5
CHINA FORESTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS BACKGROUND
The Company was incorporated under the name of Patriot Investment Corp. on February 13, 1986 under the laws of the State of Nevada. In January 2008, the Company filed an amendment to its articles of incorporation to change the name to China Forestry Inc. (the Company). The Company is principally engaged in the growing and harvesting of timber and manufacture and marketing of lumber in the Peoples Republic of China (PRC) through its holdings and subsidiaries.
On June 26, 2007, the Company closed the share exchange transaction and acquired 100% Jin Yuan Global Limited, HK Holding Company, who directly owns 51% of Harbin Senrun Forestry Development Co., Ltd. (Harbin Senrun) and indirectly owns 49% of Harbin SenRun through a wholly 100% owned subsidiary Jin Yuan Global Limited Trust. Harbin Senrun was a PRC operating company that principally engaged in the growing and harvesting of timber and manufacture and marketing of lumber in the Peoples Republic of China (PRC).
On July 15, 2010, the Company closed the transactions contemplated by the Share Exchange Agreement and acquired Financial International (Hong Kong) Holdings Co. (FIHK), a holding company organized and existing under the laws of the Hong Kong SAR of the Peoples Republic of China on January 8, 2009, as its wholly owned subsidiary. FIHK has no other material operations except it has entered into a series of contractual obligations with Hanzhong Hengtai Bio-Tech Limited (Hengtai), a company organized and existing under the laws of the Peoples Republic of China on October 22, 2003.
Hanzhong Hengtai Bio-Tech Limited (Hengtai) is a company incorporated under the laws of the Peoples Republic of China (China) that engaged in the plantation and sale of garden plants used in landscaping, such as Chinese Yews of the types Taxus chinensis var. mairei and Taxus media, as well as the holders of 100% of the voting shares of Hengtai.
The Companys relationship with Hengtai and its shareholders is governed by a series of contractual arrangements among FIHK, Hengtai and the 100% holders of the share capital of Hengtai (the Hengtai Shareholders) entered on April 1, 2010. The contractual arrangements include a Consulting Services Agreement, a Business Operating Agreement, an Equity Pledge Agreement, an Exclusive Option Agreement, and a Voting Rights Proxy Agreement (collectively the VIE Agreements). Under the laws of China, the VIE Agreements constitute valid and binding obligations of the parties of such agreements. Each of the VIE Agreements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of China.
On December 14, 2010, following the resolution of the Board of Directors to terminate the timber business, the Company closed a sale and purchase transaction contemplated by a Sale and Purchase Agreement and sold 100% of Jin Yuan Global Limited along with all its directly or indirectly owned subsidiaries Harbin Senrun for $2,000. A loss of $640,786 was recognized from the disposal.
On May 20, 2011, the Board of Directors of the Company authorized the termination of the VIE Agreements. In connection with the termination of the VIE Agreements, FIHK exercised its rights under the Exclusive Option Agreement to direct XiAn Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the Peoples Republic of China (XiAn Qi Ying), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK.
The Exclusive Option Agreement was exercised in a manner that the Hengtai Shareholders transferred all of their equity capital in Hengtai to XiAn Qi Ying. At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the Peoples Republic of China (Spone), acquired all of the capital stock of XiAn Qi Ying, so that it became a direct wholly owned subsidiary of Spone. FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK.
As a result of the termination of the VIE Agreements, Hengtai became an indirect wholly owned subsidiary of the Company, and a direct wholly owned subsidiary of XiAn Qi Ying. Previously, the status of Hengtai under the VIE Agreements was a company that was controlled by FIHK pursuant to contractual provisions of the VIE Agreements whose equity capital was owned by the original Hentai Shareholders.
6
As a result of a series of reverse acquisition transactions above, the Company now owns all of the issued and outstanding capital stock of its subsidiaries. Since there is common control between the Company and all the subsidiaries, for accounting purposes, the acquisition of XiAn Qi Ying and Henngtai has been treated as a recapitalization with no adjustment to the historical basis of the assets and liabilities of the consolidated company based on Financial Accounting Standards Board (FASB) rules on business combinations and transactions among entities under common control. The restructuring has been accounted for using the as if pooling method of accounting and the operations were consolidated as if the restructuring had occurred as of the beginning of the earliest period presented in our consolidated financial statements and the current corporate structure had been in existence throughout the periods covered by our consolidated financial statements.
|
|
China Forestry, Inc. (CHFY)
|
|
100%
|
|
Financial International (Hong Kong) Holdings Company Limited (FIHK)
|
|
100%
|
|
Spone Limited (Spone)
|
|
100%
|
|
Xi'An Qi Ying Bio-Tech Limited (Xi'An Qi Ying)
|
|
100%
|
|
Hanzhong Hengtai Biotech Limited (Hengtai)
|
On June 15, 2012, the Company effected a 1-for-10 reverse stock split of the Companys issued and outstanding shares of common stock.The par value and number of authorized shares of the common stock remained unchanged. All references to number of shares and per share amounts included in these consolidated financial statements and the accompanying notes have been adjusted to reflect the reverse stock split retroactively.
