and CEO. As a result of its acquisition of 1,075,000 common shares of the Company in exchange for the 22,500,000 (representing 40% of the outstanding) OV Orange shares pursuant to the Stock Purchase Agreement and its purchase from the Company of an additional 3,000,000 common shares on August 21, 2014 for a purchase price of $7,200,000, or $2.40 per share, Hubei Aoxin Science & Technology Group Co. Ltd. owns a total of 4,075,000 common shares, representing approximately 14.68% of the Company’s outstanding common shares.

 

Wuhan Optical Valley Orange Technology Co., Ltd. is focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry. OV Orange was sole shareholder of Optical Networking. On November 10, 2014, OV Orange entered into a share sale agreement with Mr. Deming Liu and Hubei Aoxin Science & Technology Group Co. Ltd. to sell 100% of the equity of Optical Networking for consideration of RMB 1,000,000 or $161,030. On November 12, 2014, the consideration of RMB 1 million or $161,030 was collected.

 

 

9


Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

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

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of these financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. Significant estimates include the useful lives of property and equipment, land use rights and biological assets, and assumptions used in assessing impairment for long-term assets.

 

Principles of Consolidation

 

We consolidate wholly-owned subsidiaries, HCS, WFOE, Fengze, 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 noncontrolling interest in the Company’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 March 31, 2015 and December 31, 2014, balances in banks in the PRC were $40,905,865 and $39,123,869, respectively.

 

 

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Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Notes Receivable

 

Notes receivable represents trade accounts receivable due from customers where the customers’ 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 Company’s notes receivable totaled $0 and $16,291 at March 31, 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 customer’s payment history, its current credit-worthiness and current economic trends. Management accrued allowance for doubtful accounts of $105,757 and $62,328 at March 31, 2015 and December 31, 2014.

 

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 $85,877 and $85,518 at March 31, 2015 and December 31, 2014, respectively.

 

Prepaid Expenses

 

Prepaid expenses at March 31, 2015 and December 31, 2014 totaled $189,997 and $238,875, respectively, and includes prepayments to suppliers for services that had not yet been provided to us. We recognize prepayments as expense as suppliers provide services, in compliance with our accounting policy. For the three months ended March 31, 2015 and 2014, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expenses of $86,740 and $88,823, respectively.

 

Advances to Suppliers

 

Advances to suppliers at March 31, 2015 and December 31, 2014 totaled $6,157,140 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 March 31, 2015, the prepayments to the Company’s feed suppliers and one of OV Orange’s raw material suppliers were $5,980,184 and $82,626. Included in advances to suppliers as of December 31, 2014, we had prepaid $512,049 to the Company’s premix feed supplier and $309,736 to one of OV Orange’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.

 

Plant and Equipment

 

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

 

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

 

Useful Life

Buildings

20 years

Vehicles

5-10 years

Office equipment

3-5 years

Research equipment

3-20 years

Production equipment

3-20 years

 

 

 

11


Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 adequate 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 Company’s production process, whereupon they are depreciated over their estimated useful lives.

 

Biological Assets

 

Biological assets consist primarily of hogs purchased or selected from the Company’s own production for breeding and farrowing, which management believes will produce piglets that grow faster and have better quality breeding capabilities and carcasses with a high percentage of meat and a small quantity of fat. The costs to purchase and cultivate these breeding hogs and the expenditures related to labor and materials to feed the breeding hogs until they become commercially productive and breedable are capitalized. When these breeding hogs are entered into breeding and farrowing production, amortization of the costs of these breeding hogs commences. The estimated production life for breeding hogs is three years, and the costs are amortized to a residual value of $76 (RMB 500). After  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.

 

Intangible Assets

 

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

 

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

 

Intangible assets consisted of the following:

 

 

 

March 31, 2015

 

 

December 31, 2014

 

Amortizable intangible assets:

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

Land use rights

 

$

1,734,332

 

 

$

1,727,099

 

Distribution network

 

 

1,939,747

 

 

 

1,931,657

 

Patents

 

 

3,697,966

 

 

 

3,682,545

 

Others

 

 

8,556

 

 

 

7,933

 

Total carrying amount

 

 

7,380,601

 

 

 

7,349,234

 

 

 

 

 

 

 

 

 

 

Accumulated amortization:

 

 

 

 

 

 

 

 

Land use rights

 

 

(319,107

)

 

 

(304,869

)

Distribution network

 

 

(193,975

)

 

 

(144,874

)

Patents

 

 

(1,195,303

)

 

 

(1,101,044

)

Others

 

 

(4,788

)

 

 

(2,688

)

Total accumulated amortization

 

 

(1,713,173

)

 

 

(1,553,475

)

Total intangible assets, net

 

$

5,667,428

 

 

$

5,795,759

 

 

During the first quarter of 2014, we made cash payments totaling $1.1 million to acquire a 40% noncontrolling interest of Tianzhili, one of our consolidated entities. These cash payments are reported as an investing activity in the “Cash paid for purchase of noncontrolling interest” caption of our consolidated statement of cash flows.

