10-Q 1 e615543_10q-tianli.htm Unassociated Document

 
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 September 30, 2016
 
¨
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)
 
Suite K, 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)
     
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   ¨
 
 
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  ¨
 
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
 
¨
   
  
Accelerated filer
 
¨
         
Non-accelerated filer
 
¨
 
(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  ¨    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 November 10, 2016, the Registrant had outstanding 7,988,245 shares of common stock, par value $0.004 per share.
 
 
 

 
 
 
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
 
 
 

 
 
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, 2015 filed on March 14, 2016.
 
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.
 
 
2

 

 
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.

From time to time we may consider whether it is appropriate to follow 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. Please refer to the disclosure contained in our Annual Report for the year ended December 31, 2014, and our Quarterly Report for the quarter ended March 31, 2015, for a discussion of those home country practices we have elected to follow in lieu of the corresponding requirements of the 5600 Series of the NASDAQ Marketplace Rules.

On September 1, 2016, we effected a reverse stock split of our common stock (the “Reverse Split”). As a result of the Reverse Split, every four shares of common stock outstanding were consolidated into one share. All share and per share information in this Form 10-Q has been retroactively adjusted to reflect the Reverse Split.
 
 
3

 

 
PART I     FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(AMOUNTS EXPRESSED IN US DOLLARS)
 
   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
(Unaudited)
       
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 54,721,497     $ 49,656,897  
Accounts receivable, net
    185,945       292,684  
Inventories, net
    5,883,864       5,656,165  
Advances to suppliers, net
    1,595,044       7,823,138  
Prepaid expenses
    244,792       816,646  
Other receivables, net
    305,462       312,161  
Restricted cash
    -       9,242,571  
Assets from discontinued operations
    4,856,785       7,926,437  
Total Current Assets
    67,793,389       81,726,699  
                 
Long-term prepaid expenses, net
    1,272,894       1,389,144  
Plant and equipment, net
    22,578,024       23,410,803  
Biological assets, net
    1,850,638       1,580,847  
Intangible assets, net
    2,573,787       2,802,948  
                 
Total Assets
  $ 96,068,732     $ 110,910,441  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Short-term loans
  $ 2,698,562     $ -  
Bank acceptance notes payable
    -       12,323,428  
Accounts payable and accrued payables
    44,328       19,655  
Other payables
    3,084,787       3,041,085  
Liabilities from discontinued operations
    2,368,976       2,359,696  
Total Current Liabilities
    8,196,653       17,743,864  
                 
Stockholders' Equity:
               
Common stock ($0.004 par value, 25,000,000 shares authorized, 7,988,245 shares issued and outstanding as of September 30, 2016 and 8,295,995 shares issued and outstanding as of December 31, 2015)
    31,952       33,183  
Additional paid in capital
    61,395,561       61,743,410  
Statutory surplus reserves
    2,457,180       2,457,180  
Retained earnings
    26,461,620       28,595,306  
Accumulated other comprehensive income
    (3,481,997 )     (1,018,861 )
Stockholders' Equity - Aoxin Tianli Group Inc. and Subsidiaries
    86,864,316       91,810,218  
Noncontrolling interest
    1,007,763       1,356,359  
Total Stockholders' Equity
    87,872,079       93,166,577  
Total Liabilities and Stockholders' Equity
  $ 96,068,732     $ 110,910,441  
 
See accompanying notes to unaudited consolidated financial statements
  
 
4

 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
(AMOUNTS EXPRESSED IN US DOLLARS)
 
(UNAUDITED)
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
                         
Revenues
  $ 7,841,371     $ 9,176,510     $ 26,511,428     $ 28,616,426  
Cost of goods sold
    6,983,613       6,323,915       21,374,328       22,184,523  
Gross profit
    857,758       2,852,595       5,137,100       6,431,903  
                                 
Operating expenses:
                               
General and administrative expenses
    843,205       849,481       2,701,269       3,422,050  
Selling expenses
    104,702       156,613       322,893       517,785  
Total operating expenses
    947,907       1,006,094       3,024,162       3,939,835  
                                 
Income (loss) from operations
    (90,149 )     1,846,501       2,112,938       2,492,068  
                                 
Other income (expense):
                               
Interest income
    1,422       36,545       142,871       61,784  
Subsidy income
    -       3,571       -       3,571  
Loss from disposal of Farm 2 and Farm 3
    -       (787,964 )     -       (787,964 )
Gain from disposal of construction in progress
    -       4,302       -       4,302  
Flood damange
    (1,695,338 )     -       (1,695,338 )     -  
Other income (expense), net
    1,005       521       9,670       (66,418 )
Total other income (expense)
    (1,692,911 )     (743,025 )     (1,542,797 )     (784,725 )
                                 
Income (loss) before income taxes
    (1,783,060 )     1,103,476       570,141       1,707,343  
                                 
Income taxes
    -       -       -       -  
Net income (loss) from continuing operations
    (1,783,060 )     1,103,476       570,141       1,707,343  
                                 
Discontinued operations:
                               
Gain (loss) from operations of discontinued component, net of taxes
    (1,050,327 )     (246,229 )     (3,072,531 )     (142,551 )
Gain from disposal of discontinued component, net of taxes
    -       -       -       -  
                                 
Net income (Loss)
    (2,833,387 )     857,247       (2,502,390 )     1,564,792  
Net loss attributable to noncontrolling interest
    126,040       17,757       368,704       (10,337 )
Net loss attributable to Aoxin Tianli Group Inc. common stockholders
    (2,707,347 )     875,004       (2,133,686 )     1,554,455  
                                 
Other comprehensive income (loss):
                               
Unrealized foreign currency translation adjustment
    (327,849 )     (4,149,568 )     (2,463,136 )     (3,199,044 )
                                 
Comprehensive income (loss)
  $ (3,035,196 )   $ (3,274,564 )   $ (4,596,822 )   $ (1,644,589 )
                                 
Earnings (losses) per share attributable to Aoxin Tianli Group Inc. common stockholders - basic and diluted:
                               
Weighted-average shares outstanding, basic and diluted
    7,988,245       8,295,995       8,085,717       8,138,495  
                                 
Continuing operations - Basic & diluted
  $ (0.22 )   $ 0.13     $ 0.07     $ 0.21  
Discontinued operations - Basic & diluted
  $ (0.13 )   $ (0.03 )   $ (0.38 )   $ (0.02 )
 
See accompanying notes to unaudited consolidated financial statements
 
 
5

 
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(AMOUNTS EXPRESSED IN US DOLLARS)
 
