NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 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.
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 1,047,000 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 1,047,000 common shares of Aoxin Tianli. Because Hang-ao reported a net loss of $287,609 for the year ended December 31, 2015,the 1,047,000 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 2,552,000 of the Company’s common shares, of which 403,000 shares were deposited in escrow to be issued to Mr. Hai Liu, CEO of OV Orange and the former beneficial owner of 7,500,000 (representing 15% of the outstanding) OV Orange shares (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets for the years ended December 31, 2014, 2015 and 2016.
If the net profit targets set forth in the Stock Purchase Agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 shares of the Company’s common stock issued in exchange for 30% of the OV Orange shares, shall have the right to exchange shares of the Company’s common stock received in the acquisition for up to 7,500,000 and 15,000,000 shares, respectively, of OV Orange purchased by the Company during the three month period (the “Option Period”) commencing March 16 and terminating June 15, 2017. The ratio at which the OV Orange shares may be acquired by Mr. Liu or Mr. Wu is based upon the relative fair market values of the shares of the Company and OV Orange at the time of the re-purchase, except that if the value of the shares of the Company issued to Mr. Liu or Mr. Wu is less than the value of the shares of OV Orange he is entitled to receive, he can receive all of the OV Orange shares by delivering all of his Company shares and will not receive any additional compensation.
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 403,000 “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.
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with US GAAP. The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”). All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of these financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. Significant estimates include the useful lives of property and equipment, land use rights and biological assets, and assumptions used in assessing impairment for long-term assets.
Principles of Consolidation
We consolidate wholly-owned subsidiaries, HCS, WFOE, Fengze, Tianzhili, as well as Hang-ao, and 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 June 30, 2016 and December 31, 2015, balances in banks in the PRC were $52,441,600 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 at June 30, 2016 and December 31, 2015.
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 June 30, 2016 and December 31, 2015, respectively. However, the Company reported $1,890,398 and $0 for its discontinued operations at June 30, 2016 and December 31, 2015, respectively.
Prepaid Expenses
Prepaid expenses at June 30, 2016 and December 31, 2015 totaled $204,756 and $816,646, respectively, and includes prepayments to suppliers for services that had not yet been provided to us. We recognize prepayments as expense as suppliers provide services, in compliance with our accounting policy. For the three months ended June 30, 2016 and 2015, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expense of $130,900 and $58,574, respectively. For the six months ended June 30, 2016 and 2015, the Company had amortized its prepaid insurance expense, warehouse leasing expense, and service expense of $261,744 and $145,314, respectively.
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 us. We recognize prepayments as inventory or expense as suppliers make delivery of goods in compliance with our 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 June 30, 2016 and December 31, 2015 totaled $3,596,568 and $7,823,138, respectively, which represented prepayments to the Company’s feed suppliers. Management accrued allowance for doubtful accounts of $112,585 and $115,215 at June 30, 2016 and December 31, 2015.
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:
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Useful Life
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Buildings
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20 years
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Vehicles
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5-10 years
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Office equipment
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3-5 years
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Research equipment
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3-20 years
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Production equipment
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3-20 years
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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.
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.
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 six months ended June 30, 2016 and 2015, the Company did not record impairment charges against its plant and equipment.
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.
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 quarters 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 June 30, 2016 and December 31, 2015, the Company was operating in two segments, Hog Farming and Retail.
The Company accounts for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The Company did not have any deferred tax assets or liabilities as of June 30, 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.
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 six month periods ended June 30, 2016 and 2015.
Foreign Currency Translation
As of June 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 6.6434 and RMB 6.4917 per US dollar as of June 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 six months ended June 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 6.5354 and RMB 6.0888 per US dollar for the six months ended June 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.
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:
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a)
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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.
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b)
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The amount of the loss can be reasonably estimated.
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As of June 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 April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for us beginning July 1, 2016. We are currently evaluating the impact of this standard on our consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Entities are currently required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to measurement period adjustments that occur after the effective date of the guidance with earlier application permitted for financial statements that have not been issued. The Company elected to adopt ASU 2015-16 early, effective in the year ended December 31, 2015.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The standard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. Entities are currently required to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments, which require non-current presentation only (by jurisdiction), are effective for financial statements issued for annual periods beginning after December 15, 2016 with earlier application permitted as of the beginning of an interim or annual reporting period. The guidance is to be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company elected to early adopt this standard, effective as of December 31, 2015. There was no impact from this adoption.
