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EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - Vantone International Group, Inc.f10q0911ex31i_vantone.htm
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EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT - Vantone International Group, Inc.f10q0911ex32i_vantone.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
 
o    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: 000-31469

Vantone International Group, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
 
41-1954595
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employee Identification No.)
     
No. 195 Zhongshan Road,
Heping District, Shenyang, Liaoning Province, P.R. China
 
110002
  (Address of principal executive offices)
 
(Zip Code)
 
86-24-2286-6686
 (Registrant's telephone number, including area code)

Not applicable
 (Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
 
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
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 o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class of Securities
 
Number of shares outstanding as of November 14, 2011
Common stock, par value $0.001 per share
 
30,001,000

 
 
 

 
 
TABLE OF CONTENTS

FORM 10-Q

September 30, 2011
 
PART I— FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements.
1
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
27
     
Item 4.
Controls and Procedures.
27
     
PART II— OTHER INFORMATION
 
     
Item 1.
Legal Proceedings.
27
     
Item 1A.
Risk Factors.
27
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
27
     
Item 3.
Defaults Upon Senior Securities.
27
     
Item 4.
(Removed and Reserved).
27
     
Item 5.
Other Information.
28
     
Item 6.
Exhibits.
28
 
SIGNATURES
 
 
 
 

 
 
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

CERTAIN TERMS USED IN THIS REPORT

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Vantone International Group, Inc. and its subsidiaries. “SEC” refers to the Securities and Exchange Commission.
 
 
 
 

 
 
PART I – FINANCIAL INFORMATION

Item 1. 
Financial Statements.
 
Vantone International Group, Inc. and Subsidiaries
Consolidated Balance Sheets
             
   
September 30,2011
   
March 31, 2011
 
   
(Unaudited)
   
(Audited)
 
Assets
 
Assets:
           
Current Assets
       
Cash and equivalents-non restricted
  $ 2,834,146     $ 2,885,312  
Cash- restricted
    -       1,527,044  
Accounts receivable, net of allowance
               
for doubtful amounts of $55,305and $67,157, respectively
    499,855       604,413  
Insurance commissions receivable
    472       10,761  
Interests receivable
    200,144       25,418  
Loans receivable
    7,054,202       7,053,111  
Less: Unearned income     -       (16,378
Allowance for loan losses
    (352,710     (70,531
Total loans receivable, net
    6,701,492       6,966,202  
Advanced to suppliers
    11       45,784  
Inventories
    544,260       521,739  
Advanced to stockholders/officers, net
    2,477,673       2,435,135  
Prepayments and other current assets
    405,893       265,605  
Deferred income tax assets-current
    367,660       207,765  
Total Current Assets
    14,031,606       15,495,178  
                 
Property and Equipment - Net
    702,582       1,805,034  
Investment Properties-Net
    1,064,378       -  
Non-operating Property
    1,270,427       1,238,549  
Total Assets
    17,068,993       18,538,761  
                 
Liabilities and Stockholders' Equity  
Liabilities:
         
Current Liabilities
               
Loan payable
    -       1,527,044  
Accounts payable and accrued expenses
    40,567       193,939  
Customer deposits
    4,956       4,831  
Taxes payable
    399,063       262,651  
Deferred VIP membership revenue
    -       248,387  
Deferred network service revenue-current
    4,311       4,203  
Deferred rental income
    97,849       -  
Other current liabilities
    262,890       236,716  
Total Current Liabilities
    809,636       2,477,771  
                 
Deferred Network Service Revenue-Noncurrent
    24,790       26,270  
Total Liabilities
    834,426       2,504,041  
                 
                 
Stockholders' Equity:
               
Vantone International Group Equity
               
Common stock - $0.001 par value, 100,000,000 shares
               
authorized, 30,001,000 shares                
issued and outstanding, respectively
    30,001       30,001  
Additional paid-in capital
    1,919,800       1,919,800  
Reserve funds
    877,446       865,816  
Retained earnings
    11,729,989       11,922,055  
Accumulated other comprehensive income
    1,631,789       1,242,641  
Total Vantone International Group, Inc. Stockholders' Equity
    16,189,025       15,980,313  
Non-controlling Interest
    45,542       54,407  
Total Equity
    16,234,567       16,034,720  
                 
Total Liabilities and Stockholders' Equity
  $ 17,068,993     $ 18,538,761  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
1

 
 
Vantone International Group, Inc. and Subsidiaries  
Consolidated Statements of Operations
 
   
For The Three Months Ended
September 30,
   
For The Six Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Revenues
                       
Products sold
  $ 7,065     $ 1,497,448     $ 19,513     $ 1,563,440  
Sales discount for products
    (1,725 )     -       (6,474 )     -  
Insurance service rendered
    1,134       9,562       2,935       18,436  
VIP membership fees
    71,750       34,742       251,911       261,059  
Network service fees
    1,072       -       2,131       1,008  
Financing interests
    289,887       -       640,872       -  
   Total Revenues
    369,183       1,541,752       910,888       1,843,943  
                                 
Cost of Goods Sold
         
Products sold
    1,524       556,281       5,989       587,811  
Insurance service rendered
    1,090       8,982       2,569       15,534  
VIP membership cost
    3,942       1,894       13,793       14,228  
Network service cost
    58       -       116       55  
Financing cost
    16,234       -       35,889       -  
   Total Cost of Goods Sold
    22,848       567,157       58,356       617,628  
                                 
 Gross Profit
    346,335       974,595       852,532       1,226,315  
                                 
Operating Expenses
         
Selling expenses
    12,772       4,127       40,403       5,397  
Loss on disposal of fixed assets
    576       2,677       576       2,677  
Bad debt recoveries
    (85 )     (256,882 )     (13,427 )     (347,723 )
Allowance for credit loans recoveries
    210,982       -       277,207       -  
General and administrative expenses
    356,424       236,442       684,211       478,625  
 Total Operating Expenses
    580,669       (13,636 )     988,970       138,976  
                                 
 (Loss) Income From Operations
    (234,334     988,231       (136,438 )     1,087,339  
                                 
Other Income
                         
 Interest income, net
    3,649       3,122       6,016       5,744  
 Other income (expenses), net
    11,243       (4 )     (33,151 )     (110 )
 Total Other Income (Expenses)
    14,892       3,118       (27,135 )     5,634  
                                 
 (Loss) Income Before Taxes
    (219,442 )     991,349       (163,573 )     1,092,973  
 Provision for Income Taxes
    (17,209 )     155,025       25,728       196,420  
 (Loss) Income Before Noncontrolling Interest
    (202,233 )     836,324       (189,301 )     896,553  
                                 
Less: Net loss attributable to the noncontrolling interest
    (5,008 )     (3,901 )     (8,865 )     (7,452 )
                                 
Net (Loss) Income Attributable to Vantone International
 
 Group, Inc.
  $ (197,225 )   $ 840,225     $ (180,436 )   $ 904,005  
                                 
Net (Loss) Income Per Common Share:
 
    - Basic and Diluted
  $ (0.01 )   $ 0.03     $ (0.01 )   $ 0.03  
                                 
Weighted Common Shares Outstanding
 
    - Basic and Diluted
    30,001,000       29,971,000       30,001,000       29,971,000  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
2

 
 
Vantone International Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
 
   
For The Six Months Ended
September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Net (Loss) Income Before Noncontrolling Interest
  $ (189,301 )   $ 896,553  
Other Comprehensive Income:
               
Foreign Currency Translation Adjustment
    389,148       268,294  
Total Comprehensive Income
  $ 199,847     $ 1,164,847  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
3

 
 
Vantone International Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows

   
For The Six Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash Flows From Operating Activities
           
Net (Loss) Income
  $ (180,436 )   $ 904,005  
Adjustments to Reconcile Net Income to Net Cash
               
(Used in) Provided by Operating Activities
               
Bad debt adjustment
    (13,427 )     (347,723 )
Provision for loan losses
    277,207       -  
Depreciation
    86,398       83,939  
Net loss attributable to noncontrolling interest
    (8,865 )     (7,452 )
Deferred income tax benefits
    (152,807 )     (48,565 )
Loss on inventories disposal
    976       -  
Loss on fix assets disposal
    576       2,677  
Changes in operating assets and liabilities:
               
Accounts receivable
    130,340       3,461,759  
Insurance commissions receivable
    10,301       -  
Interest receivable
    (169,704 )     -  
Advanced to suppliers
    45,773       (164,729 )
Inventories
    (9,840 )     (188,465 )
Prepayments and other current assets
    (130,103 )     2,880  
Accounts payable and accrued expenses
    (154,390 )     (113,333 )
Customer deposits
    -       (480,010 )
Taxes payable
    126,399       289,302  
Deferred VIP membership revenue
    (248,387 )     750,585  
Other current liabilities
    19,577       (2,933 )
Deferred rental income
    97,849       -  
Deferred network service revenue
    (2,102 )     31,881  
Net Cash (Used in) Provided by Operating Activities
    (274,665 )     4,173,818  
                 
Cash Flows From Investing Activities
               
Cash- restricted
    1,527,044       -  
Payment for purchase of property and equipment
    (2,860 )     (4,747 )
Net increase in loans receivable
    159,538       -  
Net Cash Provided by (Used in) Investing Activities
    1,683,722       (4,747 )
                 
Cash Flows From Financing Activities
               
Payment for loan payable
    (1,527,044 )     -  
Net Cash Used in Financing Activities
    (1,527,044 )     -  
                 
Net (Decrease) Increase in Cash and Equivalents
    (117,987 )     4,169,071  
Effect of Exchange Rate Changes on Cash
    66,821       166,967  
Cash and Equivalents at Beginning of Period
    2,885,312       5,159,615  
Cash and Equivalents at End of Period
    2,834,146       9,495,653  
                 
Supplemental Disclosures of Cash Flow Information:
               
Interest paid
  $ 32,053     $ -  
Income taxes paid
  $ 3,089     $ 2,494  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
4

 
 
Vantone International Group, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

1.  
Basis of Presentation

a.  
Interim Financial Statement

The unaudited consolidated financial statements of Vantone International Group, Inc. and subsidiaries (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet information as of March 31, 2011 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

b.  
Description of Business and Reverse Merger

Vantone International Group, Inc (“Vantone International”) was initially incorporated on April 20, 1966 under the laws of the State of Minnesota as Polar Homes, Inc. The Company changed its corporate name to Polar Campers, Inc. in 1968. The Company was originally formed to "build, manufacture, sell, lease, own, buy and otherwise deal with in mobile homes, campers, trailers and any other equipment which from time to time be decided upon; to own and otherwise deal with in real estate, and to do all things necessary and proper to accomplish said purposes." The Company ceased all business operations during 1973 and disposed of all assets and liabilities.

In August 1991, in anticipation of a business combination with another entity, the Company changed its corporate name to Access Plus, Inc. This business combination was unsuccessful and was abandoned in January 1992 due to lack of regulatory approval. Concurrent with the abandonment of that proposed business combination, the Company changed its corporate name to Environmental Protection Corporation.

On August 15, 2000, the Company changed its corporate name to Senior Optician Service, Inc. The Company intended to enter the specialty eyewear products business and to focus its efforts on specialty eyewear sales and services for senior citizens who are either home or facility bound. Effective March 31, 2003, this business plan was suspended by management.

