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EX-10.4 - EXHIBIT 10.4 - FITWAYVITAMINS, INC.v239985_ex10-4.htm
EX-10.2 - EXHIBIT 10.2 - FITWAYVITAMINS, INC.v239985_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - FITWAYVITAMINS, INC.v239985_ex10-1.htm
EX-10.5 - EXHIBIT 10.5 - FITWAYVITAMINS, INC.v239985_ex10-5.htm
EX-10.3 - EXHIBIT 10.3 - FITWAYVITAMINS, INC.v239985_ex10-3.htm
EX-32.1 - EXHIBIT 32.1 - FITWAYVITAMINS, INC.v239985_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - FITWAYVITAMINS, INC.v239985_ex31-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2011
or
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from to
 
Commission File Number 000-54204
 
Zhongbao International, Inc.
(Exact name of registrant as specified in its charter)

Nevada
27-0938396
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
No. 7 Minsheng Road, Yuzhong District,
Chongqing, People’s Republic of China
(Address of principal executive offices)
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
+86 023-86118735
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No x
 
As of November 9, 2011, there were 28,520,490 shares of common stock, par value $.0001 per share, issued and outstanding.

 
 

 
 
TABLE OF CONTENTS
 
   
Page
   
PART I. FINANCIAL INFORMATION
3
ITEM 1.
FINANCIAL STATEMENTS
3
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITIONS.
31
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 4.
CONTROLS AND PROCEDURES
39
   
PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
40
ITEM 1A.
RISK FACTORS
40
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
40
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
40
ITEM 4.
(REMOVED AND RESERVED)
40
ITEM 5.
OTHER INFORMATION
40
ITEM 6.
EXHIBITS
41

 
2

 
 
PART I.
 
FINANCIAL INFORMATION
 
ITEM 1.       FINANCIAL STATEMENTS

ZHONGBAO INTERNATIONAL INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

   
September 30,
   
June 30,
 
   
2011
   
2011
 
             
ASSETS
           
             
Current assets:
           
Cash & cash equivalents
  $ 1,094,228     $ 6,440,130  
Restricted cash
    1,450,411       1,505,446  
Accounts receivable, net
    309,016       751,653  
Real estate property development completed
    4,424,963       5,086,690  
Real estate property under development
    21,123,114       18,979,674  
Other receivables
    3,767       773  
Prepaid expenses
    409,844       404,766  
Deferred tax asset
    99,735       66,185  
Total current assets
    28,915,078       33,235,317  
                 
Property and equipment, net
    4,991,442       5,019,093  
                 
Other non-current assets:
               
Other receivables
    43,012       42,479  
Deposits and prepayments for long-term assets
    1,409,713       1,392,254  
Real estate property under development
    28,957,713       24,715,458  
Real estate property held for lease, net
    8,022,555       8,033,411  
Total other non-current assets
    38,432,993       34,183,602  
                 
Total Assets
  $ 72,339,513     $ 72,438,012  
                 
LIABILITIES AND EQUITY
               
                 
Current liabilities:
               
Short-term loans
  $ 4,699,042     $ 4,640,844  
Accounts payable
    2,199,459       3,470,774  
Customer deposits
    9,983,838       9,907,175  
Accrued expenses and other current liabilities
    497,466       561,435  
Taxes payable
    6,174,975       6,102,721  
Due to a related party
    2,173,518       1,586,723  
Total current liabilities
    25,728,298       26,269,672  
                 
Non-current liabilities:
               
Other payables
    165,842       318,482  
Long-term bank loans
    11,511,557       11,435,042  
Total non-current liabilities
    11,677,399       11,753,524  
                 
Total liabilities
    37,405,697       38,023,196  
                 
Commitment and contingencies
               
                 
Equity
               
Common stock, $0.0001 par value, 75,000,000 shares authorized 28,520,490 shares  issued and outstanding
    2,852       2,852  
Additional paid-in capital
    19,730,569       19,730,569  
Statutory surplus reserve
    1,274,078       1,255,738  
Retained earnings
    10,925,393       10,856,711  
Accumulated other comprehensive income
    2,927,509       2,494,251  
Total Zhongbao International Stockholder's Equity
    34,860,401       34,340,121  
Non-controlling interest
    73,415       74,695  
Total equity
    34,933,816       34,414,816  
                 
Total Liabilities and Equity
  $ 72,339,513     $ 72,438,012  

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
 
 
3

 

ZHONGBAO INTERNATIONAL INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

   
For the three months ended September 30,
 
   
2011
   
2010
 
             
Revenue:
           
Real estate sales, net of sales taxes of $167,666 and $316,769, respectively
  $ 1,652,347     $ 4,446,549  
Real estate lease income
    92,465       125,179  
Total revenue
    1,744,812       4,571,728  
                 
Cost of sales
               
Cost of real estate sales
    721,838       1,660,789  
Cost of real estate lease
    111,031       105,373  
Total cost of sales
    832,869       1,766,162  
                 
Gross profit
    911,943       2,805,566  
                 
Operating expenses
               
Selling and distribution expenses
    157,888       255,826  
General and administrative expenses
    564,789       618,425  
Total operating expenses
    722,677       874,251  
                 
Operating income
    189,266       1,931,315  
                 
Other expenses
               
Interest expenses
    74,947       114,622  
Other expense
    -       8,880  
Total other expenses
    74,947       123,502  
                 
Income before income taxes
    114,319       1,807,813  
                 
Income tax provision (benefit)
               
-  current
    61,132       456,137  
-  deferred
    (32,555 )     -  
Total income tax provision
    28,577       456,137  
                 
Net income
    85,742       1,351,676  
Less: net loss attributable to non-controlling interest
    (1,280 )     -  
Net income attributable to Zhongbao International Inc.
  $ 87,022     $ 1,351,676  
                 
Net income
    85,742       1,351,676  
Foreign currency translation adjustment
    433,258       363,872  
Comprehensive income
    519,000       1,715,548  
Comprehensive income attributable to non-controlling interest
    (4,333 )     -  
Comprehensive income attributable to Zhongbao International Inc.
  $ 514,667     $ 1,715,548  
                 
Basic and diluted income per common share Basic and diluted
  $ 0.003     $ 0.06  
                 
Weighted average common shares outstanding Basic and diluted
    28,520,490       24,242,415  

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
 
 
4

 
 
ZHONGBAO INTERNATIONAL INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   
For the three months ended September 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities
           
Net income
  $ 85,742     $ 1,351,676  
Adjustments to reconcile net income to net cash used in
               
operating activities:
               
Depreciation of property and equipment
    99,646       76,615  
Depreciation of real esate property held for lease
    111,031       105,373  
Deferred tax benefit
    (32,555 )     -  
Provision for doubtful accounts
    23,494       -  
Changes in assets and liabilities:
               
(Increase) decrease in -
               
Restricted Cash
    73,540       (543,178 )
Accounts receivable
    426,277       162,063  
Advance to vendors
    -       3,885,286  
Real estate property development completed
    721,838       (556,697 )
Real estate property under development
    (5,808,165 )     (11,588,303 )
Other receivables and prepaid expense
    (2,969 )     (56,098 )
Increase (decrease) in -
               
Accounts payable
    (1,308,175 )     860,209  
Other payables
    (116,612 )     (765,463 )
Customer deposits
    (47,334 )     2,823,441  
Accrued expense and other current liabilities
    (108,446 )     (5,572 )
Taxes payable
    (4,253 )     184,534  
Net cash used in operating activities
    (5,886,941 )     (4,066,114 )
                 
Cash flows from investing activities
               
Purchase of property and equipment
    (9,514 )     (72,435 )
Net cash used in investing activities
    (9,514 )     (72,435 )
                 
Cash flows from financing activities
               
Proceeds from related party loan
    564,024       -  
Repayment of long-term bank loans
    (66,544 )     -  
Proceeds from long-term bank loans
    -       2,322,030  
Net cash provided by  financing activities
    497,480       2,322,030  
                 
Effect of exchange rate changes on cash and cash equivalents
    53,073       63,400  
                 
Net decrease in cash and cash equivalents
    (5,345,902 )     (1,753,119 )
                 
Cash and cash equivalents, beginning of the period
    6,440,130       5,248,059  
                 
Cash and cash equivalents, end of the period
  $ 1,094,228     $ 3,494,940  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 174,515     $ 205,199  
Income taxes paid
  $ 11,362     $ -  

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
 
 
5

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Zhongbao International, Inc. (the “Company”), formerly known as Fitwayvitamins, Inc., is a corporation organized under the laws of the State of Nevada.

On February 11, 2011, the Company entered into a Share Exchange Agreement with China Dahua Group International Holdings Property Ltd., a British Virgin Islands company (“Dahua”) and acquired all of the outstanding capital stock of Dahua from its sole shareholder Mr. Xia Haoji (‘Dahua Shareholder”).

In connection with the Share Exchange Agreement, the Company issued to the Dahua shareholder an aggregate of 1,616,161 shares (equivalent to 24,242,415 shares after the stock forward split in March 2011) of the common stock of the Company, at par value of $0.001 per share, so that upon completion of the Share Exchange, the Dahua shareholder owns approximately 85% of the common stock of the Company. Accordingly, Dahua became the wholly owned subsidiary of the Company.

