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EX-31.1 - EXHIBIT 31.1 - PHOENIX ENERGY RESOURCE CORPexhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - PHOENIX ENERGY RESOURCE CORPexhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - PHOENIX ENERGY RESOURCE CORPexhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - PHOENIX ENERGY RESOURCE CORPexhibit31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - PHOENIX ENERGY RESOURCE CORPFinancial_Report.xls

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

[  ] 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: 000-52843

SILVAN INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

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

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

CHINA FORESTRY INDUSTRY GROUP, INC.
(Former name, former address and former fiscal year, if changed since last report)

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

Yes[ x ]        No[  ]

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

Yes[ x ]        No[  ]

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

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

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

 Yes[  ]        No [ x ]

The number of shares outstanding of each of the issuer’s classes of common stock, as of November 17, 2011 is as follows:

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



SILVAN INDUSTRIES, INC.
 
Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 2011

TABLE OF CONTENTS

 PART I 
 FINANCIAL INFORMATION 
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Item 4. Controls and Procedures 10
     
 PART II 
 OTHER INFORMATION 
     
Item 1. Legal Proceedings 11
Item 1A. Risk Factors 11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. (Removed and Reserved) 11
Item 5. Other Information 11
Item 6. Exhibits 11

i


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

1



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

F-1



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

    September 30,     December 31,  
    2011     2010  
    (Unaudited)        
ASSETS            
Current assets:            

Cash

$  72,045   $  362,810  

Restricted cash

  4,695,938     1,972,100  

Accounts receivable, net of allowance of $- and $27,252, respectively

  5,283,516     5,423,123  

Bills receivable

  2,050,560     -  

Inventory

  12,886,170     6,949,679  

Deposits and prepaid expenses

  18,235,277     10,557,660  

Other receivables

  1,330,905     777,236  

Due from related party

  1,451,047     -  

Taxes recoverable (Note 7)

  629,814     2,452,407  

Total current assets

  46,635,272     28,495,015  

Property, plant and equipment, net

  6,490,679     6,352,289  

Intangible assets, net

  9,224,452     6,666,591  

Construction in progress

  5,473,278     5,304,348  

Prepayment for property, plant and equipment

  7,570,071     1,833,096  
Total assets $  75,393,752   $  48,651,339  
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Current liabilities:            
Short term loans $  11,583,314   $  4,535,830  
Accounts payable   1,265,058     658,206  
Bills payable   8,609,220     2,730,600  
Customer deposits   1,553,063     1,936,733  
Other payables and accrued expenses   1,415,233     1,829,363  
Due to related party   -     1,527,080  
Income tax payable   4,293,711     2,501,229  
Total current liabilities   28,719,599     15,719,041  
Long term loans   7,983,095     -  
Total liabilities   36,702,694     15,719,041  
Commitments and contingencies (Note 18)            
Stockholders' equity            

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

  -     -  

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

  30,000     30,000  

Additional paid in capital – Stock and stock equivalents

  17,988,805     17,988,805  

Accumulated other comprehensive income

  3,341,490     2,291,124  

Retained earnings

  15,730,929     12,622,369  
Statutory reserve   1,599,834     -  
Total stockholders’ equity   38,691,058     32,932,298  
Total liabilities and stockholders’ equity $  75,393,752   $  48,651,339  
             

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

F-2



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
UNAUDITED

    Three months ended     Nine months ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Revenue $  10,711,139   $  8,771,019   $  29,611,048   $  25,696,546  
Cost of revenue   7,342,247     5,848,371     19,390,075     17,085,785  
Gross profit   3,368,892     2,922,648     10,220,973     8,610,761  
                         
Operating expenses                        
Selling expenses   269,467     27,834     995,699     146,481  
General and administrative expenses   697,341     322,625     1,602,111     1,062,610  
Total operating expenses   966,808     350,459     2,597,810     1,209,091  
Income from operations   2,402,084     2,572,189     7,623,163     7,401,670  
                         
Other income (expenses)                        
Interest income   642     -     24,217     -  
Interest expense   (464,170 )   (173,244 )   (1,099,182 )   (231,761 )
Other (expenses) income   (1,559 )   -     (31,923 )   43,988  
Value added tax refund   -     526,399     -     1,950,176  
Government grant   31,184     -     76,598     -  
Total other income (expenses)   (433,903 )   353,155     (1,030,290 )   1,762,403  
                         
Income before income taxes   1,968,181     2,925,344     6,592,873     9,164,073  
Less: Income tax expense   702,862     791,257     1,884,480     2,012,055  
Net income   1,265,319     2,134,087     4,708,393     7,152,018  
Other comprehensive income                        
Foreign currency translation gain   402,659     913,206     1,050,366     582,678  
Total comprehensive income $  1,667,978   $  3,047,293   $  5,758,759   $  7,734,696  
                         
Earnings per share                        
- Basic $  0.04   $  0.09   $  0.16   $  0.32  
- Diluted $  0.04   $  0.09   $  0.16   $  0.32  
Weighted average shares outstanding                
- Basic   30,000,000     22,590,044     30,000,000     22,590,044  
- Diluted   30,000,000     22,590,044     30,000,000     22,590,044  

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

F-3



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

    Nine months ended  
    September 30,  
    2011     2010  

Cash flows from operating activities

           

Net income

$  4,708,393   $  7,152,018  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

       

Depreciation

  299,852     208,350  

Amortization

  196,512     163,170  

Change in allowance for bad debts

  (27,687 )   -  

 

           

Changes in operating assets and liabilities:

           

Restricted cash

  (2,620,060 )   (1,647,059 )

Accounts receivable

  335,198     (2,898,226 )

Bills receivable

  (2,018,988 )   -  

Inventory

  (5,627,167 )   3,139,283  

Deposits and prepaid expenses

  (7,250,752 )   (4,769,454 )

Other receivables

  (520,792 )   23,846  

Taxes recoverable

  1,871,431     (1,883,773 )

Accounts payable

  576,869     (5,322,427 )

Bills payable

  5,702,484     1,647,059  

Customer deposits

  (438,494 )   (106,241 )

Other payables and accrued expenses

  (588,827 )   5,474,727  

Income tax payable

  1,686,453     1,563,159  

 

           

Net cash (used in) provided by operating activities

  (3,715,575 )   2,744,432  

 

           

Cash flows from investing activities

           

Acquisition of property, plant and equipment and construction in progress

  (5,828,086 )   (214,457 )

Acquisition of intangible assets

  (2,505,946 )   (5,988,000 )

Net cash used in investing activities

  (8,334,032 )   (6,202,457 )

Cash flows from financing activities

           

Net proceeds from issuance of common stock

  -     356,958  

Repayment of short term and long term loans

  (3,082,424 )   (733,530 )

Proceeds from short term and long term loans

  17,739,350     3,727,530  

Repayment of due to related party

  (2,900,237 )   -  

 

           

Net cash provided by financing activities

  11,756,689     3,350,958  

 

           

Effect of exchange rate changes in cash and cash equivalents

  2,153     329,050  

 

           

Net (decrease) increase in cash and cash equivalents

  (290,765 )   221,983  

Cash and cash equivalents, beginning of period

  362,810     748,493  

Cash and cash equivalents, end of period

$  72,045   $  970,476  

 

           

Supplemental Disclosures:

           

Cash paid during the period for:

           

Interest

$  1,099,182   $  231,761  

Income taxes

$  199,528   $  2,012,055  

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

F-4



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS

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

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

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

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

F-5



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS - CONTINUED

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

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

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

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

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

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

F-6



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

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

Principle of consolidation

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

F-7



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Reclassification

Restricted cash – Restricted cash accounts totaled $1,972,100 that serves as collateral for bills payable as of December 31, 2010 has been reclassified from cash to restricted cash on the consolidated balance sheet to conform to current presentation.