On August 31, 2007, the Company changed its corporate domicile from the State of Minnesota to the State of Nevada. The capital structure of the Company remained unchanged. The change of domicile was implemented by the formation of a new Nevada corporation named Senior Optician Service, Inc. which was formed on June 25, 2007. The Minnesota Senior Optician Service, Inc. was merged into and with the Nevada Senior Optician Service, Inc. The Minnesota Corporation disappeared August 31, 2007 following the completion of the merger.
 
On April 7, 2008, Mr. Honggang Yu purchased 5,175,000 shares of the Company’s common stock, representing 86.9% of the outstanding shares. The shares were purchased from Gregory M. Wilson and Kaniksu Financial Service, Inc.

Effective on August 17, 2009, the name of the Company was changed from Senior Optician Service Inc. (“Senior Optician”) to Vantone International.

On May 14, 2009, Senior Optician acquired all of the outstanding capital stock of Vantone USA Inc. (“Vantone USA”)
 
Upon completion of the Share Exchange, there were 29,901,000 shares of Vantone International common stock issued and outstanding. On May 24, 2010, the Company issued additional100, 000 common shares in exchange for the Wilson Warrant. As of result, the Company had 30,001,000 common shares issued and outstanding as of September 30, 2011. The recapitalizations are described in further detail in Note 13 to the accompanying consolidated financial statements.

Vantone USA was incorporated under the laws of Nevada on December 5, 2007. It is a holding company that has owned 100% of the equity in Shenyang Vantone Healthcare Products Manufacturing Co., Ltd. (“Vantone Manufacturing”) since July 14, 2008. Most of Vantone International’s activities are conducted through its wholly own subsidiary, Vantone Manufacturing, and Vantone Manufacturing’s variable interest entities in The People’s Republic of China (“PRC”).

Vantone International, Vantone USA, Vantone Small Financing, Vantone Manufacturing, and all of Vantone Manufacturing’s variable interest entities listed below will be called “the Company” in the accompanying consolidated financial statements.
 
 
 
5

 

Vantone Small Financing

On September 27, 2010, in an attempt to expand the Company’s business in China, Vantone International formed a joint venture with Vantone Yuan that focuses on providing micro financing service to the clients in China. The joint venture operates under the name “Shenyang Heping District Vantone Small Financing Co., Ltd. (“Vantone Small Financing”)”. Vantone Small Financing has registered capital in amount of $10 million. Pursuant to this joint venture agreement, Vantone international and Vantone Yuan are required to contribute $7.07 million and $2.93 million within six  months from the received date of operation certificate, in order to own 70.7% and 29.3% of the joint venture, respectively. On March 29 2011, the Vantone Small Financing had been approved to extend the contribution period from six months to two years by Bureau of Foreign Trade and Economic Cooperation of Heping District Shenyang City. The registered term of operations is 10 years from September 27, 2010 to September 26, 2020. As of September 30, 2011, the actual capital of $2.93 million (equivalent to RMB 19,550,425) was contributed by Vantone Yuan on October 12, 2010.

Vantone Manufacturing

Vantone Manufacturing is a foreign owned enterprise that was incorporated under the laws of LiaoNing Province in the PRC on January 9, 2007. Vantone Manufacturing was incorporated under the name “Shenyang Vantone Healthcare Food Co., Ltd.,” but adopted its current name on June 20, 2007. Its registered term of operations is fifteen years, from January 9, 2007 to January 8, 2022. Vantone Manufacturing and its KangPing branch engage in manufacturing, processing, and marketing of daily commodities, water purifying equipment, and kitchen and bath equipment. Up to March 2008, Vantone Manufacturing had outsourced all of its manufacturing activities to enterprises in the PRC that are dedicated to manufacturing products exclusively for Vantone Manufacturing.

Entrusted Management of Vantone Yuan

On April 1, 2007, Vantone Manufacturing signed three agreements (Entrusted Management Agreement, Proxy Agreement, and Purchase Option and Cooperation Agreement) with the shareholders of Shenyang Vantone Yuan Trading Co., Ltd. (“Vantone Yuan”).  Vantone Yuan is a private enterprise that was incorporated under the laws of LiaoNing Province.  It was incorporated under the name “Shenyang Tongbida Trading Co., Ltd.,” but adopted its current name on June 21, 2007.  The Entrusted Management Agreement stipulates that Vantone Manufacturing will enjoy all of the profits and bear all of the losses arising from the business of Vantone Yuan during Vantone Manufacturing’s management period. The effective terms of these agreements are ten years starting from April 1, 2007.  The terms may be extended by the written agreement among the parties upon the expiration of the agreement. By reason of the Entrusted Management Agreement and its ancillary agreements, Vantone Manufacturing is considered to be the primary beneficiary of the business of Vantone Yuan.  Therefore the financial statements of Vantone Yuan and its subsidiaries are required to be consolidated with the financial statements of Vantone Manufacturing, in accordance with accounting principles generally accepted in the United States (“US GAAP”).  See Note 14 for detailed information regarding the Entrusted Management Agreements. On October 12, 2011, Vantone Manufacturing entered into share transfer agreements (the “Transfer Agreements”) with the shareholders of Vantone Yuan.  The share transfer was approved by Shenyang Administration of Industry and Commerce on October 18, 2011, and the updated business certification of Vantone Yuan with the new stockholder’s name was issued at the same day. As a result, Vantone Yuan is our 100% wholly-owned subsidiary by then.  On October 18, 2011, we terminated the three agreements: Entrusted Management Agreement, Proxy Agreement, and Purchase Option and Cooperation Agreement. Additional information is disclosed in Note 18.

Vantone Yuan engages in the distribution and sale of daily commodities, consumer electronics, home appliances, health and beauty products and equipment.  It also engages in the import/export of various merchandise and technologies through a self-conducted trade model or agency arrangement. 
 
During the periods covered by these financial statements, Vantone Yuan also operated through the following subsidiaries:

Kang Ping Vantone Trading Co., Ltd (“Kang Ping”) was incorporated under the laws of LiaoNing Province in the PRC on March 20, 2008. Vantone Yuan owned 100% of the registered capital of its registered capital.  It engaged in the distribution and sales of daily commodities, consumer electronics, home appliances, and also engaged in the import/export of various merchandise and technologies through a self-conducted trade model or agency arrangement in Kangping County of Shenyang District.

Liaoning Vantone Insurance Agent Co., Ltd. (“Vantone Insurance”), in which Vantone Yuan acquired a 78% ownership interest on November 16, 2007.  On June 8, 2009 Vantone Yuan purchased a 10% ownership interest from the other shareholder. Therefore Vantone Yuan has held an 88% ownership interest since this change. Vantone Insurance engages in the insurance agency business, mainly representing the insurance products of New China Life Insurance Co., Ltd. ZhongYi Life Insurance Co., Ltd and Heng An Life Insurance Corporation in the Shenyang District of the PRC.

c.  
Fiscal Year

The Company’s fiscal year ends on March 31. The accompanying unaudited consolidated financial statements of operations and cash flows included activities for the six months ended September 30, 2011 and 2010, respectively.
 
 
 
6

 
 
d.  
Principle of Consolidation

The accompanying unaudited consolidated financial statements present the financial position, results of operations and cash flows of the Company and all entities in which the Company has a controlling voting interest. The unaudited consolidated financial statements also include the accounts of any variable interest entities in which the Company is considered to be the primary beneficiary and such entities are required to be consolidated in accordance with accounting principles generally accepted in the United States (“US GAAP”). These unaudited consolidated financial statements include the financial statements of Vantone International, Vantone USA, Vantone Small Financing, Vantone Manufacturing, and Vantone Manufacturing’s variable interest entities. All significant intercompany transactions and balances are eliminated in consolidation.

The accompanying unaudited consolidated financial statements are prepared in accordance with US GAAP. This basis of accounting differs from that used in the statutory accounts of some of the Company’s subsidiaries, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises with foreign investment in the PRC (“PRC GAAP”). Necessary adjustments made to the subsidiary statutory accounts to conform to US GAAP were included in these consolidated financial statements.

e.  
Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in United States requires management to make estimates and assumptions that affect the amount reported in the consolidated financial statements and the accompany notes. Actual results could differ from those estimates.

f.  
Foreign Currency Translation

The reporting currency of the Company is the U.S. dollar. The functional currencies of the Company's subsidiaries are local currencies, primarily the Chinese Renminbi. The financial statements are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the period for revenues and expenses. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss.
 
The following rates are used in translating the RMB to the U.S. Dollar presentation disclosed in these unaudited consolidated financial statements for the six months ended September 30, 2011 and 2010, respectively.
 
 
 
 
For The Six Months Ended September 30,
     
 
 
 
2011
 
 
 
2010
     
Assets and liabilities
period ended rate of RMB
    6.3843  
/per USD
    6.6912  
/per USD
 
 
 
 
 
 
 
 
     
Revenue and expenses
average rate of RMB
    6.4570  
/per USD
    6.7965  
/per USD

g.  
Accounts Receivable

Accounts receivable are recognized and carried at original invoice amount less allowance for any uncollectible amounts. The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of receivables. The estimated losses are based on a review of the current status of the existing receivables. The allowance for doubtful accounts for the six months ended September 30, 2011 and the fiscal year ended March 31, 2011 were $55,305 and $67,157, respectively.

h.  
Fair Value Measurements

For certain of the Company’s financial instruments, including cash and equivalents, accounts receivable, interests receivable, loans receivable, advanced to suppliers, inventories, prepaid and other current assets, deferred income tax assets, accounts payable and accrued expenses, customer deposits, taxes payable, and other current liabilities, the carrying amounts approximate their fair values due to the immediate or their short maturities.

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the consolidated balance sheets for receivables, certain other current assets and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
 
 
 
7

 
 
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.
  
i.  
Insurance Commissions Receivable and Payable

The Company has separately reflected receivables and payables in the consolidated financial statements. The captions “insurance commission receivable” and “insurance commission payable” result from insurance commission in connection with the Company’s agency commercial insurance services business. In general, the insurance commission was calculated based on the agency agreement with insurance carriers. Since the insurance carriers settled the insurance commission at fixed period, the Company recorded the commissions receivable from insurance carriers as “insurance commission receivable” when it incurred. Simultaneity, the Company calculated appropriate commission to agents and brokers as “insurance commission payable”.
 
j.  
Revenue Recognition

Revenue includes sales of products, insurance services rendered, small amount financing and mortgage service, VIP membership fee and network service fees collected.

Products revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers, net of allowance for estimated returns, when both title and risk of loss transfer to the customer, provided that no significant obligations remain. Deferred revenue represents the undelivered portion of invoiced value of goods sold to customers. Sales transactions for the products are generally accounted for using the deposit method. Under the deposit method, payments received from the buyer are recorded as customer deposits. Revenue is represented net of value added taxes (“VAT”) for the sales revenue from PRC subsidiaries.

Insurance service incomes result from the commission income relation to the insurance agreement sold. The Company recognizes the insurance service income upon the agency agreement with insurance company when the customer is bound to the contract after completion of any rescission period offered by the insurance underwriter.

The financing interest income was from micro financing service provided to the clients in China. The interests were calculated based on the loans agreement by both sides. The Company recorded loans principal and interests received in advance as “loans receivable” and “unearned income”, respectively.
 