2. GOING CONCERN
As reflected in the accompanying financial statements, the Company has accumulated deficits of $2,222,524 at June 30, 2012. The Companys owners have funded the losses and cash shortfalls allowing management to develop sales and contingency plans. The Company is also arranging for additional funding. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
7
a. Basis of Preparation
The accompanying financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). All significant intercompany accounts and transactions have been eliminated in consolidation.
b. Interim Financials
These interim unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. They do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the Companys audited financial statements and notes thereto contained in its report on Form 10-K for the year ended December 31, 2011.
The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Companys financial position at June 30, 2012, and the results of its operations and cash flows for the six month periods ended June 30, 2012 and 2011. The results of operations for the period ended June 30, 2012 are not necessarily indicative of the results to be expected for future quarters or the full year.
c. Variable Interest Entities
Prior to May 11, 2011, Hengtai is considered a variable interest entity (VIE), and FIHK, the Companys wholly owned subsidiary, is the primary beneficiary. The Companys relationships with Hengtai and its shareholders are governed by a series of contractual arrangements between the Company and Hengtai, which is an operating company in the PRC. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On April 1, 2010, FIHK entered into the following contractual arrangements with Hengtai:
(1) Consulting Services Agreement
. Pursuant to the consulting services agreement between FIHK and Hengtai, dated April 1, 2010, FIHK has the exclusive right to provide Hengtai with consulting services and daily operations, including general business operations in relation to business development, human resources, research and development, and business growth, and support the daily operation costs and daily expenses. Hengtai pays an annual consulting service fee to FIHK that is equal to 100% of Hengtais net revenue for such year, based on the annual financial statements. This agreement shall remain in force unless otherwise terminated. FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement. All intercompany transactions, including this service fee, have been eliminated in the consolidated financial statements presented.
(2) Business Operating Agreement
. Pursuant to the business operating agreement among FIHK and Hengtai, dated April 1, 2010, FIHK provides Hengtai guidance and instruction on Hengtais daily operations, financial management and employment issues. FIHK has the right to appoint or remove Hengtais directors and executive officers. In addition, FIHK agrees to guarantee Hengtais performance under any agreements or arrangements relating to its business arrangement with any third party. Upon the request of Hengtai, FIHK agrees to provide loans to support its operations capital requirements and to provide a guarantee if the Company needs to apply for loans from a third party. In return, Hengtai agrees to pledge its accounts receivable and all of its assets to FIHK. The term of this agreement is ten years; and may be extended or terminated only by 30-day prior written notice served by FIHK (or its designated party). FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement.
(3) Equity Pledge Agreement.
Under the equity pledge agreement between FIHK and Hengtai, dated April 1, 2010, Hengtais 100% shareholders pledged all of their equity interests in Hengtai to FIHK to guarantee its performance of its obligations under the Business Operating Agreement. If Hengtai or its shareholders breaches their respective contractual obligations, FIHK, as Pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The 100% shareholders of Hengtai also agreed that upon occurrence of any event of default, FIHK shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the 100% shareholders of Hengtai to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that FIHK may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The 100% shareholders of Hengtai agreed not to dispose of the pledged equity interests or take any actions that would prejudice FIHKs interest. This equity pledge agreement shall expire two years after Hengtais obligations under the Consulting Services Agreement have been fulfilled. FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement.
8
(4) Exclusive Option Agreement.
Under the exclusive option agreement between FIHK and Hengtai, dated on April 1, 2010, all the shareholders of Hengtai irrevocably granted to FIHK (or its designated person) an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Hengtai for the minimum amount of consideration permitted by applicable PRC law. FIHK (or its designated person) has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is ten (10) years from April 15, 2009 and may be extended prior to its expiration by written agreement of the parties.
(5) Voting Right Proxy Agreement.
Under the voting right proxy agreement between FIHK and Hengtai, dated on April 1, 2010, all shareholders of Hengtai agreed to irrevocably grant FIHK with the right to exercise the 100% shareholders of Hengtais voting rights and their other rights, including the attendance at and the voting of the all the shares held by 100% shareholders of Hengtai at shareholders meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and its Articles of Association, including but not limited to the rights to sell or transfer all or any of his equity interests of the Hengtai, and appoint and vote for the directors and Chairman as the authorized representative of the shareholders of the Hengtai. The proxy agreement may be terminated by joint consent of the parties or upon 30-day written notice from FIHK.
Under Article 1.06(c) of the Share Exchange Agreement, if FIHK does not execute and deliver the Exclusive Option Agreement described above to acquire Hengtai on or before September 30, 2010, the Company has the option to rescind the Share Exchange Agreement by delivering notice of rescission to FIHK and the shareholders of FIHK. The parties are to be returned to such position that they were in prior to entering into the Share Exchange Agreement, including, but not limited to, the return to the Company of the share certificates for 100,000,000 shares of common stock of the Company and the $1.0 million convertible promissory note issued by the Company, and the return to the shareholders of FIHK of the share certificates representing the FIHK Share Capital. The $50,000 cash payment by Hengtai as part of the Share Exchange Agreement will not be returned by the Company. The option agreement has not been exercised to date. However, FIHK is going through the approval process with the Chinese government to exercise the option to acquire Hengtai and it intends to do so. Nonetheless, the Company still has a right of rescission under the Share Exchange Agreement until the exercise of that option. There can be no assurances that the Chinese government will approve the exercise by FIHK of the option agreement to acquire Hengtai.