Immediately prior to the share exchange, the Company had 75,000,000 shares of common stock, par value $0.0001 per share, authorized, of which 10,285,205 shares of common stock were issued and outstanding.  On February 11, 2011, immediately prior to and as a condition to the completion of the Exchange Agreement, the Company entered into a stock purchase agreement (the “Split-Off Agreement”) with Margret Wessels, the Company’s then Chairperson, President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and sole director.  Pursuant to the Split-Off Agreement, Ms. Wessels agreed to purchase all of the issued and outstanding shares of Fitway Holdings Corp., a Nevada corporation and a wholly-owned subsidiary of the Company (“Fitway Holdings”), in consideration of 2,000,000 shares of the Company’s common stock owned by Ms. Wessels.  In addition, Mr. Xia and Ms. Wessels entered into a stock purchase agreement (the “Stock Purchase Agreement”) pursuant to which Mr. Xia agreed to purchase 8,000,000 shares of the Company’s common stock owned by Ms. Wessels for an aggregate purchase price of $320,000.  Immediately after the consummation of this transaction, Mr. Xia shall cause such shares of common stock purchased from Ms. Wessels to be transferred back to the Company, and the Company shall cancel and extinguish such shares.  The closing of both of these transactions took place on February 11, 2011, the closing date of the share exchange.  As a result of these transactions, Ms. Wessels no longer owns any shares of the Company’s common stock.

Upon completion of the Merger, there were 1,901,366 shares (equivalent to 28,520,490 shares after the stock forward split in March 2011) of the Company’s common stock issued and outstanding.

As a result of these transactions, Ms. Wessels resigned all her positions and Mr. Xia was appointed President, Chief Executive Officer, Chief Financial Officer and Secretary of the Company.

Subsequently, on April 7, 2011, the Company’s name was changed from “Fitwayvitamins Inc.” to “Zhongbao International, Inc.” in order to more effectively reflect the Company’s business and communicate the Company’s brand identity to customers.

 
6

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (continued)

The above mentioned merger transaction has been accounted for as a reverse merger since there was a change of control. Accordingly, Dahua is treated as the continuing entity for accounting purposes.
 
On February 24, 2011, the Company’s Board of Directors authorized a stock forward split of one-for-fourteen shares  of its common stock, par value of $0.0001 per share. The stock split was effective on March 24, 2011. The Company’s share and per share data have been retroactively restated as a result of the stock forward split in connection with this recapitalization.  As a result of the stock forward split, there were 28,520,490 shares of the Company’s common stock issued and outstanding as of June 30, 2011.

Dahua is a British Virgin Island corporation that owns 100% of the equity of Hao Yu Group Limited, a limited liability company organized under the laws of the Hong Kong Special Administrative Region of the People’s Republic of China (“HYG”).  HYG owns 100% of the equity of Chongqing Difa Investment Management Limited Company, a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China (“Difa”).  On November 10, 2010, Difa entered into a series of variable interest entity agreements (the “VIE Agreements”) with Chongqing Zhongbao Investment Group Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Zhongbao”), to manage and operate the real estate business activities of Zhongbao, principally residential apartments, commercial properties and car parks.  All of the business of Zhongbao is located in the People’s Republic of China.

Chongqing Zhongbao Investment Group, Ltd. (“Zhongbao”), formerly known as Chongqing Yulun Business Development Company Limited and Chongqing Haoji Xinjie Company Limited, was incorporated in Chongqing, People’s Republic of China (“PRC”) on September 29, 2001, with an initial registered capital of 10.1 million Renminbi (RMB) (approximately $1.2 million). Its registered capital was increased to RMB 148 million (equivalent to $19.6 million) in March 2008. The Company is engaged in real estate development, primarily in the construction and sale of residential apartments, commercial properties as well as car parking spaces.

Under these agreements, which obligate Difa to absorb a majority of the risk of loss from Zhongbao’s activities and entitle it to receive a majority of its residual returns, Difa has gained effective control over Zhongbao. Through these agreements, Difa now holds the variable interests of Zhongbao, and Difa becomes the primary beneficiary of Zhongbao. Based on these agreements, Zhongbao is considered a Variable Interest Entity (“VIE”), because the equity investor in Zhongbao no longer has the characteristics of a controlling financial interest. Accordingly, Zhongbao is consolidated under ASC 810, “Consolidation.”

The Company is effectively controlled by the same stockholders of Zhongbao through an irrevocable option agreement.  The Company has 100% equity interest in Difa as of November 10, 2010. Therefore, Difa and Zhongbao are considered under common control. The consolidation of Difa and Chongqing Zhongbao has been accounted for at historical cost and prepared on the basis as if the aforementioned exclusive contractual agreements between Difa and Zhongbao had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 
7

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (continued)

On August 19, 2010, Chongqing Zhongbao invested RMB 20 million (approximate to $2.94 million) to form a 100% controlled subsidiary Chongqing Weitai Real Estate Management Company (“Weitai”) which will be engaged in real estate property development and related business.

In November 2010, Chongqing Zhongbao invested RMB 500,000 (approximate to $74,628) to form a 100% controlled subsidiary Chongqing Zhaoli Real Estate Consulting Co., Ltd (“Zhaoli”) which will be engaged in real estate property development, consulting and related business.

On December 29, 2010, a new subsidiary Shaanxi Zhongbao Real Estate Property Development Co., Ltd (“Shaanxi Zhongbao) was formed by Chongqing Zhongbao and minority shareholder Mr. Xiong Gang. Total registered capital of Shaanxi Zhongbao amounted to RMB 50 million (approximate to $7.7 million), among which Chongqing Zhongbao contributed 99% and minority shareholder Mr. Xiong Gang contributed remaining 1% of the total registered capital. As of April 27, 2011, the registered capital of Shaanxi Zhongbao has been fully paid to the local government.  Shaanxi Zhongbao is now engaged in real estate project development and has started a new real estate development project in Xi’an since May 2011.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States (“US GAAP”). 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 the management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated June 30, 2011 financial statements and notes in the Form 10K filed with the Securities and Exchange Commission (“SEC”) on September 28, 2011. Operating results for the three months ended September 30, 2011 may not be necessarily indicative of the results that may be expected for the full year.

The unaudited condensed consolidated financial statements of the Company reflect the principal activities of the following entities. All material intercompany transactions have been eliminated.

 
8

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (continued)

Name of the entity
 
Place of
Incorporation
 
Ownership
Percentage
Zhongbao International, Inc
 
Nevada
 
Parent
China Dahua Group International Holdings Property Ltd., (“Dahua”)
 
BVI
 
100%
Hao Yu Group Limited ("Haoyu")
 
Hong Kong, China
 
100%
Chongqing Difa Investment Management Limited Company (“Difa”)
 
Chongqing, China
 
100%
Chongqing Zhongbao Investment Group, Ltd ("Zhongbao")
 
Chongqing, China
 
VIE, 100%
Chongqing Weitai Real Estate Management Company (“Weitai”)
 
Chongqing, China
 
100%
         
Chongqing Zhaoli Real Estate Consulting Company (“Zhaoli”)
 
Chongqing, China
 
100%
Shaanxi Zhongbao Real Estate Development Company (“Shaanxi Zhongbao”)
 
Xi’an, China
 
99%
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Non-controlling interest

Non-controlling interest represents one minority shareholder’s 1% ownership interest in Shaanxi Zhongbao Real Estate Property Development Co., Ltd.

Use of estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, the selection of the useful lives of property and equipment, collectability of receivables, provision necessary for contingent liabilities, fair values, revenue recognition, and realization of deferred tax assets. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

Fair value of financial instruments

The Company adopted the provisions of Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 
9

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity's own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The Company's financial instruments include cash and cash equivalents, restricted cash, accounts receivable, advances to vendors, deposits and prepayments, other receivables, accounts payable, short-term loans, customer deposits, amounts due to a related party, other payables and tax payables. Management has estimated that the fair value of these financial instruments approximate their carrying amounts due to the short-term nature. The fair value of long-term bank loans also approximate their recorded value because long-term borrowings bear a floating rate of interest. As the stated interest rate reflects the market rate, the carrying value of the bank borrowings approximates its fair value.
  
Revenue recognition

Real estate sales are reported in accordance with the ASC 360-20 “Accounting for Sales of Real Estate”.

Revenue from the sales of development properties is recognized by the full accrual method at the time of the closing of an individual unit sale.  This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer.  Further, the buyer’s initial and continuing investment must be adequate to demonstrate a commitment to pay for the property, and the buyer’s receivable, if any, is not subject to future subordination.  Sales transactions not meeting all these conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

Real estate lease income is recognized on a straight-line basis over the terms of the leasing agreements. Business tax and depreciation cost of the property are recorded as the cost of rental income.

 
10

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
Foreign currency translation

The Company's financial statements are presented in US dollars. In accordance with ASC 830, "Foreign Currency Matters", an entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. Since substantially all operations of the Company are conducted in the PRC, the functional currency of the Company is Renminbi ("RMB"), the currency of the PRC. Transactions at the Company which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People's Bank of China prevailing at the dates of the transactions. The financial statements of the Company have been translated into U.S. dollars. The financial statements are first prepared in RMB and then are translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders' equity.