The revenues from service included VIP membership fees and network service fees arising from E-commerce members. We recognize the service revenues upon the service period of the agreement signed by both sides. VIP memberships are short-term memberships. However, Network Service Memberships are permanent. Therefore, we are recognizing the revenue from Network Service Memberships for a term from the actual registered date to expiration date of the operations of Kang Ping Vantone.

k.  
Advertising costs
 
Advertising costs are booked as expenses as incurred. The Company incurred $23,231 and $0 for the six months ended September 30, 2011 and 2010.

l.  
Income Taxes

Vantone International and Vantone USA file federal consolidated income taxes. The Company’s PRC subsidiary, Vantone Small Financing and Vantone Manufacturing, file income tax returns under the Income Tax Law of the People's Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws. Vantone Yuan and its subsidiaries file income tax returns under the Income Tax Law of the People's Republic of China.

The Company follows the FASB issued ASC740 - Accounting for Income Taxes, which requires 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 tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes also are recognized for operating losses that are available to offset future income taxes.
 
 
 
8

 

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”), codified in FASB ASC Topic 740, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48, and the Company recognized no material adjustments to liabilities or stockholders’ equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements. On September 30, 2011 and March 31, 2011, the Company did not take any uncertain positions that would necessitate recording of tax related liability. 

m.  
Segment Reporting

ASC 280, Disclosure about Segments of an Enterprise and Related Information, requires disclosure of reportable segments used by management for making operating decisions and assessing performance. Reportable segments are categorized by products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. ASC 280 has effect on the Company’s financial statements. The Company generated four categories of revenues: products sold, commission received for insurance agency business, membership fees collected from members and Financing interest. See segment reporting spreadsheet on Note 15.

n.  
Recent Accounting Pronouncements
 
In June 2011, the FASB issued Accounting Standards Update (ASU) No.2011-05, “Comprehensive Income”. ASU No. 2011-05 amends the guidance with ASC Topic 220, “Comprehensive Income”, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income.
 
Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.
 
The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented.
 
The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.
 
Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company will adopt these new disclosure requirements on its financial statements and notes in the years or interim periods beginning after December 15, 2011.
 
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement”. ASU 2011-04 amends the guidance with ASC Topic 822, “Fair Value Measurement”. The amendments in this Update change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include the following:
 
1. Those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements
 
2. Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.
 
In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP). The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company will adopt these new disclosure requirements on its financial statements and notes in the years or interim periods beginning after December 15, 2011.
 
2.  
Cash Restricted and Loan Payable

In an attempt to better expand our small financing loans business and prompt the availability of external fund, Vantone Small Financing plan to make profits margins between low cost loans of bank and high lending to our customers. In order to keep friend relationship with China CITIC Bank and conveniently obtain the loans from China CITIC Bank in the near future, on January 27, 2011, Vantone Yuan entered into an entrusted loan agreement with China CITIC Bank Shenyang Branch (“China CITIC Bank”). At the same time, Vantone Small Financing also signed a loan agreement with China CITIC Bank. Pursuant to two agreements, Vantone Yuan must deposit the total amount of RMB 10 million into a special bank account that is restricted to be used only for lending and repayment loans. Simultaneously, China CITIC Bank lent such amount of RMB10 million to Vantone Small Financing at annual rate of 4.815% commencing from January 27, 2011 and ending June 29, 2011. In the event that Vantone Small Financing does not return this loan to China CITIC Bank for three months after due day, the amount of RMB 10 million deposited into special bank account will be hold by China CITIC Bank. As a result, cash restricted and loan payable of RMB 10 million (equivalent to $1,527,044) were represented as of March 31, 2011, respectively. As stated in the agreement, Vantone Small Financing repaid this loan of RMB 10 million (equivalent to $1,527,044) to China CITIC Bank on June 29, 2011. Concurrent with this transaction completion, the deposit of RMB10 million was fully returned to Vantone Yuan by China CITIC Bank at the same day.
 
 
 
9

 

3.  
Accounts Receivable and Allowance for Doubtful Accounts

We generally adopted the deposit method when we sold the products to our customers. However, we provided to major customers with short term credit before March 31, 2010 for purchase the jade mattresses with regulated temperature spiked and bamboo fiber quilts from us to grasp the market opportunity and prompt our revenue, as of result that China experienced the coldest winter in fifty years during the winter in the year 2009. Therefore, it caused the significant increase in outstanding accounts receivable as of March 31, 2010. Whereas we collected actively the accounts receivable in the past eighteen months through our efforts, the outstanding accounts receivable balance as of September 30, 2011 was only accounted for 12.80% of the total account receivable incurred as of March 31, 2010. Since the remains amount of accounts receivable as of September 30, 2011 mostly resulted from four major customers who kept friendly and long-term cooperative relationship with us, the Company agreed to extend the credit to December 2011 to support their operation business.

The accounts receivable amounts included in the consolidated balance sheets as of September 30, 2011 and March 31, 2010 were as follows: 
 
   
September 30, 2011
   
March 31,
2011
 
 
 
(Unaudited)
   
(Audited)
 
Distributors who had owed the Company more than                
   USD78,317 (equivalent to RMB 0.5 million)
 
$
490,399 
   
$
660,881
 
Distributors or Customers who had owed the Company
               
   equal or less than USD78,317 (equivalent to RMB 0.5 million)
   
64,761 
     
10,689
 
Sub-total     555,160       671,570  
Less: Allowance for doubtful accounts     55,305       67,157  
Accounts receivable, net   $ 499,855     $ 604,413  
 
As of September 30, 2011 and March 31, 2011 the gross amount of accounts receivable balance was $555,160 (equivalent to RMB 3,544,298) and $671,570 (equivalent to RMB 4,397,846), respectively.

The following is a summary of the status of allowance for doubtful accounts as of September 30, 2011 and 2010.
 
Period
 
Amount
 
Period
 
Amount
 
As of March 31, 2011
 
$
67,157
 
As of March 31, 2010
 
$
427,357
 
As of June 30, 2011
 
$
54,628
 
As of June 30, 2010
 
$
338,746
 
As of September 30, 2011
 
$
55,305
 
As of September 30, 2010
 
$
82,764
 

The Company uses the allowance method to estimate the uncollectible portion of its account receivables. Based on the percentage of outstanding receivable approach, the Company should record bad debt expense in the debit and the related credit to the allowance account at closing day. The Company maintains a reserve for uncollectible accounts of 10% of accounts receivable commencing from January 2010. As of September 30, 2011 and March 31, 2011 the allowance for doubtful accounts was $55,305 (equivalent to RMB 353,085) and $67,157 (equivalent to RMB 439,785) respectively.
 
Accounts receivable aging as of September 30, 2011 and March 31, 2011 consisted of the following:

   
September 30, 2011
   
March 31,
2011
 
   
(Unaudited)
   
(Audited)
 
More than 91 days and less than 180 days
 
$
2,107
   
$
-
 
More than 365days
   
553,053
     
671,570
 
Total
 
$
555,160
   
$
671,570
 

The Company’s accounts receivable with ages of more than 91 days and less than 180 days of $2,107 and more than 365 days of $553,053, as reflected in the table, was primarily attributable to the fact that the Company’s accounts receivable generated for the fiscal year ended March 31, 2010.
 
4.  
Loans Receivable, Net

Vantone Small Financing was established on September 27, 2010. It accepted its first loans transaction in October 2010, and started its business by providing micro financing service to the clients in China. In general, the Company considers historical credit losses, performance, economic and etc when the Company provides the loans to unrelated third parties. In order to reduce its risk, the Company sometimes withheld the full amount of loan interests before release the rest of principal loans amount to the borrowers, and these withhold interests income have been recorded as “unearned income”. In additional, the term of the loans is usually no longer than six months for the individuals.
 
 
 
10

 

In order to encourage our borrowers to establish the franchise physical stores, the Company implemented a new policy beginning on April 12, 2011. Pursuant to this new policy, the loans may be applied for the extension to six months after due date, if the borrowers establish the franchise physical stores, and begin the operation business before October 31, 2011. In addition, such borrowers must submit a commitment letter, and agree to offset our losses by the profit generating from franchise physical stores, in the event that the defaults occur. For the extension loans, the principal and interest will be repaid at mature date with monthly rate of 1.95%. As of September 30, 2011, the total amount of $5,706,673 (equivalent to RMB 36,433,000) was extended.

Our goal is to set up 110 physical stores by the end of December 31, 2011. We adopted a preferential policy to encourage more new customers to open franchises with us, commencing from July 10, 2011. According to such preferential policy, the Company will provide a maximal amount of loans (equivalent to annual rental fee of six multiple if the borrowers set up the franchise physical stores located inside the second ring road of Shenyang, otherwise, to annual rental fee of five multiple) to our new borrowers for the period of five years with monthly interest rate of 0.8625%, if such borrowers intend to open franchise physical stores with us and satisfy our requirements, such as providing individual certification, long-term lease agreement and etc. In addition, such borrowers must agree to use the operation right of franchise physical stores as a pledge within five years. As of September 30, 2011, the total amount of $298,076 (equivalent to RMB 1,903,000) was loaned to such borrowers.
 
Except that, on June 9, 2011, Vantone Small Financing filed a complaint in the Heping District Court of Shenyang City, China (the "Court") against four individual borrowers, Shengli Liu, Yan Jing, Genshe Bai and Pengcheng Chen (collectively, the "Individual Defendant"). We claim that the four Individual Defendants have breached their personal pledged loan agreements with Vantone Small Financing due to the non-repayment of the total principal of RMB 6.7 million, or approximately $1,049,453. In the complaint, Vantone Small Financing requests the Court to grant the following relief: 1) The four Individual Defendants must timely return the total principal with interest due from due dates to payment and; 2) the Court shall award Vantone Small Financing any and all costs in connection with this lawsuit, including but not limited to the attorney fees. On September 1, 2011, the Court made the following ruling: 1) The four Individual Defendants must timely return the total principal with interests from due dates to payment date at rate of 1.62% per month, totaling to loans principal of total amount of RMB 6.7 million (or approximately $1,049,453) plus total interests; 2) The four Individual Defendants must pay the penalty interest from April 20, 2011 to September 30, 2011 at rate of 50% of 0.054% per day; 3) the Court shall award Vantone Small Financing any and all costs in connection with this lawsuit, including but not limited to the attorney fees, totaling to RMB 277,597 (or approximately $43,481). On September 29, 2011, the Court sent an assistance notice to Chang’an Branch, Xi’an Land and Resources, in order to assist to close down the two parcels of 15.586 Mu (equate to 10,390.667 square meters) land use right Xi’an Hanxin Science and Technology Co. Ltd, located in Beida village East Town Chang’an County.
 
The following table presents the details of the Company's loans receivable, net.

   
Loan receivable
   
Allowance of loans losses
   
Unearned interest income
   
Total loans receivable
 
Outstanding, April 1, 2011
 
$
7,053,111
   
$
70,531
   
$
16,378
   
$
6,966,202
 
Increased
   
1,091
     
282,179
     
-
     
(281,088
)
Decreased
   
-
     
-
     
16,378
     
(16,378
)
Outstanding, September 30, 2011
 
$
7,054,202
   
$
352,710
   
$
-
   
$
6,701,492
 

The following is a summary of the status of allowance of loans losses as of September 30, 2011 and March 31, 2011:
 
Breakdown of loan principal
 
Loan principal as of 9/30/2011
   
Bad debt rate
   
Allowance of loans losses as of 9/30/2011
   
Loan principal as of 3/31/2011
   
Bad debt rate
   
Allowance of loans losses as of 3/31/2011
 
Expired loans
 
$
1,049,453
     
5
%
 
$
52,473
   
$
-
     
5
%
 
$
-
 
Extension loans
   
5,706,673
     
5
%
   
285,334
     
-
     
5
%
   
-
 
Unexpired loans
   
298,076
     
5
%
   
14,903
     
7,053,111
     
1
%
   
70,531
 
Total amount
 
$
7,054,202
           
$
352,710
   
$
7,053,111
           
$
70,531
 

Generally, the aging of extension loans refer to as less than one year, and the aging of unexpired loans generally refer to as less than six months.