Prepayment for property, plant and equipment – Prepayment for property, plant and equipment of $1,833,096 as of December 31, 2010 has been reclassified from deposits and prepaid expenses to prepayment for property, plant and equipment on the consolidated balance sheet to conform to current presentation.

Due to related party – Amount due to related party of $1,527,080 as of December 31, 2010 has been reclassified from other payables and accrued expenses to due to related party on the consolidated balance sheet to conform to current presentation.

Other taxes payable – Other taxes payable of $789,252 as of December 31, 2010 has been reclassified from income tax payable to other payables and accrued expenses on the consolidated balance sheet to conform to current presentation.

Use of estimates

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

Significant Estimates

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

F-8



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Revenue recognition

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

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

Shipping and handling

Shipping and handling costs are included in cost of revenue and selling expenses which totaled $1,553 and $25,216 for the three months ended September 30, 2011 and 2010, respectively. Shipping and handling costs amounted to $29,869 and $88,355 for the nine months ended September 30, 2011 and 2010, respectively.

Advertising

Advertising costs are included in selling expenses which totaled $50,635 and $6,237 for the three months ended September 30, 2011 and 2010, respectively. Advertising costs amounted to $155,105 and $60,673 for the nine months ended September 30, 2011 and 2010, respectively.

Government grants

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

F-9



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Foreign currency translation

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

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

    9/30/2011     9/30/2010  
Period end RMB : USD exchange rate   6.39     6.68  
Nine months average RMB : USD exchange rate   6.49     6.80  
             
    12/31/2010        
Year end RMB : USD exchange rate   6.59        
Average yearly RMB : USD exchange rate   6.76        

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

F-10



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Credit risk

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

Accounts receivable

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

The standard credit period for most of the Company’s clients is three months. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of September 30, 2011 and December 31, 2010. Allowance for doubtful accounts as of September 30, 2011 and December 31, 2010 are $0 and $27,252, respectively.

Inventory

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

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

Raw materials – purchase cost on a weighted average basis;

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

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

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

F-11



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Property and equipment

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

The Company changed the estimated maximum useful life of the machinery and equipment from 30 years to 15 years and that of furniture and fixtures from 30 years to 5 years. The change in estimate is accounted for prospectively beginning the quarter ended September 31, 2011.

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

Assets Classifications Estimated Useful Lives
Buildings 30 years
Machinery and equipment 3 to 15 years
Motor vehicles 5 to 10 years
Office equipment 3 to 10 years
Furniture and fixtures 4 to 5 years

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

F-12



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Construction in progress

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

Interest is capitalized as part of the historical cost during the construction period for qualified assets. Interest is capitalized until the asset is ready for service. Capitalized interest is determined based upon the Company’s weighted-average borrowing cost on debt for the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment, along with other capitalized costs related to that asset. Interest that is qualified for capitalization is insignificant for the three and nine months ended September 30, 2011 and 2010, as such, no capitalized interest was recorded for the aforementioned periods.

Intangible assets

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

Impairment of long – lived assets and intangible assets

In accordance with ASC 360, “Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of September 30, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.

F-13



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Income taxes

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

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

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

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

F-14



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Trade and other payables

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

Bills receivable and Bills payable

The Company utilizes banker’s acceptances in the form of bills receivable and bills payable. The Company accepts customer payment for the Company’s products by bills receivable. Bills receivable represent short-term notes receivable issued either by the customer or by the customer and an accepting bank that entitles the Company to receive the full face amount from the customer or the accepting bank at maturity, which is generally six months from the date of issuance.

Bills payable represent bills issued by an accepting bank in favor of the Company’s suppliers. The Company’s suppliers receive payments from the accepting bank directly upon maturity of the bills, and the Company is obliged to repay the face value of the bills to the accepting bank. These bills are interest free and generally mature six months from the date of issuance. To secure the banks’ undertakings, the Company is required to maintain deposits with such banks amounts equal to 50% to 100% of the bills’ amounts issued, such deposits are presentedas restricted cash as of September 31, 2011 and December 31, 2010. Upon maturity of the bills payable, the banks deduct the bills payable amount from the restricted cash account.

Product warranties

Substantially all of the Company’s products are covered by a standard warranty of 1 year for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides warranty reserve for product warranties to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. Based on historically insignificant amount of warranty expense, management determined that no product warranty reserve was necessary as of September 30, 2011 and December 31, 2010.

F-15



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Related parties

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

Comprehensive income

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

F-16



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Retirement benefit costs

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

Accumulated other comprehensive income

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

Earnings per share (EPS)

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

Statutory Surplus Reserve

In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, CNFI’s subsidiaries in the PRC are required to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.

F-17



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about the 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.

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. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011.

The Company is currently evaluating the impact, if any, of ASU No. 2011-04 on the Company’s financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, 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. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated.

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. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted because compliance with amendments is already permitted.

F-18



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

The Company intends to comply with the presentation on January 1, 2012.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis of determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company intends to adopt the amendments in this Update effective January 1, 2012.

F-19



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. ACCOUNTS RECEIVABLE

The Company has performed an analysis on all of its accounts receivable and determined that all amounts are probable of collection within one year. As such, all trade receivables are reflected as a current asset. Allowance for doubtful accounts as of September 30, 2011 and December 31, 2010 are $0 and $27,252, respectively. Bad debts written off for the three and nine months ended September 30, 2011 and 2010 were $0.

4. INVENTORY

Inventory consists of:

    September 30,     December 31,  
    2011     2010  
             
Raw materials $  10,718,993   $  6,297,151  
Packaging materials and consumable   158,433     96,380  
Finished goods   2,008,744     556,148  
  $  12,886,170   $  6,949,679  

There was no allowance made for obsolete or slow moving inventory as of September 30, 2011 and December 31, 2010.