   
September
30, 2011
   
June 30,
2011
   
September
30, 2010
 
                   
Period end exchange rate (RMB : US$)
   
6.3843
     
6.4643
     
6.6800
 
Average exchange rate for the period (RMB : US$)
   
6.4168
     
6.6264
     
6.7613
 

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

Cash includes cash on hand and demand deposits in accounts maintained with state-owned and private banks within the PRC.  The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in the PRC, which are not covered by insurance.  In addition, the Company has two bank deposit book accounts opened under the Chief Executive Officer’s name but used exclusively for the Company’s business purposes for the years ended June 30, 2011 and 2010.  Effective September 23, 2011, the CEO and the Company, acting through an officer duly authorized by the board of directors, entered into trust agreements that formally recite the facts that there are at least two signatures required to withdraw funds from such accounts.  The CEO, as the Company's sole director ratified the trust agreements on behalf of the board of directors. In addition, on September 30, 2011, the Company closed these two bank deposit books opened under CEO’s name and transferred the funds into Company’s business bank accounts. Total cash and cash equivalents as of September 30, 2011 and June 30, 2011 amounted to $1,094,228 and $6,440,130, respectively.

 
11

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Restricted cash

The Company is required to maintain certain deposits with banks that provide mortgage loans to the Company’s customers in order to purchase residential units from the Company (see Note 3).

These balances are subject to withdrawal restrictions and are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.

Accounts receivable

Accounts receivable consist of balances due from customers for the sale of residential units in the PRC.  The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. Accounts receivables are considered past due after twelve months. An allowance for doubtful accounts is established and recorded based on managements’ assessment of the credit history with the customers. Accounts receivable are reviewed periodically as to whether their carrying value has become impaired. The Company considers the assets to be impaired if the collectability of the balances become doubtful. Accounts are written off after exhaustive efforts at collection.  Doubtful allowance amounted to $23,613 and $-0- as of September 30, 2011 and June 30, 2011, respectively.

Other receivables

Other receivables consist of various cash advances to unrelated companies and individuals with which the Company has business relationships. Other receivables are reviewed periodically as to whether their carrying value has become impaired. The Company considers the assets to be impaired if the collectability of the balances becomes doubtful.  As of the balance sheet dates, no allowance was determined necessary.

Real estate property development completed and under development

Real estate property consists of finished residential unit sites completed and residential unit sites under development.  The Company leases land for the residential unit sites under land use right leases with various terms from the government of China.  Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditure for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method.  Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area times the total project costs.

 
12

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs.  For amenities retained by the Company, costs in excess of the related fair value of the amenity are also treated as common costs.  Results of operations of amenities retained by the Company are included in current operating results.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset is comprised of its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performances, the expenditure is capitalized as an additional cost of the asset.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, less any estimated residual value. Estimated useful lives of the assets are as follows:

Buildings
20 years
Machinery and equipment
5 years
Vehicles
5 years

Any gain or loss on disposal or retirement of property and equipment is recognized in the year occurred and is the difference between the net sales proceeds and the carrying amount of the relevant asset.  When property and equipment is retired or otherwise disposed of, the asset and accumulated depreciation is removed from the accounts and the resulting profit or loss is reflected in the income statement.

Maintenance, repairs and minor renewals are charged directly to expense as occurred unless such expenditures extend the useful life or represent a betterment, in which case they are capitalized.

Impairment of long-lived assets

In accordance with ASC 360, "Property, Plant and Equipment", the Company is required to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

 
13

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company tests long-lived assets, including property, plant and equipment and other assets, for recoverability when events or circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value.

Management evaluates, on an annual basis, the impairment of the Company’s real estate developments based on a community level.  Each community is assessed as an individual project.  The evaluation takes into account several factors including, but not limited to, physical condition, inventory holding period, management’s plans for future operations, prevailing market prices for similar properties and projected cash flows. No impairment losses were deemed to have occurred as of the balance sheet dates.

The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There was no impairment of long-lived assets as of the balance sheet dates.

Advance to vendors

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential units in the PRC.  Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired.  The Company considers the assets to be impaired if the collectability of the services and materials become doubtful.  As of the balance sheet dates, no allowance is deemed necessary because the collectability of the services and materials are fairly certain.

Real estate properties held for lease, net

Real estate properties held for lease are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the real estate properties held for lease are 20 years.

Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and improvements to the real estate properties held for lease are capitalized.

 
14

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Capitalized interest

Capitalized interest is accounted for in accordance with ASC 835 “Interest”.

For loans to finance projects and provide for working capital, the Company charges the borrowing costs related to working capital loans to interest expense when incurred and capitalized interest costs related to project development as a component of the project costs.

The interest to be capitalized for a project is based on the amount of borrowings related specifically to such project.  Interest for any period is capitalized based on the amounts of accumulated expenditures and the interest rate of the loans.  Payments received from the pre-sales of units in the project are deducted in the computation of the amount of accumulated expenditures during a period.  The interest capitalization period begins when expenditures have been incurred and activities necessary to prepare the asset (including administrative activities before construction) have begun, and ends when the project is substantially completed.  Interest capitalized is limited to the amount of interest incurred.

The interest rate used in determining the amount of interest capitalized is the weighted average rate applicable to the project-specific borrowings.  However, when accumulated expenditures exceed the principal amount of project-specific borrowings, the Company also capitalizes interest on borrowings that are not specifically related to the project, at a weighted average rate of such borrowings.

The Company’s significant judgment and estimates related to interest capitalization include the determination of the appropriate borrowing rates for the calculation, and the point at which capitalization is started and discontinued.  Changes in the rates used or the timing of the capitalization period may affect the balance of property under development and the costs of sales recorded. The capitalized interest for the quarters ended September 30, 2011 and 2010 was $175,404 and $207,696, respectively.

As a result of the total interest costs capitalized during the period, the interest expense for the quarter ended September 30, 2011 and 2010 was as follows:
 
   
September 
30,
2011
   
September 
30,
2010
 
   
US$
   
US$
 
             
Interest on borrowings
    250,351       322,318  
Less: total interest costs capitalized
    (175,404 )     (207,696 )
                 
Interest expense, net
    74,947       114,622  

 
15

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC.  In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project.  The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project.  The Company receives these funds and recognizes them as a current liability until the revenue can be recognized.

Other payables

Other payables represent contract deposits and bidding deposits that are to be refunded upon completion of the projects or satisfaction of claim-free warranty.
 
Property warranty

The Company provides customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company constantly monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proven that the faults are caused by them.
 
In addition, the Company also withholds up to 2% to 5% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in non-current liabilities, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. As of the balance sheet dates, the Company had not recognized any warranty liability or incurred any warranty costs in excess of the amount retained from subcontractors.

 
16

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

The Company utilizes ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of the balance sheet dates.

Comprehensive income

ASC 220, "Comprehensive Income" requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Accumulated other comprehensive income represents income from the changes in foreign currency exchange rates. The Company’s only components of comprehensive income for the three months ended September 30, 2011 and 2010 were net income and the foreign currency translation adjustment.

Advertising expenses

Advertising costs are expensed when incurred, or the first time the advertising takes place, in accordance with ASC 720-35 “Advertising Costs”.  For the three months ended September 30, 2011 and 2010, the Company recorded advertising expenses of $24,018 and $29,448, respectively.

Earnings per share

The Company computes earnings per share (“EPS’) in accordance with ASC 260 “Earnings per Share” (“ASC 260”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  ASC 260 requires companies with complex capital structures to present basic and diluted EPS.  Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period.  Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later.  Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 
17

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In February 2011, the Company entered into a share exchange transaction which has been accounted for as a reverse acquisition or recapitalization primarily since there has been a change of control. The Company computes the weighted-average number of common shares outstanding in accordance with ASC 805, Business Combinations, which states that in calculating the weighted average shares when a reverse acquisition takes place in the middle of the year, the number of common shares outstanding from the beginning of that period to the acquisition date shall be computed on the basis of the weighted-average number of common shares of the legal acquiree (the accounting acquirer) outstanding during the period multiplied by the exchange ratio established in the merger agreement. The number of common shares outstanding from the acquisition date to the end of that period shall be the actual number of common shares of the legal acquirer (the accounting acquiree) outstanding during that period.

Statement of cash flows

In accordance with ASC 230, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), an update to Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). ASU 2011-04 provides guidance to change the wording used to describe many of the requirements in U.S. generally accepted accounting principles for measuring fair value and for disclosing information about fair value measurements. For public entities, ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application by public entities is not permitted. The adoption of this update will not impact the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), an update to ASC 220, Comprehensive Income. This ASU requires the components of net income and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but continuous statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income or how earnings per share is calculated or presented. ASU 2011-05 is effective for public entities for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The adoption of this update will not impact the Company’s consolidated financial statements.

 
18

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 3 – RESTRICTED CASH

Restricted cash represents cash set aside for a particular use or event and is subject to withdrawal restrictions.  The Company is required to maintain certain deposits, as restricted cash, with banks that provide mortgage loans to the Company’s customers (See Note 8). These deposits are guarantees for the mortgage loans and are normally equivalent to 5% of the mortgage proceeds paid to the Company. These deposits are not covered by insurance.  The Company has not experienced any losses on such accounts and management believes its restricted cash account is not exposed to any risks. As of September 30, 2011 and June 30, 2011, restricted cash amounted to $1,450,411 and $1,505,446, respectively.
 
