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EXCEL - IDEA: XBRL DOCUMENT - Tanke Biosciences CorpFinancial_Report.xls
 


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

Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the Quarterly Period Ended March 31, 2012
   
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the Transition Period from ___________ to _____________

Commission File Number: 000-53529

TANKE BIOSCIENCES CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
No. 26-3853855
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
Room 2801, East Tower of Hui Hao Building, No. 519 Machang Road Pearl River New City, Guangzhou, P. R. China
510627
(Address of principal executive offices)
(Zip Code)
 
+86 (20) 3885-9025
Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company x
(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 o No x

As of May 15, 2012, there were 13,324,083 outstanding shares of common stock of the registrant, par value $.001 per share.
 
 
 

 
 
TANKE BIOSCIENCES CORPORATION
 
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
25
Item 4. Controls and Procedures.
25
   
PART II. OTHER INFORMATION
 
   
Item 1. Legal Proceedings.
26
Item 1A. Risk Factors.
 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 27
Item 3. Defaults Upon Senior Securities.
 27
Item 4. Mine Safety Disclosures
 27
Item 5. Other Information.
27
Item 6. Exhibits.
 27
Signatures  28
 
 
 

 
  
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Current assets:
           
Cash and cash equivalents
  $ 7,636,434     $ 7,700,156  
Restricted cash
    706,802       706,802  
Accounts receivable, net
    1,721,006       1,917,699  
Inventories
    1,359,908       1,187,895  
Due from-related parties, current portion
    73,948       239,476  
Loans to customers and suppliers
    2,693,488       2,513,460  
Other receivables
    70,680       53,936  
Prepayment
    3,317,622       3,633,674  
Other current assets
    745,509       914,594  
Deferred tax assets
    46,437       46,042  
       Total current assets
    18,371,834       18,913,734  
                 
Property, plant and equipment, net
    4,877,008       4,771,299  
Construction in progress
    -       35,878  
Intangible asset, net
    844,573       838,089  
Other non-current assets
    359,270       328,006  
       Total assets
  $ 24,452,685     $ 24,887,006  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 514,080     $ 784,777  
Convertible notes payable
    5,179,784       -  
Other payable and accrued liabilities
    844,076       758,907  
Income tax payable
    1,175,246       1,216,841  
Current portion of long-term borrowing
    1,109,083       785,456  
       Total current liabilities
    8,822,269       3,545,981  
                 
Convertible notes payable
    -       4,488,881  
Note payable - related party
    13,722       13,722  
Advance from government grant
    320,883       355,754  
Long-term borrowing
    -       628,365  
       Total liabilities
    9,156,874       9,032,703  
                 
 Commitments and contingencies
               
                 
 Stockholders' equity:
               
 Common stock, $0.001 par value, 50,000,000 shares authorized, 13,324,083 issued and outstanding as of March 31, 2012 (unaudited) and December 31, 2011, respectively
    13,324       13,324  
 Additional paid-in capital
    12,220,181       12,220,181  
 Retained earnings
    2,025,005       2,695,983  
 Statutory reserve
    373,406       373,406  
 Accumulated other comprehensive income
    663,895       551,409  
       Total stockholders' equity
    15,295,811       15,854,303  
       Total liabilities and stockholders' equity
  $ 24,452,685     $ 24,887,006  
                 
See accompanying notes to the condensed consolidated financial statements
 
 
3

 
 
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Net sales
  $ 4,540,442     $ 5,941,470  
Costs of sales
    (2,953,211 )     (3,515,066 )
      Gross profit
    1,587,231       2,426,404  
Selling expenses
    (546,053 )     (585,250 )
Administrative expenses
    (541,004 )     (2,544,387 )
Depreciation and amortization
    (11,666 )     (11,719 )
      Income (loss) from operations
    488,508       (714,952 )
Other income/expense
               
Interest income
    21,201       1,390  
Interest expense
    (373,087 )     (259,454 )
Amortization of discount on notes
    (690,903 )     (759,234 )
Foreign exchange losses, net
    -       (79,046 )
      Loss before income taxes
    (554,281 )     (1,811,296 )
Income tax expense
    (116,696 )     (213,355 )
      Net loss
  $ (670,977 )   $ (2,024,651 )
Other comprehensive loss:
               
Effects of foreign currency translation
    112,486       (519,458 )
Translation attributable to non-controlling interest
    -       39,125  
     Comprehensive loss
  $ (558,491 )   $ (2,504,984 )
                 
Net loss available to common shareholders per share:
               
Basic
  $ (0.05 )   $ (0.17 )
Diluted
  $ (0.05 )   $ (0.17 )
                 
Weighted average shares outstanding:
               
Basic
    13,324,083       12,166,096  
Diluted
    13,324,083       12,166,096  
 
See accompanying notes to the financial statements
 
 
4

 
 
TANKE BIOSCIENCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
   
 
       
             
Operating activities:
           
 Net loss
  $ (670,977 )   $ (2,024,651 )
 Adjustments to reconcile net income to net cash
               
    provided by operating activities:
               
    Depreciation and amortization
    123,802       11,719  
    Common stock issued for services
    -       2,116,000  
    Amortization of discount on convertible notes payable
    690,903       759,234  
    Amortization of capitalized offering costs
    198,635       218,280  
 Changes in operating assets and liabilities:
               
    Accounts receivable
    196,693       80,911  
    Inventories
    (172,013 )     110,189  
    Deferred tax asset
    (395 )     (17,977 )
    Prepayment
    316,052       -  
    Other current assets
    (29,549 )     (557,360 )
    Other non-current assets
    (31,264 )     -  
    Advance from government grant
    (34,871 )     (33,525 )
    Due from - related parties
    165,528       -  
    Accounts payable
    (270,697 )     121,780  
    Other payables and accrued liabilities
    85,169       122,215  
    Income tax payable
    (41,595 )     199,216  
    Advance from customer
    -       (2,434 )
       Net cash provided by operating activities
    525,421       1,103,597  
 
               
 Investing activities:
               
