Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Summary Of Significant Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company’s consolidated financial statements have been stated in US dollars and prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and have been consistently applied.  Certain amounts from the prior period have been reclassified to conform to the current period presentation.

Consolidation of Variable Interest Entities (VIE)

Pursuant to the requirements of Statement of Financial Accounting Standards No. 810-10, the Company has evaluated the economic relationships of its wholly owned subsidiary, China Flying and its wholly-owned subsidiary Kanghui Agricultural with Guangzhou Tanke and has determined that it is required to consolidate China Flying, Kanghui Agricultural and Guangzhou Tanke. Therefore Guangzhou Tanke is considered to be a VIE, as defined by ASC Topic 810-10, of which China Flying is the primary beneficiary as a result of its wholly owned subsidiary Kanghui Agricultural. China Flying, as mentioned above, will absorb a majority of the economic risks and rewards of all of these VIE that are being consolidated in the accompanying financial statements.

The carrying amount of the VIEs’ assets and liabilities are as follows:

	December 31, 2012			December 31, 2011
Current assets and long-term notes receivables	$	20,457,548		$	13,929,777
Property, plant and equipment		5,102,735			4,801,723
Intangible assets		1,237,740			837,525
Total assets	$	26,798,024		$	19,569,025
Total liabilities		(6,788,948	)		(1,572,020	)
Net assets	$	20,009,076		$	17,997,005

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against our general assets.  Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

Basis of consolidation

These consolidated financial statements include the financial statements of the Company and its subsidiaries (the “Group''). All inter-company balances and transactions within the Group have been eliminated.

	Percentage Interest
Name of Entity	December 31, 2012			December 31, 2011
China Flying Development Limited		100	%		100	%
Guangzhou Kanghui Agricultural Technology Co., Ltd.		100	%		100	%
Guangzhou Tanke Industry Co., Ltd.		100	%		100	%
Guangzhou Tanke Bio-Tech Co., Ltd.		100	%		100	%
Guangzhou Jenyi Bio-Tech Co., Ltd.		100	%		100	%
Guangzhou Tanke Animal Health Co., Ltd.		100	%		100	%
Qingyuan Tanke Bio-Tech Co., Ltd.		60	%		60	%

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of the amount due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment and intangible assets, and the value of warrants. Actual results could differ from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable, prepayment, loans to customer and supplier, and other receivables. The Company places its cash with financial institutions with high-credit ratings and quality. The Company maintains bank accounts in the PRC, Hong Kong, and the United States. In addition, the Company conducts periodic reviews and evaluations of the financial conditions and payment practices of customers and suppliers. The Company has not experienced losses related to these concentrations in the past.

Concentrations of Customers and Suppliers

Approximately 98% of the Company’s revenue is generated from buyers in mainland China.  All the Company’s suppliers are located in mainland China.

In 2012, we had no customer that accounted for more than 10% of our consolidated revenues.  In 2011, the two largest customers accounted for 14% and 12% of consolidated revenues.

In 2012, we had four suppliers that accounted for 16%, 15%, 14% and 10% of our total raw material purchase.  In 2011, the two largest suppliers accounted for 23% and 10% of our total raw material purchase.

Cash and Cash Equivalents

The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.

Restricted Cash

Deposits that are restricted in use are classified as restricted cash. As of December 31, 2011, the Company had restricted cash in an escrow account which represented six months of interest on the convertible notes payable. When the notes mature or are converted into stock, the cash in this account will be released from restriction. On December 31, 2012, the Company utilized the escrow fund to pay for the last accrued interest payment on the convertible notes payable. The Company has a second escrow account of approximately $232,000 as of December 31, 2012 to be utilized for Investor Relations activities.  

Trade and Other Receivables

The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. After all collection efforts have been exhausted, the account receivable is written off against the allowance. The Company generally does not require collateral for trade or other accounts receivable.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories includes the purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

As of December 31, 2012 and 2011, the Company’s provision for slow-moving or defective inventories amounted to $41,962 and $41,585, respectively.

Prepayments

Prepayments represent cash paid in advance to suppliers for purchases of raw materials.  During the past two years, as cost of raw materials continues to rise, it has become a common practice in our industry to secure supplies of raw material and to lock in prices by entering into year-long agreements with major suppliers and prepay projected usage.  In anticipation of a new manufacturing facility starting up and launching of a new product category of premix additives in 2013, we have increased our prepayments substantially in the 4th quarter of 2012.  We achieve 5% to 10% of cost savings by making these purchase commitments.  These suppliers are all in the same industry of ours and have been doing business with Tanke for many years.  We are very familiar with these suppliers and their businesses.  Prior to advancing funds to suppliers, we performed due diligence procedures on their financial condition and continuously monitor their status.  Based on our experience, we anticipate that the prepayments are fully realizable and any unutilized amounts will be fully collectible.