NOTE 4– REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

The following table summarizes the components of real estate property development completed as of September 30, 2011 and June 30, 2011:

   
September
30,
2011
   
June
30,
2011
 
   
US$
   
US$
 
Real Estate Property Development Completed
   
  
   
  
Jin Shan Li Yuan- Phase 1
 
572,160
  
 
565,074
  
Jin Shan Li Yuan- Phase 2
 
216,898
  
 
214,211
  
Jin Shan Li Yuan-  Phase 3
 
3,635,905
  
 
4,307,405
  
             
Total real estate property development completed
 
4,424,963
  
 
5,086,690
  

The following table summarizes the components of real estate property under development as of September 30, 2011 and June 30, 2011, respectively:

   
September
30,
2011
   
June
 30,
2011
 
   
US$
   
US$
 
Real Estate Property Under Development
           
             
Current
           
Jin Shan Li Yuan-  Phase 3 and 4
    21,123,114       18,979,674  
                 
Non-current
               
Shaanxi Zhongbao
    28,957,713       24,715,458  
                 
Total real estate property under development
    50,080,827       43,695,132  
 
 
19

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 4– REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT (continued)

As of September 30, 2011 and June 30, 2011, land use rights included in the real estate property under construction amounted to $687,030 and $678,521, respectively.
 
NOTE 5- REAL ESTATE PROPERTIES HELD FOR LEASE, NET

Real estate properties held for lease are recorded at cost less accumulated depreciation. The following table sets forth the balance of real estate properties held for lease as of September 30, 2011 and June 30, 2011:
 
   
September
30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
        Office and commercial spaces
    7,343,552       7,252,603  
        Basement Parking
    2,576,145       2,544,240  
        Total costs
    9,919,697       9,796,843  
        Less: accumulated depreciation
    (1,897,142     (1,763,432
                 
Real estate properties held for lease, net
    8,022,555       8,033,411  

As of September 30, 2011 and June 30, 2011, real estate properties held for lease with an aggregate assessed fair value of US$ 61.8 million and US$61 million, respectively, were pledged as collateral for certain long-term bank loans (see Note 11).

As of June 30, 2011, minimum future rental income on non-cancellable leases, in aggregate and for each of the five succeeding fiscal years and thereafter, is as follows:
 
Year Ending June 30,
 
Amount
 
   
US$
 
2012
   
470,838
 
2013
   
551,617
 
2014
   
441,358
 
2015
   
401,241
 
2016
   
382,238
 
Thereafter
   
1,140,066
 
Total
   
3,387,358
 

 
20

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 6– PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2011 and June 30, 2011 consisted of the following:

   
September 30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
Building
    5,465,031       5,397,347  
Equipment
    102,606       82,245  
Vehicles
    467,191       468,052  
Sub-total
    6,034,829       5,950,644  
Less: accumulated depreciation
    (1,043,387     (931,551
                 
Property, plant and equipment, net
    4,991,442       5,019,093  

NOTE 7– DEPOSITS AND PREPAYMENT FOR LONG-TERM ASSETS

The Company entered into several agreements to acquire land and buildings from relevant governmental agencies or outside parties in an effort to expand its business operations.  The Company was required to make deposits or pre-payment for the acquisition of the land and buildings.

The following table summarizes the deposits for long-term assets as of September 30, 2011 and June 30, 2011, respectively:

   
September 30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
Deposit for land use lease (a)
 
1,409,713
  
 
1,392,254  
  

(a)
On November 23, 2007, the Company entered into a purchase agreement with Chongqing Yongchuan Shangzhu governmental agency to acquire a parcel of land use lease of 531,020 square feet with total purchase price of RMB 20 million (approximate to $3.0 million). The Company paid the purchase price in two installments before March 2008. The Company was originally expected to obtain the Certificate of Land Use Right for this land deposit in February 2011 and plans to start a new real estate property development project on this land in June 2011. Due to the slow government approval procedure, the Company terminated the original agreement with Yongchuan Shuangzhu government agency in April 2011 and gave up the original development plan. The local government agency refunded RMB 11 million back to the Company in June 2011 and withheld remaining RMB 9 million (equivalent to $1,409,713) as security deposit in order for the Company to negotiate a nearby new piece of land in the near future.

 
21

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 8– CUSTOMER DEPOSITS

Customer deposits consisted of amounts received from customers for the pre-sale of residential units in the PRC.  Customer deposits at September 30, 2011 and June 30, 2011 consisted of the following:

   
September 30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
Current
           
Advances from real estate properties under development- Jinshan Liyuan – phases  3 & 4
    11,813,122       48,313,653  
Less: revenue recognized as progress billings
    (1,829,284     (38,406,478
                 
Total customer deposits
    9,983,838       9,907,175  

Customer deposits are typically funded up to 70% – 80% by mortgage loans made by banks to the customers. Until the customer obtains legal title to the property, the banks have a right to seek reimbursement from the Company for any defaults by the customers. The Company holds certain cash balances in restricted deposit accounts at the relevant banks (see Note 3). The Company, in turn, has a right to withhold transfer of title to the customer until outstanding amounts are fully settled.
 
NOTE 9- SHORT-TERM LOANS

Short-term loans as of September 30, 2011 and June 30, 2011 consisted of the following:

   
September
30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
Loan from an unrelated party Shaanxi Yuhang Company  (a)
           
Originally 160 days term from April 20, 2011 to September 30, 2011, expiration date has been extended to April 30, 2012, bearing no interest
    3,915,869       3,867,371  
                 
Loan from an unrelated party Shaanxi Fengxi Company (b)
               
Originally 180 days term from April 20, 2011 to October 20, 2011, expiration date has been extended to April 20, 2012, bearing no interest
               
      783,173       773,473  
                 
Total short-term loans
    4,699,042       4,640,844  
 
 
22

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 9- SHORT-TERM LOANS (continued)

(a)
On April 20, 2011, the Company’s subsidiary Shaanxi Zhongbao entered into a short-term loan agreement with a third-party Shaanxi Yuhang Real Estate Company to borrow RMB 25 million (equivalent to $3,915,869) for 160 days and to use this fund in start up the new real estate development project in Xi’an city of Shaanxi Province. The Company did not repay the loan when it expired on September 30, 2011, but entered into an agreement amendment on September 30, 2011 to extend the expiration date to April 30, 2012. The loan bears no interest. The Company agreed to let Yuhang Real Estate Company to jointly develop 30,000 square meters of residential property on this new project in the near future.

(b)
On April 20, 2011, the Company’s subsidiary Shaanxi Zhongbao entered into a short-term loan agreement with a third-party Shaanxi Fengxi Real Estate Company to borrow RMB 5 million (equivalent to $783,173) for 180 days and to use this fund in start up the new real estate development project in Xi’an city of Shaanxi Province. The Company subsequently entered into an agreement amendment on October 20, 2011 to extend the expiration date to April 20, 2012. The loan bears no interest. The Company agreed to let Fengxi Real Estate Company to jointly develop 20,000 square meters of residential property on this new project in the near future.

NOTE 10- DUE TO RELATED PARTY

During the normal course of business, the Company temporarily borrows money from its principal shareholders or officers to finance working capital needs. The amounts are usually unsecured, non-interest bearing and due on demand.

On March 1, 2011, the Company’s subsidiary Shaanxi Zhongbao borrowed RMB10, 200,000 from the Company’s CEO and major shareholder Mr. Xia Haoji for one year (from March 1, 2011 to March 1, 2012). In addition, on September 22, 2011, Shaanxi Zhongbao borrowed additional RMB 3,650,000 from Mr. Xia Haoji for six months (from September 22, 2011 to March 21, 2012).

These loans bear no interest and were used to start up the new real estate development project in Xi’an.  As of September 30, 2011, total borrowings from Mr. Xia Haoji used in Xi’an project amounted to RMB 13,850,000 (equivalent to $2,169,391).

On June 20, 2011, the Company’s subsidiary Weitai borrowed RMB 57,120 from the Company’s CEO and major shareholder Mr. Xia Haoji for one year (from June 20, 2011 to June 19, 2012). The loan bears no interest and was used as the working capital in Weitai’s daily operation. During the quarter ended September 30, 2011, Weitai repaid a portion of the loan back to Mr. Xia Haoji.

As of September 30, 2011, total related party borrowings from Mr. Xia Haoji amounted to $2,173,518.