    Increase in loans to customers and suppliers
    (180,028 )     -  
    Increase in other receivables
    (16,744 )     (68,648 )
    Change in restricted cash
    -       (706,802 )
    Purchase of property and equipment
    (193,633 )     (211,130 )
    Purchase of intangible assets
    (6,484 )     -  
    Increase in cash due to acquisition of China Flying
    -       76,075  
       Net cash used in investing activities
    (396,889 )     (910,505 )
                 
 Financing activities:
               
    Due from - related parties
    -       277,112  
    Other receivable from State Administration of Foreign Exchange
    -       (3,999,990 )
    Net proceeds from issue of convertible notes
    -       6,522,563  
    Increase (decrease) in bank borrowings
    (304,738 )     696,551  
       Net cash (used in) provided by financing activities
    (304,738 )     3,496,236  
                 
 Effect of foreign currency translation
    112,486       40,741  
                 
 Net (decrease) increase in cash
    (63,720 )     3,730,069  
 Cash and cash equivalents, beginning of period
    7,700,156       2,222,025  
 Cash and cash equivalents, end of period
  $ 7,636,436     $ 5,952,094  
                 
 Supplemental disclosures of cash flow information:
               
    Cash paid for interest
  $ 21,051     $ 41,173  
    Cash paid for income taxes
  $ 168,472     $ 21,956  
                 
The accompaning notes are an integral part of these condensed consolidated financial statements
 
 
5

 
 
TANKE BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 2012
(Unaudited)
  
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES

In these condensed consolidated financial statements, unless the context requires otherwise, the terms “we”, “our”, “us” and the “Company” refer to Tanke Biosciences Corporation, a Nevada corporation formerly known as Greyhound Commissary, Inc. (“Greyhound”), as well as our direct and indirect subsidiaries, and our principal operating business, Guangzhou Tanke Industry Co., Ltd. (“Guangzhou Tanke”), a company organized under the laws of the People’s Republic of China (“China” or the “PRC”), which we control via a series of variable interest entity contractual agreements (the “VIE Agreements”) more fully described below.

We conduct our business through our subsidiaries, principally our wholly-owned subsidiary China Flying Development Limited (“China Flying”), a Hong Kong incorporated company, and its wholly-owned subsidiary Guangzhou Kanghui Agricultural Technology Co., Ltd. (“Kanghui Agricultural” or the “WFOE”), a wholly foreign owned enterprise incorporated as a limited liability company under the laws of the PRC. The Company operates and controls Guangzhou Tanke through Kanghui Agricultural and China Flying and in connection with the VIE Agreements.

On January 3, 2011, Guangzhou Tanke entered into a series of agreements with Kanghui Agricultural, pursuant to which Kanghui Agricultural effectively assumed management of the business activities of Guangzhou Tanke. Kanghui Agricultural is entitled to 100% of the net income of Guangzhou Tanke and is able to direct Guangzhou Tanke’s actions.

Also on January 3, 2011, our board of directors unanimously approved a resolution to enter into a Share Exchange Agreement with China Flying, and Golden Genesis Limited, a British Virgin Islands company ("Golden Genesis"), the sole stockholder of China Flying. Under the terms of the Share Exchange, Golden Genesis exchanged 100% of its capital stock in China Flying for 10,758,000 shares of authorized, but previously unissued Greyhound common stock, post-split as described below. Also, at the closing, we issued an aggregate of 2,166,903 shares (post split) of our authorized, but previously unissued common stock to a U.S. advisor. Following the closing of the agreement on February 9, 2011, China Flying became our wholly owned subsidiary.

Our board of directors further approved unanimously on January 3, 2011, a one share for 8.512 shares reverse split of our issued and outstanding common stock. The effective date of the split was established by our board on a date prior to the closing of the acquisition of China Flying.

The acquisition of China Flying was contingent upon the completion of our planned private placement in which we sold 6,669,627 units (the “Units”), with net proceeds of $6,522,563. Each Unit consisted of a $1.15 principal amount convertible note and a three year warrant to purchase one share of Greyhound common stock. On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to the private placement and completed the private placement transaction (see Note 9 below). The proceeds from such sale will be used to finance the operations and growth of Guangzhou Tanke.

At the time of the Share Exchange Agreement, Greyhound had 3,397,787 shares of common stock issued and outstanding. Following the reverse split, but prior to the issuance of shares pursuant to the acquisition of China Flying, the outstanding shares were reduced to 399,180 shares. Split shares issued in connection with the reverse stock split were fully paid and non-assessable. The number of stockholders will remain unchanged as a result of the reverse split. The par value of our common stock remained unchanged.

As management of Guangzhou Tanke obtained control of the Company, the Share Exchange was treated as a reverse merger. Accordingly, for accounting purposes Guangzhou Tanke was the acquirer so historical financial information presented herewith is that of Guangzhou Tanke. Consequently, there was no step-up in the basis of the assets of Guangzhou Tanke, as Guangzhou Tanke was the acquirer for accounting purposes.

Pursuant to the VIE Agreements, Kanghui Agricultural has the right to advise, consult, manage and operate Guangzhou Tanke for a quarterly fee equal to Guangzhou Tanke’s net income. Additionally, the Tanke Shareholders pledged their rights, titles and equity interest in Guangzhou Tanke as security for Kanghui Agricultural to collect consulting and services fees provided to Guangzhou Tanke through an Equity Pledge Agreement. In order to further reinforce Kanghui Agricultural’s rights to control and operate Guangzhou Tanke, the Tanke Shareholders granted Kanghui Agricultural an exclusive right and option to acquire all of their equity interests in Guangzhou Tanke through an Option Agreement. Neither Tanke Biosciences nor Kangui Agricultural own the assets or are responsible for the liabilities of Guangzhou Tanke.
 
 
6

 
 
The VIE Agreements were necessary because without them, the shareholders of Tanke Biosciences would not have control of Guangzhou Tanke. With these in place, however, Guangzhou Tanke is contractually equivalent to a subsidiary of Tanke Biosciences.

Guangzhou Tanke has historically self financed, and has been a profitable enterprise. However, on February 9, 2011, Tanke Biosciences sold convertible notes payable (see Note 9 below) with net proceeds of $6,522,563. Such proceeds will be used to finance the operations and growth of Guangzhou Tanke.

