Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - PHOENIX ENERGY RESOURCE CORPexhibit31-2.htm
EX-32.2 - EXHIBIT 32.2 - PHOENIX ENERGY RESOURCE CORPexhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - PHOENIX ENERGY RESOURCE CORPexhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - PHOENIX ENERGY RESOURCE CORPexhibit31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2011

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to _____________

Commission File No. 000-52843

CHINA FORESTRY INDUSTRY GROUP, INC.
(Exact name of registrant as specified in its charter)

Nevada 20-5408832
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)  

Jun Yue Hua Ting, Building A
3rd Floor, Unit -1
#58 Xin Hua Road
Guiyang, Guizhou 550002
People’s Republic of China
(Address of principal executive offices)

(+86) 851-552-0951
(Registrant’s telephone number, including area code)

_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ]   No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [   ]   No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

                   Large accelerated filer [   ] Accelerated filer [   ]  
                   Non-accelerated filer  [   ] (Do not check if a smaller reporting company)       Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes[   ]   No [ X ]

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 23, 2011 is as follows:

Class of Securities   Shares Outstanding
Common Stock, $0.001 par value   30,000,000



 CHINA FORESTRY INDUSTRY GROUP, INC. 
 
 Quarterly Report on Form 10-Q 
 Three Months Ended March 31, 2011 
 
 TABLE OF CONTENTS 
 
 PART I 
 FINANCIAL INFORMATION 
Item 1. Financial Statements F-2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk 7
Item 4. Controls and Procedures 7
 PART II 
 OTHER INFORMATION 
Item 1. Legal Proceedings 8
Item 1A. Risk Factors 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
Item 3. Defaults Upon Senior Securities 8
Item 4. (Removed and Reserved) 8
Item 5. Other Information 8
Item 6. Exhibits 8

i


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA FORESTRY INDUSTRY GROUP, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

 

 

Financial Statements Page(s) 
        Condensed Consolidated Balance Sheets F-3
        Condensed Consolidated Statements of Income and Comprehensive Income F-4
        Condensed Consolidated Statements of Cash Flows F-5
        Condensed Notes to Consolidated Financial Statements F-6 - F - 22

F-2



CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES   
   
CONDENSED CONSOLIDATED BALANCE SHEETS   
    March 31,     December 31,  
    2011     2010  
    (Unaudited)     (Audited)  
ASSETS            
Current assets:            
Cash and cash equivalents $  4,587,506   $  2,334,910  
Accounts receivable, net of allowance of $- and $27,252, respectively   8,534,436     5,423,123  
Inventory   9,092,706     6,949,679  
Deposits and prepaid expenses   13,944,563     12,390,756  
Other receivables   2,456,936     777,236  
Taxes recoverable   2,086,809     2,452,407  
Total current assets   40,702,956     30,328,111  
Property, plant and equipment, net   6,339,156     6,352,289  
Land use rights, net   6,632,492     6,666,591  
Construction in progress   5,321,995     5,304,348  
Total assets $  58,996,599   $  48,651,339  
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities:            
Short term loans $  7,610,234   $  4,535,830  
Accounts payable   2,778,874     3,388,806  
Customer deposits   1,502,524     1,936,733  
Other payables and accrued expenses   1,005,623     2,567,191  
Taxes payable   3,209,486     3,290,481  
Total current liabilities   16,106,741     15,719,041  
Long term loans   7,762,439     -  
Total liabilities   23,869,180     15,719,041  

Commitments and contingencies (Note 19)

           

Stockholders' equity

           

Preferred stock: 5,000,000 shares authorized of $0.001 par value none issued and outstanding

- -

Common stock: 100,000,000 shares authorized of $0.001 par value 30,000,000 and 30,000,000 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively

30,000 30,000

Additional paid in capital

  17,988,805     17,988,805  

Accumulated other comprehensive income

  2,395,142     2,291,124  

Retained earnings

  14,713,472     12,622,369  

Total stockholders’ equity

  35,127,419     32,932,298  
Total liabilities and stockholders’ equity $  58,996,599   $  48,651,339  

The accompanying notes are an integral part of the condensed consolidated financial statements

F-3


CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

UNAUDITED    
    For The Three Months Ended  
    March 31  
    2011     2010  
Revenue $  10,442,974   $  4,290,999  
Cost of revenue   6,864,981     2,776,873  
Gross profit   3,577,993     1,514,126  
Operating expenses            
         Selling expenses   349,595     75,435  
         General and administrative expenses   373,624     218,953  
Total operating expenses   723,219     294,388  
Income from operations   2,854,774     1,219,738  
Other income (expenses)            
         Interest income   8,999     -  
         Interest expenses   (220,023 )   (21,348 )
         Other income   49,496     43,567  
         Other expenses   (26,275 )   -  
         Government grant income   -     294,247  
Total other income (expenses)   (187,803 )   316,466  
Income before income taxes   2,666,971     1,536,204  
Less: Provision for income taxes   575,867     310,883  
Net income   2,091,104     1,225,321  
Other comprehensive income            
         Foreign currency translation gain   104,018     92,041  
Net comprehensive income $  2,195,122   $  1,317,362  
Earnings per share            
- Basic $  0.07   $  0.06  
- Diluted $  0.07   $  0.06  
Weighted average shares outstanding            
- Basic   30,000,000     20,500,000  
- Diluted   30,000,000     20,500,000  

The accompanying notes are an integral part of the condensed consolidated financial statements

F-4



CHINA FORESTRY INDUSTRY GROUP, INC. AND SUBSIDIARIES   
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   
   
UNAUDITED    
    For The Three Months Ended  
    March 31  
    2011     2010  
Cash flows from operating activities            
         Net income $  2,091,104   $  1,225,321  
Adjustments to reconcile net income to net cash provided by operating activities:        
         Depreciation   79,628     68,351  
         Amortization   56,112     54,239  
Changes in operating assets and liabilities:            
         Accounts receivable   (3,084,211 )   346,816  
         Inventory   (2,113,697 )   245,172  
         Deposits and prepaid expenses   (1,510,603 )   3,028,787  
         Other receivables   (219,215 )   (727,626 )
         Taxes recoverable   372,662     293,432  
         Accounts payable   (619,386 )   (6,385,151 )
         Customer deposits   (439,362 )   1,411,913  
         Other payables and accrued expenses   (3,023,266 )   5,984,417  
         Taxes payable   (91,672 )   452,296  
         Net cash (used in) provided by operating activities   (8,501,906 )   5,997,967  
Cash flows from investing activities            
         Additions to property, plant and equipment   (45,462 )   (26,466 )
         Additions to land use rights   -     (5,851,500 )
         Net cash used in investing activities   (45,462 )   (5,877,966 )
Cash flows from financing activities            
         Repayment of short term and long term loans   (743,618 )   -  
         Proceeds from short term and long term loans   11,533,675     -  
         Net cash provided by financing activities   10,790,057     -  
Effect of exchange rate changes in cash and cash equivalents   9,907     (4,038 )
Increase in cash and cash equivalents   2,252,596     115,963  
Cash and cash equivalents, beginning of period   2,334,910     1,471,729  
Cash and cash equivalents, end of period $  4,587,506   $  1,587,692  
Supplemental disclosure            
Cash paid during the period for:            
         Interest paid $  220,023   $  21,169  
         Income taxes paid $  188,142   $  -  