 

On July 15, 2014, we acquired 88% of the equity interest of Hang-ao and its wholly owned subsidiary, Sanqiang, for $9,055,605, including $6,825,495 in cash and $2,230,110 in our common stock, with a premium payment of $2,440,820. As a result, we recognized patents held by Sanqiang of $2,773,659 as part of our intangible assets. On November 10, 2014, we sold 100% of Sanqiang’s equity interest for $3,906,759 in cash and reported $312,945 gain from disposal of subsidiaries.

 

On August 26, 2014, we acquired 95% of the outstanding equity of OV Orange and its wholly owned subsidiary, Optical Networking for common stock valued at $4,976,400. Through the acquisition, we obtained OV Orange’s patents which are reported in our intangible assets at $3,682,545. On November 10, 2014, we sold 100% of Optical Networking’s equity interest for $162,782 in cash and reported $5,965 gain from disposal of subsidiaries.

 

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

 

Year

 

Amount

 

2015

 

$

455,162

 

2016

 

$

606,884

 

2017

 

$

605,943

 

2018

 

$

605,173

 

2019

 

$

605,173

 

Thereafter

 

$

2,789,093

 

 

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

 

 

 

March 31, 2015

 

 

 

Hog Farming

 

 

Retail

 

 

Security & Protection

 

 

Total

 

Land use rights

 

$

1,734,332

 

 

$

-

 

 

$

-

 

 

$

1,734,332

 

Distribution network

 

 

-

 

 

 

1,939,747

 

 

 

-

 

 

 

1,939,747

 

Patents

 

 

-

 

 

 

-

 

 

 

3,697,966

 

 

 

3,697,966

 

Others

 

 

-

 

 

 

-

 

 

 

8,556

 

 

 

8,556

 

Less: accumulated amortization

 

 

(319,107

)

 

 

(193,975

)

 

 

(1,200,091

)

 

 

(1,713,713

)

Balance

 

$

1,415,225

 

 

$

1,745,772

 

 

$

2,506,431

 

 

$

5,667,428

 


 

 

 

December 31, 2014

 

 

 

Hog Farming

 

 

Retail

 

 

Security & Protection

 

 

Total

 

Land use rights

 

$

1,727,099

 

 

$

-

 

 

$

-

 

 

$

1,727,099

 

Distribution network

 

 

-

 

 

 

1,931,657

 

 

 

-

 

 

 

1,931,657

 

Patents

 

 

-

 

 

 

-

 

 

 

3,682,545

 

 

 

3,682,545

 

Others

 

 

-

 

 

 

-

 

 

 

7,933

 

 

 

7,933

 

Less: accumulated amortization

 

 

(304,869

)

 

 

(144,874

)

 

 

(1,103,732

)

 

 

(1,553,475

)

Balance

 

$

1,422,230

 

 

$

1,786,783

 

 

$

2,586,746

 

 

$

5,795,759

 


 

Impairment of Long-lived Assets

 

In accordance with US GAAP, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. For the three months ended March 31, 2015 and 2014, the Company had recorded no impairment charges at its long-lived assets.

 

 

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Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value of Financial Instruments

 

Effective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements and Disclosure (“ASC 820”) for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data

 

Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

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

 

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

 

Deferred Income

 

Included in deferred income are the subsidy income payments due from the Chinese government to support the Company’s research projects. Those financial supports will be recognized as subsidy income based on the progress of Company’s research projects. The Company is using the percentage of completion method to account for its subsidy income from deferred incomes. As of March 31, 2015 and December 31, 2014, the Company reported deferred income of $342,941 and $260,058, respectively. During the three months ended March 31, 2015 and 2014, the Company recognized subsidy income of $0 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 March 31, 2015 and December 31, 2014, the Company reported special payables of $183,252 and $182,488, respectively.

 

Non-controlling Interest

 

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

 

Revenue Recognition

 

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company generates revenues from (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 Company’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. For the three months ended March 31, 2015 and 2014, the amount allocated to maintenance service revenue was minimal. Based on historical experience, maintenance service calls and any related labor costs have been minimal. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

 

 

13


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AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 supermarkets’ 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 March 31, 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 March 31, 2015 and December 31, 2014.