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.
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.
Based on the Company’s initial assessment of the standard, the Company expects that any potential future disposals of individual hog farms will not be reported as discontinued operations and that the results of operations of any disposed hog farm, including revenues, costs and any gains or losses on disposal, will be classified as continuing operations within the Consolidated Statements of Operations and Comprehensive Income for all periods presented through the date of disposition.
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 1,047,000 common shares of Aoxin Tianli. Hang-ao, at the time of the acquisition, was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. The acquisition agreement includes a three year “earn out payment” provision which requires Hang-ao to reach certain levels of net income for the years 2014, 2015, and 2016 for the sellers to retain the 1,047,000 common shares of Aoxin Tianli. The net income targets are RMB 4.5 million ($733,000), 9 million ($1.5 million), and RMB 15 million ($2.4 million) for the years 2014, 2015, and 2016.
The following is a reconciliation of the purchase:
|
|
|
Shares
|
|
|
Price per Share
|
|
|
Amount
|
|
|
Fair value of the Company’s stock issued
|
|
|
1,047,000
|
|
|
$
|
2.13
|
|
|
$
|
2,230,110
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
6,825,495
|
|
|
Total purchase price
|
|
|
|
|
|
|
|
|
|
$
|
9,055,605
|
|
|
Acquired assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
$
|
215,236
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
8,121,512
|
|
|
Fixed assets
|
|
|
|
|
|
|
|
|
|
|
2,036,448
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
3,684,084
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
(3,766,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
10,290,460
|
|
|
Percentage of acquired equity
|
|
|
|
|
|
|
|
|
|
|
88
|
%
|
|
88% of acquired assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
9,055,605
|
|
|
Purchase price
|
|
|
|
|
|
|
|
|
|
|
9,055,605
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Acquired assets and liabilities, net
|
|
|
|
|
|
|
|
|
|
$
|
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 2,552,000 of the Company’s common shares, of which 403,000 shares were deposited in escrow to be issued to Mr. Hai Liu, CEO of OV Orange and the former beneficial owner of 7,500,000 (representing 15% of the outstanding) OV Orange shares (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets for the years ended December 31, 2014, 2015 and 2016. Specifically, Mr. Liu will be entitled to the Escrow Shares only if OV Orange achieves net profits equal to not less than 90% of RMB 2.6 million, RMB 6.8 million and RMB 10.5 million for the years ending December 31, 2014, 2015, and 2016, respectively. If the net profits of OV Orange in any of the three target years are less than 90% of the target, the number of Escrow Shares to be issued to Mr. Liu will be reduced in accordance with a formula set forth in the Stock Purchase Agreement.
If the net profit targets set forth in the Stock Purchase Agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 shares of the Company’s common stock issued in exchange for 30% of the OV Orange shares, shall have the right to exchange shares of the Company’s common stock received in the acquisition for up to 7,500,000 and 15,000,000 shares, respectively, of OV Orange purchased by the Company during the three month period (the “Option Period”) commencing March 16 and terminating June 15, 2017. The ratio at which the OV Orange shares may be acquired by Mr. Liu or Mr. Wu is based upon the relative fair market values of the shares of the Company and OV Orange at the time of the re-purchase, except that if the value of the shares of the Company issued to Mr. Liu or Mr. Wu is less than the value of the shares of OV Orange he is entitled to receive, he can receive all of the OV Orange shares by delivering all of his Company shares and will not receive any additional compensation.
The following is a reconciliation of the purchase:
|
|
|
Shares
|
|
|
Price per Share
|
|
|
Amount
|
|
|
Fair value of the Company’s stock issued
|
|
|
2,552,000
|
|
|
$
|
1.95
|
|
|
$
|
4,976,400
|
|
|
Acquired assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
$
|
690,990
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
3,881,918
|
|
|
Fixed assets
|
|
|
|
|
|
|
|
|
|
|
376,075
|
|
|
Long-term prepaid expense
|
|
|
|
|
|
|
|
|
|
|
1,282,037
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
2,699,753
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
(989,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,941,547
|
|
|
Discount from bargain purchase
|
|
|
|
|
|
|
|
|
|
|
(2,703,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,238,315
|
|
|
Percentage of acquired equity
|
|
|
|
|
|
|
|
|
|
|
95
|
%
|
|
95% of acquired assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
4,976,400
|
|
|
Purchase price
|
|
|
|
|
|
|
|
|
|
|
4,976,400
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Acquired assets and liabilities, net
|
|
|
|
|
|
|
|
|
|
$
|
5,238,315
|
|
|
Percentage of equity
|
|
|
|
|
|
|
|
|
|
|
5
|
%
|
|
Noncontrolling Interest
|
|
|
|
|
|
|
|
|
|
$
|
261,915
|
|
Before Aoxin Tianli acquired OV Orange, 45% of OV Orange’s equity interest was held by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Mr. Ping Wang, the same as 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.