(UNAUDITED)
 
   
For the Nine Months Ended September 30,
 
   
2016
   
2015
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income from continuing operations
  $ 570,141     $ 1,707,343  
Adjustments to reconcile net income to net cash
               
  provided by operating activities:
               
Depreciation and amortization
    2,038,110       2,302,022  
Amortization of prepaid expenses
    397,752       237,000  
Amortization of long-term prepaid expenses
    80,878       940,627  
Bad debt expense
    -       116,092  
Recovery gain from inventory valuation
    -       (85,212 )
Loss from farm shutdown
    -       11,970  
Fire damage
    22,319       -  
Flood damange
    1,695,338       -  
Destructured inventories from floods
    504,278          
Destructured biological assets from floods
    164,837          
Gain from disposal of construction in progress
    -       (4,302 )
Loss from disposal of biological assets
    530,366       167,468  
Changes in operating assets and liabilities:
               
Accounts receivable
    100,259       (918,900 )
Inventories
    3,959,585       6,166,827  
Advances to suppliers
    -       510,212  
Prepaid expenses
    (188,329 )     (117,028 )
Other receivables
    (1,679 )     (258,283 )
Long-term prepaid expenses
    (725 )     -  
Accounts payable and accrued payables
    37,544       (2,978 )
Advances from customers
    -       (44,997 )
Other payables
    70,671       (81,788 )
Total adjustments
    9,231,094       9,726,694  
Net cash provided by operating activities from continuing operations
    9,981,345       11,434,037  
Net cash provided by (used in) operating activities from discontinued operations
    6,401       2,242,816  
Net cash provided by operating activities
    9,987,746       13,676,853  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from disposal of construction in progress
    -       4,302  
Proceeds from disposal of farms
    -       1,217,414  
Purchase of biological assets
    (106,379 )     (49,894 )
Purchase of plant and equipment
    (2,988,644 )     (2,772 )
Net cash used in investing activities from continuing operations
    (3,095,023 )     1,169,050  
Net cash provided by investing activities from discontinued operations
    -       1,611,151  
Net cash provided by (used in) investing activities
    (3,095,023 )     2,780,201  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Restricted cash received from (deposited to) banks
    9,118,236       (3,246,437 )
Due to (from) related party
    -       57,814  
Proceeds from short-term loans
    2,735,471       -  
Repayment of short-term loans
    (12,157,648 )     (2,402,363 )
Net cash used in financing activities from continuing operations
    (303,941 )     (5,590,986 )
Net cash provided by financing activities  from discontinued operations
    -       1,452,645  
Net cash used in financing activities
    (303,941 )     (4,138,341 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (1,524,182 )     (1,559,952 )
                 
NET INCREASE IN CASH
    5,064,600       10,758,761  
                 
CASH, BEGINNING OF PERIOD
    49,656,897       39,123,869  
                 
CASH, END OF PERIOD
  $ 54,721,497     $ 49,882,630  
                 
SUPPLEMENTAL DISCLOSURES:
               
Cash paid during the period for:
               
Interest paid
  $ 38,626     $ 50,542  
Income tax paid
  $ -     $ -  
                 
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES
         
Prepayments for raw material purchases made with bank acceptance notes
  $ -     $ 6,492,874  
Shares issued to employees
  $ -     $ 1,433,700  
Inventories received from prior year prepayments
  $ 6,101,038     $ -  
Inventories transferred to biological assets
  $ 1,230,592     $ -  
Cancelation of shares related to Hang-ao acquisition
  $ 1,047     $ -  
Cancelation of shares related to employees' compensation
  $ 361,080     $ -  
 
See accompanying notes to unaudited consolidated financial statements
 
 
6

 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
 
(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 Aoxin Tianli Enterprise Investment Management Co., Ltd.,  a Chinese limited liability company and a wholly foreign owned entity (“WFOE”) formerly known as Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd.; 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 whollyowned 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 August 26, 2014, the Company entered into and 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 Mr. Ping Wang, the Company’s former Chairman and Chief Executive Officer. OV Orange is focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry and is also the sole shareholder of Wuhan Orange Optical Networking Technology Development Co., Ltd. (“Optical Networking”). During the fourth quarter of 2015, the Company determined to sell Hang-ao and OV Orange. Subsequently, on November 13, 2015 and December 29, 2015, the Company entered into equity transfer agreements for the sale of its 88% equity interest in Hang-ao and 95% equity interest in OV Orange for a purchase price of RMB 48.4 million ($7.5 million) and RMB 47.5 million ($7.3 million), respectively. The equity transfer agreement for the sale of OV Orange was completed with the former shareholders of OV Orange, Mr. Jin Wu, Ms. Lina Deng, and Mr. Deming Liu. On December 25, 2015, the Company terminated the equity transfer agreement entered into on November 13, 2015 for the sale of its 88% equity interest in Hang-ao due to the inability to obtain proper land use permits and deeds for its properties. The Company will keep seeking other opportunities to sell its equity in Hang-ao.  All of Aoxin Tianli’s operations are conducted by Fengze, Tianzhili, and Hang-ao. Fengze and Tianzhili’s results of operations are consolidated into those of Aoxin Tianli. The results of operations of Hang-ao and OV Orange are reflected in the Company’s consolidated financial statements as discontinued operations. HCS, WFOE, Fengze, Tianzhili, Hang-ao, Sanqiang, OV Orange, and Optical Networking are sometimes referred to as the “subsidiaries”. Aoxin Tianli and its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.

Tianli Agritech, Inc. 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 eight production farms in areas around Wuhan City, within Hubei Province, People’s Republic of China (“PRC”). On July 18, 2014, 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 would acquire 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 effective by the Wuhan Administrator for Industry & Commerce. HCS acquired WFOE and became the holder of 100% of the equity interest of WFOE, and WFOE effectively 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.
 
 
7

 

 
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 would acquire 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 effective by the Wuhan Administrator for Industry & Commerce. WFOE acquired Fengze and became the holder of 100% of the equity interest of Fengze, and Fengze effectively 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 never commenced operations and has been 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 relocation compensation of $987,459 on June 2014.

On July 15, 2014, the Company acquired Hang-ao. 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 261,750 common shares of Aoxin Tianli. 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 261,750 common shares of Aoxin Tianli. Because Hang-ao reported a net loss of $287,609 for the year ended December 31, 2015, the 261,750 Aoxin Tianli common shares were cancelled.