On May 20, 2011, the Board of Directors of the Company authorized the termination of variable interest entities (VIE) contracts. In connection with the termination of the VIE Contracts, FIHK exercised its rights under the Exclusive Option Agreement to direct XiAn Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the Peoples Republic of China (XiAn Qi Ying), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK.
The Exclusive Option Agreement was exercised in a manner that the Selling Shareholders transferred all of their equity capital in Hengtai to XiAn Qi Ying. At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the Peoples Republic of China (Spone), acquired all of the capital stock of XiAn Qi Ying, so that it became a direct wholly owned subsidiary of Spone. FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK.
As a result of the termination of the VIE Agreements, Hengtai became an indirect wholly owned subsidiary of the Company, and a direct wholly owned subsidiary of XiAn Qi Ying. Previously, the status of Hengtai under the VIE Agreements was a company that was controlled by FIHK pursuant to contractual provisions of the VIE Agreements whose equity capital was owned by the original Hentai Shareholders.
d. Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
e. Use of Estimates
In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported. Actual results may differ from these estimates. The Company regularly evaluates estimates and assumptions related to obsolete inventory, useful life and recoverability of long lived assets. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results
9
experienced by the Company may differ materially and adversely from the Companys estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
f. Financial Instruments
The carrying amount reported in the balance sheet for cash, accounts receivable, inventory, other receivables, short-term loans, accounts payable, other payables, accrued expenses, interest payable and long-term loans approximate fair value because of the immediate or short-term maturity of these financial instruments.
g. Fair Value Accounting
The Company adopted the standard Fair Value Measurements, codified with ASC 820 and effective January 1, 2008. The provisions of ASC 820 are to be applied prospectively.
ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e. the exit price at the measurement date). Under ASC 820, fair value measurements are not adjusted for transaction cost. ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
|
|
Level 1:
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2:
|
Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
|
|
|
Level 3:
|
Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
|
An asset or liabilitys level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
h. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits with banks. Cash deposits with banks are held in financial institutions in China, which have no federally insured deposit protection. Accordingly, the Company has a concentration of credit risk related to these uninsured deposits.
i. Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollected amounts through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for bad debts and a credit to accounts receivable.
j. Inventories
Inventories are stated at the lower of cost, as determined on a standard cost basis, or net present value. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Management also regularly evaluates the composition of the Companys inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.
k. Property, Plant, and Equipment
Property, plant and equipment are initially recognized recorded at cost. Gains or losses on disposals are reflected as gain or loss in the period of disposal. The cost of improvements that extend the life of plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.
10
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:
|
|
Buildings
|
10 years
|
Machinery and equipment
|
5 years
|
Transportation equipment
|
5 years
|
Office equipment
|
5 years
|
l. Intangible Assets
Intangible assets are stated in the balance sheet at cost less accumulated amortization. The costs of the intangible assets are amortized on a straight-line basis over their estimated useful lives. The respective amortization periods for the intangible assets are as follows:
Land use right 30-70 years
m. Impairment of Long-Lived Assets
The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with the standard, Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, codified with ASC 360, which requires the Group to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the assets (or asset groups) fair value.
n. Comprehensive Income
The standard, Reporting Comprehensive Income, codified with ASC 220, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income arose from the effect of foreign currency translation adjustments.
n. Revenue Recognition
The Company generates revenues from the sales of plants, such as Taxus mairei and etc. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales are presented net of value added tax (VAT). No return allowance is made as product returns are insignificant based on historical experience.
o. Advertising expense
The advertising costs are expensed as incurred and included in selling expenses.
p. Income Taxes
The Company accounts for income taxes in accordance with the standard, "Accounting for Income Taxes," codified with ASC 740. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future deductibility is uncertain.
The Company is exempt from paying income tax in China as it produces the products which fall into the tax exemption list issued by the Chinese government.
q. Earnings (Loss) Per Share
11
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. At June 30, 2012, the Company has an outstanding convertible debenture that is convertible into 6,800,000 shares of common stock. The potential dilution associated with convertible debt was excluded from the calculation for the six months ended June 30, 2011 as it will create an anti-dilutive effect. The basic and diluted earnings per share for the six months ended June 30, 2012 and 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
269,034
|
|
|
$
|
67,824
|
|
Net income without convertible interest expense
|
|
$
|
318,897
|
|
|
$
|
117,413
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
15,600,000
|
|
|
|
15,600,000
|
|
Dilution associated with convertible debt
|
|
|
6,800,000
|
|
|
|
-
|
|
Weighted average common shares outstanding diluted
|
|
|
22,400,000
|
|
|
|
15,600,000
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.017
|
|
|
$
|
0.004
|
|
Diluted earnings per share
|
|
$
|
0.014
|
|
|
$
|
0.004
|
|
r. Segment Information
The standard, Disclosures about Segments of an Enterprise and Related Information, codified with ASC 280, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Company believes that it operates in one business segment (research, development, production, marketing and sales) and in one geographical segment (China), as all of the Companys current operations are carried out in China.
s. Foreign Currency Translation
The Companys functional currency is Chinese Renminbi (RMB) and its reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.