F-20



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. DEPOSITS AND PREPAID EXPENSES

Deposits and prepaid expenses consist of:

    September 30,     December 31,  
    2011     2010  
             
Deposits for            
Raw materials and goods supplies $  17,156,698   $  9,424,358  
Electricity   6,044     113,860  
Shipping and handling   193,447     129,861  
Prepayment for services   719,816     773,334  
Others   159,272     116,247  
  $  18,235,277   $  10,557,660  

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

F-21



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. OTHER RECEIVABLES

Other receivables consist of:

    September 30,     December 31,  
    2011     2010  
             
Guarantee deposits $  920,134   $  682,711  
Due from employees   232,466     73,066  
Prepaid promotion and advertising expenses   92,694     -  
Prepaid professional expenses   27,067     9,665  
Others   58,544     11,794  
  $  1,330,905   $  777,236  

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

7. TAXES RECOVERABLE

According to a tax refund approval notice issued by the Tax Administration of the Ministry of Finance of the PRC, certain items are qualified for the refund of value added tax (VAT). The tax refund rate is 100% in 2009 and 80% in 2010 of the VAT tax payable amount. The Company’s wood flooring and wooden fiber sheets qualify for the VAT refund. The Company is required to pay the VAT tax payable first, then entitled for the tax refund. No such tax refund approval notice is issued for 2011.

Taxes recoverable consist of:

    September 30,     December 31,  
    2011     2010  
             
VAT $  629,814   $  2,452,407  

F-22



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. PROPERTY, PLANT AND EQUIPMENT, NET

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

    September 30,     December 31,  
    2011     2010  
             
Buildings $  3,069,848   $  2,975,099  
Machinery and equipment   4,196,698     3,968,175  
Motor vehicles   138,820     134,536  
Office equipment   266,477     99,436  
Furniture and fixtures   22,290     46,212  
    7,694,133     7,223,458  
Less: Accumulated depreciation   (1,203,454 )   (871,169 )
  $  6,490,679   $  6,352,289  

During the three months ended September 30, 2011, depreciation expense amounted to $135,320, of which $115,167 and $20,153 were recorded as cost of sales and general and administrative expenses, respectively.

During the three months ended September 30, 2010, depreciation expense amounted to $71,590, of which $59,833 and $11,757 were recorded as cost of sales and general and administrative expenses, respectively.

During the nine months ended September 30, 2011, depreciation expense amounted to $299,852, of which $247,232 and $52,620 were recorded as cost of sales and general and administrative expenses, respectively.

During the nine months ended September 30, 2010, depreciation expense amounted to $208,350, of which $174,124 and $34,226 were recorded as cost of sales and general and administrative expenses, respectively.

F-23



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. INTANGIBLE ASSETS, NET

Net intangible assets at September 30, 2011 were as follows:

    At Cost     Accumulated Amortization     Net Book Value  
                   
Land use rights $  3,141,573   $  91,237   $  3,050,336  
Forest right   6,261,251     353,455     5,907,796  
Software   280,953     14,633     266,320  
  $  9,683,777   $  459,325   $  9,224,452  

Net intangible assets at December 31, 2010 were as follows:

    At Cost     Accumulated Amortization     Net Book Value  
                   
Land use rights $  847,752   $  53,421   $  794,331  
Forest right   6,068,000     195,740     5,872,260  
  $  6,915,752   $  $249,161   $  6,666,591  

Private ownership of land is not permitted in the PRC. Instead, the Company has leased five lots of land. The cost of the first, second, fourth and fifth lots land use rights acquired in 2007, 2008, 2011 and 2011 were $329,535 (RMB2,105,232), $547,859 (RMB3,500,000), $618,443 (RMB3,950,925) and $1,645,736 (RMB10,513,782), respectively. These lots were located at Hexing Village, Dingxiao Economic Development Zone, Xingyi City, Qianxinan, Guizhou Province, respectively, within the PRC. The cost of the third lot of land is forest land, acquired in 2010 was $6,261,251 (RMB40,000,000) and was located at Liping County, Qiandongnan, Guizhou Province, the PRC.

Land use rights are amortized on the straight line basis over their respective lease periods. The lease period of agriculture land is 30 to 50 years.

During the three months ended September 30, 2011 and 2010, amortization expense amounted to $77,720 and $54,390 respectively which was recorded under general and administrative expenses.

During the nine months ended September 30, 2011 and 2010, amortization expense amounted to $196,512 and $163,170, respectively which was recorded under general and administrative expenses.

F-24



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. INTANGIBLE ASSETS, NET - CONTINUED

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

Remainder of 2011 $  77,978  
2012   311,911  
2013   311,911  
2014   311,911  
2015   311,911  
Thereafter   7,898,830  
Total $  9,224,452  

10. CONSTRUCTION IN PROGRESS

    September 30,     December 31,  
    2011     2010  
             
Wooden fiber manufacturing factory $  5,418,298   $  5,251,065  
Wooden floor manufacturing factory   54,980     53,283  
Total $  5,473,278   $  5,304,348  

F-25



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. SHORT TERM AND LONG TERM LOANS

(a) Short term loans

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

                Interest     September 30,     December 31,  
Bank   Term     Notes     rate     2011     2010  
                               
Xingyi City Rural
Cooperative Bank
  March 26, 2010 to
March 25, 2011
   
    7.965%
$
-
  $
743,330
 
Bank of Chongqing
  June 21, 2010 to
June 20, 2011
    (i)
  5.31%
 
-
   
3,034,000
 
Xingyi City Rural
Cooperative Bank
  July 17, 2009 to
July 16, 2011
    (ii)
  8.10%
 
-
   
758,500
 
China Merchant Bank
  March 8, 2011 to
March 7, 2012
    (iii)
  8.484%
 
3,913,282
   
-
 
Xingyi City Rural
Cooperative Bank
  April 30, 2011 to
April 29, 2012
    (ii)
  8.715%
 
3,756,751
   
-
 
Bank of Chongqing
  July 4, 2011 to
July 3, 2012
    (iv)
  7.572%
 
3,130,625
   
-
 
Xingyi City Rural
Cooperative Bank
  August 3, 2011 to
August 2, 2012
    (ii)
  9.5667%
 
782,656
   
-
 
                               
                                        $  11,583,314   $  4,535,830  

F-26



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. SHORT TERM AND LONG TERM LOANS - CONTINUED

(b) Long term loans

Long term loans consist of the following:

                Interest     September 30,     December 31,  
Bank   Term     Notes     rate     2011     2010  
                               
Guiyang City
Nanming Rural Credit
Cooperative Bank
  January 24, 2011
to November 18,
2012
    (iii)

  8.775%

$

3,913,282
  $

 -
 
Guiyang City
Nanming Rural Credit
Cooperative Bank
  January 24, 2011
to January 18,
2013
    (iii)

  8.775%

 

4,069,813
   

-
 
                               
                                          $        7,983,095   $  -  

Notes:

(i) The loan is secured by forestry land use right of the Company. The net book value of the forestry land use right is $1,349,965 as of December 31, 2010.

(ii) The loan has a corporate guarantee by Zhong Ruixin Investment Guarantee Co., Ltd in which our director, Mr. Yi Zeng also serves as their general manager. The Company paid a total guarantee fee of $228,231 to Zhong Ruixin Investment Guarantee Co., Ltd.