 
23

 

ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)

NOTE 11- LONG-TERM BANK LOANS

Long-term bank loans as of September 30, 2011 and June 30, 2011 consisted of the following:
 
   
September
30,
2011
   
June 30,
2011
 
   
US$
    US$  
Loan from China Industrial and Commercial Bank (a)
       
 
 
Three year term from January 20, 2010 to January 14, 2013, with a fixed interest rate of 0.495% per month
           
Requiring monthly interest payment of $18,822
    3,821,888       3,774,554  
Loan from China Industrial and Commercial Bank (b)
               
Three year term from February 28, 2010 to February 27, 2013, With a fixed interest rate of 0.495% per month
               
Requiring monthly interest payment of $25,204
    5,117,727        5,120,399  
Loan from China Industrial and Commercial Bank (c)
               
Three year term from July 19 , 2010 to July 18, 2013, with a fixed interest rate of 0.495% per month
               
Requiring monthly interest payment of $12,667
    2,571,942       2,540,089  
                 
Total long-term bank loans
    11,511,557       11,435,042  

(a)
Pursuant to the loan contract with China Industrial and Commercial Bank, the Company pledged its real estate properties held for lease located at the Company’s headquarter Jinta Building in Chongqing, of 2,006 square meters as collateral for this loan. The Company repaid RMB 1.9 million (equivalent to $293,920) of this loan back to the Bank in January, 2011. The remaining principal of this loan is due at maturity.

(b)
Pursuant to the loan contract with China Industrial and Commercial Bank, the Company pledged its real estate properties held for lease of 10,689.8 square meters located at the Company’s headquarter Jinta Building in Chongqing, as collateral for this loan.  The Company repaid RMB 24.9 million (approximate to $3.85 million) of this loan back to the Bank between August 2010 and January 2011, and repaid RMB 427,000 (approximately $66,883) during the quarter ended September 30, 2011. The remaining principal of the loan is due at maturity.
 
(c)
Pursuant to the loan contract with China Industrial and Commercial Bank, the Company pledged real estate property held for lease of 1,895.6 square meters located at the Company’s headquarter Jinta Building in Chongqing as collateral for this loan.  The Company repaid RMB 4.3 million (approximate to $662,094) of this loan back to the Bank between October 2010 and May 2011. The repayment of the remaining principal of this loan is due at maturity.

 
24

 
 
ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 11- LONG-TERM BANK LOANS (continued)

As of September 30, 2011, the Company’s long term bank loans are all denominated in RMB and are secured by the Company’s real estate properties held for lease as mentioned above. The interest rates of these bank loans are adjustable based on the range of 95% to 110% of the People’s Bank of China (PBOC) prime rate.
 
Future minimum principal payments of long-term bank loans as of September 30, 2011 are as follows:

As of September 30, 
 
Amount
 
   
US$
 
2012
    8,939,615  
2013
    2,571,942  
         
Total
    11,511,557  

NOTE 12 –TAXES

(a)
Business sales tax
 
The Company’s subsidiaries Difa and Zhongbao are subject to 5% business sales tax on actual revenue.  It is the Company’s continuing practice to recognize 5% of the sales tax on estimated revenue, and file tax returns based on the actual result. In the PRC, the local tax authority may exercise broad discretion in applying the tax amount.  As a result, the Company’s accrual for sales tax may differ from the actual tax.

(b)
Corporate income tax

United States

The parent Company Zhongbao International, Inc (formerly Fitwayvitamins Inc.) was incorporated in the United States.  Due to the change in control resulting from the reverse acquisition in February 2011, it lost its net operating loss carry-forwards and had no taxable income as of September 30, 2011. Management does not expect to remit any of its net income back to the United States in the foreseeable future.

British Virgin Islands

China Dahua is a tax exempt company incorporated in the British Virgin Islands and conducts substantially all of its business through its subsidiaries and VIEs.
 
 
25

 
 
ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 12 – TAXES (continued)
 
Hong Kong
 
HYG, the Company's wholly owned subsidiary incorporated in Hong Kong, is subject to Hong Kong corporate income tax at a rate of 16.5% on the estimated assessable profits arising in Hong Kong. As of September 30, 2011, HYG had no provision for income taxes, as it had no assessable profits during these periods.

PRC

The Company’s PRC subsidiaries are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.

The following table reconciles the statutory rates to the Company’s effective tax rate for the three months ended September 30, 2011 and 2010:
 
   
September 30,
2011
   
September30,
2010
 
   
US$
   
US$
 
China Statutory income tax rate
    25.0 %     25.0 %
Current net operating loss
    28.5 %     -  
Deferred net operating loss carry-forward (1)
    (28.5 %)     -  
Effective tax rate
    25.0 %     25.0 %

Note: (1) Net operating loss carry-forward can be used to offset future taxable income in PRC.

The Company’s PRC subsidiaries Shaanxi Zhongbao, Chongqing Weitai and Chongqing Zhaoli suffered operating losses, which can be carried forward and be available to reduce future years' taxable income. For the three months ended September 30, 2011, the Company has recorded net income tax provision of $28,577 after applied deferred income tax benefit of $32,555. For the three months ended September 30, 2010, the Company has recorded income tax provisions of $456,137.

Deferred income tax reflects the net effects of temporary difference between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes, and operating loss carry-forward.
 
The components of deferred tax assets as of September 30, 2011 and June 30, 2011 consist of the following:
 
   
September 30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
Deferred tax assets-beginning balance
    66,185       -  
Net operating loss of subsidiaries (2)
    32,555       64,566  
Effect of foreign exchange rate adjustment
    635       1,619  
Deferred tax assets, ending balance
    99,375       66,185  
 
Note (2): for the three months ended September 30, 2011, the Company’s subsidiaries Shaanxi Zhongbao, Chongqing Difa, Chongqing Weitai and Chongqing Zhaoli incurred net operating losses totaling RMB 208,899 (or $32,555), which can be carried forward and be available to reduce future years' taxable income.
 
 
26

 
 
ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 12 – TAXES (continued)

As of June 30, 2011, the tax years ended December 31, 2005 through December 31, 2010 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities.
 
(c)
Land appreciation tax

Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, the Company’s local tax authority in Chongqing city has not imposed the regulation on real estate companies in its area of administration. Instead, the local tax authority has levied the LAT at the rate of 1.0% against total cash receipts from sales of real estate properties, rather than according to the progressive rates.

For the three months ended September 30, 2011 and 2010, the Company has made full payment for LAT with respect to properties sold through those dates in accordance with the requirements of the local tax authorities.

(d)
Taxes payable consisted of the following:
 
   
September
30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
City Construction Tax
    36,925       38,847  
Business tax payable
    683,931       716,134  
Income tax payable
    5,440,285       5,323,503  
Other tax payable
    13,834       24,237  
Total  tax payable
    6,174,975       6,102,721  

NOTE 13 - SEGMENT INFORMATION

The Company follows the provisions of ASC 280, “Segment Reporting”, which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance.

The Company operates in two reportable segments: real estate property sales and real estate property held for lease. As the Company primarily generates its revenues from customers in the PRC, no geographical segments are presented.

The measurement of segment income is determined as earnings before income taxes. Summary information by operating segment for the three months ended September 30, 2011 and 2010 is as follows:

 
27

 
 
ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 13 - SEGMENT INFORMATION (continued)
 
   
September  30,  2011
   
September 30,  2010
 
   
US$
   
US$
 
Revenue
           
Net real estate sales
    1,652,347       4,446,549  
Real estate lease income
    92,465       125,179  
Total revenue
    1,744,812       4,571,728  
Cost of revenue
               
Cost of real estate sales
    721,838       1,660,789  
Cost of real estate lease
    111,031       105,373  
Total cost of revenue
    832,869       1,766,162  
Gross profit
               
Real estate sales
    930,509       2,785,760  
Real estate lease
    (18,566 )     19,806  
Total Gross profit
    911,943       2,805,566  
Operating income:
               
Real estate sales
    246,130       1,933,859  
Real estate lease
    (56,864 )     (2,544 )
Total operating income
    189,266       1,931,315  

NOTE 14 - STATUTORY RESERVE

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors.
 
The statutory surplus reserve fund is non-discretionary other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital before the conversion.

Pursuant to the Company’s articles of incorporation, the Company has appropriated 10% of its net profits as statutory surplus reserve for the three months ended September 30, 2011 and 2010, respectively.  As of September 30, 2011 and June 30, 2011, the balance of statutory surplus reserve was $1,274,078 and $1,255,738, respectively.
 
 
28

 
 
ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 14 - STATUTORY RESERVE (continued)

The discretionary surplus reserve may be used to acquire property and equipment or to increase working capital. The Company’s Board of Directors elected not to make an appropriation to this reserve for the three months ended September 30, 2011 and 2010, respectively.

NOTE 15 - NONCONTROLLING INTEREST

Non-controlling interest represents one minority shareholder’s 1% ownership interest in Shaanxi Zhongbao. As of September 30, 2011 and June 30, 2011, non-controlling interest consisted of the following:

   
September 30,
   
June 30,
 
   
2011
   
2011
 
             
Original paid-in capital
  $ 76,789     $ 76,789  
Retained Earnings
    959       11,579  
Accumulated other comprehensive income
    (4,333 )     (13,673 )
Total non-controlling interest
  $ 73,415     $ 74,695  
 
NOTE 16 - COMMITMENT AND CONTINGENCIES

The Company started to develop a new real estate project in Xi’an city, Shaanxi province of China since May 2011 and expects to complete the project development within the next three years. This is an old-town redevelopment project which has required the Company to relocate and compensate existing residents in order to make the land clear and available for development. As of September 30, 2011, the Company has relocated total of 413 individual families and is liable to compensate these individual families with new residential apartments and commercial front-stores totaling 294,855 square meters within the next three years when the construction work of the project is completed.
 