The accompanying notes are an integral part of the condensed consolidated financial statements

F-5


1. ORGANIZATION AND NATURE OF BUSINESS

China Forestry Industry Group, Inc. (formerly known as Exotacar, Inc. and Phoenix Energy Resource Corporation (“PNXE”) ( “the Company”, “we”, “us”, “our” or “CNFI”) was incorporated on June 3, 2005 in the State of Nevada. On June 25, 2008, the Company changed its business focus from the development of online exotic car sales and entered into the oil and natural gas industry towards indentifying and pursuing options regarding the development of energy resources, and changed its name from Exotacar, Inc. to Phoenix Energy Resource Corporation. From June 25, 2008 through to the date of the reverse acquisition, the Company was a designated shell company with minimal operations. On January 7, 2011, the Company changed its name from Phoenix Energy Resource Corporation to China Forestry Industry Group, Inc. to more accurately reflect the new business operations.

On November 1, 2010, the Company completed a reverse acquisition transaction pursuant to a share exchange agreement among the Company, China Bingwu Forestry Group Limited (“CBF”) and CBF’s sole stockholder, Ms. RenPing Tu, whereby the Company acquired 100% of the issued and outstanding capital stock of CBF in exchange for 20,500,000 shares of the Company’s stock, which constituted 68.33% of the Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition. As a result of the acquisition of CBF, the Company now owns all of the issued and outstanding capital stock of CBF, which in turn owns Qianxinan Aosen Forestry Co., Limited (“QAF”) and Qianxinan Silvan Touch Flooring Co., Limited (“QSTF”). For accounting purposes, the share exchange transaction with CBF was treated as a reverse acquisition and recapitalization of CNFI, with CBF as the acquirer and CNFI as the acquired party. Upon completion of the exchange, CBF, QAF and QSTF became wholly owned subsidiaries of CNFI.

China Bingwu Forestry Group Limited (“CBF”) was incorporated under the Companies laws of the Hong Kong Special Administrative Region of the People’s Republic of China on April 9, 2010. It was principally established to serve as an investment holding company and its operations are carried out in Hong Kong.

On May 18, 2010, CBF entered into an Equity Ownership Transfer Agreement (the “Transfer Agreement”) with the existing stockholders of QAF, namely Mr. YuLu Bai, to acquire 100% equity interest of QAF for $2,488,471. This business combination was accounted for as entities under common control because the majority shareholders of CBF and QAF are the same people.

QAF is a private corporation, incorporated under the laws of the People’s Republic of China (“PRC”) on November 22, 2004. QAF’s principal activities are manufacturing and wholesaling of fiber boards, wood flooring, carpentry boards, wood products, furniture, and timber.

On October 22, 2007, QAF formed Qianxinan Silvan Touch Flooring Co., Limited (“QSTF”) of which QAF owned a 55% equity interest. On May 8, 2009, QAF acquired the remaining 45% equity interest in QSTF from the existing stockholder and QSTF became 100% wholly owned by QAF. QSTF’s principal activities are manufacturing and wholesaling of wood flooring, furniture and decorations.

As a result of the reverse acquisition of CBF, the Company entered into a new business. Through its Chinese subsidiaries, the Company is now engaged in the business of manufacturing and wholesaling of fiber boards, wood flooring, carpentry boards, wood products, furniture, timber and decorations.

On March 24, 2011, QSTF formed a wholly owned subsidiary, Guiyang Silvan Touch Flooring Co., Limited (“GSTF”) in the PRC. The total paid-in capital of GSTF was $3,044,094 (RMB 20 million). GSTF’s principal activities are manufacturing and wholesaling of wood flooring, furniture and decorations.

On March 29, 2011, QAF further invested $6,088,187 (RMB40,000,000) in QSTF. The registered capital of QSTF increased to $9,132,281 (RMB60,000,000). QSTF is 100% wholly owned by QAF.

The Company is headquartered in the PRC, and the principal location of operation of the Company is at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, the People’s Republic of China.

F-6


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The condensed consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in the PRC, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the condensed consolidated financial statements in accordance with US GAAP.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Group believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Group for the year ended December 31, 2010 and notes thereto included in the Form 10K of China Forestry Industry Group, Inc. filed on April 15, 2011. The Group follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

Principle of consolidation

The condensed consolidated financial statements include the accounts of CNFI, CBF, QAF, QSTF and GSTF. All significant intercompany balances and transactions have been eliminated in the consolidation. The condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission.

Use of estimates

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.

Significant Estimates

These financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to depreciation of property, plant and equipment, allowance for uncollectible accounts, impairment testing of long-lived assets and various contingent liabilities. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

F-7


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Revenue recognition

The Company’s revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer, including the distributor and the end user. No return allowance is made as products returns are insignificant based on historical experience.

The Company recognizes revenue upon shipment. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT liability may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

Shipping and handling

Shipping and handling costs are included in cost of revenue and selling expenses which totaled $22,508 and $47,637 for the three months ended March 31, 2011 and 2010, respectively.

Advertising

Advertising costs are included in selling expenses which totaled $59,034 and $29,556 for the three months ended March 31, 2011 and 2010, respectively.

Government grants

Government grants may represent local authority grants to the company for industry development and the revenue is recognized on cash basis when the local authority approves the grant to the Company. Government grant income may also consist of value added tax refunds or certain other reimbursements from the government.