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

(iv) The loan is secured by the real estate properties of Guizhou Huacheng Group in which our director, Mr. Yudong Ji also serves as their chairman and personal guarantee by our directors, Mr. YuLu Bai, Mr. Yudong Ji, Mr. Yi Zeng and our general manager, Mr. Qin Shi.

Interest expenses on the loans for the three months ended September 30, 2011 and 2010 amounted to $464,018 and $175,244, respectively. Interest expenses on the loans for the nine months ended September 30, 2011 and 2010 amounted to $1,099,182 and $231,761, respectively.

F-27



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. CUSTOMER DEPOSITS

Customer deposits represent amounts advanced by customers for orders of product. The products normally are shipped within three months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of September 30, 2011 and December 31, 2010, customer deposits amounted to $1,553,063 and $1,936,733, respectively.

13. OTHER PAYABLES AND ACCRUED EXPENSES

    September 30,     December 31,  
    2011     2010  
             
Other taxes payable $  476,516   $  789,252  
Due to third parties   781,143     775,187  
Due to employees   46,646     151,700  
Accrued wages   110,928     113,224  
Total $  1,415,233   $  1,829,363  

Other taxes payable include VAT tax, city maintenance and construction levies, stamp duty, education levies and other miscellaneous taxes.

F-28



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAXES

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

No Hong Kong profits tax has been provided in the financial statements, as the Company did not have any assessable profits for the three and nine months ended September 30, 2011 and 2010.

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

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

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

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

F-29



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. INCOME TAXES – CONTINUED

Provision for income taxes is as follows:

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2011     2010     2011     2010  
Income tax CNFI - U.S. corporate tax $  -   $  -   $  -   $  -  
CBF - Hong Kong profits tax   -     -     -     -  
QAF - China EIT   202,944     163,325     480,765     789,863  
QSTF - China EIT   487,614     627,932     1,390,671     1,222,192  
GSTF - China EIT   12,304     -     13,044     -  
Deferred tax   -     -     -     -  
                         
  $  702,862   $  791,257   $  1,884,480   $  2,012,055  

The Company did not recognize any interest or penalties related to unrecognized tax benefits in the three and nine months ended September 30, 2011 and 2010. The Company had no uncertain positions that would necessitate recording of tax related liability. The Company is subject to examination by the respective tax authorities.

F-30



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15. STOCK OPTIONS AND WARRANTS

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

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

    Number of shares           Remaining  
    entitled to     Exercise     Contractual Life  
    purchase     Price     (years)  
Balance as of December 31, 2010   60,000   $  4.00     4.21  
Warrants exercised   -     -        
Warrants expired   -     -        
Total outstanding as of September 30, 2011   60,000   $  4.00     4.21  

There was no share based compensation expense for the three and nine months ended September 30, 2011 and 2010.

On May 17, 2010, our Chairman and CEO, Mr. Yulu Bai, entered into an option agreement with Ms. Ren Ping Tu, his wife, pursuant to which Mr. Bai was granted an option to acquire all of the 20,500,000 shares of the Company’s common stock currently owned by Ms. Tu for an exercise price of $2,500,000. On September 6, 2011, Mr. Bai exercised the option to acquire all 20,500,000 shares of the Company’s common stock. After Mr. Bai exercised this option, he owns 68.33% of the Company’s issued and outstanding common stock and became the controlling stockholder.

F-31



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

16. CONCENTRATION, RISKS, AND UNCERTAINTIES

The Company has the following concentrations of business with customers constituting 10% or greater of the Company’s revenues for the three and nine months ended September 30, 2011 and 2010:

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2011     2010     2011     2010  
                         
Customer A   90.79%     20.25%     77.35%     34.15%  
Customer B   *     10.68%     16.78%     28.72%  

* Constitute less than 10% of the Company’s total sales.

As of September 30, 2011, amount due from customer A and customer B were $2,728,265 and $493,600, respectively.

The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties of its major customers.

The Company has the following concentrations of business with suppliers constituting 10% or greater of the Company’s purchases for the three and nine months ended September 30, 2011 and 2010:

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2011     2010     2011     2010  
                         
Supplier A   39.33%     56.40%     64.68%     32.40%  
Supplier B   *     22.83%     *     10.75%  

* Constitute less than 10% of the Company’s total purchases.

As of September 30, 2011, amount due to supplier A and B were $772,467 and $0, respectively.

F-32



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

17. ECONOMIC AND POLITICAL RISK

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

18. COMMITMENTS AND CONTINGENCIES

(1) Operating Leases

As of September 30, 2011, the Company entered into six lease agreements for its stores and warehouses at six locations which expire in 2014. The future minimum lease payments as of September 30, 2011 are as follow:

For the year ending December 31,

Remainder of 2011   $  19,988  
2012     81,060  
2013     74,567  
2014     10,380  
    $  185,995  

During the three months ended September 30, 2011 and 2010, rental expenses amounted to $11,165 and $0 respectively which was recorded under general and administrative expenses.

During the nine months ended September 30, 2011 and 2010, rental expenses amounted to $11,165 and $0, respectively which was recorded under general and administrative expenses.

F-33



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

18. COMMITMENTS AND CONTINGENCIES - CONTINUED

(2) Capital commitment

Production line for wooden fiber sheet

As at September 30, 2011, the total estimated contract costs to complete the production line for wooden fiber sheet are approximately $58.3 million (RMB372.4 million) of which the Company has paid for approximately $6.1 million (RMB39.2 million). The remaining of $52.2 (RMB333.2 million) will be completed and paid by the end of 2013.

Production line for wooden floor

As at September 30, 2011, the total estimated contract costs to complete the production line for wooden floor are approximately $23.7 million (RMB151.6 million) of which the Company has paid for approximately $0.2 million (RMB1.6 million). The remaining of $23.5 million (RMB150.0 million) will be completed and paid by the end of 2013.

Purchase of Property

As at September 30, 2011, the total estimated contract costs to acquire a property under construction are approximately $9.8 million (RMB62.7 million) of which the Company has paid for approximately $6.7 million (RMB42.5 million). The remaining of $3.1 million (RMB20.2 million) will be completed and paid by the end of 2011.

(3) Obligations under material contracts

(i)

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

   
(ii)

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

F-34



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

19. EARNINGS PER SHARE

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

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
BASIC                        
Numerator for basic earnings per share attributable to the Company’s common stockholders:                
Net income $  1,265,319   $  2,134,087   $  4,708,393   $  7,152,018  
Net income used in computing basic earnings per share $  1,265,319   $ 2,134,087   $  4,708,393   $  7,152,018  
Basic earnings per share $  0.04   $  0.09   $  0.16 $     0.32  
                         
Basic weighted average shares outstanding   30,000,000     22,590,044     30,000,000     22,590,044  

F-35



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

19. EARNINGS PER SHARE - CONTINUED

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
DILUTED                        
Numerator for diluted earnings per share attributable to the Company’s common stockholders:                
Net income $  1,265,319   $  2,134,087   $  4,708,393   $  7,152,018  
Net income used in computing diluted earnings per share $  1,265,319   $ 2,134,087   $  4,708,393   $  7,152,018  
Diluted earnings per share $  0.04   $  0.09   $  0.16   $  0.32  
                         
                         
Weighted average outstanding shares of common stock   30,000,000     22,590,044     30,000,000     22,590,044  
Warrants and contingently issuable shares   -     -     -     -  
Options and contingently issuable shares   -     -     -     -  
Diluted weighted average shares outstanding   30,000,000     22,590,044     30,000,000     22,590,044  

For the three months and nine months ended September 30, 2011, 60,000 warrants were not included in the diluted earnings per share because the average stock price was lower than the strike price of these warrants. There were no potentially dilutive securities during the three months ended September 30, 2011 and 2010.