Vantone Small Financing uses the allowance method to estimate the uncollectible portion of its loans principal. Based on analysis of loans principal aging, the Company should record a provision for loans losses in the debit and the related credit to the allowance account at closing day. The Company adopted an allowance at 1% of the unexpired loans principal amount for the fiscal year ended March 31, 2011.
 
 
 
11

 

For the six months ended September 30, 2011, the Company adopted an allowance at 5% of the unexpired loans principal amount, primarily due to the fact that such portion of loans were long term, and lent new borrowers as described above, which caused an increase in uncollectible risk .
 
In connection with extended maturity, the Company considered to enhance the uncollectible risk. As a result, the Company determined that the allowance at 5% of the extension loans principal amount was used for the six months ended September 30, 2011. In addition, the Company believes that the Company probably receives the overdue loans of $1,049,453 ending this lawsuit. Therefore, the Company used an allowance rate at 5% of this portion during the six months ended September 30, 2011.
 
5.  
Inventories

Inventories as of September 30, 2011 and March 31, 2011 consisted of the following:

 
 
September 30, 2011
   
March 31,
2011
 
 
 
(Unaudited)
   
(Audited)
 
Raw materials
 
$
81,821
   
$
80,142
 
Finished goods
   
462,439
     
441,597
 
Total
 
$
544,260
   
$
521,739
 

Inventories turnover for the six months ended September 30, 2011 and 2010 consisted of the following:

   
For The Six Months Ended September 30,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Inventory turnover
   
0.01
     
2.46
 

Cost of goods sold decreased enormously for the six months ended September 30, 2011 as compared to the same period in 2010. However, average inventories increased significantly in the six months ended September 30, 2011 as compared to the same period in 2010. As a result, the inventories turnover figure for the six months ended September 30, 2011 was obviously less than in the same period in 2010. 

6.  
Advanced to Stockholders/ Officers, Net

Amounts advanced to stockholders/officers are unsecured, non-interest bearing, and have no set repayment date. As of September 30, 2011 and March 31, 2011, the total net amounts of advanced to the stockholders/officers were $2,477,673 and $2,435,135, respectively. This represented the net amounts lent by the Company to stockholders/officers. All advances to Mr. Honggang Yu occurred before May 14, 2009, the “Share Exchange” date. The net amount different in advanced to stockholders/officers between September 30, 2011 and March 31, 2011 was merely caused by the currency exchange rate different between September 30, 2011 and March 31, 2011.

   
September 30, 2011
   
March 31,
2011
 
   
(Unaudited)
   
(Audited)
 
Mr. Honggang Yu
 
$
2,477,673
   
$
2,435,135
 
Total
 
$
2,477,673
   
$
2,435,135
 

7.  
Property and Equipment-net

Property and equipment, less accumulated depreciation, consisted of the following:

   
Estimated
   
September 30, 2011
   
March 31,
 2011
 
   
Life
   
(Unaudited)
   
(Audited)
 
                         
Buildings
   
20
   
$
754,398
   
$
2,063,092
 
Vehicles
   
3-5
     
206,186
     
201,013
 
Equipments and office furniture
   
5
     
84,702
     
79,802
 
Software
   
3
     
45,687
     
44,541
 
Subtotal
     
1,090,973
     
2,388,448
 
Less: Accumulated depreciation
     
388,391
     
583,414
 
Total
   
$
702,582
   
$
1,805,034
 

Depreciation expenses charged to operations were $86,398 and $83,939 for the six months ended September 30, 2011 and 2010, respectively.
 
 
 
12

 

8.  
Non-Operating Property
  
In January, 2011, our entrust agreements entity Vanton Yuan entered into a Purchase Agreement (the “Agreement”) with Liaodong Island Real Estate Development Co., Ltd (“Liaodong Island”) and Department of Land and Resources of Liaoning (“Land and Resource of Liaoning”) to acquire the ownership certificate of the building located at 28# KunShan West Road Apt A3, Shenyang City, China, which is near by the North Train station of Shenyang with approximately 1,800 square meters construction space (the “Building”). This Building was originally developed by Liaodong Island and Land and Resource of Liaoning. Vantone Yuan possesses the purchase amount payment invoice of purchasing the Building from Liaodong Island under the fully executed purchase agreement entered into between Vantone Yuan, Liaodong Island and Land and Resources of Liaoning. However, it was found that this Building was originally owned by Land and Resource of Liaoning after the completion of construction. According to the regulations in PRC, Vantone Yuan must submit the application to Shenyang Real Estate Trading Center to transfer the ownership certification of this Building from Land and Resource of Liaoning to Vantone Yuan. Since Liaodong Island and Land and Resources of Liaoning failed to perform their respective contractual obligations under the above Agreement, the title of invoice was not issued in accordance with ownership of this Building, Vantone Yuan cannot acquire the ownership certificate of this Building. Despite the fact that Vantone Yuan actively negotiated with the relevant parties and signed the Purchase Agreement of this Building with Land and Resource of Liaoning in January 2011, the Land and Resource of Liaoning has  not provide the invoice to Vantone Yuan.

The Company (“Plaintiff”) has initiated a lawsuit against Land & Resource of Liaoning and Liaodong Island (collectively, the “Defendants”) in the Huanggu District Court, Shenyang City, China (the “Court”) on August 4, 2011, the Company believes Defendants have breached the purchase agreement of the Building located at 28# KunShan West Road Apt A3, Shenyang City, China, with Vantone Yuan because the Defendants failed to assist Vantone Yuan to obtain the ownership title certification of the Building, after Vantone Yuan has duly performed the contractual obligations of full purchase payment under the above purchase agreement In the complaint, Plaintiff requests that the Court, the following relief: 1) the Defendants must timely transfer the ownership certification of the Building to the title of Plaintiff; 2) the Court shall award damages to Plaintiff due to delay to transfer the ownership certification of this building to Plaintiff, totaling to RMB38,183.60 (USD $ 5,981); and 3) the Court shall award Plaintiff costs in connection with the action.  If the Plaintiff loses this lawsuit, Vantone Yuan may still use this building, and Vantone Yuan will delay to obtain the ownership certification of this building.

Moreover, in order to decorate this building, the Company has advanced the total amount of RMB 1,383,529 to Liaodong Island as of September 30, 2011. The Plaintiff did not demand for this amount of advanced costs for decoration of the Building against the Defendants. The Company expects to have its insurance operation business move to this Building after the interior decoration is completed within the year 2011. Due to the above lawsuit, there is no assurance that the Company can use this Building in year 2011. Since this Building is not used in any operating activity as of September 30, 2011, the Company does not include it in the depreciation as of September 30, 2011. The net amount different in non-operating property between September 30, 2011 and March 31, 2011 was merely caused by the currency exchange rate different between September 30, 2011 and March 31, 2011.

   
September 30, 2011
   
March 31,
2011
 
   
(Unaudited)
   
(Audited)
 
             
Non-Operation Buildings
 
$
1,270,427
   
$
1,238,549
 
Less: Accumulated depreciation
   
-
     
-
 
Total
 
$
1,270,427
   
$
1,238,549
 

9.  
Investment Property

In May 2006, the major shareholder of Vantone Insurance invested a building with approximately 1,390 square meters to acquire the ownership of Vantone Insurance, which was located in #195 Zhong Shan Road, Sunshine Plaza 16 Floor, Heping District Shenyang City. In September 2007, Vantone Yuan purchased an office space with approximately 1,390 square meters located in the same district of Sunshine Plaza 17 Floor. The Company used these two floors as their executive office until May 2011.
 
In June 2011, Vantone Insurance leases its floor space (16 floor of Sunshine Plaza) of about 1,390 square meters for RMB 695,000 per year to an unrelated party. The term of this lease agreement was for two years from June 1, 2011 to May 30, 2013. In addition, Vantone Yuan leases its floor space (17 floor of Sunshine Plaza)  of about 530 square meters for RMB 265,000 every year from June 1, 2010 to May 30, 2013 and space of about 655 square meters for RMB294,750 per year commencing from July 20, 2011 and ending July 19, 2013, respectively. These two floors space were recorded as our properties at cost and depreciation of properties were computed by using the straight-line method over the estimated useful lives before June 2011. According to the requirement for GAAP accounting treatment, the Company reclassified these lease floor spaces as investment property since June 2011.
 
 
 
13

 

As of September 30, 2011 and March 31, 2011, Investment Properties consisted of the following: 

   
Estimated
   
September 30, 2011
   
March 31,
 2011
 
   
Life
   
(Unaudited)
   
(Audited)
 
Buildings
   
20
   
$
1,361,794
   
$
-
 
Less: Accumulated depreciation
     
297,416
   
- 
 
Total
   
$
1,064,378
   
$
-
 

10.  
Taxes Payable

a.  
Corporation Income Tax (“CIT”)

Vantone International and Vantone USA file federal consolidated income tax returns. Vantone Small Financing, Vantone Manufacturing and its Kang Ping branch file income tax returns under the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws. Vantone Yuan and its subsidiaries file income tax returns under the Income Tax Law of the PRC concerning China Private Enterprises and local income tax laws.
 
In accordance with the relevant PRC tax laws and regulations, Vantone Manufacturing is subject to CIT at 27% and 25% tax rate before, on and after January 1, 2008, respectively. However, on April 14, 2010, in accordance with the relevant tax laws and regulations of the PRC, Vantone Manufacturing was approved by PRC Tax Authority, and is entitled to full exemption from CIT for two years starting from January 1, 2008, and a 50% reduction in CIT for the next three years, As a result, Vantone Manufacturing was entitled to a full exemption from CIT for the years 2008 and 2009. Commencing from January 2010, Vantone Manufacturing began to be charged CIT at a 12.5% rate, half of regular CIT rate 25%.

On June 22 and August 31, 2010. Vantone Manufacturing’s Kang Ping branch was approved for cancellation of national and local tax registration by Liaoning KangPing National and Local Tax Bureau, respectively.

Vantone Yuan and its subsidiaries are subject to CIT at 33% and 25% tax rate before, on and after January 1, 2008, respectively. However, Vantone Yuan had been exempted from CIT for a period from April 12, 2007 to December 31, 2007 by Shenyang City Heping Region National Tax Authority.
 
The deferred tax assets, current, in the accompanying balance sheet were $367,660 and $207,765 as of September 30 and March 31, 2011, respectively. There were no deferred tax liabilities as of September 30, 2011 and March 31, 2011. All of deferred tax assets were from Vantone Small Financing and Vantone Manufacturing, and Vantone Manufacturing’s variable interest entities in the PRC. The deferred tax assets primary resulted from tax credit carry forward and the bad debt allowance.