Foreign currency translation

Assets and liabilities of the Company with a functional currency other than US$ are translated into US$ using period end exchange rates. Income and expense items are translated at the average exchange rates in effect during the period. Foreign currency translation differences are included as a component of Accumulated Other Comprehensive Income in Stockholders’ Equity.

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the financial statements were as follows:

  3/31/2011 3/31/2010
Year end RMB : USD exchange rate 6.5701 6.8361
Three months average RMB : USD exchange rate 6.5894 6.8360
     
  12/31/2010 12/31/2009
Year end RMB : USD exchange rate 6.5900 6.8200
Average yearly RMB : USD exchange rate 6.7600 6.8200

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Credit risk

The Company may be exposed to credit risk from its cash at bank. An allowance has been considered for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment. No allowance is considered necessary for the period.

F-8


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased. As of March 31, 2011 and December 31, 2010, substantially all of the Company’s cash and cash equivalents were held by major banks located in the PRC, which management believes are of high credit quality.

Accounts receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

The standard credit period for most of the Company’s clients is three months. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of March 31, 2011 and December 31, 2010. Allowance for doubtful accounts as of March 31, 2011 and December 31, 2010 are $0 and $27,252, respectively.

Inventory

Inventory is valued at the lower of cost (determined on a weighted average method) and net realizable value.

Costs incurred in bringing each product to its location and conditions are accounted for as follows:

  • raw materials – purchase cost on a weighted average basis;

  • manufactured finished goods and work-in-progress – cost of direct materials and labor and a portion of manufacturing overhead based on normal operating capacity but excluding borrowing costs; and

  • retail and wholesale merchandise finished goods – purchase cost on a weighted average basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets.

Assets Classifications Estimated Useful Lives
Buildings 30 years
Plant and machinery 3 to 50 years
Motor vehicles 5 to 10 years
Office equipment 3 to 10 years
Furniture and fixtures 4 to 30 years

An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statements of income in the period the item is disposed. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.

F-9


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Construction in progress

Construction in progress represents the direct cost of construction and cost of plant and machinery installed as well as acquisition cost and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction in progress is completed and the asset is ready for its intended use.

Intangible assets

Intangible assets consist of land use rights which represent acquisition of land use rights of agriculture land from farmers and are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land ranges from 30 years to 60 years.

Impairment of long – lived assets and intangible assets

In accordance with ASC 360, “Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of March 31, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.

Income taxes

The Company accounts for income taxes under the provisions of ASC 740 "Accounting for Income Taxes". Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

ASC 740 also prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.

F-10


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Trade and other payables

Trade payables and other payables are carried at cost and represent liabilities for goods and services provided to the Company prior to the end of the period that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. Trade payables are non-interest bearing and are normally settled on 7 to 60 day terms.

Product warranties

Substantially all of the Company’s products are covered by a standard warranty of 1 year for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides warranty reserve for product warranties to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. The product warranty reserve was $0 as of March 31, 2011 and December 31, 2010.

Related parties

Parties are considered to be related to the Company if the related party has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or where the Company and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the company.

Comprehensive income

The Company follows the FASB’s accounting standard. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.

Retirement benefit costs

PRC state managed retirement benefit programs are defined contribution plans and the payments to the plans are charged as expenses when employees have rendered service entitling them to the contribution.

Accumulated other comprehensive income

ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.

Earnings per share (EPS)

Earnings per share is calculated in accordance with ASC 260-10 which requires the Company to calculate net income (loss) per share based on basic and diluted net income (loss) per share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

There is no dilution factor occurred during the period, the basic EPS equals diluted EPS.

F-11


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (FASB) issued amended guidance to clarify the acquisition date that should be used for reporting pro-forma financial information for business combinations. If comparative financial statements are presented, the pro-forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been completed as of the beginning of the comparable prior annual reporting period. The amendments in this guidance became effective prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The Company adopted this guidance on January 1, 2011 which had no impact in the consolidated financial results as the amendments relate only to additional disclosures.

In December 2010, the FASB issued amendments to the guidance on goodwill impairment testing. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In making that determination, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The amendments were effective January 1, 2011 and the Company adopted this guidance on January 1, 2011 which did not have a material impact in the Consolidated Financial Statements.

In January 2010, the FASB issued additional disclosure requirements for fair value measurements which the company included in its interim and annual financial statements in 2010. Certain disclosure requirements relating to fair value measurements using significant unobservable inputs (Level 3) were deferred until January 1, 2011. These new requirements did not have an impact in the consolidated financial results as they relate only to additional disclosures.

F-12


3. ACCOUNTS RECEIVABLE

The Company has performed an analysis on all of its accounts receivable and determined that all amounts are probable of collection within one year. As such, all trade receivables are reflected as a current asset. Allowance for doubtful accounts as of March 31, 2011 and December 31, 2010 are $0 and $27,252, respectively. Bad debts written off for the three months ended March 31, 2011 and 2010 are $0.

Aging of accounts receivable is as follows:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Within 3 months $  6,500,751   $  2,430,367  
Over 3 months but within 6 months   -     2,516,207  
Over 6 months but within 12 months   2,033,685     503,801  
Over 1 year   -     -  
    8,534,436     5,450,375  
Allowance for doubtful accounts   -     (27,252 )
  $  8,534,436   $  5,423,123  

4. INVENTORY

Inventory consists of:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Raw materials $  7,835,142   $  6,297,151  
Finished goods   1,136,457     556,148  
Packing materials and consumable   121,107     96,380  
  $  9,092,706   $  6,949,679  

There was no allowance made for obsolete or slow moving inventory as of March 31, 2011 and December 31, 2010.

F-13


5. DEPOSITS AND PREPAID EXPENSES

Deposits and prepaid expenses consist of:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Deposits for            
Property (Note 19) $  6,468,699   $  -  
Raw materials and goods supplies   5,921,552     9,424,358  
Equipment   568,244     1,763,382  
Construction in progress   65,538     69,714  
Electricity   -     113,860  
Transportation   124,936     129,861  
Prepayment for services   779,765     773,334  
Others   15,829     116,247  
  $  13,944,563   $  12,390,756  

Trade deposits are paid to suppliers of raw materials and goods supplies, equipment, construction in progress, electricity and transportation as deposits for inventory purchases and provision for services. The inventory is normally delivered within one to two months after the payments have been made. Prepayments for services were paid for financial advisory services and services in connection with the listing of the Company.