The consolidated financial statements of the Company are translated into U.S. dollars in accordance with the standard, Foreign Currency Translation, codified with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency consolidated financial statements into U.S. dollars are included in determining comprehensive income. At June 30, 2012 and December 31, 2011, the cumulative translation adjustments of $202,009 and $204,350, respectively, were classified as items of accumulated other comprehensive income in the stockholders equity section of the balance sheet. For the six months ended June 30, 2012 and 2011, other comprehensive income (loss) was ($2,341) and $2,527, respectively.
The exchange rates used to translate amounts in RMB into U.S. dollars for the purposes of preparing the consolidated financial statements were as follows: As of June 30, 2012 and December 31, 2011, the Company used the period-end rates of exchange for assets and liabilities of $1 to RMB6.3249 and $1 to RMB6.294, respectively. For the six months ended June 30, 2012 and 2011, the Company used the periods average rate of exchange to convert revenues, costs, and expenses of $1 to RMB6.3188 and $1 to RMB6.5412, respectively. The Company used historical rates for equity.
t. Related Parties
A party is considered to be related to the Company if the party directly or indirectly or 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 of the Company and its management and other parties with which the Company may deal 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. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the
12
transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
u. Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
v. Recently Issued Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
.
This standard clarifies guidance on how to measure fair value and is largely consistent with existing fair value measurement principles. The ASU also expands existing disclosure requirements for fair value measurements and makes other amendments. For the Company, this ASU is effective prospectively beginning January 1, 2012. The adoption of this standard did not have a material impact on the Companys consolidated results of operations or financial condition.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, and in December 2011 issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. These standards require entities to present items of net income and other comprehensive income either in a single continuous statement, or in separate, but consecutive, statements of net income and other comprehensive income. The new requirements do not change which components of comprehensive income are recognized in net income or other comprehensive income, or when an item of other comprehensive income must be reclassified to net income. Also, the earnings-per share computation does not change. However, the current option under existing standards to report other comprehensive income and its components in the statement of changes in equity is eliminated. For the Company, these standards are effective retrospectively beginning January 1, 2012. Since these standards impact presentation and disclosure requirements only, their adoption did not have a material impact on the Companys consolidated results of operations or financial condition.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures About Offsetting Assets and Liabilities, which creates new disclosure requirements regarding the nature of an entitys rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. The ASU is effective January 1, 2013 with retrospective application required. Since this standard impacts disclosure requirements only, its adoption will not have a material impact on the Companys results of operations or financial condition.
In December 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update No. 2011-12 (ASU 2011-12), Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The provisions of ASU 2011-12 became effective in fiscal years beginning after December 15, 2011. The adoption of ASU 2011-12 did not materially impact our financial statements.
The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
4. SIGNIFICANT CONCENTRATIONS
Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist of cash and accounts receivable as of June 30, 2012 and December 31, 2011. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.
The major part of the Companys cash at June 30, 2012 and December 31, 2011 is maintained at one financial institution in the PRC which does not provide insurance for amounts on deposit. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
13
Geographic Concentration
For six months ended June 30, 2012 and 2011 the Companys sales were mainly made to customers located in the PRC.
In addition, total accounts receivables as of June 30, 2012 and December 31, 2011 also arose from customers located in the PRC.
Customer Concentration
In 2009, the Company changed its sales strategy by switching the focused product in the market. This change resulted in concentration on certain customers for the Companys sales. The following table sets forth information as to the revenue derived from those customers that accounted for more than 10% of our revenue for the six months ended June 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
For the Six Months Ended
|
|
|
June 30, 2012
|
|
|
June 30, 2011*
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Cheng Junhui
|
$
|
137,257
|
|
|
13%
|
|
|
|
|
|
|
|
Ruby Green Engineering Co., Ltd. Shanxi
|
|
289,388
|
|
|
27%
|
|
|
|
|
|
|
|
|
Wu Zhongliang
|
|
108,248
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*No customer accounted for more than 10% of total sales for the six months ended June 30, 2011.
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
Accounts receivable
|
|
$
|
172,883
|
|
|
$
|
81,048
|
|
Less: Allowance for doubtful accounts
|
|
|
(21,196
|
)
|
|
|
(18,629
|
)
|
Accounts receivable, net
|
|
$
|
151,687
|
|
|
$
|
62,419
|
|
Bad debt expense was 1,869 and $6,036 for the six months ended June 30, 2012 and 2011, respectively.
6. INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
Inventories
|
|
$
|
1,700,412
|
|
|
$
|
1,657,166
|
|
Less: Allowance for obsolescence
|
|
|
-
|
|
|
|
(30,446
|
)
|
Inventories, net
|
|
$
|
1,700,412
|
|
|
$
|
1,626,720
|
|
7. PREPAYMENT
As of June 30, 2012 and December 31, 2011, the Company made prepayment for rental of land and advance to suppliers for $129,770 and $129,817, respectively.