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 11, 2014, the transaction was completed and the consideration of RMB 24 million or $3.9 million had been 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 OV Orange in exchange for 638,000 of the Company’s common shares, of which 100,750 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..
 
 
8

 

 
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 201,500 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.

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 had been collected.

On December 29, 2015, the Company entered into equity transfer agreements with the former shareholders of OV Orange, Mr. Jin Wu, Ms. Lina Deng, and Mr. Deming Liu, for the sale of its 95% equity interest in OV Orange for a purchase price of RMB 47.5 million ($7.3 million), as a condition of the sale, the 100,750 “earn-out” shares deposited in escrow and issued to Mr. Hai Liu, CEO and the former beneficial owner of OV Orange will be released to him at the end of March, 2017 as previously stipulated  in the acquisition agreement.

On September 1, 2016, the Company effected a reverse stock split of the Company's common stock (the “Reverse Split”). Under the laws of the British Virgin Islands and the Amended and Restated Memorandum and Articles of Association, shareholder approval of the Reverse Split was not required. As a result of the Reverse Split, every four shares of common stock outstanding were consolidated into one share. All share and per share information in these notes and the accompanying consolidated financial statements has been retroactively adjusted to reflect the Reverse Split.
 
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.
 
 
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Principles of Consolidation

We consolidate wholly-owned subsidiaries, HCS, WFOE, Fengze, Tianzhili, as well as Hang-ao, and for the periods prior to their sales, Sanqiang, Optical Networking, and OV Orange. All material intercompany accounts and transactions have been eliminated in consolidation. The 12% equity interest holders in Hang-ao will be accounted as noncontrolling interest in the Company’s consolidation financial statements.

Cash

Cash 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. The Company maintained cash and cash equivalents with various financial institutions in the PRC. As of September 30, 2016 and December 31, 2015, balances in banks in the PRC were $54,721,497 and $49,656,897, 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 did not accrue any allowance for doubtful accounts for the Company’s continuing operations at September 30, 2016 and December 31, 2015. However, the Company reported an allowance for doubtful accounts of $54,560 and $0 for its discontinued operations at September 30, 2016 and December 31, 2015, respectively.

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 did not record any inventory reserve for its continuing operations at September 30, 2016 and December 31, 2015, respectively. However, the Company reported an inventory reserve of $1,872,644 and $0 for its discontinued operations at September 30, 2016 and December 31, 2015, respectively.

Prepaid Expenses

Prepaid expenses at September 30, 2016 and December 31, 2015 totaled $244,792 and $816,646, respectively, and includes prepayments to suppliers for services that had not yet been provided to the Company. The Company recognizes prepayments as an expense as suppliers provide services, in compliance with its accounting policy. For the three months ended September 30, 2016 and 2015, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expense of $136,008 and $91,686, respectively. For the nine months ended September 30, 2016 and 2015, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expense of $397,752 and $237,000, respectively.

Advances to Suppliers

Advances to suppliers are stated at cost, net of an allowance for doubtful accounts and include prepayments to suppliers for merchandise and raw materials that had not yet been shipped to the Company. The Company recognizes prepayments as inventory or expense as suppliers make delivery of goods in compliance with its accounting policy. The Company maintains allowances for doubtful accounts for estimated losses resulting from prepayments without future economic benefits to the Company. The Company reviews the advances to suppliers on a periodic basis and makes allowances where there is doubt as to the future economic benefits of individual balances. Advances to suppliers at September 30, 2016 and December 31, 2015 totaled $1,595,044 and $7,823,138, respectively, which represented prepayments to the Company’s feed suppliers. Management accrued allowance for doubtful accounts of $112,131 and $115,215 at September 30, 2016 and December 31, 2015.
 
 
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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

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 the breeding hogs have completed their production life of breeding, these breeding hogs are then transferred into inventory as the vast majority of these breeding hogs will then 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 these breeding hogs produce piglets which are deemed appropriate for internal breeding purposes, the gestation and raising costs until weaned for these piglets are then 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 and distribution networks. 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.
 
 
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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 and 10 year life of the acquired distribution network.

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 nine months ended September 30, 2016 and 2015, the Company reported an impairment  loss of $1,388,754 and $0 against its plant and equipment from continuing operations. The loss was caused by the flood which occurred in early July 2016. For the same periods, the Company reported an impairment loss of $16,363 and $0 against the plant and equipment in its discontinued operations.

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.

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.
 
 
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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 breeding, raising, and selling hogs for use in Chinese pork meat production, the sale of hogs for breeding by other hog producers and selling specialty pork products to retailers.

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 the hogs are sold. 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 that they purchase.

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.

In 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 determined that as of the end of the second quarter of 2013, the Company was operating in two segments, Hog Farming and Retail.

After completion of the Hang-ao and OV Orange acquisitions in 2014, the Company had determined to establish another segment, the emerging business segment, in which it included its operations in electro-hydraulic servovalves and optical fiber hardware and software solutions. During the fourth quarter of 2015, the Company determined to sell its subsidiaries, Hang-ao and OV Orange. Subsequently, OV Orange was sold on December 29, 2015. Accordingly, the results of operations from Hang-ao and OV Orange were reflected as discontinued operations in the Company’s consolidated financial statements. As of September 30, 2016 and December 31, 2015, the Company was operating in two segments, Hog Farming and Retail.

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 September 30, 2016 and December 31, 2015.

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, which are conducted through Hang-ao and included in the Company’s discontinued operations, are subject to the 25% enterprise income tax. 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 incomes from services rendered. However, the Company’s operations in servo-valve products, conducted through Hang-ao, are subject to such taxes. According to the PRC tax regulations, companies engaging in the agricultural business are exempt from these taxes. With respect to the Company’s operations in Retail segment, the Company is engaged in breeding, processing, and distributing black hogs and black hog meats which are exempt from VAT taxes and corporate income tax as well.
 
 
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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 nine month periods ended September 30, 2016 and 2015.

Foreign Currency Translation

As of September 30, 2016 and December 31, 2015, the accounts of Aoxin 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 6.67022 and RMB 6.4917 per US dollar as of September 30, 2016 and December 31, 2015, 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 nine months ended September 30, 2016 and 2015, 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 6.58022 and RMB 6.1606 per US dollar for the nine months ended September 30, 2016 and 2015, 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.

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.
 
 
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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 September 30, 2016 and December 31, 2015, 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 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 January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard requires several targeted changes including that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The new guidance also changes certain disclosure requirements and other aspects of current US GAAP. Amendments are to be applied as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This standard is effective for fiscal years starting after December 15, 2017, including interim periods within those fiscal years. The standard does not permit early adoption with the exception of certain targeted provisions. The Company is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.
 