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September     30,  
    2011     2010     2011     2010  
Potential common shares outstanding as of September 30, Warrant outstanding (shares)   60,000     -     60,000     -  

F-36



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

20. PRODUCT LINE INFORMATION

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

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,     September 30,     September 30,  
    2011     2010     2011     2010  
                         
Domestic sales                        
       Wooden fiber sheet $  2,102,709   $  286,392   $  4,168,537   $  10,040,917  
       Wooden floor   8,608,430     8,484,627     25,442,511     15,655,629  
  $  10,711,139   $  8,771,019   $  29,611,048   $  25,696,546  

F-37



SILVAN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

21. RELATED PARTIES TRANSACTIONS

As of September 30, 2011 and 2010, the Company had the following significant related party transactions:

Name of related party

Nature of transactions

 

 

Mr. YuLu Bai, Chief

There are due from Mr. YuLu Bai totaled $1,451,047 and $0 as of

 

 

Executive Officer

September 30, 2011 and 2010 and included in Due from Related Party. Due to Mr. YuLu Bai was $1,527,080 as of December 31, 2010. The amounts are unsecured, interest free and have no fixed term of repayment.

 

The amount due from Mr. Bai relates to proceeds from the share exchange agreement which was deposited to Mr. Bai’s account. At December 31, 2010, the Company had payable to Mr. Bai for forestry right that Mr. Bai paid on behalf of the Company; therefore, the amount due from Mr. Bai was netted with the amount due to Mr. Bai, resulted in a net due to related party balance of $1,527,080. During the nine months ended September 30, 2011, the Company paid off the amount due to Mr. Bai, resulted in a net due from related party balance of $1,451,047 as of September 30, 2011. The Company expects to collect the amount due from Mr. Bai by end of 2011.

F-38



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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

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

Use of Terms

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

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

  • “Silvan Industries” refers to Silvan Industries, Inc., a Nevada corporation (formerly China Forestry Industry Group, Inc.);

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

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

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

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

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

  • “PRC” and “China” refer to the People’s Republic of China;

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

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

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

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

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

Overview of Our Business

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

2


The primary raw material used in our products is wood, which we currently procure from third party suppliers. We expect that commencing in late 2012, we will be able to procure approximately 20% of our wood from a 2,250 hectares (approximately, 22.5 km2) of fir forest in Guizhou Province.

Our manufacturing facility in Qianxinan, Guizhou Province has an annual production capacity of six million square meters of laminate flooring and 75,000 cubic meters of industrial fiber boards. We are constructing two new manufacturing facilities next to our current facility to expand our laminate flooring production line and industrial fiber board production line. We expect that this expansion will increase our overall capacity to 200,000 cubic meters of fiber boards and 12 million square meters of laminate floor.

We market and sell our products through five branch offices and 504 contracted flooring specialty retail stores, concentrated mostly in southwestern China. We also sell some of our products through eight retail stores which we refer to as “flagship” stores because they are generally larger and better equipped with samples, promotional material and product inventory, as compared to regular retail stores, and as a result, they better promote our image and the quality of our products. We are also seeking commercial arrangements for the sale of our products through home supply stores, such as our recent agreement to sell our products at Red Star Macalline Furniture Mall’s Guiyang store. Red Star Macalline Furniture Mall is a large home products supply store chain in China, similar to Home Depot and Lowe’s in the U.S., with over 30 malls and stores across China. We believe that home supply stores are an important channel for the sale of building/home renovation materials and we plan to increase our efforts to work with more home supply stores in the future.

In March 2011, we established Guiyang Silvan Touch in order to expand our sales channels. Guiyang Silvan Touch’s principal activity is the wholesaling of wood flooring, furniture and decorations.

Recent Developments

  • On October 3, 2011, we filed a Certificate of Amendment to our Articles of Incorporation with the Nevada Secretary of State to change the name of the Company from “China Forestry Industry Group, Inc.” to “Silvan Industries, Inc.” Please see our current report on Form 8-K filed with the SEC on October 6, 2011 for more information.

  • On May 17, 2010, our Chairman and CEO, Mr. Yulu Bai, entered into an option agreement with Ms. Ren Ping Tu, his wife, pursuant to which Mr. Bai was granted an option to acquire all of the 20,500,000 shares of the Company’s common stock currently owned by Ms. Tu for an exercise price of $2,500,000. On September 6, 2011, Mr. Bai exercised the option to acquire all 20,500,000 shares of the Company’s common stock. After Mr. Bai exercised this option, he directly owns 68.33% of the Company’s issued and outstanding common stock.

Third Quarter Financial Performance Highlights

The following summarizes certain key financial information for the third quarter of 2011:

  • Revenue: Revenue was $10.7 million for the three months ended September 30, 2011, an increase of $1.9 million, or 22.1%, from $8.8 million for the same period last year.

  • Gross Profit and Margin: Gross profit was $3.4 million for the three months ended September 30, 2011, an increase of $0.45 million, or 15.3%, from $2.9 million for the same period last year. Gross margin was 31.5% for the three months ended September 30, 2011, as compared to 33.3% for the same period last year.

  • Net Income: Net income was $1.3 million for the three months ended September 30, 2011, a decrease of $0.8 million, or 40.7%, from $2.1 million for the same period last year.

  • Fully diluted net income per share: Fully diluted net income per share for the three months ended September 30, 2011 was $0.04, as compared to $0.09 for the same period last year.

Results of Operations

Comparison of Three Months Ended September 30, 2011 and September 30, 2010

The following table shows key components of our results of operations during the three months ended September 30, 2011 and 2010, in both dollars and as a percentage of our revenue.