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.
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:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Accounts receivable
|
|
$
|
106,650
|
|
|
$
|
292,684
|
|
|
Less: Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
106,650
|
|
|
$
|
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 six months ended June 30, 2016 and 2015, the Company reported a recovery gain of $0 and $5,684, respectively, from the allowance for doubtful accounts.
NOTE 4—INVENTORIES
Inventories consisted of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Raw materials—hogs
|
|
$
|
1,039,829
|
|
|
$
|
383,807
|
|
|
Work in process—biological assets
|
|
|
2,546,870
|
|
|
|
2,416,201
|
|
|
Infant hogs
|
|
|
2,407,682
|
|
|
|
2,853,727
|
|
|
Finished goods—specialty pork products
|
|
|
-
|
|
|
|
2,430
|
|
|
Less: inventory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
5,994,381
|
|
|
$
|
5,656,165
|
|
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 June 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 $1,890,398 and $0 for its discontinued operations at June 30, 2016 and December 31, 2015, respectively. For the six months ended June 30, 2016 and 2015, the Company did not report any recovery gain 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 June 30, 2016 and December 31, 2015, advances to suppliers amounted to $3,596,568 and $7,823,138, respectively, representing amounts prepaid to the Company’s feed suppliers. During the six months ended June 30, 2016 and 2015, the Company reported a bad debt expense of $0 and $122,357 over its advances to suppliers, respectively, for certain prepayments which may not have future economic benefits to the Company.
NOTE 6—OTHER RECEIVABLES
At June 30, 2016 and December 31, 2015, the Company reported other receivables of $304,440 and $312,161, respectively, including no allowance for doubtful receivables. The balances as of June 30, 2016 and December 31, 2015 included a deposit of $301,053 and $308,086 to a professional loan guarantee service company for issuance of the bank acceptance notes and short-term loans. During the six months ended June 30, 2016 and 2015, the Company reported a bad debt expense of $0 and $327, 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 June 30, 2016 and December 31, 2015 are as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Prepaid rental expenses
|
|
$
|
1,769,668
|
|
|
$
|
1,811,007
|
|
|
Less: Accumulated amortization
|
|
|
(465,353
|
)
|
|
|
(421,863
|
)
|
|
|
|
$
|
1,304,315
|
|
|
$
|
1,389,144
|
|
Amortization expense for the three months ended June 30, 2016 and 2015 was $27,020 and $135,341, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 was $53,997 and $788,633, respectively. The estimated amortization expense of long-term prepaid expenses over each of the next five years and thereafter is $107,994 per annum.
NOTE 9—PLANT AND EQUIPMENT
Plant and equipment consist of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Buildings
|
|
$
|
29,351,655
|
|
|
$
|
29,975,914
|
|
|
Vehicles
|
|
|
441,867
|
|
|
|
452,190
|
|
|
Office equipment
|
|
|
463,698
|
|
|
|
480,970
|
|
|
Production equipment
|
|
|
5,144,329
|
|
|
|
2,296,519
|
|
|
|
|
|
35,401,549
|
|
|
|
33,205,593
|
|
|
Less: Accumulated depreciation
|
|
|
(10,741,864
|
)
|
|
|
(9,794,790
|
)
|
|
|
|
$
|
24,659,685
|
|
|
$
|
23,410,803
|
|
|
a)
|
Depreciation expense was $745,386 and $969,226 for the three months ended June 30, 2016 and 2015, respectively. Depreciation expense was $1,190,003 and $1,313,776 for the six months ended June 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 $779,337 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 $12,063 for the six months ended June 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.