As Tanke Biosciences has complete control over Guangzhou Tanke, all assets presented on the balance sheet of Tanke Biosciences are available to settle obligations of Tanke Biosciences. Furthermore, there are no liabilities on the balance sheets of Guangzhou Tanke that do not have recourse against the assets of Tanke Biosciences. As Guangzhou Tanke is our sole operating entity, nearly all operating assets and liabilities are those of Guangzhou Tanke.

“RMB” and “Renminbi” refer to the legal currency of China and “$”, “US dollar” and “US$” refer to the legal currency of the United States.

Overview of Our Business

Through Guangzhou Tanke, our principal operating business, we are one of the leading animal nutrition and innovative feed additive providers in China. Our products are distinguished from traditional artificial feed additives in that they are environmentally-friendly and are designed to optimize the growth and health of livestock such as pigs and cattle, as well as farmed fish.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Preparation

The Company’s consolidated financial statements as of March 31, 2012 and for the three  months ended March 31, 2012 and 2011 have been stated in US dollars and prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. In the opinion of our management, we have included all adjustments (consisting only of normal recurring adjustments) considered necessary in order to make the financial statements not misleading. Operating results for the three months ended March 31, 2012 are not indicative of the results that may be expected for the fiscal year ending December 31, 2012. The condensed consolidated balance sheet information as of December 31, 2011 was derived from the audited consolidated financial statements included in the Form 10-K.  These unaudited financial statements and related notes should be read in conjunction with our audited annual financial statements for the year ended December 31, 2011 included in our Form 10-K filed with the Securities and Exchange Commission on April 16, 2012.

(b) Basis of consolidation

These consolidated financial statements include the financial statements of the Company and its subsidiaries (the “Group''). All inter-company balances and transactions within the Group have been eliminated.

(c) Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of the amount due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment and intangible assets, and the value of warrants. Actual results could differ from those estimates.
 
 
7

 
 
(d) Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts receivable and amounts due from related parties. The Company places its cash with financial institutions with high-credit ratings and quality. The Company maintains bank accounts in the PRC only. In addition, the Company conducts periodic reviews of the related party financial conditions and payment practices. The Company has not experienced losses related to these concentrations in the past.

Approximately 99% of the Company’s revenue is generated from buyers in mainland China.

(e) Concentrations of Suppliers

All the Company’s suppliers are located in mainland China.

(f) Cash and Cash Equivalents

The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.

(g) Restricted Cash

Deposits that are restricted in use are classified as restricted cash. Such restricted cash is in an escrow account and represents one year of interest on the convertible notes payable. When the notes mature or are converted into stock, the cash in this account will be released from restriction.

(h) Trade and Other Receivables

The Company periodically assesses its accounts receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, an allowance is recorded for that doubtful account. Once collection efforts have been exhausted, the account receivable is written off against the allowance. The Company does not require collateral for trade or other accounts receivable.
 
(i) Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories includes the purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

As of March 31, 2012 and December 31, 2011, the Company’s provision for slow-moving or defective inventories amounted to $41,942 and $0, respectively.
 
(j) Prepayments

Prepayments represent cash paid in advance to suppliers for purchases of raw materials.
 
(k) Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
 
 
8

 
 
Depreciation of property and equipment is calculated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:

Buildings
15-20 years
Plant and machinery
3-20 years
Motor vehicle
10 years
Office equipment
3-10 years

Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred.

Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less the proceeds from disposal is charged or credited to income.
 
(l) Intangible Asset

The intangible asset primarily represented two land use rights, and they are recorded at cost less accumulated amortization.

According to the laws of China, land in the PRC is owned by the government and cannot be sold to an individual or company.  However, the government grants the users a land use right to use the land.  The land use rights granted to the Company are being amortized using the straight-line method over the lease term of fifty years.

(m) Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets.

(n) Statutory Reserves

In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company, Guangzhou Tanke is required to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to statutory 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.

As of March 31, 2012 and December 31, 2011, the statutory reserves of the subsidiary already reached 50% of the registered capital of the subsidiary and the Company did not have any further allocation on it.

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.

(o) Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No.104.  Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:
 
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectability is reasonably assured.
 
The Company’s revenue is generated through the wholesale and retail sale of livestock feed including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured.
 
 
9

 
 
Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of March 31, 2012 and December 31, 2011, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.

(p) Cost of Goods Sold

Cost of revenue consists primarily of material cost, labor cost, rent of land allocated to production, overhead associated with the manufacturing process and directly related expenses.

(q) Research and Development Costs

Research and development costs are charged to expense as incurred and are included in operating expenses.
 
(r) Value Added Tax
 
In accordance with the relevant tax laws in the PRC, VAT is levied on the invoiced value of sales and is payable by the purchaser. The Company is required to remit the VAT it collects to the tax authority, but may deduct the VAT it has paid on eligible purchases. The difference between the amounts collected and paid is presented as VAT recoverable or payable balance on the balance sheet.
 
(s) Income Taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to ASC 740, ”Income Tax”. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
The Company is not subject to United States income tax. Furthermore, the Company is audited every year by an agency of the Chinese tax authority. Consequently, there are no uncertain tax positions requiring accrual or disclosure in accordance with ASC 740-10, Income Taxes.

(t) Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from net income or loss, investments by owners and distributions to owners. The Company’s only component of other comprehensive income is the foreign currency translation adjustment.

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

 
 
(v) Commitments and Contingencies
 
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
 
(w) Foreign Currency Translation
 
The Company, its subsidiaries and VIE maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
 
The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.
 
 Exchange rates used (RMB to USD)
2011
2012
Assets and liabilities
Balance sheet date (3/31)
0.1525
0.1584
Revenue and expenses
 Period average (1/1 to 3/31)
0.1518
0.1588
 
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
 
(x) Financial Instruments
 
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, due to/from related parties, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of long-term borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
 
Convertible notes are not carried at fair value due to the discounts for warrants and the beneficial conversion feature. As the interest on these notes approximates market interest, the fair value is their face value of $7,670,071.
 
It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.
 