The components of the provisions for income taxes were as follows:

 
 
For The Six Months Ended September 30,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
   
(Unaudited)
 
Current
 
$
178,535
   
$
244,985
 
Deferred income tax benefits
   
(152,807
)
   
(48,565
)
Total
 
$
25,728
   
$
196,420
 
 
The following is a reconciliation of the statutory tax rate to the effective tax rate for the six months ended September 30, 2011 and 2010:

 
 
For The Six Months Ended of September 30,
 
   
2011
   
2010
 
 
 
(Unaudited)
   
(Unaudited)
 
U.S. statutory corporate income tax rate
   
34%
     
34%
 
PRC tax rate difference
   
(9)%
     
(9)%
 
Net effect of tax exemption/non-taxable
               
income/non-deductible expenses
   
(41)%
     
(7)%
 
Effective tax rate
   
(16)%
     
18%
 
 
 
 
14

 
 
The tax effect of temporary differences that give rise to the Company’s deferred tax assets as of September 30, 2011 and March 31, 2011 were as follows:

 
 
September 30, 2011
   
March 31,
2011
 
 
 
(Unaudited)
   
(Audited)
 
Deferred income taxes assets :
 
 
   
 
 
Bad debt allowance
 
$
88,178
   
$
17,633
 
Loss carry forward
   
279,482
     
190,132
 
Total deferred income taxes assets - current
 
$
367,660
   
$
207,765
 
 
b. 
Value Added Tax (“VAT”)

Vantone Manufacturing and Vantone Yuan’s subsidiaries are subject to VAT on merchandise sales in PRC. Since Vantone Manufacturing engages in the manufacture and processing business, a small scale VAT rate of 6% was applicable before January 1, 2009. For Vantone Yuan’s subsidiaries whichever engage in distribution and sales of daily commodities, a small scale VAT rate of 4% was applicable prior to January 1, 2009. According to China VAT regulations, commencing from January 1, 2009, all small scale VAT rates have been changed to 3%. On July 1, 2009, Vantone Manufacturing becomes a general taxpayer and the tax rate was changed from 3% to 17%.

Kang Ping is subject to VAT on merchandise sales in the PRC. A small scale VAT rate of 4% was applicable prior to January 1, 2009, a rate of 3% was applicable after January 1, 2009, and a general VAT rate of 17% is applicable for the merchandise sales on and after April 1, 2009, since its sales amount within one year had achieved a level which subject to general VAT rate of 17%.

Vantone Yuan is also subject to VAT on merchandise sales in the PRC. A small scale VAT rate of 4% was applicable prior to February 1, 2008, and a general VAT rate of 17% was applicable for the merchandise sales on and after February 1, 2008, respectively.
 
c.  
Business Tax (“BT”)

The Company is also subject to business tax, which is charged on the service income at a rate of 5% in accordance with the tax law in Liaoning Province of PRC. The service income in the company as follows: insurance agent service, VIP membership fees, network service fees and small amount financing and mortgage service.

d.  
Taxes Payable
 
As of September 30, 2011 and March 31, 2011, taxes payable consisted of the following:

 
 
September 30, 2011
   
March 31,
2011
 
 
 
(Unaudited)
   
(Audited)
 
Value-added taxes
 
$
(86,797
)
 
$
(28,720
)
Corporate income tax provision
   
472,778
     
287,889
 
Business taxes
   
10,998
     
(5,988
)
Individual income tax withholdings
   
90
     
655
 
City construction, education, and other taxes
   
1,994
     
8,815
 
Total
 
$
399,063
   
$
262,651
 

11.  
Deferred Revenue-VIP and Network

In April 2010, the Company established an insurance B2C e-commerce trade platform named “Vantone Insurance Online Shop” (“Vantone Online”). Once the customer register to our membership (it refers to VIP membership), it can enjoy more convenient service by Vantone Online. In general, we charge registration fee for one year. As a result, we recognized the partial amount as revenues and the rest of amount as “deferred VIP membership revenue” when we received registration fees. Hereafter we will record to revenue from “deferred VIP membership revenue” based on the service period. As of September 30, 2011 and March 31, 2011, the deferred VIP membership revenues were $0 and $248,387, respectively.

Further, the insurance agent registers to permanent membership. Pursuant to this condition, we recognized the partial amount as revenues and the rest of amount as “deferred network service revenue” when we received registration fees. Hereafter we will record to revenue from “deferred network service revenue” based on the service period from payment to expiration date of operations of Kang Ping Vantone. As of September 30, 2011, the deferred network service revenue-current and non-current were $4,311 and $24,790 respectively.
 
 
 
15

 
 
12.  
Operating Lease Commitments

The Company leases certain office spaces under operating lease agreements. The rental expenses under operating leases were $19,997 and $18,247 for the six months ended September 30, 2011 and 2010, respectively. The following is a schedule of future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms beyond September 30, 2011.

For The Fiscal Years Ending September 30,
 
Amount
 
       
2012
 
$
46,911
 
2013
   
17,914
 
2014
   
12,080
 
2015
   
12,080
 
2016
   
9,060
 
Total minimum rental payments required
 
$
98,045
 

13.  
Stockholder’s Equity
 
a.  
Common Stock

The Company is authorized to issue 100,000,000 shares of Common Stock, $.001 par value per share, of which 30,001,000 shares are outstanding and issued as of September 30, 2011.

Before the Share Exchange with Vantone USA, Vantone International (formerly “Senior Optician”) had 5,954,000 shares of common stock issued and outstanding.

In exchange for the outstanding shares of Vantone USA, Vantone International issued 23,947,000 shares of its common stock to the shareholders of Vantone USA (the “Share Exchange”). Those shares represent 80.1 % of the outstanding shares of Vantone International 19,157,600 of the shares were issued to Honggang Yu, although he immediately assigned 14,368,200 of them to other shareholders for whom he served as nominee. Honggang Yu is the Chief Executive Officer of Vantone USA, as well as the Chief Executive Officer of Vantone International. The remaining 4,789,400 shares were issued to Jichun Li, the Chief Financial Officer of Vantone International, although he immediately assigned 3,831,520 of them to other shareholders for whom he serves as nominee. As a result of these transactions, persons associated with Vantone now own securities that represent 97.4% of the equity in Vantone International.

In March 2008, the Company and Gregory M. Wilson agreed to exchange a common stock warrant for 800,000 shares issued to Mr. Wilson on March 31, 2006 for a new common stock purchase warrant (the “Wilson Warrant”).  The Wilson Warrant permitted Mr. Wilson to purchase 800,000 shares of the Company’s common stock for a price equal to the lesser of (a) fifty percent of the lowest closing bid price quoted between March 31, 2006 and the exercise date or (b) $0.02 1/2 . The Wilson Warrant could be exercised by payment in cash of the exercise price or by a cashless exercise procedure. In lieu of exercise, either Mr. Wilson or the Company could cause the Wilson Warrant to be exchanged for shares of the Company’s common stock, except that the Company could not cause the exchange to occur until it had filed an 8-K reporting that it has ceased to be a shell company.  The number of shares issuable in exchange for the Wilson Warrant would be the greater of (a) 100,000 or (b) 0.33% of the outstanding shares, and the foregoing ratio shall not be affected by any reverse split of the Company’s common.

On May 24, 2010, the Company issued 100,000 common shares in exchange for the Wilson Warrant.
 
Upon completion of the Share Exchange and warrant exchange, there were 30,001,000 shares of the Company’s common stock issued and outstanding as of September 30, 2011.

b.  
Additional Paid-In Capital

The additional paid-in capital represents the excess of the aggregate fair value of the capital contributed over the par value of the stock issued. There was $1,919,800 and $1,919,800 additional paid-in capital as of September 30, 2011 and March 31, 2011, respectively.
 
c.  
Dividends and Reserves

Under the regulations and laws of the PRC, net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) cumulative prior years' losses, if any; (ii) allocations to the "Statutory Surplus Reserve" of at least 10% of net income after taxes, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital; and (iii) allocations to any discretionary surplus reserve, if approved by shareholders.

The Company has not accrued "discretionary surplus reserve”, since it had not been approved by the shareholders of the Company.
 
 
 
16

 

The Company established and segregated in reserve funds an aggregate amount of $877,446 and $865,816 for the Statutory Surplus Reserve as of September 30, 2011 and March 31, 2011, respectively.

14.  
Proxy Agreement, Entrusted Management Agreement, and Purchase Option and Cooperation Agreement
 
Effective as of April 1, 2007, Vantone Manufacturing entered into three agreements with Vantone Yuan and/or the shareholders of Vantone Yuan:  the Entrusted Management Agreement, the Proxy Agreement, and the Purchase Option and Cooperation Agreement.  Summaries of the agreements follow:

Proxy Agreement: In this agreement, the shareholders of Vantone Yuan assigned to Vantone Manufacturing their voting rights and all other shareholders rights, including the right to attend and vote such shares at any shareholder’s meeting of the Company (or by written consent in lieu of a meeting) without any limitations. The effective term of this agreement shall be ten (10) years and may be extended by the written agreement among the parties upon the expiration of this agreement.
  
Entrusted Management Agreement:  In this agreement, the shareholders of Vantone Yuan entrusted Vantone Manufacturing to manage all assets and debts of Vantone Yuan. The term of this Entrusted Management Agreement shall be from April 1, 2007 to the earlier of the following:

1)
March 31, 2017,

2)
the winding up of Vantone Yuan,

3)
the termination date of this Entrusted Management Agreement to be determined by the parties, or

4)
the date on which Vantone Manufacturing completes the acquisition of Vantone Yuan.

In exchange for the services of Vantone Manufacturing pursuant to this Entrusted Management Agreement, Vantone Yuan and its shareholders shall pay an entrusted management fee to Vantone Manufacturing. The entrusted management fee shall equal Vantone Yuan’s net profits, being the monthly revenues after deduction of operating costs, expenses, and taxes. If the net profit is zero, Vantone Yuan is not required to pay the entrusted management fee; if Vantone Yuan sustains losses, all such losses will be carried over to next month and deducted from next month's entrusted management fee.  Vantone Manufacturing and Vantone Yuan shall calculate, and Vantone Yuan and its shareholders shall pay, the monthly entrusted management fee at the conclusion of each month.

In addition, Vantone Manufacturing shall assume all operation risks arising out of the operations of Vantone Yuan and bear all losses of Vantone Yuan. If Vantone Yuan does not have sufficient funds to repay its debts, Vantone Manufacturing is responsible for paying these debts on behalf of Vantone Yuan. If Vantone Yuan's net assets are lower than its registered capital, Vantone Manufacturing is responsible for funding the deficit.

Purchase Option and Cooperation Agreement:  In this agreement, the  shareholders of Vantone Yuan granted to  Vantone Manufacturing the exclusive option to acquire, at any time upon satisfaction of the requirements under the PRC law, the entire or a portion of all shareholders’ shares of equity or/assets owned by Vantone Yuan.
 
By reason of these three agreements, Vantone Manufacturing is considered to be the primary beneficiary of Vantone Yuan and its subsidiaries. Vantone Yuan and its subsidiaries are considered to be the variable interest entities of Vantone Manufacturing. Since Vantone International is the 100% equity owner of Vantone Manufacturing,   Vantone Manufacturing and Vantone Manufacturing’s variable interest entities shall be required to be consolidated into the Company’s financial statements in accordance with accounting principles generally accepted in the United States (“US GAAP”).

On October 18, 2011, we terminated the three agreements: Entrusted Management Agreement, Proxy Agreement, and Purchase Option and Cooperation Agreement. Additional information is disclosed in Note 18.