3


(All amounts, other than percentages, in U.S. Dollars)

    Three Months Ended     Three Months Ended  
    September 30, 2011     September 30, 2010  
          % of           % of  
    Dollars     Revenue     Dollars     Revenue  
Revenue $  10,711,139     100.00%   $  8,771,019     100.00%  
Cost of revenue   7,342,247     68.55%     5,848,371     66.68%  
Gross profit   3,368,892     31.45%     2,922,648     33.32%  
Operating expenses                        
     Selling expenses   269,467     2.52%     27,834     0.32%  
     General and administrative expenses   697,341     6.51%     322,625     3.68%  
Total operating expenses   966,808     9.03%     350,459     4.00%  
Income from operations   2,402,084     22.43%     2,572,189     29.33%  
Other income (expenses)                        
     Interest income   642     0.01%     -     0.00%  
     Interest expenses   (464,170 )   -4.33%     (173,244 )   -1.98%  
     Other (expenses) income   (1,559 )   -0.01%     -     0.00%  
     Value added tax refund   -     0.00%     526,399     6.00%  
     Government grant   31,184     0.29%     -     0.00%  
Total other income (expenses)   (433,903 )   -4.05%     353,155     4.03%  
Income before income taxes   1,968,181     18.38%     2,925,344     33.35%  
Less: income tax expense   702,862     6.56%     791,257     9.02%  
Net income $  1,265,319     11.81%   $  2,134,087     24.33%  

Revenue. We generate revenue from the sales of our industrial fiber boards, laminate flooring, wooden flooring, and related flooring products. Our revenue increased to $10.7 million for the three months ended September 30, 2011, from $8.8 million for the same period in 2010, representing a 22.1% increase. The increase in revenue was mainly due to an increase in average unit sales price with stable sales volume across all product categories.

In terms of product lines, sales of our laminate flooring and fiber board products accounted for approximately 62.6% and 37.4% of our revenue, respectively, for the three months ended September 30, 2011, as compared to approximately 64.5% and 35.5%, respectively, for the same period in 2010. We did not sell any hard wood flooring products in the third quarter because we are still developing this new product market.

The average unit sales price of our laminate flooring products increased slightly by approximately 2.3% for the three months ended September 30, 2011. We sold approximately 1.00 million square meters of laminate flooring products during the three months ended September 30, 2011, as compared to approximately 1.07 million square meters of laminate flooring products for the same period in 2010. We were able to maintain the relatively stable sales volume as last year with the increased average unit sales price mainly due to our continued promotion and market expansion efforts for this product line.

The average sales price of our fiber board products increased approximately 26% in the third quarter of 2011 as compared to the same period last year. A larger portion of our products sold in this quarter was 15mm fiber board which generally has a higher sales price than our 12mm fiber board which was the major products sold in the same quarter last year. Sales volume remained fairly stable. We sold approximately 0.6 million pieces of fiber boards during the three months ended September 30, 2011 as compared to approximately 0.59 million pieces of fiber boards for the comparative period in 2010.

Cost of revenue. Our cost of revenue is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of revenue increased $1.5 million, or 26%, to $7.3 million for the three months ended September 30, 2011, from $5.8 million for the same period in 2010. The cost of revenue as a percentage of revenue increased from 67% for the three months ended September 30, 2010 to 69% for the three months ended September 30, 2011. Such increase was primarily due to the significant increase in cost of raw materials primarily including wood, chemical boards and papers. Unit cost for these raw materials has increased 19 to 20% compared to the same period in 2010. The rise in raw material cost is due to macro inflationary environment in China, which in turn resulted in the increase in unit cost and until selling price of our products.

4


Gross profit and gross margin. Our gross profit is equal to the difference between our revenue and our cost of revenue. Our gross profit increased $0.5 million, or 15%, to $3.4 million for the three months ended September 30, 2011, from $2.9 million for the same period in 2010. Gross profit as a percentage of net revenue (gross margin) was 31% and 33% for the three months ended September 30, 2011 and 2010, respectively. The decrease in the gross margin was primarily driven by the decreased gross margin of our laminate flooring products. The respective gross margins for our laminate flooring and fiber board products were 25% and 25% for the three months ended September 30, 2011, as compared to 32% and 21% for the same period in 2010. The drop in the gross margin of our laminate flooring product line was mainly attributable to a greater percentage increase in average cost than the percentage increase in average sales price.

Selling expenses. Our selling expenses are comprised primarily of sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, travel expense, consulting fees and other sales related costs. Our selling expenses increased by $241,633, or 868%, to $269,467 for the three months ended September 30, 2011, from $27,834 for the same period in 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary, welfare expenses and advertisement and exhibition expenses. Our salary expenses for the three months ended September 30, 2011 amounted to $144,315, compared to $12,171 for the same period in 2010. Our welfare expenses for the three months ended September 30, 2011 amounted to $36,100, compared to $1,447 for the same period in 2010. Our advertisement and exhibition expenses for the three months ended September 30, 2011 amounted to $49,806, compared to $623 for the same period in 2010. Due to continued efforts to promote our brand recognition and marketing in the PRC, our travel and consultation expenses also increased and contributed to the increase of selling and marketing expenses. Our travel expenses for the three months ended September 30, 2011 amounted to $22,182, compared to $10,137 for the same period in 2010. Our consultation expenses for the three months ended September 30, 2011 amounted to $9,093, compared to $721 for the same period in 2010.

General and administrative expenses. General and administrative expenses consist primarily of compensation and benefits to our management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our general and administrative expenses increased $374,716, or 116%, to $697,341 for the three months ended September 30, 2011, from $322,625 for the same period in 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company. This also led to increases of related welfare expenses.

Other income (expense). We had $433,903 in other expenses for the three months ended September 30, 2011, as compared to other income of $353,155 for the same period in 2010. Compared to same period in 2010, we incurred more expenses in this quarter mainly because of a higher interest expense of $290,926 resulting from increased bank borrowings during the three months ended September 30, 2011. We had approximately $19.6 million bank loans as of September 30, 2011 as compared to $4.5 million as of September 30, 2010. In addition, a majority of the 2010 other income was attributable to a $0.53 million value added tax refund. According to a tax refund approval notice issued by the Tax Administration of the Ministry of Finance of the PRC, certain items, including our wood flooring and wooden fiber sheets are qualified for the refund of VAT in 2009 and 2010. No such tax refund approval notice was issued for 2011. During the three months ended September 30, 2011, we received $31,184 in government grant income for use in research and development of applied technology as compared to $0 for the same period in 2010.

Income taxes. Our income taxes decreased by $0.09 million, or 11%, to $0.7 million for the three months ended September 30, 2011, from $0.8 million for the same period in 2010. The decrease was due to the decrease in our taxable income.

Net income. For the three months ended September 30, 2011, we generated a net income of $1.3 million, a decrease of $0.8 million, or 40.7%, from $2.1 million for the same period in 2010, as a result of the cumulative effect of the foregoing factors.

Comparison of Nine Months Ended September 30, 2011 and September 30, 2010

The following table shows key components of our results of operations during the nine months ended September 30, 2011 and 2010, in both dollars and as a percentage of our revenues.