|
NOTE 10—BIOLOGICAL ASSETS
Biological assets consist of the following:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Breeding hogs
|
|
$
|
3,671,206
|
|
|
$
|
5,481,979
|
|
|
Less: Accumulated amortization
|
|
|
(1,941,791
|
)
|
|
|
(3,901,132
|
)
|
|
|
|
$
|
1,729,415
|
|
|
$
|
1,580,847
|
|
As of June 30, 2016 and December 31, 2015, $613,018 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 June 30, 2016 and 2015 was $60,546 and $165,506, respectively. For the six month periods ended June 30, 2016 and 2015, the amortization of the biological assets was $109,124 and $342,471, 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 June 30, 2016 and December 31, 2015 are as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Land use rights
|
|
$
|
1,595,852
|
|
|
$
|
1,633,132
|
|
|
Distribution network
|
|
|
1,784,864
|
|
|
|
1,826,560
|
|
|
Less: Accumulated amortization
|
|
|
(739,972
|
)
|
|
|
(656,744
|
)
|
|
|
|
$
|
2,640,744
|
|
|
$
|
2,802,948
|
|
Amortization expense for the three month periods ended June 30, 2016 and 2015 was $42,406 and $61,688, respectively. Amortization expense for the six month periods ended June 30, 2016 and 2015 was $99,842 and $122,909, respectively.
The estimated amortization expense of intangible assets for the next five years is as follow:
|
Year
|
|
Amount
|
|
|
2016
|
|
$
|
230,642
|
|
|
2017
|
|
$
|
230,642
|
|
|
2018
|
|
$
|
230,642
|
|
|
2019
|
|
$
|
230,642
|
|
|
2020
|
|
$
|
230,642
|
|
|
Thereafter
|
|
$
|
1,487,534
|
|
Activity related to intangible assets by business segments was as follows:
|
|
|
Hog Farming
|
|
|
Retail
|
|
|
Total
|
|
|
Land use rights
|
|
$
|
1,595,852
|
|
|
$
|
-
|
|
|
$
|
1,595,852
|
|
|
Distribution network
|
|
|
-
|
|
|
|
1,784,864
|
|
|
|
1,784,864
|
|
|
Less: accumulated amortization
|
|
|
(353,251
|
)
|
|
|
(386,721
|
)
|
|
|
(739,972
|
)
|
|
Balance as of June 30, 2016
|
|
$
|
1,242,601
|
|
|
$
|
1,398,143
|
|
|
$
|
2,640,744
|
|
|
|
|
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 June 30, 2016 and December 31, 2015, short-term loans are as follows:
|
|
|
June 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.
|
|
$
|
1,204,212
|
|
|
$
|
-
|
|
|
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.
|
|
|
1,505,264
|
|
|
|
-
|
|
|
|
|
$
|
2,709,476
|
|
|
$
|
-
|
|
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 such payment was made during the six months ended June 30, 2016. Amounts of $0 and $45,180 were recorded as interest expense for the six months ended June 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 June 30, 2016 and December 31, 2015, the Company’s bank acceptance notes payables consisted of the following:
|
|
|
June 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
|
|
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 June 30, 2016 and December 31, 2015 were $2,720,027 and $3,041,085, respectively. Included in other payables as of June 30, 2016 and December 31, 2015 were mainly deposit payables of $2,117,920 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 June 30, 2016 and December 31, 2015, deposits from farmers were $2,117,920 and $2,346,776, respectively.
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 $620,218 as a retainer from the buyer to secure this transaction. On December 25, 2015, the Company terminated the equity transfer agreement for due to the inability to obtain proper land use permits and deeds for its properties. The retainer of $602,107 will be returned to the buyer.
The amortization of deposit payables for the three months ended June 30, 2016 and 2015 was $89,179 and $95,610. The amortization of deposit payables for the six months ended June 30, 2016 and 2015 was $204,253 and $190,497. The following table sets forth the aggregate future amortization of deposit payables expected for the next five years:
|
|
|
Amortization
|
|
|
2016
|
|
$
|
408,506
|
|
|
2017
|
|
$
|
408,506
|
|
|
2018
|
|
$
|
408,506
|
|
|
2019
|
|
$
|
408,506
|
|
|
2020
|
|
$
|
408,506
|
|
|
Thereafter
|
|
$
|
75,390
|
|
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.
During the six months ended June 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”) from which it recognized revenues of $25,913 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. The related party revenues mentioned above were included in the results of discontinued operations of the Company’s consolidated statements of operations and comprehensive income.