Future minimum real estate property to be compensated back to individual families in connection with the above mentioned relocation is estimated as follows:
 
Year Ending June 30,
 
Amount
 
   
(square meters)
 
2012
   
-
 
2013
   
174,855
 
2014
   
120,000
 
Total
   
294,855
 
 
As is industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of the registration of the mortgage with the relevant mortgage registration authorities, which generally occurs within six to twelve months after the purchasers take possession of the relevant properties.  The mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees.  If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit.  The Company has made necessary reserves in its restricted cash account to cover any potential mortgage default as required by mortgage lenders.  The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient.
 
 
29

 
 
ZHONGBAO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY FITWAYVITAMINS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (UNAUDITED)
  
NOTE 17 - CONCENTRATION OF RISKS

The Company’s real estate projects are concentrated in Chongqing Municipality City, PRC. Any negative events such as a slowdown in the economy in Chongqing might cause material loss to the Company and have a material adverse effect on the Company’s financial condition and results of operations. The risk in this respect will be mitigated by the Company by expanding its operations outside of Chongqing.

The Company sells to a wide range of customers. No single supplier or customer accounted for more than 10% of revenue for the three months ended September 30, 2011 and 2010, respectively.

Substantially all of the Company’s project construction work was outsourced to third-party contractors. For the three months ended September 30, 2011, two subcontractors Chongqing Fuling Real Estate Construction Company and Shanghai Hongguang Real Estate Construction Company conducted approximately 52.9% and 18.7% of the total construction work on Jinshan Liyuan Phase III and Phase IV, respectively. For the three months ended September 30, 2010, one subcontractor Chongqing Ruina Real Estate Construction Company conducted 98.3% of the total construction work on Jinshan Liyuan Phase II and Phase III. The Company is exposed to risks that the performance of the subcontractor may not meet its standards or specifications. Negligence or poor work quality by subcontractors may result in defects in the buildings or residential units, which could in turn cause the Company to suffer financial losses, harm its reputation or expose it to third-party claims.

 
30

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion may contain certain forward-looking statements. Such statements are not covered by the safe harbor provisions. These statements include the plans and objectives of management for future growth of the Company, including plans and objectives related to the consummation of acquisitions and future private and public issuances of the Company's equity and debt securities. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

The words “we,” “us” and “our” refer to the Company. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements.” Actual results could differ materially from those projected in the forward looking statements as a result of a number of risks and uncertainties, including but not limited to: (a) limited amount of resources devoted to achieving our business plan; (b) our failure to implement our business plan within the time period we originally planned to accomplish; (c) our strategies for dealing with negative cash flow; and (d) other risks that are discussed in this report or included in our previous filings with the Securities and Exchange Commission.

Executive Summary
 
We are engaged in real estate development in Chongqing City, southwest of mainland China. We conduct substantially all of our business through Chongqing Zhongbao Investment (Group) Stock Co, Ltd and its subsidiaries, including Shaanxi Zhongbao Real Estate Property Development Co., Ltd., (“Shaanxi Zhongbao”), Chongqing Zhaoli Real Estate Consulting Co., Ltd. (“Zhaoli”), and Chongqing Weitai Real Estate Management Company (“Weitai”).  All of our businesses are conducted in mainland China. Since the initiation of our business in September 2001, we have kept focusing on expanding our business in certain Tier II cities in China which we strategically selected based on a set of criteria. Our selection criteria include population and urbanization growth rate, general economic condition and growth rate, income and purchasing power of resident consumers, anticipated demand for private residential properties, availability of future land supply and land prices and governmental urban planning and development policies. We utilize a standardized and scalable model that emphasizes rapid asset turnover, efficient capital management and strict cost control. We are rapidly growing within our industry in Chongqing, China. Our major competitors include Duo-Li Real Estate Development Co., Ltd. and Zhongqing Ju-Feng Real Estate Development Co., Ltd. To date, we have completed most of the construction  work of Phase I, Phase II  and Phase III of our Jinshan Liyuan project located in Nanchcuan City, Chongqing, which began in 2008. These properties have not been fully sold as of September 30, 2011. Also, we have started to construct Jinshan Liyuan Phase IV since July 2011.  The completion of the construction of the whole Jinshan Liyuan Project is expected before June 30, 2012. In addition, starting on May 2011, we have also  expanded our business into the city of Xi’an, Shaanxi Province to develop a new real estate property project and expect to benefit from rising residential housing demand as a result of increasing income levels of consumers and growing populations. We expect complete the construction for the Xi’an project in three years, with total construction area of 1 million square meters in five construction phases.
 
 
31

 
 
We intend to continue our expansion into additional selected Tier II cities and counties as suitable opportunities arise. We will expand to more selected target Tier II cities, including cities in Shaanxi Province and other counties in Chongqing which we are surveying for expansion in the near future. We will also expand into more selected areas of real estate businesses, such as real estate management, as part of our expansion plan.

Results of Operations for the three months ended September 30, 2011 and 2010

 The following table presents an overview of our results of operations for the three months ended September 30, 2011 and 2010.

   
September 30,
   
September 30,
   
Increase
       
   
2011
   
2010
   
(decrease)
   
Percentage
 
Total revenue
    1,744,812       4,571,728       (2,826,916 )     (61.8 ) %
Total cost of sales
    832,869       1,766,162       (933,293 )     (52.8 ) %
Gross profit
    911,943       2,805,566       (1,893,623 )     (67.5 ) %
Operating expenses
                               
Selling and distribution expenses
    157,888       255,826       (113,855 )     (44.5 ) %
General and administrative expenses
    564,789       618,425       (85,938 )     (13.9 ) %
Total operating expenses
    722,677       874,251       (199,793 )     (22.9 ) %
Operating income
    189,266       1,931,315       (1,742,049 )     (90.2 ) %
Total other expenses
    71,947       123,502       (48,555 )     (39.3 ) %
Income before income taxes
    114,319       1,807,813       (1,693,494 )     (93.7 ) %
Total income tax provisions
    28,577       456,137       (427,560 )     (93.7 ) %
Net income
    85,742       1,351,676       1,265,934       (93.7 ) %
 
Revenues

We derived our revenues predominantly from sales of our residential real estate properties.  For the three months ended September 30, 2011 and 2010, revenues from sales of our residential real estate properties were $1,652,347 and $4,446,549, representing a decrease of $2,794,202 or 62.8%.  We recognize real estate sales revenue when all the criteria for revenue recognition have been met and the property has been delivered to buyers.  Our sales revenue was affected by the number of units sold and also affected by the market price increase or decrease.  For the three months ended September 30, 2011, we did not have any new construction work been completed and delivered to buyers, because Building #9 of Jinshan Liyuan Phase III has not been fully completed and Phase IV of Jinshan Liyuan was still under construction. The only available-for-sale real estate property was previously unsold property from Jinshan Liyuan Phase I, II and III. For the three months ended September 30, 2011, total 42 units from building #1 and #2 of Phase III were delivered to buyers at an average sales price of RMB 4,078 (approximate to $576) per square meter. For the same period of 2010, total 150 units of residential property were sold at an average selling price of RMB 2,433 (approximate to $336) per square meter. As a result, the number of units sold decreased 72%, and the selling price increased 67.5%.  In addition, in terms of total area sold, 9 total of 3,158 square meters were sold during the quarter ended September 30, 2011 as compared to 13,239 square meters sold for the quarter ended September 30, 2010, the total area sold decreased 10,081 square meters or 76.1% when comparing the three months ended September 30, 2011 to the prior comparative period. The decrease in our sales revenue was also affected by the recent overall depressed real estate industry in China during this period. In order to control the skyrocketing sales prices in China’s real estate market, the Chinese government implemented certain macro-economic control policies which led to real estate developers to face more difficulties in obtaining land use rights and bank loans. This governmental policy also negatively affected buyer’s confidence and consumption psychology. Some buyers are taking a wait-and-see attitude and delayed their purchasing decision. Such market condition impacted our sales revenue to certain degree. As a result of the above combined factors, real estate sales for the quarter ended September 30, 2011 decreased when comparing to the same period of 2010, primarily as a result of  the decrease in both units and total area sold.

 
32

 
 
Revenue from real estate sales are presented in the net amount, which means sales taxes are deducted from the gross amount to calculate net sales revenue. Sales tax is a one-time tariff which consists of a business tax at the rate of 5% on actual revenue. For the quarter ended September 30, 2011 and 2010, we reported sales tax in connection with the real estate sales in the amount of $167,666 and $316,769, respectively.

In addition to real estate property sales, we also constructed and held some commercial space and basement parking lots for leasing in order to generate rental income.  Real estate properties held for lease are recorded at cost less accumulated depreciation. We have entered into several leasing contracts with various outside parties and leased these commercial space or parking lots for rental income. Overall, rental income is immaterial to the Company’s total revenue.