5


(All amounts, other than percentages, in U.S. Dollars)

    Nine Months Ended     Nine Months Ended  
    September 30, 2011     September 30, 2010  
          % of           % of  
    Dollars     Revenue     Dollars     Revenue  
Revenue $  29,611,048     100.00%   $  25,696,546     100.00%  
Cost of revenue   19,390,075     65.48%     17,085,785     66.49%  
Gross profit   10,220,973     34.52%     8,610,761     33.51%  
Operating expenses                        
     Selling expenses   995,699     3.36%     146,481     0.57%  
     General and administrative expenses   1,602,111     5.41%     1,062,610     4.14%  
Total operating expenses   2,597,810     8.77%     1,209,091     4.71%  
Income from operations   7,623,163     25.74%     7,401,670     28.80%  
Other income (expenses)                        
     Interest income   24,217     0.08%     -     0.00%  
     Interest expenses   (1,099,182 )   -3.71%     (231,761 )   -0.90%  
     Other (expenses) income   (31,923 )   -0.11%     43,988     0.17%  
     Value added tax refund   -     0.00%     1,950,176     7.59%  
     Government grant   76,598     0.26%     -     -  
Total other income (expenses)   (1,030,290 )   -3.48%     1,762,403     6.86%  
Income before income taxes   6,592,873     22.26%     9,164,073     35.66%  
Less: Provision for income taxes   1,884,480     6.36%     2,012,055     7.83%  
Net income $  4,708,393     15.90%   $  7,152,018     27.83%  

Revenue. Our revenue increased to $29.6 million for the nine months ended September 30, 2011, from $25.7 million for the same period in 2010, representing a 15% increase. The increase in revenue was mainly due to higher sales volume in the first quarter of 2011 after the expansion of our sales and distribution network, coupled with increase in unit sales price of both our laminate flooring and fiber boards. During the nine months ended September 30, 2011, we sold approximately 2.9 million square meters of laminate flooring products and approximately 1.6 million pieces of fiber boards, as compared to approximately 1.6 million square meters of laminate flooring products and approximately 2.2 million pieces of fiber boards for the same period in 2010. In addition, we started selling hard wood flooring products in the first quarter of 2011 and sold approximately 0.05 million square meters of hard wood flooring products in the nine months ended September 30, 2011. Our respective sales of laminate flooring products, fiber board products and hard wood flooring products accounted for approximately 64.0%, 35.9% and 0.1% of our revenue for the nine months ended September 30, 2011, as compared to 46.1%, 53.9% and 0% for the same period in 2010.

Cost of revenue. Our cost of revenue increased $2.3 million, or 13%, to $19.4 million for the nine months ended September 30, 2011, from $17.1 million for the same period in 2010. The increase was generally in line with the increase in sales volume. Cost of revenue as a percentage of revenue remain relatively consistent as we had a slight decrease from 66% for the nine months ended September 30, 2010 to 65% for the nine months ended September 30, 2011 primarily attributable to our fiber board product line. As a percentage of revenue, cost of revenue for our fiber board product line was 74% for the nine months ended September 30, 2011, as compared to 78% for the same period in 2010. The decrease was due to the fact that the percentage increase in the unit selling price of fiber boards outpaced the percentage increase in the raw material cost. The unit cost of major raw materials had a percentage increase between 2% to 29% while the unit selling price of 12mm and 15mm fiber boards increased by 7% and 25%, respectively. To minimize the impact of continuing rise in raw material cost, we hope that through our research and development efforts, we can improve our manufacturing technology of this product line which we expect to result in lower consumption of raw materials.

Gross profit and gross margin. Our gross profit increased $1.6 million, or 19%, to $10.2 million for the nine months ended September 30, 2011, from $8.6 million for the same period in 2010. Such increase in overall gross profit was mainly due to an approximately 27% increase in gross profit generated from sales of fiber boards which more than offset an approximately 6% decrease of gross profit from sales of laminate flooring products. Gross profit as a percentage of net revenue (gross margin) was 35% and 34% for the nine months ended September 30, 2011 and 2010, respectively. The slight increase in gross margin was primarily driven by increased gross margin of fiber board products. Gross margins for our laminate flooring products and fiber board products were 26% and 26%, respectively, for the nine months ended September 30, 2011, as compared to 34% and 22%, respectively, for the same period in 2010. The gross margin of new hard wood flooring products was 24.8% for the nine months ended September 30, 2011. The improved gross margin of fiber board product line was due to the decrease in cost of revenue as noted above. The drop in gross margin of laminate flooring products was mainly attributable to a combined effect of decrease in their unit sales price and increase in unit cost. The average sales price of laminate flooring products per square meter dropped approximately 10% from the nine months ended September 30, 2010 as a result of intense competition in the market for similar products.

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Selling expenses. Our selling expenses increased significantly by $0.8 million, or 580%, to $1.0 million for the nine months ended September 30, 2011, from $0.1 million for the same period in 2010. The increase was primarily a result of the expansion of our sales network leading to increased salary, welfare expenses and advertisement and exhibition expenses. Our salary expenses for the nine months ended September 30, 2011 amounted to $0.7 million, compared to $0.3 million for the same period in 2010. Our welfare expenses for the nine months ended September 30, 2011 amounted to $0.1 million, compared to $5,859 for the same period in 2010. Our advertisement and exhibition expenses for the nine months ended September 30, 2011 amounted to $0.2 million, compared to $55,045 for the same period in 2010. Due to continued efforts to promote our brand and marketing in the PRC, we also incurred more travel and consultation expenses. Our travel expenses for the nine months ended September 30, 2011 amounted to $72,292, compared to $17,974 for the same period in 2010. Our consultation expenses for the nine months ended September 30, 2011 amounted to $96,325, compared to $721 for the same period in 2010.

General and administrative expenses. Our general and administrative expenses increased $0.5, million or 51%, to $1.6 million for the nine months ended September 30, 2011, from $1.1 million for the same period in 2010. This increase was mainly due to the hiring of additional staff to manage our expanding business, particularly in our finance department, to assist with the increased administrative duties associated with being a public company. This also led to increases of related welfare expenses.

Other income (expense). We had $1.0 million in net other expenses for the nine months ended September 30, 2011, as compared to net other income of $1.8 million for the same period in 2010. The $2.8 million decrease in other income (expense) was primarily due to value added tax refund of $1.9 million received in the nine months ended September 30, 2010 coupled with higher interest expense of $1.1 million resulting from increased bank borrowings during the nine months ended September 30, 2011, as compared to $0.2 million interest expense for the comparative period in 2010.

Income taxes. Our income taxes decreased by $0.1 million, or 6%, to $1.9 million for the nine months ended September 30, 2011, from $2.0 million for the same period in 2010. The decrease was due to the decrease in our taxable income.

Net income. For the nine months ended September 30, 2011, we generated a net income of $4.7 million, a decrease of $2.4 million, or 34%, from $7.2 million for the same period in 2010, as a result of the cumulative effect of the foregoing factors.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $72,045. The following table summarizes the key cash flow metrics from our condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010.