 
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In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We anticipate this standard will have a material impact on our consolidated balance sheets, and we are currently evaluating its impact.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The Company is currently assessing the impact and timing of adopting this guidance on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016- 10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
 
In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting.” The amendment rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: 1) Revenue and Expense Recognition for Freight Services in Process, which is codified in paragraph 605-20-S99-2; 2) Accounting for Shipping and Handling Fees and Costs, which is codified in paragraph 605-45-S99-1; 3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller of the Vendor's Products), which is codified in paragraph 605-50-S99-1; 4) Accounting for Gas-Balancing Arrangements (i.e., use of the "entitlements method"), which is codified in paragraph 932-10-S99-5, which is effective upon adoption of ASU 2014-09. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients". The amendments, among other things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
 
 
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In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The new standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements.

Reclassification

Certain prior year balances were reclassified to conform to the current period presentation wherein Hang-ao and OV Orange, are classified as discontinued operations. None of these reclassifications had an impact on reported financial position or cash flows for any of the periods presented.

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 261,750 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 261,750 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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The following is a reconciliation of the purchase:
 
   
Shares
   
Price per Share
   
Amount
 
Fair value of the Company’s stock issued
    261,750     $ 8.52     $ 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
                  $ 10,290,460  
Percentage of equity
                    12 %
Noncontrolling Interest
                  $ 1,234,855  
 
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 638,000 of the Company’s common shares, of which 100,750 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 201,500 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.
 
 
18

 

 
The following is a reconciliation of the purchase:

   
Shares
   
Price per Share
   
Amount
 
Fair value of the Company’s stock issued
    638,000     $ 7.80     $ 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, Aoxin Tianli’s former CEO. 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.

Deconsolidation

On November 10, 2014, the Company sold 100% of Sanqiang’s equity interest for $3,906,759 in cash. Aoxin Tianli recognized a gain of $312,945 from this transaction.

The following is a reconciliation of the deconsolidation:
 
   
Amount
 
Selling price
  $ 3,906,759  
Disposed assets and liabilities:
       
Cash
    16,839  
Current assets
    292,795  
Fixed assets
    17,370  
Intangible assets
    3,550,949  
Liabilities
    (284,139 )
      3,593,814  
Gain from disposal of subsidiaries, net of income tax
  $ 312,945  

On November 10, 2014, the Company sold 100% of Optical Networking’s equity interest for $162,906 in cash. Aoxin Tianli recognized a gain of $5,965 from this transaction.
 
 
19

 

 
The following is a reconciliation of the deconsolidation:
 
   
Amount
 
Selling price
  $ 162,906  
Disposed assets and liabilities:
       
Cash
    72,665  
Current assets
    84,276  
      156,941  
Gain from disposal of subsidiaries, net of income tax
  $ 5,965  

On December 29, 2015, the Company sold 95% of OV Orange’s equity interest for $7,317,036 in cash. Aoxin Tianli recognized a gain of $2,144,226 from this transaction.

The following is a reconciliation of the deconsolidation:
 
   
Amount
 
Selling price
  $ 7,317,036  
Disposed assets and liabilities:
       
Cash
    65,446  
Current assets
    2,202,581  
Long-term prepaid expenses
    1,103,974  
Fixed assets and construction in progress
    925,524  
Intangible assets
    2,190,288  
Liabilities
    (1,315,003 )
      5,172,810  
Gain from disposal of subsidiaries, net of income tax
  $ 2,144,226  
 
NOTE 3—ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

   
September 30,
   
December 31,
 
   
2016
   
2015
 
Accounts receivable
  $ 185,945     $ 292,684  
Less: Allowance for doubtful accounts
    -       -  
    $ 185,945     $ 292,684  

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. During the nine months ended September 30, 2016 and 2015, the Company reported a recovery gain of $0 and $5,640, respectively, from the allowance for doubtful accounts.
 
NOTE 4—INVENTORIES

Inventories consisted of the following:

   
September 30,
   
December 31,
 
   
2016
   
2015
 
Raw materials—hogs
  $ 1,102,565     $ 383,807  
Work in process—biological assets
    2,383,237       2,416,201  
Infant hogs
    2,398,062       2,853,727  
Finished goods—specialty pork products
    -       2,430  
Less: inventory reserve
    -       -  
    $ 5,883,864     $ 5,656,165  
 
 
20

 

 
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 September 30, 2016 and December 31, 2015, the Company did not write down the value of its inventories from the continuing operations. However, the Company reported an inventory reserve of $1,872,644 and $0 for its discontinued operations at September 30, 2016 and December 31, 2015, respectively. For the nine months ended September 30, 2016 and 2015, the Company reported a recovery gain of $0 and $85,212 from its impairment loss reserve. The term “Work in process—biological assets” has the meaning set forth above in Note 2—Biological Assets.
 
NOTE 5—ADVANCES TO SUPPLIERS

The Company makes advances for materials or services the Company uses in its operations. Advances to suppliers consisted of prepayments to suppliers for merchandise and raw materials which were mainly comprised of premix feeds. As of September 30, 2016 and December 31, 2015, advances to suppliers amounted to $1,595,044 and $7,823,138, respectively, representing amounts prepaid to the Company’s feed suppliers. During the nine months ended September 30, 2016 and 2015, the Company reported a bad debt expense of $0 and $121,407 over its advances to suppliers, respectively, for certain prepayments which may not have future economic benefits to the Company.
 
NOTE 6—OTHER RECEIVABLES

At September 30, 2016 and December 31, 2015, the Company reported other receivables of $305,462 and $312,161, respectively, including no allowance for doubtful receivables. The balances as of September 30, 2016 and December 31, 2015 included a deposit of $299,840 and $308,086 to a professional loan guarantee service company for issuance of the bank acceptance notes and short-term loans. During the nine months ended September 30, 2016 and 2015, the Company reported a bad debt expense of $0 and $325, respectively, from the allowance for doubtful accounts.
 
NOTE 7—RESTRICTED CASH

Restricted cash consists of cash deposits held by a bank to secure bank acceptance notes payable. At December 31, 2015, the Company reported restricted cash of $9,242,571 which was collateral for its outstanding bank acceptance notes payable of $12,323,428. Restricted cash was returned from the bank when the Company repaid its bank acceptance notes payable during the second quarter of 2016.
 
NOTE 8—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. The prepaid rental expenses are being amortized using the straight-line method over the lease term of 21.33 years.