15.  
Segment Reporting
 
The Company engages in three types of business activities: daily commodities (including healthcare and beauty products, feminine hygiene products) sales, insurance agency service, and small financing service. In addition, the Company collects the VIP membership and network service fees from the clients who would like to enjoy the discount on the merchandises they purchased from the Company on line. Network service members not only can buy or/and sell the Company’s daily commodities, but also joints the Company as one of its insurance agent. The chief operating decision makers evaluate performance, make operating decisions, and allocate resources based on the separated type of business financial data. Gross profit, operating income, income from operations, and income taxes are allocated to specific business activities within the organization. In accordance with ASC 280 “Disclosures about Segments of an Enterprise and Related Information” the Company is considered to have three reportable segments. The Company is required to disclose certain information about profit or loss, total assets and liabilities and long-lived assets. Following is a summary of segment information for the six months ended September 30, 2011 and 2010:
 
 
 
17

 
 
 
For The Six Months Ended September 30, 2011
 
 
Products Sold
   
Insurance Agency
   
Financing Interest
   
Total
 
 
and Related Service
   
Related Service
   
Related Service
 
 
 
   
 
   
 
   
 
 
Total assets
  $ 9,010,916     $ 795,121     $ 7,262,956     $ 17,068,993  
Total long - lived assets, net
  $ 2,543,792     $ 491,548     $ 2,047     $ 3,037,387  
Total liabilities
  $ 422,842     $ 199,863     $ 211,721     $ 834,426  
                                 
Net revenue from products sold
  $ 13,039     $ -     $ -     $ 13,039  
Revenue from Insurance service rendered
  $ -     $ 2,935     $ -     $ 2,935  
Revenue from financing interests
  $ -     $ -     $ 640,872     $ 640,872  
Revenue from membership fees
  $ 251,911     $ -     $ -     $ 251,911  
Revenue from network service fees
  $ 2,131     $ -     $ -     $ 2,131  
(Loss) Income from operations
  $ (274,544 )   $ (73,877 )   $ 211,983     $ (136,438 )
Depreciation expenses
  $ 69,380     $ 16,639     $ 379     $ 86,398  
Bank interest income
  $ 23,893     $ 143     $ 415     $ 24,451  
Non-controlling interest
  $ -     $ (8,865 )   $ -     $ (8,865 )
Income tax (benefits) expenses
  $ (29,263 )   $ (16,845 )   $ 71,836     $ 25,728  
 
 
For The Six Months Ended September 30, 2010
 
  Products Sold
and Related Service
    Insurance Agency
Related Service
    Financing Interest
Related Service
   
Total
 
 
 
   
 
   
 
   
 
 
Total assets
  $ 15,940,357     $ 701,658     $ -     $ 16,642,015  
Total long - lived assets, net
  $ 2,561,147     $ 501,243     $ -     $ 3,062,390  
Total liabilities
  $ 1,799,188     $ 116,940     $ -     $ 1,916,128  
 
 
 
   
 
   
 
   
 
 
Net revenue from products sold
  $ 1,563,440     $ -     $ -     $ 1,563,440  
Revenue from Insurance service rendered
  $ -     $ 18,436     $ -     $ 18,436  
Revenue from financing interests
  $ -     $ -     $ -     $ -  
Revenue from membership fees
  $ 261,059     $ -     $ -     $ 261,059  
Revenue from network service fees
  $ -     $ 1,008     $ -     $ 1,008  
Income (Loss) from operations
  $ 1,179,261     $ (91,922 )   $ -     $ 1,087,339  
Depreciation expenses
  $ 67,599     $ 16,341     $ -     $ 83,939  
Bank interest income
  $ 5,584     $ 160     $ -     $ 5,744  
Non-controlling interest
  $ -     $ (7,452 )   $ -     $ (7,452 )
Income tax (benefits) expenses
  $ 226,181     $ (29,761 )   $ -     $ 196,420  

(1)  
Vantone Small Financing was established on September 27, 2010. Therefore, there were no financing services for the six months ended September 30, 2010.
 
16.  
Concentrations of Business

a.  
Major Customers

The following summarizes products sold to major customers (each 10% or more of total products sold):

 
             
Percentage of
 
For The Six Months Ended September 30,
 
Sold to Major
Customers
   
Number of
Customers
   
Total Products Sold
 
2011
 
$
6,735
     
3
     
51.65
%
2010
 
$
532,488
     
2
     
34.06
%

The following summarizes insurance agency service fees received from major insurance company (each 10% or more of total insurance agency service fees received):
 
 
18

 

 
 
Revenue from
         
Percentage of
 
For The Six Months Ended September 30,
 
Major
Insurance Co.
   
Number of
 Insurance Co.
   
Total Service Rendered
 
2011
 
$
2,935
     
3
     
100.00
%
2010
 
$
18,436
     
3
     
100.00
%
 
None of the Company’s customers from Vantone Small Financing accounted for more than 10% of total revenue from small financing interest income for the six months ended September 30, 2011.
 
b.  
Major Suppliers

The following summarizes raw materials and products purchased from major suppliers (each 10% or more of total raw material and products purchased): 

 
 
Purchased from
         
Percentage of
 
For The Six Months Ended September 30,
 
Major Suppliers
   
Number of
Suppliers
   
Total Purchased
 
2011
 
$
22,337
     
2
     
92.09
%
2010
 
$
749,700
     
5
     
98.25
%

17.  
Concentrations of Risks

Financial Risks:

The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. 
 
Credit Risk Management

In 2009, the financial office of the Liaoning province in China released regulations governing the running of a small loan company in the province. (Document NO. 68) http://www.lnjrw.gov.cn/financal/jrb/xl.aspx?ID=910487a7ea5a4249b39b806f9e93a6d9&Code=014004003.  Pursuant to the 2009 regulations, a small loan business that operates in the Liaoning province must comply with the following requirements:

1.  
Limitation of the capital source of a small loan company. The registered capital of a small loan company must come primarily from its shareholders, and the integrated capital cannot come from more than two banking and financial organizations. In addition, the integrated capital cannot be more than 50% of the company’s registered capital.
2.  
Loan interest rate limitation.  The regulation also required the upper limit of the loan interest rate must not exceed the interest rate requirement of judicial departments. The lower limit of the loan interest rate must be at least 0.9 times the China Central Bank loan base rate.

If we fail to comply with these regulations we may not be able to operate our small loan business in the Liaoning province and our profitability may suffer.

Vantone Small Financing is an emerging non-financial corporation in China, but due to the Chinese economic growth slows down, aggravate of the inflation and influence of the prospective on rising the interest rate, if we can’t expand investment channel effectively for attracting more clients, our profitability is hard to forecast. Vantone Small Financing business may occur the risk which the principal and interest is unable to recover, it might affect our profitability. As of September 30, 2011, four borrowers had defaulted on its loan payments to us.
 
Vantone Small Financing provides the micro loans in the ordinary course of business. The Company performs ongoing credit evaluations of its borrowers and maintains allowances for doubtful accounts based on factors surrounding the credit risk, historical trends, and other information. In order to reduce its risk, the Company required that the borrowers purchase the casualty insurance as a qualification to acquire the loans from the Company. Pursuant to the agreement about casualty insurance, the Company is as primary beneficiary and the Company receives the compensation in part from insurance carrier if the borrowers incurred some misfortune. In addition, all loans of the borrowers have been pledged by common stock of public companies in USA. Since the Company cannot predict the extent to which an active public market for the common stocks will develop or be sustained, once the market price of common stocks decline significantly, the Company recover its loans by sold those common stock may be futile if the defaults occurred. The resulting bad debts would reduce or eliminate our profits for the period in which the defaults occurred, and would reduce the working capital available to fund future operations.

Geographical Risks:

Substantially all of the Company’s operations are carried out through its subsidiaries located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the economy of the PRC. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in the United States. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by, among other things, changes in the political, economic and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, changes in the PRC's cork manufacture industry and regulatory rules and policies, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation.
 
 
 
19

 
 
18.  
Subsequent Events 

On October 12, 2011, our wholly-owned indirect subsidiary Shenyang Vantone Healthcare Products Manufacturing Co., Ltd. (“Vantone Manufacturing”) entered into share transfer agreements (the “Transfer Agreements”) with Honggang Yu and Jichun Li, respectively.  Such transfer was approved by Shenyang Administration of Industry and Commerce on October 18, 2011. Pursuant to the Transfer Agreements, Honggang Yu transferred 90% of the equity of Shenyang Vantone Yuan Trading Co., Ltd. (“Vantone Yuan”) to Vantone Manufacturing; and Mr. Jichun Li transferred 10% of the equity of Vantone Yuan to Vantone Manufacturing.  As a result of the two transfers Vantone Yuan is now our 100% wholly-owned indirect subsidiary.  Honggang Yu has served as our President, Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer since April 7, 2008.  Jichun Li has served as our Director and Vice President since May 14, 2009.  At our six months ended September 30, 2011, Mr. Yu and Mr. Li each owned 39.9% and 3.2%, respectively, of our common stock.  On October 18, 2011, we terminated the following three agreements:

(1)  
Entrusted Management Agreement, dated April 1, 2007, among Honggang Yu, Zhang, Jichun Li, Shenyang Vantone Yuan Trading Co., Ltd.  and Shenyang Vantone Healthcare Products Manufacturing Co., Ltd.;

(2)  
Proxy Agreement, dated April 1, 2007, among Shenyang Vantone Healthcare Products Manufacturing Co., Ltd., Shenyang Vantone Yuan Trading Co., Ltd., Honggang Yu and Jichun Li; and

(3)  
Purchase Option and Cooperation Agreement, dated April 1, 2007, among Honggang Yu, Jichun Li, Shenyang Vantone Yuan Trading Co., Ltd. and Shenyang Vantone Healthcare Products Manufacturing Co., Ltd.

These three agreements (the “Entrusted Management Agreements”) were terminated in connection with the entering into of the Transfer Agreements.  The Entrusted Management Agreements stipulated that Vantone Manufacturing will enjoy all of the profits and bear all of the losses arising from the business of Vantone Yuan during Vantone Manufacturing’s management period.  Pursuant to the terms of the Transfer Agreements, Vantone Yuan is now 100% wholly owned by Vantone Manufacturing, as a result of such direct ownership the Entrusted Management Agreements are no longer necessary.
 
 
 
20

 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of our financial condition and results of operations should also be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this prospectus. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

Overview

We operate as a diversified company in China, headquartered in Shenyang City. Our business consists of three primary segments: (i) the production and sales of water purification products, (ii) insurance agency service and (iii) small financing loans service. We also sell daily commodities, including health food, cosmetic skincare and women care products, etc. In 2010, we also sold electronic products.
 
From April 2007 to April 2010 we developed a sales network across China for our businesses, excluding our small loan business which was set up in September 2010.  During this time we established approximately 400 franchise stores, as well as branch offices in the Jilin and Heilongjiang Provinces. Through our sales network, we distributed approximately 70 different products, ranging from daily commodities such as health food and products, cosmetics and skincare products, vitamins, water filters, bamboo fiber products, jade mattresses with regulated temperature control, appliances, kitchenware, and insurance products.  In April 2010, we closed our 400 franchise stores and primarily operated our business through our website Vantone Online. At this time we encourage customers to open franchises with us. All members who registered as VIP members on Vantone Online could apply to open a merchandise franchise, and the members who meet insurance agent qualifications could also apply to open up an insurance franchise. We not only provided small loans for members to support their business, but also provided online order services and online payment services on Vantone Online. The members who opened a merchandise or insurance franchise with us receive professional training and instructions before they could operate the franchises. For the fiscal year ended March 31, 2011, we also allowed members to publicize their franchise stores on our website. Simultaneously, we decided to significantly change our business model to accommodate online orders and e-payment. 