(y) Recent Accounting Updates

In June 2011, the FASB issued ASC Topic 220 “Comprehensive Income” that amends the presentation of comprehensive income in the financial statements by requiring an entity 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 update also eliminates the option to present the components of other comprehensive income as part of the statement of equity. The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011, with early adoption permitted.  The adoption of this ASU did not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amends ASC Topic 820 to require additional disclosures regarding fair value measurements. One of the areas concerned is to add disclosures about the sensitivity of fair value measurements categorized within Level 3 of the fair value hierarchy, which require the most judgment in determining fair value. The provisions of ASU 2011-04 will be effective for years beginning after December 15, 2011 for both public and nonpublic entities. Public entities will begin adoption in the first interim period beginning after December 15, 2011. Early adoption is not permitted.  The adoption of this ASU did not have a material impact on the Company’s financial statements.
 
 
11

 
 
3. INVENTORIES

Inventories as of March 31, 2012 and December 31, 2011 consisted of the following.

 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Raw materials
  $ 775,090     $ 538,465  
Finished goods
    440,160       360,873  
Work in pogress
    144,056       242,748  
Packaging material
    42,545       45,810  
Inventory allowance
    (41,942 )        
    $ 1,359,908     $ 1,187,895  
4. ACCOUNTS RECEIVABLE
 
Accounts receivable as of March 31, 2012 and December 31, 2011 consisted of the following.
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Account receivables
  $ 1,956,292     $ 2,150,981  
Less: Allowance for doubtful accounts
    (235,286 )     (233,282 )
    $ 1,721,006     $ 1,917,699  

5. DUE FROM RELATED PARTIES

Due from related parties consisted of the following.
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Advance to director
  $ 73,948     $ 239,149  
Others
    -       327  
    $ 73,948     $ 239,476  
 
Advance to directors represents advance payment made to directors for business development activities and will normally be repaid within one year.
 
 
12

 
 
6. OTHER RECEIVABLES AND LOANS TO CUSTOMERS AND SUPPLIERS

Other receivables consisted of the following.
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Deposit and others
  $ 17,113     $ 13,425  
Advance to staff
    53,568       40,511  
    $ 70,681     $ 53,936  
 
Loans to customers and suppliers represent 8% interest bearing advances to one of the Company’s customers and one supplier, both of which are effective in December 2011 and expected to be repaid within one year.
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Loans to customers and suppliers
  $ 2,693,488      $ 2,513,460  
 
7. PREPAYMENT AND OTHER CURRENT ASSETS

In order to secure key raw materials and supplies and to lock in rising purchase prices, the Company paid substantial amounts of cash in advance on purchase orders. In addition, a few major R&D projects were paid in advance for developers’ work.
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Prepayment to suppliers
  $ 3,317,622     $ 3,633,674  
 
Other current assets as of March 31, 2012 and December 31, 2011 consisted of the following.
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Deferred expenses
  $ 29,550     $ -  
Offering costs, net
    715,958       914,594  
    $ 745,507     $ 914,594  
In connection with the private placement, the Company incurred $1,624,002 of offering costs. These costs have been reflected as other current assets and are being amortized using the interest method over the expected life of the related convertible notes payable. Amortization of these costs is recorded as interest expense. As of March 31, 2012, the remaining book value of these offering costs amounted to $715,958.
 
 
13

 
 
8. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment as of March 31, 2012 and December 31, 2011 consisted of the following.

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
 Buildings and leasehold improvements
  $ 4,557,206     $ 4,518,397  
 Plant and equipment
    1,058,767       1,024,245  
 Motor vehicles
    168,906       166,884  
 Office equipment
    319,065       164,907  
 Total property, plant and equipment
    6,103,944       5,874,433  
                 
 Accumulated depreciation
    1,226,936       1,103,134  
 Property, plant and equipment, net
  $ 4,877,008     $ 4,771,299  
 Construction in progress
    -       35,878  
    $ 4,877,008     $ 4,807,177  
The Company has buildings on the site it occupies, including factory buildings. Due to the lack of a Land Use Right Certificate, the Company is unable to apply for the Property Ownership Certificate for the buildings. However, as the buildings are in use, the Company depreciates them over their expected useful lives. During the quarter ended June 30, 2011, the Company’s factory campus construction project was completed and the costs were moved from construction in process to the buildings account. Upon placement in service, the Company began depreciating them.

9. INTANGIBLE ASSET, NET

The intangible asset as of March 31, 2012 and December 31, 2011 consisted of the following.
 
   
December 31,
   
December 31,
 
   
2011
   
2010
 
             
 Deposit for land use right
  $ 841,588     $ 835,985  
 Other
    2,985       2,104  
    $ 844,573     $ 838,089  

On November 21, 2003, the Company applied to the Government of Huaqiao Town, Huadu District, Guangzhou, for the land use right of No. 2 Industry Area of Huaqiao Town (i.e., Laohutou Lot, Wangongtang) covering an area of around 430,000 square feet. The Company has paid $259,774 as consideration for the land use right.

On October 22, 2010, the Company applied to the Administration Committee of Qingyuan Huaqiao Industrial District for the land use right covering an area of around 60 acres. The Company has paid $576,211 as consideration for the land use right and started the construction project during the year.
 
 
14

 
 
10. OTHER NON-CURRENT ASSETS

Other non-current assets consisted of the following.

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Staff loan
  $ 296,431     $ 265,167  
Others
    62,839       62,839  
    $ 359,270     $ 328,006  
 
Staff loans are made to employees under terms that call for repayment of the amounts within two years.
 
11. OTHER PAYABLE AND ACCRUED LIABILITIES

Other payable and accrued liabilities as of March 31, 2012 and December 31, 2011 consisted of the following.

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
             
Other payables
  $ 105,405     $ 67,751  
Staff welfare payable
    68,546       68,057  
Accrued payroll
    112       46,294  
Value added tax payable
    42,909       93,140  
Registration rights penalties
    460,206       460,206  
Accrued Interest
    153,401       -  
Other tax payable
    13,496       23,459  
    $ 844,076     $ 758,907  

Other payables represent loans from third parties, which are interest free, unsecured and repayable on demand.  Registration rights penalties associated with the registration rights agreement.  Accrued interest for the 8% convertible note payable, paid semi-annually.

12. CONVERTIBLE NOTES PAYABLE

On February 9, 2011, the Company entered into a Securities Purchase Agreement with individual investors relating to a private placement transaction by the Company (the “Private Placement”) of 6,669,627 units. Each unit consisted of a $1.15 principal amount 8% Senior Convertible Note (the “Notes”) and a Common Stock Purchase Warrant (the “Warrants”) to purchase one share of the Company’s common stock at an exercise price of $1.40 per share.