Long-term prepaid expenses at September 30, 2016 and December 31, 2015 are as follows:
 
   
September 30,
   
December 31,
 
   
2016
   
2015
 
Prepaid rental expenses
  $ 1,763,587     $ 1,811,007  
Less: Accumulated amortization
    (490,693 )     (421,863 )
    $ 1,272,894     $ 1,389,144  
 
 
21

 

 
Amortization expense for the three months ended September 30, 2016 and 2015 was $26,881 and $151,994, respectively. Amortization expense for the nine months ended September 30, 2016 and 2015 was $80,878 and $940,627, respectively. The estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter is $107,837 per annum.
 
NOTE 9—PLANT AND EQUIPMENT

Plant and equipment consist of the following:

   
September 30,
   
December 31,
 
   
2016
   
2015
 
Buildings
  $ 26,997,808     $ 29,975,914  
Vehicles
    440,087       452,190  
Office equipment
    468,099       480,970  
Production equipment
    5,123,605       2,296,519  
      33,029,599       33,205,593  
Less: Accumulated depreciation
    (10,451,575 )     (9,794,790 )
    $ 22,578,024     $ 23,410,803  

a)
Depreciation expense was $619,173 and $605,774 for the three months ended September 30, 2016 and 2015, respectively. Depreciation expense was $1,809,176 and $1,919,550 for the nine months ended September 30, 2016 and 2015, respectively.

b)
Disposal of hog farms
On August 11, 2015, the Company sold 2 hog farms located in Nanyan Village and Qunyi Village, Hubei Province to a third party, Wuhan City Tianjian Agricultural Development Co., Ltd., for $1,204,084 or RMB 7.5 million, and reported a loss of $787,964 from the transaction.
 
c)
Impairment charge
On November 6, 2013, the Animal Husbandry and Veterinary Bureau of Caidian District, Wuhan City, directed the Company to close one of the Company's farms located in the Caidian District. During the course of the Company's strategic review of its operations and consideration of the November 6 2013 notice from the Animal Husbandry and Veterinary Bureau of Caidian District, the Company assessed the recoverability of the carrying value of certain property, plant and equipment which resulted in impairment losses of $0 and $11,970 for the nine months ended September 30, 2016 and 2015, respectively. The impairment charge represented the excess of carrying amounts of the Company's property, plant and equipment over the estimated fair value of the Company's hog farm in Caidian District.
 
d)
Flood damage
In early July 2016, the city of Wuhan had a record weekly rainfall of 22.6 inches. The rain collapsed more than 40,000 houses and forced the evacuation of nearly 1.5 million people in 11 regions. The Company estimated its total economic losses at $2,364,453, including $1,388,754 relating to our facilities,  estimated damage compensation of $306,584 to local farmers, and $504,278 and $164,837 relating to our marketable hogs and breeder hogs, respectively, which were reported as part of  cost of goods sold.
 
NOTE 10—BIOLOGICAL ASSETS

Biological assets consist of the following:

   
September 30,
 
December 31,
 
   
2016
   
2015
 
Breeding hogs
  $ 3,150,997     $ 5,481,979  
Less: Accumulated amortization
    (1,300,359 )     (3,901,132 )
    $ 1,850,638     $ 1,580,847  
 
 
22

 

 
As of September 30, 2016 and December 31, 2015, $492,155 and $836,972 of breeding hogs was a breed of black hogs. Amortization of the biological assets, included as a component of inventory, for the three month periods ended September 30, 2016 and 2015 was $64,696 and $140,596, respectively. For the nine month periods ended September 30, 2016 and 2015, the amortization of the biological assets was $325,400 and $483,067, respectively.
 
NOTE 11—INTANGIBLE ASSETS

Included in the intangible assets are land use rights and an acquired distribution network. 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 occur that might adversely impact their recorded value. The Company computes amortization using the straight-line method over the 50 year life of the land use rights and 10 year life of acquired distribution network.

Intangible assets at September 30, 2016 and December 31, 2015 are as follows:

   
September 30,
 
December 31,
 
   
2016
   
2015
 
Land use rights
  $ 1,589,423     $ 1,633,132  
Distribution network
    1,777,674       1,826,560  
Less: Accumulated amortization
    (793,310 )     (656,744 )
    $ 2,573,787     $ 2,802,948  

Amortization expense for the three month periods ended September 30, 2016 and 2015 was $56,409 and $60,024, respectively. Amortization expense for the nine month periods ended September 30, 2016 and 2015 was $156,251 and $182,933, respectively.

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

Year
 
Amount
 
2016 (remaining)
  $ 72,819  
2017
  $ 229,070  
2018
  $ 229,070  
2019
  $ 229,070  
2020
  $ 229,070  
Thereafter
  $ 1,584,688  

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

   
Hog Farming
   
Retail
   
Total
 
Land use rights
  $ 1,589,423     $ -     $ 1,589,423  
Distribution network
    -       1,777,674       1,777,674  
Less: accumulated amortization
    (363,704 )     (429,606 )     (793,310 )
Balance as of September 30, 2016
  $ 1,225,719     $ 1,348,068     $ 2,573,787  
 
 
23

 

 
   
Hog Farming
   
Retail
   
Total
 
Land use rights
  $ 1,633,132     $ -     $ 1.633.132  
Distribution network
    -       1,826,560       1,826,560  
Less: accumulated amortization
    (337,096 )     (319,648 )     (656,744 )
Balance as of December 31, 2015
  $ 1,296,036     $ 1,506,912     $ 2,802,948  
 
NOTE 12—SHORT-TERM LOANS

As of September 30, 2016 and December 31, 2015, short-term loans are as follows:

   
September 30, 2016
   
December 31, 2015
 
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 5.66%, due by June 22, 2017, guaranteed by Wuhan Agriculture Guarantee Co., Ltd.
  $ 1,199,361     $ -  
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 5.66%, due by June 24, 2017, guaranteed by Wuhan Agriculture Guarantee Co., Ltd.
    1,499,201       -  
    $ 2,698,562     $ -  

In the second quarter of 2016, the Company paid $69,025 to a guarantee service provider for providing a guarantee of the loans from Shanghai Pudong Development Bank. No other such payment was made during the nine months ended September 30, 2016. Amounts of $38,626 and $50,542 were recorded as interest expense for the nine months ended September 30, 2016 and 2015, respectively.
 