In April 2011, in order to increase our sales volume, and satisfy our customers’ demands, we made the decision to open physical store locations in China. In April 2011, we retained a strategy company to design our VI logo, create a market analysis report, and conduct strategic development of our franchised owned stores.  Currently, we have stopped selling our products through our Vantone online website and stopped online member registration. Customers are now only able to make orders and purchase our products at our physical store locations, where they can also view samples of our products. By the end of October 2011, we have set up eighteen physical stores in the Liaoning province. Today our website is only be used for advertising our products and to provide information for our customers and our physical store locations

In order to increase the number of customers that visit our franchise stores, we intend to provide convenience services in the future, such as credit card payment services, telephone and cell phone prepaid services, travel agency services, traffic penalty payment services, water and electric bill payment services and IC card prepaid services, etc. We plan to start such convenience services commencing in the near future.
 
 
 
21

 

Results of Operations

Results of Operations for the Three Months Ended September 30, 2011 as Compared to the Three Months Ended September 30, 2010

 
 
 
For The Three Months Ended
September 30,
   
2011 Vs 2010
 
 
 
 
2011
   
2010
   
Increase /(Decrease)
 
Revenues
   
 
   
 
   
 
 
 
Products sold
  $ 7,065     $ 1,497,448     $ (1,490,383 )     -100 %
 
Sales discount for products
    (1,725 )     -       (1,725 )     100 %
 
Insurance service rendered
    1,134       9,562       (8,428 )     -88 %
 
VIP membership fees
    71,750       34,742       37,008       107 %
 
Network service fees
    1,072       -       1,072       100 %
 
Financing interest
    289,887       -       289,887       100 %
 
   Total Revenues, Net
    369,183       1,541,752       (1,172,569 )     -76 %
 
 
 
 
   
 
   
 
   
 
 
Cost of Goods Sold
   
 
   
 
 
 
Products sold
    1,524       556,281       (554,757 )     -100 %
 
Insurance service rendered
    1,090       8,982       (7,892 )     -88 %
 
VIP membership cost
    3,942       1,894       2,048       108 %
 
Network service cost
    58       -       58       100 %
 
Financing cost
    16,234       -       16,234       100 %
 
   Total Cost of Goods Sold
    22,848       567,157       (544,309 )     -96 %
 
 
 
 
   
 
   
 
   
 
 
Gross Profit
    346,335       974,595       (628,260 )     -64 %
 
 
 
 
   
 
   
 
   
 
 
Operating Expenses
   
 
   
 
 
 
Selling expenses
    12,772       4,127       8,645       209 %
 
Loss on disposal of fixed assets
    576       2,677       (2,101 )     -78 %
 
Bad debt recoveries
    (85 )     (256,882 )     256,797       -100 %
 
Provision for loan losses
    210,982       -       210,982       100 %
 
General and administrative expenses
    356,424       236,442       119,982       51 %
Total Operating Expenses
    580,669       (13,636 )     594,305       -4358 %
 
 
 
 
   
 
   
 
         
(Loss) Income From Operations
    (234,334 )     988,231       (1,222,565 )     -124 %
 
 
 
 
   
 
   
 
   
 
 
Other Income
   
 
   
 
   
 
 
 
Interest income, net
    3,649       3,122       527       17 %
 
Other income (expenses ), net
    11,243       (4 )     11,247       -281175 %
Total Other Income
    14,892       3,118       11,774       378 %
 
 
 
 
   
 
   
 
   
 
 
(Loss) Income Before Taxes
    (219,442 )     991,349       (1,210,791 )     -122 %
Provision for Income Taxes
    (17,209 )     155,025       (172,234 )     -111 %
(Loss) Income Before Noncontrolling Interest
    (202,233 )     836,324       (1,038,557 )     -124 %
 
 
 
 
   
 
   
 
   
 
 
 
Less: Net loss attributable to the noncontrolling interest
    (5,008 )     (3,901 )     (1,107 )     28 %
 
 
 
 
   
 
   
 
   
 
 
Net (Loss) Income Attributable to Vantone International
 
Group, Inc.
  $ (197,225 )   $ 840,225     $ (1,037,450 )     -123 %

Revenues

For the three months ended September 30, 2011, our revenues, net were $369,183 as compared to $1,541,752 for the three months ended September 30, 2010, a decrease of $1,172,569 or76%. The primary reason for the decrease in revenues resulted from the decrease of products sold income for the three months ended September 30, 2011 as compared to the same period in 2010.

During that period, our revenue net from the sale of products (identified as “product sold” on our statements of operations) decreased from $1,497,448 in the three months ended September 30, 2010 to $5,340 (Sales were $7,065 and discount were $1,725) (1.45% of total revenue) for the three months ended September 30, 2011. This occurred because the Company closed the Vantone Online website for the three months ended September 30, 2011.
 
 
22

 
 
Except for product sales, we also sold insurance products. Our insurance business remains insignificant.  For the three months ended September 30, 2011, our revenue from the sale of insurance services (identified as “insurance service rendered” on our Statements of Operations) fell to $1,134 from $9,562 for three months ended September 30, 2010. The primary reason for the lack of vitality in our insurance business was that we focused on initiating the Vantone Insurance B2C Network as our point of entry into the national insurance market.  The complexity of developing this mode of insurance marketing, which is new to China, delayed the expansion of our insurance business. At present we are uncertain of the future development of our insurance business, although we expect that over the long term it will grow into a significant factor in our overall revenue.

In addition, VIP membership fees increased to $71,750 in revenue for the three months ended September 30, 2011 from $34,742 for the three months ended September 30, 2010. Despite the fact that none of our new memberships were recruited for the three months ended September 30, 2011, arising from closing the Vantone Online in this period, we still realized more VIP membership fees during this quarter through our VIP members last fiscal year. Since Network Service Memberships are permanent, we still recognized $1,072 as Network service memberships for the three months ended September 30, 2011.

Our revenues of financing interest is our new profit point, which is primarily driven by lending to individual consumers, and generated net interest income of $289,887 for the three months ended September 30,2011. We had RMB 45,036,000 (equivalent to $7,054,202) in total loans outstanding as of September 30, 2011.

Cost of Goods Sold and Gross Profit

For the three months ended September 30, 2011, cost of goods sold amounted to $22,848 or 6.19% of net revenues as compared to cost of sales of $567,157 or 36.79% of net revenues for the three months ended September 30, 2010. Gross profit for the three months ended September 30, 2011 was $346,335 or 93.81% of total revenues, as compared to $974,595 or 63.21% of total revenues for the three months ended September 30, 2010. The gross margin increased primarily as a result that little cost is involved in acquiring the VIP & Network Service Memberships fees and financing interest income, which constituted 98.55% of total revenues.  
 
Operating Expenses
 
For the three months ended September 30, 2011, total operating expenses were $580,669 as compared to $13,636 income for the three months ended September 30, 2010, an increase of $594,305 or 4358%. The increase in total operating expenses was primarily due to an increase in selling, provision for loan losses and General & administrative expenses.  The increase in Selling expenses were primarily due to an increased in advertising costs associated with the establishment of franchise physical stores for the three months ended September 30, 2011. General and administrative expenses were 51% higher than in the three months ended September 30, 2010. The increase in general and administrative was mainly due to an increase in employee salaries, related to employee insurances, and management costs of Vantone Small Financing for the three months ended September 30, 2011. Moreover, we reversed a bad debt expense of $256,882 based upon the significant collection in accounts receivable outstanding for three months ended September 30, 2010. The provision for loan losses was $210,982 for the three months ended September 30, 2011. Pursuant to the management's estimate, we adopted the allowance for loan losses at 1% of outstanding loan principal beginning October 2010. In order to reduce the risk, we increased the allowance rate for loan losses to 5% of outstanding loans principal amount for the three months ended September 30, 2011. 
 
Other Income

For the three months ended September 30, 2011, total other income amounted to $14,892 as compared to $3,118 for the three months ended September 30, 2010, an increase of $11,774. This increased in other income was primarily attributable to the fact that the Company realized the rental income amount of RMB 285,266 (equivalent to $44,179) for the three months ended September 30, 2011.

Income Tax

Income taxes expense decreased by $172,234 to income tax benefit of $17,209 for the three months ended September 30, 2011 as compared to $155,025 for the three months ended September 30, 2010. This decrease was primarily due to the fact that our PRC subsidiaries incurred more losses for the three months ended September 30, 2011. Although Vantone Small Financing and Kang Ping realized profit during this quarter, it had been offset fully by those losses incurred our other subsidiaries for the three months ended September 30, 2011. As a result, income taxes expenses significantly reduced during this quarter ended September 30, 2011.
 
 
 
23

 

Results of Operations for the Six Months Ended September 30, 2011 as Compared to the Six Months Ended September 30, 2010.
 
     
For The Six Months Ended September 30,
   
 2011 Vs 2010
 
     
2011
   
2010
   
Increase /(Decrease)
 
Revenues
                       
 
Products sold
  $ 19,513     $ 1,563,440     $ (1,543,927 )     -99 %
 
Sales discount for products
    (6,474 )     -       (6,474 )     -100 %
 
Insurance service rendered
    2,935       18,436       (15,501 )     -84 %
 
VIP membership fees
    251,911       261,059       (9,148 )     -4 %
 
Network service fees
    2,131       1,008       1,123       111 %
 
Financing interest
    640,872       -       640,872       100 %
 
   Total Revenues, Net
    910,888       1,843,943       (933,055 )     -51 %
                                   
Cost of Goods Sold
                               
 
Products sold
    5,989       587,811       (581,822 )     -99 %
 
Insurance service rendered
    2,569       15,534       (12,965 )     -83 %
 
VIP membership cost
    13,793       14,228       (435 )     -3 %
 
Network service cost
    116       55       61       111 %
 
Financing cost
    35,889       -       35,889       100 %
 
   Total Cost of Goods Sold
    58,356       617,628       (559,272 )     -91 %
                                   
Gross Profit
    852,532       1,226,315       (373,783 )     -30 %
                                   
Operating Expenses
                               
 
Selling expenses
    40,403       5,397       35,006       649 %
 
Loss on disposal of fixed assets
    576       2,677       (2,101 )     -78 %
 
Bad debt recoveries
    (13,427 )     (347,723 )     334,296       -96 %
 
Provision for loan losses
    277,207       -       277,207       100 %
 
General and administrative expenses
    684,211       478,625       205,586       43 %
Total Operating Expenses
    988,970       138,976       849,994       612 %
                                   
(Loss) Income From Operations
    (136,438 )     1,087,339       (1,223,777 )     -113 %
                                   
Other Income
                               
 
Interest income, net
    6,016       5,744       272       5 %
 
Other expenses, net
    (33,151 )     (110 )     (33,041 )     30037 %
Total Other (Expenses) Income
    (27,135 )     5,634       (32,769 )     -582 %
                                   
(Loss) Income Before Taxes
    (163,573 )     1,092,973       (1,256,546 )     -115 %
Provision for Income Taxes
    25,728       196,420       (170,692 )     -87 %
(Loss) Income Before Noncontrolling Interest
    (189,301 )     896,553       (1,085,854 )     -121 %
                                   
 
Less: Net loss attributable to the noncontrolling interest
    (8,865 )     (7,452 )     (1,413 )     19 %
                                   
Net (Loss) Income Attributable to Vantone International
                               
Group, Inc.
  $ (180,436 )   $ 904,005     $ (1,084,441 )     -120 %
 
Revenues

For the six months ended September 30, 2011, our revenues, net were $910,888 as compared to $1,843,943 for the six months ended September 30, 2010, a decrease of $ 933,055 or 51%. The decrease in revenues was primarily attributable to the fact that the revenues arising from product sales reduced significantly for the six months ended September 30, 2011 as compare to the same period in 2010.
 