The following table sets forth the breakdown of our revenue for the three months ended September 30, 2011 and 2010, respectively:

   
2011
   
2010
 
   
USD
   
%
   
USD
   
%
 
Real estate sales, net
    1,652,347       94.7 %     4,446,549       97.3 %
Real estate lease income
    92,465       5.3 %     125,179       2.7 %
Total revenue
    1,744,812       100.0 %     4,571,728       100.0 %
 
 
33

 

Cost of Revenues

Cost of real estate sales:

The following table sets forth the breakdown of the costs of real estate sales for the three months ended September 30, 2011 and 2010, respectively:
 
   
2011
   
2010
 
   
US$
   
US$
 
Land use right costs
    104,515       417,240  
Direct construction cost
    599,109       1,128,181  
Auxiliary facility cost
    13,721       40,610  
Other costs
    4,493       74,757  
Total Cost of real estate sales
    721,838       1,660,789  

Our cost of real estate sales consists primarily of the cost of land use rights and construction costs. Costs of real estate sales are capitalized and allocated to development projects using the specific identification method. Costs are recorded based on the ratio of the sales value of the relevant units completed and sold to the estimated total project sales value, multiplied by the total project costs.

Land use right costs include the premium we paid to acquire land use rights for our property development sites, plus taxes. Our land use rights costs vary for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Our land use right costs for the three months ended September 30, 2011 was $104,515, representing a decrease of $312,725 or 74.9%, as compared to that of for the three months ended September 30, 2010.  This decrease was primarily due to the fact that more land use costs were allocated during the quarter ended September 30, 2010 when more area was sold. For the quarter ended September 30, 2010, total area sold from Jinshan Liyuan Phase II and III amounted to 13,239 square meters. Additional costs were allocated to landscaping, road construction, and other infrastructures in order to make the whole project more attractive to potential buyers. In the three months ended September 30,2011, total area sold only amounted to 3,158 square meters, less land-related costs were allocated to landscaping, road and other basic infrastructure.  Accordingly, land-related costs allocated in 2010 was higher than in 2011.

We outsource the construction of all of our projects to third party contractors, who are selected through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials, equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices.  As a result, our construction costs consisted primarily of the payments to third-party contractors, which are paid over the construction period based on specified milestones.  Our direct construction costs for the three months ended September 30, 2011 was $599,109, representing a decrease of $529,072 or 46.9%, as compared to the three months ended September 30, 2010. The decrease in construction cost was affected by the decrease in units and area sold in 2011, as well as affected by inflation adjustment from year to year.

Cost of real estate sales decreased $938,951 or 56.5% when comparing the three months ended September 30, 2011 and 2010.  We allocate cost of real estate sales by using the specific identification method, which means the total square meters of the property been sold times the average unit costs, to determine the total cost of revenue.  Our unit construction costs were based on historical figures such as construction costs, land costs, and facility costs. These costs are accumulated in a cost pool and are allocated to the each building and each square meter under construction. The costs are then transferred to cost of revenue when the finished goods are sold to the buyers and when revenue can be recognized. If the unit cost is relatively stable, it is the total area sold which determines the total cost of revenue. For the three months ended September 30, 2011, the average unit cost included in the property sold was RMB 1,467 (approximately $229) per square meter, while for the same period of 2010, the average unit cost included  in the property sold was RMB 848 (equivalent to $125) per square meter. Unit cost increased 82.2% from 2010 to 2011. Therefore, when comparing the total cost of revenue for the year ended June 30, 2011 and 2010, because a total of 3,158 square meters were sold in 2011 at $229 per square meter, and 13,239 square meters were sold in prior comparative period at $125 per square meter, the decrease in total area sold led to a decrease in total cost of real estate sales, offset by increased unit cost included in inventory for the period indicated. On the other hand, revenue decreased by approximately 62.8%, while the cost of real estate sales decreased by 56.5% for the three months ended September 30, 2011 and 2010, the decrease was due to decreased units and area sold, as well as the impact of the increase in the overall market selling price from $336 per square meter in 2010 to $576 per square meter in 2011.

 
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Cost of real estate lease:

Our cost of real estate lease consists primarily of maintenance, repairs and minor renewals.
 
The following table presents a breakdown of our cost of revenue of real estate business for the three months ended September 30, 2011 and 2010:

   
September 30,
         
September 30,
       
   
2011
   
%
   
2010
   
%
 
   
(USD)
         
(USD)
       
Cost of real estate sales
    721,838       86.7 %     1,660,789       94.0 %
Cost of real estate lease
    111,031       13.3 %     105,373       6.0 %
Total
    832,869       100.0 %     1,766,162       100.0 %

Gross Profit

The following table presents the gross profit of our businesses for the three months ended September 30, 2011 and 2010:

   
September 30,
   
September 30,
 
   
2011
   
2010
 
   
Gross
   
Gross
   
Gross
   
Gross
 
   
profit
   
margin
   
profit
   
margin
 
Project
 
USD
   
%
   
USD
   
%
 
Real estate property sales - Jinshan Liyuan
    930,509       56.3 %     2,785,760       62.6 %
Rental property
    (18,566 )     (20.1 %)     19,806       15.8 %
Total gross profit
    911,943       52.3 %     2,805,566       61.4 %

Total gross profit from our real estate business decreased by $1,893,623, or 67.5%, to $911,943 for the three months ended September 30, 2011, from $2,805,566 for the three months ended September 30, 2010. The decrease was primary due to decreased revenue from real estate sales as discussed above. The gross margin of our real estate business decreased from 61.4% for the three months ended September 30, 2010 to 52.3% for the three months ended September 30, 2011.  The decrease in gross margin was principally attributed to the increase in unit cost, decrease in sales revenue and offset by increased sale price per square meter as discussed above.

Selling and distribution expenses

Our selling and distribution expenses include: (1) advertising and promotion expenses, such as billboard and other physical advertising cost, and costs associated with our showrooms and model apartments; and (2) sales commissions paid to a third-party marketing firm, to whom we outsourced the sales and marketing of the real estate property developed.
 
 
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Selling expense decreased 383.3% or $97,938 from the three months ended September 30, 2010 to the three months ended September 30, 2011. The decrease in selling expense for the three months ended September 30, 2011 was primarily affected by the decrease in sales commission paid to outsourced sales and marketing firm Xinshang Real Estate Company. We outsourced the sales and marketing activities to Chongqing Xinshang Real Estate Consulting Firm and paid sales commission based on 2.3% of the total sales collection amount from the consulting firm.  For the three months ended September 30, 2010, we paid sales commission of RMB 1.47 million (equivalent to $218,026) as sales commission to the consulting firm.  For the three months ended September 30, 2011, we only paid RMB 368,609 (or $57,444) sales commission to outside sales and marketing consulting firm due to decreased sales.  The decrease in sales commission expense was offset by increased office and other selling expense incurred on Xi’an new project. The net change in our selling expense reflected the above factors.

General and Administrative Expenses

For the three months ended September 30, 2011, our general and administrative expenses were $564,789, representing a decrease of $53,636 or 8.7%, as compared to the prior comparative period. The decrease was primarily a result of the following factors: (1) professional and consulting costs decreased $157,598 because we paid more consulting, auditing and legal fees during the quarter ended September 30, 2010 in order to prepare for going public in the U.S. We subsequently became a public listed company in February 2011; and (2) the decrease in consulting expenses was offset by increased general and administrative expenses incurred in our new subsidiary Shaanxi Zhongbao in order to start a new project in Xi’an. Total general and administrative expenses incurred to support the new project planning in Xi’an during the quarter ended September 30, 2011 amounted to $99,033, including salary, meals and entertainment, and travel expense.

We expect that our general and administrative expenses will increase as we expand our business and operations.  In addition, as a result of going public, we are subject to the rules and regulations of the United States securities laws regarding corporate governance and internal controls.  Therefore, we expect to incur more cost by hiring qualified professionals who are knowledgeable about U.S. accounting and capital markets.  Our general and administrative expense may also increase due to our need for more personnel as our business continues to grow.

Interest expense

Interest expense decreased $39,675 or 34.6% when comparing the three months ended September 30, 2011 to the prior comparative period. The decrease in our interest expense was due to our decreased bank loan balance from $14.9 million as of September 30, 2010 to $11.5 million as of September 30, 2011. As the balance of outstanding bank loans decreased, we reported less interest expense accordingly. In addition, for the three months ended September 30, 2011, most of our interest expense incurred has been capitalized as construction cost because the purpose of the borrowing was to use the loan proceeds for the construction of our real estate project. This was a little bit different than in the prior comparative period in 2010, in which a portion of our bank loan was used as working capital and accordingly interest expense incurred on such bank loan was recorded as interest expense.  As a result of these factors, interest expense for the three months ended September 30, 2010 was higher than in 2011.

Income tax expenses

Income tax expense decreased $427,560 or 93.7% when comparing the three months ended September 30, 2011 to the three months ended September 30, 2010. The change is primarily due to decreased sales revenue and taxable income for the period as discussed above.

We are subject to a 25% corporate income tax rate in PRC. For the three months ended September 30, 2011, our subsidiaries Shaanxi Zhongbao, Chongqing Weitai, Chongqing Zhaoli and Chongqing Difa suffered operating losses.   For Chinese income tax purposes, these operating losses can be carried forward and are available to reduce future years' taxable income. For the three months ended September 30, 2011, we recorded net income tax provision of $28,577 after applying a deferred income tax benefit of $32,555. For the three months ended September 30, 2010, we recorded net income tax provisions of $456,137 due to the higher amount of taxable income.
 