NOTE 13—BANK ACCEPTANCE NOTES PAYABLE

Bank acceptance notes payable represent amounts due to banks which are collateralized. 50% of bank acceptance notes payable are secured by the Company’s restricted cash which is on deposit with the lender. At September 30, 2016 and December 31, 2015, the Company’s bank acceptance notes payables consisted of the following:

   
September 30, 2016
   
December 31, 2015
 
Shanghai Pudong Development Bank, non-interest bearing, repaid by January 15, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
  $ -     $ 1,540,429  
Shanghai Pudong Development Bank, non-interest bearing, repaid by January 20, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,429  
Shanghai Pudong Development Bank, non-interest bearing, repaid by January 26, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,429  
Shanghai Pudong Development Bank, non-interest bearing, repaid by January 30, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,429  
Shanghai Pudong Development Bank, non-interest bearing, repaid by June 21, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,428  
Shanghai Pudong Development Bank, non-interest bearing, repaid by June 22, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,428  
Shanghai Pudong Development Bank, non-interest bearing, repaid by June 23, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,428  
Shanghai Pudong Development Bank, non-interest bearing, repaid by June 24, 2016, collateralized by restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    -       1,540,428  
    $ -     $ 12,323,428  
 
 
24

 

 
As of December 31, 2015, the Company made a cash deposit of $308,086 to Wuhan Agriculture Guarantee Co., Ltd. as collateral to secure the bank acceptance notes payable. The deposit was reported as part of other receivables and was returned when the Company repaid the notes payable to Shanghai Pudong Development Bank.
 
NOTE 14—OTHER PAYABLES

Other payables at September 30, 2016 and December 31, 2015 were $3,084,787 and $3,041,085, respectively. Included in other payables as of September 30, 2016 and December 31, 2015 were mainly deposit payables of $1,583,559 and $2,346,776 for joint development agreements with cooperatives in Enshi Autonomous Prefecture.

Since December 31, 2011, the Company signed 7 joint development agreements with 7 local cooperatives in the Enshi Autonomous Prefecture in Hubei Province. Under these agreements, the Company provides funding to local independent farmers to construct small-scale hog farms in which the farmers will grow black hogs for sale to the Company. According to the joint development agreements, each participating farmer paid a deposit of approximately one-third of the construction cost of the hog farm to the Company upon completion of the respective hog farm. The deposit is amortized against the depreciation expense over a period of 10 years. Should the farmer withdraw from the program within this period, the deposit will be refunded proportionately. As of September 30, 2016 and December 31, 2015, deposits from farmers were $1,583,559 and $2,346,776, respectively.

In early July 2016, the city of Wuhan had a record weekly rainfall of 22.6 inches. The rain collapsed more than 40,000 houses and forced the evacuation of nearly 1.5 million people in 11 regions, including the Enshi Autonomous Prefecture. The rain caused unrecoverable damage at 172 small-scale hog farms the Company had constructed for local independent farmers. The Company estimated its total economic losses at $2,364,453, including $1,388,754 relating to its facilities, damage compensation of $306,584 to local farmers, and $504,278 and $164,837 relating to our marketable hogs and breeder hogs, respectively, which were reported as part of our cost of goods sold. The cooperation agreement with the 172 damaged small-scale hog farms was terminated and the Company estimated that the relevant deposit payables of approximately $750,000 will be returned to the farmers.

In addition to the deposit payables from farmers, other payables also includes a down payment related to the Company’s terminated equity transaction. On November 13, 2015, the Company entered into an equity transfer agreement for the sales of its 88% equity interest in Hang-ao for a purchase price of RMB 48.4 million ($7.5 million) and received $599,680 as a retainer from the buyer to secure this transaction. On December 25, 2015, the Company terminated the equity transfer agreement due to the inability to obtain proper land use permits and deeds for its properties. The retainer of $599,680 will be returned to the buyer.
 
 
25

 

 
The amortization of deposit payables for the three months ended September 30, 2016 and 2015 was $48,464 and $93,031. The amortization of deposit payables for the nine months ended September 30, 2016 and 2015 was $252,717 and $283,528. The following table sets forth the aggregate future amortization of deposit payables expected for the next five years:

   
Amortization
 
2016
  $ 336,956  
2017
  $ 336,956  
2018
  $ 336,956  
2019
  $ 336,956  
2020
  $ 235,735  
Thereafter
  $ -  
 
NOTE 15—RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

Advances from customers – related party

As of September 30, 2015, OV Orange reported an advance from customer of $58,070 from a related party, Beijing Central Aoxin Technology Development Co., Ltd. (“Central Aoxin.”). Central Aoxin’s registered agent was Mr. Ping Wang, our former CEO.

Due to related party

The amount due to related party was $227,151 as of September 30, 2015. As of September 30, 2015, the Company received advances of $227,151 from Hubei Hang-ao Servo Technology Co., Ltd. for operating purposes. Such advances are non-interest bearing and were repaid before the end of 2015.

Revenues – related party

During the nine months ended September 30, 2015, OV Orange sold products to Beijing Central Aoxin Technology Development Co., Ltd. (“Central Aoxin”) and Wuhan Aoxin Pike Wealth Investment Management Co., Ltd. (“Aoxin Pike”) and recognized revenues of $25,306 in total. Central Aoxin’s registered agent was Mr. Ping Wang, our former CEO. One of Aoxin Pike’s major shareholders has an indirect investment in the Company.

Issuance of common stock

On February 6, 2015, the Company issued 202,500 of its common shares to 7 employees, including the Company’s former CEO, former CFO, and a director, as stock awards pursuant to its 2014 Share Incentive Plan. Those shares have been registered under the Securities Act of 1933, as amended. However, 3 of the mentioned employees have resigned, including Mr. Ping Wang, and the relevant stock awards of 51,000 common shares were canceled and returned to the Company on March 8, 2016.
 
NOTE 16—CAPITAL STOCK

The Company is authorized to issue 25,000,000 shares of common stock, $0.004 par value, and as of September 30, 2016 and December 31, 2015, it had 7,988,245 shares and 8,295,995 shares outstanding, respectively.

On December 6, 2010 the Company granted 6,500 options with an exercise price of $24.00 to a director with vesting of one-third as of the date of grant, one-third vesting in December 2011, and the final one-third vesting in December 2012, contingent on the director continuing to serve as a board member. The option can be exercised through January, 2017. The Company recognizes the compensation cost over the award’s service period based on a Black Scholes valuation of the options as of the date of the grant. The 6,500 options were given up when new options were granted on October 1, 2014.
 