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
Buildings
|
|
$
|
20,566
|
|
|
$
|
20,446
|
|
Machinery and equipment
|
|
|
10,658
|
|
|
|
10,424
|
|
Transportation equipment
|
|
|
92,913
|
|
|
|
93,369
|
|
Office equipment
|
|
|
16,535
|
|
|
|
12,062
|
|
Total
|
|
|
140,672
|
|
|
|
136,301
|
|
Less: Accumulated depreciation
|
|
|
(95,227
|
)
|
|
|
(90,345
|
)
|
Add: Construction in process
|
|
|
40,439
|
|
|
|
38,001
|
|
Property, plant, and equipment, net
|
|
$
|
85,884
|
|
|
$
|
83,957
|
|
The depreciation was $5,011 and $2,599 for the six months ended June 30, 2012 and 2011, respectively. They are broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cost of goods
|
|
$
|
1,208
|
|
|
$
|
910
|
|
Operating expenses
|
|
|
3,803
|
|
|
|
1,689
|
|
Total
|
|
$
|
5,011
|
|
|
$
|
2,599
|
|
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
Land use right
|
|
$
|
11,542
|
|
|
$
|
11,598
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
(1,932
|
)
|
|
|
(1,823
|
)
|
Intangible assets, net
|
|
$
|
9,610
|
|
|
$
|
9,775
|
|
The amortization for land use right was $101 and $97 for the six months ended June 30, 2012 and 2011, respectively. They are broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cost of goods
|
|
$
|
101
|
|
|
$
|
97
|
|
Operating expenses
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
50
|
|
|
$
|
48
|
|
As of June 30, 2012 and December 31 2011, land use right of the Company, was pledged as collateral under certain loan agreements (see Note 10)
15
10. SHORT-TERM LOANS
Short-term loans consist of the following:
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Loan Amount
|
|
Duration
|
|
Annual Interest Rate
|
|
Collateral
|
Agricultural Development Bank of China-Hanzhong Branch
|
|
$
|
528,320
|
|
2009.9.8-2010.9.7
|
|
9.38%
|
|
737 mu (491,357.9 square meters) of forest land use right
|
Chang'An Bank-Hanzhong Branch
|
|
|
205,537
|
|
2007.7.9- 2008.7.8
|
|
15.77%
|
|
Credit loan
|
|
|
|
733,767
|
|
|
|
|
|
|
Loans from nonfinancial institutions and individuals
|
|
|
200,150
|
|
|
|
|
|
|
Total
|
|
$
|
933,917
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Loan Amount
|
|
Duration
|
|
Annual Interest Rate
|
|
Collateral
|
Agricultural Development Bank of China-Hanzhong Branch
|
|
$
|
538,608
|
|
2009.9.8-2010.9.7
|
|
8.96%
|
|
737 mu (491,357.9 square meters) of forest land use right
|
Chang'An Bank-Hanzhong Branch
|
|
|
214,490
|
|
2007.7.9- 2008.7.8
|
|
15.77%
|
|
Credit loan
|
|
|
|
753,098
|
|
|
|
|
|
|
Loans from nonfinancial institutions and individuals
|
|
|
301,229
|
|
|
|
|
|
|
Total
|
|
$
|
1,054,327
|
|
|
|
|
|
|
Interest expense for short-term loans was $47,546 and $80,694 for the six months ended June 30, 2012 and 2011, respectively.
Forest land use right secured for short-term loans is use right of 737 MU (491,357.9square meters) forest land granted from government with carrying value as the followings:
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
Land use right
|
|
$
|
352
|
|
|
$
|
358
|
|
Loans from nonfinancial institutions and individuals are made for the Companys operational need. The loans are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. The interest rates for loans to nonfinancial institutions and individuals are from 10%~15%.
The loans are currently past due and the related interest expenses have been accrued. The loan from Chang'An Bank-Hanzhong Branch accordingly increased interest rate due to default.
16
11. LONG-TERM LOANS
Long-term loans consist of the following:
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Amount
|
|
|
Duration
|
|
Annual Interest Rate
|
|
Collateral
|
The Bureau of Finance of Chenggu County
|
|
$
|
79,091
|
|
|
2006.3.9 - 2010.11.30
|
|
2.40%
|
|
Credit Loan
|
Less: principal due within one year
|
|
|
(79,091
|
)
|
|
|
|
|
|
|
Total, net
|
|
$
|
-
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Amount
|
|
|
Duration
|
|
Annual Interest Rate
|
|
Collateral
|
The Bureau of Finance of Chenggu County
|
|
$
|
79,479
|
|
|
2006.3.9 - 2010.11.30
|
|
2.40%
|
|
Credit Loan
|
Less: principal due within one year
|
|
|
(79,479
|
)
|
|
|
|
|
|
|
Total, net
|
|
$
|
-
|
|
|
|
|
|
|
|
Total Interest expense for long-term loans was $950 and $918 for the six months ended June 30, 2012 and 2011, respectively.
The loan is currently past due and the related interest expense has been accrued. The Company is subject to related penalty from the Bureau of Finance of Chenggu County due to default.
12. CONVERTIBLE PROMISSORY NOTE-SHAREHOLDERS
The $1,000,000 convertible promissory note was issued to FIHKs prior shareholders to execute Shares Exchange Agreement between the Company and FIHK on July 15 2010. The outstanding principal amount of this Note, together with all accrued and unpaid interest due thereunder is convertible into Six Million and Eight Hundred Thousand (6,800,000) shares of the Companys common stock. The note bears a 10% annual interest rate and its principal and accrued interest are due on June 3, 2015 or on such earlier date that the note is converted.
