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EX-32.2 - CERTIFICATION - China Ginseng Holdings Incf10q1210a3ex32ii_chinagins.htm
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EX-31.1 - CERTIFICATION - China Ginseng Holdings Incf10q1210a3ex31i_chinaginseng.htm
EX-32.1 - CERTIFICATION - China Ginseng Holdings Incf10q1210a3ex32i_chinaginseng.htm




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

FORM 10-Q/A3

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010
 
¨ TRANSITION REPORT UNDER   SECTION 13 OR 15(d) OF THE EXCHANGE ACT
   
For the transition period from _____________________ to ______________

China Ginseng Holdings, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-3348253
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
64 Jie Fang Da Road
 
130022
Ji Yu Building A, Suite 1208
   
Changchun City, China
   
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone (01186) 43185790039

SEC File Number:  000-54072
 
N/A
(Former name, former address and former three months, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 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
¨
 
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

As of February 22, 2011 there were 43,049,797 shares issued and outstanding of the registrant’s common stock.
 
 
 
 

 
 
 
  EXPLANATORY NOTE

We are filing this Form 10-Q/A3 for the period ended December 31, 2010 (“Amended Report”) to respond to the SEC comments we received on our Form 10-12G (filing No. 000-54072) revising our originally filed Form 10-Q (“Original Report”) for this same period regarding our management’s discussion and analysis of results of operations primarily to provide more detailed discussion of the reason(s) for the changes in the results of operations.   This Amended Report does not reflect events occurring after the filing of the Form 10-Q on February 22, 2010, nor does it modify or update those disclosures presented therein, except with regard to the modifications described in this Explanatory Note. As such, this Amended Report continues to speak as of February 22, 2011. Accordingly, this Amended Report should be read in conjunction with the Original Report and our other reports filed with the SEC subsequent to the filing of our Original Report, including any amendments to those filings.
 
In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this Amended Report, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Original Report have been re-executed and re-filed as of the date of this Amended Report and are included as exhibits hereto.
 
 
 
 
 

 

 
 
TABLE OF CONTENTS
 
PART I -- FINANCIAL INFORMATION
   
3
 
Item 1
Financial Statements
     
Item 2
Management's Discussion and Analysis or Plan of Operation.
   
4
 
Item 3
Quantitative and Qualitative Disclosure about Market Risk
   
15
 
Item 4
Controls and Procedures.
   
15
 
PART II -- OTHER INFORMATION ..
   
 
 
Item 1
Legal Proceedings.
   
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds.   
   
 
 
Item 3
Defaults Upon Senior Securities
   
 
 
Item 4
(Removed and Reserved).
   
 
 
Item 5
Other Information.
   
 
 
Item 6
Exhibits.
   
17
 
 

 
 
2

 

 
 
PART I — FINANCIAL INFORMATION
 
ITEM 1.

Contents

 


Consolidated Balance Sheets as of December 31, 2010 (unaudited) and June 30, 2010
   
F-1
 
         
Consolidated Statements of Operations for the three months and six months ended December 31, 2010 and 2009 (unaudited)
   
F-2
 
         
Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009 (unaudited)
   
F-3-F-4
 
         
Consolidated Statement of Stockholders Equity and Comprehensive Loss
   
F-5
 
         
Notes to Consolidated Financial Statements (unaudited)
   
F-6
 
 
 

 
 
3

 

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 
   
December 31, 2010
   
June 30, 2010
 
   
(Unaudited)
       
ASSETS
 
             
CURRENT ASSETS
           
Cash
 
$
134,339
   
$
171,111
 
Accounts receivable- net
   
571,695
     
45,245
 
Inventory
   
2,250,964
     
1,119,542
 
Ginseng crops, current portion
   
225,692
     
308,764
 
Due from related parties
   
62,730
     
23,475
 
Prepaid expenses
   
1,400,165
     
30,503
 
Total Current Assets
   
4,645,585
     
1,698,640
 
                 
PROPERTY AND EQUIPMENT, net
   
2,523,346
     
2,563,317
 
                 
OTHER ASSETS
               
Ginseng crops, non-current portion
   
2,578,777
     
3,527,967
 
Intangible assets-patents, net
   
8,036
     
9,225
 
Receivable from farmers
   
178,861
     
157,665
 
Deferred income tax asset
   
132,803
     
130,189
 
Long-term investment
   
23,102
     
-
 
Total Assets
 
$
10,090,510
   
$
8,087,003
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
                 
CURRENT LIABILITIES
               
Loan payable
 
$
301,992
   
$
294,512
 
Note payable – building purchase
   
60,398
     
1,251,675
 
Notes payable – related parties
   
598,279
     
755,311
 
Accounts payable
   
658,090
     
887,945
 
Accrued expenses
   
431,497
     
350,652
 
Taxes payable
   
224,357
     
205,758
 
Payments received in advance
   
731,484
     
20,786
 
Total Current Liabilities
   
3,006,097
     
3,766,639
 
 
OTHER LIABILITIES
               
Loan payable to financial institution
   
1,207,967
     
-
 
Long term payable to farmers
   
476,964
     
420,440
 
Total Liabilities
   
4,691,028
     
4,187,079
 
                 
COMMITMENTS AND CONTINGENCIES
   
-
     
-
 
                 
STOCKHOLDERS’ EQUITY
               
Common Stock, $0.001 par value, 50,000,000
               
shares authorized; 44,089,797 and 36,776,047
               
shares issued and outstanding at December
               
31 and June 30, 2010, respectively
   
44,090
     
36,777
 
Additional paid-in capital
   
6,990,062
     
5,125,683
 
Accumulated deficit
   
(2,224,961
)
   
(1,727,592
)
Accumulated other comprehensive income
   
590,291
     
465,056
 
Total Stockholders’ Equity
   
5,399,482
     
3,899,924
 
                 
Total Liabilities and Stockholders’ Equity
 
$
10,090,510
   
$
8,087,003
 

See accompanying notes to consolidated financial statements.

 
 
F - 1

 

 

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
                         
                         
REVENUE
 
$
919,877
   
$
58,579
   
$
973,175
   
$
90,195
 
                                 
COSTS AND EXPENSES
                               
Cost of goods sold
   
819,222
     
67,984
     
864,481
     
82,898
 
Selling, general and administrative expenses
   
224,172
     
44,170
     
502,553
     
(5,358
)
Depreciation and amortization
   
4,620
     
7,567
     
10,613
     
14,551
 
Total Costs and Expenses
   
1,048,014
     
119,721
     
1,377,647
     
92,091
 
                                 
LOSS FROM OPERATIONS
   
(128,137
)
   
(61,142
)
   
(404,472
)
   
(1,896
)
                                 
NON OPERATING EXPENSES
                               
Other expenses
   
-
     
(122
)
   
-
     
(122
)
Interest expense
   
(44,641
)
   
(35,258
)
   
(76,759
)
   
(70,505
)
Net Other Expenses
   
(44,641
)
   
(35,380
)
   
(76,759
)
   
(70,627
)
                                 
LOSS BEFORE INCOME TAXES
   
(172,778
)
   
(96,522
)
   
(481,231
)
   
(72,523
)
                                 
PROVISION FOR INCOME TAXES
   
(16,138
)
   
(9,788
)
   
(16,138
)
   
(9,788
)
                                 
NET LOSS
 
$
(188,916
)
 
$
(106,310
)
 
$
(497,369
)
 
$
(82,311
)
                                 
NET LOSS PER COMMON SHARE
                               
  Basic
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.00
)
  Diluted
 
$
(0.00
)
 
$
(0.00
)
 
$
(0.01
)
 
$
(0.00
)
                                 
WEIGHTED AVERAGE COMMON
                               
  SHARES OUTSTANDING –
                               
  Basic
   
42,515,237
     
34,397,297
     
41,337,249
     
34,397,297
 
  Diluted
   
42,515,237
     
34,397,297
     
41,337,249
     
34,397,297
 

See accompanying notes to consolidated financial statements.
 
 
 
F - 2

 

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
For the Six Months Ended
 
   
December 31,
 
   
2010
   
2009
 
             
             
Cash Flows from Operating Activities:
           
Net loss
 
$
(497,369
)
 
$
(82,311
)
Adjustments to reconcile net loss to
               
  net cash from operating activities:
               
Depreciation and amortization
   
102,473
     
65,480
 
Imputed interest
   
51,820
     
60,277
 
Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable
   
(526,450
)
   
136,313
 
(Increase) decrease in inventory
   
(99,160
)
   
(209,310
)
(Increase) decrease in prepaid expense
   
(1,369,662
)
   
49,888
 
(Increase) decrease in due from related parties
   
(39,255
)
   
(21,479
)
(Increase) decrease in amounts due from farmers
   
(21,196
)
   
(26,278
)
Increase (decrease) in accounts payable
   
(229,855
)
   
(881,933
)
Increase (decrease) in taxes payable
   
18,599
     
6,414
 
Increase in receivables in advance
   
710,698
     
-
 
Increase (decrease) in amounts due from farmers
   
56,524
     
70,074
 
Increase (decrease) in accrued expenses
   
80,845
     
52,857
 
Net cash provided by (used in)
               
operating activities
   
(1,761,988
)
   
(780,008
)
                 
Cash Flows from Investing Activities:
               
Long term investment
   
(23,102
)
   
-
 
Purchase of property and equipment
   
(4,839
)
   
(3,186
)
Net cash provided by (used in)
               
 investing activities
   
(27,941
)
   
(3,186
)
                 
Cash Flows from Financing Activities:
               
Proceeds from sale of common stock for cash
   
1,819,872
     
-
 
Repayments of notes payable- building
   
(16,000
)
   
-
 
Repayments of loans payable to related parties
   
(193,433
)
   
(108,205
)
Proceeds from loans payable to related parties
   
29,781
     
885,916
 
Net cash provided by (used in)
               
 financing activities
   
1,640,220
     
777,711
 
                 
Effect of exchange rate on cash
   
112,937
     
6,390
 
                 
Increase (decrease) in cash
   
(36,772
)
   
907
 
                 
Cash at beginning of period
   
171,111
     
10,227
 
                 
Cash at end of period
 
$
134,339
   
$
11,134
 
 
See accompanying notes to consolidated financial statements.
 
 
 
F - 3

 

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
For the Six Months Ended
 
   
December 31,
 
   
2010
   
2009
 
             
Supplemental Disclosure of Cash Flow
   
-
     
-
 
Information:
   
-
     
-
 
Cash paid for:
   
-
     
-
 
Interest
   
-
     
-
 
Income taxes
   
-
     
-
 
                 
Non-cash financing activity-
               
Settlement of note payable with long-term
   
-
     
-
 
bank loan
   
-
   
$
1,207,967
 

See accompanying notes to consolidated financial statements.
 
 
F - 4

 
 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2010 (Unaudited)

                           
Accumulated
       
               
Additional
         
Other
   
Total
 
   
Common Stock
   
Paid-in
   
Accumulated
   
Comprehensive
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Income
   
Equity
 
                                     
Balance, June 30, 2010
   
36,776,047
   
$
36,777
   
$
5,125,683
   
$
(1,727,592
)
 
$
465,056
   
$
3,899,924
 
                                                 
Imputed interest for related party loans
   
-
     
-
     
51,820
     
-
     
-
     
51,820
 
Issuance of private placement shares for cash at $0.25 per share
   
7,313,750
     
7,313
     
1,812,559
     
-
     
-
     
1,819,872
 
Net loss for the six months ended December 31, 2010
   
-
     
-
     
-
     
(497,369
)
   
-
     
(497,369
)
Translation adjustment
   
-
     
-
     
-
     
-
     
125,235
     
125,235
 
Total comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(372,134
)
Balance, December 31, 2010 (Unaudited)
   
44,089,797
   
$
44,090
   
$
6,990,062
   
$
(2,224,961
)
 
$
590,291
   
$
5,399,482
 

See accompanying notes to consolidated financial statements.
 