6. OTHER RECEIVABLES

Other receivables consist of:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Due from related party (Note 23) $  1,444,174   $  -  
Guarantee deposits   684,982     682,711  
Due from employees   182,366     73,066  
Promotion fee receivable   114,902     -  
Design fee receivable   -     9,665  
Others   30,512     11,794  
  $  2,456,936   $  777,236  

Guarantee deposits are provided to financial institutions in return for issuance of a corporate guarantee to financiers. Due from employees are the amounts advanced for business transactions on behalf of the Company and will be reconciled on the completion of business transactions.

7. TAXES RECOVERABLE

Taxes recoverable consist of:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
VAT $  2,086,809   $ 2,452,407  

F-14


8. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consist of the following:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Buildings $  2,984,996   $  2,975,099  
Plant and equipment   4,009,205     3,968,175  
Motor vehicles   134,983     134,536  
Office equipment   64,935     99,436  
Furniture and fixtures   98,966     46,212  
    7,293,085     7,223,458  
Less: Accumulated depreciation   (953,929 )   (871,169 )
  $  6,339,156   $  6,352,289  

During the three months ended March 31, 2011, depreciation expenses amounted to $79,628, of which $64,744 and $14,884 were recorded as cost of sales and general and administrative expenses, respectively.

During the three months ended March 31, 2010, depreciation expenses amounted to $68,351, of which $57,543 and $10,808 were recorded as cost of sales and general and administrative expenses, respectively.

9. LAND USE RIGHTS

Land use rights consist of:

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Land use rights $  6,941,330   $  6,915,752  
Less: Accumulated amortization   (308,838 )   (249,161 )
Total $  6,632,492   $  6,666,591  

Private ownership of land is not permitted in the PRC. Instead, the Company has leased three lots of land. The cost of the first and second lots land use rights acquired in 2007 and 2008 were $320,426 (RMB2,105,232) and $532,716 (RMB3,500,000), respectively and these lots were located at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, the People’s Republic of China. The cost of the third lot of land use rights acquired in 2010 was $6,088,187 (RMB40,000,000) and was located at Liping County, Qiandongnan, Guizhou Province, the People’s Republic of China.

Land use rights are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land is 30 years.

During the three months ended March 31, 2011 and 2010, amortization expenses amounted to $56,112 and $54,239 respectively which was recorded under general and administrative expenses.

Estimated amortization for the next five years and thereafter is as follows:

Remainder of 2011 $  168,832  
2012   225,109  
2013   225,109  
2014   225,109  
2015   225,109  
Thereafter   5,563,224  
Total $  6,632,492  

F-15


10. CONSTRUCTION IN PROGRESS

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Wooden fiber manufacturing factory $  5,268,534   $  5,251,065  
Wooden floor manufacturing factory   53,461     53,283  
Total $  5,321,995   $  5,304,348  

11. SHORT TERM AND LONG TERM LOANS

There are no provisions in the Company’s bank borrowings that would accelerate repayment of loan as a result of a change in credit ratings or a material adverse change in the Company’s business. Under certain agreements, the Company has the option to retire the loans prior to maturity, either at par or at a premium over par.

(a) Short term loans

Short-term loans represent the borrowings from commercial banks that are due within one year. These loans consisted of the following:

                Interest     March 31,     December 31,    
Bank   Term     Notes     rate     2011     2010  
                      (unaudited)        
Xingyi City Rural Cooperative Bank   March 26, 2010 to               $     $    
    March 25, 2011           7.965%      -      743,330  
Bank of Chongqing   June 21, 2010 to     (i)                    
    June 20, 2011           5.310%     3,044,094     3,034,000  
Xingyi City Rural Cooperative Bank   July 17, 2009 to     (ii)                    
    July 16, 2011           8.100%     761,023     758,500  
China Merchant Bank   March 8, 2011 to     (iii)                    
    March 7, 2012           6.060%     3,805,117     -  
                    $  7,610,234   $  4,535,830  

(b) Long term loans

Long term loans consists of the following:

                Interest     March 31,     December 31,  
Bank   Term     Notes     rate     2011     2010  
                      (unaudited)        
Guiyang City Nanming Rural Credit   January 19, 2011 to     (iii)     8.775%   $ 3,805,117   $ -  
Cooperative Bank   November 18, 2012                          
Guiyang City Nanming Rural Credit   January 19, 2011 to     (iii)     8.775%     3,957,322     -  
Cooperative Bank   January 18, 2013                          
                  $ 7,762,439   $ -  

Notes:

(i) The loan is secured by forestry land use right of the company. The net book value of the forestry land use right is $1,342,572 and $1,349,965 as of March 31, 2011 and December 31, 2010.

(ii) The loan has a corporate guarantee by Zhong Ruixin Investment Guarantee Co., Ltd in which our director, Mr. Yi Zeng also serves as their general manager.

(iii) The loans are secured by the real estate properties of Guizhou Huacheng Group in which our director, Mr. Yudong Ji also serves as their chairman.

Interest expenses on the loans for the three months ended March 31, 2011 and 2010 amounted to $220,023 and $25,948, respectively.

F-16


12. CUSTOMER DEPOSITS

Customer deposits represent amounts advanced by customers for orders of product. The products normally are shipped within three months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of March 31, 2011 and December 31, 2010, customer deposits amounted to $1,502,524 and $1,936,733, respectively.

13. OTHER PAYABLES AND ACCRUED EXPENSES

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Due to related parties (Note 23) $  -   $  1,527,080  
Due to third parties   807,168     775,187  
Due to employees   45,357     151,700  
Accrued wages   153,098     113,224  
Total $  1,005,623   $  2,567,191  

14. TAXES PAYABLE

    March 31,     December 31,  
    2011     2010  
    (unaudited)        
VAT $  279,030   $  730,056  
Enterprise income tax   2,898,414     2,501,229  
City maintenance and construction levies   14,024     31,925  
Stamp duty   -     1,731  
Education levies   13,057     25,540  
Other   4,961     -  
  $  3,209,486   $  3,290,481  

15. INCOME TAXES

The Company is incorporated in the State of Nevada in the U.S. and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax.

No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the three months ended March 31, 2011 and 2010.

Beginning January 1, 2008, China unified the corporate income tax rule on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.

Under Guizhou Province preferential tax policy, QAF and QSTF are entitled to certain tax exemptions and reductions available to all companies in Guizhou Province, the People’s Republic of China.