As a result of the Private Placement, the Company offered and sold $7,670,071 worth of Notes convertible into 6,669,627 shares of common stock. The Notes are payable 24 months from February 9, 2011 with an interest rate of 8% per annum payable semiannually in arrears. The Company placed in escrow an amount of the proceeds of the Private Placement equal to one semi-annual interest payment on the Notes to secure prompt interest payments. Until such time as 75% of the Notes are converted into shares of Common Stock, if such escrow is depleted in order to make interest payments, the Company will replenish such escrow amount. At the option of the holder, the Notes may be converted into Common Stock at a price of $1.15 per share, which is subject to customary weighted average and stock based anti-dilution protection. The issuance of the Notes was not registered under the Securities Act as such issuance was exempt from registration under Section 4(2) of the Securities Act and Regulation D.
 
 
15

 
 
The Notes contain customary events of default and affirmative and negative covenants of the Company, including negative covenants which restrict the Company’s ability to do the following (among other things) without the consent of the investors: (i) incur, or permit to exist, any indebtedness for borrowed money in excess of (A) US$3,000,000 during the twelve (12) month period beginning on February 9, 2011, or (B) US$5,000,000 during the two-year period beginning on February 9, 2011 and ending on February 9, 2013 (the maturity date of the Notes), except in the ordinary course of the Company’s business; (ii) lend or advance money, credit or property to or invest in (by capital contribution, loan, purchase or otherwise) any person or entity in excess of US$1,000,000 except: (A) investments in United States Government obligations, certificates of deposit of any banking institution with combined capital and surplus of at least $200,000,000; (B) accounts receivable arising out of sales in the ordinary course of business; and (C) inter-company loans between and among the Company and its subsidiaries; (iii) pay dividends or make any other distribution on shares of the capital stock of the Company; (iv) create, assume or permit to exist, any lien on any of the Company’s property or assets now owned or hereafter acquired, subject to existing liens and certain exceptions; (v) assume guarantees, subject to certain exceptions; (vi) engage in “sale-leaseback” transactions, subject to certain exceptions; (vii) make capital expenditures in excess of US$5,000,000 in any fiscal year, subject to certain exceptions; and (viii) materially alter the Company’s business.

In connection with the issuance of the Notes, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the investors which sets forth the rights of the investors to have the shares of common stock underlying the Notes and Warrants registered with the SEC for public resale. Pursuant to the Registration Rights Agreement, we agreed to file, no later than April 11, 2011, a registration statement to register the shares underlying the Notes and the Warrants and to have such registration statement effective no later than September 18, 2011. If the registration statement was not filed by April 11, 2011 (the “Filing Failure”), was not effective by September 18, 2011 (the “Effectiveness Failure”) or if, after the effective date, sales of securities included in the registration statement cannot be made (including, without limitation, because of a failure to keep the registration statement effective, to disclose such information as is necessary for sales to be made pursuant to the registration statement, to register a sufficient number of shares of Common Stock or to maintain the listing of the Common Stock) (a “Maintenance Failure”) then, as liquidated damages (and in complete satisfaction and to the exclusion of any claims or remedies inuring to any holder of the securities) the Company is required to pay an amount in cash equal to 1% of the aggregate purchase price paid by the Investors on each of the following dates: (i) 20 days following the date of a Filing Failure; (ii) 30 days following the initial day of a Maintenance Failure; (iii) on every thirtieth day thereafter (pro-rated for periods totaling less than thirty days) until such failure is cured; (iv) on every thirtieth day after the day of an Effectiveness Failure and thereafter (pro rated for periods totaling less than thirty days) until such Effectiveness Failure is cured; (v) on every thirtieth day after the initial day of a Maintenance Failure and thereafter (pro rated for periods totaling less than thirty days) until such Maintenance Failure is cured. The payments to be made by the Company are limited to a maximum of 6% of the aggregate amount paid by the Investors ($460,204.29). The registration statement was not declared effective by September 18, 2011, as such an Effectiveness Failure occurred and the Company made an estimate of the probable amount it would pay in damages and accrued $260,782. The Company will continue to assess the likelihood of payments under this arrangement, and if necessary will recognize these estimates into earnings in the period in which they become likely in accordance with ASC 825-20, Registration Payment Arrangements.

The warrants issued as a component of the units were valued using the Black-Scholes method using the following assumptions: (1) life of warrants of 3 years, (2) annualized volatility of 100%, (3) fair value of stock as of grant date of $1.15, (4) exercise price of $1.40, (5) annual dividend rate of 0%, and (6) discount rate of 1.34%. Such calculation resulted in a warrant value of $4,470,536.

The proceeds of the unit offering were allocated to the Notes and warrants based on their relative fair values on a weighted average basis, with the resulting allocated value of the warrants of $2,824,350 being classified to additional paid in capital. Such discount to the Notes is being amortized over their expected life.

The beneficial conversion feature associated with the issuance of the above Notes, amounted to $2,824,350, which has also been recorded as a discount to the convertible notes payable and is being amortized over the life of the Notes. The Notes do not contain any embedded derivatives which require liability classification.

As of March 31, 2012, the book value of the Notes amounted to $5,179,784, which consisted of the aggregate face value of $7,670,071, less the remaining discount of $2,490,287.
 
 
16

 
 
13. INCOME TAX

The Company’s operating subsidiary, Guangzhou Tanke, is a “domestic enterprise” that is registered and operated in Guangzhou, the PRC. Income tax expense for the three months ended March 31, 2012 and 2011 represents the provision for current income tax expenses in the PRC.

Tanke Bio-Tech, a subsidiary of Guangzhou Tanke, is a joint venture with a foreign entity that received a full exemption from income taxes in 2007 and 2008 and half rate reduction (12.5%) for years 2009, 2010 and 2011 in accordance with the Law of the People's Republic of China on Income Tax of Enterprises with Foreign Investment and Foreign Enterprises and Notification of the State Council on Carrying out the Transitional Preferential Policies concerning Enterprise Income Tax (Guofa (2007) No. 39).  Beginning in 2012, Tanke Bio-Tech starts benefiting from a different reduced tax rate of 15% due to its status of an official new, high-tech company.