 
 
F - 5

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010
 
NOTE A – PRESENTATION, NATURE OF BUSINESS, AND GOING CONCERN

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included.  Results for the three and six months ended December 31, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011.  For further information, refer to the financial statements and footnotes thereto included in the China Ginseng Holdings, Inc. on Form 10 for the year ended June 30, 2010 filed February 9, 2011.

Nature of Business

China Ginseng Holdings, Inc. and Subsidiaries (the “Company”), was incorporated under the laws of Nevada on June 24, 2004. Prior to August 2010, the Company was engaged primarily in the sale of fresh and dried ginseng.  Recently, the Company has decided to refocus its business on the sale of ginseng beverages and wines.

On November 24, 2004, the Company acquired 55% of Yanbian Huaxing Ginseng Industry Co. Limited (“Yanbian Huaxing”), which is located in China and, is in the business of farming, processing, distribution, and marketing of Asian ginseng. On November 24, 2005, the Company acquired the remaining 45% interest in Yanbian Huaxing. In 2010, the Company ceased marketing ginseng and is presently utilizing the harvest to produce ginseng beverage.

Yanbian Huaxing was granted by the Chinese Government 20 years land use rights of approximately 1,500 hectors (3,705 acres) of land for use in growing ginseng in 2004.  The Company had no operations prior to November 24, 2004.

On August 24, 2005, the Company acquired Jilin Ganzhi Ginseng Produce Co. Limited (“Jilin Ganzhi”), whose principal business is the manufacture of ginseng drinks.

On October 19, 2005, the Company incorporated a new company, Jilin Huamei Beverage Co. Limited (“Jilin Huamei”).  To date, Jilin Huamei has not had any significant operations, other than operating as a sale department for canned ginseng juice and wine. The Company’s market promotion and penetration of canned ginseng juice and wine is conducted by Jilin Huamei and all of the Company’s distribution agreements for sales of our canned ginseng juice and wine are signed through Jilin Huamei

On March 31, 2008 the Company acquired Tonghua Linyuan Grape Planting Co. Limited (“Tonghua Linyuan”) whose principal activity is growing, cultivation and harvesting of a grape vineyard. As of December 31, 2010, Tonghua Linyuan leased 750 acres of land on which the grapes were planted. As of December 31, 2010, Tonghua Linyuan reserved 1,170 tons of grape juice for fermentation and 965 tons of fermented grape juice. The Company plans to produce wine through a winery producer but to date has not commenced production.
 
 
 
F - 6

 

 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010
 
NOTE A– NATURE OF BUSINESS, PRESENTATION AND GOING CONCERN (CONTINUED)

Going Concern

As indicated in the accompanying financial statements, the Company has accumulated deficits of $2,224,961 and $1,727,592 as of December 31, 2010 and June 30, 2010, respectively, and there are existing uncertain conditions the Company foresees relating to its ability to obtain working capital and operate successfully.  Management’s plans include the raising of capital through the equity markets to fund future operations and the generating of revenue through its businesses. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations.

Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenues will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Consolidated Financial Statements

The financial statements include the accounts and activities of China Ginseng Holdings, Inc. and its wholly-owned subsidiaries, Yanbian Huaxing Ginseng Co. Limited, Jilin Huamei Beverage Co. Limited, Jilin Ganzhi Ginseng Products Co. Limited, and Tonghua Linyuan Grape Planting Co. Limited.  All intercompany transactions have been eliminated in consolidation.
 
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Effective July 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10 Generally Accepted Accounting Principles-Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied to nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Positions or Emerging Issue Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASUs”).  The FASB will not consider ASUs as authoritative in their own right.  ASUs will serve only to update the Codification, provide background information about the guidance and provide the basis for conclusions on the change(s) in the Codification.  References made to FASB guidance throughout this document have been updated for the Codification.
 
 

 
F - 7

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Foreign Currency Translation

The Company considers the Chinese Yuan Renminbi to be its functional currency.  The Company does not have any material transactions in foreign currencies other than the Chinese Yuan Renminbi. Assets and liabilities were translated into US dollars at period-end exchange rates.  Statement of operations amounts were translated using the average rate during the period.  Gains and losses resulting from translating foreign currency financial statements are included in accumulated other comprehensive income, a separate component of stockholders’ equity.

Cash Equivalents

For purposes of reporting cash flows, cash equivalents include investment instruments purchased with an original maturity of three months or less.  There were no cash equivalents as of December 31, 2010 and June 30, 2010.

Inventory

Inventory consists of fresh and dried ginseng as well as crushed grapes and is stated at the lower of cost or market value.  Cost is determined using the First-In, First-Out (FIFO) Method.

Ginseng Crops

The Company uses the full absorption costing method to value its ginseng crops.  Included in crop costs are seeds, labor, applicable overhead including depreciation, and supplies. Common costs are allocated in each period based upon the total number of hectors under cultivation during the period.

The carrying value of the ginseng crops is reviewed on a regular basis for any impairment in value using management’s best estimate as to expected future market values, yields and costs to harvest.  Costs accumulated on the acres expected to be harvested during the next fiscal year have been classified as a current asset.

Revenue Recognition

The Company’s primary source of revenue has been from the sale of fresh and dried ginseng. Currently, the Company is processing the ginseng and storing the stock for future juice production which it commenced in the later part of 2010.  The grape harvest for 2009 has been crushed and the juice produced has been stored in storage tanks.  The Company plans to do the same for the grapes harvested in 2010. Ginseng is planted in the Spring (April) and Fall (September) of each year and is generally harvested in September.  It usually takes up to 6 years for a ginseng root to mature, although, senior maturity can take up to 8 years.

 

 
F - 8

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


NOTE B– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (Continued)

Harvested ginseng can be sold in two ways: (1) fresh ginseng which can be sold immediately and stored in refrigerators for up to 3 years and (2) dried ginseng which is processed and dried via sunlight and steam machines. Drying is a two-month process.  Dried ginseng can be stored up to 5 years. The Company previously focused on selling dried ginseng as it is more profitable than selling fresh ginseng

When the Company sells ginseng, it receives orders prior to harvest.  For major customers, 20% to 30% is paid upon delivery as payment in advance.  The balance is billed after the customer incurs a lengthy inspection process which can take up to 60 days.  Until the customer finalizes its inspection and deems the shipment acceptable, the shipment is still the property of the Company.  Upon customer completion of inspection and approval, the sale is then recorded and the balance of the invoice price is sent to the Company. For smaller sales, the customers pick up the ginseng from the Company, pay in cash at time of pick up and receive an invoice with appropriate sales tax applied and a cash acknowledgement. On these orders, revenue is recognized upon shipment/payment.

Commencing with the fourth quarter of 2010, the Company has entered into several distribution agreements to sell ginseng juice and wine.  In accordance with these agreements, the distributors will advance funds to the Company for orders to be placed.  Upon the placement of orders by the distributor, the Company will ship product to the distributor and title will pass to the distributor.   In relation to distribution agreements for ginseng beverages, it is the Company’s policy commmencing with the initiation of the distribution agreements to allow the distributors to return all unsold products at the end of six months from the shipment date should the product not be sold and the product has not exceeeded the expiration date.  Since these agreements commenced in September 2010, the Company has no established history as to the quantity of the ginseng and wine which may be returned in order to determine if a reserve for returns and allowances is necessary.  The Company is currently working closely with the distributors to establish this history.  Currently, at each reporting period, the Company is ascertaining from each distributor its’ current on hand quantity and assessing the situation in order to establish a return allowance, if necessary.  At December 31, 2010, the first quarter in which the Company had ginseng juice sales to distributors which aggregated approximately $42,000, all sales to distributors were sold to end user customers.  These distribution agreements also contain incentive arrangements based upon the accumulated product purchased by the distributor; none of which have been earned at December 31, 2010.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist principally of trade receivables. When ginseng is shipped to a customer, the customer is entitled to an inspection process which could take up to 60 days.  Upon completion of the inspection and approval process, the customer notifies the Company and a sale is recorded. Receivables from sales are based upon contracted prices. The Company provides an allowance for doubtful accounts which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions.  Normal trade receivables are due 60 days after the date of sale.  Trade receivables past due more than 120 days are considered delinquent. Delinquent receivables are written off based upon individual credit evaluation and specific circumstances of the customer.  The allowance for doubtful accounts was $nil and $9,471 as of December 31, 2010 and June 30, 2010, respectively.

Property and Equipment

Property and equipment is recorded at cost and is depreciated using the straight line method over the estimated useful lives of the respective assets, as follows:

Biological assets – vineyard
40 years
Buildings and improvements
6 - 40 years
Machinery and equipment
5 - 15 years
Motor vehicles
5 - 10 years
Office equipment
5 - 10 years

Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized.  When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized in operations.
 
 

 
F - 9

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Vineyard Development Costs

Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. The costs are capitalized within Property and Equipment. When the vineyard becomes commercially productive, annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard, which is estimated to be 40 years. All of the company’s vineyards are considered commercially productive.

Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold. For the six months ending December 31, 2010 and 2009, approximately $30,458 and $50,929, respectively, was amortized into inventory costs.

Net Loss Per Common Share

The Company computes per share amounts in accordance with ASC Topic 260 Earnings per Share (EPS) which requires presentation of basic and diluted EPS.  Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS is based on the weighted-average number of shares of Common Stock and Common Stock equivalents outstanding during the periods. Diluted EPS is not presented as it would be antidilutive.

Stock Based Compensation

The Company accounts for stock issued for services in accordance with Topic ASC 718 Compensation-Stock Compensation (formerly SFAS No. 123R “Share Based Payments). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based upon the fair value of the equity instruments issued.

Comprehensive Income

The Company follows ASC 220-10, Reporting Comprehensive Income, (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments.
 
 

 
F - 10

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010

 
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

The Company accounts for income taxes utilizing the liability method of accounting.  Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
 
Uncertainty in Income Taxes
 
The Company follows ASC 740-10 Accounting for Uncertainty in Income Taxes (“ASC 740-10”).  This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach.  ASC 740-10 is effective for fiscal years beginning after December 15, 2006.  Management has adopted ASC 740-10 for fiscal year 2009, evaluates their tax positions on an annual basis, and has determined that as of June 30, 2010, no additional accrual for income taxes other than the foreign, federal and state provisions and related interest and estimated penalty accruals are considered necessary.
 
Impairment of Long-Lived Assets

Long-lived assets, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.  For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.

Fair Value Measurements
 
In September 2006, ASC issued 820, Fair Value Measurements.   ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements.

In February 2007, ASC issued 825-10 The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of ASC 320-10, (“ASC 825-10”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates.  A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.

 
 
F - 11

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010
 
NOTE C - PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following at:

   
December 31,
   
June 30,
 
   
2010
   
2010
 
Buildings and improvements
 
$
1,581,844
   
$
1,539,557
 
Vineyards
   
1,157,012
     
1,128,355
 
Machinery and equipment
   
674,472
     
657,766
 
Motor vehicles
   
62,056
     
60,519
 
Office equipment
   
32,306
     
24,555
 
     
3,507,690
     
3,410,752
 
Less accumulated depreciation
   
984,344
     
847,435
 
   
$
2,523,346
   
$
2,563,317
 

Reference is made to Note I - Note Payable – Building Purchase

Total Depreciation was $101,159 and $62,483 for the six months ended December 31, 2010 and 2009, respectively. Depreciation is recorded in the financial statements as follows:

   
Six Months Ended
 
   
December 31,
 
   
2010
   
2009
 
Depreciation Expense
 
$
9,299
   
$
11,964
 
Capitalized Inventory
   
74,252
     
43,158
 
Capitalized Ginseng Crops
   
17,608
     
7,771
 
   
$
101,159
   
$
62,893
 

Depreciation expense is included within Deprecation and amortization on the consolidated Statements of Operations. Capitalized Inventory and Ginseng Crops are included within the respective balances on the consolidated Balance Sheets.