Deferred income tax reflects the net effect of temporary difference between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes, and operating loss carry-forward.
 
 
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Deferred tax assets as of September 30, 2011 and June 30, 2011 consist of the following:
 
   
September 30,
2011
   
June 30,
2011
 
   
US$
   
US$
 
Deferred tax assets-beginning balance
    66,185       -  
Net operating loss of subsidiaries (Note)
    32,555       64,566  
Effect of foreign exchange rate adjustment
    635       1,619  
Deferred tax assets, ending balance
    99,375       66,185  

Note: for the three months ended September 30, 2011, the Company’s subsidiaries Shaanxi Zhongbao, Chongqing Difa, Chongqing Weitai and Chongqing Zhaoli incurred net operating losses totaling RMB 208,899 (or $32,555), which can be carried forward and are available to reduce future years' taxable income.

Net Income

As a result of the above-mentioned factors, we reported net income of $85,742 for the three months ended September 30 2011, as compared to net income of $1,351,676 for the three months ended September 30 2010. Net income decreased by $1.26 million or 93.7% from year to year. The decrease in net income was primarily attributable to the decrease in sales revenue as discussed above.

Liquidity and Capital Resources

Our principal sources of financing are our cash generated by investing activities, and borrowings from banks, third-parties and related parties.

For the three months ended September 30, 2011, net cash used in operating activities amounted to $5,886,941, and for the same period of 2010, net cash used in operating activities was $4,066,114.  Net cash used in investing activities amounted to $9,514 and $72,435 for the three months ended September 30, 2011 and 2010, respectively. Net cash provided by financing activities amounted to $497,480 and $2,322,030 for the three months ended September 30, 2011 and 2010, respectively.

As of September 30, 2011 and June 30, 2011, our reported cash and cash equivalents of $1,094,228 and $6,440,130, respectively. Our cash includes cash on hand and demand deposits in accounts maintained with state-owned and private banks within the PRC.  We consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. We maintain bank accounts in the PRC, which are not covered by insurance.  In addition, we have  two bank deposit books that were opened under an officer’s name but were used exclusively for Company’s business purposes  for the years ended June 30, 2011 and 2010. Effective September 23, 2011, the CEO and the Company, acting through an officer duly authorized by the board of directors, entered into trust agreements that formally recite the facts that there are at least two signatures required to withdraw funds from such accounts.  The CEO, as the Company's sole director, ratified the trust agreements on behalf of the board of directors. Subsequently, on September 30, 2011, the Company closed these two bank deposit books that had been opened under CEO’s name and transferred the funds into Company’s business bank accounts.
 
We have maintained good relationships with various local banks which will provide additional capital when we need it. We believe that our cash and cash equivalents, our operating cash flows and our available borrowing sources from banks will be sufficient to finance our working capital needs in the future.
 
 
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The following table presents selected cash flow data from our cash flow statements for the three months ended September 30, 2011 and 2010, respectively.
 
   
2011
   
2010
 
             
Net cash used in operating activities
  $ (5,886,941 )   $ (4,066,114 )
Net cash used in investing activities
    (9,514 )     (72,435 )
Net cash provided by  financing activities
    497,480       2,322,030  
Effect of exchange rate changes on cash and cash equivalents
    53,073       63,400  
Net decrease in cash and cash equivalents
    (5,345,902 )     (1,753,119 )
Cash and cash equivalents, beginning of the period
    6,440,130       5,248,059  
Cash and cash equivalents, end of the period
  $ 1,094,228     $ 3,494,940  
 
Operating Activities

Net cash used in operating activities for the three months ended September 30, 2011 was $5,886,941, including net income of $85,742. Net cash used in operating activities was affected by changes in assets and liabilities such as an increase in real estate property under development of $5,808,165 primarily because we incurred additional land acquisition related cost of RMB 22.8 million (approximately $3.5 million) in our new real estate development project in Xi’an city of Shaanxi Province. In order to start this new project, we were required to relocate existing residents off the land and make the land available for development. We recorded such compensation cost as long-term construction cost. In addition, we incurred RMB 12.1 million construction cost (approximately $2 million) in Jinshan Liyuan Phase IV to construct the remaining two buildings, which are expected to be completed before June 2012.

Net cash used in operating activities for the three months ended September 30, 2010 was $4,066,114, which was primarily due to a decrease of: (i) real estate property under development of $11,588,303 and (ii) other payables of $765,463, offset by an increase of  advance to vendors of $3,885,286 and $2,823,441 from customer deposits.

Investing Activities

 Net cash used in investing activities was $9,514 and $72,435 for the three months ended September 30, 2011 and 2010, respectively, primarily including the purchase of property and equipment  for the period indicated.

Financing Activities

Net cash provided by financing activities was $497,480 for the three months ended September 30, 2011, which primarily included $564,024 in proceeds from related party loans, offset by repayment of bank loans of $66,544.  In order to start our new project in Xi’an city, we borrowed RMB 3.65 million (approximately $571,717) from our CEO Mr. Xia Haoji during the quarter ended September 30, 2011.

Net cash provided by financing activities was $2,322,030 for the three months ended September 30, 2010, which were proceeds from long-term bank borrowings.  
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material.
 
 
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Inflation
 
Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the real estate industry and continually maintain effective cost controls in operations.
 
Seasonality
 
Our operating results and operating cash flows historically have not been subject to dramatic seasonal variations, although there is an increase in advertising and selling expenses when we begin pre-sales of new projects under construction. New market opportunities or new project introductions could change any perceived patterns, seasonal or operational.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of September 30, 2011, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
  
Such conclusion is is based on deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses. The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) the lack of a functioning audit committee and lack of a majority of outside directors on the Company's board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements; and (4) ineffective controls over period end financial disclosure and reporting processes.  The aforementioned material weaknesses were identified by the Company's Chief Executive Officer and Chief Financial Officer in connection with the review of our financial statements as of September 30, 2011 and communicated to our management.
 
Management believes that the material weaknesses set forth in items (2), (3) and (4) above did not have an effect on the Company's financial results. However, management believes that the lack of a functioning audit committee and lack of a majority of outside directors on the Company's board of directors can result in ineffective oversight in the establishment of required internal controls and procedures and deterioration of its financial statements.
 
The Company is committed to improving its financial organization. As part of this commitment, the Company will seek to create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function including: (i) appointing one or more outside directors to our board of directors who shall be appointed to the audit committee of the Company resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; and (ii) preparing and implementing sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements.

 
39

 
 
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on the Company’s board.  In addition, management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses: (a) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements; and (b) ineffective controls over period end financial close and reporting processes.  Further, management believes that the hiring of additional personnel who have the technical expertise and knowledge will result proper segregation of duties and provide more checks and balances within the department.  Additional personnel will also provide the cross training needed to support the Company if personnel turn over issues within the department occur.  We believe that these actions coupled with the appointment of additional outside directors will greatly decrease any control and procedure issues the Company may encounter in the future.

Changes in Internal Controls over Financial Reporting
 
During the period covered by this quarterly report on Form 10-Q, other than as described above, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.
 
OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
In the normal course of business, we are subject to claims and litigation. Neither we nor our subsidiaries are currently a party to any material legal proceedings nor are we aware of any material proceeding to which any of our directors, officers, affiliates, or any holder of more than five percent of our common stock, or any associate of any such director, officer, affiliate, or shareholder, is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
 
ITEM 1A.
RISK FACTORS
 
Not Applicable.
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.
(REMOVED AND RESERVED)
    
ITEM 5.
OTHER INFORMATION
 
None.

 
40

 
 
ITEM 6.
EXHIBITS

Exhibit No.
 
Description
10.1
 
English Translation of Real Estate Loan Agreement, dated January 25, 2010, between Chongqing Zhongbao Investment Group Co., Ltd. and Industrial and Commercial Bank of China.
10.2
 
English Translation of Real Estate Loan Agreement, dated February 5, 2010, between Chongqing Zhongbao Investment Group Co., Ltd. and Industrial and Commercial Bank of China.
10.3
 
English Translation of Loan Agreement, dated April 20, 2011, between Shaanxi Zhongbao Real Estate Property Development Co., Ltd. and Shaanxi Fengxi Construction Co., Ltd, as renewed on October 21, 2011.
10.4
 
English Translation of Loan Agreement, dated April 20, 2011, between Shaanxi Zhongbao Real Estate Property Development Co., Ltd. and Shaanxi Hangyu Real Estate Development Co., Ltd, as renewed on September 30, 2011.
10.5
 
English Translation of Loan Agreement, dated September 22, 2011, between Shaanxi Zhongbao Real Estate Property Development Co., Ltd. and Haoji Xia.
31.1
 
Certification of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
 
Certification of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101
 
Interactive Data Files **
  

*  Filed herewith
** To be filed by amendment
 
41

 
 
SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
Zhongbao International, Inc.
     
 
By:
/s/ Haoji Xia
   
Name: Haoji Xia
November 14, 2011
 
Title: Chief Executive Officer and
Chief Financial Officer
   
(Principal Executive Officer, Principal Financial Officer)
 
 
42