 
26

 

 
On February 6, 2015, the Company issued 202,500 of its common shares to 7 employees pursuant to the Company’s 2014 Share Incentive Plan. Those shares were valued at $1,433,700; 81,000 shares vested as of the date of grant, 60,750 shares vested in December 2015, and 60,750 common shares vest in December 2016. The Company will recognize the compensation cost over the employees’ service period. During the year ended December 31, 2015, 3 of the 7 employees, including the Company’s former CEO, resigned and the relevant unvested 51,000 shares were canceled on March 8, 2016. For the nine months ended September 30, 2016 and 2015, the Company reported an amortization expense of $207,975 and $836,325.

On September 1, 2016, the Company effected a reverse stock split of the Company's common stock (the “Reverse Split”). Under the laws of the British Virgin Islands and the Amended and Restated Memorandum and Articles of Association, shareholder approval of the Reverse Split was not required. As a result of the Reverse Split, every four shares of common stock outstanding were consolidated into one share. All share and per share information in these notes and the accompanying financial statements has been retroactively adjusted to reflect the Reverse Split.

The table below provides the estimated fair value of the director options, and the significant assumptions used to determine their values.
 

   
Director Options
Estimated Fair Value Per Option or Warrant
 
$4.82
Stock Price at Date of Grant
 
$8.00
Assumptions:
   
Dividend Yield
 
0%
Stock Price Volatility
 
105.24%
Risk-Free Interest Rate
 
1.00%

The following table summarizes the stock options and warrants outstanding as of September 30, 2016 and December 31, 2015 and the activity during the nine months ended September 30, 2016.

   
Options
   
Weighted Average Exercise Price
   
Warrants
   
Weighted Average Exercise Price
 
Outstanding as of December 31, 2015
    15,750     $ 10.00       -     $ -  
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
Outstanding at September 30, 2016
    15,750     $ 10.00       -     $ -  
Exercisable at September 30, 2016
    10,750     $ 10.00       -     $ -  

The fair value of the director options and the placement agent warrants were estimated as of the grant date using the Black Scholes options pricing model. The determination of the fair value is affected by the price of the Company’s common stock at the grant date as well as assumptions made regarding the expected price volatility of the common stock over the terms of the grant, the risk-free interest rate and any expected dividends.

The weighted average remaining contractual life for the options is 5 years. The market value of the Company’s common stock was $1.94 and $3.60 as of September 30, 2016 and December 31, 2015, respectively. The intrinsic value of the outstanding options and the warrants as of September 30, 2016 and December 31, 2015 was $0.
 
 
27

 
 
NOTE 17—STATUTORY RESERVES

As stipulated by the Company Law of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
 
Making up cumulative prior years’ losses, if any;
Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;
Allocations to the discretionary surplus reserve, if approved by the stockholders;
The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

In accordance with the Chinese Company Law, the Company has allocated 10% of its net income as the statutory reserve contribution. The reserve amounted to $2,457,180 as of September 30, 2016 and December 31, 2015.
 
Credit risk and major customers

As of September 30, 2016 and December 31, 2015, all of the Company’s cash including cash on hand and deposits in accounts were maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of a bank’s failure. However, the Company has not experienced any such losses and believes it is not exposed to any significant risks on its cash in bank accounts

The Company’s key customers are located in the PRC. The Company has not entered into long-term supply contracts with any of these major customers. During the nine months ended September 30, 2016 and 2015, there were no customers that accounted for more than 10% of the Company’s revenue.
 
Risk arising from operations in foreign countries

Substantially all of the Company’s operations are conducted in China. The Company’s operations are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
 
NOTE 18—COMMITMENTS AND CONTINGENCIES

General

The Company follows ASC 450, Accounting for Contingencies, in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred. The Company has not accounted for any loss contingencies as of September 30, 2016 and December 31, 2015.

Lease obligations

The Company leases office space pursuant to a lease that has a remaining term of nine years.  As the holder of land use rights for its hog farms, the Company makes rental payments to the government over the term of the land use rights, which range from 19 years to 50 years. The Company does not have capital leases. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced. Net rental expense relating to the Company’s operating leases for the nine month periods ended September 30, 2016 and 2015 was $56,205 and $64,140, respectively.
 
 
28

 

 
The following table sets forth the aggregate minimum future annual rental commitments at September 30, 2016 under all non-cancelable leases for years ending December 31:
 

   
Operating Leases
 
2016 (remaining)
  $ 18,735  
2017
  $ 74,180  
2018
  $ 74,180  
2019
  $ 74,180  
2020
  $ 52,297  
Thereafter
  $ 1,329,468  
 
NOTE 19—SEGMENT INFORMATION

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluates their performance. As of September 30, 2016, the Company has two operating segments, “Hog Farming” and “Retail.” The Hog Farming segment consists of sales of breeder hogs and market hogs raised by the Company and participants in the black hog program. The Company’s Retail segment consists of selling specialty pork products through supermarkets and other outlets. The Company primarily evaluates performance based on income before income taxes excluding non-recurring items.

Condensed financial information with respect to these reportable business segments for the nine months ended September 30, 2016 and 2015 is set forth below. The results of operations of Hang-ao and OV Orange are reflected as discontinued operations in the Company’s consolidated financial statements.
 
Nine Months Ended September 30, 2016
 
Hog Farming
   
Retail
   
Consolidated
 
Segment revenues
  $ 25,196,557     $ 1,314,871     $ 26,511,428  
Inter-segment revenues
    -       -       -  
Revenues from external customers
  $ 25,196,557     $ 1,314,871     $ 26,511,428  
Segment income (loss)
  $ 1,210,836     $ (66,375 )   $ 1,144,461  
Unallocated corporate loss
                    (574,320 )
Income before income taxes from continuing operations
                    570,141  
Income taxes
                    -  
Net income from continuing operations
                    570,141  
Discontinued operations:
                       
Loss from operations of discontinued component, net of income taxes
                    (3,072,531 )
Gain from disposal of discontinued component, net of income taxes
                    -  
Net income
                  $ (2,502,390 )
Other segment information:
                       
Depreciation and amortization
  $ 1,878,378     $ 159,732     $ 2,038,110  
 
 
29

 

 
Nine Months Ended September 30, 2015
 
Hog Farming
   
Retail
   
Consolidated
 
Segment revenues
  $ 27,504,207     $ 1,112,219     $ 28,616,426  
Inter-segment revenues
    -       -       -  
Revenues from external customers
  $ 27,504,207     $ 1,112,219     $ 28,616,426  
Segment income (loss)
  $ 3,222,538     $ (287,815 )   $ 2,934,723  
Unallocated corporate loss
                    (1,227,380 )
Income before income taxes from continuing operations
                    1,707,343  
Income taxes
                    -  
Net income from continuing operations
                    1,707,343  
Discontinued operations:
                       