For the six months ended June 30, 2012 and 2011, the interest expense for this note was $49,863 and $49,589, respectively.
13. GERNERAL AND ADMINISTRATIVE
For the six months ended June 30, 2012 and 2011, the amount of general and administrative expenses mainly composed of the following events:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Office expense
|
|
$
|
7,119
|
|
|
$
|
10,229
|
|
Salary and welfare
|
|
|
27,659
|
|
|
|
25,972
|
|
Employee insurance
|
|
|
10,553
|
|
|
|
8,058
|
|
Audit and accounting
|
|
|
16,485
|
|
|
|
16,014
|
|
Legal service fee
|
|
|
15,104
|
|
|
|
1,529
|
|
Entertainment fee
|
|
|
14,970
|
|
|
|
14,652
|
|
Depreciation expense
|
|
|
3,803
|
|
|
|
1,689
|
|
Bad debt expense
|
|
|
1,869
|
|
|
|
6,036
|
|
Others
|
|
|
44,662
|
|
|
|
32,594
|
|
Total
|
|
$
|
142,224
|
|
|
$
|
116,773
|
|
17
14. CHINA CONTRIBUTION PLAN
Full time employees of the Company participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Companys subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations. The Company has no further commitments beyond its monthly contribution. For the six months ended June 30, 2012 and 2011, the total provisions for such employee benefits were $10,553 and $8,058, respectively.
Though provisions were made, the Company did not make full monthly contribution to these funds. In the event that any current or former employee files a complaint with the PRC government, the Company may be subject to administrative fines. As the Company believes that these fines would not be material, no accrual for such fines has been made in this regard.
15. STATUTORY RESERVES
Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable statutory surplus reserve fund. Subject to certain cumulative limits, the statutory surplus reserve fund requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC ("PRC GAAP") at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the reserve fund. For foreign invested enterprises, the annual appropriation for the reserve fund cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss. Therefore, the Company did not make any appropriations to the reserve funds mentioned above.
16.
RELATED PARTY TRANSACTION
All transactions associated with the following companies or individuals are considered to be related party transactions.
|
|
|
Name
|
|
Relationship
|
|
|
|
Hanzhong Bashan God Grass Biological Development Co., Ltd.
|
|
A company controlled by relative of Hengtai's CEO
|
Yang, Yung Li
|
|
*Previous owner of Hengtai
|
Shau, Jen Heng
|
|
*Previous owner and CEO of Hengtai
|
Qinba Taxus Association
|
|
An organization controlled by the Company
|
Liu, Sheng Li
|
|
Chairman, President and Director,
|
*In September 2010, Xian Qiying Bio-Tech Limited acquired 100% capital of Hengtai from previous owners.
Due to related parties
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
Name
|
|
2012
|
|
|
2011
|
|
Yang, Yung Li
|
|
$
|
76,023
|
|
|
$
|
76,397
|
|
Shau, Jen Heng
|
|
|
93,122
|
|
|
|
88,018
|
|
Total
|
|
$
|
169,145
|
|
|
$
|
164,415
|
|
"Due to related parties" represents loans payable that are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. Due to related parties is subject to interest rate from 10%~15%.
18
Interest expense for related party loans was $6,335 and $4,118 for the six months ended June 30, 2012 and 2011, respectively.
Other receivables-related parties
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
December 31
|
|
Name
|
|
2012
|
|
|
2011
|
|
Yang, Yung Li
|
|
$
|
15,494
|
|
|
$
|
-
|
|
Hanzhong Bashan God Grass Biological Development Co., Ltd.
|
|
|
-
|
|
|
|
75,279
|
|
17. CONTINGENCIES, RISKS AND UNCERTAINTIES
Country Risk
The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in or have a material adverse effect upon the Companys business and financial condition.
18. OPERATING LEASE COMMITMENT
The Company leases land under operating leases which are for 3~30 years and, expire beginning on April 30, 2011. The rents were $21,911 and $16,387 for the six months ended June 30, 2012 and 2011, respectively.
They are broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cost of goods
|
|
$
|
21,911
|
|
|
$
|
16,387
|
|
Operating expenses
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
21,911
|
|
|
$
|
16,387
|
|
Future minimum lease payments for operating leases with initial or remaining noncancelable terms in excess of one year are as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
2012
|
|
$
|
41,224
|
|
2013
|
|
|
39,580
|
|
2014
|
|
|
38,983
|
|
2015
|
|
|
35,612
|
|
2016
|
|
|
34,858
|
|
|
|
$
|
190,257
|
|
19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words believe, expect, anticipate, optimistic, intend, will, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements.
GENERAL DESCRIPTION OF BUSINESS
Introduction
We were originally incorporated in Nevada on January 13, 1986. Since inception, we have not had active business operations and were considered a development stage company. In 1993, we entered into an agreement with Bradley S. Shepherd in which Mr. Shepherd agreed to become an officer and director and use his best efforts to organize and update our books and records and to seek business opportunities for acquisition or participation. The acquisition of the share capital of Hong Kong Jin Yuan was such an opportunity.