On February 6, 2015, the Company issued 810,000 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 204,000 common shares were canceled and returned to the Company on March 8, 2016.
NOTE 16—CAPITAL STOCK
The Company is authorized to issue 100,000,000 shares of common stock, $0.001 par value, and as of June 30, 2016 and December 31, 2015, it had 31,952,000 shares and 33,183,000 shares outstanding, respectively.
On December 6, 2010 the Company granted 26,000 options with an exercise price of $6.00 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 26,000 options were given up when new options were granted on October 1, 2014.
On February 6, 2015, the Company issued 810,000 of its common shares to 7 employees pursuant to the Company’s 2014 Share Incentive Plan. Those shares were valued at $1,433,700; 324,000 shares vested as of the date of grant, 243,000 shares vested in December 2015, and 243,000 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, had resigned and the relevant unvested 204,000 shares had been canceled on March 8, 2016. For the six months ended June 30, 2016 and 2015, the Company reported an amortization expense of $261,744 and $145,314.
The table below provides the estimated fair value of the director options, and the significant assumptions used to determine their values.
|
|
|
Director Options
|
Placement Agent Warrants
|
|
Estimated Fair Value Per Option or Warrant
|
|
$1.20
|
$0.56
|
|
Stock Price at Date of Grant
|
|
$2.00
|
$4.36
|
|
Assumptions:
|
|
|
|
|
Dividend Yield
|
|
0%
|
0%
|
|
Stock Price Volatility
|
|
105.24%
|
31.3%
|
|
Risk-Free Interest Rate
|
|
1.00%
|
1.40%
|
The following table summarizes the stock options and warrants outstanding as of June 30, 2016 and December 31, 2015 and the activity during the six months ended June 30, 2016.
|
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding as of December 31, 2015
|
|
|
63,000
|
|
|
$
|
2.50
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at June 30, 2016
|
|
|
63,000
|
|
|
$
|
2.50
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Exercisable at June 30, 2016
|
|
|
43,000
|
|
|
$
|
2.50
|
|
|
|
-
|
|
|
$
|
-
|
|
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 5.25 years. The market value of the Company’s common stock was $0.83 and $0.90 as of June 30, 2016 and December 31, 2015, respectively. The intrinsic value of the outstanding options and the warrants as of June 30, 2016 and December 31, 2015 was $0.
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 June 30, 2016 and December 31, 2015.
Credit risk and major customers
As of June 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 six months ended June 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 June 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 six month periods ended June 30, 2016 and 2015 was $37,727 and $43,094, respectively.
The following table sets forth the aggregate minimum future annual rental commitments at June 30, 2016 under all non-cancelable leases for years ending December 31:
|
|
|
Operating Leases
|
|
|
2016
|
|
$
|
37,727
|
|
|
2017
|
|
$
|
74,690
|
|
|
2018
|
|
$
|
74,690
|
|
|
2019
|
|
$
|
74,690
|
|
|
2020
|
|
$
|
52,656
|
|
|
Thereafter
|
|
$
|
1,338,593
|
|
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 June 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 six months ended June 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.
|
Six Months Ended June 30, 2016
|
|
Hog Farming
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Segment revenues
|
|
$
|
17,870,759
|
|
|
$
|
799,298
|
|
|
$
|
18,670,057
|
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Revenues from external customers
|
|
$
|
17,870,759
|
|
|
$
|
799,298
|
|
|
$
|
18,670,057
|
|
|
Segment income (loss)
|
|
$
|
2,772,811
|
|
|
$
|
(58,853
|
)
|
|
$
|
2,713,958
|
|
|
Unallocated corporate loss
|
|
|
|
|
|
|
|
|
|
|
(360,757
|
)
|
|
Income before income taxes from continuing operations
|
|
|
|
|
|
|
|
|
|
|
2,353,201
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
2,353,201
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(2,022,204
|
)
|
|