NOTE D –INVENTORY

Inventory is comprised of the following at:

   
December 31,
   
June 30,
 
   
2010
   
2010
 
Fresh and dried harvested Ginseng
 
$
935,470
   
$
13,290
 
Raw materials
   
1,268,791
     
1,064,359
 
Operating supplies
   
46,703
     
41,893
 
   
$
2,250,964
   
$
1,119,542
 

As of December 31, 2010 and June 30, 2010, there were no shipments of ginseng at customer locations awaiting inspection and approval that may be subject to invoicing.
 
 
 
F - 12

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010
 
NOTE E – GINSENG CROPS

The Company’s business, prior to June 30, 2009, was primarily to harvest and sell fresh and dried ginseng.  The growth period of ginseng takes approximately 6 years before harvest can commence and up to 8 years for improved harvest and seedling yields.  The Company is changing its business model to utilize the harvested ginseng to manufacture ginseng beverages.  It commenced ginseng beverage production in August 2010.  The Company plants selected areas each year and tracks the costs expended each year by planting area.  The Chinese government owns all the land in China.  See Note P-Commitments and Contingencies.

Currently, the Company has land use rights grants from the Chinese government for approximately 1,500 hectors of land (approximately 3,705 acres) to grow ginseng which were awarded in April and May 2004.  These grants are for 20 years.  However, there are no assurances that the Chinese government will continue to renew these grants in the future. The planting of new ginseng is dependent upon the Company’s cash flow and its ability to raise working capital.

During the past 5 years, the Company has planted approximately 518,000 square meters of land which represents approximately 3% of the total land grants.  The Company plans to plant over the next 5 years 420,000 square meters of ginseng (2011-100,000 square meters, 2012-100,000 square meters, 2013-100,000 square meters, 2014-100,000 square meters and 2015-20,000 square meters).  As of June 30, 2010, the Company has 208,182 square meters of ginseng available for harvest and plans to harvest 11,132 square meters in 2010; 54,833 square meters in 2011 and 65,800 square meters in 2012 based upon their anticipated ginseng feed stock required to produce the ginseng juice beverages.

The Company bases its planting upon projected harvest needs and the long growth cycle of ginseng.   The Company has been holding its harvested ginseng crops for use in production of ginseng drink.  Between the harvested ginseng and ginseng crops available to be harvested, the Company believes it has sufficient ginseng to produce its ginseng juice in sufficient quantities in the future.  The Company has developed harvest plans for the lives of land use rights grant period.  The Company has 10 to 15 years remaining on its leases.  In the future, the Company plans to negotiate extensions of these leases with the Chinese Government or, if unsuccessful, attempt to obtain new leases.  If necessary, the Company will be able to purchase ginseng on the open market for use in its beverage production.

An analysis of ginseng crop costs is as follows for each of the applicable periods:

   
December 31,
2010
   
June 30,
2010
 
Beginning Crop Costs
 
$
3,836,731
   
$
3,842,812
 
Capitalized costs during year:
               
Scaffolding
   
-
     
66,448
 
Field clearing and cultivation
   
-
     
48,061
 
Labor including farmer net costs
   
98,859
     
512,488
 
Freight
   
1,558
     
-
 
Depreciation
   
17,608
     
42
 
Other
   
388
     
1,026
 
     
118,413
     
628,065
 
Less:
               
Cost of crops harvested
   
(1,150,675
)
   
(225,176
)
Adjustment to Ginseng crop write-downs for crops sold
   
-
     
(408,970
)
     
(1,150,675
)
   
(634,146
)
Ending Crop Costs
   
2,804,469
     
3,836,731
 
Less: Current portion
   
225,692
     
308,764
 
   
$
2,578,777
   
$
3,527,967
 
 
 

 
F - 13

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010

 
NOTE E – GINSENG CROPS (CONTINUED)

The cost of harvest is calculated by reference to the planting area and the detailed costs maintained for each planting area.  Based upon the square meters planted by area, a square meter cost is calculated and applied to the square meters harvested, rendering a cost of harvest.

For each financial reporting period, the ginseng crop harvested is valued at net realizable value.  If the net realizable value is lower than carrying value, a write down is made for the difference.
 
The Company classifies the ginseng that it anticipates harvesting within the next year as current.  The remaining ginseng is classified as long term.

NOTE F – AGREEMENTS WITH FARMERS

The Company has executed agreements with a number of local farmers to grow, cultivate and harvest Ginseng utilizing the Company’s land grants.  The farming contracts commenced in January 2008.  In connection with these agreements, the Company (1) leases sections of the Ginseng land grants to the farmers at approximately $0.20 (1.5 RMB) per square meter per year, (2) provides the seeds and fertilizer to the farmers and clears the land of large debris. These costs are capitalized by the Company and included in the Ginseng Crop inventory, (3) pays the farmers a management fee of approximately $0.50 (4.00 RMB) per square meter per year and (4) the farmers are required to produce 2 kg of Ginseng for each square meter that they manage.  The company pays the farmers market price for their Ginseng.  If the harvest is below 2 kg per square meter, the difference will be deducted from the total payment for Ginseng purchased. If the harvest produces more than 2 kg per square meter, the Company pays approximately $3.00 for every extra kilo.

The Company has recorded a receivable from the farmers for the rental income of the leased ginseng land grants of $178,861 and $157,665 as of December 31 and June 30, 2010, respectively.  The Company has also recorded a long-term payable-farmers for the management fee due to the farmers. The liability as of December 31 and June 30, 2010 were $476,964 and $420,440, respectively.  The receivable and liability balances for the respective areas will be settled at harvest time when the Company purchases the harvest at the current market value for ginseng.

NOTE G – INTANGIBLE ASSETS
 
Intangible assets consist of the patent rights for ginseng drinks. The cost and related amortization is as follows:

   
December 31,
   
June 30,
 
   
2010
   
2010
 
Cost
 
$
16,875
   
$
16,455
 
Less accumulated amortization
   
(8,839
)
   
(7,230
)
   
$
8,036
   
$
9,225
 

Amortization expense was $1,314 and $1,231 for the six months ended December 31, 2010 and 2009, respectively.

 
 
F - 14

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


NOTE H – LOANS PAYABLE TO FINANCIAL INSTITUTION

In 2002, the Company’s subsidiary, Tonghua Linyuan Grape Co. Limited (“Tonghua Linyuan”), borrowed 2,000,000 RMB from Ji’an Qingshi Credit Coperative at an interest rate of 6.325% per annum with a maturity date of April 4, 2003. The loan is secured by assets of Tonghua, including 14 carbon-steel storage cans, 16 high-speed steel storage cans and 150 tons of grape juice, and currently is in default. However, Ji’an Farmer’s Credit Union verbally agreed in March 2008 not to call the loan. No principal or interest payments are required to be made until the Company is generating profits and interests continues to accrue until the Company pays off the loan. The loan balance as of December 31, 2010 and June 30, 2010 is $301,992 and $294,512, respectively.

On September 10, 2010, Jilin Ganzhi obtained a loan from a financial institution of 8,000,000 RMB ($1,207,967) to be used to pay the amount owed on the Building Purchase (See Note I).  The loan is due on August 10, 2012, and bears interest at a floating-rate which is 90% of the benchmark interest rate.  The benchmark interest rate is the rate announced by the Peoples Bank of China as an interest rate of the same type and class of loans at the date of the loan which changes with the adjustment of national bank rate. The rate was 8.55% at December 31, 2010. The housing and land use rights of the facility serve as collateral.
 
NOTE I – NOTE PAYABLE – BUILDING PURCHASE

On March 2, 2010, the Company entered into an agreement with Meihekou Hang Yilk Tax Warehousing Logistics, an auctioneer, to purchase office and warehouse facilities.  The purchase price was $1,325,479 (RMB 9,000,000).  On June 24, 2010, the Company made payment of $73,804 (RMB 500,000) leaving a balance of $1,207,967 (RMB 8,500,000) which was to be paid by June 30, 2010.

On September 10, 2010, 8,000,000 RMB of this note was repaid with the proceeds of a bank loan.  In December 2010, an additional 100,000 RMB ($16,000) was repaid, leaving a balance of 400,000 RMB ($48,617).  The remaining balance 400,000 RMB was to be paid off by the end of June 2010 pursuant to the written contract; however, the Company obtained oral consent from the seller to extend the due date to December 31, 2011. As of the date of this report, the Company has not paid the remaining balance of 400,000 RMB and if the seller revokes the oral extension, the final payment will be in default and the seller will have the right to repossess the property and obtain an amount equivalent to 6 months rental expense for using the premises.

NOTE J - RELATED PARTY TRANSACTIONS

The Company had been financing its operations from loans from individual shareholders of the Company, principally residents of China.  The individuals have loaned the Company funds which are interest free, have no specific repayment date, and are unsecured.  The funds received are evidenced by receipt of cash acknowledgments.  As of December 31, 2010 and June 30, 2010, funds borrowed to fund the current operations of the Company were $598,279 and $755,311, respectively.  In accordance with FASB ASC 835-30, the Company has inputted an interest charge of $51,820 and $60,277 which has been recorded in the financial statements for the six months ended December 31, 2010 and 2009, respectively.

As of December 31, 2010 and June 30, 2010, the Company had receivables from related parties aggregating $62,730 and $23,475, respectively. These balances relate to unsettled travel advances.
 
NOTE K - STOCKHOLDERS’ EQUITY

During the period from April 1, 2010 to June 30, 2010, the Company sold 2,378,750 shares and received $591,902 in cash as a result of a private sale of securities pursuant to Regulation S, promulgated under the Securities Act of 1933, as amended.  During the six months ended December 31, 2010, the Company sold an additional 7,313,750 shares, also pursuant to Regulation S, for an aggregate amount of $1,819,872.  As of this report date, the shares have not yet been issued but have been reflected in the accompanying financial statements as though they were issued.
 
 
 
F - 15

 

 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


NOTE L - WARRANT AGREEMENT

During the period August 2005 to October 2005, the Company issued 798,384 warrants in connection with a private placement.  The warrants vested immediately and were exercisable over a 5 year period. However, all of these warrants expired during the six months ended December 31, 2010

The following summarizes the warrants issued in connection with the Company’s private placement:

   
Warrants
Outstanding
   
Weighted Average
Exercise Price
 
Balance, June 30, 2010
   
798,334
   
$
0.39
 
                 
Granted
   
-
     
-
 
Exercised
   
-
     
-
 
Expired
   
(798,334
)
 
$
0.39
 
                 
Balance,  December 31, 2010
   
-
     
-
 


NOTE M – PROVISION FOR INCOME TAXES

Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities.  Deferred income  taxes  are  measured  based  on  the  tax  rates  expected  to  be  in  effect  when  the temporary differences are included in the Company’s tax return.  Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

Deferred tax assets consist of the following at:

   
December 31,
2010
   
June 30,
2010
 
Timing difference related to inventory provisions
 
$
132,803
   
$
130,189
 
Net operating losses
   
622,000
     
350,000
 
Valuation allowance
   
(622,000
)
   
(350,000
)
Deferred tax asset
 
$
132,803
   
$
130,189
 

The deferred tax asset is the result of an inventory provision and related reserve of $843,000 (RMB 4,248,000 of which 2,130,310 RMB was recorded in 2010 and 2,117,776 RMB was recorded in 2009).  Under Chinese tax laws, the Company is not entitled to a deduction for the provision until the inventory is completely discarded. Accordingly, the liability has been recorded offset by a deferred tax asset representing a timing difference.
 