Cash Flow

    Nine Months Ended September 30,  
    2011     2010  
Net cash (used in) provided by operating activities $  (3,715,575 ) $  2,744,432  
Net cash used in investing activities   (8,334,032 )   (6,202,457 )
Net cash provided by financing activities   11,756,689     3,350,958  
Effects of exchange rate change in cash   2,153     329,050  
Net (decrease) increase in cash and cash equivalents   (290,765 )   221,983  
Cash and cash equivalents at beginning of the period   362,810     748,493  
Cash and cash equivalent at end of the period $  72,045   $  970,476  

Operating Activities

Net cash used in operating activities was $3.7 million for the nine months ended September 30, 2011, as compared to net cash provided by operating activities of $2.7 million for the same period in 2010. The decrease in net cash from operating activities was primarily due to a decrease of $2.4 million in net income, an approximately $5.6 million cash outflow in inventory purchases which was primarily offset with a corresponding increase in bills payable which are utilized to pay our suppliers for raw material purchases, a $7.3 million outflow in deposits and prepaid expenses primarily for deposits paid to suppliers of raw materials and goods supplies. In addition, as a result of increase in our bills payable, our cash outflow for the restricted cash balance, which serves as collaterals for bills payable, increased by $2.6 million. The significant increase in inventory during the nine months ended September 30, 2011 was attributable to increased inventory and raw materials purchases in anticipation of the development of our sales network in some selected markets in China, as evidenced by our $12.9 million inventory balance as of September 30, 2011 and our $9.5 million sales order backlog.

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Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2011 was $8.3 million, as compared to $6.2 million for the same period in 2010. The net cash used in investing activities was primarily due to our purchase of land use rights for approximately $2.5 million during the nine months ended September 30, 2011. In addition, we paid approximately $5.8 million as prepayment for properties under construction for the expansion of our facilities.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2011 was $11.8 million, as compared to $3.4 million for the same period in 2010. The increase in net cash provided by financing activities was primarily due to increased bank borrowings of $17.7 million to fund our expansion. Such increase was offset by repayment of two short term bank loans totaled $3.1 million that matured in June and July 2011. In addition, we paid off $2.9 million payable to Mr. Yulu Bai for the purchase cost of the forestry land use right that Mr. Bai had paid on behalf of the Company.

Loan Commitments

As of September 30, 2011, the amount, maturity date and term of each of our bank loans were as follows:

          Interest              
Bank   Amount*     Rate     Maturity Date     Duration  
China Merchant Bank $  3,913,282     8.484%     March 7, 2012     1 year  
Xingyi City Rural Cooperative Bank   3,756,751     8.715%     April 29, 2012     1 year  
Bank of Chongqing   3,130,625     7.572%     July 3, 2012     1 year  
Xingyi City Rural Cooperative Bank   782,656     9.5667%     August 2, 2012     1 year  
Guiyang City Nanming Rural Credit Cooperative Bank   3,913,282     8.775%     November 18, 2012     22 months  
Guiyang City Nanming Rural Credit Cooperative Bank   4,069,813     8.775%     January 18, 2013     2 years  
Total $  19,566,409                    

* Calculated based on the exchange rate of $1 = RMB 6.3885

We are not aware of any material trend, event or capital commitment, which would potentially adversely affect liquidity. In the event a material trend develops, we believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditure and working capital for the next 12 months. In the future we may also require additional cash resources due to changed business conditions or acquisitions that we may decide to pursue. In addition, because substantially all of our revenues are generated from our indirect PRC subsidiaries, Aosen Forestry and Silvan Flooring, the ability of our PRC subsidiaries to make dividends and other payments to us is subject to the PRC dividend restrictions. Current PRC law permits payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to the statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As we disclosed above, our PRC subsidiaries did not allocate their after-tax profits to the statutory general reserve fund pursuant to the PRC regulations. As of September 30, 2011, we had allocated an aggregate of RMB10,380,366 (approximately $1.6 million) to our fund.

If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

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Obligations Under Material Contracts

In addition to the loan obligations disclosed above, we have the following material contractual obligations:

  • On February 2, 2010, we entered into a financial advisory agreement to appoint Asia Regal Financial Capital Group Co., Ltd. and Shenzhen Junwei Investment and Development Co., Ltd. as financial advisors. Pursuant to the agreement, we are obligated to issue to the financial advisors 100,000 shares of common stock at $0.10 per share prior to December 31 of every year within 5 years from the quotation of our stock in the OTC markets. The agreement contains an exclusivity provision whereby we have agreed to engage them as our sole financial advisors for a 2-year period following such stock quotation and contains a $1 million liquidated damages provision for breach of such exclusivity.

  • As of September 30, 2011, the total estimated contract costs to complete the production line for wooden fiber sheet are approximately $58.3 million (RMB372.4 million) of which the Company has completed and paid for approximately $6.1 million (RMB39.2 million). The remaining of $52.2 million (RMB333.2 million) will be completed and paid by the end of 2013.

  • As of September 30, 2011, the total estimated contract costs to complete the production line for wooden floor are approximately $23.7 million (RMB151.6 million) of which the Company has completed and paid for approximately $0.2 million (RMB1.6 million). The remaining of $23.5 million (RMB150.0 million) will be completed and paid by the end of 2013.

  • As of September 30, 2011, the total estimated contract costs to complete a property are approximately $9.8 million (RMB62.7 million) of which the Company has completed and paid for approximately $6.7 million (RMB42.5 million). The remaining of $3.1 million (RMB20.2 million) will be completed and paid by the end of 2011.

  • As of September 30, 2011, we have operating lease commitments for four store leases and two warehouse leases, the leases expire through year 2013. Our future minimum lease payments are as follow: $19,988 for the remainder of 2011, $81,060 for 2012, $74,567 for 2013 and $10,380 for 2014.

Seasonality

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

Inflation

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

Off Balance Sheet Arrangements

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

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

9


Recent Accounting Pronouncements

See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Yulu Bai, and Chief Financial Officer, Mr. Jiyong He, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, 2011. Based upon, and as of the date of this evaluation, Messrs. Bai and He, determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2010, which we are still in the process of remediating as of September 30, 2011, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2010 for the description of these weaknesses.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2010, management concluded that we need to increase our qualified accounting personnel and enhance the supervision, monitoring and reviewing of financial statements preparation processes. We have already taken measures to remediate these material weaknesses by seeking an additional financial reporting and accounting staff member. We are currently seeking additional seasoned finance and accounting professionals and experienced financial reporting personnel with relevant knowledge in the preparation of financial statements in accordance with U.S. GAAP and financial reporting disclosure requirements under SEC rules to strengthen the accounting department. In addition, we are actively seeking a new CFO who is knowledgeable and experienced in US GAAP and SEC reporting matters. We have been interviewing potential candidates to seek for these qualified accounting staff and CFO.

In the meantime, we have hired AuditPrep Limited to assist with the preparation of US GAAP financial statements and assisting with the preparation of periodic reports under the Exchange Act. AuditPrep Limited’s professionals consist of managers and partners that are either AICPA or trained and experienced in US GAAP and SEC reporting matters

Other than the foregoing changes, there were no changes in our internal controls over financial reporting during the third quarter of 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

Not Applicable.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

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

ITEM 6. EXHIBITS.

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

Exhibit No. Description
31.1 Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith)

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SIGNATURES

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

Date: November 21, 2011 SILVAN INDUSTRIES, INC.
     
  By: /s/ Yulu Bai
    Yulu Bai, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Jiyong He
    Jiyong He, Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)


EXHIBIT INDEX

Exhibit No. Description
31.1

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

31.2

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

32.1

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

32.2

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

101

Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith)