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EX-32.1 - RENMIN TIANLI GROUP, INC.e613626_ex32-1.htm
EX-31.1 - RENMIN TIANLI GROUP, INC.e613626_ex31-1.htm
EX-32.2 - RENMIN TIANLI GROUP, INC.e613626_ex32-2.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

 
FORM 10-Q
 

 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2015
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                      to                     .
 
Commission File Number 001-34799
 

 
AOXIN TIANLI GROUP, INC.
(Exact name of registrant as specified in its charter)
 

 
British Virgin Islands
 
Not applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification number)
 
SuiteK, 12th Floor, Building A, Jiangjing Mansion
228 Yanjiang Ave., Jiangan District, Wuhan City
Hubei Province, China 430010
(Address of principal executive offices and zip code)
 
(+86) 27 8274 0726
(Registrant’s telephone number, including area code)
 
TIANLI AGRITECH, INC.
(Former name, former address and former fiscal year, if changed since last report)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
  
    Yes  x    No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer
o
 
Accelerated filer
o
         
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of May 13, 2015, the Registrant had outstanding 33,183,000 shares of common stock, par value $0.001 per share.
 
 
1

 
 
AOXIN TIANLI GROUP, INC.
FORM 10-Q
 
INDEX
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
2
PART I    FINANCIAL INFORMATION
  
4
      Item 1.
  
Financial Statements.
  
4
      Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
37
      Item 3.
  
Quantitative and Qualitative Disclosures about Market Risk.
  
56
      Item 4.
  
Controls and Procedures
  
56
PART II    OTHER INFORMATION
  
59
      Item 1A.
  
Risk Factors
  
59
      Item 6.
  
Exhibits
  
59
 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to those set forth herein and in our Annual Report on Form 10-K for the fiscal year ended  December 31, 2014 filed on March 18, 2015.
 
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by the federal securities laws, the Company undertakes no obligation to update forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.
 
NASDAQ CORPORATE GOVERNANCE

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

Shareholder Approval Requirements

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

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

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

NASDAQ Stock Market IM-5615 requires each issuer to establish certain procedures and take certain actions to evaluate conflicts of interest that may arise involving members of the Company’s Board of Directors. The Company has determined that it will follow the laws of the British Virgin Islands, its home country, in connection with conflicts of interest on the part of directors.  Under the laws of the British Virgin Islands if a director of the Company has disclosed any interest he may have in a transaction to all other directors of the Company, that director may: (a) vote on a matter relating to the transaction; (b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (c) sign a document on behalf of the Company, or do any other thing in his or her capacity as a director, that relates to the transaction.
 
NASDAQ Stock Market IM-5615 requires each issuer to establish certain procedures and taken certain action to evaluate conflicts of interest that may arise involving members of the Company’s Board of Directors. The Company has determined that it would follow the laws of the British Virgin Islands, its home country, in connection with conflicts of interest on the part of directors if a director of the Company has disclosed any interest he may have in a transaction to all other directors of the Company, that director may: (a) vote on a matter relating to the transaction; (b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (c) sign a document on behalf of the Company, or do any other thing in his or her capacity as a director, that relates to the transaction.
 
From time to time we may consider whether it is appropriate to follow other requirements of the 5600 Series of the NASDAQ Marketplace Rules.  Should we determine not to follow one or more of such Rules in favor of the laws of the BVI, we will advise our shareholders before doing so.
 
 
PART I     FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS EXPRESSED IN US DOLLARS)
 
   
March 31, 2015
   
December 31, 2014
 
   
(Unaudited)
       
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 40,905,864     $ 39,123,869  
Notes receivable
    -       16,291  
Accounts receivable, net
    2,761,243       2,237,794  
Accounts receivable – related party
    28,798       19,875  
Inventories
    10,368,154       11,015,763  
Advances to suppliers
    6,157,140       1,051,259  
Prepaid expenses
    189,997       238,875  
Other receivables
    146,312       241,666  
Loan receivable – related party
    -       1,629,062  
Due from related party
    79,177       78,195  
Restricted cash
    3,598,946       -  
                 
Total Current Assets
    64,235,631       55,652,649  
                 
Long-term prepaid expenses
    3,625,057       2,832,996  
Plant and equipment, net
    35,913,716       36,525,169  
Construction in progress
    713,102       710,128  
Biological assets, net
    1,818,231       2,036,823  
Intangible assets, net
    5,667,428       5,795,759  
Total Assets
  $ 111,973,165     $ 103,553,524  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Short-term loans
  $ 2,421,110     $ 2,411,012  
Bank acceptance notes payable
    6,543,539       -  
Accounts payable and accrued liabilities
    1,724,223       1,506,703  
Advances from customers
    117,601       83,304  
Advances from customers – related party
    59,869       58,451  
Deferred income
    342,941       260,058  
Special payables
    183,252       182,488  
Other payables
    2,821,972       2,991,109  
Other payables – related party
    181,213       180,457  
Due to related party
    381,042       455,232  
Total Liabilities
    14,776,762       8,128,814  
                 
Stockholders’ Equity:
               
Common stock ($0.001 par value, 100,000,000 shares authorized, 33,183,000 shares and 32,373,000 shares issued and outstanding on March 31, 2015 and December 31, 2014)
    33,183       32,373  
Additional paid in capital
    64,455,074       63,022,184  
Statutory surplus reserves
    2,552,070       2,532,813  
Retained earnings
    23,846,264       24,105,472  
Accumulated other comprehensive income
    4,643,960       4,079,896  
Stockholders’ Equity – Aoxin Tianli Group, Inc., and Subsidiaries
    95,530,551       93,772,738  
Noncontrolling interest
    1,665,852       1,651,972  
Total Stockholders’ Equity
    97,196,403       95,424,710  
 Total Liabilities and Stockholders’ Equity
  $ 111,973,165     $ 103,553,524  
 
See notes to financial statements.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
 
   
For the Three Months Ended March 31,
 
   
2015
   
2014
 
Revenue
  $ 11,324,120     $ 9,716,629  
Revenue – related party
    25,716       -  
Revenue
    11,349,836       9,716,629  
Cost of goods sold
    9,099,495       8,254,511  
Gross profit
    2,250,341       1,462,118  
                 
General and administrative expenses
    2,063,798       773,411  
Selling expenses
    268,474       282,767  
Operating expenses
    2,332,272       1,056,178  
                 
Income (loss) from operations
    (81,931 )     405,940  
                 
Other income (expense):
               
Interest income (expense) and bank charges
    9,303       (89,676 )
Other income (expense)
    (56,765 )     (15,239 )
Total other income (expense)
    (47,462 )     (104,915 )
                 
Income (loss) before income taxes
    (129,393 )     301,025  
Income taxes
    87,119       -  
Net income (loss)
    (216,512 )     301,025  
                 
                 
Add:
               
Net (income) loss attributable to the noncontrolling interest
    (23,439     127,017  
Net income (loss) attributable to Aoxin Tianli Group, Inc. and Subsidiaries
  $ (239,951 )   $ 428,042  
                 
Earnings (loss) per share attributable to the stockholders of Aoxin Tianli Group, Inc. and Subsidiaries – Basic and Diluted
  $ (0.01 )   $ 0.03  
Weighted average shares outstanding – Basic and Diluted
    32,913,000       13,964,000  
                 
                 
Comprehensive income (loss):
               
Net income (loss) attributable to Aoxin Tianli Group, Inc. and Subsidiaries
  $ (239,951 )   $ 428,042  
Unrealized foreign currency translation adjustment
    13,625       (365,368 )
Comprehensive income (loss)
  $ (226,326 )   $ 62,674  
 
See notes to financial statements. 
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
 
   
For the Three Months Ended March 31,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ (216,512 )   $ 301,025  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    996,036       884,027  
Amortization of prepaid expenses
    86,740       88,823  
Amortization of long-term prepaid expenses
    653,292       21,493  
Provision for doubtful accounts
    179,866       8,486  
Loss from inventory valuation
    -       86,917  
Loss from farm shutdown
    12,017       -  
Loss from disposal of biological assets
    68,594       -  
Changes in operating assets and liabilities:
               
Notes receivable
    16,297       -  
Accounts receivable
    (555,138 )     64,678  
Accounts receivable – related party
    (8,806 )     -  
Inventories
    691,115       1,326,872  
Advances to suppliers
    1,301,522       (534,902 )
Prepaid expenses
    (37,346 )     (39,488 )
Other receivables
    94,226       896,107  
Accounts payable and accrued liabilities
    210,411       (41,301 )
Advances from customers
    33,820       -  
Advances from customers – related party
    1,169       -  
Deferred income
    81,485       -  
Other payables
    (86,089 )     (40,578 )
                 
Net cash provided by operating activities
    3,522,699       3,022,159  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Cash paid for purchase of noncontrolling interest
    -       (1,090,114 )
Proceeds from collection of loan receivable from related party
    1,629,700       -  
Purchase of biological assets
    (587 )     -  
Purchase of plant and equipment
    (10.929 )     (3,467 )
                 
Net cash provided by (used in) investing activities
    1,618,184       (1,093,581 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Increase at restricted assets
    (3,585,339 )     -  
Proceeds from capital contribution
    -       6,000,000  
Due (from) related party
    (75,819 )     (10,990 )
Repayments of short-term loans
    (1,629,700 )     -  
Proceeds from short-term loans
    1,629,700       1,635,163  
Net cash provided by (used in) financing activities
    (3,661,158 )     7,624,173  
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    302,270       (109,423 )
NET INCREASE IN CASH
    1,781,995       9,443,328  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    39,123,869       10,087,694  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 40,905,864     $ 19,531,022  
                 
                 
SUPPLEMENTAL DISCLOSURES:
               
Cash paid during the period for:
               
Interest expense paid
  $ 28,216     $ 146,661  
Income tax paid
  $ 87,119     $ -  
                 
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES:
               
Prepayments for raw material purchases made with bank acceptance notes
  $ 6,518,799     $ -  
Shares issued to employees
  $ 1,433,700     $ -  

See notes to financial statements.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

The consolidated financial statements include the financial statements of Aoxin Tianli Group, Inc. (referred to herein as “Aoxin Tianli”) (formerly known as Tianli Agritech, Inc.); its wholly-owned subsidiary, HC Shengyuan Limited, a Hong Kong limited liability company (“HCS”); HCS’s wholly-owned subsidiary, Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company and a wholly foreign owned entity (“WFOE”) which changed its name to “Wuhan Aoxin Tianli Enterprise Investment Management Co., Ltd.” on June 6, 2014; WFOE’s wholly-owned subsidiary, Wuhan Fengze Agricultural Science and Technology Development Co., Ltd., a Chinese limited liability company (“Fengze”), which had been controlled by WFOE through a series of contractual control agreements which were terminated on July 2, 2014, when WFOE acquired 100% of the equity interest of Fengze; and Fengze’s wholly owned subsidiary, Hubei Tianzhili Breeder Hog Co., Ltd., a Chinese limited liability company (“Tianzhili”). On July 15, 2014, the Company acquired Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. (“Hang-ao”), a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao. Hang-ao was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. (“Sanqiang”) and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. On November 10, 2014, the Company entered into a share sale agreement with Mr. Fawei Qiu who held 12% of the equity of Hang-ao, to sell 100% of the equity of Sanqiang for RMB 24 million or $3.9 million. On August 26, 2014, the Company consummated a stock purchase agreement whereby it acquired 95% of the outstanding equity of Wuhan Optical Valley Orange Technology Co., Ltd., a corporation organized under the laws of the People’s Republic of China (“OV Orange”). As a result of the completion of the transaction, OV Orange became a 95% owned subsidiary of the Company, with the remaining 5% equity interest owned by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Ping Wang, the Company’s Chairman and CEO. OV Orange is focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry and is the sole shareholder of Wuhan Orange Optical Networking Technology Development Co., Ltd. (“Optical Networking”). On November 10, 2014, OV Orange entered into a share sale agreement with Mr. Deming Liu and Hubei Aoxin Science & Technology Group Co. Ltd. to sell 100% of the equity of Optical Networking for consideration of RMB 1,000,000 or $161,030. All of Aoxin Tianli’s operations are conducted by Fengze, Tianzhili, Hang-ao, and OV Orange. Fengze,Tianzhili, Hang-ao and OV Orange’s results of operations are consolidated into those of Aoxin Tianli. HCS, WFOE, Fengze, Tianzhili, Hang-ao, and OV Orange are sometimes referred to as the “subsidiaries”. Aoxin Tianli, its consolidated subsidiaries are collectively referred to herein as the “Company”, “we” and “us”, unless specific reference is made to an entity.
 