 

The Company is subject to the Enterprise Income Tax law (“EIT”) of the People’s Republic of China. However, according to the EIT, companies that are engaged in the agricultural business and primary processing of agricultural products are exempt from the 25% enterprise income tax. The Company’s operations in breeding, raising, and selling hogs for use in Chinese pork meat production and hog breeding, are exempt from the Chinese income tax. However, the Company’s operations in servo-valve products 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 Company’s hog sales are not subject to the PRC’s 17% VAT tax or the 5% business tax levied on income from services rendered. However, the Company’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 Company’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 Company’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period.  There were no dilutive instruments outstanding during the three month periods ended March 31, 2015 and 2014.

 

 

14


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AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 6.1129 per US dollar and RMB 6.1385 per US dollar as of March 31, 2015 and December 31, 2014, respectively. Stockholders’ equity is translated at the historical rates and items in the statements of operations and cash flows are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with US GAAP as a component of stockholders’ equity.

 

During the three months ended March 31, 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 6.1361 and RMB 6.12 per US dollar for the three months ended March 31, 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 Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.

 

 

15


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AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Contingencies

 

Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessments inherently involve an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Accrual of Environmental Obligations

 

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

 

a)

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

 

 

b)

The amount of the loss can be reasonably estimated.

 

 

As of March 31, 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 guidance is effective for the Company starting on January 1, 2017. 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.

 

 

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AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


 

Repurchase of 40% Noncontrolling Interest

 

On March 22, 2014, the Company acquired the 40% minority equity interest in Hubei Tianzhili Breeder Hog Co., Ltd. (“Tianzhili”) for RMB 6,666,700 or $1,083,100. As a result of this purchase, Tianzhili became the wholly owned subsidiary of the Company.

 

Tianzhili, which is based in Hubei Province, China, is engaged in the business of raising and selling black hogs through several major Chinese retail channels located in Wuhan, Hubei.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed as of the date of the acquisition of the noncontrolling interest in Tianzhili. The allocation of the purchase price reflects final values assigned and may differ from preliminary values reported in the consolidated financials for prior periods.

 

 

 

March 22, 2014

 

Property, plant and equipment

 

$

10,129,629

 

Intangible asset – land use right

 

 

262,913

 

Intangible asset - distribution network

 

 

1,926,417

 

Other assets, including cash of $185,531

 

 

519,845

 

Assets acquired

 

$

12,838,804

 

Accounts payable and other liabilities

 

 

3,496

 

Other payables

 

 

3,153,447

 

Liabilities assumed

 

$

3,156,943

 

Net assets acquired

 

$

9,681,861

 

 

The intangible asset arising from the Tianzhili noncontrolling interest acquisition reflects the economic potential of the markets in which the acquired company operates as well as the synergies and economies of scale expected from operating the business as part of Aoxin Tianli.

 

Acquisitions

 

On July 15, 2014, the Company acquired Hang-ao, a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 1,047,000 common shares of Aoxin Tianli. Hang-ao, at the time of the acquisition, was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. The acquisition agreement includes a three year “earn out payment” provision which requires Hang-ao to reach certain levels of net income for the years 2014, 2015, and 2016 for the sellers to retain the 1,047,000 common shares of Aoxin Tianli. The net income targets are RMB 4.5 million ($733,000), 9 million ($1.5 million), and RMB 15 million ($2.4 million) for the years 2014, 2015, and 2016.

 

 

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Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The following is a reconciliation of the purchase:

 

 

 

Shares

 

 

Price per Share

 

 

Amount

 

Fair value of the Company’s stock issued

 

 

1,047,000

 

 

$

2.13

 

 

$

2,230,110

 

Cash

 

 

 

 

 

 

 

 

 

 

6,825,495

 

Total purchase price

 

 

 

 

 

 

 

 

 

$

9,055,605

 

Acquired assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

$

215,236

 

Current assets

 

 

 

 

 

 

 

 

 

 

8,121,512

 

Fixed assets

 

 

 

 

 

 

 

 

 

 

2,036,448

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

3,684,084

 

Liabilities

 

 

 

 

 

 

 

 

 

 

(3,766,820

)

 

 

 

 

 

 

 

 

 

 

 

10,290,460

 

Percentage of acquired equity

 

 

 

 

 

 

 

 

 

 

88

%

88% of acquired assets and liabilities

 

 

 

 

 

 

 

 

 

 

9,055,605

 

Purchase price

 

 

 

 

 

 

 

 

 

 

9,055,605

 

Goodwill

 

 

 

 

 

 

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Acquired assets and liabilities, net

 

 

 

 

 

 

0

 

 

$

10,290,460

 

Percentage of equity

 

 

 

 

 

 

 

 

 

 

12

%

Noncontrolling Interest

 

 

 

 

 

 

 

 

 

$

1,234,855

 

 

 

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Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

On August 26, 2014, the Company entered into and consummated a stock purchase agreement (the “Stock Purchase Agreement”) whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”), from certain of the former shareholders of OV Orange in exchange for 2,552,000 of the Company’s common shares, of which 403,000 shares were deposited in escrow to be issued to Mr. Hai Liu, CEO of OV Orange and the former beneficial owner of 7,500,000 (representing 15%) of the outstanding OV Orange shares (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets for the years ended December 31, 2014, 2015 and 2016. Specifically, Mr. Liu will be entitled to the Escrow Shares only if OV Orange achieves net profits equal to not less than 90% of RMB 2.6 million, RMB 6.8 million and RMB 10.5 million for the years ending December 31, 2014, 2015, and 2016, respectively. If the net profits of OV Orange in any of the three target years are less than 90% of the target, the number of Escrow Shares to be issued to Mr. Liu will be reduced in accordance with a formula set forth in the Stock Purchase Agreement.

 

If the net profit targets set forth in the Stock Purchase Agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 shares of the Company’s common stock issued in exchange for 30% of the OV Orange shares, shall have the right to exchange shares of the Company’s common stock received in the acquisition for up to 7,500,000 and 15,000,000 shares, respectively, of OV Orange purchased by the Company during the three month period (the “Option Period”) commencing March 16 and terminating June 15, 2017. The ratio at which the OV Orange shares may be acquired by Mr. Liu or Mr. Wu is based upon the relative fair market values of the shares of the Company and OV Orange at the time of the re-purchase, except that if the value of the shares of the Company issued to Mr. Liu or Mr. Wu is less than the value of the shares of OV Orange he is entitled to receive, he can receive all of the OV Orange shares by delivering all of his Company shares and will not receive any additional compensation.

 

 

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Table of Contents

 

AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The following is a reconciliation of the purchase:

 

 

 

Shares

 

 

Price per Share

 

 

Amount

 

Fair value of the Company’s stock issued

 

 

2,552,000

 

 

$

1.95

 

 

$

4,976,400

 

Acquired assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

$

690,990

 

Current assets

 

 

 

 

 

 

 

 

 

 

3,881,918

 

Fixed assets

 

 

 

 

 

 

 

 

 

 

376,075

 

Long-term prepaid expense

 

 

 

 

 

 

 

 

 

 

1,282,037

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

2,699,753

 

Liabilities

 

 

 

 

 

 

 

 

 

 

(989,226

)

 

 

 

 

 

 

 

 

 

 

 

7,941,547

 

Discount from bargain purchase

 

 

 

 

 

 

 

 

 

 

(2,703,232

)

 

 

 

 

 

 

 

 

 

 

 

5,238,315

 

Percentage of acquired equity

 

 

 

 

 

 

 

 

 

 

95

%

95% of acquired assets and liabilities

 

 

 

 

 

 

 

 

 

 

4,976,400

 

Purchase price

 

 

 

 

 

 

 

 

 

 

4,976,400

 

Goodwill

 

 

 

 

 

 

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

Amount

 

Acquired assets and liabilities, net

 

 

 

 

 

 

 

 

 

$

5,238,315

 

Percentage of equity

 

 

 

 

 

 

 

 

 

 

5

%

Noncontrolling Interest

 

 

 

 

 

 

 

 

 

$

261,915

 

 

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

 

 

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AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 3—ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Accounts receivable

 

$

2,867,000

 

 

$

2,300,122

 

Less: Allowance for doubtful accounts

 

 

(105,757

)

 

 

(62,328

)

 

 

$

2,761,243

 

 

$

2,237,794

 

 

The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company increased the allowance for doubtful accounts in the amount of $43,004 and $8,336 in the three months ended March 31, 2015 and 2014, respectively.