As a result of a Share Exchange, Hong Kong Jin Yuan became our wholly-owned subsidiary, Harbin SenRun became our indirect wholly-owned subsidiary, and we succeeded to the business of Harbin SenRun Forestry Development Co., Ltd., a producer of forest products with approximately 1,561 hectares of State forest assets located mainly over the Small Xing An Mountains, Jin Yin County, and the Harbin Wu Chang District of Heilongjiang Province of Northern China.
Harbin SenRun was founded in 2004. Historically, it had a workforce of approximately 8 full time employees, mainly in sales, administration and in supporting services. It recruited temporary part-time workers to carry out felling, cutting and forestry plantation and protection. Its principal revenue was log sales.
Harbin SenRun lost its wood-cutting quota for log sales from the Bureau of Forestry for the year ended December 31, 2007, and, as a result, did not have any revenues for that period. While Harbin Senrun has applied for a wood cutting quota in subsequent years, it has not been successful in acquiring one.
On December 14, 2010, we simultaneously entered into and closed the transactions contemplated by a Sale and Purchase Agreement with Land Synergy Limited (as Purchaser), a company incorporated in the British Virgin Islands (Land Synergy) and sold to Land Synergy 100% of the share capital of Hong Kong Jin Yuan, including its wholly-owned subsidiary, Harbin SenRun, for US$2,000. As a result, we no longer engage in the timber business operations.
On July 15, 2010, we entered into a Share Exchange with Financial International (Hong Kong) Holdings Co. Limited (FIHK).
From April 1, 2010 to May 20, 2011, FIHK had a series of contractual arrangements with Hanzhong Hengtai Bio-Tech Limited (Hengtai), a company organized and existing under the laws of the Peoples Reuplic of China that is engaged in the plantation and sale of garden plants used for landscaping, including Chinese Yew, Aesculus, Dove Tree and Dendrobium.
In
May 20, 2011, FIHK exercised its rights under the Exclusive Option Agreement to direct XiAn Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the Peoples Republic of China (XiAn Qi Ying), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai. The Exclusive Option Agreement was exercised in a manner that the shareholders of Hengtai transferred all of their equity capital in Hengtai to XiAn Qi Ying. At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the Peoples Republic of China (Spone), acquired all of the capital stock of XiAn Qi Ying, so that it became a direct wholly owned subsidiary of Spone. FIHK then acquired
20
all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK and also accordingly became the indirect wholly owned subsidiary of us.
Hengtai was incorporated on October 22, 2003 with a registered capital of 15.0 million RMB. The registered address of Hengtai is in Economic Development Zone of Hanzhong City, Shaanxi Province, China. Hengtai possesses several permits and licenses for its plantation business, including a Seedling Production Permit, a Forestry User Right, and a Seedling Operations Permit.
Chinese Yew is the major product of Hengtai and the company plants two types that carry the biological names Taxus chinensis var. mairei and Taxus media. Currently, they take up approximately 28% of the planting area of the company.
Hengtai currently has 29 full-time employees, including 3 members of management, 19 agricultural experts, 5 employees in sales and marketing, and 2 administrative employees.
On June 15, 2012, the Company effected a 1-for-10 reverse stock split of the Companys issued and outstanding shares of common stock. The par value and number of authorized shares of the common stock remained unchanged. All references to number of shares and per share amounts included in these consolidated financial statements and the accompanying notes have been adjusted to reflect the reverse stock split retroactively.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011
Net Sales
We had net sales of $332,352 for the three months ended June 30, 2012 as compared to $337,590 for the three months ended June 30, 2011, a decrease of $5,238 or approximately 2%.
Cost of Sales and Gross Profit
For the three months ended June 30, 2012, cost of sales amounted to $244,334 as compared to cost of sales of $261,964 for the three months ended June 30, 2011. Gross profit for the three months ended June 30, 2012 was $88,018, as compared to $75,626 for the three months ended June 30, 2011. Gross margin for the periods was 26% and 22%, respectively.
Operating Expenses
For the three months ended June 30, 2012, total operating expenses were $107,469 as compared to $65,037 for the three months ended June 30, 2011, an increase of $42,432, or approximately 65%. The increase was mainly due to increase in accounting and legal fees and depreciation expenses. The Company also increased selling expenses by advertising and promotions to attract customers.
Other Income (Expenses), net
For the three months ended June 30, 2012, total other income was $19,338 as compared to total other expenses of $(37,110) for the three months ended June 30, 2011. The increase in total other income for the three month period ended June 30, 2012 as compared to June 30, 2011 was attributable to subsidy and incentives received from the government with a reduction in short-term loan interest expense.
Net Income (Loss)
As a result of these factors, we reported a net loss of $113 or $0 per share for the three months ended June 30, 2012, as compared to a net loss of $26,521 or $0 per share for the same period in 2011. The decrease in net loss was attributable to increase in gross margin on the goods sold with a decrease in interest expenses on loans. The Company also received additional subsidy from the government.
Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011
Net Sales
21
We had net sales of $1,076,315 for the six months ended June 30, 2012 as compared to $868,579 for the six months ended June 30, 2011, an increase of $207,736 or approximately 24%. The increase in sales was resulted from increased advertisements and promotions during the Chinese New Year holiday season for the period of January to March 2012.