The Company was incorporated in the British Virgin Islands on November 9, 2009 as a limited liability company. The Company is engaged in the business of breeding, raising, and selling hogs for use in China’s pork meat production and hog breeding by other hog producers. The Company also sells pork products directly to certain outlets. The Company operates ten production farms in areas around Wuhan City, within Hubei Province, People’s Republic of China (“PRC”). On July 18, 2014, the Company, then known as Tianli Agritech, Inc. changed its name to “Aoxin Tianli Group, Inc.” Its wholly owned subsidiary, HCS, was incorporated in Hong Kong on November 24, 2009 as a limited liability company. Other than its equity interest in HCS, Tianli does not own any assets or conduct any operations.
 
WFOE was incorporated in Wuhan City on June 2, 2005. On November 26, 2009, HCS entered into a stock purchase agreement with WFOE whereby HCS acquired 100% of the equity interest of WFOE. On January 19, 2010, the Wuhan Municipal Commission of Commerce approved the ownership change. On January 27, 2010, the ownership change was declared effectively by the Wuhan Administrator for Industry & Commerce. HCS acquired WFOE and became the holder of 100% of the equity interest of WFOE, and WFOE became the wholly-owned subsidiary of the Company. Other than the equity interest in WFOE, HCS does not own any assets or conduct any operations.
 
 
 AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

On June 6, 2014, WFOE changed its name from “Wuhan Fengxing Agricultural Science and Technology Development Co., Ltd.” to “Wuhan Aoxin Tianli Enterprise Investment Management Co., Ltd.” and entered into a share purchase agreement with Fengze’s Principal Stockholders whereby WFOE acquired 100% of the equity interest of Fengze. On June 20, 2014, the Wuhan Municipal Commission of Commerce approved the ownership change and it was declared effectively by the Wuhan Administrator for Industry & Commerce. WFOE acquired Fengze and became the holder of 100% of the equity interest of Fengze, and Fengze became the wholly-owned subsidiary of the Company.
 
On June 20, 2014, WFOE, Fengze, and Fengze’s former Principal Stockholders entered into a termination agreement to terminate the Entrusted Management Agreement, Pledge of Equity Agreement, and Option Agreement made on December 1, 2009.
 
On November 5, 2012, XMRJ LLP (“XMRJ”), a limited partner enterprise formed under Chinese law that engages in equity investments in China, agreed to invest RMB 10,000,000, or approximately $1,600,000, in Tianzhili. Until such investment, Tianzhili was a wholly-owned subsidiary of Fengze. Tianzhili conducts our black hog breeding operations. In consideration for its commitment to make the investment and an interest free loan, XMRJ received a 40% equity interest in Tianzhili. As of December 31, 2012, Tianzhili received $1,057,636 or RMB 6,666,700 from XMRJ. On March 22, 2014, Fengze entered into an equity purchase agreement with XMRJ to purchase the 40% minority equity interest in Tianzhili for RMB 6,666,700 or $1,083,100. As a result of this purchase, Tianzhili became the wholly owned subsidiary of the Company.
 
On January 16, 2013, Tianzhili established Hubei Tianzhili (Hefeng) Breeder Hog Co., Ltd (“Hefeng”), a wholly owned subsidiary of Tianzhili, in Enshi Tujia and Miao Autonomous Prefecture of Hubei Province, as a limited liability company. Hefeng will be engaged in managing black hog farming and operations in Hefeng county of Enshi Tujia and Miao Autonomous Prefecture. On November 18, 2014, Hefeng was dissolved and its business registration terminated.
 
On November 6, 2013, the Animal Husbandry and Veterinary Bureau of Caidian District, Wuhan City, directed the Company to close its farm located in the Caidian District (Farm 8). The Company was advised that all agricultural and manufacturing activities in the area of Dacha Lake in the Caidian District were ordered to shut down before the end of 2013 as part of the government's effort to restore the lake to its natural condition. The Company finished its evacuation of this farm during the first quarter of 2014 and received part of the relocation compensation of $987,459 on June 2014. However, the final amount of its evacuation cost and loss from the farm shutdown that will be reimbursed by Caidian District is still undetermined. The Company maintains minimum personnel in the Caidian Farm or Farm 8 awaiting the final determination and reimbursements of its evacuation cost and loss.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

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

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

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

If the net profit targets set forth in the Stock Purchase Agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 shares of the Company’s common stock issued in exchange for 30% of the OV Orange shares, shall have the right to exchange shares of the Company’s common stock received in the acquisition for up to 7,500,000 and 15,000,000 shares, respectively, of OV Orange purchased by the Company during the three month period (the “Option Period”) commencing March 16 and terminating June 15, 2017. The ratio at which the OV Orange shares may be acquired by Mr. Liu or Mr. Wu is based upon the relative fair market values of the shares of the Company and OV Orange at the time of the re-purchase, except that if the value of the shares of the Company issued to Mr. Liu or Mr. Wu is less than the value of the shares of OV Orange he is entitled to receive, he can receive all of the OV Orange shares by delivering all of his Company shares and will not receive any additional compensation.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS (CONTINUED)

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

Wuhan Optical Valley Orange Technology Co., Ltd. is focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry. OV Orange was sole shareholder of Optical Networking. On November 10, 2014, OV Orange entered into a share sale agreement with Mr. Deming Liu and Hubei Aoxin Science & Technology Group Co. Ltd. to sell 100% of the equity of Optical Networking for consideration of RMB 1,000,000 or $161,030. On November 12, 2014, the consideration of RMB 1 million or $161,030 was collected.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Use of Estimates

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

Principles of Consolidation

We consolidate wholly-owned subsidiaries, HCS, WFOE, Fengze, Tianzhili, as well as Hang-ao and OV Orange. All material intercompany accounts and transactions have been eliminated in consolidation. The 12% equity interest holders in Hang-ao and the 5% equity interest holder of OV Orange will be accounted as noncontrolling interest in the Company’s consolidation financial statements.

Cash and Cash Equivalents

Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents. The Company maintained cash and cash equivalents with various financial institutions in the PRC. As of March 31, 2015 and December 31, 2014, balances in banks in the PRC were $40,905,865 and $39,123,869, respectively.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Notes Receivable

Notes receivable represents trade accounts receivable due from customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $0 and $16,291 at March 31, 2015 and December 31, 2014, respectively.

Accounts Receivable

Accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends. Management accrued allowance for doubtful accounts of $105,757 and $62,328 at March 31, 2015 and December 31, 2014.

Inventories

Inventories are stated at the lower of cost, as determined by the weighted-average method, or market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value if that is lower. Costs of raised animals include proportionate costs of breeding, including amortization of the breeding herd or biological assets, plus the costs of feed and other maintenance costs through the balance sheet date. Management inspects and monitors inventory on a continual basis. The Company recorded an inventory reserve of $85,877 and $85,518 at March 31, 2015 and December 31, 2014, respectively.

Prepaid Expenses

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

Advances to Suppliers

Advances to suppliers at March 31, 2015 and December 31, 2014 totaled $6,157,140 and $1,051,259, respectively, and includes prepayments to suppliers for merchandise and raw materials that had not yet been shipped to us. We recognize prepayments as inventory or expense as suppliers make delivery of goods in compliance with our accounting policy. As of March 31, 2015, the prepayments to the Company’s feed suppliers and one of OV Orange’s raw material suppliers were $5,980,184 and $82,626. Included in advances to suppliers as of December 31, 2014, we had prepaid $512,049 to the Company’s premix feed supplier and $309,736 to one of OV Orange’s raw material suppliers.
 
Restricted Cash

Restricted cash consists of cash deposits held by a bank and a guarantee service provider to secure bank acceptance notes payable.

Plant and Equipment

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

Estimated useful lives of the Company’s assets are as follows:
 
Useful Life
Buildings
20 years
Vehicles
5-10 years
Office equipment
3-5 years
Research equipment
3-20 years
Production equipment
3-20 years
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Construction in Progress

Construction in progress consists of amounts expended for building construction of new breeding and animal rearing facilities. Once the building construction is completed and the facilities are approved for adequate breeding and animal rearing activity, the construction in progress assets are categorized as buildings and production equipment and are then accounted for in plant and equipment. Assets accounted for as plant and equipment are used in the Company’s production process, whereupon they are depreciated over their estimated useful lives.

Biological Assets

Biological assets consist primarily of hogs purchased or selected from the Company’s own production for breeding and farrowing, which management believes will produce piglets that grow faster and have better quality breeding capabilities and carcasses with a high percentage of meat and a small quantity of fat. The costs to purchase and cultivate these breeding hogs and the expenditures related to labor and materials to feed the breeding hogs until they become commercially productive and breedable are capitalized. When these breeding hogs are entered into breeding and farrowing production, amortization of the costs of these breeding hogs commences. The estimated production life for breeding hogs is three years, and the costs are amortized to a residual value of $76 (RMB 500). After  breeding hogs have completed their production life of breeding, they are transferred into inventory as the vast majority will be sold for meat processing. Expenses incurred maintaining breeding hogs during gestation until piglets are weaned are capitalized into inventory and included in Work in process—biological assets, a component of inventories. If a breeding hog produce piglets which are deemed appropriate for internal breeding purposes, the gestation and raising costs until these piglets are weaned are allocated into biological assets.

Amortized expenses pertaining to biological assets are included in inventory costs for those piglets to be sold and ultimately become a component of cost of goods sold.

Intangible Assets

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

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

Intangible assets consisted of the following:
 
   
March 31, 2015
   
December 31, 2014
 
Amortizable intangible assets:
           
Carrying amount:
           
Land use rights
  $ 1,734,332     $ 1,727,099  
Distribution network
    1,939,747       1,931,657  
Patents
    3,697,966       3,682,545  
Others
    8,556       7,933  
Total carrying amount
    7,380,601       7,349,234  
                 
Accumulated amortization:
               
Land use rights
    (319,107 )     (304,869 )
Distribution network
    (193,975 )     (144,874 )
Patents
    (1,195,303 )     (1,101,044 )
Others
    (4,788 )     (2,688 )
Total accumulated amortization
    (1,713,173 )     (1,553,475 )
Total intangible assets, net
  $ 5,667,428     $ 5,795,759  

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

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

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

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

Year
 
Amount
 
2015
  $ 455,162  
2016
  $ 606,884  
2017
  $ 605,943  
2018
  $ 605,173  
2019
  $ 605,173  
Thereafter
  $ 2,789,093  

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

   
March 31, 2015
 
   
Hog Farming
   
Retail
   
Security & Protection
   
Total
 
Land use rights
  $ 1,734,332     $ -     $ -     $ 1,734,332  
Distribution network
    -       1,939,747       -       1,939,747  
Patents
    -       -       3,697,966       3,697,966  
Others
    -       -       8,556       8,556  
Less: accumulated amortization
    (319,107 )     (193,975 )     (1,200,091 )     (1,713,713 )
Balance
  $ 1,415,225     $ 1,745,772     $ 2,506,431     $ 5,667,428  

 
   
December 31, 2014
 
   
Hog Farming
   
Retail
   
Security & Protection
   
Total
 
Land use rights
  $ 1,727,099     $ -     $ -     $ 1,727,099  
Distribution network
    -       1,931,657       -       1,931,657  
Patents
    -       -       3,682,545       3,682,545  
Others
    -       -       7,933       7,933  
Less: accumulated amortization
    (304,869 )     (144,874 )     (1,103,732 )     (1,553,475 )
Balance
  $ 1,422,230     $ 1,786,783     $ 2,586,746     $ 5,795,759  

 
Impairment of Long-lived Assets

In accordance with US GAAP, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. For the three months ended March 31, 2015 and 2014, the Company had recorded no impairment charges at its long-lived assets.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

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

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

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

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

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

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

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

Deferred Income

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

Special Payables

Special payables are the portion of certain subsidies received from the Chinese government which should be paid to cooperative organizations, individuals, or companies who participate in the Company’s research projects. Those payables are “Pass through” payments. As of March 31, 2015 and December 31, 2014, the Company reported special payables of $183,252 and $182,488, respectively.

Non-controlling Interest

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

Revenue Recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company generates revenues from (1) the business of breeding, raising, and selling hogs for use in Chinese pork meat production, the sale of hogs for breeding by other hog producers, and the wholesale of distribution of specialty pork products, (2) selling electro-hydraulic servo devices and providing maintenance services, and (3) delivering optical fiber hardware and software solutions for the security and protection industry.
 
Revenues generated from the sales of breeding and meat hogs and specialty pork are recognized when these products are delivered to customers in accordance with previously agreed upon pricing and delivery arrangements, and the collectability of these sales is reasonably assured. Cash payment, which sometimes is in the form of wired cash transfers to the Company’s bank account, is usually received by the Company at the time hogs are sold. Hogs and specialty pork are not returnable and accordingly, no provision has been made for returnable goods. The customers are responsible for shipping the hogs purchase.

Revenues generated from sales of electro-hydraulic servo devices, maintenance services, and sales of optical fiber hardware and software solutions are recognized upon shipment and transfer of title or performance of the maintenance service. Electro-hydraulic servo devices generally are sold with a one-year warranty. Maintenance service revenue is based on an estimate of the number of service person hours necessary to render a service and  recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. For the three months ended March 31, 2015 and 2014, the amount allocated to maintenance service revenue was minimal. Based on historical experience, maintenance service calls and any related labor costs have been minimal. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Segment Information

The Company follows FASB ASC 280-Segment Reporting, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluates their performance.

Starting from the second quarter of 2013, the Company entered into distribution agreements with supermarkets whereby the Company is permitted to sell specialty pork products in the supermarkets’ retail facilities. Consequently, management has determined that as of the end of the second quarter of 2013, the Company is operating in two segments, hog farming and retail. However, after completion of the Hang-ao and OV Orange acquisitions, the Company has determined to establish two more segments, the Servo segment and the Security & Protection segment, in which it includes its operations in electro-hydraulic servo control and optical fiber hardware and software solutions. As of March 31, 2015, the Company is operating in four segments, Hog Farming, Retail, Servo and Security & Protection.

Income Taxes

The Company accounts for income taxes under the provisions of Section 740-10-30 of the FASB Accounting Standards Codification, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The Company did not have any deferred tax assets or liabilities as of March 31, 2015 and December 31, 2014.

The Company is subject to the Enterprise Income Tax law (“EIT”) of the People’s Republic of China. However, according to the EIT, companies that are engaged in the agricultural business and primary processing of agricultural products are exempt from the 25% enterprise income tax. The Company’s operations in breeding, raising, and selling hogs for use in Chinese pork meat production and hog breeding, are exempt from the Chinese income tax. However, the Company’s operations in servo-valve products and optical fiber products and services, are subject to the 25% enterprise income tax. Since OV Orange is certified as a new high technology company, OV Orange is enjoying a 15% preferential enterprise income tax rate until the end of 2015. Aoxin Tianli is incorporated in the British Virgin Islands. Under the current tax laws of the British Virgin Islands, the Company is not subject to income taxes.

In addition the Company’s hog sales are not subject to the PRC’s 17% VAT tax or the 5% business tax levied on income from services rendered. However, the Company’s operations in servo-valve products and optical fiber products are subject to such taxes. According to the PRC tax regulations, companies engaged in the agricultural business are exempt from these taxes. The Company’s operations in breeding, processing, and distributing black hogs and black hog meats are exempt from VAT taxes and corporate income tax as well.

Related parties

A Party is considered to be related to the Company if the party, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners and management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.

Basic and Diluted Earnings per Share

The Company reports earnings per share in accordance with FASB ASC 260 “Earnings per share”. The Company’s basic earnings per share are computed using the weighted average number of shares outstanding for the periods presented. Diluted earnings per share are computed based on the assumption that any dilutive options or warrants were converted or exercised. Dilution is computed by applying the treasury stock method.  Under this method, the Company’s outstanding stock warrants are assumed to be exercised, and funds thus obtained were assumed to be used to purchase common stock at the average market price during the period.  There were no dilutive instruments outstanding during the three month periods ended March 31, 2015 and 2014.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Foreign Currency Translation

As of March 31, 2015 and December 31, 2014, the accounts of Tianli were maintained and its financial statements were expressed in Chinese Renminbi (RMB). Such financial statements were translated into United States Dollars (USD) in accordance with US GAAP, with the RMB as the functional currency. All assets and liabilities are translated at the current exchange rates as of the balance sheet dates. These rates were RMB 6.1129 per US dollar and RMB 6.1385 per US dollar as of March 31, 2015 and December 31, 2014, respectively. Stockholders’ equity is translated at the historical rates and items in the statements of operations and cash flows are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with US GAAP as a component of stockholders’ equity.

During the three months ended March 31, 2015 and 2014, the transactions of Tianli were denominated and recorded in RMB and are translated at the average rates of exchange for the period. These rates were RMB 6.1361 and RMB 6.12 per US dollar for the three months ended March 31, 2015 and 2014, respectively. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Stock Based Compensation

In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC 718-10-55 - Compensation-Stock Compensation, or ASC 718-10-55. Under ASC 718-10-55, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In addition, FASB ASC 825-10-50-10 – Financial Instruments – Overall – Disclosures, or ASC 825-10-50-10, expresses views of the Securities and Exchange Commission, or the SEC, staff regarding the interaction between ASC 718-10-55 and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company’s compensation cost is measured on the date of grant at its fair value. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Contingencies

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

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

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

Accrual of Environmental Obligations

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

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

b)
The amount of the loss can be reasonably estimated.

As of March 31, 2015 and December 31, 2014, the Company did not have any environmental remediation obligations, nor did it have any asset retirement obligations under ASC 410. Furthermore, the Company did not have any environmental remediation loss contingencies requiring recognition or disclosure in its financial statements.

Recently Issued Accounting Pronouncements

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition. FASB issued Accounting Standards Update (“ASU”) No. 2014-9, “Revenue from Contracts with Customers” (“ASU 2014-9”). ASU 2014-9 provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The updated guidance related to revenue recognition which affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective for the Company starting on January 1, 2017. The Company is currently evaluating the impact this guidance will have on its combined financial position, results of operations and cash flows.

In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for us beginning July 1, 2016. We are currently evaluating the impact of this standard on our consolidated financial statements.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 
Repurchase of 40% Noncontrolling Interest

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

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

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

   
March 22, 2014
 
Property, plant and equipment
  $ 10,129,629  
Intangible asset – land use right
    262,913  
Intangible asset - distribution network
    1,926,417  
Other assets, including cash of $185,531
    519,845  
Assets acquired
  $ 12,838,804  
Accounts payable and other liabilities
    3,496  
Other payables
    3,153,447  
Liabilities assumed
  $ 3,156,943  
Net assets acquired
  $ 9,681,861  

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

Acquisitions

On July 15, 2014, the Company acquired Hang-ao, a Chinese limited liability company located in Xiangyang, Hubei Province. In accordance with the acquisition agreement, Aoxin Tianli became the holder of 88% of the equity interest of Hang-ao for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 1,047,000 common shares of Aoxin Tianli. Hang-ao, at the time of the acquisition, was the sole shareholder of Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. and engaged in the business of manufacturing and marketing electro-hydraulic servo-valves and related servo systems and components. The acquisition agreement includes a three year “earn out payment” provision which requires Hang-ao to reach certain levels of net income for the years 2014, 2015, and 2016 for the sellers to retain the 1,047,000 common shares of Aoxin Tianli. The net income targets are RMB 4.5 million ($733,000), 9 million ($1.5 million), and RMB 15 million ($2.4 million) for the years 2014, 2015, and 2016.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following is a reconciliation of the purchase:

   
Shares
   
Price per Share
   
Amount
 
Fair value of the Company’s stock issued
    1,047,000     $ 2.13     $ 2,230,110  
Cash
                    6,825,495  
Total purchase price
                  $ 9,055,605  
Acquired assets and liabilities:
                       
Cash
                  $ 215,236  
Current assets
                    8,121,512  
Fixed assets
                    2,036,448  
Intangible assets
                    3,684,084  
Liabilities
                    (3,766,820 )
                      10,290,460  
Percentage of acquired equity
                    88 %
88% of acquired assets and liabilities
                    9,055,605  
Purchase price
                    9,055,605  
Goodwill
                  $ -  
 

               
Amount
 
Acquired assets and liabilities, net
            0     $ 10,290,460  
Percentage of equity
                    12 %
Noncontrolling Interest
                  $ 1,234,855  
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

If the net profit targets set forth in the Stock Purchase Agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 shares of the Company’s common stock issued in exchange for 30% of the OV Orange shares, shall have the right to exchange shares of the Company’s common stock received in the acquisition for up to 7,500,000 and 15,000,000 shares, respectively, of OV Orange purchased by the Company during the three month period (the “Option Period”) commencing March 16 and terminating June 15, 2017. The ratio at which the OV Orange shares may be acquired by Mr. Liu or Mr. Wu is based upon the relative fair market values of the shares of the Company and OV Orange at the time of the re-purchase, except that if the value of the shares of the Company issued to Mr. Liu or Mr. Wu is less than the value of the shares of OV Orange he is entitled to receive, he can receive all of the OV Orange shares by delivering all of his Company shares and will not receive any additional compensation.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following is a reconciliation of the purchase:

   
Shares
   
Price per Share
   
Amount
 
Fair value of the Company’s stock issued
    2,552,000     $ 1.95     $ 4,976,400  
Acquired assets and liabilities:
                       
Cash
                  $ 690,990  
Current assets
                    3,881,918  
Fixed assets
                    376,075  
Long-term prepaid expense
                    1,282,037  
Intangible assets
                    2,699,753  
Liabilities
                    (989,226 )
                      7,941,547  
Discount from bargain purchase
                    (2,703,232 )
                      5,238,315  
Percentage of acquired equity
                    95 %
95% of acquired assets and liabilities
                    4,976,400  
Purchase price
                    4,976,400  
Goodwill
                  $ -  
 
               
Amount
 
Acquired assets and liabilities, net
                  $ 5,238,315  
Percentage of equity
                    5 %
Noncontrolling Interest
                  $ 261,915  
 
Before Aoxin Tianli acquired OV Orange, 45% of OV Orange’s equity interest was held by Hubei Aoxin Science & Technology Group Co. Ltd., a company whose Chairman and principal shareholder is Mr. Ping Wang, the chairman and principal shareholder of Aoxin Tianli. Therefore, the acquisition of OV Orange is a related party transaction and the discount of $2,703,232 from this bargain purchase was recorded as part of additional paid-in capital.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 3—ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

   
March 31,
   
December 31,
 
   
2015
   
2014
 
Accounts receivable
  $ 2,867,000     $ 2,300,122  
Less: Allowance for doubtful accounts
    (105,757 )     (62,328 )
    $ 2,761,243     $ 2,237,794  

The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company increased the allowance for doubtful accounts in the amount of $43,004 and $8,336 in the three months ended March 31, 2015 and 2014, respectively.
 
NOTE 4—INVENTORIES

Inventories consisted of the following:

   
March 31,
   
December 31,
 
   
2015
   
2014
 
Raw materials—hogs
  $ 877,390     $ 984,045  
Work in process—biological assets
    3,395,949       3,603,752  
Infant hogs
    3,783,341       4,195,792  
Finished goods—specialty pork products
    36,220       128,944  
Raw materials
    220,362       236,015  
Work in process
    1,722,955       1,343,440  
Finished goods
    417,815       609,293  
Less: inventory reserve
    (85,878 )     (85,518 )
    $ 10,368,154     $ 11,015,763  

Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower. As of March 31, 2015 and December 31, 2014, the Company determined that there were write downs of $85,878 and $85,518, respectively. The term “Work in process—biological assets” has the meaning set forth above in Note 2—Biological Assets.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 5—ADVANCES TO SUPPLIERS

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

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

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

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

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

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

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

On December 19 and December 24, 2013, OV Orange, engaged an agent bank, China Everbright Bank, to make entrusted loans of $812,559 and $1,950,141 to Blueeye. Those loans were due on December 18 and December 23, 2014 with 5% interest rate charge, but no collateral or guarantee offered. As of December 31, 2014, $1,629,062 of the $2,762,700 loan receivables was extended to January 23, 2015 and had been fully collected on January 6, 2015.
 
NOTE 8—RESTRICTED ASSETS

At March 31, 2015 and December 31, 2014, the Company reported restricted assets of $3,598,946 and $0, respectively. Restricted assets consist of cash deposits held by a bank and a guarantee service provider to secure bank acceptance notes payable.
 
NOTE 9—LONG-TERM PREPAID EXPENSES

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

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

   
March 31,
   
December 31,
 
   
2015
   
2014
 
Prepaid rental expenses
  $ 1,923,231     $ 1,915,211  
Prepaid research expenses
    1,635,885       1,629,062  
Stock based compensation to employees
    1,433,700       -  
Less: Accumulated amortization
    (1,367,759 )     (711,277 )
    $ 3,625,057     $ 2,832,996  

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

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

Year
 
Amount
     
2015
$
526,812
     
2016
$
702,416
     
2017
$
224,516
     
2018
$
224,516
     
2019
$
224,516
     
Thereafter
$
1,722,281
 
NOTE 10—PLANT AND EQUIPMENT

Plant and equipment consist of the following:

   
March 31,
   
December 31,
 
   
2015
   
2014
 
Buildings
  $ 39,698,803     $ 39,533,242  
Vehicles
    593,332       609,742  
Office equipment
    864,218       628,415  
Production equipment
    4,236,342       4,462,044  
Research equipment
    919,505       916,668  
      46,312,200       46,150,111  
Less: Accumulated depreciation
    (10,398,484 )     (9,624,942 )
    $ 35,913,716     $ 36,525,169  
 
a)  Depreciation expense was $666,460 and $565,355 for the three months ended March 31, 2015 and 2014, respectively.
 
b)  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 $12,017 and $0 for the three months ended March 31, 2015 and 2014, 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.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 11—CONSTRUCTION IN PROGRESS

Construction in progress consists of amounts expended for upgrading the Company’s facilities. Once construction is completed, the construction in progress assets are placed into production and transferred into plant and equipment, whereupon they are depreciated over their estimated useful lives. As of March 31, 2015 and December 31, 2014, construction in progress was $713,102 and $710,128, respectively. Included in construction in progress, were $90,137 for upgrading the feed processing facility and $662,226 for optical fiber equipment purchases.
 
NOTE 12—BIOLOGICAL ASSETS

Biological assets consist of the following:

   
March 31,
    December 31,  
   
2015
   
2014
 
Breeding hogs
  $ 6,431,556     $ 6,712,355  
Less: Accumulated amortization
    (4,613,325 )     (4,675,532 )
    $ 1,818,231     $ 2,036,823  

As of March 31, 2015 and December 31, 2014, $950,974 and $982,172 of breeding hogs was a breed of black hogs. Amortization of the biological assets, included as a component of inventory, for the three month periods ended March 31, 2015 and 2014 was $176,965 and $400,923, respectively.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 13—INTANGIBLE ASSETS

Included in intangible assets are land use rights, acquired distribution network, and patents owned by Hang-ao and OV Orange. 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 land use rights and 10 year life of acquired distribution network.

Intangible assets at March 31, 2015 and December 31, 2014 are as follows:

   
March 31,
    December 31,  
   
2015
   
2014
 
Land use rights
  $ 1,734,332     $ 1,727,099  
Distribution network
    1,939,747       1,931,657  
Patents
    3,697,966       3,682,545  
Others
    8,556       7,933  
Less: Accumulated amortization
    (1,713,173 )     (1,553,475 )
    $ 5,667,428     $ 5,795,759  

Amortization expense for the three month periods ended March 31, 2015 and 2014 was $152,611 and $12,954, respectively.

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

Year
 
Amount
     
2015
$
455,162
     
2016
$
606,884
     
2017
$
605,943
     
2018
$
605,173
     
2019
$
605,173
     
Thereafter
$
2,789,093
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 14—SHORT-TERM LOANS

As of March 31, 2015 and December 31, 2014, the short-term loans are as follows:

   
March 31, 2015
   
December 31, 2014
 
Loan payable to Hubei Zaoyang Rural Commercial Bank, annual interest rate of 9.9%, due by March 30, 2016, guaranteed by Wuhan Aoxin Investment and Guarantee Services, Co., Ltd.
  $ 1,635,885     $ -  
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 8.4%, due by February 6, 2015, guaranteed by Wuhan Agriculture Guarantee Co., Ltd. and Tianzhili and secured by certain assets of the Company. The loan had been repaid in January 21, 2015.
    -       1,140,344  
Loan payable to Shanghai Pudong Development Bank, annual interest rate of 8.4%, due by January 21, 2015, guaranteed by Wuhan Agriculture Guarantee Co., Ltd. and Tianzhili and secured by certain assets of the Company. The loan had been repaid in January 21, 2015.
    -       488,718  
Loan payable to Wuhan Rural Commercial Bank, annual interest rate of 8.4%, due by August 4, 2015 guaranteed by Wuhan Aoxin Investment and Guarantee Services, Co., Ltd.
    785,225       781,950  
    $ 2,421,110     $ 2,411,012  

In the first quarter of 2014, the Company paid $40,572 to a guarantee service provider for providing the guarantee of the loans from Shanghai Pudong Development Bank. No such payment was made during the three months ended March 31, 2015. Amount of $28,216 and $146,661 was recorded as interest expense for the three months ended March 31, 2015 and 2014, respectively.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 15—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 March 31, 2015 and December 31, 2014, the Company’s bank acceptance notes payables consisted of the following:

   
March 31, 2015
   
December 31, 2014
 
Shanghai Pudong Development Bank, non-interest bearing, due and paid on January 15, 2016, collateralized by 50% of restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
  $ 1,635,885     $ -  
Shanghai Pudong Development Bank, non-interest bearing, due and paid on January 20, 2016, collateralized by 50% of restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    1,635,885       -  
Shanghai Pudong Development Bank, non-interest bearing, due and paid on January 26, 2016, collateralized by 50% of restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    1,635,885       -  
Shanghai Pudong Development Bank, non-interest bearing, due and paid on January 30, 2016, collateralized by 50% of restricted cash deposited, guaranteed by Fengze, Tianzhili, and Wuhan Agriculture Guarantee Co., Ltd.
    1,635,884       -  
    $ 6,543,539     $    

In the first quarter of 2015, the Company paid $81,648 to a guarantee service provider for providing the guarantee of bank acceptance notes payable. The Company also made a cash deposit of $327,177 to the guarantee service provider as collateral to secure bank acceptance notes payable.
 
NOTE 16—OTHER PAYABLES

Other payables at March 31, 2015 and December 31, 2014 were $2,821,972 and $2,991,109, respectively. Included in other payables as of March 31, 2015 and December 31, 2014 were deposit payables of $2,777,939 and $2,861,203.

Since the year ended 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 on which farmers 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 March 31, 2015 and December 31, 2014, deposits from farmers were $2,777,939 and $2,861,203, respectively.

The amortization of deposit payables for the three months ended March 31, 2015 and 2014 was $94,887 and $95,205. The following table sets forth the aggregate future amortization expected for the next five years:
 
   
Amortization
2015
$
379,548
2016
$
379,548
2017
$
379,548
2018
$
379,548
2019
$
379,548
Thereafter
$
924,232
 
NOTE 17—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.

Due from related party

The amount due from related party was $79,177 and $78,195 as of March 31, 2015 and December 31, 2014, respectively. The amount due as of March 31, 2015 and December 31, 2014 was a security deposit to Wuhan Aoxin Investment and Guarantee Service Co., Ltd. who provided a guarantee service for a bank loan of $785,225 and $781,950 from Wuhan Rural Commercial Bank.

Loan receivable – related party

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

On December 19 and December 24, 2013, OV Orange, engaged an agent bank, China Everbright Bank, to make entrusted loans of $812,559 and $1,950,141 to Blueeye. Those loans were not guaranteed or collaterized and were due on December 18 and December 23, 2014 with 5% annual interest. As of December 31, 2014, $1,629,062 of the $2,762,700 loan receivables was extended to January 23, 2015.  The loans were fully collected on January 6, 2015.

Accounts receivable – related party

As of March 31, 2015 and December 31, 2014, OV Orange reported accounts receivable of $28,798 and $19,875 from related parties, Beijing Central Aoxin Technology Development Co., Ltd. (“Central Aoxin”) and Wuhan Aoxin Pike Wealth Investment Management Co., Ltd. (“Aoxin Pike”). Central Aoxin’s registered agent was Mr. Ping Wang, our CEO. One of Aoxin Pike’s major shareholders has an indirect investment in the Company.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 17—RELATED PARTY TRANSACTIONS (CONTINUED)

Advances from customers – related party

As of March 31, 2015 and December 31, 2014, OV Orange reported an advance from customer of $59,869 and $58,451 from a related party, Beijing Central Aoxin Technology Development Co., Ltd. (“Central Aoxin.”). Central Aoxin’s registered agent was Mr. Ping Wang, our CEO.

Other payable – related party

On October 10, 2013, Hang-ao entered into a purchase agreement with Hubei Hang-ao Servo Technology Co., Ltd. to buy a two story office and a residential apartment for employee use. The total purchase price was RMB 30,112,439 or $4.9 million. Hang-ao paid $4.7 million in 2013 and the office and apartment were transferred to the Company in 2014. As of March 31, 2015 and December 31, 2014, the Company reported an outstanding payable of $181,213 and $180,457, respectively. The major shareholder of Hubei Hang-ao Servo Technology Co., Ltd. is one of the Company’s shareholders.

Due to related party

The amount due to related party was $381,042 and $455,232 as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, the Company received advances of $166,440 from a Company shareholder, the former chief executive officer, Ms. Hanying Li, and $214,602 from Hubei Hang-ao Servo Technology Co., Ltd. for operating purposes. As of December 31, 2014, the Company received advances of $48,926 from Ms. Hanying Li, and $406,306 from Hubei Hang-ao Servo Technology Co., Ltd. for operating purposes. Such advances are non-interest bearing and due upon demand.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 17—RELATED PARTY TRANSACTIONS (CONTINUED)

Revenues – related party

During the three months ended March 31, 2015, OV Orange sold products to Beijing Central Aoxin Technology Development Co., Ltd. (“Central Aoxin”) and Wuhan Aoxin Pike Wealth Investment Management Co., Ltd. (“Aoxin Pike”) and recognized revenues of $25,716 in total. Central Aoxin’s registered agent was Mr. Ping Wang, our CEO. One of Aoxin Pike’s major shareholders has an indirect investment in the Company.

Bank loan guaranteed by related party

Wuhan Aoxin Investment and Guarantee Services, Co., Ltd. provided a loan guarantee for the Company’s short-term bank loan of $785,225 from   Wuhan Rural Commercial Bank.

Issuance of common stock

On February 6, 2015, the Company issued 810,000 of its common shares to 7 employees, including the Company’s CEO, CFO, and a director, pursuant to its. 2014 Share Incentive Plan. Those shares have been registered under the Securities Act of 1933, as amended.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 18—CAPITAL STOCK

The Company is authorized to issue 100,000,000 shares of common stock, $0.001 par value, and as of March 31, 2015 and December 31, 2014, it had 33,183,000 shares and 32,373,000 shares issued and outstanding, respectively.

On December 6, 2010 the Company granted 26,000 options with an exercise price of $6.00 to a director with one-third vesting 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 the director was granted new options on October 1, 2014.

On August 15, 2013, the Company issued 10,000 shares of the Company’s common stock to its investor relations firm for its 2013 consulting services. The shares were valued at $6,900 and recognized as compensation cost as part of the Company’s general and administrative expenses.

On October 28, 2013, the Company issued 2,760,000 shares of the Company’s common stock to Mr. Wei Gong for $1.16 per share. The shares were valued at $3,201,600.

On March 24, 2014, the Company issued 3,000,000 shares of the Company’s common stock to Mr. Ping Wang, who had been appointed as Chairman of the board of directors and Chief Executive Officer of the Company on March 28, 2014, for $2 per share. The shares were valued at $6,000,000.

On April 10, 2014, the Company issued to Mr. Ping Wang, its Chairman and CEO,  2,600,000 of its common shares  for a purchase price of $5,720,000, or $2.20 per share. After giving effect to the sale, Mr. Wang owned 5,600,000 common shares, representing approximately 28.6% of the Company’s outstanding common shares.

On June 6, 2014, the Company issued 1,600,000 shares of the Company’s common stock to Mr. Houliang Yu, an independent third party, at $2.40 per share. The shares were valued at $3,840,000.

On July 15, 2014, the Company acquired 88% of the equity of Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. (“Hang-ao”) for consideration of $9 million, including RMB 42 million or approximately $6.8 million in cash and 1,047,000 common shares of the Company.

On August 18, 2014, the Company sold to Hubei Aoxin Science and Technology Group Co., Ltd., 3,000,000 common shares for a purchase price of $7,200,000, or $2.40 per share. After giving effect to the sale, Hubei Aoxin Science and Technology Group Co., Ltd., owned approximately 11.90% of the Company’s outstanding common shares. As a condition of the sale, Hubei Aoxin Science and Technology Group Co., Ltd., agreed not to sell the shares for 12 months and thereafter at not less than $2.40 per share. Mr. Ping Wang, the Company’s Chairman and CEO, is the Chairman and a principal shareholder of Hubei Aoxin Science and Technology Group Co., Ltd.

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. (“OV Orange”) in exchange for 2,552,000 of the Company’s common shares.

The Company did not pay any brokerage or other commissions to an underwriter, broker-dealer or other person in connection with the foregoing sales.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 18—CAPITAL STOCK (CONTINUED)

On October 1, 2014, the Company granted 70,000 options with an exercise price of $2.50 to its non-employee directors with vesting of 23,000 options as of the date of grant, 24,000 options vesting in December 2015, and the final 23,000 options vesting in December 2016, contingent on the directors continuing to serve as a board member. The options can be exercised through October 1, 2021. 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.

On November 28, 2014, the Company sold and issued 4,600,000 shares of the Company’s common stock to independent third parties, Mr. Kai Xiao (1,500,000 shares), Mr. Wei Huang (1,500,000 shares), Mr. Yingjian Li (800,000 shares) and Mr. Ruinao Yang (800,000 shares) at $2.4 per share. The shares were valued at $11,040,000.

On December 16, 2014, the Company issued 10,000 shares of the Company’s common stock to its investor relations firm for its 2014 consulting services. The shares were valued at $18,700 and recognized as compensation cost as part of the Company’s general and administrative expenses.

On February 6, 2015, the Company issued 810,000 of its common shares to 7 employees for their future services, 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 vest in December 2015, and 243,000 common shares vest in December 2016. The Company recognized the compensation cost over the employees’ service period. For the three months ended March 31, 2015, the Company amortized $597,375.

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 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 %
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 18—CAPITAL STOCK (CONTINUED)

The following table summarizes the stock options and warrants outstanding as of March 31, 2015 and December 31, 2014 and the activity during the three months ended March 31, 2015.

   
Options
   
Weighted Average Exercise Price
   
Warrants
   
Weighted Average Exercise Price
 
Outstanding as of December 31, 2014
    70,000     $ 2.50       210,000     $ 7.21  
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
Outstanding at March 31, 2015
    70,000     $ 2.50       210,000     $ 7.21  
Exercisable at March 31, 2015
    23,000     $ 2.50       210,000     $ 7.21  

The weighted average remaining contractual life for the options and the warrants is 6.50 years and 0.25 years, respectively. The market value of the Company’s common stock was $1.5 and $1.73 as of March 31, 2015 and December 31, 2014, respectively. The intrinsic value of the outstanding options and the warrants as of March 31, 2015 and December 31, 2014 was $0.
 
NOTE 19—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 shareholdings 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 $2,552,070 and $2,532,813 as of March 31, 2015 and December 31, 2014.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 20—CERTAIN RISKS AND CONCENTRATION
 
Credit risk and major customers

As of March 31, 2015 and December 31, 2014, 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 three months ended March 31, 2015, there were two customers that accounted for more than 10% of the Company’s revenue.

During the three months ended March 31, 2014, there was no customer 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.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 21—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 March 31, 2015 and December 31, 2014.

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 three month periods ended March 31, 2015 and 2014 was $21,465 and $21,537, respectively.

The following table sets forth the aggregate minimum future annual rental commitments at March 31, 2015 under all non-cancelable leases for years ending December 31:
 
   
Operating Leases
2015
$
64,396
2016
$
85,862
2017
$
85,658
2018
$
85,047
2019
$
85,047
Thereafter
$
1,539,217
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 21—COMMITMENTS AND CONTINGENCIES (CONTINUED)

Environmental matters

Environmental laws and regulations to which the Company is subject mandate additional concerns and requirements. Failure to comply with applicable laws, regulations and permits can result in injunctive actions, damages and civil and criminal penalties. The laws and regulations applicable to the Company's activities change frequently and it is not possible to predict the potential impact on the Company from any such future changes.

Although management believes that the Company is in material compliance with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with the applicable statutes, laws, rules and regulations will not be challenged by governing authorities or private parties, or that such challenges will not lead to material adverse effects on the Company’s financial position, results of operations, or cash flows.

The Company is not involved in any legal matters. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(UNAUDITED)
 
NOTE 22—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 March 31, 2015, the Company has 4 operating segments, “Hog Farming,” “Retail,” “Servo” and “Security & Protection”. 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, restaurants, and hotels. The Servo segment represents the Company’s operations in electro-hydraulic servo controls and the Security & Protection segment represents the Company’s operations in optical fiber hardware and software solutions.

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 three months ended March 31, 2015 and 2014 is set forth below.
 
Three Months Ended March 31, 2015
 
Hog Farming
   
Retail
   
Servo
   
Security & Protection
   
Consolidated
 
Segment revenues
  $ 9,091,780     $ 496,635     $ 1,219,157     $ 516,548     $ 11,324,120  
Segment revenues – related party
    -       -       -       25,716       25,716  
Inter-segment revenues
    -       -       -       -       -  
Revenues from external customers
  $ 9,091,780     $ 496,635     $ 1,219,157     $ 542,264     $ 11,349,836  
Segment income (loss)
  $ 798,714     $ (338,990 )   $ 320,192     $ (94,871 )   $ 685,045  
Unallocated corporate loss
                                    (814,438 )
Loss before income taxes
                                    (129,393 )
Income taxes
                                    87,119  
Net loss
                                  $ (216,512 )
Other segment information:
                                       
Depreciation and amortization
  $ 629,111     $ 277,127     $ 90,422     $ 133,495     $ 1,130,155  
 
Three Months Ended March 31, 2014
 
Hog Farming
   
Retail
   
Servo
   
Security & Protection
   
Consolidated
 
Segment revenues
  $ 9,238,940     $ 477,689     $ -     $ -     $ 9,716,629  
Segment revenues – related party
    -       -       -       -       -  
Inter-segment revenues
    -       -       -       -       -  
Revenues from external customers
  $ 9,238,940     $ 477,689     $ -     $ -     $ 9,716,629  
Segment income (loss)
  $ 202,508     $ 188,193     $ -     $ -     $ 390,701  
Unallocated corporate loss
                                    (89,676 )
Loss before income taxes
                                    301,025  
Income taxes
                                    -  
Net loss
                                  $ 301,025  
Other segment information:
                                       
Depreciation and amortization
  $ 879,498     $ 4,529     $ -     $ -     $ 884,027  
 
 
AOXIN TIANLI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
 
NOTE 22—SEGMENT INFORMATION (CONTINUED)
 
As of March 31, 2015
 
Hog Farming
   
Retail
   
Servo
   
Security & Protection
   
Consolidated
 
Total segment assets
  $ 93,544,248     $ 408,809     $ 10,173,843     $ 6,853,547     $ 110,980,447  
Other unallocated corporate assets
                                    992,718  
                                    $ 111,973,165  
Other segment information:
                                       
Expenditures for segment assets
  $ -     $ 274     $ -     $ 10,655     $ 10,929  
                                         
As of December 31, 2014
                                       
Total segment assets
  $ 84,112,595     $ 602,337     $ 9,530,709     $ 9,131,129     $ 103,376,770  
Other unallocated corporate assets
                                    176,754  
                                    $ 103,553,524  
Other segment information:
                                       
Expenditures for segment assets
  $ 8,606,643     $ 1,083,100     $ 6,594,555     $ 658,959     $ 16,943,257  
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our Company’s financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in this report and with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements.
 
Overview

Our Company is in the business of breeding, raising, and selling hogs in the Wuhan City area of the PRC, and has begun to distribute specialty processed black hog products through supermarkets and to restaurants, hotels and other outlets. We have also initiated sales of specialty processed black hog meat through the internet. In 2014, our management determined to diversify our operations by acquiring emerging companies focused on modern technologies.   In July 2014, we entered the market for the manufacture and marketing of electro-hydraulic servo-valves and related servo systems and components by acquiring 88% of the equity of Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. (“Hang-ao”), located in Xiangyang, Hubei Province.  In August 2014, we entered the market for next-generation optical fiber hardware and software solutions for the security and protection industry by acquiring 95% of the equity of Wuhan Optical Valley Orange Technology Co., Ltd. (“OV Orange”) located in Wuhan.

On June 6, 2014, our wholly owned subsidiary, WFOE, entered into a share purchase agreement with the Principal Stockholders of Fengze, which we then controlled and consolidated as a VIE, whereby WFOE acquired 100% of the equity of Fengze and Fengze effectively became the wholly-owned subsidiary of the Company.
 
During 2014, Fengze owned and operated nine commercial farms in the Wuhan City area and one commercial farm in Enshi Autonomous Prefecture, Hubei Province. In addition, Fengze’s subsidiary, Tianzhili, operates in the Enshi Autonomous Prefecture (“Enshi”). Tianzhili mainly raises and sells black hogs in conjunction with local hog farmers in Enshi. In addition, it distributes black hog products through supermarkets, including Zhongbai, Xinyijia and Wushang Mart, and to restaurants, hotels and other outlets in the greater Wuhan City area.
 
On July 15, 2014, we acquired 88% of the equity of Hang-ao, a Chinese limited liability company engaged in the manufacture and marketing of electro-hydraulic servo-valves and related servo systems and components located in Xiangyang, Hubei Province, from the former owners of Hang-ao, for consideration of $9,055,605, including RMB 42 million or approximately $6.8 million in cash and 1,047,000 of our common shares. The acquisition agreement includes a three year “earn out payment” provision which requires Hang-ao to reach certain levels of net income for the sellers to retain the 1,047,000 common shares. The target net incomes are RMB 4.5 million ($733,000), RMB 9 million ($1.5 million), and RMB 15 million ($2.4 million) for the years of 2014, 2015, and 2016, respectively. On November 11, 2014, we sold 100% of the equity of Hang-ao’s wholly-owned subsidiary, Beijing Sanqiang Tongwei Electromechanical Hydraulic Technology Development Co., Ltd. to Mr. Fawei Qiu, who previously held 12% of the equity of Hang-ao, for RMB 24 million or $3,906,759 in cash. The target net income was achieved for 2014.
 
On August 26, 2014, we acquired 95% of the equity of Wuhan Optical Valley Orange Technology Co., Ltd. (“OV Orange”), a corporation organized under the laws of the People’s Republic of China focused on delivering next-generation optical fiber hardware and software solutions for the security and protection industry located in Wuhan, from the former owners of OV Orange, for 2,552,000 of our common shares, valued at $4,976,400. Under the terms of the acquisition agreement, 403,000 of those shares, which were 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, were deposited in escrow (the “Escrow Shares”), subject to the attainment by OV Orange of certain agreed upon net profit targets. 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 acquisition agreement. The target net income was achieved for 2014.
 
 
If the net profit targets set forth in the acquisition agreement are achieved for all three years Mr. Liu and Mr. Jin Wu, the record holder of 806,000 of our common shares issued in exchange for 30% of the OV Orange shares, shall have the right during the three month period commencing March 16 and terminating June 15, 2017 to exchange those shares for up to 7,500,000 and 15,000,000, respectively, of the OV Orange shares purchased by us. 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 our common shares and the shares of OV Orange at the time of the re-purchase, except that if the value of the common shares 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 common shares, but no additional consideration will be given to him.

As a result of the completion of the transaction, OV Orange became a 95% owned subsidiary of the Company, with the remaining 5% equity interest owned by Hubei Aoxin Science & Technology Group Co., Ltd., a company whose Chairman and principal shareholder is Ping Wang, the Company’s Chairman and CEO. As a result of its acquisition of 1,075,000 common shares of the Company in exchange for 22,500,000 (representing 40%) of the outstanding OV Orange shares pursuant to the acquisition agreement and its purchase from us of an additional 3,000,000 common shares on August 21, 2014 for a purchase price of $7,200,000, Hubei Aoxin Science and Technology Group Co., Ltd., owns a total of 4,075,000 common shares, representing approximately 12.28% of our common shares.

On November 12, 2014, we sold 100% of the equity of OV Orange’s wholly-owned subsidiary, Wuhan Orange Optical Networking Technology Development Co., Ltd., to Mr. Deming Liu and Hubei Aoxin Science and Technology Group Co., Ltd., for RMB 1,000,000, or $161,030 in cash.
   
Principal Factors Affecting our Results of Operations
 
Revenues

We derive the bulk of our revenues from the sale of hogs to other hog farms for breeding purposes, to brokers who sell our hogs both to other hog farms for breeding purposes and to slaughterhouses, and directly to slaughterhouses for conversion into pork products. Some hogs are bred and raised for sale as market hogs, while others become market hogs because customers do not select them as breeder hogs. Also very few boars are required for breeding purposes,   so most males in our litters will be sold as market hogs. The average sales price for a breeder is significantly higher than that of a market hog, and since breeder hogs are sold at a younger age than market hogs and usually weigh about 110 pounds when sold, as compared to an average weight of about 220 pounds for a market hog on sale date, the direct cost of feeding and otherwise raising a breeder hog is less than a market hog. Thus, the gross margin for breeder hogs is substantially higher than that of market hogs. Consequently, we have focused our efforts to increase the proportion of sales represented by breeder hogs, and our success in so doing has been a major contributor to our operating profit.

In our retail segment, we generate revenues by selling black hog meat products to restaurants, hotels, and through supermarkets and the Internet.

In our servo segment, we sell electro-hydraulic servo devices and provide related maintenance services. In our security & protection segment, we sell optical fiber hardware and software solutions to the security and protection industry. Revenues generated from sales of electro-hydraulic servo devices, providing maintenance services, and optical fiber hardware and software solutions are recognized upon shipment and transfer of title or provision of the service. Electro-hydraulic servo devices generally are sold with a one-year warranty. Maintenance service revenue is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. The amount attributed to maintenance service revenue was minimal during the three months ended March 31, 2015. To date, maintenance service calls and related labor costs have been minimal. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.

We receive subsidies from the government for operating our farms, as well as financial support  for some of our research projects. Some of these subsidies are non-recurring, such as the payment we receive when we reach specified annual production capacities, for the acquisition of certain operating equipment, or for specific research projects. Others, such as subsidies for breeder hog insurance, are ongoing so long as we qualify. Of course, there is no assurance the government will continue any of its policies for granting subsidies.
 
Factors Affecting Revenues and Profitability
 
The following factors, among others, affect the revenues and profitability that we derive from our operations. For other factors affecting our revenues, see “Risk Factors—Risks Related to Our Business,” included in the Company’s Annual Report on Form 10-K. for the fiscal year ended December 31, 2014.
 
Consumer demand for pork products. Consumer demand for pork products is closely linked to the performance of the general Chinese economy and is sensitive to business and personal discretionary spending levels.
 
Declines in consumer demand may occur as a result of adverse general economic conditions.  Lower consumer confidence and changes in consumer preferences for pork as compared with other meats can lower the revenues and profitability of our operations. As a result, changes in consumer demand and general business cycles can subject our revenues to volatility.
 
Revenues resulting from the sale of breeder hogs. A significant amount of our revenues and operating margin result from the sale of young breeder hogs for use by other hog farmers. Because these breeder hogs command a price significantly higher than market hogs, and are sold at a younger age, thus incurring less feed and related finishing expenses, the profitability of the sale of a breeder hog is higher than that for the sale of a market hog. A significant reduction in the proportion of our sales that are breeder hogs would very likely significantly reduce our overall profit margin.
 
 
Revenues resulting from sales by our servo and security & protection segment. Part of our revenues and operating margin were generated from sales of electro-hydraulic servo devices and optical fiber hardware and software solutions for the security and protection industry. The markets for products involved in bringing new technologies to the Chinese market continually evolve as Chinese manufacturing enterprises modernize their systems. Often, these products are initially introduced to the Chinese market by foreign producers. For Chinese producers of these products to be competitive they must demonstrate that they have mastered these products which generally require that they spend money on research and development and maintain staff to develop new technologies. At the same time, they need to build up brand awareness. A significant product defect or apparent inability to master relevant technology would very likely significantly reduce our overall profit margin.
 
Government action in our industry. Because pork occupies such a central role in the Chinese diet, the government has occasionally taken action to prevent the price of pork from dropping below or above specified levels and has provided subsidies to companies engaged in hog farming. We benefit from this protection, and we could be harmed if the government terminated such practices. In addition, the government has taken actions to prevent the spread of diseases among livestock, including mandatory culls of affected animals. These actions have occasionally resulted in relative shortages, which tend to lead to higher prices for healthy animals, and could result in a reduction of our stock, thus reducing revenues and profit. Likewise it is possible that the government could implement some form of price controls that could adversely impact our ability to price our products so as to recover increases in costs such as feed.
 
Competition and subsidies. While the hog farming industry in Hubei province and the Wuhan City area includes a large number of farms, many of those farms are smaller farms that sell relatively few hogs per year. We believe the incentives being given to farms that reach specified annual production capacities are likely to result in a consolidation of the industry. Our ability to increase our production capacity and thus to qualify for these incentives for our operations allows us to receive non-recurrent benefits from these subsidies, as well as to benefit from increased economies of scale in our operations.  Likewise, the markets for electro-hydraulic servo devices and optical fiber products are mainly dominated by major foreign producers which constitute strong competition for Chinese companies seeking to enter these markets. Our products and technologies may not be able to compete with other competitors which have more experienced at developing new innovations. Our ability to receive certain subsidies from the government is dependent upon our being able to maintain our production technologies and thus to qualify for incentives for our research and development efforts.
 
Epidemic outbreaks. The outbreak of animal diseases could adversely affect our revenues. An occurrence of serious animal diseases, such as foot-and-mouth disease, or any outbreak of other epidemics in the PRC affecting animals or humans might result in material disruptions to our sales.
 
Taxes. We believe that the provisions of the PRC’s Enterprise Income Tax law currently provide our hog breeding operations with an exemption from PRC income taxes, VAT taxes and business service taxes. If this understanding is incorrect or if the law or interpretations of the law change, this could significantly impact the Company’s net operating results.
 
Costs and Expenses
 
We primarily incur the following costs and expenses:
 
Costs of goods sold. In raising hogs, we incur a number of costs that represent the costs of goods sold. We purchase hog feed, premix components, medicines and other supplies to grow our hogs and keep them healthy. In addition, cost of goods sold includes expenses such as the amortization of sows (referred to as biological assets), farm employee wages, water, electricity, equipment depreciation expense, maintenance expense, quarantine expense, equipment costs, insurance expense, and sewage charges. For our electro-hydraulic servo devices and optical fiber products, to date, maintenance service calls and related labor costs have been minimal. However, a significant product defect would very likely significantly increase our cost of goods sold.
 
 
General and administrative expenses. General and administrative expenses consist primarily of compensation expense for our corporate staff, professional fees (including consulting, audit and legal fees), communication costs, research and development costs, gasoline, welfare expenses, education expenses, travel and business hospitality expenses, land rent, and other office administrative and related expenses.
 
Sales and marketing costs. Sales and marketing costs include salaries, wages, and promotion expenses.
 
Factors Affecting Expenses
 
Supplies and commodity prices. The largest component of our expenses are the materials required to breed and raise hogs. Specifically, while we ordinarily breed our own hogs, we periodically purchase breeding stock to  improve our genetic breeding pool. Similarly, the prices of corn and soybean husks in China are important to our operations, because corn and soybean husks are the primary component of the hogs’ diet. To the extent the prices of these materials vary, our cost of goods will fluctuate, and we may not be able to recover higher costs by higher prices for our products. For this reason, we may be affected by droughts, floods, crop diseases and the like, which tend to make feed scarcer and thus more expensive.
 
Number of customers. The more customers we have, the more likely it is that related selling expenses, travel expenses and similar costs will increase. At present, we sell substantially all of our hogs, electro-hydraulic servo devices and optical fiber products to a relatively small number of customers. We believe this concentration of customers for our hogs has allowed us to focus our marketing and selling efforts. However, we believe we will have to devote substantial marketing efforts to build brand awareness with wholesale customers for our black hog specialty products, servo valves and optical fiber products, which will likely require substantial expenditures.
 
Number of farms and business we operate. We have acquired or constructed a number of hog farms in the last several years. As we operated more farms, our administrative expenses tended to increase in dollars terms. While we do not anticipate substantial expansion of our hog business, we do anticipate acquiring new businesses with emerging technologies. The acquisition of such businesses will also increase our administrative expenses.
 
Retail expenses. As we pursue a strategy of providing our branded product to retail outlets, we expect that we will face additional costs such as promotion and advertising expenses to establish our brand image and retail recognition.

In an effort to significantly increase the scale of our operations, in 2012 we concluded a series of agreements (the “Exclusivity Agreements”) with the Animal Husbandry and Veterinary Bureau of Enshi Tujia and Miao Autonomous Prefecture of Hubei Province, the Animal Husbandry and Veterinary Bureau of Xianfeng County of Hubei Province, the Xuwang Hog Farming Professional Cooperatives of Xianfeng County, and the Qiming Hog Farming Professional Cooperatives of Xianfeng County, whereby we were granted the exclusive right to breed and sell Enshi black hogs in Enshi Autonomous Prefecture in Hubei Province. The agreements call for the joint development, funding and operation of local cooperatives whereby the Company, the relevant governmental agencies and the cooperatives will assist participating farmers to breed and raise Enshi black hogs which will be purchased by the Company for resale or retained as breeders at the Company’s discretion. In these agreements we agreed to incur various costs and contribute various amounts to cover the costs of different aspects of the program.

By the end of the first quarter of 2014 we had funded and completed the construction of 798 farms for local farmers. Achievement of any of the program’s goals and the need for financing are dependent upon the participation, cooperation and skills of local farmers. Given the long term of this project, it is likely that there will be continued negotiation of various issues that arise during the life of the project. After providing the financing necessary for completion of the construction for 798 farms, we decided to temporarily stop providing capital to the program and focus on our black hog retail operations and now the acquisition of companies in other industries.
 
 
Comparison of the Results of Operations for the Three Months Ended March 31, 2015 and 2014
 
All amounts, other than percentages, are in U.S. dollars

   
For Three Months Ended March 31,
         
Percentage of
 
   
2015
   
2014
   
Net Change
   
Change
 
Sales
  $ 11,349,836     $ 9,716,629     $ 1,633,207       17%  
Cost of goods sold
    9,099,495       8,254,511       844,984       10%  
Gross profit
    2,250,341       1,462,118       788,223       54%  
Selling, general and administrative  expenses
    2,332,272       1,056,178       1,276,094       121%  
Income (loss) from operations
    (81,931 )     405,940       (487,871 )     (120%)  
Interest expense, net
    9,303       (89,676 )     98,979       (110%)  
Subsidy income
    -       -               -  
Other expenses, net
    (56,765 )     (15,239 )     (41,526 )     (273%)  
Total other income (expense)
    (47,462 )     (104,915 )     57,453       (55%)  
Income (loss) before income taxes
    (129,393 )     301,025       (430,418 )     (143%)  
Income taxes
    87,119       -       87,119       n/a  
Net income (loss)
  $ (216,512 )   $ 301,025     $ (517,537 )     (172%)  

The following table sets forth information as to the gross margin for our four business segments for the three months ended March 31, 2015 and 2014 (dollars in thousands).
 
   
For the Three Months Ended March 31, 2015
 
   
Hog Farming
   
Retail
   
Servo
   
Security & Protection
   
Total
 
Revenues
  $ 9,092     $ 497     $ 1,219     $ 542     $ 11,350  
Cost of goods sold
  $ 7,663     $ 382     $ 787     $ 268     $ 9,099  
Gross profit (loss)
  $ 1,429     $ 115     $ 432     $ 274     $ 2,250  
Gross margin %
    16 %     23 %     35 %     50 %     20 %
 
   
For the Three Months Ended March 31, 2014
 
   
Hog Farming
   
Retail
   
Servo
   
Security & Protection
   
Total
 
Revenues
  $ 9,239     $ 478     $ -     $ -     $ 9,717  
Cost of goods sold
  $ 8,008     $ 247     $ -     $ -     $ 8,255  
Gross profit
  $ 1,231     $ 231     $ -     $ -     $ 1,462  
Gross margin %
    13 %     48 %     -       -       15 %
 
Revenues. For the three months ended March 31, 2015, we had revenues of $11,349,836, compared to revenues of $9,716,629 for the same period of 2014. Our revenues increased by $1,633,207 or approximately 17%. This growth in revenues was primarily attributable to sales from our newly acquired subsidiaries Hang-ao and OV Orange, which contributed $1.2 million and $0.5 million to our revenues in the quarter. Our sales from our hog related businesses declined slightly, as sales of black hogs  increased approximately $0.6 million, partially offset by a decrease of approximately $0.8 million from sales of regular market hogs and breeder hogs, while sales of specialty pork products were up slightly.
 
 
The tables below illustrate our sales of breeder hogs, market hogs, black hogs and specialty pork products for the three months ended March 31, 2015 and 2014.
 
Sales by Products
 
   
Three Months Ended March 31,
 
   
2015
   
2014
 
   
No. of Hogs Sold
   
Average Price/Hog
   
Sales
   
No. of Hogs Sold
   
Average Price/Hog
   
Sales
 
Breeder Hogs – regular hogs
    7,183     $ 263     $ 1,887,893       7,069     $ 281     $ 1,989,004  
Market Hogs – regular hogs
    21,343     $ 183       3,901,557       22,583     $ 203       4,580,243  
Market Hogs – black hogs
    15,269     $ 216       3,302,330       11,700     $ 228       2,669,693  
                                                 
Total
    43,795     $ 208     $ 9,091,780       41,352     $ 223     $ 9,238,940  

   
Three Months Ended March 31,
 
   
2015
   
2014
 
   
Kilogram
   
Average Price/kg
   
Sales
   
Kilogram
   
Average Price/kg
   
Sales
 
Market Hogs – specialty black hog pork products
    114,932     $ 4     $ 496,635       89,483     $ 5     $ 477,689  
Total
    114,932     $ 4     $ 496,635       89,483     $ 5     $ 477,689  

During the first quarter of 2015, we sold approximately 2% more breeder hogs with 6% less selling price and 5% less market hogs with 10% less selling price. As a result, revenue attributable to breeder hogs decreased by 1% and revenue attributable to market hogs decreased by 6%. The decreases in the selling price per hog of regular market hogs were primarily attributable to: (1) an apparent decline in China pork market demand impacted by H7N9 avian flu; (2) a number of preferential policies for hog raising instituted by the government of China since 2011, such as government subsidies, which attracted more investment into the hog farming industry and resulted in an increase in the supply of market hogs, and (3) the central government’s new policies to promote frugality and thrift, which forbid extravagance from the government’s spending binge wasting in gifts and unnecessary parties. This gradually changed the food consumption habit and reduced the pork demand as well. The decline in our breeder hog sales was primarily because after almost a 3 year downturn in the China pork market, more and more hog farmers were shrinking their farm sizes resulting in lower demand for breeder hogs.
For the first quarter of 2015 and 2014, we generated $3,798,965 and $3,147,382 in revenue through sales of black hogs and black hog specialty pork products. During the three months ended March 31, 2015, we sold 15,269 black hogs as breeder and market hogs and 114,932 kilograms of black hog meat were used to produce specialty pork products sold in our retail business. During the three months ended March 31, 2014, we sold 11,700 black hogs as breeder and market hogs and 89,483 kilograms of black hog meat were used to produce specialty pork products sold in our retail business.

During the first quarter of 2015, our servo segment contributed $1,219,157 to our revenue, $1,007,840 from selling electro-hydraulic servo devices and relevant components and $211,317 from providing maintenance services to our customers.
 
 
During the first quarter of 2015, our security & protection segment contributed $542,264 to our revenue, $179,024 from selling optical fiber invasion alarm systems and $363,240 from selling education devices and providing relevant technical supports.
 
Cost of goods sold. Cost of goods sold includes the cost of raw materials, feed, labor, depreciation, amortization, processing costs, and other overhead costs. For the first quarter of 2015, cost of goods sold was $9,099,495 as compared to $8,254,511 for the same period of 2014, an increase of $844,984, or 10%. Cost of goods sold related to Hog Farming was $7,662,664 for the first quarter of 2015 as compared to $8,008,398 for the first quarter of 2014. Cost of goods sold for our Retail segment was $381,192 for 2015 and $246,113 for 2014. Cost of goods sold related to our Servo segment and our Security & Protection segment were $787,117 and $268,522 during the first three months in 2015. The major reasons for the increase in our cost of goods sold were our newly acquired subsidiaries,  and our expanding operations in black hog sales. The expansion of our black hog sales caused the related costs to increase from $2.7 million to $3.5 million. The year over year growth rate in  cost of goods sold was 10% and benefited from reductions in the purchase prices for feeds. Our costs of goods sold for regular breeder hogs and market hogs decreased 13% and 20%, respectively.

Profit Margins. Our gross margin increased to 20% in the first quarter of 2015 from 15% in 2014. Our gross profit was $2,250,341 for 2015 as compared to $1,462,118 for 2014. This increase in our gross profit reflected the margins of $432,040 contributed by our Servo segment and $273,742 from our Security & Protection segment.

Our gross margin from Hog Farming was 16% in 2015 as compared to 13% in 2014. Our margin from Retail was 23% in 2015 and 48% in 2014. The gross margins for breeder hogs were 41% and 36% in the first quarter of 2015 and 2014, respectively, and the gross margins for regular market hogs were 12% and 6% in 2015 and 2014. The gross margins for black market hogs were 6% and 9% in 2015 and 2014. The gross margin from our specialty black hog pork products was 23% and 48% in 2015 and 2014. The increase in our gross margin for our regular breeder hogs was a result of reduced feed prices. Our revenues from regular breeder hogs and market hogs decreased 5% and 15%, respectively. However, at the same time, our costs of goods sold dropped 13% and 20%, resulting in the growth in our gross margins. Our black hog sales, whether as market hogs or specialty black hog products, benefited from our growing brand awareness and reduced feed costs. The gross margins from black market hogs and specialty pork products benefitted from increases of 24% and 4% in our revenues from sales of market black hogs and specialty pork products, comparing the first quarter of 2015 to the 2014. Additionally, our cost of goods sold for both sections of our black hog business increased 28% and 55%, respectively, more than the growth rates in revenues. As a result, black hog sales, either from black market hogs or specialty pork products, had a decrease of $154,597 in our gross margin.
 