As of March 31, 2012 and December 31, 2011, the income tax payable for the Company amounted to $1,175,246 and $1,216,841, respectively.

Significant components of the Company’s deferred tax asset are as follows.

 
   
March 31,
   
December 31,
 
    2012    
2011
 
   
(Unaudited)
       
Deferred tax asset
           
Allowance for doubtful accounts
  $ 46,437     $ 46,042  

14. LONG-TERM LOANS

The details of the Company’s long-term borrowings are as follows:

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
       
Bank loans bearing interest at 5.4% and 5.85% per
           
annum, maturing on May 21, 2012 and January 30, 2013.
           
The loans are uncollateralized other than restricted cash
           
deposited at the bank.
  $ 1,109,083     $ 1,413,821  
                 
Less: Current portion
    (1,109,083 )     (785,456 )
    $ -     $ 628,365  

The bank loans consist of $554,542 (RMB 3,500,000) and $554,541 (RMB 3,500,000), bearing interest at 5.4% and 5.85% per annum, maturing on May 21, 2012 and January 30, 2013, respectively.  Interest is calculated and paid on the 20th of each month.  Principle payments are made on a quarterly basis.
 
 
17

 
 
15. GOVERNMENT GRANT

The government grant liability represents an advance from the Chinese government for research and development projects. The Company has recorded the grants received as a government grant liability, and ratably recognizes the amount as a reduction of research and development expense when the related research and development activities are performed.  As of March 31, 2012 and December 31, 2011, government grant balances are $320,883 and $355,754, respectively.

16. SEGMENT INFORMATION

The Company operates in four segments: organic trace mineral additives, functional regulation additives, herbal medicinal additives and other revenues. Management oversees each of these operations separately.

Property, equipment and other assets are shared and not tracked separately by segment. Administrative expenses are also not tracked by segment. Following is a breakdown of revenue, costs of sales and gross profit by segment.
  
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
 Segment revenues
           
 Organic Trace Mineral Additives
  $ 3,385,908     $ 4,862,113  
 Functional Regulation Additives
    901,901       710,112  
 Herbal Medicinal Additives
    42,585       1,252  
 Other
    210,048       367,993  
    $ 4,540,442     $ 5,941,470  
                 
 Segment costs of sales
               
 Organic Trace Mineral Additives
  $ 2,120,456     $ 2,879,446  
 Functional Regulation Additives
    582,823       423,680  
 Herbal Medicinal Additives
    51,065       796  
 Other
    198,867       211,144  
    $ 2,953,211     $ 3,515,066  
                 
 Segment gross profit
               
 Organic Trace Mineral Additives
  $ 1,265,452     $ 1,982,667  
 Functional Regulation Additives
    319,078       286,432  
 Herbal Medicinal Additives
    (8,480 )     456  
 Other
    11,181       156,849  
    $ 1,587,231     $ 2,426,404  
 
 
18

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements. As a result of the Share Exchange and the VIE Agreements, the Company, through Kanghui Agricultural, its indirect wholly owned subsidiary, assumed management of the business activities of Guangzhou Tanke and has the right to appoint all executives and senior management and the members of the board of directors of Guangzhou Tanke. As used in this section, the terms “we”, “our”, “us” and the “Company” refer to the Company, our direct and indirect subsidiaries and Guangzhou Tanke, our principal operating business.
   
Overview

We are one of the leading animal nutrition and feed additive providers in China and in 2001 were designated a certified high-tech company by the Guangzhou City Commission of Science and Technology as recognition for new technology developed by us in the agriculture industry. Our products optimize the growth and health of livestock such as pigs and cattle, as well as farmed fish, and seek to capitalize on China’s growing demand for safe and reasonably priced food. Feed additives are utilized in China at less than half the rate of the United States and Europe, and we have a significant growth opportunity as Chinese farmers and ranchers include a greater amount of increasingly sophisticated additive to their feed.

We have more than 165 employees, with 40 engaged in sale or sales-related activities. Our headquarters and manufacturing facilities are in a state-of-the-art 34,000 square-meter facility in the capital city of Guangzhou, in Guangdong province. We currently produce 22 branded feed additives, with each brand available in seven different mixes that correspond to different states of an animal’s life cycle.

Our major products address most key market categories within China’s animal feed additive industry including: Organic Trace Mineral Additives, which account for approximately 75% of our revenue, Functional regulation, which account for approximately 20% of our revenue, and Herbal Medicinal Additives, which account for approximately 1% of our revenue. Our extensive distribution network reaches China’s top 10 feed producers and the 500 largest animal farming operations. We currently market 22 different brands of feed additives at various price points to meet the demands of existing and prospective customers. Within each brand there are seven different mixes that correspond to the different growth stages of an animal’s life cycle. While the majority of our sales are domestic, international sales, mainly in Southeast Asia, Latin American and other developing countries, currently account for approximately 1% of our total sales.

Critical Accounting Policies

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Basis of Preparation

The Company’s consolidated financial statements have been stated in US dollars and prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. In the opinion of our management, we have included all adjustments considered necessary in order to make the financial statements not misleading. Operating results for the three months ended March 31, 2012 are not indicative of the results that may be expected for the fiscal year ending December 31, 2012.

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of the amount due from related parties, the net realizable value of inventories, the estimation of useful lives of property and equipment and intangible assets, and the value of warrants. Actual results could differ from those estimates.
 
 
19

 
 
Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Revenue Recognition, and SEC Staff Accounting Bulletin No. 104. Pursuant to these pronouncements, revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectability is reasonably assured.

The Company’s revenue is generated through the wholesale and retail sale of livestock feed, including organic trace mineral additives, functional regulation additives, herbal medicinal additives and raw materials. Before the Company recognizes revenue on these product sales, written purchase orders and contracts are received in advance of all shipments of goods to customers. For sales within the Company’s own province, delivery is made by Company employees. Such delivery occurs on the same day as shipment. For delivery outside the province, shipment is made through a separate logistics company that assumes the risk of loss. Revenue is recognized upon shipment of goods to the customers. The Company typically does not incur bad debt losses because this type of loss is deducted from the salesperson’s compensation, thereby mitigating the loss to the Company. Therefore, collectability is reasonably assured.