Gain from disposal of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
330,997
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,092,537
|
|
|
$
|
102,179
|
|
|
$
|
1,194,716
|
|
|
Six Months Ended June 30, 2015
|
|
Hog Farming
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Segment revenues
|
|
$
|
18,638,633
|
|
|
$
|
801,283
|
|
|
$
|
19,439,916
|
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Revenues from external customers
|
|
$
|
18,638,633
|
|
|
$
|
801,283
|
|
|
$
|
19,439,916
|
|
|
Segment income (loss)
|
|
$
|
2,342,841
|
|
|
$
|
(690,931
|
)
|
|
$
|
1,651,910
|
|
|
Unallocated corporate loss
|
|
|
|
|
|
|
|
|
|
|
(1,048,043
|
)
|
|
Income before income taxes from continuing operations
|
|
|
|
|
|
|
|
|
|
|
603,867
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
603,867
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
103,678
|
|
|
Gain from disposal of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
707,545
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,046,615
|
|
|
$
|
542,044
|
|
|
$
|
1,588,659
|
|
|
Three Months Ended June 30, 2016
|
|
Hog Farming
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Segment revenues
|
|
$
|
9,231,697
|
|
|
$
|
379,092
|
|
|
$
|
9,610,789
|
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Revenues from external customers
|
|
$
|
9,231,697
|
|
|
$
|
379,092
|
|
|
$
|
9,610,789
|
|
|
Segment income (loss)
|
|
$
|
1,436,045
|
|
|
$
|
(41,314
|
)
|
|
$
|
1,394,731
|
|
|
Unallocated corporate loss
|
|
|
|
|
|
|
|
|
|
|
(178,125
|
)
|
|
Income before income taxes from continuing operations
|
|
|
|
|
|
|
|
|
|
|
1,216,606
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
1,216,606
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(611,417
|
)
|
|
Gain from disposal of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
605,189
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
600,510
|
|
|
$
|
43,575
|
|
|
$
|
644,085
|
|
|
Three Months Ended June 30, 2015
|
|
Hog Farming
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Segment revenues
|
|
$
|
9,546,853
|
|
|
$
|
304,648
|
|
|
$
|
9,851,501
|
|
|
Inter-segment revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Revenues from external customers
|
|
$
|
9,546,853
|
|
|
$
|
304,648
|
|
|
$
|
9,851,501
|
|
|
Segment income (loss)
|
|
$
|
1,544,127
|
|
|
$
|
(351,941
|
)
|
|
$
|
1,192,186
|
|
|
Unallocated corporate loss
|
|
|
|
|
|
|
|
|
|
|
(229,436
|
)
|
|
Income before income taxes from continuing operations
|
|
|
|
|
|
|
|
|
|
|
962,750
|
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
962,750
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(38,693
|
)
|
|
Gain from disposal of discontinued component, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
924,057
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
417,504
|
|
|
$
|
264,917
|
|
|
$
|
682,421
|
|
Condensed financial status with respect to these reportable business segments as of June 30, 2016 and December 31, 2015 is as follows:
|
As of June 30, 2016
|
|
Hog Farming
|
|
|
Retail
|
|
|
Consolidated
|
|
|
Total segment assets
|
|
$
|
91,320,761
|
|
|
$
|
1,626,623
|
|
|
$
|
92,947,384
|
|
|
Other unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
5,898,356
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,845,740
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for segment assets
|
|
$
|
3,002,759
|
|
|
$
|
-
|
|
|
$
|
3,002,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
$
|
100,644,120
|
|
|
$
|
1,757,852
|
|
|
$
|
102,401,972
|
|
|
Other unallocated corporate assets
|
|
|
|
|
|
|
|
|
|
|
8,508,469
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,910,441
|
|
|
Other segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for segment assets
|
|
$
|
-
|
|
|
$
|
2,741
|
|
|
$
|
2,741
|
|
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.
Including in the liabilities from the discontinued operations, the Company reported a loan payable of $1,505,265 to Rural Commercial Bank with an annual interest rate of 9.90% and due by March 30, 2016. As of the date of this report, the Company is still in the process of renewing this loan.
