The financial statements required by this
item are set forth beginning on page F-1.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - ORGANIZATION AND BUSINESS BACKGROUND
China Health
Industries Holdings, Inc. (“China Health US”) was incorporated in the State of Arizona on July 11, 1996 and was the
successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it entered into a Stock Purchase Agreement
and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”), a Delaware corporation, and changed
its name to Universal Fog, Inc. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since
1996) became a wholly-owned subsidiary of Edmonds 6.
China Health
Industries Holdings Limited ("China Health HK") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance
as a limited liability company. China Health HK was formed for the purpose of seeking and consummating a merger or acquisition
with a business entity organized as a private corporation, partnership, or sole proprietorship as defined by FASB ACS topic 915
(“Development Stage Entities”).
Harbin Humankind
Biology Technology Co., Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic
of China (the "PRC") on December 14, 2003, as a limited liability company under the Company Law of PRC. Humankind
is engaged in the manufacture and sale of health products and “green” (or organic) food, and the detection of disease
susceptibility or pre-disposition through genetic studies.
On August
20, 2007, the sole shareholder of China Health, Ltd entered into a share purchase agreement (“Share Purchase Agreement”)
with the owners of Humankind. Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the ownership in Humankind
for a cash consideration of $60,408 (“Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind
became a wholly-owned subsidiary of China Health HK. The share purchase transaction was accounted for as a “reverse merger”:
since the owner of Humankind owned a majority of the outstanding shares of China Health HK’s common stock immediately following
the execution of the Share Purchase Agreement, it was deemed to be the acquirer in the reverse merger. Consequently, the assets
and liabilities and the historical operations that have been reflected in the financial statements for periods prior to the Share
Purchase are those of Humankind and have been recorded at the historical cost basis. After completion of the Share Purchase, China
Health HK’s consolidated financial statements include the assets and liabilities of both China Health HK and Humankind,
the historical operations of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the
Share Purchase.
On October
14, 2008, Humankind set up a 99% owned subsidiary Harbin Huimeijia Medicine Company (“Huimeijia”) with its primary
business being manufacturing and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of Huimeijia.
Huimeijia is consolidated in the consolidated financial statements of China Health HK.
On December
31, 2008, China Health HK. entered into a reverse merger with Universal Fog, Inc., a U.S. publicly traded shell company (the “Transaction”).
China Health HK is the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health
US. After the Transaction and a 20:1 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3%
of the 62,234,737 total outstanding shares of common stock of China Health US. On April 7, 2009, Mr. Sun transferred 28,200,000
shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of China Health US, or approximately
53.03% of the total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries Holdings,
Inc. on February 19, 2009.
China Health
US, China Health HK, Humankind, and Huimeijia are collectively referred herein to as the “Company.”
Our present
corporate structure is as follows:
Note
2 - SIGNIFICANT ACCOUNTING POLICIES
This summary
of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.
The financial statements and notes are representations of the Company’s management, which is responsible for their integrity
and objectivity. These accounting policies conform to generally accepted accounting principles in the United States ("GAAP")
and have been consistently applied in the preparation of the consolidated financial statements.
Principles
of Consolidation
The accompanying
consolidated financial statements include China Health Industries Holdings, Inc., a Delaware corporation and a public company,
and its three subsidiary companies, China Health Industries Holdings Limited, Harbin Humankind Biology Technology Co., Limited
and Harbin Huimeijia Medicine Company. All significant intercompany balances and transactions have been eliminated in consolidation.
Effective
January 1, 2009, the Consolidation Topic, ASC 810-10-45-16, revised the accounting treatment for non-controlling minority interests
of partially-owned subsidiaries. Non-controlling minority interests represent the portion of earnings that is not within the parent
company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet.
These amounts are immaterial as of June 30, 2013, June 30, 2012 and June 30, 2011, respectively. Additionally, this statement
requires net income from non-controlling minority interests to be shown separately on the consolidated statements of income. These
amounts are immaterial for the years ended June 30, 2013, 2012 and 2011, respectively. All significant intercompany balances and
transactions have been eliminated in consolidation.
Segment
Reporting
The Company
operates in one segment in accordance with the accounting guidance FASB ASC topic 280, “Segment Reporting.” Our chief
financial officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
All revenue
is from customers in People’s Republic of China (“PRC”). All of the company’s assets are located in PRC.
Fair
Value of Financial Instruments
The Company
applies the provisions of accounting guidance, FASB ASC Topic 820 that requires all entities to disclose the fair value of financial
instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate
fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
Fair
Value Measurements
FASB ASC
Topic 820,
Fair Value Measurements and Disclosures
, clarifies the definition of fair value for financial reporting, establishes
a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
Various
inputs are considered when determining the fair value of the Company’s debt. The inputs or methodologies used for valuing
securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized
in the three broad levels listed below.
|
Level 1 – observable
market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
Level 2 – other
significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
|
|
Level 3 – significant
unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
|
The carrying
value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets
and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The
Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial
assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement
is prepared. The Company had no financial assets or liabilities carried and measured on a recurring basis during the reporting
periods.
The availability
of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type
of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial
instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market
participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs
are less observable in the market and may require management judgment.
Translation
of Foreign Currencies
Humankind
and Huimeijia maintain their books and accounting records in PRC currency “Renminbi” (“RMB”), which has
been determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the
exchange rates prevailing on the date of the transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains
and losses resulting from these transactions are included in operations.
Humankind
and Huimeijia’s financial statements are translated into the reporting currency, the United States Dollar (“USD”).
Assets and liabilities of China Health are translated at the prevailing exchange rate at each reporting period end date. Contributed
capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are
translated at the average rate of exchange during the reporting period. Translation adjustments resulting from the translation
of these financial statements are reflected as accumulated other comprehensive income in shareholders’ equity.
Use of
Estimates
The preparation
of financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. China Health bases its estimates and judgments on historical
experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates
and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change
as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.
The more significant estimates and assumptions by management include, among others, useful lives and residual value of long-lived
assets, valuation of inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, intangible
assets and deferred taxes. While the Company believes that the estimates and assumptions used in the preparation of the financial
statements are appropriate, actual results could differ from those estimates.
Statement
of Cash Flows
In accordance
with Statement FASB ASC Topic 230,
Statement of Cash Flows
, cash flow from the Company's operations is calculated based
upon the local currencies. As a result, amounts related to assets and liabilities reported in the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance sheet.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments
which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
The company
maintains cash and cash equivalents at several financial institutions. Only accounts at US financial institutions are insured
by the Federal Deposit Insurance Corporation (FDIC). As of June 30, 2013, 2012 and 2011, the Company’s
uninsured bank balances totaled $28,839,609, $44,500,205 and $23,740,502, respectively, which were mainly maintained at financial
institutions located in the PRC. As of June 30, 2013, 2012 and 2011, the Company’s insured bank balances,
all of which were maintained at US financial institutions, totaled $0, $4,326 and $4,318, respectively.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. China Health extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due
accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements,
aging of receivables, payment history, the customer’s current credit worthiness, and the economic environment.
Concentrations
of Credit Risk
All of the
Company’s manufacturing is located in the PRC. There can be no assurance that the Company will be able to successfully continue
to manufacture its products and failure to do so would have a material adverse effect on the Company’s financial position,
results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies,
some of which are beyond management’s control. These contingencies include general economic conditions, prices of raw materials,
competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade in the
PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s
operations will be subject to the risks of restrictions on transfer of funds, domestic and international customs, changing taxation
policies, foreign exchange restrictions, and political and governmental regulations.
The Company
operates in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of
foreign exchange rates between U.S. dollars and the Chinese currency RMB. The results of operations denominated in foreign currency
are translated at the average rate of exchange during the reporting period.
Earnings
Per Share
Basic earnings
per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common
shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options and warrants. For the years ended June 30, 2013, 2012 and
2011, the Company had no potential dilutive common stock equivalents outstanding.
Potential
common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained
upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used
to purchase common stock at the average market price of the common stock during the period.
FASB ASC
Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic and diluted earnings
per share (EPS) computations.
Prepaid
Expenses
Prepaid
expenses principally include prepaid R&D expenses and advances to raw material suppliers.
The Company has entered into five
Technology Development Agreements (the “Agreements”) with Shenyang Pharmaceutical University and Jiamusi
Pharmaceutical University (the “Contractors”) during the period from April 9, 2010 through July 7, 2010. The
Agreements entrust the Contractors to develop different tablet and health food products and obtain approval for the
correlated registration or certification within a certain period (3 years) on behalf of the Company. As of June 30, 2013,
2012 and 2011, the total payments made by the Company to the Contractors were $1,466,419 (RMB 9 million), $1,416,654 (RMB 9
million) and $1,392,434 (RMB 9 million), respectively. The Company is recognizing the payments to the Contractor as prepaid
expenses, and is recognizing R&D expenses ratably over the terms of the Agreements. As of June 30, 2013, 2012 and 2011,
prepaid expenses amounted to $156,750, $600,321 and $900,928, respectively.
The
Company periodically makes advances to certain vendors for purchases of raw materials, and records those advances as advances
to suppliers. Advances to suppliers as of June 30, 2013, 2012 and 2011 amounted to $65,126, $99,317 and $106,702,
respectively.
Inventory
Inventory
consists of raw material, work in progress and finished goods of manufactured products.
Inventory
is stated at lower of cost or market and consist of materials, labor and overhead. The Company determines the cost of inventory
by the first-in, first-out method. The value of inventory is determined using the weighted average cost method and includes any
related production overhead costs incurred in bringing the inventory to its present location and condition. Overhead costs included
in finished goods include direct labor cost and other costs directly applicable to the manufacturing process. The Company evaluates
inventory for excess, slow moving, and obsolete inventory as well as inventory the volume of which is in excess of its net realizable
value. This evaluation includes analyses of sales levels by product and projections of future demand. In order to state the inventory
at lower of cost or market, the Company maintains reserves against its inventory. If future demand or market conditions are less
favorable than the Company’s projections, a write-down of inventory may be required, and would be reflected in cost of goods
sold in the period the revision is made. Inventory amounts are reported net of such allowances.
Management
has recorded an inventory allowance of $0, $0 and $0 as of June 30, 2013, 2012 and 2011, respectively.
Impairment
of Long-Lived Assets
The Company’s
long-lived assets and other assets are reviewed for impairment in accordance with the guidance of the FASB ASC Topic 360-10, “
Property,
Plant, and Equipment
,
”
and FASB ASC Topic 205
“Presentation of Financial Statements
.
”
The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If
such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount
of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future
cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material
effect on our reporting results and financial position. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through June 30, 2013, 2012 and 2011, the Company has not experienced impairment losses on its long-lived assets. However,
there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment
of long-lived assets in the future.
Property,
Plant and Equipment
Property,
plant and equipment are carried at the lower of cost or fair value. Maintenance, repairs and minor renewals are expensed as incurred;
major renewals and improvements that extend the lives or increase the capacity of plant assets 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 the reporting period of disposition.
Depreciation
is calculated on a straight-line basis over the estimated useful life of the assets. The percentages or depreciable life applied
are:
Building, Warehouse and Improvements
|
|
20 to 30 years
|
Land Use Rights
|
|
50 years
|
Furniture & Equipment
|
|
5 to 7 years
|
Transportation Equipment
|
|
5 to 15 years
|
Machinery and Equipment
|
|
7 to 15 years
|
Intangible
Assets
The Company
evaluates intangible assets in accordance with FASB ASC Topic 350, “
Intangibles — Goodwill and Other.”
Intangible
assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. If the assumptions and estimates
used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset
impairment charges could be required. The value of our intangible assets could be impacted by future adverse changes such as:
(i) any future declines in our operating results, (ii) a decline in the valuation of technology, including the valuation of our
common stock, (iii) a significant slowdown in the worldwide economy or (iv) any failure to meet the performance projections included
in our forecasts of future operating results. In accordance with FASB ASC Topic 350, the Company tests intangible assets for impairment
on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management
estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future
operating results that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect.
If our actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used
to assess the recoverability of these assets, we could incur additional impairment charges in a future period.
Intangible
assets consist of patents and land use right. Patent costs are amortized over an estimated life of ten years.