 

NOTE 4—INVENTORIES

 

Inventories consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Raw materials—hogs

 

$

877,390

 

 

$

984,045

 

Work in process—biological assets

 

 

3,395,949

 

 

 

3,603,752

 

Infant hogs

 

 

3,783,341

 

 

 

4,195,792

 

Finished goods—specialty pork products

 

 

36,220

 

 

 

128,944

 

Raw materials

 

 

220,362

 

 

 

236,015

 

Work in process

 

 

1,722,955

 

 

 

1,343,440

 

Finished goods

 

 

417,815

 

 

 

609,293

 

Less: inventory reserve

 

 

(85,878

)

 

 

(85,518

)

 

 

$

10,368,154

 

 

$

11,015,763

 

 

Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower. As of March 31, 2015 and December 31, 2014, the Company determined that there were write downs of $85,878 and $85,518, respectively. The term “Work in process—biological assets” has the meaning set forth above in Note 2—Biological Assets.

 

 

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AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

 

NOTE 5—ADVANCES TO SUPPLIERS

 

The Company makes advances for materials or services the Company uses in its operations. Advances to suppliers mainly consisted of prepayments to suppliers for merchandise and raw materials which were mainly comprised of premix feeds. As of March 31, 2015 and December 31, 2014, advances to suppliers amounted to $6,157,140 and $1,051,259, respectively.

 

As of March 31, 2015, the prepayments to the Company’s feed suppliers and one of OV Orange’s raw material suppliers were $5,980,184 and $82,626. Included in advances to suppliers as of December 31, 2014, we had prepaid $512,049 to the Company’s premix feed supplier and $309,736 to one of OV Orange’s raw material suppliers.

 

NOTE 6—OTHER RECEIVABLES

 

At March 31, 2015 and December 31, 2014, the Company reported other receivables of $146,312 and $241,666, respectively, including an allowance for doubtful receivables of $3,302 and $1,513.

 

On March 31, 2015 and December 31, 2014, the Company loaned $0 and $62,326 to two of its customers. The loans bear no interest and are not collateralized. Those loans were collected in January 2015.

 

On March 31, 2015 and December 31, 2014, the Company reported travel advances of $112,276 and $122,995 to its employees.

 

In August 2013, the Company entered into a promotional agreement with a marketing company to prepare a series of nationwide promotional activities to promote “Tianli-Xiduhei” black hogs for the 2014 Chinese New Year. According to the agreement, the Company provided a security deposit of $981,932 to the marketing company. The deposit was returned March 7, 2014 after the end of the promotional activities.

 

NOTE 7—LOAN RECEIVABLES – RELATED PARTY

 

At March 31, 2015 and December 31, 2014, the Company reported loan receivables of $0 and $1,629,062 to a related party, Wuhan Blueeye Photo-electricity Industry Co., Ltd. (“Blueeye”), whose CEO and major shareholder has an indirect investment relationship with the Company.

 

On December 19 and December 24, 2013, OV Orange, engaged an agent bank, China Everbright Bank, to make entrusted loans of $812,559 and $1,950,141 to Blueeye. Those loans were due on December 18 and December 23, 2014 with 5% interest rate charge, but no collateral or guarantee offered. As of December 31, 2014, $1,629,062 of the $2,762,700 loan receivables was extended to January 23, 2015 and had been fully collected on January 6, 2015.

 

NOTE 8—RESTRICTED ASSETS

 

At March 31, 2015 and December 31, 2014, the Company reported restricted assets of $3,598,946 and $0, respectively. Restricted assets consist of cash deposits held by a bank and a guarantee service provider to secure bank acceptance notes payable.

 

NOTE 9—LONG-TERM PREPAID EXPENSES

 

Long-term prepaid expenses primarily consist of prepaid rental expenses for three parcels of land comprising the Company’s farm located in Enshi Prefecture, a prepayment to Huazhong University of Science and Technology for a research project, and a prepayment to employees for their future services until 2016. The prepaid rental expenses and research expense are being amortized using the straight-line method over the lease term of 21.33 years and cooperative term of 15 years.

 

Long-term prepaid expenses at March 31, 2015 and December 31, 2014 are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Prepaid rental expenses

 

$

1,923,231

 

 

$

1,915,211

 

Prepaid research expenses

 

 

1,635,885

 

 

 

1,629,062

 

Stock based compensation to employees

 

 

1,433,700

 

 

 

-

 

Less: Accumulated amortization

 

 

(1,367,759

)

 

 

(711,277

)

 

 

$

3,625,057

 

 

$

2,832,996

 

 

Amortization expense for the three months ended March 31, 2015 and 2014 was $653,292 and $21,493, respectively.

 

The estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter will be as follow.

 

Year

 

Amount

 

 

 

2015

$

526,812

 

 

 

2016

$

702,416

 

 

 

2017

$

224,516

 

 

 

2018

$

224,516

 

 

 

2019

$

224,516

 

 

 

Thereafter

$

1,722,281

 

NOTE 10—PLANT AND EQUIPMENT

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