Our gross margin from our Servo and Security & Protection segments were 35% and 50%, respectively. Both segments have short operating histories and hold certain key technologies. We believe over time  both companies should be able to increase their contribution to our earnings.

Expenses. Selling, general and administrative expenses increased by $1,276,094 in the first quarter of 2015 as compared to the same period in 2014. The increase was primarily the result of our new operating segments which generated expenses of $111,304 (Servo) and $381,145 (Security & Protection), a grant of stocked to key employees which generated non-cash compensation expense of $597,375, and an increase of $295,607 in our Retail segment for selling our black hog specialty products.

Net Other Expense. Net other expense decreased from $104,915 for the three months ended March 31, 2014 to net other expenses of $47,462 for the three months ended March 31, 2015, an increase of $57,453, which was primarily due to the decrease of $98,979 in our interest expense.

Income Taxes. Our Hog Farming and Retail segments are exempt from the Chinese income tax and VAT. With respect to our operations in electro-hydraulic servo valve devices and optical fiber products, we are subject to 17% VAT tax and 25% corporate income tax, except that our operations in optical fiber detection alarm products enjoy a preferential income tax rate of 15% which will expire at the end of 2015. During the first quarter of 2015 we reported $87,119 in corporate income taxes which represented the income taxes on the net income from our Servo segment.
 
Net Income (Loss). Our net income (loss) for the three months ended March 31, 2015 and 2014 was ($216,512) and $301,025, respectively. The decrease of $517,537 was primarily the result of stocked based compensation of $597,375 for shares granted to employees and an increase of $295,607 in operating expenses from our Retail segment, which partially offset by net income of $320,192 contributed by our Servo segment.
 
 
Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2015 our working capital was $49,458,869 as compared to $47,523,835 at December 31, 2014. These funds are deposited in financial institutions located as follows:

   
March 31, 2015
   
December 31, 2014
 
Country
 
Dollar
   
%
   
Dollar
   
%
 
United States
  $ -       -     $ -       -  
China
    40,905,864       100 %     39,123,869       100 %
    $ 40,905,864       100 %   $ 39,123,869       100 %
 
In an effort to control our feed costs and take advantage of our ability to borrow at advantageous rates, we entered into agreements with two of our suppliers whereby we have prepaid $6,518,799 for feed to be delivered to us in or prior to January 2016.  The specific quantities and dates of delivery will be determined by us from time to time. The prepayment was made by entering into agreements with Shanghai Pudong Development Bank whereby the bank agreed to issue its acceptances in favor of our suppliers.  The acceptances are non-interest bearing and mature on various dates in January 2016.  Each acceptance is secured by cash deposited by us with the bank in an amount equal to 50% of the amount of the acceptance.   If either supplier were for any reason to fail to deliver the agreed upon product, we would nevertheless be liable in full to the bank when the acceptance comes due.
 
Consolidated Statement of Cash Flows

   
Three Months Ended March 31,
   
2015
 
2014
Net cash provided by operating activities
$
3,522,699
$
3,022,159
Net cash provided by (used in) investing activities
 
1,618,184
 
(1,093,581)
Net cash provided by (used in) financing activities
 
(3,661,158)
 
7,624,173
Exchange rate effect on cash
 
302,270
 
(109,423)
Net cash inflow
$
1,781,995
$
9,443,328
 
Cash Provided by Operating Activities
 
Net cash provided by operating activities in the three months ended March 31, 2015 totaled $3,522,699. Cash flow pertaining to operating activities benefited from depreciation and amortization of $996,036, amortization of prepaid expenses and long-term prepaid expenses of $86,740 and $653,292, a non-cash bad debt expense of $179,866, a decrease in inventory of $691,115, reduction in advances to suppliers of $1,301,522, and an increase of $210,411 in accounts payable and accrued payables and were partially offset by an increase of $555,138 in accounts receivable and repayments of $86,089 of other payables.
 
Net cash provided by operating activities in the three months ended March 31, 2014 totaled $3,022,159. Cash flow pertaining to operating activities included depreciation and amortization of $884,027, amortization of prepaid expenses of $110,316, a decrease from inventory of $1,326,872 and collections of other receivables of $896,107. These favorable factors were offset by a prepayment made in the first quarter of 2014 to one of our feed suppliers of $534,902.
 
Cash Provided by (Used in) Investing Activities
 
Net cash provided by investing activities for the three months ended March 31, 2015 totaled $1,618,184. This amount principally reflects  $1,629,700 borrowed from a related party.
 
Net cash used in investing activities for the three months ended March 31, 2014 totaled $1,093,581. This included $1,090,114 paid for purchase of a 40% interest in our subsidiary, Tianzhili.
 
Cash Provided by (Used in) Financing Activities
 
For the three months ended March 31, 2015, we used net cash of $3,661,158 in financing activities. This mainly reflects an increase in cash deposits of $3,585,339 in a bank and a guarantee service provider for our bank acceptance notes payable.
 
 
For the three months ended March 31, 2014, we had net cash provided by financing activities of $7,624,173. This included proceeds of $6 million from a capital contribution from the sale of 3 million shares to our current Chairman and CEO, Mr. Ping Wang, and proceeds from a renewed short-term loan of $1,635,163.
 
Commitments for Capital Expenditures
 
Our capital requirements for the next twelve months relate to purchasing breeder hogs and acquiring new companies to execute our diversification policy, as well as additional investment in our Retail segment to expand our marketing and distribution channels. We also expect to incur modest expenses in maintaining our hog farms. We believe that our cash flow from operations will be sufficient to meet our anticipated cash requirements for the next twelve months.
 
In July and August 2014 we acquired Hubei Hang-ao Servo-valve Manufacturing Technology Co., Ltd. and Wuhan Optical Valley Orange Technology Co., Ltd. as the initial steps in our plan to diversify our operations. We anticipate that we will make additional acquisitions of growth companies in China in industries other than hog farming.  The consummation of such acquisitions will require that we deploy our capital and, possibly, seek to borrow funds or raise additional equity from the sale of our securities.  There is no guarantee that such debt or equity will be available on terms acceptable to us, if at all.  The sale of our equity will dilute the interests of our current shareholders.
 
Contractual Obligations and Off Balance Sheet Items
 
Contractual Obligations
 
We have certain fixed contractual obligations for which we have estimated our future payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may cause actual payments to differ from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following tables summarize our contractual obligations as of March 31, 2015 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
 

   
Payments Due by Period
 
   
Total
   
Less than 1 Year
   
1 – 3
Years
   
3 – 5
Years
   
Over 5
Years
 
Contractual obligations
                             
Bank loans
  $ 2,421     $ 2,421     $ -     $ -     $ -  
Others
    -       -       -       -       -  
    $ 2,421     $ 2,421     $ -     $ -     $ -  
 
Bank loans consist of short term bank loans. Historically, we have refinanced these bank loans for an additional term of one year and we expect to continue to refinance these loans upon expiration.
 
Off Balance Sheet Items
 
Under SEC regulations, we are required to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual arrangement to which any entity that is not consolidated with us is a party, under which we have:
 
 
 
any obligation under certain guarantee contracts,
 
 
any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
 
 
any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and
 
 
any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
 
We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial statements and our management’s discussion and analysis.

Accounts Receivable

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

As a basis for estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
 
Inventories

Inventories, consisting principally of our hogs held for sale, are stated at the lower of cost, as determined by the weighted-average method, or market. We compare 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.  The price of hogs could fluctuate upward or downward.  If prices were to decrease below the amounts we use in determining the carrying value of our inventory, any profit we might achieve on the sale of our inventories would be less than anticipated. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

Plant and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

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

 
  
Useful Life
Buildings
  
20 years
Vehicles
  
5-10 years
Office equipment
  
3-5 years
Research equipment
  
3-20 years
Production equipment
  
3-20 years

The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in disposition.

We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize 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
 

Construction in Progress

Construction in progress consists of amounts expended for building construction of new breeding and animal rearing facilities. Once construction of a building is completed and the facilities are approved for adequate breeding and animal rearing activity, and have commenced of animal rearing activities, the construction in progress assets are categorized as buildings and production equipment and accounted for in plant and equipment, whereupon they are depreciated over their estimated useful lives.

Included in construction in progress are new breeding and animal rearing facilities under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.
 
 
Biological Assets

Biological assets consist primarily of hogs purchased or selected from the Company’s own production for breeding and farrowing.  The costs to purchase and cultivate breeding hogs and the expenditures related to labor and materials to feed breeding hogs until they become commercially productive and breedable are capitalized. When breeding hogs are entered into breeding and farrowing, amortization of the costs incurred until they became commercially productive commences. The estimated production life for breeding hogs is three years, and the costs are amortized to a residual value, currently $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.  Similar to other assets, the failure of our biological assets to be serviceable over the entirety of their anticipated useful lives or to be sold at their anticipated residual value, will negatively impact our operating results.

Intangible Assets

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

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

Non-controlling Interest

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

Revenue Recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company generates revenues from (1) the business of breeding, raising, and selling hogs for use in Chinese pork meat production and the sale of hogs for breeding by other hog producers, (2) selling electro-hydraulic servo devices and providing maintenance services, and (3) delivering optical fiber hardware and software solutions for the security and protection industry. From September 30, 2011 until June 15, 2012, the Company also generated revenue from selling specialty pork products to retailers. In the second quarter of 2013, the Company resumed 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 the shipping of the hogs that they have purchased.
 
 
Revenues generated from sales of electro-hydraulic servo devices, providing maintenance services, and sales of optical fiber hardware and software solutions are recognized upon shipment and transfer of title or performance of the maintenance service.. Electro-hydraulic servo devices generally are sold with a one-year warranty. Maintenance service revenue is based on an estimated of the number of service person hours necessary to render a service and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment.

Currency Exchange Rates

Our functional currency is the U.S. dollar, and the functional currency of our operating subsidiaries and VIE is the RMB. All of our sales are denominated in RMB. As a result, changes in the relative values of U.S. dollars and RMB affect our reported levels of revenues and profitability as the results of our operations are translated into U.S. dollars for reporting purposes. In particular, fluctuations in currency exchange rates could have a significant impact on our financial stability due to a mismatch among various foreign currency-denominated sales and costs. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating subsidiaries. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

Our financial statements are expressed in U.S. dollars, which is the functional currency of our parent company. The functional currency of our operating subsidiaries and affiliates is RMB. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB against the U.S. dollar could result in a charge in our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results.

Stock Based Compensation

Stock based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award. The Accounting Standards Codification also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the period of services or the vesting period, whichever is applicable. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.
 
Item3.
Quantitative and Qualitative Disclosures about Market Risk.
 
Not applicable as the Company is a smaller reporting company.
 
 
Item4.
Controls and Procedures
 
Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Based upon their evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that our Disclosure Controls are effective as of the end of the period covered by this report.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in the Company’s internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
PART II     OTHER INFORMATION
 
Item 1A.
Risk Factors
 
Our business is subject to numerous risks and uncertainties including but not limited to those discussed in "Risk Factors" in our Annual Report on Form 10-K for fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 18, 2015 which are incorporated by reference into this report.

Item 6.
Exhibits
 
The following exhibits are filed herewith:
 
Exhibit
Number
 
 
Document
   
   
 31.1
 
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
 
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
     
32.1
  Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Aoxin Tianli Group, INC.
 
       
May 13, 2015
By:
/s/ Ping Wang  
   
Ping Wang
 
   
Chief Executive Officer
 
     (Principal Executive Officer)  
       
May 13, 2015
By:
/s/ Jun Wang  
   
Jun Wang
 
   
Chief Financial Officer
 
     (Principal Financial and Accounting Officer)