 

 
F - 16

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


NOTE M – PROVISION FOR INCOME TAXES (CONTINUED)
 
The Company has a net operating loss carry forward as follows:

   
December 31,
2010
   
June 30,
2010
 
International (China)
 
$
1,120,400
   
$
949,600
 
United States
   
709,400
     
378,000
 
   
$
1,829,800
   
$
1,327,600
 
 
The operating losses are available to offset future taxable income. The foreign (China) net operating loss carryforwards can only be carried forward for five years and will commence expiring in the calendar year 2013.  The Company does not file a consolidated tax return in China. Therefore, the profitability of the individual Chinese companies will determine the utilization of the carryforward losses. The U.S. carryforward losses are available to offset future taxable income for the succeeding 20 years and commence expiring in the year 2027.

The components of income (loss) before taxes are as follows:

   
For the Six Months Ended
December 31,
 
   
2010
   
2009
 
International (China)
 
$
(152,700
)
 
$
36,000
 
United States
   
(328,500
)
   
(108,500
)
   
$
(481,200
)
 
$
(72,500
)
 
The provision for income taxes consists of the following:

   
For the Six Months Ended
December 31,
 
   
2010
   
2009
 
International (China)
 
$
(16,138
)
 
$
(9,788
)
United States
   
-
     
-
 
   
$
(16,138
)
 
$
(9,788
)
 
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and Federal statutory rate for the years ended June 30, 2010 and 2009, respectively, are as follows:

   
For the Six Months Ended December 31,
 
   
2010
   
2009
 
Federal statutory rate
   
(34.0
)%
   
(34.0
)%
State income taxes, net of benefit
   
3.3
     
3.3
 
Valuation allowance
   
30.7
     
30.7
 
Effective tax rate
   
-
     
-
 
 
 
 
F - 17

 
 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010

 
NOTE N – FAIR VALUE MEASUREMENTS

On January 1, 2008, the Company adopted ASC 820 which defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements.  ASC 820’s valuation techniques are based on observable and unobservable inputs.  Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions.

ASC 820 classifies these inputs into the following hierarchy:

 
Level 1 inputs:
Quoted prices for identical instruments in active markets.
 
 
Level 2 inputs:
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
 
Level 3 inputs:
Instruments with primarily unobservable value drivers.
 
NOTE O – INVESTMENT IN CHANGCHUN ZHONGSHEN BEVERAGE CO. LTD

In December 2010, the Company invested $23,102 (153,000 RMB) in Changchun Zhongshen Beverage Co. Ltd. (“Zhongshen”).  This investment represented a 17% interest in Zhonghsen.  Zhongshen is a retailor of ginseng juice and wine.  The Company will account for this investment utilizing the equity method.

NOTE P – OPERATING SEGMENTS

The Company presently organizes its business into two reportable farming segments: (1) the cultivation and harvest of ginseng for the production of ginseng beverages, and (2) the cultivation and harvest of grapes for the eventual production of wine and grape juice.

The Company’s reportable business segments are strategic business units that offer different products.  Each segment is managed separately because they require different productions techniques and market to different classes of customers.

Six months ended December 31, 2010:

   
Parent
Company
   
Ginseng
   
Wine
   
Total
 
Revenues
   
-
     
973,175
     
-
     
973,175
 
Net loss
   
(331,335
)
   
(128,337
)
   
(37,697
)
   
(497,369
)
Total assets
   
260,172
     
7,515,455
     
2,314,883
     
10,090,510
 
                                 
Other significant items:
                               
Depreciation and amortization
   
295
     
9,482
     
836
     
10,613
 
Interest expense
   
51,820
     
14,516
     
10,423
     
76,759
 
Expenditures for fixed assets
   
-
     
4,839
     
-
     
4,839
 

 
 
F - 18

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2010


 
NOTE P – OPERATING SEGMENTS (CONTINUED)

Six months ended December 31, 2009:

   
Parent
Company
   
Ginseng
   
Wine
   
Total
 
Revenues
   
-
     
31,624
     
58,571
     
90,195
 
Net loss
   
(255,716
)
   
195,739
     
(62,651
)
   
(122,628
)
Total assets
   
112,278
     
4,689,281
     
2,104,541
     
6,906,100
 
                                 
Other significant items:
                               
Depreciation and amortization
   
-
     
14,140
     
411
     
14,551
 
Interest expense
   
60,277
     
-
     
10,228
     
70,505
 
Expenditures for fixed assets
   
-
     
1,186
     
-
     
1,186
 

NOTE Q – SUBSEQUENT EVENTS

Since December 31, 2010, the Company’s board of directors has approved the issuance of 1,338,750 shares of the Company’s common stock to investors who participated in a private placement conducted in accordance with Regulation S.
 
 
 
F - 19

 

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This Form 10−Q contains forward-looking statements. Our actual results could differ materially from those set forth as a result of general economic conditions and changes in the assumptions used in making such forward-looking statements. The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and accompanying notes and the other financial information appearing else where in this report. The analysis set forth below is provided pursuant to applicable Securities and Exchange Commission regulations and is not intended to serve as a basis for projections of future events.
 
Company Overview

Our company, China Ginseng Holdings Inc., was incorporated on June 24, 2004 in the State of Nevada.  The Company conducts business through its four wholly owned subsidiaries located in Northeast China.  We have been granted 20 year land use rights to  3,705 acres of lands by the Chinese government for ginseng planting and we control through lease approximately 750 acres of grape vineyards.
 
Since our inception in 2004, we have been engaged in the business of farming, processing, distribution and marketing of fresh ginseng, dry ginseng, ginseng seeds, and seedlings.  In March 2008, we acquired Tonghua Linyuan Grape Planting Co, to plant wild mountain grapes. Starting in August 2010, we have gradually shifted the focus of our business from direct sales of ginseng to canned ginseng juice production and wine production.

We believe that the shift of business focus to ginseng juice production and wine production will bring more profit to the Company in the long term. Before we decided to enter into the business of ginseng juice production, we conducted research regarding the market for functional drink and especially ginseng beverage. “Functional drink” is a drink product that is non-alcoholic, ready to drink and includes in its formulation non-traditional ingredients, including herbs, vitamins, minerals, amino acids or additional raw fruit or vegetable ingredients, so as to provide specific health benefits that go beyond general nutrition. In July 2010, China Lano Chiyip Research Institute conducted an extensive research on functional drinks in Chinese domestic market and published a report on its research results (the “Lano Chiyip Report”). According to the Lano Chiyip Report, revenue of functional drink sales of the entire Chinese market increased from 0.84 billion RMB in 2000 to 3 billion RMB in 2005. In recent years, with deteriorating natural environment and increasing pressure of daily life, there are more and more people having the so called “sub-health conditions”, which is defined by the World Health Organization as a state between health and disease when the patient experiences reduction in his or her vitality and adaptability although there is no defined disease diagnosed. At the same time, people in China are becoming more concerned about their health and quality of life.  There is increasing need for healthy food and drink, which has driven the growing market for functional beverages in China. China’s current consumption of functional drinks is only 0.5 kg/person annually, compared with 7 kg/person annually in Western countries. Therefore, we see great potential for sales of functional beverages in the China market.

Our ginseng beverage is a functional drink. According to our market research, there are approximately 10 types of ginseng drinks in the China market. To the best of our knowledge, all of our competitors’ ginseng drinks are produced by blending after extracting the main component of ginsenosides through chemical methods. The extraction of ginsenosides causes damage to the nutritional components of the ginseng.  We employ a different technology which preserves the nutritional components of ginseng and produces a more nutritious ginseng drink. Ginseng is one of the most widely used herbs in Chinese medicine for thousands of years. It is well acknowledged by most Chinese as a panacea capable of treating a wide variety of syndromes. Based on our observations regarding ginseng’s popularity and credibility with Chinese consumers, we plan to market our ginseng beverage as a luxurious and high-end brand beverage in China. We believe that we will require approximately three to five years to establish our brand.

Since we shifted the focus of our business in August 2010 into the ginseng beverage business and the wine business, we have started to store our raw material in 2008 and sell very limited self-produced ginseng. Therefore, the revenues attributable to the direct sales of ginseng produced by us have already and will continue to decrease as the ginseng is utilized for the ginseng juice. Nevertheless, because the market price of ginseng increased in the three months ended December 31, 2010 and we just started sales of canned ginseng juice in that period, the sales of ginseng still counted for the biggest part of our revenue for the three months ended December 31, 2010.   However, in a long run, we expect a decrease of revenue form direct sales of ginseng and an increase of revenue from sales of canned ginseng juice. We plan to have 70% of our revenue from sales of canned ginseng juice, 20% of our revenue from sales of ginseng and 10% of our revenue from sales of our wine in the next two to three years.
 
As our new business is in the initial stages, we need to spend capital to promote our new products and develop our market. As we are in the initial stage of ginseng beverage and wine business, we cannot assure the demands for our ginseng beverage and wine will be profitable in the short term and there is no guarantee that we will be able to generate the revenue with ginseng beverage and wine business.
 
Considering the current outstanding unpaid loans we have, our auditors have determined that we do not currently have sufficient working capital necessary and have raised substantial doubt about our ability to continue as a going concern. As of December 31, 2010, the cash balance on hand for the Company was $134,339.

In order to meet the challenge, we are taking the following actions:
 
 
·
We plan to seek additional capital to support our operation through a private placement pursuant to Regulation S;
 
·
We are recruiting distributors for ginseng beverage and wine products and we intend to recruit one general distributor for ginseng juice and one for wine in every city in which we sell our products;

 
 
4

 
 
Although China Ginseng Holdings has not generated any revenues from its wine businesses, the revenue from ginseng beverage is $42,820 for the quarter ended December 31, 2010. We believe there is future potential in our business due to the fact that (i) the China Ginseng market is gradually recovering, (ii) the demand and the price is in the uptrend due to Chinese government restrictions on the amount of land available for ginseng farming (land under our Company’s control was not affected by the government restrictions), and (iii)  as of the date of this filing, we have already entered into binding agreements with nine distributors for our  beverage in different cities.

As the impact of the shift in the focus of our business away from the ginseng business and into the ginseng beverage business, and also the wine business is uncertain, our past revenues and other financial results will not provide a meaningful basis for future performance given the material change in our business and there is no guarantee that we will be able to attain profitability in the foreseeable future.

Our Subsidiaries:

Our business in China is currently conducted through four wholly owned subsidiaries located in Northeast China, the current operational status of each of these businesses as of the date of this filing is as follows:
 
Yanbian Huaxing Ginseng Industry Co. Limited (“Yanbian”) – Ginseng farming and sales

 
¨
On November 24, 2004, we acquired a 55% interest in Yanbian Huaxing Ginseng Industry Co. Limited from Huaxing Ginseng Industry Co, Ltd. for $200,000.   Subsequently in August, 2005, we acquired the remaining 45% interest from Huaxing Ginseng for $164,000.  The price was determined based upon the registered capital of Yanbian of $364,000 in China.  In October 2005, we increased the registered capital of Yanbian by putting in an additional $250,000 in order to meet the requirement for foreign owned enterprise requirement.  We received a certificate of approval issued by the Chinese government certifying Yanbian as a Foreign-Owned Enterprise wholly-owned by us. Yanbian is operated to plant ginseng and our revenue in the past was mainly from the sales of ginseng produced and sold by Yanbian. With the shift of business focus to canned ginseng juice, we anticipate a decrease of revenue of direct sales of ginseng while most of ginseng produced by Yanbian has been and will continue to be used as raw material for canned ginseng juice.

Jilin Ganzhi Ginseng Products Co. Ltd. (“Ganzhi”) - Producing Canned Ginseng Juice.