Financial Information for Discontinued Operations
|
|
|
Hang-ao
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
Accounts receivable, net
|
|
$
|
18,357
|
|
|
$
|
24,225
|
|
|
Inventories, net
|
|
|
-
|
|
|
|
1,744,024
|
|
|
Plant and equipment, net
|
|
|
5,843,499
|
|
|
|
6,148,541
|
|
|
Other
|
|
|
1,330
|
|
|
|
9,647
|
|
|
Assets of discontinued operations
|
|
$
|
5,863,186
|
|
|
$
|
7,926,437
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loan
|
|
$
|
1,505,265
|
|
|
$
|
1,540,429
|
|
|
Accounts payable and accrued payables
|
|
|
430,592
|
|
|
|
461,992
|
|
|
Other payables
|
|
|
44,361
|
|
|
|
54,909
|
|
|
Due to related party
|
|
|
331,094
|
|
|
|
302,366
|
|
|
Liabilities of discontinued operations
|
|
$
|
2,311,312
|
|
|
$
|
2,359,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
|
|
Hang-ao
|
|
|
OV Orange
|
|
|
Total
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
Revenues and other incomes
|
|
$
|
35,518
|
|
|
$
|
-
|
|
|
$
|
35,518
|
|
|
Costs and expenses
|
|
|
2,057,722
|
|
|
|
-
|
|
|
|
2,057,722
|
|
|
Loss before taxes
|
|
|
(2,022,204
|
)
|
|
|
-
|
|
|
|
(2,022,204
|
)
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(2,022,204
|
)
|
|
$
|
-
|
|
|
$
|
(2,022,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal before income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain on disposal, net of income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(2,022,204
|
)
|
|
$
|
-
|
|
|
$
|
(2,022,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2015
|
|
|
|
|
Hang-ao
|
|
|
OV Orange
|
|
|
Total
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
Revenues and other incomes
|
|
$
|
1,764,617
|
|
|
$
|
808,718
|
|
|
$
|
2,573,335
|
|
|
Costs and expenses
|
|
|
1,348,539
|
|
|
|
1,032,299
|
|
|
|
2,380,838
|
|
|
Income (loss) before taxes
|
|
|
416,078
|
|
|
|
(223,581
|
)
|
|
|
192,497
|
|
|
Income taxes
|
|
|
88,794
|
|
|
|
25
|
|
|
|
88,819
|
|
|
Earnings (loss) from discontinued operations, net of taxes
|
|
$
|
327,284
|
|
|
$
|
(223,606
|
)
|
|
$
|
103,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal before income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain on disposal, net of income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations, net of taxes
|
|
$
|
327,284
|
|
|
$
|
(223,606
|
)
|
|
$
|
103,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2016
|
|
|
|
|
Hang-ao
|
|
|
OV Orange
|
|
|
Total
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
Revenues and other incomes
|
|
$
|
12,723
|
|
|
$
|
-
|
|
|
$
|
12,723
|
|
|
Costs and expenses
|
|
|
619,619
|
|
|
|
-
|
|
|
|
619,619
|
|
|
Loss before taxes
|
|
|
(611,417
|
)
|
|
|
-
|
|
|
|
(611,417
|
)
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(611,417
|
)
|
|
$
|
-
|
|
|
$
|
(611,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal before income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain on disposal, net of income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(611,417
|
)
|
|
$
|
-
|
|
|
$
|
(611,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2015
|
|
|
|
|
Hang-ao
|
|
|
OV Orange
|
|
|
Total
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
Revenues and other incomes
|
|
$
|
539,610
|
|
|
$
|
249,807
|
|
|
$
|
789,417
|
|
|
Costs and expenses
|
|
|
443,779
|
|
|
|
382,631
|
|
|
|
826,410
|
|
|
Income (loss) before taxes
|
|
|
95,831
|
|
|
|
(132,824
|
)
|
|
|
(36,993
|
)
|
|
Income taxes
|
|
|
1,700
|
|
|
|
-
|
|
|
|
1,700
|
|
|
Earnings (loss) from discontinued operations, net of taxes
|
|
$
|
94,131
|
|
|
$
|
(132,824
|
)
|
|
$
|
(38,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal before income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gain on disposal, net of income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations, net of taxes
|
|
$
|
94,131
|
|
|
$
|
(132,824
|
)
|
|
$
|
(38,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 20—SUBSEQUENT EVENTS
On July 12, 2016, the Company announced that its hog farms in Wuhan City and some of the independently operated black hog farms in Enshi Prefecture were damaged as torrential rains caused devastating flooding in southern China in early July with Wuhan City being one of the hardest hit areas. The Company expects total losses associated with the floods to be approximately $1.5 million to $2 million.
On July 19, 2016, the Company announced it had entered into a Letter of Intent to acquire a majority stake in Hannan Chengmai Zaohuaxiang Hog Industry Co., Ltd, a high-end specialty black hog farm operator based in Hainan Province with annual production capacity of 30,000 hogs
. The transaction is subject to due diligence investigations by the relevant parties, the negotiation and execution of definitive agreements, the approval of the Company’s Board of Directors, and the satisfaction of other customary closing conditions.