Revenue is presented net of sales returns, which are not significant. However, the Company continually performs analyses of returns and records a provision at the time of sale if necessary. As of March 31, 2012, it was determined that potential returns and allowances were not material so the Company did not record a provision for returns. The Company revisits this estimate regularly and adjusts it if conditions change.

Research and Development Costs

Research and development costs are charged as expense when incurred and included in operating expenses.

Foreign Currency Translation

The Company and its subsidiaries maintain financial statements in the functional currency of each entity. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

The financial statements of each entity are prepared using the functional currency, and have been translated into United States dollars (“US$” or “$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates for the period. Stockholders’ equity is translated at historical exchange rates. Any translation adjustments are included as a foreign exchange adjustment in other comprehensive income, a component of stockholders’ equity.

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

Results of Operations for the Three Months Ended March 31, 2012 as Compared to the Three Months Ended March 31, 2011
 
 
20

 
 
The following is a comparison of our revenue, costs of sales and gross profit by segment for the three months ended March 31, 2012 and 2011.

Revenue and Costs of Sales

The Company operates in four segments: (1) Organic Trace Mineral Additives, (2) Functional Regulation Additives, (3) Herbal Medicinal Additives and (4) Other. Management tracks each of these operations separately. The Company evaluates the performance of its operating segments based on segment revenue and gross profit, and management uses aggregate segment gross profit as a measure of the overall performance of the business. The Company believes that information about aggregate segment gross profit assists investors by allowing them to evaluate changes in the gross profit of the Company’s various offerings separate from factors other than product offerings that affect net income.
   
Three Months Ended
             
   
March 31,
             
   
2012
   
2011
   
$ Change
   
% Change
 
                         
 Segment revenues
                       
 Organic Trace Mineral Additives
  $ 3,385,908     $ 4,862,113     $ (1,476,205 )     -30.4 %
 Functional Regulation Additives
    901,901       710,112       191,789       27.0 %
 Herbal Medicinal Additives
    42,585       1,252       41,333       3301.4 %
 Other
    210,048       367,993       (157,945 )     -42.9 %
    $ 4,540,442     $ 5,941,470     $ (1,401,028 )     -23.6 %
                                 
 Segment costs of sales
                               
 Organic Trace Mineral Additives
  $ 2,120,456     $ 2,879,446     $ (758,990 )     -26.4 %
 Functional Regulation Additives
    582,823       423,680       159,143       37.6 %
 Herbal Medicinal Additives
    51,065       796       50,269       6315.2 %
 Other
    198,867       211,144       (12,277 )     -5.8 %
    $ 2,953,211     $ 3,515,066     $ (561,855 )     -16.0 %
                                 
 Segment gross profit
                               
 Organic Trace Mineral Additives
  $ 1,265,452     $ 1,982,667     $ (717,215 )     -36.2 %
 Functional Regulation Additives
    319,078       286,432       32,646       11.4 %
 Herbal Medicinal Additives
    (8,480 )     456       (8,936 )     -1959.7 %
 Other
    11,181       156,849       (145,668 )     -92.9 %
    $ 1,587,231     $ 2,426,404     $ (839,173 )     -34.6 %
  
Organic Trace Mineral Additives

Organic trace mineral additives constitute the largest and fastest growing area of our business. We are one of China’s largest domestic providers of organic trace mineral additives, specializing in the development and production of chelated organic trace mineral additives. Our current trace mineral manufacturing facility is the one of the largest chelating facilities in China and has the capacity to produce approximately 350 metric tons of organic trace minerals per week.

Revenue from organic trace mineral additives in the first quarter of 2012 decreased by $1,476,205, or 30.4%, as compared to 2011 due to a volume variance.  In 2012, this revenue accounted for approximately 75% of our revenues for the three months ended March 31, 2012 as compared to 82% for the three months ended March 31, 2011.  Our gross profit percentage for the organic trace mineral additive sales amounted to 37.4% and 40.8% for the quarter ended March 31, 2012 and 2011, respectively. The decrease in the gross profit as a percent of revenue was due to cost increases, particularly in raw materials. In order to maintain competitiveness, the Company has not raised prices to offset its increased costs.
 
 
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The timing of Chinese New Year (“CNY”) in 2012 had caused a bit of distortion on the seasonality of the business.  In 2011, CNY was in February making January 2011 still a very strong sales month as customers all rushed to purchase what they needed in the following two months.  2012’s CNY was in mid-January causing two very soft sales months in January and February.
 
Functional Regulation Additives
 
Functional feed additives are widely used to enhance the properties of other products, improve feed efficiency and stimulate the rapid maturation of the immune system.  We currently produce two types of functional regulation additives: feed acidifiers and flavor enhancers. Feed acidifiers are used to prevent microbial degradation of raw materials or finished feeds and to maintain the quality of feed. Flavor enhancers are used to improve feed palatability, enhance animal appetite and stimulate saliva, gastric and pancreatic juices and other digestive juice secretion and gastrointestinal motility and ultimately feed consumption and yield from production animals.

Revenue from functional regulation additives for the quarter ended March 31, 2012 increased by $191,789, or 27.0%, as compared to the first quarter of 2011. The increase in sales is primarily due to increased sales from the successful introduction of two new products in the 2nd half of 2011.However, the gross profit percentage for the quarter ended March 31, 2012 decreased to 35.4%, as compared to 40.3% in the first quarter of 2011 due to higher material and labor costs.

Herbal Medicinal Additives

Chinese herbal feed additives utilize traditional Chinese medicine theory to improve an animal’s digestion and appetite and to regulate the yin and yang balance of an animal’s health.  Herbal medicines come from plants, plant extracts, fungal and bee products, minerals, shells and certain animal parts. Compared to synthetic antibiotics or inorganic chemicals, these naturally-derived products are less toxic, residue free and thought to be ideal feed additives in food animal production.

Revenue from herbal medicinal additives for the quarter ended March 31, 2012 increased by $41,333, or 3,301.4%, as compared to the quarter ended March 31, 2011.

Herbal Medicinal Additives are still in a development and introductory stage when customers are adapting to the usage and Tanke is making minor modifications to products. Prices and costs will continue to fluctuate in the near future until the right balance is reached.