Under these “tax holidays”, QAF is entitled to exemption from EIT for 3 years and reduced tax rates for 2 years after that, effective as of 2006 and 2009, respectively. Under Chinese tax law, enterprise income tax is charged and collected first and refunded later. Provisions for income tax were made at 25% on yearly reported profits less the amounts of income tax refunded for the fiscal years 2010 and 2009. QAF is subject to the uniform corporate income tax rate of 25% beginning in 2011.

Further, QSTF incurred income tax expenses during fiscal years 2010 and 2009, but QSTF was entitled to a claim for refund of these payments. Provision for income tax is made at EIT rate of 25% on yearly reported profits less the amounts of income tax refunded for the fiscal years 2010 and 2009.

F-17


15. INCOME TAXES – CONTINUED

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2011 and 2010:

    March 31,     March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
U.S. statutory rate   35%     34%  
Foreign income not recognized in USA   (35% )   (34% )
Hong Kong profits tax rate   16.5%     16.5%  
Offshore subsidiary income not recognized   (16.5% )   (16.5% )
China Enterprise income tax rate   25%     25%  
China Enterprise income tax concession   (-)     (-)  
Parent company losses not subject to PRC income tax   0.8%     0.2%  
Late payment penalty on income tax   0.2%     -  
Over provision of income tax in previous year   (4.4% )   (5.0% )
    21.6%     20.2%  

Provision for income taxes is as follows:

    March 31,     March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Income tax            
CNFI - U.S. corporate tax $  -   $  -  
CBF - Hong Kong profits tax   -     -  
QAF - China EIT   140,077     190,379  
QSTF - China EIT   435,790     120,504  
GSTF - China EIT   -     -  
Deferred tax   -     -  
  $  575,867   $  310,883  

16. STOCK OPTIONS AND WARRANTS

The Company accounts for its stock options and warrants in accordance with ASC Topic 718, “Compensation – Stock Compensation” and ASC Topic 505-50 “Equity – Based Payments to Non-Employees” which were adopted by the Company on December 15, 2010. The Company issued a warrant to a third party for the purchase of 60,000 shares of the Company’s common stock at an exercise price of $4.00 per share. The warrant expires on December 15, 2015.

The Company determines the estimated fair value of share-based awards using the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as by assumptions regarding certain complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards and the actual and projected option exercise behaviors.

    Number of shares              
    entitled to purchase     Exercise Price     Expiration date  
Balance as of December 31, 2010   60,000   $ 4.00        
Warrants exercised   -     -        
Warrants expired   -     -        
Total outstanding as of March 31, 2011   60,000   $ 4.00     December 15, 2015  

There was no share based compensation expense for the three months ended March 31, 2011 and 2010.

F-18


17. MAJOR CUSTOMERS

The Company had 5 major customers whose revenue individually represented the following percentages of the Company’s total revenue:

    March 31,     March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Customer A   71.80%     8.63%  
Customer B   27.27%     36.45%  
Customer C   0.75%     1.37%  
Customer D   0.15%     -  
Customer E   0.02%     -  
Customer F   -     45.72%  
Customer G   -     2.05%  
    99.99%     94.22%  

The Company had 5 major customers whose accounts receivable balance individually represented of the Company’s total accounts receivable as follows:

    March 31,     March 31,  
    2011     2010  
    (unaudited)     (unaudited)  
Customer A   43.19%     53.31%  
Customer B   36.03%     16.63%  
Customer C   4.22%     -  
Customer D   0.70%     -  
Customer E   0.67%     6.74%  
Customer F   -     23.32%  
    84.81%     100.00%  

18. ECONOMIC AND POLITICAL RISK

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

F-19


19. COMMITMENTS AND CONTINGENCIES

Total lease expense for the three months ended March 31, 2011 and 2010 were $0.

The future minimum lease payments as of March 31, 2011 and 2010 were $0.

Purchase of Property for a total consideration of $9,537,975

On August 25, 2006, the Company signed a contract for property under construction, totaling $9,537,975 (RMB62,665,450). During the three months ended March 31, 2011 and as of March 31, 2011, the Company paid $6,468,699 (RMB42,500,000) was recorded in deposits and prepaid expenses. The remainder $3,069,276 (RMB20,165,450) will be paid by the end of 2011.

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. As of March 31, 2011 and December 31, 2010, the Company did not have any pending claims, charges, or litigation that it would have a material adverse effect on its consolidated balance sheets, consolidated statements of income and comprehensive income or cash flows.

F-20


20. OBLIGATIONS UNDER MATERIAL CONTRACTS

(i)

The Company entered into a financial advisory agreement dated February 2, 2010 to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, the Company is obligated to issue 100,000 of common shares at $0.10 per share to them prior to December 31 of every year within 5 years from the Company listing on OTCBB. The agreement contains an exclusivity provision whereby the Company has agreed to engage them as the Company’s sole financial advisor and its related company within 2 years since the date of the Company’s listed on OTCBB and also contains a $1 million liquidated damages provision for breach of such exclusivity.

   
(ii)

CCG Investor Relations Partners LLC, CCG, an investor relations firm was issued a warrant to purchase up to 60,000 shares of the Company’s stock, at a price of $4.00 per share, pursuant to the terms and conditions of a letter agreement, dated December 15, 2010, between the Company and CCG. The warrant shall have a term of 5 years and expires on December 15, 2015, CCG had not exercised the warrant and had not purchased any shares of the Company’s stock.

   

21. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the year, if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in the following table:

    For The Three Months Ended  
    March 31,  
    2011     2010  
BASIC   (unaudited)     (unaudited)  
Numerator for basic earnings per share attributable to the Company’s common stockholders:
Net income used in computing basic earnings per share $  2,091,104   $  1,225,321  
Basic earnings per share $  0.07   $  0.06  
Basic weighted average shares outstanding   30,000,000     20,500,000  
             
    For The Three Months Ended  
    March 31,  
    2011     2010  
DILUTED   (unaudited)     (unaudited)  
Numerator for diluted earnings per share attributable to the Company’s common stockholders:
Net income used in computing diluted earnings per share $  2,091,104   $  1,225,321  
Diluted earnings per share $  0.07   $  0.06  
Weighted average outstanding shares of common stock and            

diluted weighted average shares outstanding

  30,000,000     20,500,000  
Potential common shares outstanding as of March 31:            

Warrants outstanding

  60,000     -  

For the three months ended March 31, 2011 and 2010, 60,000 and 0 warrants, respectively were not included in the diluted earnings per share because the average stock price was lower than the strike price of these warrants.

F-21


22. PRODUCT LINE INFORMATION

The Company sells wooden fiber sheets and wooden floors which are used by customers in various industries. The production process, class of customer, selling practice and distribution process are the same for all wooden fiber sheets and wooden floors. The Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. The Company considers itself to be operating within one reportable segment. The Company does not have long-lived assets located in foreign countries. The Company's net revenue from external customers by main product lines is as follows:

    March 31, March 31,  
    2011 2010  
    (unaudited) (unaudited)  
Domestic sales            
     Wooden fiber sheet $  1,447,616   $  2,756,672  
     Wooden floor   8,995,358     1,534,327  
  $  10,442,974   $  4,290,999  

23. RELATED PARTIES TRANSACTIONS

In addition to the transactions and balances as disclosed elsewhere in these condensed consolidated financial statements, the Company had the following significant related party transactions:

Name of related party Nature of transactions
   
Mr. YuLu Bai Included in other receivables, due from Mr. YuLu Bai was $1,444,174 as of March 31, 2011 and included in other payables and accrued expenses, due to Mr YuLu Bai was $1,527,080 as of December 31, 2010. The amounts are unsecured, interest free and have no fixed term of repayment.

F-22



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A, “Risk Factors” included herein, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

  • the “Company,” “we,” “us,” and “our” refer to the combined business of CNFI and its subsidiaries, Bingwu Forestry, Aosen Forestry and Silvan Flooring;

  • “CNFI” refers to China Forestry Industry Group, Inc., a Nevada corporation;

  • “Bingwu Forestry” refers to China Bingwu Forestry Group Limited, a Hong Kong company;

  • “Aosen Forestry” refers to Qian Xi Nan Aosen Forestry Company, Limited, a PRC company;

  • “Guiyang Silvan Touch” refers to Guiyang Silvan Touch Flooring Co., Limited, a PRC company;

  • “Silvan Flooring” refers to Qian Xi Nan Silvan Flooring Company, Limited, a PRC company;

  • “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;

  • “PRC,” “China,” and “Chinese,” refer to the People's Republic of China;

  • “SEC” refers to the Securities and Exchange Commission;

  • “Exchange Act” refers the Securities Exchange Act of 1934, as amended;

  • “Securities Act” refers to the Securities Act of 1933, as amended;

  • “Renminbi” and “RMB” refer to the legal currency of China; and

  • “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States.

Overview of our Business

Our company manufactures and sells floor materials and related products to residential and commercial customers in China. Our product lines include laminate flooring and fiber floor boards that are manufactured in a variety of colors, dimensions and designs.

1


Our manufacturing facility in Qianxinan, Guizhou province has annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing new manufacturing facility that we expect will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor. We are in the process of obtaining the land use rights for this new facility, which we expect to receive by mid-2012 when we launch our new plant, however, we cannot guarantee that such approval will be obtained by that time.

We market and sell our products at five branch offices, eight affiliate stores, and approximately 504 contracted flooring specialty retail stores, concentrated mostly in southwestern China. We are also pursuing commercial arrangements for the sale of our products through home supply stores. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

Recent Developments

The Company plans to continue expanding its production capacity by completing the construction of a new manufacturing facility and expanding its nationwide sales network. In March 2011, we established Guiyang Silvan Touch in order to expand the Company’s sales channels. Guiyan Silvan Touch’s principal activities will be manufacturing and wholesaling of wood flooring, furniture and decorations. During the three months ended March 31, 2011, Guiyang Silvan Touch had not started operations.

First Quarter Financial Performance Highlights
The following are some financial highlights for the first quarter:

. Revenues: Our revenues were $10.4 million for the three months ended March 31, 2011, an increase of approximately $6.2 million, or 143.4%, from $4.3 million for the same period in 2010.

. Gross Profit and Margin: Gross profit was $3.6 million for the three months ended March 31, 2011, as compared to $1.5 million for the same period in 2010.

. Net Income: Net income was $2.1 million for the three months ended March 31, 2011, an increase of approximately $0.9 million, or approximately 70.7%, from $1.2 million for the same period in 2010.

. Fully diluted net income per share: Fully diluted net income per share was approximately $0.07 for the three months ended March 31, 2011, as compared to approximately $0.06 for the same period in 2010.

As at March 31, 2011, the total of our contract backlog was approximately $7.5 million.

Results of Operations

Comparison of Three Months Ended March 31, 2011 and March 31, 2010

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

2



All amounts,                                    
other than                                    
percentages, in   Three Months Ended     Three Months Ended              
U.S. dollars   March 31, 2011     March 31, 2010              
    Dollar ($)     Percentage of     Dollar ($)     Percentage of     Increase/     Increase/  
          Revenue           Revenue     (Decrease)     (Decrease)  
                            Dollar ($)     Percentage  
Revenue   10,442,974     100.00%     4,290,999     100.00%     6,151,975     143.37%  
Cost of revenue   6,864,981     65.74%     2,776,873     64.71%     4,088,108     147.22%  
Gross profit   3,577,993     34.26%     1,514,126     35.29%     2,063,867     136.31%  
Operating expenses                                    
Selling expenses   (349,595 )   3.35%     (75,435 )   1.76%     274,160     363.44%  
General and administrative                                    
expenses   (373,624 )   3.58%     (218,953 )   5.10%     154,671     70.64%  
Total operating expenses   (723,219 )   6.93%     (294,388 )   6.86%     428,831     145.67%  
Income from operations   2,854,774     27.34%     1,219,738     28.43%     1,635,036     134.05%  
Other income (expense)                                    
Interest income   8,999     0.09%     -     0.00%     8,999     -%  
Interest expenses   (220,023 )   (2.11 )%   (21,348 )   (0.50 )%   198,675     930.65%  
Other income   49,496     0.47%     43,567     1.02%     5,929     13.61%  
Other expenses   (26,275 )   (0.25 )%   -     0.00%     26,275     100.00%  
Government grant income   -     0.00%     294,247     6.86%     (294,247 )   (100.00 )%
Total other income (expenses)   (187,803 )   (1.80 )%   316,466     7.38%     (504,269 )   (159.34 )%
Income before income taxes   2,666,971     25.54%     1,536,204     35.80%     1,130,767     73.61%  
Provision for income taxes   (575,867 )   5.51%     (310,883 )   7.25%     264,984     (85.24 )%
Net income   2,091,104     20.02%     1,225,321     28.56%     865,783     70.66%  