During that period, our revenue net from the sale of products (identified as “product sold” on our statements of operations) decreased from $1,563,440 in the six months ended September 30, 2010 to $13,039 (Sales were $19,513 and discount were $6,474) (1.43% of total revenue) for the six months ended September 30, 2011. This occurred because the Company closed the Vantone Online website for the six months ended September 30, 2011 and retained a strategy company to design a VI logo and conduct the market research report and create a physical store development report from April 2011 to July 2011. In addition, we spent more time assisting our customers to open franchise stores for the quarter ended September 30, 2011. This caused a significant decrease in product sales for the six months ended September 30, 2011 compare to the same period in 2010.  
 
Except for product sales, our insurance business remains insignificant.  For the six months ended September 30, 2011, our revenue from the sale of insurance policies (identified as “insurance service rendered” on our Statements of Operations) fell to $2,935 from $18,436 for six months ended September 30, 2010. The primary reason for the lack of vitality in our insurance business was that we focused on initiating the Vantone Insurance B2C Network as our point of entry into the national insurance market.  The complexity of developing this mode of insurance marketing, which is new to China, delayed the expansion of our insurance business. At present we are uncertain of the future development of our insurance business, although we expect that over the long term it will grow into a significant factor in our overall revenue.
 
 
 
24

 

In addition, VIP memberships fees were fell to $251,911 in revenue for the six months ended September 30, 2011 from $261,059 for the six months ended September 30, 2010. The primary reason was primarily attribution to the fact that none of new memberships had been recruited for the six months ended September 30, 2011, arising from closing the Vantone Online in this period. Since Network Service Memberships are permanent, we still recognized $2,131 as Network service membership for the six months ended September 30, 2011.

Our revenues of financing interest is our new profit point, which are primarily driven by lending to individual consumers, and generate net interest income $640,872 for the six months ended September 30,2011. We had RMB 45,036,000 (equivalent to $7,054,202) in total loans outstanding as of September 30, 2011.

Cost of Goods Sold and Gross Profit

For the six months ended September 30, 2011, cost of goods sold amounted to $58,356 or 6.41% of net revenues as compared to cost of sales of $617,628 or 33.49% of net revenues for the six months ended September 30, 2010. The decrease in cost for the six months ended September 30, 2011 was primarily due to the decrease in product sold for the six months ended September 30, 2011. Gross profit for the six months ended September 30, 2011 was $852,532 or 93.59% of total revenues, as compared to $1,226,315 or 66.51% of total revenues for the six months ended September 30, 2010. The gross margin increased primarily as a result that we realized high gross margins arising from the service rendered of VIP & Network Service Memberships fees and financing interest income for the six months ended September 30, 2011 which were constituted 98.57% of total revenues .
 
Operating Expenses
 
For the six months ended September 30, 2011, total operating expenses were $988,970 as compared to $138,976 for the six months ended September 30, 2010, an increase of $849,994 or 612%. The increase in total operating expenses was primarily due to an increase in selling expenses, provision for loan losses and General & administrative expenses. Selling expenses were $40,403 as compared to $5,397 for the six months ended September 30, 2010 an increase of 35,006 or 649% the increases due to an increased in advertising costs associated with the establishment franchise physical stores for the six months ended September 30, 2011. General and administrative expenses were 43% higher than in the six months ended September 30, 2010. The increase in general and administrative was mainly due to an increase in employee salaries, related to employee insurances, and management costs of Vantone Small Financing for the six months ended September 30, 2011. Moreover, we reversed a bad debt expense of $13,427 and $347,723 based upon the significant collection in accounts receivable outstanding for six months ended September 30, 2011 and 2010, respectively. The provision for loan losses was $277,207 for the six months ended September 30, 2011. Pursuant to the management's estimate, we adopted the allowance for loan losses at 1% of outstanding loan principal beginning October 2010. In order to reduce the risk, we increased the allowance rate for loan losses to 5% of the part of outstanding loans principal amount commencing from the six months ended September 30, 2011. 

Other Income

For the six months ended September 30, 2011, total other expenses amounted to $27,135 as compared to the other income of $5,634 for the six months ended September 30, 2010, an increase of $32,769. This increased for other expense was primarily attributable to the Company incurred the tax penalty expenses of RMB 301,544 (equivalent to $46,700) arising from the substandard invoices used by Kang Ping for the six months ended September 30, 2011. No such expenses were made in the six months ended September 30, 2010.

Income Tax

Income taxes expense decreased by $170,692 to $25,728 for the six months ended September 30, 2011 as compared to $196,420 for the six months ended September 30, 2010. This decrease was primarily due to more income taxes expense incurred by Kang Ping and Vantone Small Financing for the six months ended September 30, 2011.
 
Our business operates primarily in Chinese Renminbi (“RMB”), but we report our results in our SEC filings in U.S. Dollars.  The conversion of our accounts from RMB to Dollars will result in translation adjustments.  While our net income will be added to the retained earnings on our balance sheet; the translation adjustments will be added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since they will be more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  During the six months ended September 30, 2011, the effect of converting our financial results to Dollars was to add $389,148 to our accumulated other comprehensive income. 

Liquidity and Capital Resources
 
Operating working capital (total current assets less total current liabilities) increased by $204,563 from $13,017,407 as of March 31, 2011 to $13,221,970 as of September 30, 2011. The increase was primarily as of result of an increase in interests receivable, prepayments and other current assets and a decrease in account payable and accrued expense and deferred VIP membership revenue for the six months ended September 30, 2011. The ratio of current assets to current liabilities was 17.33:1.
 
The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended September 30, 2011 and 2010:
 
 
 
25

 
 
   
For The Six Months Ended September 30,
 
    2011    
2010
 
   
(Unaudited)
   
(Unaudited)
 
Cash (Used in) provided by:
           
Operating Activities
    (274,665 )     4,173,818  
Investing Activities
    1,683,722       (4,747 )
Financing Activities
    (1,527,044 )     -  

Cash used in operating activities was $274,665 for the six months ended September 30, 2011 as compared to $4,173,818 provided by operating activities for the six months ended September 30, 2010. The decreased in cash provided by operating activities was primarily a result of significantly decreased of operating income and collation in accounts receivable for the six months ended September 30, 2011.
 
Net cash provided by investing activities amounted to $1,683,722 for six months ended September 30, 2011 from $4,747 used in for the six months ended September 30, 2010. The increased in provided by cash was primarily attributable to the fact that we received the deposit of 10 million (equivalent to $1,527,044) from bank for the six months ended September 30, 2011, arising from a cash restricted transaction. Additional information is disclosed in Note 2 of the Company’s financial statements. No such transactions were made for the six months ended September 30, 2010. In addition, we lent principal of 1.9 million to individual customers to develop our small financing loans business for the six months ended September 30, 2011. 

Net cash used in financing activities amounted to $1,527,044 for the six months ended September 30, 2011 from $0 provided by for the six months ended September 30, 2010. The increase in cash used in financing activities was mainly due to the fact that Vantone Small Financing returned a loan of RMB 10 million (equivalent to $1,527,044) to bank for the six months ended September 30, 2011. Additional information is disclosed in Note 2 of the Company’s financial statements. No such transactions were made for the six months ended September 30, 2010.

We believe that we have sufficient funds to operate our existing business for the next twelve months. However, in addition to funds available from operating and loans from shareholders, we may need external sources of capital for our expansion of our business. There can be no assurance that we will be able to obtain such additional financing at acceptable terms to us, or at all.

Recent Accounting Pronouncements

In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU No. 2010-20 amends the guidance with ASC Topic 310, “Receivables” to facilitate financial statement users’ evaluation of (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The amendments in ASU No. 2010-20 also require an entity to provide additional disclosures such as a roll forward schedule of the allowance for credit losses on a portfolio segment basis, credit quality indicators of financing receivables and the aging of past due financing receivables. The Company is required to adopt ASU No. 2010-20 as of December 15, 2010 and the Company has adopted these new disclosure requirements on its financial statements and notes
 
In April 2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition” or ASU 2010-17. This update provides guidance on the recognition of revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in the period the milestone is achieved. The pronouncement is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. The adoption of this ASU does not have a material impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial statements. 
 
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 or results of operations.
 
 
 
26

 

Item 3. 
Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. 
Controls and Procedures.

(a) 
Evaluation of disclosure controls and procedures. Our disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by us in the reports we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) that information required to be disclosed by us in the reports it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of September 30, 2011 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
 
(b) 
Changes in internal control over financial reporting. During the period covered by this report, 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.

On June 9, 2011, Vantone Small Financing filed a complaint in the Heping District Court of Shenyang City, China against four individual borrowers, Shengli Liu, Yan Jing, Genshe Bai and Pengcheng Chen. We claim that the defendants have breached their personal pledged loan agreements with Vantone Small Financing due to the non-repayment of the total principal of RMB 6.7 million, or approximately $1,049,453). In the complaint, Vantone Small Financing requests the court to grant the following relief: 1) The defendants must timely return the total principal with interest due from due dates to payment and; 2) the court shall award Vantone Small Financing any and all costs in connection with the this lawsuit, including but not limited to the attorney fees.

On August 4, 2011, Vantone Yuan filed a complaint in the Huanggu District Court of Shenyang City, China against Liaodong Island and Land and Resource of Liaoning. We claim that the defendants breached the purchase agreement among Vantone Yuan and the defendants because the defendants failed to assist Vantone Yuan in obtaining the ownership title certification of the purchased property, after Vantone Yuan has duly performed the contractual obligations of full payment pursuant to the purchase agreement In the complaint, we requested the following relief: 1) the defendants must timely transfer the ownership certification of the property to Vantone Yuan; 2) the court shall award damages to the plaintiff due to delay in transferring the ownership certification of the property to the plaintiff, totaling to RMB 38,183.60, or approximately $5,981; and 3) the court shall award the plaintiff costs in connection with the action.

On September 1, 2011, the Court made the following ruling: 1) The four Individuals Defendants must timely return the total principal with interests from due dates to payment date at rate of 1.62% per month, totaling to loans principal of total amount of RMB 6.7 million (or approximately $1,049,453) plus total interests; 2) The four Individuals Defendants must pay the penalty interest from April 20, 2011 to September 1, 2011 at rate of 50% of 0.054% per day; 3) the Court shall award Vantone Small Financing any and all costs in connection with this lawsuit, including but not limited to the attorney fees, totaling to RMB 277,597 (or approximately $43,481).

On September 29, 2011, the Court sent an assistance notice to Chang’an Branch, Xi’an Land and Resources, in order to assist to close down the two parcels of 15.586 Mu (equate to 10,380.276 square meters) land use right Xi’an Hanxin Science and Technology Co. Ltd, located in Beida village East Town Chang’an County.

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).
 
 
 
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Item 5.
Other Information.

None.
 
Item 6. 
Exhibits.
 
Exhibit No.
 
Description
31.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

* In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.

 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
VANTONE INTERNATIONAL GROUP, INC.
     
Date: November 18, 2011
By:
/s/ Honggang Yu
   
Honggang Yu
   
Chief Executive Officer and Chief Financial Officer
   
(Duly Authorized Officer, Principal Executive Officer and Principal Accounting Officer)

 
 
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