Cost of Sales and Gross Profit
For the three months ended June 30, 2012, cost of sales amounted to $790,775 as compared to cost of sales of $682,098 for the six months ended June 30, 2011. Gross profit for the six months ended June 30, 2012 was $285,540, as compared to $186,481 for the six months ended June 30, 2011. Gross margin for the periods was 27% and 21%, respectively.
Operating Expenses
For the six months ended June 30, 2012, total operating expenses were $192,583 as compared to $141,168 for the six months ended June 30, 2011, an increase of $51,415, or approximately 36%. The increase was mainly due to increase in accounting and legal fees and depreciation expenses. The Companys selling expenses increased due to increased sales personnels wages and salaries.
Other Income (Expenses), net
For the six months ended June 30, 2012, total other income was $176,077 as compared to of $22,511 for the six months ended June 30, 2011. The increase in total other income for the three month period ended June 30, 2012 as compared to June 30, 2011 was attributable to subsidy and incentives received from the government with a reduction in short-term loan interest expense.
Net Income (Loss)
As a result of these factors, we reported a net income of $269,034 or $0.02 per share for the six months ended June 30, 2012, as compared to a net income of $67,824 or $0 per share for the same period in 2011. The increase in net income was attributable to increase in sales revenues during the Chinese New Year holiday due to effective advertising and promotions. The Company was able to maintain a higher gross margin on the goods sold along with a decrease in interest expenses on loans. The Company also received additional subsidy from the government
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents
At June 30, 2012, we had cash and cash equivalents of $103,753. Our working capital was $401,759 and $136,828 at June 30, 2012 and December 31, 2011, respectively.
Operating activities
Net cash provided in operating activities for the six months ended June 30, 2012 was $152,944 as compared to net cash provided in operating activities of $88,179 for the six months ended June 30, 2011.
For the six months ended June 30, 2012, we had net income of $269,034. Our inventories increased by $73,692, accounts payable decreased by $18,427, accounts receivable increased by $91,136, other receivables increased by $28,260, accrued liabilities and other current liabilities increased by $88,397, offset by non-cash items such as depreciation and amortization of $5,112; and bad debt allowance of $1,869.
For the six months ended June 30, 2011, we had net income of $67,824, our inventories increased by $82,890, accounts payable increased by $20,124, restricted cash decreased by $28,833, accounts receivable decreased by $950, other receivables decreased by $32,333, prepayments increased by $27,534, accrued liabilities and other current liabilities increased by $39,195, offset by non-cash items such as depreciation and amortization of $2,696, provision for bad debts of $6,036 and loss on disposal of property, plant and equipment of $612.
Investing activities
Net cash provided by investing activities for the six months ended June 30, 2012 was $52,435 as compared to net cash used in investing activities for the six months ended June 30, 2011 was $96,132.
22
For the six months ended June 30, 2012, we acquired property and equipment of $7,350. In addition, we received $59,785 from our related parties as repayment of loans.
For the six months ended June 30, 2011, we received net proceeds of $612 from the disposal of property, plant and equipment. We acquired property and equipment of $58,949 and made loans to related parties of $37,795.
Financing activities
Net cash used in financing activities for the six months ended June 30, 2012 was $116,068 as compared to net cash provided by financing activities for the six months ended June 30, 2011 of $47,316.
For the six months ended June 30, 2012, we repaid $120,798 of loans. We have borrowed 5,104 from related parties and repaid $374 to related parties.
For the six months ended June 30, 2011, we received proceeds of $37,500 from related parties and repaid $15,856 to related parties. We received proceeds of $67,946 and made repayment of $55,524 for loans.
We have not generated sufficient cash flows from operations. If we do not generate enough revenues from the sales of our products to meet our cash needs, we will need other financing to continue to operate. As we work to increase sales of our products, we expect to increase cash flows from operations. However, we may choose at any time to raise capital through private debt or equity financing to strengthen our financial position and facilitate growth.
Related Parties Transactions
We have historically funded our cash needs through a series of debt transactions, primarily with related parties. Amounts due to related parties as of June 30, 2012 and December 31, 2011 were $169,145 and $164,415, respectively.
Significant Accounting Policies
Information regarding new accounting standards is included in Note 3 to the Consolidated Financial Statements.
23
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for Smaller Reporting Company.
ITEM 4 - CONTROLS AND PROCEDURES
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation performed, our management concluded that during the period covered by this report, our internal controls over financial reporting were effective.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 30, 2012, that the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.
Changes in internal control over financial reporting
During the quarter ended June 30, 2012, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any legal proceedings to which we are a party or of which our property is the subject. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None in the quarter ended June 30, 2012.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
24
ITEM 6 EXHIBITS
|
|
31.1
|
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
|
|
|
31.2
|
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
|
|
|
32.1
|
Certification of the Company's Chief Executive Officer Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
101
|
The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.
|
SIGNATURES
Pursuant to the requirements of he Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA FORESTRY, INC.
(Registrant)
|
|
|
|
August 14, 2012
|
/s/ Shuncheng Ma
|
|
Shuncheng Ma
|
|
Chief Financial Officer
|
|
(Principal Accounting Officer)
|
25