Revenue. We generate revenues from the sales of our industrial fiber boards, laminate flooring, wooden flooring, and related flooring products. Our revenues increased to $10.4 million for the three months ended March 31, 2011, from $4.3 million for the three months ended March 31, 2010, representing an approximate 143.4% increase. The increase in revenue was mainly due to higher sales volume after the expansion of our sales and distribution network. During the three months ended March 31, 2011, we sold approximately 1.1 million square meters of laminate flooring, approximately 512,000 pieces of fiber boards and approximately 5,000 square meters of hard wood flooring, as compared to approximately 157,000 square meters of laminate flooring and approximately 510,000 pieces of fiber boards for the three months ended March 31, 2010. This quarter we started selling hard wood flooring in the market. The sales of our laminate flooring, fiber board products and hard wood flooring accounted for approximately 67.3%, 31.5% and 1.2% of our sales revenues, respectively, for the three months ended March 31, 2011, as compared to 23.5%, 76.5% and 0%, respectively, for the three months ended March 31, 2010.

Cost of Sales. Our cost of goods sold is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of sales increased approximately $4.1 million, or 147.2%, to $6.9 million for the three months ended March 31, 2011, from $2.8 million for the three months ended March 31, 2010. The increase was generally in line with the increase in volume of our product sales. The cost of sales as a percentage of revenue increased slightly from 64.7% for the three months ended March 31, 2010 to 65.7% for the three months ended March 31, 2011. The increase in cost of sales as a percentage of revenue is primarily due to the laminate flooring product line; cost of sales for this product line was 75.8% of sales for the three months ended March 31, 2011 compared to 73.8% for the same period in 2010. The increase in cost for the laminate flooring product line is due to enhancements to the quality and selection of laminate flooring, which resulted in a slight increase in cost of sales as a percentage of revenue.

Gross Profit and Gross Margin. Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross profit increased approximately $2.1 million, or 136.3%, to $3.6 million for the three months ended March 31, 2011, from $1.5 million for the three months ended March 31, 2010. Gross profit as a percentage of net revenue (gross margin) was 34.3% and 35.3% for the three months ended March 31, 2011 and 2010, respectively. The decrease in the gross margin was primarily driven by the difference between the percentage increase in cost of sales (147.2%) and the increase in revenues (143.4%) and to the decrease in gross margin of laminate flooring. The gross margins from sales of our laminate flooring, fiber board products and wooden floor were 24.2%, 24.0% and 24.8%, respectively, for the three months ended March 31, 2011, as compared to 26.2%, 23.1% and 0%, respectively, for the three months ended March 31, 2011. The drop in laminate flooring’s gross margin is attributable to a decrease in unit selling price and increase in unit cost. The unit selling price of laminate flooring dropped 18.7%, from RMB 55.5 ($8.53) per square meter for the three months ended March 31, 2010 to RMB 54.1 ($8.32) per square meter for the same period in 2011 as a result of intense competition in the market for similar products.

Selling Expenses. Our selling expenses are comprised primarily of sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, travel expense, consulting fees and other sales related costs. Our selling and marketing expenses increased by approximately $275,000, or 363.4%, to $350,000 for the three months ended March 31, 2011, from $75,000 for the three months ended March 31, 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary and advertisement expenses. Our salary expenses for the three months ended March 31, 2011 amounted to approximately $181,000, compared to approximately $300 for the three months ended March 31, 2010. Our advertisement expenses for the three months ended March 31, 2011 amounted to approximately $59,000, compared to approximately $29,000 for the three months ended March 31, 2010. Due to continued efforts to promote our brand recognition and marketing in the PRC, our travel and consultation expenses increased and contributed to the increase of selling and marketing expenses. Our travel expenses for the three months ended March 31, 2011 amounted to approximately $22,000, compared to approximately $50 for the three months ended March 31, 2010.

3


General and Administrative Expenses. General and administrative expenses consist primarily of compensation and benefits to our management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased approximately $155,000, or 70.6%, to $374,000 for the three months ended March 31, 2011, from $219,000 for the three months ended March 31, 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company.

Other income (expense). We had $188,000 in net other expenses for the three months ended March 31, 2011, as compared to net other income of $316,000 for the three months ended March 31, 2010. The decrease in other income (expense) of $504,000 is primarily due to a one-time government grant of $294,000 received in the three months ended March 31, 2010 and higher interest expense of $220,000 resulting from increased bank borrowings during the three months ended March 31, 2011.

Income Before Income Taxes. Our income before income taxes increased by approximately $1.1 million, or 74%, to $2.7 million for the three months ended March 31, 2011, from $1.5 million for the three months ended March 31, 2010. However, as a percentage of revenue, our income before income taxes decreased from 35.8% for the three months ended March 31, 2010 to 25.5% for the three months ended March 31, 2011. The dollar increase in income before income taxes is mainly a result of higher revenues; the decrease in income before income taxes as a percentage of revenue is primarily a result of the factors causing the fluctuation in other income (expense) discussed above.

Government grant income. We had $0 in government grant income for the three months ended March 31, 2011, as compared to approximately $294,000 for the three months ended March 31, 2010. Government grant income consisted entirely of the value added tax refund for the three months ended March 31, 2010.

Income Taxes. Our income taxes increased by approximately $265,000, or 85%, to $576,000 for the three months ended March 31, 2011, from $311,000 for the three months ended March 31, 2010. The increase was due to our increase in income.

Net Income. For the three months ended March 31, 2011, we generated a net income of $2.1 million, an increase of approximately $866,000, or 70.7%, from $1.2 million for the three months ended March 31, 2010. This increase was primarily attributable to the rapid growth in our production and sales as noted above.

Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of $4.6 million. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for the three months ended March 31, 2011 and 2010.

4



Cash Flow            
(all amounts in U.S. dollars)            
    For the three months ended March 31,  
    2011     2010  
Net cash (used in) provided by operating activities $  (8,501,906 ) $ 5,997,967  
Net cash used in investing activities $  (45,462 ) $ (5,877,966 )
Net cash provided by financing activities $  10,790,057   $ -  
Effect of exchange rate changes on cash $  9,907   $ (4,038 )
Net increase in cash $  2,252,596   $ 115,963  
Cash, beginning of period $  2,334,910   $ 1,471,729  
Cash, end of period $  4,587,506   $ 1,587,692  

Operating activities

Net cash used in operating activities was $8.5 million for the three months ended March 31, 2011, as compared to net cash provided by operating activities of $6.0 million for the three months ended March 31, 2010. Although there was an increase of approximately $1 million in net income, this gain was reduced by a $3.4 million increase in accounts receivable, an increase of $2.3 million in inventory and an increase of $4.5 million in deposits and prepaid expenses for the expansion of our production facilities, a decrease of $5.8 million in accounts payable, a decrease of $1.8 million in customer deposits, a decrease of $9 million in other payables and accrued expenses for the repayment of payables. Accounts receivable increased during the three months ended March 31, 2011 mainly as a result of the significant increase in revenue by over $6.1 million compared to the same period in 2010. The $3.1 million increase in inventory during the first quarter of 2011 is attributable to increased inventory and raw materials purchases in anticipation of the development of our sales network throughout the national China market. Deposits and prepaid expenses increased $1.5 million during the three months ended March 31, 2011 as a result of the Company’s prepayment of $6.5 million for a property under construction for the expansion of its facilities. Customer deposits decreased during the first quarter of 2011 due to an increase in delivered orders; corresponding deposits were recognized into revenue. Other payables and accrued expenses decreased by over $1.5 million during the three months ended March 31, 2011 due to the Company’s repayment of a payable to Mr. Yulu Bai for the purchase cost of the forestry land use right that Mr. Bai had paid on behalf of the Company.

Investing activities

Net cash used in investing activities for the three months ended March 31, 2011 was $45,000, as compared to $5.9 million for the three months ended March 31, 2010. The decrease in net cash used in investing activities was primarily due to our purchase of land use rights to 2,250 hectares (approximately 22.5 square kilometers) of forest land for $5.9 million during the three months ended March 31, 2010.

Financing activities

Net cash provided by financing activities for the three months ended March 31, 2011 was $10.8 million, as compared to $0 for the three months ended March 31, 2010. The increase in net cash provided by financing activities was primarily due to a loan from China Merchant Bank for $3.9 million, and two loans from the Guiyang City Nanming Rural Credit Cooperative Bank for $3.8 million and $4.0 million, respectively.

Loan Commitments

As of March 31, 2011, the amount, maturity date and term of each of our bank loans were as follows:

 (all amounts in U.S. Dollars*)    
Bank   Amount     Interest Rate     Maturity Date     Duration  
China Merchant Bank $ 3,805,117     6.06%     March 7, 2012     1 year  
Xingyi City Rural Cooperative Bank   761,023     8.10%     July 16, 2011     1 year  
Bank of Chongqing   3,044,094     5.31%     June 20, 2011     1 year  

Guiyang City Nanming Rural Credit Cooperative Bank

  3,805,117     8.78%     November 18, 2012     22 months  

Guiyang City Nanming Rural Credit Cooperative Bank

  3,957,322     8.78%     January 18, 2013     2 years  
TOTAL $ 15,372,673                    

5



We believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditure and working capital for the next 12 months. We may, however, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Obligations under Material Contracts

The table below sets forth our contractual obligations as of March 31, 2011.

Contractual Obligations   Total     Less than 1 year     1-3 years     3-5 years     More than 5 years  
Long-Term Debt Obligations $  15,372,673   $  7,610,234   $ 7,762,439   $  -   $  -  
Due to Related Companies   -     -     -     -     -  
Operating Lease Obligations   -     -     -     -     -  
Capital Expenditures   3,069,276     3,069,276     -     -     -  
Purchase Obligations   1,409,032     1,409,032     -     -     -  
Total $  19,850,981   $  12,088,542   $ 7,762,439   $  -   $  -  
  • The Company entered into a financial advisory agreement dated February 2, 2010 to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, the Company is obligated to issue 100,000 of common shares at $0.10 per share to hem prior to December 31 of every year within 5 years from the quotation of the Company stock in the OTC markets. The agreement contains an exclusivity provision whereby the Company has agreed to engage them as the sole financial advisor of the Company’s and its affiliates for a 2-year period following such stock quotation and contains a $1 million liquidated damages provision for breach of such exclusivity.

  • CCG Investor Relations Partners LLC, CCG, the Company’s investor relations firm, was issued a warrant to purchase up to 60,000 shares of the Company’s stock, at a price of $4.00 per share, pursuant to the terms and conditions of an engagement letter agreement, dated December 15, 2010, between the Company and CCG. The warrant has a term of 5 years and expires on December 15, 2015. CCG had not exercised the warrant and had not purchased any shares of the Company’s stock.

  • On August 25, 2006, the Company entered into a contract for property under construction, requiring payments totaling $9,537,975 (RMB62,665,450). As of March 31, 2011, the Company had paid $6,468,699 (RMB42,500,000). These payments were recorded in deposits and prepaid expenses. The remaining $3,069,276 (RMB20,165,450) will be paid by the end of 2011.

6


Critical Accounting Policies

There have been no changes in our critical accounting policies from those disclosed in under Item 7, “Management's Discussion and Analysis of Results of Operations and Financial Condition” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction.

Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change in our industry and continually maintain effective cost control in operations.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Yulu Bai, and our Chief Financial Officer, Mr. Jiyong He, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on our assessment, Mr. Bai and Mr. He determined that, as of March 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, because of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2010, management concluded that the Company needs to increase its qualified accounting personnel and enhance the supervision, monitoring and reviewing of financial statements preparation processes. The Company has already taken measures to remediate these material weaknesses by seeking an additional financial reporting and accounting staff member with relevant accounting experience, skills and knowledge in the preparation of financial statements in accordance with of U.S. GAAP and financial reporting disclosure requirements under SEC rules. In addition, The Company is working closely with its outside consultant in reinforcing the rigorous process for collecting and reviewing information required for the preparation of the financial statements including footnotes.

Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of March 31, 2011 due to the material weakness described below, we believe that the consolidated financial statements included in this Quarterly Report on Form 10-Q correctly present our financial condition, results of operations and cash flows for the fiscal years covered thereby in all material respects.

7


Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the first quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 1A. RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No. Description
   
31.1

Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   
31.2

Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   
32.1

Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   
32.2

Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

8


SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 23, 2011

CHINA FORESTRY INDUSTRY GROUP, INC.

By: /s/ Yulu Bai                                                                  
Yulu Bai
Chief Executive Officer
(Principal Executive Officer)

By: /s/ Jiyong He                                                              
Jiyong He
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)