 
¨
On August 24, 2005, we acquired a 100% interest in Jinlin Ganzhi Products Co. for $95,691 and subsequently on September 26, 2007 and August 31, 2008 we invested $50,000 and $20,000 respectively into Ganzhi. Ganzhi is operated to process ginseng and produce canned ginseng juice. We received a certificate of approval issued by the Chinese government certifying Ganzhi as a Foreign-Owned Enterprise wholly-owned by us. Ganzhi started production of canned ginseng juice in the three months ended December 31, 2010 and the sales of canned ginseng juice are conducted through Huamei.

Tonghua Linyuan Grape Planting Co. (“Tonghua”) – Growing grapes and producing wine

 
¨
On March 31, 2008, we acquired a 100% ownership of Tonghua Linyuan Grape Planting Co. for the issuance 6,155,000 shares of common stock of the Company.  The price was determined by arm’s-length negotiations based upon the appraised net asset value of Tonghua at the time of acquisition which was approximately $1,332,248.  We signed the Tonghua acquisition agreement on April 12, 2007, but the transaction was not closed until March 31, 2008. We received a certificate of approval issued by the Chinese government certifying Tonghua as a Foreign-Owned Enterprise wholly-owned by us. Tonghua is operated to plant grapes and produce wine. Other than one sale of grapes made by Tonghua in 2010, Tonghua reserved all the grapes planted for wine production. In addition, Tonghua has contracted for the production of wine with a winery producer whereby Tonghua provides the producer with grape juice and supplies and producer charges processing fee per bottle. Tonghua plans to start wine production in March 2011 and the sales of wine will be conducted through Huamei starting in April, 2011.
 
Jinlin Huamei Beverage Co. Ltd (“Huamei”) - Marketing of our canned ginseng juice and wine
 
 
¨
Jinlin Huamei was incorporated by us on October 19, 2005 as a foreign investment company in China.  The registred capital of Huamei is $200,000. We received a certificate of approval issued by the Chinese government certifying Huamei as a Foreign-Owned Enterprise wholly-owned by us  Huamei operates as a sale department of our canned ginseng juice and wine. We plan to recruit one general distributor for our canned ginseng juice and one general distributor for our wine in each big city in China through Huamei. As of the date of this filing, Huamei  has  signed 10 general distributors for our ginseng beverage and 1 general distributor for our wine. We commenced sales of ginseng beverage in October 2010, therefore, Huamei started generating revenue in November 2010.
 
As of the date of this filing, each of our four subsidiaries operates as an essential part of our integrated business and all of our businesses are operational.
 
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce of the People’s Republic of China, the China Securities Regulatory Commission, the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, and the State Administration of Foreign Exchange, jointly amended and released the Merger & Acquisition Rules, which became effective on September 8, 2006 ( the “2006 M&A rules”). This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the China Securities Regulatory Commission prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the 2006 M&A rules do not apply to any any foreign owned enterprise. Three of the four foreign owned enterprises (Ganzhi, Yanbian and Huamei) became wholly foreign owned enterprises before September 8, 2006. Therefore, the 2006 M&A rules definitely are not applicable to Ganzhi, Yanbian or Huamei. Tonghua became a wholly foreign owned enterprise after September 8, 2006.  According to the 2006 M&A rules, where a special purpose company is to be listed overseas for transaction, it shall be subject to the approval of the securities regulatory organ under the State Council of the PRC. Under the said rules, the “special purpose company” refers to an overseas company directly or indirectly controlled by a domestic company or Chinese person to realize the interests of a domestic company actually owned by the aforesaid domestic company or Chinese person by means of overseas listing. The current shareholders of Tonghua are not the original shareholders of Tonghua before Tonghua became a wholly foreign owned enterprise on January 15, 2008. Thus, the Company is not of the opinion that China Ginseng Holdings, Inc. is a “special purpose company” as defined in the 2006 M&A rules. Our structure shall not be subject to the 2006 M&A rules.
 
Our Products:

Previously, through Yanbian Huaxing, we focused on the farming, processing, distribution and marketing of Asian and American Ginseng and related byproducts in the following varieties:

 
·
Fresh Ginseng:   For pharmaceutical, health supplement, cosmetic industry and fresh consumption.

 
·
Dry Ginseng:   Dried form for pharmaceutical and health supplement consumption.

 
·
Ginseng Seeds :  Selling of ginseng seeds.

 
·
Ginseng Seedling :  Selling of ginseng seedling.

Ginseng's growing cycle is from April to September, six months a year.  Normally we sow the seed in March and harvest in September. Ginseng seeds are obtained after the blossom in Autumn. The seeds can be sowed in September or next Spring. It takes 10 days to germinate and the growing cycle for seedling is 10 days. For every hectare cultivated, we can harvest approximinately 18 to 20 kg ginseng. Excessive rain in June to August will cause oxidation on the ginseng because that is the grow season for ginseng.  Our average yearly rain volume in the past ten years is approximately 500 Millimeter and we usually have around 30% of ginseng oxidized each year. However, we had 90% of ginseng oxidized in 2010 because there was 1400 millimeter rain from July to August which was unusual given the average annual rain volume in the past ten years.   Once ginseng is oxidized, it is no longer qualified as raw material for ginseng beverage, however, we can still sell it to the market at lower price compared to the price of  non-oxidized ginseng. As of June 2010, our planting area for ginseng is 443,830 square meter.

Since August 2010, we have gradually shifted our business focus from direct sale of ginseng and ginseng byproducts to production and sale of canned ginseng juice and wine.
 
 
 
5

 
 
 
Through Jilin Ganzhi, we are producing two types of canned ginseng juice:

 
·
Ganzhi Asian Ginseng Beverage

 
·
Ganzhi American Ginseng Beverage

Through Tonghua Linyuan, we have already grown and crushed the grapes from our vineyards and have the juices reserved.  We plan to start wine production in March 2011 and sales in April, 2011. We have contracted for the production of the wine with a third party producer. 
 
We plan to produce and sell two kinds of wine:

 
·
Bingqing Ice Wine

 
·
Pearl in the Snow (Red)

New Focus of Our Business

Canned Ginseng Juice

Currently, there are approximately 10 types of ginseng drinks on the market.  The price range for those products is between 4 –30 RMB per can (about USD $0.60-$ 4.51).

The most important component of ginseng is ginsenoside. Based upon reading of our competitors’ product labels, all of their ginseng drinks are produced by blending after extracting ginsenosides through chemical methods. The extraction of ginsenosides will cause damage to its nutritional components.  Our technology is different from that traditional method.  We squeeze out the natural juice from fresh ginseng as the main material plus natural extracts like xylitol, citric acid and steviosides as subsidiary ingredients. We have farming technician periodically inspect farmers to ensure they follow our growing guidelines to control the quality of the fresh ginseng.  We use low residue pesticide and biodegradable fertilizer for ginseng planting. And we use xylitol instead of sugar to lower calories.  Further, products made with xylitol do not cause a sour taste.

The reason direct squeezing is not commonly used in canned ginseng juice is that it needs fresh ginseng as a raw material and preservation of fresh ginseng is very difficult. However, our drink formula enables us to use refrigerated ginseng as raw material to produce canned ginseng juice. Although it is refrigerated, we are still able to preserve the freshness of the ginseng in final products.  The drink formula for our ginseng beverages is a registered patent approved by the Chinese government, patent number ZL 03111397.6.  This patent was issued on January 23, 2008 and expires 20 years after issuance.

In order to produce canned ginseng juice, we store our fresh ginseng in refrigerated warehouse space. We are currently renting a refrigerated warehouse (-20° C degree) to store all fresh ginseng inventory necessary for production of the ginseng beverages. Monthly rent for the refrigerated warehouse is RMB 4,500 (about USD $676.86). We commenced production in August 2010 and sales in October, 2010. However, as we are in the initial stage of the ginseng beverage business, we cannot assure that we will generate profits from the sale of our ginseng beverage in the short term, if at all.

We own our production plant at which the ginseng beverage is produced.  The plant is certified by the Chinese government as a Good Manufacturing Process facility, which is required for our production of these products.  Good Manufacturing Process standards cover organization and personnel, building and facilities, equipment, materials, hygiene and sanitation, validation, documentation, production management, quality management, production distribution and recall, complaints and adverse reactions report, and self-inspections.

Wine

Our grapes grow on 750 acres of land leased from a group of individual farmers, paying approximately $37.50 per acre a year for 15 years.  This lease expires on December 31, 2014.   Our vineyard is located in Ji’An City, Jilin Province, North Latitude 41 degree with average temperature of 7.5°C, annual precipitation 800mm-1000mm, frost free period 150 days out of a year.  Ji’An is the largest grape growing area in Asia. Our current estimated grape production is 565 tons annually.

The grape growing cycle is from April to September, five to six months a year. For grapes, every acre can produce approximately 750 kg grapes annually.

As of the date of this filing, Tonghua Linyuan has reserved 1,170 tons of grape juice for fermentation stored in 16 stainless holding tanks. The harvesting cycle of grapes takes around 5 months. We plant in April and harvest in the middle of September. Last fall we harvested 562.5 tons of grapes in average and produced 281 tons of juice.  We let the juice ferment for 40 days and sealed it in barrels in December.

We plan to start production of wine in March 2011 and sales in April 2011. We have a written production agreement with Tonghua Jinyuanshan Winery (“Tonghua Winery”) to process and bottle wine for us from May 20, 2009 to May 19, 2012. Under the terms of the agreement, we provide Tonghua Winery with grape juice, bottling supplies and packaging supplies, and Tonghua Winery processes and bottles the wine with a charge of approximately $0.15-0.22 per bottle (approximately $0.15 per bottle for processing red wine and approximately $0.22 per bottle for processing ice wine). 
 
 
6

 

Distribution

We intend to recruit one general distributor for our products of ginseng beverage and wine in every city.  The city level distributor can recruit the second level distributors.  In addition to recruiting general distributors, in some major cities, Jinlin Huamei will establish sale branch offices to facilitate the local sales. Our direct sale will target at customers of high end retailers such as supermarkets, pharmacies, hotels, gift shops, entertainment centers, tourists attractions, airport and high speed trains.

We have started negotiating distribution and sales agreements with potential general distributors. Currently, we have signed 10 general distributors for our ginseng beverage and 1 general distributor for our wine. Our development plan is to recruit up to 550 city level distributors for our ginseng beverage and up to 2,000 second level distributors in the next three to five years; and to recruit up to 400 city level distributors for our wine in the same timeframe.
 
Sales of our products:

In the past, our revenue was mainly from the sales of ginseng produced and sold by Yanbian.  In August 2010, we shifted our business focus to canned ginseng juice and wine and started to store fresh ginseng for producing canned ginseng juice. Most of the ginseng produced by Yanbian has been and will continued to be used as raw material of canned ginseng juice and only those not qualified to be used for canned ginseng juice will be sold directly through Yanbian. Therefore, the revenues attributable to the direct sales of ginseng produced by Yanbian have already and will continue to decrease as the ginseng is utilized for the ginseng juice. Nevertheless, because the market price of ginseng increased in the three months ended December 31, 2010 and we just commenced sales of canned ginseng juice in that period, the sales of ginseng by Yanbian still counted for the biggest part of our revenue for the three months ended December 31, 2010.   However, in the long run, we expect a decrease of revenue form direct sales of ginseng and an increase of revenue from sales of canned ginseng juice. We plan  to have 70% of our revenue from sales of canned ginseng juice, 20% of our revenue from sales of ginseng and 10% of our revenue from sales of our wine in the next 2-3 years.
 
Competitive environment
 
The market for ginseng products and wine is highly competitive. Our operations may be affected by technological advances by competitors, industry consolidation, patents granted to competitors, competitive combination products, new products offered by our competitors, as well as new information provided by other marketed products and/or other post-market studies.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believes to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
In addition, starting August 2010, we have gradually shifted our business from farming to producing ginseng juice and wine with our crops as raw materials. Given this shift of focus of our business, past financial results are not indicative of future performance. Furthermore, we cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Inventory

Our inventory consists of fresh and dried ginseng as well as crushed grapes and is stated at the lower of cost or market value.  Cost is determined using the First-In, First-Out (FIFO) Method.

Ginseng Crops and Grape Crops

The Company uses the full absorption costing method to value its ginseng crops and grape crops.  Included in crop costs are seeds, labor, applicable overhead including depreciation, and supplies. Common costs are allocated in each period based upon the total number of hectors under cultivation during the period.
 
Ginseng's growing cycle is from April to September, six months a year.  Normally we sow the seed in April and harvest in September and October. Ginseng seeds are obtained after the blossom in the fall. The seeds can be sowed in September or next spring, it takes 10 days to germinate and the growing cycle for seedling is 10 days. The grape growing cycle is from April to September, five to six months a year.
 
For ginseng, every hectare can harvest 18 to 20 kg ginseng; for grapes, every acre can produce approximately 1500 kg grapes. As of December 31, 2010, the planting area for ginseng is 111 acres, and the planting area for grapes is 750 acres.
 
The carrying value of the ginseng crops and Grape crops is reviewed on a regular basis for any impairment in value using management’s best estimate as to expect future market values, yields and costs to harvest.  Costs accumulated on the acres expected to be harvested during the next fiscal year have been classified as a current asset.
 
 
 
7

 

Revenue Recognition

The Company’s primary source of revenue has been from the sale of fresh and dried ginseng and in the year ended June 30, 2010, one bulk sale of crushed grapes.  Currently, the Company is processing the ginseng and storing the stock for future juice production which it plans to commence in early 2011.  The grapes harvested in 2009 have been crushed and the juice produced has been stored in storage tanks.  The Company plans to do the same for grapes harvested in 2010. Ginseng is planted in the Spring (April) and Fall (September) of each year and is generally harvested in September.  It usually takes up to 6 years for a ginseng root to mature, although, senior maturity can take up to 8 years.

Harvested ginseng can be sold in two ways: (1) fresh ginseng which can be sold immediately and stored in refrigerators for up to 3 years; and (2) dried ginseng which is processed and dried via sunlight and steam machines. Drying is a two month process.  Dried ginseng can be stored up to 5 years. The Company has focused on selling dried ginseng as it is more profitable than selling fresh ginseng. The Company has also been storing fresh ginseng for future juice manufacturing.

When the Company sells ginseng, it receives orders prior to harvest.  For major customers, 20% to 30% is paid upon delivery as payment in advance.  The balance is billed after the customer incurs a lengthy inspection process which can take up to 60 days.  Until the customer finalizes its inspection and deems the shipment acceptable, the shipment is still the property of the Company.  Upon customer’s completion of inspection and approval, the sale is then recognized and the balance of the invoice price is sent to the Company. For smaller sales, the customers pick up the ginseng from the Company, pay in cash at the time of pick up and receive an invoice with appropriate sales tax applied and a cash acknowledgement. On these orders, revenue is recognized upon payment. The Company had one bulk sale of crushed grape juice and recognized the sale when the tanker left the vineyard.

Commencing with the fourth quarter of 2010, the Company has entered into several distribution agreements to sell ginseng juice and wine.  In accordance with these agreements, the distributors will advance funds to the Company for orders to be placed.  Upon the placement of orders by the distributor, the Company will ship product to the distributor and title will pass to the distributor.   In relation to distribution agreements for ginseng beverages, i t is the Company’s policy commmencing with the initiation of the distribution agreements to allow the distributors to return all unsold products at the end of six months from the shipment date should the product not be sold and the product has not exceeeded the expiration date.  Since these agreements commenced in September 2010, the Company has no established history as to the quantity of the ginseng and wine which may be returned in order to determine if a reserve for returns and allowances is necessary.  The Company is currently working closely with the distributors to establish this history.  Currently, at each reporting period, the Company is ascertaining from each distributor its’ current on hand quantity and assessing the situation in order to establish a return allowance, if necessary.  At December 31, 2010, the first quarter in which the Company had ginseng juice sales to distributors which aggregated approximately $42,000, all sales to distributors were sold to end user customers.  These distribution agreements also contain incentive arrangements based upon the accumulated product purchased by the distributor; none of which have been earned at December 31, 2010.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist principally of trade receivables. When ginseng is shipped to a customer, the customer is entitled to an inspection process which could take up to 60 days.  Upon completion of the inspection and approval process, the customer notifies the Company and a sale is recorded.  The allowance for doubtful accounts represents management’s estimate of the amount of probable credit losses, determined by reviewing past due balances and other information.  Account balances are written off against the allowance if management determines the receivable is uncollectible.  The Company’s standard terms stipulate payment in 60 days and consider a receivable to be uncollectible after one year or when appropriate collection efforts have been exhausted.

Vineyard Development Costs

Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. The costs are capitalized within Property and Equipment. When the vineyard becomes commercially productive, annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard, which is estimated to be 40 years. All of the Company’s vineyards are considered commercially productive.  Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold.
 
Income Taxes

The Company accounts for income taxes utilizing the liability method of accounting.  Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse.

Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.

Going Concern

As of June 30, 2009, the Company had a working capital deficiency of $1,041,681.The report of our independent registered public accounting firm on the financial statements for the year ended June 30, 2010 includes an explanatory paragraph indicating substantial doubt as to our ability to continue as a going concern.  To address the Company’s cash flow problems, management plans to take a series of actions, including raising capital through additional financings and continuing its efforts to recruit distributors for ginseng beverage and wine products.  Management believes that these actions will enable the Company to continue to finance its operations and allow it to move towards profitability in the coming year.  Since June 30, 2010, the Company has raised an additional $1,227,970 in cash through a private placement conducted in accordance with Regulation S. As of the six months ended December 31, 2010, our working capital turns to positive of $1,639,488; increased $3,707,487 compared to the deficit of $ 2,067,999 for the six months ended December 31, 2009
 
 
8

 
 
Recently Issued Accounting Pronouncements
 
In July 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”.  This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
 
In January 2010, the FASB expanded the disclosure requirements for fair value measurements relating to the transfers in and out of Level 2 measurements and amended the disclosure for the Level 3 activity reconciliation to be presented on a gross basis. In addition, valuation techniques and inputs should be disclosed for both Levels 2 and 3 recurring and nonrecurring measurements. The new requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about the Level 3 activity reconciliation which are effective for fiscal years beginning after December 15, 2010. The Company adopted the new disclosure requirements on January 1, 2010 except for the disclosure related to the Level 3 reconciliation, which will be adopted on January 1, 2011. The adoption will not have an impact on its consolidated financial condition, results of operations or cash flows.

In October 2009, the FASB issued an amendment to the accounting and disclosure for revenue recognition. The amendment modifies the criteria for recognizing revenue in multiple element arrangements. Under the guidance, in the absence of vendor-specific objective evidence (“VSOE”) or other third party evidence (“TPE”) of the selling price for the deliverables in a multiple-element arrangement, this amendment requires companies to use an estimated selling price (“ESP”) for the individual deliverables.

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) officially launched the FASB Accounting Standards Codification (“ASC”), which has become the single official source of authoritative nongovernmental U.S. GAAP, in addition to guidance issued by the Securities and Exchange Commission. The ASC is designed to simplify U.S. GAAP into a single, topically ordered structure. All guidance contained in the ASC carries an equal level of authority. The ASC is effective for all interim and annual periods ending after September 15, 2009.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), codified in FASB ASC Topic 855-10-05, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 (ASC 855-10-05) also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 (ASC 855-10-05) is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this pronouncement during the year ended December 31, 2009. SFAS 165 (ASC 855-10-05) requires that public entities evaluate subsequent events through the date that the financial statements are issued. In February 2010, FASB issued Accounting Standards Update 2010-09, “Subsequent Events-Amendments to Certain Recognition and Disclosure Requirements,” removed the requirement that public entities disclosed the date through which subsequent events have been evaluated
 
Result of Operation

The following tables present certain consolidated statement of operations information. Financial information is presented for the three months and six months ended December 31, 2010 and 2009 respectively.

   
For the Three Months Ended December 31, 2010
                   
Change
   
2010
   
2009 (Restated)
   
Amount
 
%
Revenues
 
$
918,877
   
$
58,579
   
$
860,298
 
  1468%
Cost of Goods Sold
   
819,222
     
67,984
     
751,238
 
  1105%
Selling ,general and administrative expenses
   
224,172
     
44,170
     
180,002
 
  408%
Net Income (Loss)
   
(188,916
)    
(106,310
   
82,606
 
77%
 
 
   
For the Six Months Ended Dec 31, 2010
                   
Change
   
2010
   
2009 (Restated)
   
Amount
 
%
Revenues
 
$
973,175
   
$
90,195
   
$
882,980
 
  978%
Cost of Goods Sold
   
864,481
     
82,898
     
781,583
 
  943%
Selling, general and administrative expenses
   
502.553
     
(5,358
)    
507,911
 
  9479%
Net Income (Loss)
   
(497,369
)    
(82,311
)    
415,058
 
504%
 
Revenue
 
   
Three Months ended December 31,
 
Products 
 
2010
   
2009
 
Ginseng (Production)
  $ 510,717     $ -  
Ginseng (Purchase for Resale)
    366,340       -  
Seeds and Seedlings
    -       -  
Grape
    -       58,579  
Ginseng Beverage
    42,820       -  
Total
  $ 919,877     $ 58,579  
 
   
Three Months ended December 31,
       
Products
 
2010
   
% (of total
revenue)
   
2009
   
%(of total
revenue)
 
Ginseng (Production)
 
$
510,717
     
56
%
 
$
-
       
Ginseng (Purchase for Resale)
   
366,340
     
40
%
   
-
       
Seeds and Seedlings
   
-
             
-
       
Grape
   
-
             
58,579
     
100
%
Ginseng Beverage
   
42,820
     
4
%
   
-
         
Total
 
$
919,877
     
100
%
 
$
58,579
     
100
%
 
 
 
9

 

Our total revenue increased from $58,579 for the three months ended December 31, 2009 to $919,877 for the three months ended December 31, 2010, an increase of $861,298 or 1,470.32%. The increase was primarily attributable to the sales of ginseng and ginseng juice sales which had not occurred in the same period of 2009.  

For the three months ended December 31, 2011, about $42,820 or 4% of our revenue was generated from our ginseng juice product. This was a result of our marketing effort to the previously unaddressed beverage market. We have signed 10 distribution agreements since August, 2010 and with their sales channels we have started to generate revenue from our Ginseng beverage business; the fact that we just started sales of canned ginseng juice in the three months ended December 31, 2010, the sales generated by Huamei was a small part of our revenue for the three months ended December 31, 2010. However, we believe that there is a significant opportunity for functional drink in China and there are currently no leading brands in the market. With our unique production technology of ginseng beverage and our focus on high-end consumer, we anticipate that, in the long run, around 70% of our revenue will come from sales of ginseng beverage in next 2-3 years. Nevertheless, there is no assurance that our sales of ginseng beverage will generate 70% of our revenues in the next 2-3 years;
 
Meanwhile, we   believe   that 90% of ginseng oxidized in 2010 should not have a significant impact on our ginseng beverage business due to the following reasons: 1) We have started to store ginseng as raw material for ginseng beverage business since 2008 and we just start to sell ginseng juice in the market, the market share is small at the current time so we do not need to worry we do have enough ginseng to make ginseng juice; 2) our average oxidized ginseng a year is only 30%, 90% oxidized ginseng in 2010 is a rare event; 3) In the next 2-3 years, if our ginseng beverage business has a rapid development and because of oxidized ginseng cause us lack of ginseng to produce ginseng juice, we still can buy from outside to make it.
 
Approximately $366,340 or 40% was the result of resale of ginseng purchased from the market and sold to major customers. These sales were supported by increased market demand and market price.  The policy of the Chinese government restricted the amount of land available for ginseng farming caused market demand and ginseng prices to go higher in this quarter in 2010. We did not have revenue from resale of ginseng purchased in 2009 due to the oversupply in the ginseng market;

The remaining $510,717 or 56% was a result of revenue generated from our own farming production.  This was caused by market demand and the quantity of unqualified ginseng which was unsuitable for use in ginseng beverages. In 2010, due to the weather condition, 90% of our own farmed ginseng was oxidized. Since it is unqualified to make ginseng beverage, we sold it to the market.

Our average yearly rain volume in the past ten years is approximately 500 millimeter and we usually have around 30% of ginseng that becomes oxidized each year. Because of the excessive rain in 2010, 90% of our own framed ginseng was oxidized, the fact that the market price of ginseng increased in the three months ended December 31, 2010 and the fact that the market demand of ginseng increased in that period, the sales of ginseng by Yanbian was counted for the biggest part of our revenue for the three months ended December 31, 2010.

Cost of Goods Sold

   Three Months ended December 31,
Products 
 
December 31,
2010
Cost of goods sold
   
% of total cost of goods sold
   
December 31,
2009
Cost of goods sold
   
% of total cost of goods sold
   
2010-2010 
Dollar
Variance
   
% change
 
Ginseng (production)
  $ 498,318       61 %     --       --       498,318        --  
Ginseng (purchase)
    286,800       35 %     9,405       14 %     277,395       2949 %
Grape Sales
    --       --       58,579       86 %     (58,579 )     --  
Ginseng Beverage Production
    34,104       4 %     --               34,104       --  
Total
  $ 819,222       100 %     67,984       100     751,238       1105 %
 
Our total cost of goods sold increased from $67,984 for the three months ended December 31, 2009 to $819,222 for the three months ended December 31, 2010, an increase of $751,238 or 1,105%. The primary reasons for the increase were following:
 
1.  
We had a cost of $498,318 for ginseng production for the three months ended December 31, 2010, resulting from the ginseng harvest in 2010. In 2010, we had 90% oxidized ginseng so we had to harvest it for sale.
 
2.  
We had a cost of $286,800 for purchasing ginseng for resale, increased $277,395, or 2949% for the three months ended December 31, 2010 was due to increased quantity, quality and the price of ginseng we purchased from outside farmer.  For the three months ended December 31, 2010, the quality of ginseng we purchased from outside farmer was higher than the same period time of 2009 and the purchased quantity increased was due to market demand. As we mentioned, the purchased price and market demand increased was due to Chinese government’s policy to restrict the amount of land available for ginseng farming and nationwide inflation in all raw materials.
 
·  
35% of $286,800, or $100,380 increasing was caused by increased purchased ginseng
 
·  
65% of $286,800, or $186,420 increasing was due to increased purchased  price
 
3.  
We had a cost of $34,104 for ginseng beverage production in the three month ended December 31, 2010 because we started to produce our ginseng juice in October, 2010.
 
Cost of sales as a percentage of revenue decreased from 100% to 89% as compared to the three months ended December 31, 2009.
 
 
10

 

Selling General and Administration Expenses
 
Sales costs, general expenses and administrative expenses increased significantly from a $44,170 for the three months ended December 31, 2009 to $ 224,172 for the three months ended December 31, 2010, an increase of $180,002 or 407.52%. The increase is mainly from the rise in general administrative expenses and marketing expenses for our new business, the ginseng juice and grape wine operations. The increase is mainly from 1) the rise in general administrative expenses and marketing expenses for our new business– the ginseng juice and grape wine operation. In order to develop our new business and promote our new products, company representatives attended most national agriculture exhibitions and food exhibitions during the period and promoted our ginseng juice through various channels 2) The increased salaries paid for increased staff and the increased salaries in the sales division ; and 3) the increased professional fee and related to public filings.
 
Depreciation and Amortization

Depreciation and amortization was $4,620 for the quarter ended December 31, 2010, compared to $7,567 for the quarter ended December 31, 2009, a decrease of $2,947 or 63.79%. The decreasing was primary due to the depreciation calculation of Jilin Ganzhi. For the three months ended December 31, 2010, there was no depreciation charge on the property of Jinlin Ganzhi.

Interest Expense

Our Interest expense increased by $9,383, from $35,258 for the quarter ended December 31, 2009 to $44,641 for the quarter ended December 31, 2010, representing a 26.61% increase. The change in imputed interest to related party loans and the interest paid to bank loans for Ganzhi building is the primary reasons for the increase in interest expense.
 
Income Tax Expense

Income tax expense for the quarter ended December 31, 2010 is $16,138, an increase of $6,350 or 64.88% from $9,788 for the quarter ended December 31, 2009. This income tax expense relates to taxes payable in China by the Company’s subsidiaries, Yanbian Huaxing and Jilin Huamei.  The increase in income tax expense is due to increased taxable income by Jilin Huamei in the quarter ended December 31, 2010.

Net Loss

The Net Loss for the quarter ended December 31, 2010 was $188,916; an increase of $82,606 or 77.70% compared to a net loss of $106,310for the quarter ended December 31, 2009. The increase is primarily due to the increase in operating expenses and administrative expenses. There also was an increase in the cost of producing ginseng and in purchasing ginseng for resale.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. We have currently financed our operations and capital expenditures through loans from individual lenders, including officers, directors and other shareholders of the Company and capital raised through a private placement pursuant to Regulation S as well. Our current activities are related to developing our new business strategy: the sale of ginseng juice and wine products.

As of December 31, 2010, we had working capital of $1,639,488 compared to a working capital deficit of $2,067,999 as of June 30, 2010.

As of December 31, 2009, and as of December 31, 2010, there was no change in our loan payments since the loans remained constant. As of June 30, 2010, we had outstanding loan of 2,000,000 RMB (about $292,942)) to Ji’An Qingshi Credit Cooperatives; the principal terms of the loan are as follows:

 
1.
Type of Loan: Short Term Agriculture Loan
 
 
2.
Loan Purpose: Planting
 
 
3.
Loan Amount: Principal of 2,000,000 RMB [ about USD $292,942] with an annual interest of 6.325%
 
 
4.
Loan Period:  From February 4, 2002 to February 4, 2003; Repayment due date was February 4, 2003
     
 
5.
Security: The loan is secured by the assets of Tonghua including 14 carbon-steel storage cans; 16 high-speed steel  storage cans and 450 tons of grape juice

We have not paid any principal or interest of the loan, however, Ji’An Qingshi Credit Cooperative verbally agreed in March 2008  not to call the loan. The material terms for the verbal agreement are: No principal or interest payments are required to be made until the Company is generating profits and interest continues to accrue until we repay the loan.   Thus, the debt in Tonghua acquisition will not have impact on our liquidity and capital resource before we start to repay the lender. Nevertheless, we had a net loss of $648,727 for the year ended June 30, 2010, if we continue operation without generating net income, Ji’An Qingshi might revoke the oral agreement and call the loan. If we can not pay off the loan when Ji’An Qingshi revokes the oral agreement, Ji’An Qingshi has the right to sell, auction or any other methods to liquidate the secured assets and receive the payment of outstanding principal and interests ranking senior to other lenders out of the secured assets. As the date of the fiing, Tonghua has 31 storage cans in total including 15 carbon-steel cans and 16 high-speed steel storage cans; 2 white-steel transport tanks, 1170 tons of grape juice. Therefore, if Ji’An Qinshi decides to revoke the oral agreement and call the loan, it will not lead to the close of operation and business of Tonghua, however, it will cause extra costs for Tonghua to rent additional storage cans from third party.
 
On March 2, 2010, the Company entered into an agreement with Meihekou Hang Yilk Tax Warehousing Logistics, an auctioneer, to purchase office and production facilities.  The Company obtained an 8 million RMB (about USD $1,203,312 ) bank loan from Meihekou City Rural Credit Union  to pay the seller on November 8, 2010.

The principal terms of the 8 million RMB bank loan agreements are as follows:
 
 
·
Parties: Ganzhi Ginseng Products Co., Ltd (“Ganzhi”) and Meihekou City Rural Credit Union (“Meihekou Credit Union”);

 
·
Meihekou granted a loan of 8 million RMB (about USD $ 1,203,312) to Ganzhi to be used to pay off its debt and the term of the loan is 23 months from September 10th, 2010 to August 10th, 2012.
 
 
·
The loan carries an annual  floating rate which is an interest rate on value date (upward) 90%, changing with the adjustment of national bank rate, the sliding scale will not change. The monthly interest rate of May 2011 is 9.65833 and we paid interest of 78,171.38 RMB (about USD $ 12,026) on  May  20, 2011. Up to date, we have paid interest of  approximately $66,896 in total.

 
·
The payment shall be made in the order of loan expense, interest and principal. Ganzhi shall pay 1,600,000 RMB (about USD $240,662.4) principal on August 10, 2011 and the rest of principal of 6,400,000 RMB (about USD $962,649.6]) on August 10, 2012.

As no principal is required to repaid until August 10, 2011 and we are current on the payment of interest, the debt in 8 million RMB Meihekou loan will not a have material impact on our liquidity and capital resources until such time as we are required to repay the principal.  In addition, there are no financial covenants in the Meihekou Credit Union agreement that place restrictions or limits on our ability to raise capital in the future.

As of December 31, 2009, and as of December 31, 2010, there was no change in our loan payments since the loans remained constant.  Since the lender, Ji’An Qingshi Credit Cooperative has verbally agreed not to call the loan, we can repay this loan at our own discretion when funds are available. Thus, the debt in Tonghua Linyuan acquisition will not have impact on our liquidity and capital resource before we start to repay the lender.

As of December 31, 2010, and as of December 31, 2009, we had notes payables of approximately $598,279 and $1,570,936 to individual lenders, respectively. These amounts are mainly due to the working capital demands of the business and are interest free. As of December 31, 2010, we had additional notes payables of approximately $60,398 due to the building purchase of beverage business.

As of December 31, 2010 we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business. We started our ginseng beverage production in August 2010 and sales in October, 2010.  As of June 30, 2010, we raised capital $591,902 through private financing pursuant to Regulation S. Since June 30, 2010, we raised an additional $1,227,970 in private financing pursuant to Regulation S. We intend to continue to seek additional financing until such time as we are able to support our growth through our operations. Meanwhile, we intend to continue to try and recruit the distributors in different cities in order to increase our sales. If we are unable to raise additional cash through financing activities prior to our operations yielding sufficient cash to support our planned growth and expansion, we may have to significantly reduce our operations, which could have a material adverse effect upon our business.

 
11

 
 
 
Comparison of results for the six months ended December 31, 2010 and 2009:
 
Revenue
  
   
Six Months ended December 31,
 
Products 
 
2010
   
2009
 
Ginseng (production)
  $ 520,654     $ -  
Ginseng (purchase)
    409,701       31,616  
Grape
    -       58,579  
Ginseng Beverage
    42,820       -  
Total
  $ 973,175     $ 90,195  
 
   
Six Months ended December 31,
                   
Products 
 
2010
   
%(of total
revenue)
   
2009
   
%(of total revenue)
 
Ginseng (production)
 
$
520,654
   
54
%
 
$
-
       
Ginseng (purchase)
   
409,701
   
42
%
   
31,616
   
35
%
Grape
   
-
           
58,579
   
65
%
Ginseng Beverage
   
42,820
   
4
%
   
-
       
Total
 
$
973,175
         
$
90,195
       

Our total sales increased from $90,195 for the six months ended December 31, 2009 to $973,175 for the six months ended December 31, 2010, an increase of $882,980 or 978.97%. The increase was primarily attributable to the sales of ginseng and ginseng juice sales which had not occurred in the same period time of 2009.  
 
For the three months ended December 31, 2011, about $42,820 or 4% of our revenue was generated from our ginseng juice product. This was a result of our marketing efforts to the previously unaddressed beverage market. We have signed 10 distribution agreements since August, 2010 and with their sales channels we have started to generate revenue from our Ginseng beverage business;   the fact that we just started sales of canned ginseng juice in the three months ended December 31, 2010, the sales generated by Huamei was a small part of our revenue for the three months ended December 31, 2010. However, we believe that there is a significant opportunity for functional drink in China and there are currently no leading brands in the market. With our unique production technology of ginseng beverage and our focus on high-end consumer, we anticipate that, in the long run, around 70% of our revenue will come from sales of ginseng beverage in next 2-3 years. Nevertheless, there is no assurance that our sales of ginseng beverage will generate 70% of our revenues in the next 2-3 years;
 
Meanwhile, we believe   that 90% of ginseng oxidized in 2010 should not have a significant impact on our ginseng beverage business due to the following reasons: 1) We have started to store ginseng as raw material for ginseng beverage business since 2008 and we just start to sell ginseng juice in the market, the market share is small at the current time so we do not need to worry we do have enough ginseng to make ginseng juice; 2) our average oxidized ginseng a year is only 30%, 90% oxidized ginseng in 2010 is a rare event; 3) In the next 2-3 years, if our ginseng beverage business has a rapid development and because of oxidized ginseng cause us lack of ginseng to produce ginseng juice, we still can buy from outside to make it.
 
Approximately $409,701 or 42% was the results of resale of ginseng purchased from the market and sold to major customers.  Our ginseng sales revenue from purchase and resale increased from $31,616 for the six months ended December 31, 2009 to $409,701 for the six months ended December 31, 2010, an increase of $378,085 or 1196%. These sales were supported by increased market demand and market price.
 
 
·
95% of $378, 085, or $362,961.6 increasing was caused by increased market order we received.
 
 
·
5% of $378, 085, or $15,123.4 increasing was due to increased market selling price of ginseng.
 
The policy of the Chinese government restricted the amount of land available for ginseng farming and caused market demand and ginseng prices go higher in this quarter in 2010. There was a significant decline from 2008 to 2009 in the price of ginseng due to the global recession and local market conditions. Demand for herbal medicine exports declined in 2008, creating a significant oversupply in China. The price gradually recovered in 2009 after production fell in the nearby region of Heilongjian. In addition, the Chinese government restricted the amount of land available for ginseng farming. Land under our company’s control was not affected by the government restrictions
 
 
 
12

 
 
The remaining $520,654 or 54% was a result of revenue generated from our own farming production.  This was a result of market demand and the quantity of unqualified ginseng, which is not suitable for use in ginseng beverage production. In 2010, due to the weather condition, 90% of our own farming ginseng was oxidized. Since it is unqualified to make ginseng beverage, we sold it to the market.

Our average yearly rain volume in the past ten years is approximately 500 millimeter and we usually have around 30% of ginseng that becomes oxidized each year. Because of the excessive rain in 2010, 90% of our own framed ginseng was oxidized, the fact that the market price of ginseng increased in the three months ended December 31, 2010 and the fact that the market demand of ginseng increased in that period, the sales of ginseng by Yanbian was counted for the biggest part of our revenue for the three months ended December 31, 2010.
 
Cost of Goods Sold
Six Months ended December 31,
 
Products 
 
2010
   
% of the total cost of goods sold
   
2009
   
% of the total cost of goods sold
   
2010-2009 dollar variance
   
% of Change
 
Ginseng (Farming)
    505,528       59 %     -       -       505,528       -  
Ginseng (Purchase for Resale)
    260,842       7 %     24,319       29 %     236,523       973 %
American Ginseng (Purchase for Resale)
    64,007       30 %     -       -       64,007       -  
Grape Sale
    -       -       58,579       71 %     (58,579 )     -  
Ginseng Beverage Production
    34,104       4 %     -               34,104       -  
Total
    864,481       100 %     82,898       100 %     781,583       943 %
 
Our total cost of goods sold increased from $82,898 for the six months ended December 31, 2009 to $864,481 for the six months ended December 31, 2010, an increase of $781,583 or 943%. The primary reasons for the increase were the following:
 
1.  
We had a cost of $505,528 for ginseng production for the three months ended December 31, 2010, resulting from the ginseng harvest in 2010. In 2010, we had 90% oxidized ginseng so we had to harvest it for sale.

2.  
We had a cost of $260,842 for purchasing ginseng for resale, increased $236,523, or 973% for the six months ended December 31, 2010 was due to increased quantity, quality and the price of ginseng we purchased from outside farmer. For the six months ended December 31, 2010, the quality of ginseng we purchased from outside farmer was higher than the same period time of 2009 and the purchased quantity increased was due to market demand. As we mentioned, the purchased price and market demand increased was due to Chinese government’s policy to restrict the amount of land available for ginseng farming and nationwide inflation in all raw materials.
 
·  
32% of $781583, or $299260 increasing was caused by increased purchased ginseng
 
·  
68% of $781583, or $482323 increasing was due to increased purchased  price

3.  
We had a cost of 64,007 for purchasing America ginseng for resale due to the market demand and stored it for America ginseng production.
 
We had a cost of $34,104 for ginseng beverage production in the six months ended December 31, 2010 because we started to produce our ginseng juice in October, 2010 so we did not have any cost of ginseng juice in the six months ended December 31, 2009.
 
Cost of sales as a percentage of revenue decreased from 92% to 89% as compared to the prior comparative period.
 
Selling, General and Administrative Costs
 
Sales costs, general expenses and administrative expenses increased significantly from negative $5,358 for the six months ended December 31, 2009 to $ 502,503 for the six months ended December 31, 2010, an increase of $507,861. The increase is mainly from 1) the rise in general administrative expenses and marketing expenses for our new business– the ginseng juice and grape wine operation. In order to develop our new business and promote our new products, company representatives attended most national agriculture exhibitions and food exhibitions during the period and promoted our ginseng juice through various channels 2) the increased salaries paid for increased staff and increased salaries in the sales division; and 3) the increased professional fee and related to public filings.
 
Depreciation and Amortization
 
Depreciation and amortization was $10,613 for the six months ended December 31, 2010 compared to $14,551 for the six months ended December 31, 2009, a decrease of $3,938 or 37.11%.  The decreasing was primary due to the depreciation calculation of Jilin Ganzhi. For the six months ended December 31, 2010, there was no depreciation charge on the property of Jinlin Ganzhi.
 
Interest Expense

Our Interest expense increased by $6,254, from $70,505 for the six months ended December 31, 2009 to $76,759 for the six months ended December 31, 2010, representing a 8.87% increase.  The change in imputed interest on related party loans and the interest paid to bank loans for Jilin Ganzhi building are the primary reasons for the increase in interest expense.
 
 
13

 
 
Income Taxes

Income tax expenses for the six months ended December 31, 2010 was $16,138 compared to $9,788 for the six months ended December 31, 2009.   This income tax expense relates to taxes payable in China by the Company’s subsidiary, Yanbian Huaxing and Jilin Huammei. The increase in income tax expense is due to the additonal income generated by Jilin Huamei for the three months ended December 31, 2010.

Net Income (Loss)
 
We had a net loss of $497,369 for the six months ended December 31, 2010 and a net loss of $82,311 for the six months ended December 31, 2009, an increase of $415,058, or 504.26%.  The net loss is primarily due to the increase in operating expenses and administrative expenses. There also was an increase in the cost of producing ginseng and in purchasing ginseng for resale.
 
Discussion of Cash Flow
 
Cash flows results for the six months ended December 31, 2010 and the six months ended December 31, 2009 are summarized as follows:
 
   
December 31, 2010
   
December 31, 2009
 
Net cash provided by(used in) operating activities
 
$
(1,761,988
)
 
$
(780,008
)
Net cash provided by(used )in investing activities
 
$
(27,941
)
 
$
(3,186
)
Net cash provided by financial activities
 
$
1,640,220
   
$
777,711
 

Operating activities
 
Cash flows used in operating activities increased by $981,980 for the six months ended December 31, 2010 compared to the same period of 2009. This change was primarily the result of an increase in net losses of $ 415,058, in addition to an increase in accounts receivable of $662,763, a decrease in inventory of $110,150 an increase in prepaid expense of $1,419,550 and a decrease in accounts payable of $652,078. These amounts were offset by an increase in receivable in advance of $710,698. The increase in accounts receivable primary was due to the sales of ginseng held by Yanbian Huaxin.  The inventory decreased due to the ginseng juice production by using reserved raw materials. An increased in prepaid expense was due to the Company increase advance to suppliers to maintain good relationship with the suppliers.

A decrease in our accounts payable was because we paid accounts payable with the cash generated from financial activities; and an increase receivable in advance is primary due to the deposit we received from our ginseng customers.

Investing activities

Cash flows used in investing activities amounted to $27,941 for the six months ended December 31, 2010, which consisted of a long-term investment of $23,102 and a purchase of property of $4,839. In November 2010, Jilin Huamei spent $4,839 purchasing a MiniVan for business use.  In December 2010, the Company invested $23,102 (153,000 RMB) in Changchun Zhongshen Beverage Co. Ltd. (“Zhongshen”). This investment represented a 17% interest in Zhonghsen. Zhongshen is a retailer of ginseng juice and wine.  The Company will account for this investment utilizing the equity method.

Our cash flow used in investing activities amounted to $3,186 in the six months ended December 31, 2009, which consisted of a purchase of equipment. During the period time of December 31, 2010, Company purchased two computers, a printer and a projector as office equipment.

Financing activities

Our cash flows provided by financing activities for the six months ended December 31, 2010 was $1,640,220, which consist of proceeds from sale of common stock of $1,189,872 and proceeds from related party loans of $29,781, offset by repayment to related party loans of $193,433 and repayment of notes payable of $16,000.

Cash flows provided by financing activities for the six months ended December 31 2009 was $777,711, which consist of proceeds from related party loans of $885,916, offset by repayment to related party loans of $108,205.

Cash flows provided by financing activities increased by $862,509 or 110.90% in the six months ended December 31, 2010 compared to the same period in 2009.
 
 
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Commitments and Contingencies

The Company has employment contacts with key individuals including the President of the Company.  The total commitment per year was approximately $36,200 in 2009 and $36,200 in 2010.

The Chinese government owns all the land in China. Currently, the Company has grants from the Chinese government for approximately 1,500 hectares of land (3,705 acres) to grow ginseng.  These grants are for twenty years and are set to expire in 2025. These grants can be renewed, although there is no assurance that the Chinese government will renew them in the future.

The Company is obligated to pay back a loan of $292,492 to Ji’An Credit Cooperatives (the debt carried from Tonghua Linyuan), secured by all assets of Tonghua Linyuan until the loan is repaid.  The loan was due for repayment on February 4, 2003.  The Company is currently in default on the loan and the lender has verbally agreed not to call the loan. We intend to pay off the loan when the ginseng beverage production and wine production business generates sufficient profit.

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4.  Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Management is responsible for establishing and maintaining adequate controls over financial reporting. The Company’s disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act of 1934, as amended (the “Exchange Act”), are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and may find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
 
Pursuant to rules adopted by the SEC as directed by Section 302 of the Sarbanes-Oxley Act of 2002, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules13a-15(e)) as of September 30, 2010. In making this assessment, our Chief Executive Officer and Chief Financial Officer used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.
 
 
15

 
 
Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2010, the Company’s disclosure controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, were not effective at a reasonable assurance level. Management’s assessment identified the following material weaknesses:
 
 
·
As of December 31, 2010, there was a lack of accounting personnel with the requisite knowledge of Generally Accepted Accounting Principles (“GAAP”) in the US and the