Property, Plant and Equipment

Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.

Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:

Buildings	15-20 years
Plant and machinery	3-20 years
Motor vehicle	10 years
Office equipment	3-10 years

Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.

Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less the proceeds from disposal is charged or credited to income.

Intangible Assets

Intangible assets consisted mainly of two land use rights and purchased new product technology which are recorded at cost less accumulated amortization.

According to the laws of China, land in the PRC is owned by the government and cannot be sold to an individual or company. However, the government grants the users a land use right to use the land. The land use rights granted to the Company are being amortized using the straight-line method over the lease term of fifty years.

During the second quarter of 2012, the Company acquired from an agriculture research institute the exclusive right to commercialize a new production technology and manufacturing process.  This institute is assisting the Company with the application for 2 patents.  In the third quarter of 2012, the Company began applying this new technology in its manufacturing process and the result was a substantial increase in sales of this product category during the second half of 2012.  The Company began amortization of the new production technology in the third quarter of 2012 over a useful life of three years.

Amortization of intangible assets is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:

Land use rights	50 years
New Production Technology	3 – 5 years

Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. There were no impairments of long-lived assets for the periods presented.

Statutory Reserves

In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, Guangzhou Tanke is required to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to statutory reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional.

As of December 31, 2012 and 2011, the statutory reserves of the subsidiaries already reached 50% of the registered capital of the subsidiaries and the Company did not have any further allocation on it.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No.104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists;

- Delivery has occurred or services have been rendered;

- The seller's price to the buyer is fixed or determinable; and

- Collectability is reasonably assured.

The Company’s revenue is generated through the wholesale and retail sale of livestock feed additives including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby partially mitigating the loss to the Company. Therefore, collectability is reasonably assured.

Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analysis of returns and records a provision at the time of sale if necessary. As of December 31, 2012 and 2011, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.

Cost of Goods Sold

Cost of revenue consists primarily of material cost, labor cost, rent of land allocated to production, overhead associated with the manufacturing process and directly related expenses.

Research and Development Costs

Research and development costs are charged to expense as incurred and are included in operating expenses after partially offset by grants from government sponsored projects. Net research and development expense for the years ended December 31, 2012 and 2011 were $290,691 and $246,038, respectively. 

Value Added Tax (VAT)

In accordance with the relevant tax laws in the PRC, VAT is levied on the invoiced value of sales and is payable by the purchaser. The Company is required to remit the VAT it collects to the tax authority, but may deduct the VAT it has paid on eligible purchases. The difference between the amounts collected and paid is presented as VAT recoverable or payable balance on the balance sheet.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740, ”Income Tax”. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The Company is not subject to United States income tax. Furthermore, the Company is audited every year by an agency of the Chinese tax authority. Consequently, there are no uncertain tax positions requiring additional accrual or disclosure in accordance with ASC 740-10, Income Taxes.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined to include all changes in equity except those resulting from net income or loss, investments by owners and distributions to owners. The Company’s only component of other comprehensive income (loss) is the foreign currency translation adjustment.

Earnings (Loss) per share (EPS)

Earnings (loss) per share is calculated in accordance with ASC 260-10 which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Warrants and convertible notes were not included in the diluted EPS calculation because the Company had a net loss for the years ended December 31, 2012 and 2011 and they would be anti-dilutive.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Foreign Currency Translation

The Company, its subsidiaries and VIE maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.

Exchange rates used (RMB to USD)		2011	2012
Assets and liabilities	Balance sheet date (December 31)	0.1573	0.1585
Revenue and expenses	Period average (Twelve months ended December 31)	0.1545	0.1584

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

Fair Value Measurement

The Group categorizes its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by FASB ASC 820, Fair Value Measurements and Disclosures, which defines the fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the buyer and the seller at the measurement date. ASC 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller in pricing the asset or liability. These inputs are further defined as observable and unobservable inputs. Observable inputs are those that a buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent of the Group. Unobservable inputs reflect the Group’s assumptions about the inputs that the buyer and seller would use in pricing the asset or liability developed based on the best information available in the circumstances. At December 31, 2012 and 2011, the Company has no financial instruments subject to recurring fair value measurement.

The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 - Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, prepayments, loans to customer and supplier, note receivables from related parties, other receivables, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of long-term borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.

Convertible notes are not carried at fair value due to the discounts for warrants and the beneficial conversion feature.  As the interest on these notes approximates market interest, the fair value is their face value of $7,670,071.  As of the end of year 2012, there was a balance of $402,394 of unamortized amount.

It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.

Stock-Based Payments

The Company awards warrants to placement agent as the compensation for the issuance of convertible notes.  Expense related to such awards is measured based on the fair value of the instrument on the grant date (recorded as other current assets) and amortized on a straight-line basis over the convertible notes period.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.