Loss from operations of discontinued component, net of income taxes
                    (142,551 )
Gain from disposal of discontinued component, net of income taxes
                    -  
Net income
                  $ 1,564,792  
Other segment information:
                       
Depreciation and amortization
  $ 2,001,458     $ 300,564     $ 2,302,022  

Three Months Ended September 30, 2016
 
Hog Farming
   
Retail
   
Consolidated
 
Segment revenues
  $ 7,325,798     $ 515,573     $ 7,841,371  
Inter-segment revenues
    -       -       -  
Revenues from external customers
  $ 7,325,798     $ 515,573     $ 7,841,371  
Segment loss
  $ (1,561,975 )   $ (7,522 )   $ (1,569,497 )
Unallocated corporate loss
                    (213,563 )
Loss before income taxes from continuing operations
                    (1,783,060 )
Income taxes
                    -  
Net loss from continuing operations
                    (1,783,060 )
Discontinued operations:
                       
Loss from operations of discontinued component, net of income taxes
                    (1,050,327 )
Gain from disposal of discontinued component, net of income taxes
                    -  
Net loss
                  $ (2,833,387 )
Other segment information:
                       
Depreciation and amortization
  $ 785,841     $ 57,553     $ 843,394  
 
 
30

 
 
Three Months Ended September 30, 2015
 
Hog Farming
   
Retail
   
Consolidated
 
Segment revenues
  $ 8,865,574     $ 310,936     $ 9,176,510  
Inter-segment revenues
    -       -       -  
Revenues from external customers
  $ 8,865,574     $ 310,936     $ 9,176,510  
Segment income (loss)
  $ 914,984     $ 367,829     $ 1,282,813  
Unallocated corporate loss
                    (179,337 )
Income before income taxes from continuing operations
                    1,103,476  
Income taxes
                    -  
Net income from continuing operations
                    1,103,476  
Discontinued operations:
                       
Loss from operations of discontinued component, net of income taxes
                    (246,229 )
Gain from disposal of discontinued component, net of income taxes
                    -  
Net income
                  $ 857,247  
Other segment information:
                       
Depreciation and amortization
  $ 608,029     $ 105,334     $ 713,363  

Condensed financial status with respect to the reportable business segments as of September 30, 2016 and December 31, 2015 is as follows:

 
As of September 30, 2016
 
Hog Farming
   
Retail
   
Consolidated
 
Total segment assets
  $ 89,425,910     $ 1,701,403     $ 91,127,313  
Other unallocated corporate assets
                    4,941,419  
                    $ 96,068,732  
Other segment information:
                       
Expenditures for segment assets
  $ 2,988,644     $ -     $ 2,988,644  
                         
As of December 31, 2015
                       
Total segment assets
  $ 100,644,120     $ 1,757,852     $ 102,401,972  
Other unallocated corporate assets
                    8,508,469  
                    $ 110,910,441  
Other segment information:
                       
Expenditures for segment assets
  $ 589     $ 275     $ 864  
 
NOTE 19—DISCONTINUED OPERATIONS

Discontinued operations primarily included our servo-valve business and our security and protection business which were conducted via two of our subsidiaries, Hang-ao and OV Orange. Results of operations, financial position and cash flows for these businesses are separately reported as discontinued operations for all periods presented.

During the fourth quarter of 2015, the Company determined to sell Hang-ao and OV Orange. Subsequently, on November 13, 2015 and December 29, 2015, the Company entered into equity transfer agreements for the sale of its 88% equity interest in Hang-ao and 95% equity interest in OV Orange for a purchase price of RMB 48.4 million ($7.5 million) and RMB 47.5 million ($7.3 million), respectively. The equity transfer agreement for the sale of OV Orange was completed. On December 25, 2015, the Company terminated the equity transfer agreement entered into  for the sale of its 88% equity interest in Hang-ao due to the inability to obtain proper land use permits and deeds for its properties. The Company will keep seeking other opportunities to sell its equity in Hang-ao.
 
 
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Financial Information for Discontinued Operations

   
Hang-ao
 
   
September 30, 2016
   
December 31, 2015
 
Accounts receivable, net
  $ 12,233     $ 24,225  
Inventories, net
    -       1,744,024  
Plant and equipment, net
    4,836,993       6,148,541  
Other
    7,559       9,647  
Assets of discontinued operations
  $ 4,856,785     $ 7,926,437  
                 
Short-term loan
  $ 1,499,201     $ 1,540,429  
Accounts payable and accrued payables
    481,106       461,992  
Other payables
    58,909       54,909  
Due to related party
    329,760       302,366  
Liabilities of discontinued operations
  $ 2,368,976     $ 2,359,696  
                 

   
For the Nine Months Ended September 30, 2016
 
   
Hang-ao
   
OV Orange
   
Total
 
Operations
                 
Revenues and other incomes
  $ 44,283     $ -     $ 44,283  
Costs and expenses
    3,116,814       -       3,116,814  
Loss before taxes
    (3,072,531 )     -       (3,072,531 )
Income taxes
    -       -       -  
Loss from discontinued operations, net of taxes
  $ (3,072,531 )   $ -     $ (3,072,531 )
                         
Disposal
                       
Gain on disposal before income taxes
  $ -     $ -     $ -  
Income taxes
    -       -       -  
Gain on disposal, net of income taxes
  $ -     $ -     $ -  
                         
Loss from discontinued operations, net of taxes
  $ (3,072,531 )   $ -     $ (3,072,531 )
                         

   
For the Nine Months Ended September 30, 2015
 
   
Hang-ao
   
OV Orange
   
Total
 
Operations
                 
Revenues and other incomes
  $ 1,876,797     $ 1,018,560     $ 2,895,357  
Costs and expenses
    1,539,198       1,410,580       2,949,778  
Income (loss) before taxes
    337,599       (392,020 )     (54,421 )
Income taxes
    88,105       25       88,130  
Earnings (loss) from discontinued operations, net of taxes
  $ 249,494     $ (392,045 )   $ (142,551 )
                         
Disposal
                       
Gain on disposal before income taxes
  $ -     $ -     $ -  
Income taxes
    -       -       -  
Gain on disposal, net of income taxes
  $ -     $ -     $ -  
                         
Earnings (loss) from discontinued operations, net of taxes
  $ 249,494     $ (392,045 )   $ (142,551 )