Pharmaceutical
Patents
On June
9, 2007, the Company entered into a Purchase Agreement, pursuant to which the Company agreed to purchase pharmaceutical patents
from a third party for $518,135 (RMB 3,180,000). As of June 30, 2013, 2012 and 2011, the Company amortized all
the pharmaceutical patents at the purchase price.
Health
Supplement Product Patents
On January
18, 2013, the Company entered into a Purchase Agreement, pursuant to which the Company agreed to purchase health supplement product
patents from a third party for $4,888,063 (RMB 30,000,000). The Company recorded the health supplement product patents at the
purchase price and will amortize the costs, over their estimated 10-year beneficial period, using the straight-line method. There
were no impairments during the year ended June 30, 2013. As of the June 30, 2013, these health supplement product patents have
a net balance of $4,765,862.
Land
Use Right
All land
belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain the right to use a piece of land for
commercial purposes or residential purposes for an initial period of 50 years or 70 years, respectively. The land use right can
be sold, purchased, and exchanged in the market. The successor owner of the land use right will have the right to use the land
for the time remaining after reducing the time which has been consumed by the predecessor owner from the initial period. On June
7, 2004, the Company entered into a Purchase Contract with the local government, pursuant to which the Company agreed to purchase
the right to use an approximately 8-acre piece of land in Harbin County, Heilongjiang Province for commercial purposes over a
fifty-year period from June 7, 2004 through June 6, 2054, for $855,085 (RMB 5,248,000), which the Company paid to the seller on
June 13, 2004. The Company then paid the seller $177,597 (RMB 1,089,984) on June 17, 2009. The Department of Housing and Urban
Development (“HUD”) of Harbin City approved this transaction. The Company recorded the land use right at its purchase
price. The cost of the land use right is amortized over its prospective beneficial period, using the straight-line method with
no residual value. The Company’s production facilities and office are both located on this piece of land. As of June 30, 2013, 2012 and 2011, the land use right and improvement have a net balance of $861,746, $852,834 and $860,163,
respectively.
Revenue
Recognition
The Company
recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when
title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists
and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers.
The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title
and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable
rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially
affect results of operations. The Company records revenue net of sales taxes. The Company allows its customers to return product
for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience.
As of June 30, 2013, 2012 and 2011, the provision amounted to $39,299, $294,737 and $904,227, respectively.
Sales
Incentives
— The Company accounts for cash consideration (such as sales incentives and cash discounts) given to
its customers or resellers as a reduction of revenue rather than an operating expense. Sales incentives are recorded when
revenue is recognized. For the years ended June 30, 2013 and 2012, the Company did not provide sales incentives to its
customers or resellers.
Research
and Development Costs
The Company’s
five agreements with the Contractor entrust the Contractor to develop different tablet and health food products, and obtain approval
for the correlated registration or certification within a certain period (3 years) on behalf of the Company. As of June 30, 2013,
June 30, 2012 and June 30, 2011, the total payments made by the Company to the Contractor were $1,466,419 (RMB 9 million), $1,416,654
(RMB 9 million) and $1,392,434 (RMB 9 million), respectively. The Company is recognizing the payments to the Contractor as deferred
expenses, and is recognizing R&D expenses ratably over the terms of the agreements. As of June 30, 2013, 2012 and 2011, deferred expenses amounted to $156,750, $600,321 and $900,928, respectively.
The Company
reclassified its research and development costs as of June 30, 2013, 2012 and 2011, which were previously included
in operating expenses, to general and administrative expenses to conform to the current presentation. The reclassification had
no effect on the Company’s financial condition, results of operations or cash flows.
Advertising
Costs
Advertising
costs are expensed as incurred and included as part of selling and marketing expenses in the accompanying consolidated statement
of operations. Advertising costs were immaterial for the years ended June 30, 2013, 2012 and 2011, respectively.
Income
Taxes
The Company
adopts FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized.
In July
2006 the FASB issued FIN 48(ASC 740-10), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109 (ASC 740), which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in
the financial statements. Under FIN 48(ASC 740-10), tax positions that previously failed to meet the more-likely-than-not threshold
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met.
The application
of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations
themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations
and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need
to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation
allowance.
As a result
of the implementation of FIN 48 (ASC 740-10), the company undertook a comprehensive review of its portfolio of tax positions in
accordance with recognition standards established by FIN 48 (ASC 740-10). The Company recognized no material adjustments to liabilities
or stockholders’ equity as a result of the implementation. The adoption of FIN 48 did not have a material impact
on the Company’s financial statements.
Enterprise
Income Tax
Under the
Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises
at a rate of 25% of their taxable income.
Value
Added Tax
The Provisional
Regulations of PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these
regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is
imposed on goods sold in, or imported into, the PRC and on processing, repair and replacement services provided within the PRC.
Value added
tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on
the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for
the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added
tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods
and services in the same financial year.
Sales
Taxes and Sales-Related Taxes
Pursuant
to the tax law and regulations of PRC, the Company is obligated to pay 7% and 5% of the annual VAT paid as tax on maintaining
and building cities and education additional fee, both of which belong to sales-related taxes. Sales-related taxes are recorded
when sales revenue is recognized. Sales taxes and sales-related taxes for the years ended June 30, 2013, June 30, 2012, and June
30, 2011 were $141,714, $992,789, and $1,062,267, respectively.
Comprehensive
Income
The Company
reports comprehensive income in accordance with FASB ASC Topic 220 “Comprehensive Income," which established standards
for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same
prominence as other financial statements.
Total comprehensive
income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions
to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals
net income plus or minus adjustments for currency translation. Total comprehensive income was a gain of $1,284,128, $15,129,154
and $19,095,358 for the years ended June 30, 2013, 2012 and 2011, respectively.
While total
comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive
income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date.
For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased overall equity by
$4,501,780, $2,664,729 and $2,010,981 as of June 30, 2013, June 30, 2012 and June 30, 2011, respectively.
Pension
and Employee Benefits
Full time
employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which
certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided
to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees’
salaries. Management believes full-time employees who have passed the probation period are entitled to such benefits.
The total
provisions for such employee benefits were $36,468, $25,127 and $24,272 for the years ended June 30, 2013, 2012 and 2011, respectively.
Statutory
Reserves
Pursuant
to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the
statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as
determined in accordance with the generally accepted accounting principles in PRC, after offsetting any prior years’ losses.
Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal
to 50% of the Company’s registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax
net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective
benefits to the employees and is non-distributable other than in liquidation. The Company had appropriated $38,679 (RMB 250,000)
to the statutory reserve, which is 50% of Humankind’s registered capital as of June 30, 2013, 2012 and 2011. Since Huimeijia
had accumulated deficits from its inception, no appropriation to the statutory reserve was required.
Recent
Accounting Pronouncements
In May 2011,
the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve
consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and
annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited. The Company is
currently evaluating this guidance, but does not expect its adoption to have a material effect on its consolidated financial statements.
In June
2011, the FASB issued new guidance on the presentation of comprehensive income that require a company to present components of
net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are
no changes to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption
permitted. The Company is currently evaluating this guidance, but does not expect its adoption to have a material effect on its
consolidated financial statements.
In September
2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether
it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of
its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard
is effective for the Company for its annual and interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. The Company is currently evaluating this guidance, but does not expect its adoption to have a material
effect on its consolidated financial statements.
In July
2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for
Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances
indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it
is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if
an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure
the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment
tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement
is not expected to have a material impact on the Company’s financial statements
In February
2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive
Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in
financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated
other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where
net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the
respective line items of net income but only if the amount reclassified is required under US GAAP to be reclassified to net income
in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their
entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional
detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December
15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s
consolidated results of operations or financial condition.
In March
2013, the FASB issued guidance on a parent company’s accounting for the cumulative translation adjustment upon derecognition
of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent company releases any related
cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete
liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for
the Company beginning July 1, 2014. The adoption of this pronouncement is not expected to have a material impact on the Company’s
financial statements.
Note
3 – CASH AND CASH EQUIVALENTS
Cash and
cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments
which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
The Company
maintains cash and cash equivalents at several financial institutions. Only accounts at US financial institutions are insured
by the Federal Deposit Insurance Corporation (FDIC). As of June 30, 2013, June 30, 2012 and June 30, 2011, the Company’s
uninsured bank balances, all of which were maintained at financial institutions located in the PRC, totaled $28,839,609, $44,500,205
and $23,740,502, respectively. As of June 30, 2013, June 30, 2012 and June 30, 2011, the Company’s insured bank balances,
all of which were maintained at US financial institutions, totaled $0, $4,326 and $4,318, respectively.
Note
4 - CONTROL BY PRINCIPAL OWNERS
The directors,
executive officers, their affiliates and related parties own, beneficially and in the aggregate, the majority of the voting power
of the outstanding capital of the Company. Accordingly, directors, executive officers and their affiliates, if they voted their
shares uniformly, would have the ability to control the approval of most corporate actions, including approving significant expenses,
increasing the authorized capital stock and the dissolution, merger or sale of the Company's assets
.
Note
5 – ACCOUNTS RECEIVABLE
The Company’s
accounts receivable amounted to $4,686, $2,186,143 and $8,506,933 as of June 30, 2013, June 30, 2012 and June 30, 2011, respectively.
The decrease in accounts receivable was primarily due to the decrease in product sales.
Note
6 – OTHER RECEIVABLES
Other receivables
consist of the following:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Advances to
Employees
|
|
|
12,334
|
|
|
|
11,915
|
|
|
|
2,955
|
|
Accrued Interest
|
|
|
-
|
|
|
|
-
|
|
|
|
25,992
|
|
Other Receivables -Tiefeng
|
|
|
-
|
|
|
|
-
|
|
|
|
3,094,299
|
|
Other Receivables -HLJ
Huimeijia
|
|
|
16,293,544
|
|
|
|
-
|
|
|
|
-
|
|
Other
Receivables
|
|
|
12,653
|
|
|
|
11,315
|
|
|
|
3,094
|
|
Total
Other Receivables
|
|
$
|
16,318,531
|
|
|
$
|
23,230
|
|
|
$
|
3,126,340
|
|
Advances
to employees are unsecured and non-interest bearing, and have no fixed terms of repayment; therefore, they are deemed payable
on demand.
On April
9, 2009, Humankind entered into a letter of intent with the shareholders of Heilongjiang Tiefeng Rice Company Limited (“Tiefeng”)
to purchase all the equity interests of Tiefeng (the “Tiefeng Share Transfer Agreement”). On July 23, 2009, the Company
paid $814,677 (RMB 5,000,000) in retaining fees. The Tiefeng Share Transfer Agreement was signed on August 18, 2009, and the Company
prepaid $8,146,772 (RMB 50,000,000) to Tiefeng on August 19, 2009.
As of March
31, 2010, Tiefeng had not received the crucial certified documents required from local government agencies. Based on the amended
agreement, the deal was thus voided. Tiefeng paid back approximately $1.46 million (RMB 10,000,000) to the Company on March 31,
2010, and an additional $1.46 million (RMB 10,000,000) was paid on April 30, 2010 as part of the deposit refund. Another installment
of $1.46 million (RMB 10,000,000) was paid on May 31, 2010. The balance of $3,094,299 (RMB 20,000,000) was converted to a loan
to Tiefeng with a two-year term starting May 5, 2010. Interest was charged semi-yearly using the current Chinese bank borrowing
rate of 5.31%. During the year ended June 30, 2012, Tiefeng had paid the total interest of $169,965 (RMB 1,080,000) and paid back
approximately $3.15 million (RMB 20,000,000) to the Company. For the years ended June 30, 2013, June 30, 2012 and June 30, 2011,
other receivables from -Tiefeng were $0, $0 and $3,094,299, respectively.
On April
10, 2013, Humankind entered into an agreement with the shareholders of Heilongjiang Huimeijia Pharmaceutical Co.,Ltd. (“HLJ
Huimeijia”) to purchase all the equity interests of HLJ Huimeijia (the “HLJ Share Transfer Agreement”) for a
total purchase price of $16,293,545 (RMB100,000,000). The full purchase price was prepaid to HLJ Huimeijia as of June 30, 2013.
The alternation procedures for business registration, i.e., the procedures to change the ownership record of HLJ Huimeijia with
the local State Administration for Industry and Commerce are currently under way, and the transaction is expected to close in
the fourth quarter of the 2013 calendar year.
Note
7 – INVENTORY
Inventory
consists of following:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Finished Goods
|
|
|
41,209
|
|
|
|
61,624
|
|
|
|
154,770
|
|
Work-in-Progress
|
|
|
43,050
|
|
|
|
56,572
|
|
|
|
191,506
|
|
Raw Materials
|
|
|
59,960
|
|
|
|
137,163
|
|
|
|
328,127
|
|
Supplies
and Packing Materials
|
|
|
17,417
|
|
|
|
18,131
|
|
|
|
63,804
|
|
Total
|
|
$
|
161,636
|
|
|
$
|
273,490
|
|
|
$
|
738,207
|
|
Note
8 – LONG TERM DEPOSIT
The Company
paid $3,305,525 (RMB 21,000,000) as of June 30, 2012 and $3,249,014 (RMB 21,000,000) as of June 30, 2011 to the Harbin Songbei
District Development and Construction Committee as the prepayment for the acquisition of the land use rights. During the years
ended June 30, 2012 and June 30, 2011, the Company was in the process of going through a full range of procedures with the local
government before the land use rights could be granted to the Company.
The Company
reclassified the prepayment as a long term deposit as of June 30, 2012 and June 30, 2011, which was previously included in current
assets, to other assets; in order to conform to the current presentation. The reclassification had no effect on the Company’s
financial condition, results of operations or cash flows.
However,
the land use rights were not transferred to the Company due to policy reasons, and the deal was thus voided. The Harbin Songbei
District Development and Construction Committee paid back approximately $3,305,525 (RMB 21,000,000) to the Company on December
21, 2012. As of June 30, 2013, the long term deposit was $0.
Note
9 – CONSTRUCTION IN PROGRESS
Plant and
production lines of Huimeijia under development are accounted for as construction-in-progress. Construction-in-progress is recorded
at acquisition cost and includes development expenditures, professional fees and the interest expenses capitalized during the
course of construction for the purpose of financing the project. Currently, construction has been completed and the project is
waiting for final inspection and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress
will be transferred to property and equipment, at which time depreciation will commence. The Company has no capitalized interest
and to date has funded this construction through operations without the use of outside debt financing. As of June 30, 2013, June
30, 2012 and June 30, 2011, the Company has incurred $1,955, $1,889 and $1,856 in construction in progress, respectively.
On March
10, 2011, Humankind entered into an agreement with a contractor to construct a warehouse for the Company. The estimated total
cost of construction was approximately $684,330 (RMB 4,200,000). As of June 30, 2013, the warehouse had been completed and the
$684,330 (RMB 4,200,000) was recorded as a cost of construction in progress. The project is now waiting for final inspection and
examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred
to property and equipment.
On August
15, 2011, Humankind entered into an agreement with a contractor to construct an office building for the Company. The estimated
total cost of construction was approximately $655,440 (RMB 4,022,700), anticipated to be completed within 45 days from August
15, 2011 to October 15, 2011. Due to local weather conditions, the construction was not completed on time. As of June 30, 2012,
75% of construction had been completed and $474,898 (RMB 3,017,025) had been recorded as a cost of construction in progress. As
of June 30, 2013, the office building had been completed and $655,440 (RMB 4,022,700) was recorded as a cost of construction in
progress. The project is now waiting for final inspection and examination and government approval. Upon readiness for use of the
project, the cost of construction-in-progress will be transferred to property and equipment.
On December
8, 2012, Humankind entered into an agreement with a contractor for the interior decoration of the office building and warehouse
at a cost of $814,677 (RMB 5,000,000). The decoration had been completed as of June 30, 2013 and is waiting for final inspection
and examination and government approval. The $814,677 (RMB 5,000,000) was recorded as a cost of construction in progress.
Note
10 - PROPERTY, PLANT AND EQUIPMENT
The following
is a summary of property, plant and equipment:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Building and
Warehouses
|
|
|
1,131,095
|
|
|
|
1,092,710
|
|
|
|
1,074,029
|
|
Machinery and Equipment
|
|
|
200,318
|
|
|
|
190,627
|
|
|
|
192,459
|
|
Office Equipment
|
|
|
48,913
|
|
|
|
47,253
|
|
|
|
30,177
|
|
Vehicles
|
|
|
166,417
|
|
|
|
160,769
|
|
|
|
94,204
|
|
Other
|
|
|
24,440
|
|
|
|
23,611
|
|
|
|
23,207
|
|
Less:
Accumulated Depreciation
|
|
|
(463,156
|
)
|
|
|
(359,426
|
)
|
|
|
(266,795
|
)
|
Total
|
|
$
|
1,108,027
|
|
|
$
|
1,155,544
|
|
|
$
|
1,147,281
|
|
Depreciation
expense was $89,563, $87,974 and $64,448 for the years ended June 30, 2013, 2012 and 2011, respectively. Depreciation expense
charged to operations was $41,860, $41,177 and $39,493 for the years ended June 30, 2013, 2012 and 2011, respectively. Depreciation
expense charged to cost of goods sold was $47,703, $46,797 and $24,955 for the years ended June 30, 2013, 2012 and 2011, respectively.
Note
11 – INTANGIBLE ASSETS
The following
is a summary of intangible assets:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Land Use Right
|
|
|
1,032,682
|
|
|
|
997,636
|
|
|
|
980,581
|
|
Health Supplement Product
Patents
|
|
|
4,888,064
|
|
|
|
-
|
|
|
|
-
|
|
Less:
Accumulated Amortization
|
|
|
(293,138
|
)
|
|
|
(144,802
|
)
|
|
|
(120,418
|
)
|
Intangible
Assets – Net
|
|
$
|
5,627,608
|
|
|
$
|
852,834
|
|
|
$
|
860,163
|
|
Amortization
expense charged to operations was $140,827, $22,286 and $19,132 for the years ended June 30, 2013, 2012 and 2011, respectively.
Note
12 - RELATED PARTY DEBT
Related
party debt represents temporary short-term loans from majority owner, Mr. Xin Sun, a PRC citizen. These loans are unsecured and
non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand. Cash flow classified
as due to Mr. Sun is classified as cash flow from financing activities. The total borrowings from Mr. Sun were $431,802, $435,196
and $432,924 as of June 30, 2013, June 30, 2012 and June 30, 2011, respectively.
Note
13 – INCOME TAX AND TAXES PAYABLE
The following
is a summary of taxes payable:
|
|
|
June
30, 2013
|
|
|
|
June
30, 2012
|
|
|
|
June
30, 2011
|
|
Taxes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
Payable
|
|
|
-
|
|
|
|
214,414
|
|
|
|
1,539,224
|
|
VAT Taxes Payable
|
|
|
213,317
|
|
|
|
208,269
|
|
|
|
998,420
|
|
City and Supplement Taxes
|
|
|
25,605
|
|
|
|
24,996
|
|
|
|
69,892
|
|
Payroll
Taxes & other Taxes
|
|
|
6,559
|
|
|
|
15,781
|
|
|
|
50,046
|
|
Total
|
|
$
|
245,481
|
|
|
$
|
463,460
|
|
|
$
|
2,657,582
|
|
On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the
“New CIT Law”). The New CIT Law reduced the corporate income tax rate from 33% to 25% effective on January 1, 2008.
All Chinese enterprises are governed by the PRC Income Tax Law and various local income tax laws, pursuant to which each of the
Chinese subsidiaries of China Health US is subject to an income tax at a statutory rate of 25% for the years ended June 30, 2013,
2012 and 2011.
The provision
for income taxes consisted of the following for the years ended June 30, 2013, 2012 and 2011, respectively:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Provision
for PRC Income Tax - Current Taxes
|
|
|
23,932
|
|
|
|
4,808,869
|
|
|
$
|
5,924,501
|
|
Provision
for PRC Income Tax - Deferred Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Provision for Income Taxes
|
|
$
|
23,932
|
|
|
$
|
4,808,869
|
|
|
$
|
5,924,501
|
|
The following
table reconciles the PRC statutory rates to The Company’s effective tax rate for the years ended June 30, 2012 and 2011:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Pre-Tax Income
|
|
|
(528,991
|
)
|
|
|
19,284,275
|
|
|
$
|
23,598,496
|
|
Statutory Tax Rate
|
|
|
25%
|
|
|
|
25
%
|
|
|
|
25
%
|
|
PRC Enterprise Income
Tax at Statutory Rate
|
|
|
-
|
|
|
|
4,821,069
|
|
|
|
5,899,624
|
|
Loss (Income) for US and
Hong Kong Entities Not Deductible for Tax
|
|
|
-
|
|
|
|
151
|
|
|
|
6,898
|
|
Expenses Not Deductible
for Tax – Temporary Difference
|
|
|
23,932
|
|
|
|
3,610
|
|
|
|
215,314
|
|
Expenses Not Deductible
for Tax – Permanent Difference
|
|
|
-
|
|
|
|
(15,961
|
)
|
|
|
(206,914
|
)
|
Increase
in Valuation Allowance Related to Deferred Tax Assets
|
|
|
-
|
|
|
|
-
|
|
|
|
9,579
|
|
Total
Provision for Income Taxes
|
|
$
|
23,932
|
|
|
$
|
4,808,869
|
|
|
$
|
5,924,501
|
|
Note
14 – EARNINGS PER SHARE
Basic earnings
per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common
shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options and warrants
Potential
common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained
upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used
to purchase common stock at the average market price of the common stock during the period.
FASB ASC
Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic and diluted earnings
per share (EPS) computations.
For the
years ended June 30, 2013, 2012 and 2011, the Company does not have potential dilutive shares.
The following
table sets forth the computation of basic and diluted net income per share:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Net income attributable to the common stockholders
|
|
$
|
(552,923
|
)
|
|
$
|
14,475,406
|
|
|
$
|
17,673,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
Dilutive effect of options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common stock and common stock equivalents
|
|
$
|
62,239,737
|
|
|
$
|
62,239,737
|
|
|
$
|
62,239,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
(0.0089
|
)
|
|
|
0.2326
|
|
|
|
0.2840
|
|
Basic
|
|
$
|
(0.0089
|
)
|
|
$
|
0.2326
|
|
|
$
|
0.2840
|
|
Diluted
|
|
$
|
(0.0089
|
)
|
|
$
|
0.2326
|
|
|
$
|
0.2840
|
|
Note
15 - COMMITMENTS AND CONTINGENCIES
The Company’s
assets are located in PRC and revenues are derived from operations in PRC
In terms
of industry regulations and policies, the economy of PRC has been transitioning from a planned economy to market oriented economy.
Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic
reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business
enterprises, a substantial portion of productive assets in PRC is still owned by the Chinese government. For example, all land
is state owned and leased to business entities or individuals through the government’s granting of Land Use Rights. The
granting process is typically based on government policies at the time of granting and can be lengthy and complex. This process
may adversely affect the Company’s future manufacturing expansions. The Chinese government also exercises significant
control over PRC’s economic growth through the allocation of resources and providing preferential treatment to particular
industries or companies. Uncertainties may arise with changing of governmental policies and measures.
The Company
faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its
assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with
an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the
more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that
may produce major shocks, instabilities and even crises, in both its domestic arena and in its relationships with other countries,
including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company’s
performance.
Rental expense
was approximately $15,337, $25,809 and $25,763 for the years ended June 30, 2013, 2012 and 2011, respectively. Since the Company
terminated its rental agreement on January 9, 2013, its rental expenses were lower as of the year ended June 20, 2013 compared
to the years ended June 30, 2012 and June 30, 2011.
STATUTORY
RESERVE COMMITMENT
I
n
compliance with PRC laws, the Company is required to appropriate a portion of its net income to its statutory reserve up to a
maximum of 50% of its registered capital in the PRC. The Company had appropriated $38,679 (RMB 250,000) to its statutory reserve,
which is 50% of Humankind’s registered capital as of June 30, 2013 and June 30, 2012. Since Huimeijia has been accumulating
a deficiency, no statutory reserve fund has been createdsince its inception.
The Company
had future unfunded commitments, as provided below
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
PRC
Subsidiaries Registered Capital
|
|
|
|
|
|
|
|
|
|
Harbin
Humankind Biology
|
|
$
|
73,437
|
|
|
$
|
73,437
|
|
|
$
|
73,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harbin Huimeijia Medicine
(Company has accumulated deficiency, no reserve commitment required)
|
|
|
146,873
|
|
|
|
146,873
|
|
|
|
146,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Reserve
Ceiling based on 50% of PRC Registered Capital of Harbin Humankind Biology or at least 10% of the after-tax net earnings until
the reserve is equal to 50% of its registered capital
|
|
|
38,679
|
|
|
|
38,679
|
|
|
|
38,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Retained Earnings Appropriated to Statutory Reserve
|
|
|
38,679
|
|
|
|
38,679
|
|
|
|
38,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Commitment
Outstanding
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note
16 – MAJOR SUPPLIERS AND CUSTOMERS
The Company
had one supplier that accounted for 85% of the Company’s total purchases for the year ended June 30, 2013.
The Company
had six customers that in the aggregate accounted for 71% of the Company’s total sales for the year ended June 30, 2013,
with each individual customer accounting for 13%, 12%, 12%, 12%, 11% and 11%, respectively.
The Company
had two suppliers that in the aggregate accounted for 82% of the Company’s purchases for the year ended June 30, 2012, with
each supplier accounting for 55% and 27%, respectively.
The Company
had three customers that in the aggregate accounted for 35% of the Company’s total sales for the year ended June 30, 2012,
with each customer accounting for 12%, 12% and 11%, respectively.
The Company
had two suppliers that in the aggregate accounted for 82% of the Company’s purchases for the year ended June 30, 2011, with
each supplier accounting for 61% and 21%, respectively.
The Company
had no customer that accounted for more than 10% of the Company’s total sales for the year ended June 30, 2011.
Note
17 – SUBSEQUENT EVENTS
Management
has considered all events occurring through the date the financial statements have been issued, and has determined that there
are no such events that are material to the financial statements, or all such material events have been fully disclosed.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
March 31, 2013
|
|
|
June 30, 2012
|
|
|
|
Unaudited
|
|
|
Audited
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
45,942,099
|
|
|
$
|
44,504,531
|
|
Accounts receivable
|
|
|
4,631
|
|
|
|
2,186,143
|
|
Inventory
|
|
|
196,620
|
|
|
|
273,490
|
|
Other receivable
|
|
|
24,443
|
|
|
|
23,230
|
|
Prepaid expenses
|
|
|
545,098
|
|
|
|
699,638
|
|
Total current assets
|
|
|
46,712,891
|
|
|
|
47,687,032
|
|
|
|
|
|
|
|
|
|
|
Property & equipment - net
|
|
|
1,117,077
|
|
|
|
1,155,544
|
|
Intangible assets - net
|
|
|
5,687,056
|
|
|
|
852,834
|
|
Construction-in-progress
|
|
|
649,626
|
|
|
|
476,787
|
|
Long-term deposit
|
|
|
-
|
|
|
|
3,305,525
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
54,166,650
|
|
|
$
|
53,477,722
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
304,192
|
|
|
$
|
297,430
|
|
Related party debt
|
|
|
431,405
|
|
|
|
435,196
|
|
Wages payable
|
|
|
240,430
|
|
|
|
119,858
|
|
Tax payable
|
|
|
283,541
|
|
|
|
463,460
|
|
Total current liabilities
|
|
|
1,259,568
|
|
|
|
1,315,944
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, ($0.0001 par value, 300,000,000
shares authorized, 62,239,737 issued and outstanding
as of March 31, 2013 and June 30, 2012, respectively)
|
|
|
6,224
|
|
|
|
6,224
|
|
Additional paid-in capital
|
|
|
1,462,227
|
|
|
|
1,462,227
|
|
Accumulated other comprehensive income
|
|
|
3,863,744
|
|
|
|
2,664,729
|
|
Statutory reserve
|
|
|
38,679
|
|
|
|
38,679
|
|
Retained earnings
|
|
|
47,536,208
|
|
|
|
47,989,919
|
|
Total stockholders' equity
|
|
|
52,907,082
|
|
|
|
52,161,778
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
54,166,650
|
|
|
$
|
53,477,722
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
(Unaudited)
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
2,479,660
|
|
|
$
|
11,250,503
|
|
|
$
|
5,938,862
|
|
|
$
|
56,164,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
2,305,756
|
|
|
|
6,406,449
|
|
|
|
5,059,918
|
|
|
|
33,777,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
173,904
|
|
|
|
4,844,054
|
|
|
|
878,944
|
|
|
|
22,386,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses
|
|
|
377,999
|
|
|
|
566,849
|
|
|
|
1,093,578
|
|
|
|
3,442,839
|
|
Depreciation and amortization expenses
|
|
|
15,053
|
|
|
|
51,414
|
|
|
|
47,093
|
|
|
|
81,975
|
|
Research & development
|
|
|
120,491
|
|
|
|
120,152
|
|
|
|
358,658
|
|
|
|
360,200
|
|
Total operating expenses
|
|
|
513,543
|
|
|
|
738,415
|
|
|
|
1,499,329
|
|
|
|
3,885,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(339,639
|
)
|
|
|
4,105,639
|
|
|
|
(620,385
|
)
|
|
|
18,501,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
66,951
|
|
|
|
82,860
|
|
|
|
190,490
|
|
|
|
232,776
|
|
Interest expense
|
|
|
-
|
|
|
|
(6,907
|
)
|
|
|
-
|
|
|
|
(20,602
|
)
|
Total other income
|
|
|
66,951
|
|
|
|
75,953
|
|
|
|
190,490
|
|
|
|
212,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(272,688
|
)
|
|
|
4,181,592
|
|
|
|
(429,895
|
)
|
|
|
18,713,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
93
|
|
|
|
550,167
|
|
|
|
23,816
|
|
|
|
4,588,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(272,781
|
)
|
|
$
|
3,631,425
|
|
|
$
|
(453,711
|
)
|
|
$
|
14,124,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
164,110
|
|
|
|
(6,373
|
)
|
|
|
1,199,015
|
|
|
|
1,158,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
$
|
(108,671
|
)
|
|
$
|
3,625,052
|
|
|
$
|
745,304
|
|
|
$
|
15,283,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted earnings (loss) per share
|
|
$
|
(0.0044
|
)
|
|
$
|
0.0583
|
|
|
$
|
(0.0073
|
)
|
|
$
|
0.2269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted weighted average shares outstanding
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
Net income (loss)
|
|
$
|
(453,711
|
)
|
|
$
|
14,124,853
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
82,649
|
|
|
|
81,975
|
|
Imputed interest
|
|
|
-
|
|
|
|
20,602
|
|
Decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivables and other receivables
|
|
|
2,208,627
|
|
|
|
2,694,974
|
|
Inventory
|
|
|
82,302
|
|
|
|
42,258
|
|
Prepaid expenses and long-term deposit
|
|
|
3,453,206
|
|
|
|
356,857
|
|
Decrease in operating
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other payables
|
|
|
(8,852
|
)
|
|
|
(3,564,666
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,364,221
|
|
|
|
13,756,853
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(2,929
|
)
|
|
|
(76,071
|
)
|
Purchases of intangible assets
|
|
|
(4,782,103
|
)
|
|
|
-
|
|
Increases in construction-in-progress
|
|
|
(160,308
|
)
|
|
|
(479,327
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,945,340
|
)
|
|
|
(555,398
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Repayment of related parties loan
|
|
|
(4,326
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,326
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,023,013
|
|
|
|
791,612
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,437,568
|
|
|
|
13,993,067
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning balance
|
|
|
44,504,531
|
|
|
|
23,744,820
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending balance
|
|
$
|
45,942,099
|
|
|
$
|
37,737,887
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
23,816
|
|
|
$
|
5,618,304
|
|
Cash paid for interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
CHINA HEALTH INDUSTRIES HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING
POLICIES
China Health Industries Holdings, Inc.
(“China Health US”) was incorporated in the State of Arizona on July 11, 1996 and was the successor of the business
known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it entered into a Stock Purchase Agreement and Share Exchange
(effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”), a Delaware corporation, and changed its name to Universal
Fog, Inc. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned
subsidiary of Edmonds 6.
China Health Industries Holdings Limited
("China Health HK") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability
company. China Health HK was formed for the purpose of seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as defined by FASB ACS topic 915 (“Development Stage
Entities”).
Harbin Humankind Biology Technology Co.,
Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC")
on December 14, 2003, as a limited liability company under the Company Law of PRC. Humankind is engaged in the manufacture
and sale of health products and “green” (or organic) food, and the detection of disease susceptibility or pre-disposition
through genetic studies.
On August 20, 2007, the sole shareholder
of China Health HK entered into a share purchase agreement (“Share Purchase Agreement”) with the owners of Humankind.
Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the ownership in Humankind for a cash consideration
of $60,408 (“Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind became a wholly-owned
subsidiary of China Health HK. The share purchase transaction was accounted for as a “reverse merger”: since the owner
of Humankind owned a majority of the outstanding shares of China Health HK’s common stock immediately following the execution
of the Share Purchase Agreement, it was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities
and the historical operations that have been reflected in the financial statements for periods prior to the Share Purchase are
those of Humankind and have been recorded at the historical cost basis. After completion of the Share Purchase, China Health HK’s
consolidated financial statements include the assets and liabilities of both China Health HK and Humankind, the historical operations
of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the Share Purchase.
On October 14, 2008, Humankind set up a
99% owned subsidiary Harbin Huimeijia Medicine Company (“Huimeijia”) with its primary business being manufacturing
and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of Huimeijia. Huimeijia is consolidated in
the consolidated financial statements of China Health HK.
On December 31, 2008, China Health HK.
entered into a reverse merger with Universal Fog, Inc., a U.S. publicly traded shell company (the “Transaction”). China
Health HK is the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US. After
the Transaction and a 20:1 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737
total outstanding shares of common stock of China Health US. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common
stock to 296 individuals, leaving him with 33,003,088 shares of common stock of China Health US, or approximately 53.03% of the
total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries Holdings, Inc. on February
19, 2009.
China Health US, China Health HK, Humankind,
and Huimeijia are collectively referred herein to as the “Company.”
Our present corporate structure is as follows:
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the SEC. Certain
information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles in the United States of America (“US GAAP”) have been condensed or omitted as allowed by such rules and
regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the years ended June 30, 2013 and 2012. These condensed consolidated
financial statements include all adjustments, which in the opinion of management are necessary to a fair presentation of financial
position and results of operations. All such adjustments are of a normal and recurring nature. The results of operations for the
nine months ended March 31, 2013 may not be indicative of results for the year ending June 30, 2013.
Translation of Foreign Currencies
Humankind and Huimeijia maintain their
books and accounting records in PRC currency “Renminbi” (“RMB”), which has been determined as the functional
currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the
date of the transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains and losses resulting from these
transactions are included in operations.
Humankind and Huimeijia’s financial
statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of
China Health are translated at the prevailing exchange rate at each reporting period end date. Contributed capital accounts are
translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average
rate of exchange during the reporting period. Translation adjustments resulting from the translation of these financial statements
are reflected as accumulated other comprehensive income in shareholders’ equity.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various
other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future
events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as
more experience is acquired, as additional information is obtained and as our operating environment changes. The more significant
estimates and assumptions by management include, among others; useful lives and residual value of long-lived assets, valuation
of inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, intangible assets and deferred
taxes. While the Company believes that the estimates and assumptions used in the preparation of the financial statements are appropriate,
actual results could differ from those estimates.
Statement of Cash Flows
In accordance with Statement FASB ASC Topic
230,
Statement of Cash Flows
, cash flow from the Company's operations is calculated based upon the local currencies. As
a result, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Cash and Cash Equivalents
Cash and cash equivalents include cash
on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as
to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
The Company maintains cash and cash equivalents
at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation
(“FDIC”). As of March 31, 2013, the Company’s uninsured bank balances totaled $45,942,099, which were mainly
maintained at financial institutions located in the PRC. The Company’s insured bank balances, all of which were maintained
at US financial institutions, totaled $0.
Revenue Recognition
The Company recognizes
revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the
product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists and collection
of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of
the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and
rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue
recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations.
The Company records revenue net of sales taxes. The Company allows its customers to return product for exchange or credit subject
to certain limitations. A provision for such returns is recorded based upon historical experience. As of March 31, 2013, the Company
had a provision amounted to $301,485 for such returns, as historically sales returns have been immaterial.
Concentrations of Credit Risk
All of the Company’s manufacturing
is located in the PRC. There can be no assurance that the Company will be able to successfully continue to manufacture its products
and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and
cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond
management’s control. These contingencies include general economic conditions, prices of raw materials, competition, governmental
and political conditions, and changes in regulations. Since the Company is dependent on trade in the PRC, the Company is subject
to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject
to the risks of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange
restrictions, and political and governmental regulations.
The Company operates in China, which may
give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between
U.S. dollars and the Chinese currency RMB. The results of operations denominated in foreign currency are translated at the average
rate of exchange during the reporting period.
Earnings Per Share
Basic earnings per common share is computed
by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the
period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding
during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon
exercise of common stock options and warrants. For the nine months ended March 31, 2013 and 2012, the Company had no potential
dilutive common stock equivalents outstanding.
Potential common shares issued are calculated
using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants
in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market
price of the common stock during the period.
FASB ASC Topic 260,
Earnings Per Share
,
requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.
Comprehensive Income
The Company reports comprehensive income
in accordance with FASB ASC Topic 220
Comprehensive Income
, which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Total comprehensive income is defined as
all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders
(i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus
or minus adjustments for currency translation. Total comprehensive income was a loss of $108,671 and a gain of $3,625,052 for the
three months ended March 31, 2013 and 2012, respectively, and gains of $745,304 and $15,283,601 for the nine months ended March
31, 2013 and 2012, respectively.
While total comprehensive income is the
activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”)
represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily
the cumulative balance related to adjustments for currency translation and increased overall equity by $3,863,744 and $2,664,729
as of March 31, 2013 and June 30, 2012, respectively.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02,
Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities
with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely
than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an
indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise,
it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment,
if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal
years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have
a material impact on the Company’s financial statements.
In February 2013, the FASB issued ASU No.
2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments
do not change the current requirements for reporting net income or other comprehensive income in financial statements. However,
the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income
by component. In addition, an entity is required to present, either on the face of the statement where net income is presented
or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the
same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income,
an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those
amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early
adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results
of operations or financial condition.
In March 2013, the FASB issued guidance
on a parent company’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of
assets within a foreign entity. This new guidance requires that the parent company releases any related cumulative translation
adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign
entity in which the subsidiary or group of assets had resided. The new guidance will be effective for the Company beginning July 1,
2014. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
Note 2 – ACCOUNTS RECEIVABLE
The Company’s accounts receivable
totaled $4,631 and $2,186,143 as of March 31, 2013 and June 30, 2012, respectively. Most of the Company’s products were sold
to its sales agents, and the decrease in accounts receivable was primarily due to accounts settled by the sale agents during the
six month period ended December 31, 2012. The Company offers the sales agents 60 to 90 day terms for payment in order to increase
the Company’s sales. Agents normally settle most accounts receivable within one month.
Note 3 - INVENTORY
Inventory consists of following:
|
|
March 31, 2013
|
|
|
June 30, 2012
|
|
Inventories
|
|
|
|
|
|
|
Finished Goods
|
|
|
59,270
|
|
|
|
61,624
|
|
Work-in-Progress
|
|
|
50,620
|
|
|
|
56,572
|
|
Raw Materials
|
|
|
66,651
|
|
|
|
137,163
|
|
Supplies and Packing Materials
|
|
|
20,079
|
|
|
|
18,131
|
|
Total
|
|
$
|
196,620
|
|
|
$
|
273,490
|
|
Note 4 - LONG TERM DEPOSIT
The Company had paid $3,305,525 (RMB 21,000,000)
as of June 30, 2012 to the Harbin Songbei District Development and Construction Committee as the prepayment for the acquisition
of the land use rights. As of March 31, 2013, the land use rights had not been transferred to the Company due to policy reasons.
Based on the amended agreement, the deal was thus voided. The Harbin Songbei District Development and Construction Committee paid
back approximately $3.37 million (RMB 21,000,000) to the Company on December 21, 2012. As of March 31, 2013 and June 30, 2012,
the long term deposit was $0 and $3,305,525, respectively.
Note 5 – PREPAID EXPENSES
Prepaid expenses consist of following:
|
|
March 31, 2013
|
|
|
June 30, 2012
|
|
Prepaid Expenses
|
|
|
239,226
|
|
|
|
600,321
|
|
Advance to Suppliers
|
|
|
305,872
|
|
|
|
99,317
|
|
Total
|
|
$
|
545,098
|
|
|
$
|
699,638
|
|
P
repaid
expenses principally include prepaid R&D expenses and advances to raw material suppliers.
The Company entered into five Technology
Development Agreements (the “Agreements”) with Shenyang Pharmaceutical University and Jiamusi Pharmaceutical University
(the “Contractors”) during the period from April 9, 2010 through July 7, 2010. The Agreements entrust the Contractors
to develop different tablets and health food products and obtain approval for the correlated registration or certification within
a certain period (3 years) on behalf of the Company. The Company is recognizing the payments to the Contractors as prepaid expenses,
and is recognizing R&D expenses ratably over the terms of the Agreements. As of March 31, 2013 and June 30, 2012, prepaid expenses
amounted to $239,226 and $600,321, respectively.
The Company periodically
makes advances to certain vendors for purchases of raw materials, and records those advances as advances to suppliers.
Advances to suppliers as of March 31, 2013 and June 30, 2012 amounted to $305,872 and $99,317, respectively.
Note 6 – CONSTRUCTION IN PROGRESS
Plant and production lines of Huimeijia
under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, and
includes development expenditures, professional fees and the interest expenses capitalized during the course of construction for
the purpose of financing the project. Currently, construction has been completed and the project is waiting for final inspection
and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred
to property and equipment, at which time depreciation will commence. The Company has no capitalized interest and to date has funded
this construction through operations without the use of outside debt financing. As of March 31, 2013 and June 30, 2012, the Company
had incurred a total of $1,932 and $1,889 in construction in progress, respectively.
On August 15, 2011, Humankind entered into
an agreement with a contractor to construct an office building for the Company. The estimated total cost of construction was approximately
$647,694 (RMB 4,022,700), anticipated to be completed within 45 days from August 15, 2011 to October 15, 2011. Due to local weather
conditions, the construction was not completed on time. As of June 30, 2012, 75% of construction had been completed and $474,898
(RMB 3,017,025) had been recorded as a cost of construction in progress. As of March 31, 2013, office building had been completed
and the $647,694(RMB 4,022,700) was recorded as cost of construction in progress. The project is now waiting for final inspection
and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred
to property and equipment, at which time depreciation will commence.
Note 7 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
|
|
March 31, 2013
|
|
|
June 30, 2012
|
|
Building and Warehouses
|
|
|
1,117,728
|
|
|
|
1,092,710
|
|
Machinery and Equipment
|
|
|
197,950
|
|
|
|
196,574
|
|
Office Equipment
|
|
|
48,335
|
|
|
|
41,306
|
|
Vehicles
|
|
|
164,450
|
|
|
|
160,769
|
|
Other
|
|
|
24,151
|
|
|
|
23,611
|
|
Less: Accumulated Depreciation
|
|
|
(435,537
|
)
|
|
|
(359,426
|
)
|
Total
|
|
$
|
1,117,077
|
|
|
$
|
1,155,544
|
|
Depreciation expense charged to
operations was $31,649 and $ $31,937 for the nine months ended March 31, 2013 and 2012, respectively. Depreciation expense
charged to cost of goods sold was $35,556 and $ $35,095 for the nine months ended March 31, 2013 and 2012, respectively.
Note 8 – INTANGIBLE ASSETS
The following is a summary of intangible assets:
|
|
March 31, 2013
|
|
|
June 30, 2012
|
|
Land Use Right
|
|
|
1,020,478
|
|
|
|
997,636
|
|
Health Supplement Product Patents
|
|
|
4,830,296
|
|
|
|
-
|
|
Less: Accumulated Amortization
|
|
|
(163,718
|
)
|
|
|
(144,802
|
)
|
Intangible Assets - Net
|
|
$
|
5,687,056
|
|
|
$
|
852,834
|
|
Amortization expense charged to operations
was $15,444 and $14,493 for the nine months ended March 31, 2013 and 2012, respectively.
Note 9 - RELATED PARTY DEBT
Related party debt represents temporary
short-term loans from the Company’s majority owner, principal executive officer and sole director, Mr. Xin Sun, a PRC citizen.
These loans are unsecured and non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on
demand. Cash flow classified as due to Mr. Sun is classified as cash flow from financing activities. The total borrowings from
Mr. Sun were $431,405 and $435,196 as of March 31, 2013 and June 30, 2012, respectively.
Note 10 - COMMITMENTS AND CONTINGENCIES
The Company’s assets are located in PRC and revenues
are derived from operations in PRC.
In terms of industry regulations and policies,
the economy of PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese
government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership
of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive
assets in PRC is still owned by the Chinese government. For example, all land is state owned and leased to business entities or
individuals through the government’s granting of land use rights. The granting process is typically based on government policies
at the time of the grant and can be lengthy and complex. This process may adversely affect the Company’s future manufacturing
expansions. The Chinese government also exercises significant control over PRC’s economic growth through allocation of resources
and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental
policies and measures.
The Company faces a number of risks and
challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC,
and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system,
overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a
state of change. The PRC also faces many social, economic and political challenges that may produce major shocks, instabilities
and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks,
instabilities and crises may in turn significantly and negatively affect the Company’s performance.
Rental expense was approximately $11,800
and $17,342, for the nine months ended March 31, 2013 and 2012, respectively. Since the Company has orally terminated its rental
agreement, it has no rental commitment for the nine months ended March 31, 2013.
Note 11 – MAJOR SUPPLIERS AND CUSTOMERS
The Company had seven suppliers in the
nine months ended March 31, 2013, of which one accounted for 85% of the Company’s total purchases for the nine months ended
March 31, 2013.
The Company had five customers that in
the aggregate accounted for 61% of the Company’s total sales for the nine months ended March 31, 2013, with each customer
accounting for 13%, 13%, 12%, 12% and 11%, respectively.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
|
|
Unaudited
|
|
|
Audited
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,866,019
|
|
|
$
|
44,504,531
|
|
Accounts receivable
|
|
|
1,074,414
|
|
|
|
2,186,143
|
|
Inventory
|
|
|
217,054
|
|
|
|
273,490
|
|
Other receivable
|
|
|
24,048
|
|
|
|
23,230
|
|
Prepaid expenses
|
|
|
461,437
|
|
|
|
699,638
|
|
Total current assets
|
|
|
51,642,972
|
|
|
|
47,687,032
|
|
|
|
|
|
|
|
|
|
|
Property & equipment - net
|
|
|
1,135,432
|
|
|
|
1,155,544
|
|
Intangible assets - net
|
|
|
859,291
|
|
|
|
852,834
|
|
Construction-in-progress
|
|
|
647,614
|
|
|
|
476,787
|
|
Long-term deposit
|
|
|
-
|
|
|
|
3,305,525
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
54,285,309
|
|
|
$
|
53,477,722
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
303,259
|
|
|
$
|
297,430
|
|
Related party debt
|
|
|
431,459
|
|
|
|
435,196
|
|
Wages payable
|
|
|
222,166
|
|
|
|
119,858
|
|
Tax payable
|
|
|
312,672
|
|
|
|
463,460
|
|
Total current liabilities
|
|
|
1,269,556
|
|
|
|
1,315,944
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, ($0.0001 par value, 300,000,000
shares authorized, 62,239,737 issued and
outstanding as of December 31, 2012 and June 30,
2012, respectively)
|
|
|
6,224
|
|
|
|
6,224
|
|
Additional paid-in capital
|
|
|
1,462,227
|
|
|
|
1,462,227
|
|
Accumulated other comprehensive income
|
|
|
3,699,634
|
|
|
|
2,664,729
|
|
Statutory reserve
|
|
|
38,679
|
|
|
|
38,679
|
|
Retained earnings
|
|
|
47,808,989
|
|
|
|
47,989,919
|
|
Total stockholders' equity
|
|
|
53,015,753
|
|
|
|
52,161,778
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
54,285,309
|
|
|
$
|
53,477,722
|
|
The accompanying notes are an
integral part of these consolidated financial statements.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
(Unaudited)
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
December
31,
2012
|
|
|
December
31,
2011
|
|
|
December
31,
2012
|
|
|
December
31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
2,005,894
|
|
|
$
|
23,973,612
|
|
|
$
|
3,459,202
|
|
|
$
|
46,167,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
1,637,514
|
|
|
|
14,401,135
|
|
|
|
2,754,162
|
|
|
|
27,371,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
368,380
|
|
|
|
9,572,477
|
|
|
|
705,040
|
|
|
|
18,795,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses
|
|
|
361,514
|
|
|
|
2,286,370
|
|
|
|
715,579
|
|
|
|
4,129,519
|
|
Depreciation and amortization expenses
|
|
|
16,040
|
|
|
|
15,862
|
|
|
|
32,040
|
|
|
|
30,561
|
|
Research & development
|
|
|
120,086
|
|
|
|
120,024
|
|
|
|
238,167
|
|
|
|
240,048
|
|
Total
operating expenses
|
|
|
497,640
|
|
|
|
2,422,256
|
|
|
|
985,786
|
|
|
|
4,400,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(129,260
|
)
|
|
|
7,150,221
|
|
|
|
(280,746
|
)
|
|
|
14,395,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
62,059
|
|
|
|
76,778
|
|
|
|
123,539
|
|
|
|
149,916
|
|
Interest expense
|
|
|
-
|
|
|
|
(6,595
|
)
|
|
|
-
|
|
|
|
(13,695
|
)
|
Total
other income
|
|
|
62,059
|
|
|
|
70,183
|
|
|
|
123,539
|
|
|
|
136,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(67,201
|
)
|
|
|
7,220,404
|
|
|
|
(157,207
|
)
|
|
|
14,532,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
15,980
|
|
|
|
2,041,873
|
|
|
|
23,723
|
|
|
|
4,038,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(83,181
|
)
|
|
$
|
5,178,531
|
|
|
$
|
(180,930
|
)
|
|
$
|
10,493,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
gain
|
|
|
465,558
|
|
|
|
631,937
|
|
|
|
1,034,905
|
|
|
|
1,165,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income
|
|
$
|
382,377
|
|
|
$
|
5,810,468
|
|
|
$
|
853,975
|
|
|
$
|
11,658,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted earnings
(loss) per share
|
|
$
|
(0.0013
|
)
|
|
$
|
0.0832
|
|
|
$
|
(0.0029
|
)
|
|
$
|
0.1686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted weighted average
shares outstanding
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
For the Six Months Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
Net income (Loss)
|
|
$
|
(180,930
|
)
|
|
$
|
10,493,429
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
55,565
|
|
|
|
53,841
|
|
Imputed interest
|
|
|
-
|
|
|
|
13,695
|
|
(Increase) / decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivables and other receivables
|
|
|
1,142,032
|
|
|
|
(8,799,797
|
)
|
Inventory
|
|
|
61,164
|
|
|
|
(199,859
|
)
|
Prepaid expenses
|
|
|
3,520,750
|
|
|
|
252,405
|
|
Increase in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other payables
|
|
|
3,535
|
|
|
|
1,808,701
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,602,116
|
|
|
|
3,622,415
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(2,866
|
)
|
|
|
(76,076
|
)
|
Increases in construction-in-progress
|
|
|
(159,679
|
)
|
|
|
(479,357
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(162,545
|
)
|
|
|
(555,433
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Payment to related party
|
|
|
(4,326
|
)
|
|
|
(479,357
|
)
|
Proceeds from related party debts
|
|
|
-
|
|
|
|
479,357
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,326
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
926,243
|
|
|
|
796,996
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
5,361,488
|
|
|
|
3,863,978
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning balance
|
|
|
44,504,531
|
|
|
|
23,744,820
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending balance
|
|
$
|
49,866,019
|
|
|
$
|
27,608,798
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
23,723
|
|
|
$
|
6,911,670
|
|
Cash paid for interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
CHINA HEALTH INDUSTRIES HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING
POLICIES
China Health Industries Holdings, Inc.
(“China Health US”) was incorporated in the State of Arizona on July 11, 1996 and was the successor of the business
known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it entered into a Stock Purchase Agreement and Share Exchange
(effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”), a Delaware corporation, and changed its name to Universal
Fog, Inc. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned
subsidiary of Edmonds 6.
China Health Industries Holdings Limited
("China Health HK") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability
company. China Health HK was formed for the purpose of seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as defined by FASB ACS topic 915 (“Development Stage
Entities”).
Harbin Humankind Biology Technology Co.,
Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC")
on December 14, 2003, as a limited liability company under the Company Law of PRC. Humankind is engaged in the manufacture
and sale of health products and “green” (or organic) food, and the detection of disease susceptibility or pre-disposition
through genetic studies.
On August 20, 2007, the sole shareholder
of China Health HK entered into a share purchase agreement (“Share Purchase Agreement”) with the owners of Humankind.
Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the ownership in Humankind for a cash consideration
of $60,408 (“Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind became a wholly-owned
subsidiary of China Health HK. The share purchase transaction was accounted for as a “reverse merger”: since the owner
of Humankind owned a majority of the outstanding shares of China Health HK’s common stock immediately following the execution
of the Share Purchase Agreement, it was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities
and the historical operations that have been reflected in the financial statements for periods prior to the Share Purchase are
those of Humankind and have been recorded at the historical cost basis. After completion of the Share Purchase, China Health HK’s
consolidated financial statements include the assets and liabilities of both China Health HK and Humankind, the historical operations
of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the Share Purchase.
On October 14, 2008, Humankind set up a
99% owned subsidiary Harbin Huimeijia Medicine Company (“Huimeijia”) with its primary business being manufacturing
and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of Huimeijia. Huimeijia is consolidated in
the consolidated financial statements of China Health HK.
On December 31, 2008, China Health HK.
entered into a reverse merger with Universal Fog, Inc., a U.S. publicly traded shell company (the “Transaction”). China
Health HK is the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US. After
the Transaction and a 20:1 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737
total outstanding shares of common stock of China Health US. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common
stock to 296 individuals, leaving him with 33,003,088 shares of common stock of China Health US, or approximately 53.03% of the
total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries Holdings, Inc. on February
19, 2009.
China Health US, China Health HK, Humankind,
and Huimeijia are collectively referred herein to as the “Company.”
Our present corporate structure is as follows:
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the SEC. Certain
information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles in the United States of America (“US GAAP”) have been condensed or omitted as allowed by such rules and
regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the years ended June 30, 2013 and 2012. These condensed consolidated
financial statements include all adjustments, which in the opinion of management are necessary to a fair presentation of financial
position and results of operations. All such adjustments are of a normal and recurring nature. The results of operations for the
six months ended December 31, 2012 may not be indicative of results for the year ending June 30, 2013.
Translation of Foreign Currencies
Humankind and Huimeijia maintain their
books and accounting records in PRC currency “Renminbi” (“RMB”), which has been determined as the functional
currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the
date of the transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains and losses resulting from these
transactions are included in operations.
Humankind and Huimeijia’s financial
statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of
China Health are translated at the prevailing exchange rate at each reporting period end date. Contributed capital accounts are
translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the
average rate of exchange during the reporting period. Translation adjustments resulting from the translation of these financial
statements are reflected as accumulated other comprehensive income in shareholders’ equity.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various
other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future
events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as
more experience is acquired, as additional information is obtained and as our operating environment changes. The more significant
estimates and assumptions by management include, among others; useful lives and residual value of long-lived assets, valuation
of inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, intangible assets and deferred
taxes. While the Company believes that the estimates and assumptions used in the preparation of the financial statements are appropriate,
actual results could differ from those estimates.
Statement of Cash Flows
In accordance with Statement FASB ASC Topic
230,
Statement of Cash Flows
, cash flow from the Company's operations is calculated based upon the local currencies. As
a result, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Cash and Cash Equivalents
Cash and cash equivalents include cash
on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as
to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
The Company maintains cash and cash equivalents
at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation
(“FDIC”). As of December 31, 2012, the Company’s uninsured bank balances totaled $49,866,019, which were mainly
maintained at financial institutions located in the PRC. The Company’s insured bank balances, all of which were maintained
at US financial institutions, totaled $0.
Revenue Recognition
The
Company recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize
revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an
arrangement exists and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of
goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue
is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the
Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition
practices do not contain estimates that materially affect the results of operations. The Company records revenue net of sales
taxes. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision
for such returns is recorded based upon historical experience. As of December 31, 2012, the Company had a provision amounted
to $300,550 for such returns, as historically sales returns have been immaterial.
Concentrations of Credit Risk
All of the Company’s manufacturing
is located in the PRC. There can be no assurance that the Company will be able to successfully continue to manufacture its
products and failure to do so would have a material adverse effect on the Company’s financial position, results of operations
and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond
management’s control. These contingencies include general economic conditions, prices of raw materials, competition, governmental
and political conditions, and changes in regulations. Since the Company is dependent on trade in the PRC, the Company is subject
to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject
to the risks of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange
restrictions, and political and governmental regulations.
The Company operates in China, which may
give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between
U.S. dollars and the Chinese currency RMB. The results of operations denominated in foreign currency are translated at the average
rate of exchange during the reporting period.
Earnings Per Share
Basic earnings per common share is computed
by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the
period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding
during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon
exercise of common stock options and warrants. For the six months ended December 31, 2012 and 2011, the Company had no potential
dilutive common stock equivalents outstanding.
Potential common shares issued are calculated
using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants
in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market
price of the common stock during the period.
FASB ASC Topic 260,
Earnings Per Share
,
requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.
Comprehensive Income
The Company reports comprehensive income
in accordance with FASB ASC Topic 220
Comprehensive Income
, which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Other comprehensive income is defined as
all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders
(i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus
or minus adjustments for currency translation. Other comprehensive income was gains of $465,558 and $631,937 for the three months
ended December 31, 2012 and 2011, respectively, and gains of $1,034,905 and $1,165,121 for the six months ended December 31, 2012
and 2011, respectively.
While total comprehensive income is the
activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”)
represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily
the cumulative balance related to adjustments for currency translation and increased overall equity by $3,699,634 and $2,664,729
as of December 31, 2012 and June 30, 2012, respectively.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02,
Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities
with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely
than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an
indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise,
it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment,
if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal
years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have
a material impact on the Company’s financial statements.
Note 2 ACCOUNTS RECEIVABLE
The Company’s accounts receivable
totaled $1,074,414 and $2,186,143 as of December 31, 2012 and June 30, 2012, respectively. Most of the Company’s products
were sold to its sales agents, and the decrease in accounts receivable was primarily due to accounts settled by the sale agents
during the six-month period ended December 31, 2012. The Company offers the sales agents 60 to 90 day terms for payment in order
to increase the Company’s sales. Agents normally settle most accounts receivable within one month.
Note 3 - INVENTORY
Inventory consists of following:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
Inventory
|
|
|
|
|
|
|
Finished Goods
|
|
|
70,283
|
|
|
|
61,624
|
|
Work-in-Progress
|
|
|
44,561
|
|
|
|
56,572
|
|
Raw Materials
|
|
|
80,946
|
|
|
|
137,163
|
|
Supplies and Packing Materials
|
|
|
21,264
|
|
|
|
18,131
|
|
Total
|
|
$
|
217,054
|
|
|
$
|
273,490
|
|
Note 4 – PREPAID EXPENSE
Prepaid expenses consist of following:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
Prepaid Expenses
|
|
|
360,161
|
|
|
|
600,321
|
|
Advances to Suppliers
|
|
|
101,276
|
|
|
|
99,317
|
|
Total
|
|
$
|
461,437
|
|
|
$
|
699,638
|
|
Prepaid expenses principally include prepaid
R&D expenses and advances to raw material suppliers.
The Company entered into five Technology
Development Agreements (the “Agreements”) with Shenyang Pharmaceutical University and Jiamusi Pharmaceutical University
(the “Contractors”) during the period from April 9, 2010 through July 7, 2010. The Agreements entrust the Contractors
to develop different tablets and health food products and obtain approval for the correlated registration or certification within
a certain period (3 years) on behalf of the Company. The Company is recognizing the payments to the Contractors as prepaid expenses,
and is recognizing R&D expenses ratably over the terms of the Agreements. As of December 31, 2012 and June 30, 2012, prepaid
expenses amounted to $360,161 and $600,321, respectively.
The Company periodically
makes advances to certain vendors for purchases of raw materials, and records those advances as advances to suppliers.
Advances to suppliers as of December 31, 2012 and June 30, 2012 amounted to $101,276 and $99,317, respectively.
Note 5 - LONG TERM DEPOSIT
The Company had paid $3,305,525 (RMB 21,000,000)
as of June 30, 2012 to the Harbin Songbei District Development and Construction Committee as the prepayment for the acquisition
of the land use rights. As of December 31, 2012, the land use rights had not been transferred to the Company due to policy reasons.
Based on the amended agreement, the deal was thus voided. The Harbin Songbei District Development and Construction Committee paid
back approximately $3.37 million (RMB 21,000,000) to the Company on December 21, 2012. As of December 31, 2012 and June 30, 2012,
the long term deposit was $0 and $3,305,525, respectively.
Note 6 – CONSTRUCTION IN PROGRESS
Plant and production lines of Huimeijia
under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, and
includes development expenditures, professional fees and the interest expenses capitalized during the course of construction for
the purpose of financing the project. Currently, construction has been completed and the project is waiting for final inspection
and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred
to property and equipment, at which time depreciation will commence. The Company has no capitalized interest and to date has funded
this construction through operations without the use of outside debt financing. As of December 31, 2012 and June 30, 2012, the
Company had incurred a total of $1,926 and $1,889 in construction in progress, respectively.
On August 15, 2011, Humankind entered into
an agreement with a contractor to construct an office building for the Company. The estimated total cost of construction was approximately
$639,102 (RMB 4,022,700), anticipated to be completed within 45 days from August 15, 2011 to October 15, 2011. Due to local weather
conditions, the construction was not completed on time. As of June 30, 2012, 75% of construction had been completed and $474,898
(RMB 3,017,025) had been recorded as a cost of construction in progress. As of December 31, 2012, the office building had been
completed and the $645,688 (RMB 4,022,700) was recorded as a cost of construction in progress. The project is now waiting for final
inspection and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress
will be transferred to property and equipment, at which time depreciation will commence.
Note 7 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
Building and Warehouses
|
|
|
1,114,265
|
|
|
|
1,092,710
|
|
Machinery and Equipment
|
|
|
203,349
|
|
|
|
196,574
|
|
Office Equipment
|
|
|
42,121
|
|
|
|
41,306
|
|
Vehicles
|
|
|
163,941
|
|
|
|
160,769
|
|
Other
|
|
|
24,077
|
|
|
|
23,611
|
|
Less: Accumulated Depreciation
|
|
|
(412,321
|
)
|
|
|
(359,426
|
)
|
Total
|
|
$
|
1,135,432
|
|
|
$
|
1,155,544
|
|
Depreciation expense charged to operations
was $21,784 and $20,639 for the six months ended December 31, 2012 and 2011, respectively. Depreciation expense charged to cost
of goods sold was $23,525 and $$23,280 for the six months ended December 31, 2012 and 2011, respectively.
Note 8 – INTANGIBLE ASSETS
The following is a summary of intangible assets:
|
|
December 31, 2012
|
|
|
June 30, 2012
|
|
Land Use Right
|
|
|
1,017,317
|
|
|
|
997,636
|
|
Less: Accumulated Amortization
|
|
|
(158,026
|
)
|
|
|
(144,802
|
)
|
Intangible Assets - Net
|
|
$
|
859,291
|
|
|
$
|
852,834
|
|
Amortization expense charged to operations
was $10,256 and $9,922 for the six months ended December 31, 2012 and 2011, respectively.
Note 9 - RELATED PARTY DEBT
Related party debt represents temporary
short-term loans from the Company’s majority owner, principal executive officer and sole director, Mr. Xin Sun, a PRC citizen.
These loans are unsecured and non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on
demand. Cash flow classified as due to Mr. Sun is classified as cash flow from financing activities. The total borrowings from
Mr. Sun were $431, 459 and $435,196 as of December 31, 2012 and June 30, 2012, respectively.
Note 10 - COMMITMENTS AND CONTINGENCIES
The Company’s assets are located in PRC and revenues
are derived from operations in PRC.
In terms of industry regulations and policies,
the economy of PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese
government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership
of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive
assets in PRC is still owned by the Chinese government. For example, all land is state owned and leased to business entities or
individuals through the government’s granting of land use rights. The granting process is typically based on government policies
at the time of the grant and can be lengthy and complex. This process may adversely affect the Company’s future manufacturing
expansions. The Chinese government also exercises significant control over PRC’s economic growth through allocation of resources
and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental
policies and measures.
The Company faces a number of risks and
challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC,
and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system,
overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a
state of change. The PRC also faces many social, economic and political challenges that may produce major shocks, instabilities
and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks,
instabilities and crises may in turn significantly and negatively affect the Company’s performance.
Rental expense was approximately $11,114
and $11,134, for the six months ended December 31, 2012 and 2011, respectively. Since the Company has orally terminated its rental
agreement, it has no rental commitment for the six months ended December 31, 2012 and 2011.
Note 11 – MAJOR SUPPLIERS AND CUSTOMERS
The Company had seven suppliers in the
six months ended December 31, 2012, of which one accounted for 85% of the Company’s total purchases for the six months ended
December 31, 2012.
The Company had five customers that in
the aggregate accounted for 60% of the Company’s total sales for the six months ended December 31, 2012 with each customer
accounting for 13%, 12%, 12%, 12% and 11%, respectively.
The Company had two suppliers that in the
aggregate accounted for 82% of the Company’s total purchases for the six months ended December 31, 2011, with each supplier
accounting for 55% and 27%, respectively.
The Company had three customers that in
the aggregate accounted for 37% of the Company’s total sales for the six months ended December 31, 2011, with each customer
accounting for 13%, 12% and 12%, respectively.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
|
|
Unaudited
|
|
|
Audited
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
45,846,175
|
|
|
$
|
44,504,531
|
|
Accounts receivable
|
|
|
1,207,483
|
|
|
|
2,186,143
|
|
Inventory
|
|
|
268,904
|
|
|
|
273,490
|
|
Other receivable
|
|
|
23,808
|
|
|
|
23,230
|
|
Prepaid expenses
|
|
|
586,379
|
|
|
|
699,638
|
|
Total current assets
|
|
|
47,932,749
|
|
|
|
47,687,032
|
|
|
|
|
|
|
|
|
|
|
Property & equipment - net
|
|
|
1,145,350
|
|
|
|
1,155,544
|
|
Intangible assets - net
|
|
|
856,950
|
|
|
|
852,834
|
|
Construction-in-progress
|
|
|
481,960
|
|
|
|
476,787
|
|
Long-term deposit
|
|
|
3,341,395
|
|
|
|
3,305,525
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,758,404
|
|
|
$
|
53,477,722
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
300,636
|
|
|
$
|
297,430
|
|
Related party debt
|
|
|
431,190
|
|
|
|
435,196
|
|
Wages payable
|
|
|
138,790
|
|
|
|
119,858
|
|
Tax payable
|
|
|
254,412
|
|
|
|
463,460
|
|
Total current liabilities
|
|
|
1,125,028
|
|
|
|
1,315,944
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, ($0.0001 par value,
300,000,000 shares authorized,
62,239,737 issued and outstanding as of
September 30, 2012 and June 30, 2012,
respectively)
|
|
|
6,224
|
|
|
|
6,224
|
|
Additional paid-in capital
|
|
|
1,462,227
|
|
|
|
1,462,227
|
|
Accumulated other comprehensive income
|
|
|
3,234,076
|
|
|
|
2,664,729
|
|
Statutory reserve
|
|
|
38,679
|
|
|
|
38,679
|
|
Retained earnings
|
|
|
47,892,170
|
|
|
|
47,989,919
|
|
Total stockholders' equity
|
|
|
52,633,376
|
|
|
|
52,161,778
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
53,758,404
|
|
|
$
|
53,477,722
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
(Unaudited)
|
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
1,453,308
|
|
|
$
|
22,193,526
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
1,116,648
|
|
|
|
12,970,066
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
336,660
|
|
|
|
9,223,460
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses
|
|
|
354,065
|
|
|
|
1,963,173
|
|
Depreciation and amortization expenses
|
|
|
16,000
|
|
|
|
14,699
|
|
Research & development
|
|
|
118,081
|
|
|
|
-
|
|
Total operating expenses
|
|
|
488,146
|
|
|
|
1,977,872
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(151,486
|
)
|
|
|
7,245,588
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
61,480
|
|
|
|
73,138
|
|
Interest expense
|
|
|
-
|
|
|
|
(7,100
|
)
|
Total other income
|
|
|
61,480
|
|
|
|
66,038
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(90,006
|
)
|
|
|
7,311,626
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
7,743
|
|
|
|
1,996,728
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(97,749
|
)
|
|
$
|
5,314,898
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
569,347
|
|
|
|
533,184
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
471,598
|
|
|
$
|
5,848,082
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
Basic & diluted earnings (loss) per share
|
|
$
|
(0.0016
|
)
|
|
$
|
0.0854
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic & diluted weighted average shares outstanding
|
|
|
62,239,737
|
|
|
|
62,239,737
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
For the Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
Net income (Loss)
|
|
$
|
(97,749
|
)
|
|
$
|
5,314,898
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
27,578
|
|
|
|
26,288
|
|
Imputed interest
|
|
|
-
|
|
|
|
7,100
|
|
(Increase) / decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts receivables and other receivables
|
|
|
991,520
|
|
|
|
(4,975,798
|
)
|
Inventory
|
|
|
7,474
|
|
|
|
(158,714
|
)
|
Prepaid expenses
|
|
|
119,581
|
|
|
|
124,199
|
|
Increase/(decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other payables
|
|
|
(194,377
|
)
|
|
|
1,994,894
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
854,027
|
|
|
|
2,332,867
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
-
|
|
|
|
(66,031
|
)
|
Increases in construction-in-progress
|
|
|
-
|
|
|
|
(378,429
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(444,460
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Repayment of related parties loan
|
|
|
(4,326
|
)
|
|
|
-
|
|
Proceeds from related party debts
|
|
|
-
|
|
|
|
378,429
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(4,326
|
)
|
|
|
378,429
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
491,943
|
|
|
|
331,936
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,341,644
|
|
|
|
2,598,772
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning balance
|
|
|
44,504,531
|
|
|
|
23,744,820
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending balance
|
|
$
|
45,846,175
|
|
|
$
|
26,343,592
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
7,743
|
|
|
$
|
4,076,657
|
|
Cash paid for interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
CHINA HEALTH INDUSTRIES HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING
POLICIES
China Health Industries Holdings, Inc.
(“China Health US”) was incorporated in the State of Arizona on July 11, 1996 and was the successor of the business
known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it entered into a Stock Purchase Agreement and Share Exchange
(effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”), a Delaware corporation, and changed its name to Universal
Fog, Inc. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned
subsidiary of Edmonds 6.
China Health Industries Holdings Limited
("China Health HK") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability
company. China Health HK was formed for the purpose of seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as defined by FASB ACS topic 915 (“Development Stage
Entities”).
Harbin Humankind Biology Technology Co.,
Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC")
on December 14, 2003, as a limited liability company under the Company Law of PRC. Humankind is engaged in the manufacture
and sale of health products and “green” (or organic) food, and the detection of disease susceptibility or pre-disposition
through genetic studies.
On August 20, 2007, the sole shareholder
of China Health HK entered into a share purchase agreement (“Share Purchase Agreement”) with the owners of Humankind.
Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the ownership in Humankind for a cash consideration
of $60,408 (“Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind became a wholly-owned
subsidiary of China Health HK. The share purchase transaction was accounted for as a “reverse merger”: since the owner
of Humankind owned a majority of the outstanding shares of China Health HK’s common stock immediately following the execution
of the Share Purchase Agreement, it was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities
and the historical operations that have been reflected in the financial statements for periods prior to the Share Purchase are
those of Humankind and have been recorded at the historical cost basis. After completion of the Share Purchase, China Health HK’s
consolidated financial statements include the assets and liabilities of both China Health HK and Humankind, the historical operations
of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the Share Purchase.
On October 14, 2008, Humankind set up a
99% owned subsidiary Harbin Huimeijia Medicine Company (“Huimeijia”) with its primary business being manufacturing
and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of Huimeijia. Huimeijia is consolidated in
the consolidated financial statements of China Health HK.
On December 31, 2008, China Health HK.
entered into a reverse merger with Universal Fog, Inc., a U.S. publicly traded shell company (the “Transaction”). China
Health HK is the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US. After
the Transaction and a 20:1 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737
total outstanding shares of common stock of China Health US. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common
stock to 296 individuals, leaving him with 33,003,088 shares of common stock of China Health US, or approximately 53.03% of the
total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries Holdings, Inc. on February
19, 2009.
China Health US, China Health HK, Humankind,
and Huimeijia are collectively referred herein to as the “Company.”
Our present corporate structure is as follows:
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared by Company without audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted
as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the years ended June 30, 2013 and 2012. These
condensed consolidated financial statements include all adjustments, which in the opinion of management are necessary to a fair
presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. The results
of operations for the three months ended September 30, 2012 may not be indicative of results that may be expected for the year
ending June 30, 2013.
Translation of Foreign Currencies
Humankind and Huimeijia maintain their
books and accounting records in PRC currency “Renminbi” (“RMB”), which has been determined as the functional
currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the
date of the transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains and losses resulting from these
transactions are included in operations.
Humankind and Huimeijia’s financial
statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of
China Health are translated at the prevailing exchange rate at each reporting period end date. Contributed capital accounts are
translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average
rate of exchange during the reporting period. Translation adjustments resulting from the translation of these financial statements
are reflected as accumulated other comprehensive income in shareholders’ equity.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. China Health bases its estimates and judgments on historical experience and on various
other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future
events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as
more experience is acquired, as additional information is obtained and as our operating environment changes. The more significant
estimates and assumptions by management include, among others; useful lives and residual value of long-lived assets, valuation
of inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, intangible assets and deferred
taxes. While the Company believes that the estimates and assumptions used in the preparation of the financial statements are appropriate,
actual results could differ from those estimates.
Statement of Cash Flows
In accordance with Statement FASB ASC Topic
230,
Statement of Cash Flows
, cash flow from the Company's operations is calculated based upon the local currencies. As
a result, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Cash and Cash Equivalents
Cash and cash equivalents include cash
on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as
to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
The company maintains cash and cash equivalents
at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation
(FDIC). As of September 30, 2012, the Company’s uninsured bank balance which was mainly maintained at financial institutions
located in the PRC, totaled $45,846,175. The Company’s insured bank balance, which was maintained at US financial institutions,
totaled $0.
Revenue Recognition
The Company recognizes
revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the
product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection
of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of
the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and
rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue
recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations.
The Company records revenue net of sales taxes. The Company allows its customers to return product for exchange or credit subject
to certain limitations. A provision for such returns is recorded based upon historical experience. As of September 30, 2012, the
Company had a provision amounted to $297,935 for such returns, as historically sales returns have been de minimums.
Concentrations of Credit Risk
All of the Company’s manufacturing
is located in the PRC. There can be no assurance that the Company will be able to successfully continue to manufacture its
products and failure to do so would have a material adverse effect on the Company’s financial position,
results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies,
some of which are beyond management’s control. These contingencies include general economic conditions, prices of raw materials,
competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade in the
PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s
operations will be subject to the risks of restrictions on transfer of funds, domestic and international customs, changing taxation
policies, foreign exchange restrictions, and political and governmental regulations.
The Company operates in China, which may
give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between
U.S. dollars and the Chinese currency RMB. The results of operations denominated in foreign currency are translated
at the average rate of exchange during the reporting period.
Earnings Per Share
Basic earnings per common share is computed
by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the
period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding
during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon
exercise of common stock options and warrants.
For the three months ended September 30, 2012
and 2011, the Company had no potential dilutive common stock equivalents outstanding.
Potential common shares issued are calculated
using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants
in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market
price of the common stock during the period.
FASB ASC Topic 260,
Earnings Per Share
,
requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.
Comprehensive Income
The Company reports comprehensive income
in accordance with FASB ASC Topic 220
Comprehensive Income
, which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Total comprehensive income is defined as
all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders
(i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus
or minus adjustments for currency translation. Total comprehensive income was a gain of $471,598 and $5,848,082 for the three months
ended September 30, 2012 and 2011, respectively.
While total comprehensive income is the
activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”)
represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI
is primarily the cumulative balance related to adjustments for currency translation and increased overall equity by $3,234,076
and $2,664,729 as of September 30, 2012 and June 30, 2012, respectively.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02,
Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities
with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely
than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an
indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise,
it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment,
if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal
years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have
a material impact on the Company’s financial statements.
Note 2 – ACCOUNTS RECEIVABLE
The Company’s accounts receivable
totaled to $1,207,483 and $2,186,143 as of September 30, 2012 and June 30, 2012, respectively. The decrease in accounts receivable
was primarily due to settlement by company’s sale agents during three months period ended September 30, 2012. Company offered
these agents 60 days to 90 days term in order to increase the Company’s sales. Agents normally settled the accounts receivable
within one month in current quarters. Most of the Company’s products were sold to the sales agents during three-month period
ended September 30, 2012.
Note 3 - INVENTORIES
Inventory consists of following:
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
Inventories
|
|
|
|
|
|
|
Finished Goods
|
|
|
55,189
|
|
|
|
61,624
|
|
Work-in-Progress
|
|
|
38,237
|
|
|
|
56,572
|
|
Raw Materials
|
|
|
153,397
|
|
|
|
137,163
|
|
Supplies and Packing Materials
|
|
|
22,081
|
|
|
|
18,131
|
|
Total Inventory
|
|
$
|
268,904
|
|
|
$
|
273,490
|
|
Note 4 – PREPAID EXPENSES
Prepaid expenses consist of following:
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
Prepaid R&D Expenses
|
|
|
485,984
|
|
|
|
600,321
|
|
Advance to Raw Material Suppliers
|
|
|
100,395
|
|
|
|
99,317
|
|
Total
|
|
$
|
586,379
|
|
|
$
|
699,638
|
|
Prepaid expenses principally include prepaid
R&D expenses and advances to raw material suppliers.
The Company has entered into five Technology
Development Agreements (the “Agreements”) with Shenyang Pharmaceutical University and Jiamusi Pharmaceutical University
(the “Contractors”) during the period from April 9, 2010 through July 7, 2010. The Agreements are to entrust the Contractors
to develop different tablet and health food product, and obtain the approval for the correlated registration or certification within
a certain period (3 years) on behalf of the Company. The Company recognized the amount paid to the Contractors as prepaid expense,
and recognize R&D expense ratably over the terms of the Agreements. As of September 30, 2012 and June 30, 2012, the prepaid
expenses amounted to $485,984 and $600,321 respectively.
The Company periodically
makes advances to certain vendors for purchases of raw materials, and records those advances as advances to suppliers.
Advances to suppliers as of September 30, 2012 and June 30, 2012 amounted to $100,395 and $99,317 respectively.
Note 5 – LONG TERM DEPOSIT
The Company paid $3,341,395 (RMB 21,000,000)
as of September 30, 2012 and $3,305,525 (RMB 21,000,000) as of June 30, 2012 to Harbin Songbei District Development and Construction
Committee as prepayment for the acquisition of land use rights. The Company is in the process of going through a full range of
procedures before the land use rights can be granted to the Company.
Note 6 – CONSTRUCTION IN PROGRESS
Plant and production lines of Huimeijia
under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, and
includes development expenditures, professional fees and the interest expenses capitalized during the course of construction for
the purpose of financing the project. Currently, construction has been completed and the project is waiting for final inspection
and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred
to property and equipment, at which time depreciation will commence. The Company has no capitalized interest and to date has funded
this construction through operations without the use of outside debt financing. As of September 30, 2012 and June 30, 2012, the
Company had incurred a total of $1,909 and $1,889 in construction in progress, respectively.
On August 15, 2011, Humankind entered into
an agreement with a contractor to construct an office building for the Company. Estimated total cost of construction was approximately
$640,068 (RMB4,022,700). The Company anticipates the construction to be completed within 45 days from August 15, 2011 to October
15, 2011. Due to local weather condition, the construction has not been completed on time. As of June 30, 2012, 75% of construction
had been completed and $474,898 (RMB 3,017,025) had been recorded as cost of construction in progress. As of September 30, 2012,
office building had been completed and the $480,051 (RMB3,017,025) had been recorded as cost of construction in progress.
Upon readiness for use of the project,
the cost of construction-in-progress will be transferred to property and equipment, at which time depreciation will commence.
Note 7 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
Building and Warehouses
|
|
|
1,104,567
|
|
|
|
1,092,710
|
|
Machinery and Equipment
|
|
|
198,707
|
|
|
|
196,574
|
|
Office Equipment
|
|
|
41,754
|
|
|
|
41,306
|
|
Vehicles
|
|
|
162,514
|
|
|
|
160,769
|
|
Other
|
|
|
23,867
|
|
|
|
23,611
|
|
Less: Accumulated Depreciation
|
|
|
(386,059
|
)
|
|
|
(359,426
|
)
|
Total
|
|
$
|
1,145,350
|
|
|
$
|
1,155,544
|
|
Depreciation expense was $22,493 and $21,348
for the three months ended September 30, 2012 and 2011. Depreciation expense charged to operations was $10,915 and $9,759 for the
three months ended September 30, 2012 and 2011, respectively. Depreciation expense charged to cost of goods sold was $11,578 and
$11,589 for the three months ended September 30, 2012 and 2011, respectively.
Note 8 - INTANGIBLE ASSETS
The following is a summary of intangible assets:
|
|
September 30, 2012
|
|
|
June 30, 2012
|
|
Land Use Right
|
|
|
1,008,462
|
|
|
|
997,636
|
|
Less: Accumulated Amortization
|
|
|
(151,512
|
)
|
|
|
(144,802
|
)
|
Intangible Asset - Net
|
|
$
|
856,950
|
|
|
$
|
852,834
|
|
Amortization expense charged to operations
was $5,085 and $4,940 for the three months ended September 30, 2012 and 2011, respectively.
Note 9 - RELATED PARTY DEBT
Related party debt represents temporary
short-term loans from the majority owner, Mr. Xin Sun, our Chairman and principal executive officer, a PRC citizen. These loans
are unsecured, non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand. Cash flow
classified as due to Mr. Sun is classified as cash flow from financing activities. The total borrowings from Mr. Sun were $431,190
and $435,196 as of September 30, 2012 and June 30 2012, respectively.
Note 10 - COMMITMENTS AND CONTINGENCIES
The Company’s assets are located in PRC and revenues
are derived from operations in PRC.
In terms of industry regulations and policies,
the economy of PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese
government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership
of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive
assets in PRC is still owned by the Chinese government. For example, all land is state owned and are leased to business entities
or individuals through the government’s granting of land use rights. The granting process is typically based on government
policies at the time of grant and it can be lengthy and complex. This process may adversely affect the Company’s future manufacturing
expansions. The Chinese government also exercises significant control over PRC’s economic growth through allocation of resources
and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental
policies and measures.
the Company faces a number of risks and
challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC,
and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system,
overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a
state of change. The PRC also faces many social, economic and political challenges that may produce major shocks, instabilities
and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks,
instabilities and crises may in turn significantly and negatively affect the Company’s performance
.
Rental expense was approximately $5,510
and $3,763, for the three months ended September 30, 2012 and 2011, respectively. Since the Company orally terminated its rental
agreement, there is no rental commitment for the three months ended September 30, 2012 and 2011.
Note 11 – MAJOR SUPPLIERS AND CUSTOMERS
The Company had seven suppliers in the
three months ended September 30, 2012, one of them accounted for 80% of the Company’s purchases for the three months ended
September 30, 2012.
The Company had five customers that in
the aggregate accounted for 60% of the Company’s total sales for the three months ended September 30, 2012 with each accounting
for 13%, 12%, 12%, 12% and 11%, respectively.
The Company had two suppliers that in the aggregate accounted
for 82% of the Company’s purchases for the three months ended September 30, 2011 with each accounting for 55% and 27%, respectively.
The Company had three customers that in the aggregate accounted
for 38% of the Company’s total sales for the three months ended September 30, 2011 with each accounting for 13%, 13% and
12%, respectively.