Other

Other revenue mainly consists of buying and then reselling raw materials. Revenue from raw material sales accounted for 5% of our revenue for the three months ended March 31, 2012 and decreased by $157,945 as compared to 2011. This revenue is very price sensitive, and since our costs increased to the point that selling raw materials actually lost money, we plan on curtailed this activity. Going forward, we do not expect this to be a significant source of revenue.

Operating Expenses and Other Income / Expenses

The following table reconciles aggregate segment gross profit to net income for the three months ended March 31, 2012 and 2011.
 
 
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Three Months Ended
             
   
March 31,
             
   
2012
   
2011
   
$ Change
   
% Change
 
                         
Gross profit
  $ 1,587,231     $ 2,426,404     $ (839,173 )     -34.6 %
Selling expenses
    (546,053 )     (585,250 )     (39,197 )     -6.7 %
Administrative expenses
    (541,004 )     (2,544,387 )     (2,003,383 )     -78.7 %
Depreciation and amortization
    (11,666 )     (11,719 )     (53 )     -0.5 %
      Income (loss) from operations
    488,508       (714,952 )     1,203,460       168.3 %
Other income/expense
                               
Interest income
    21,201       1,390       19,811       1425.3 %
Interest expense
    (373,087 )     (259,454 )     113,633       43.8 %
Amortization of discount on notes
    (690,903 )     (759,234 )     (68,331 )     -9.0 %
Foreign exchange losses, net
    -       (79,046 )     (79,046 )     -100.0 %
      Loss before income taxes
    (554,281 )     (1,811,296 )     1,257,015       69.4 %
Income tax expense
    (116,696 )     (213,355 )     (96,659 )     -45.3 %
      Net loss
  $ (670,977 )   $ (2,024,651 )   $ 1,353,674       66.9 %
 
Selling, General and Administrative Expenses

Selling expenses for the three months ended March 31, 2012 decreased by $39,197 as compared to 2011. The amount represents primarily travel and meeting expenses for sales department staff to develop new customers and expand the market. The amount increased in 2011 due to the increase in the number of salespeople, along with an increase in travel and meeting expenses for the sales department staff to develop new customers and expand the market that occurred in the first quarter of 2011.  During 2012, these expenses decreased slightly as our overall revenue also decreased in the first quarter of 2012.  Due to the timing of Chinese New Year, January 2011 was still a strong sales month with heavy sales activities whereas by mid-January of 2012, almost all businesses shut down for a month.

General and administrative expenses for three months ended March 31, 2012 decreased by $2,003,383 as compared to 2011. This was due to higher accounting and legal expenses associated with our public filings in 2011, which did not occur in 2012.  In particular, we issued shares of common stock to a consultant as compensation in the first quarter of 2011, which accounted for $2,116,000 of the total administrative expenses.  There were no such expenses in 2012.

Other Income/Expenses

Interest expense for the three months ended March 31, 2012 increased by $113,633 as compared to 2011. The primary reason for this increase was related to the amortization of our capitalized offering costs related to the issuance of our convertible notes payable in February 2011, which amounted to $198,634 for the first quarter of 2012 compared to $109,140 in 2011.  This increase is due to a full three months of amortization recorded in 2012, as opposed to only approximately 1.5 months in 2011. These amounts are recorded as a component of interest expense. This account also includes actual interest expense on the convertible notes.

The expense associated with the amortization of discounts on our convertible notes payable for the three months ended March 31, 2012 amounted to $690,903 as compared to $759,234 in 2011. As discussed above with the amortization of the capitalized offering costs, the convertible notes payable were issued in February 2011.  These amounts are expected to be amortized through February 2013.

Income Tax Expense

Our income tax expense decreased by $96,659 for the three month ended March 31, 2012 as compared to 2011. The decrease was attributable to a decrease in taxable income during the quarter. We pay different income tax rates depending on which company records the activity. For example, Guangzhou Tanke is taxed at 25%, while Tanke Bio-Tech is taxed at 12.5%. In the first quarter of 2012, proportionally more income was generated by Tanke Bio-Tech, so the effective tax rate was lower than prior periods.
 
 
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Pursuant to Section 26 of the Inland Revenue Ordinance ('IRO'), the governing statute of Hong Kong taxation, any dividend income received by any entity subject to IRO would not be taxable in Hong Kong. Furthermore, foreign (non-Hong Kong) investment income that is repatriated to Hong Kong is not subject to Hong Kong profits (income) tax.

Liquidity and Capital Resources

As of March 31, 2012 and 2011 we had cash balances of $7,636,434 and $5,952,094, respectively. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily by cash from operations, issuance of convertible notes and capital contribution by our stockholders.

The following table sets forth a summary of our cash flows for the periods indicated.
 
   
Year Ended
             
   
December 31,
    $       %  
   
2011
   
2010
   
Change
   
Change
 
                           
Net cash provided by operating activities
  $ 359,894     $ 1,103,597     $ (743,703 )     -67.39 %
Net cash used in investing activities
    (396,890 )     (910,505 )     513,615       -56.41 %
Net cash provided by financing activities
    (139,210 )     3,496,236       (3,635,446 )     -103.98 %
Effect of foreign currency conversion on cash
    112,486       40,741       71,745       176.10 %
Net increase in cash
  $ (63,720 )   $ 3,730,069     $ (3,793,789 )     -101.71 %
 
Operating Activities

Net cash provided by operating activities was $359,894 for the three months ended March 31, 2012 compared to cash provided of $1,103,597 for the three months ended March 31, 2011.  Although we had a net loss of $2,024,651 during the three months ended March 31, 2011, a significant amount of our expenses were non-cash related such as $2,116,000 in expenses associated with the issuance of common stock for services, $759,234 for the amortization of the discounts recorded on our convertible notes payable, as well as $218,280 of offering cost amortization. These non-cash expenses offset the loss and allowed us to continue generating cash from operations.  During 2012, our loss of $670,977 included non-cash expenses of $690,903 for the amortization of the discounts on the convertible notes payable, as well as $198,635 in capitalized operating costs.

Investing Activities

Net cash used in investing activities was $396,890 for the three months ended March 31, 2012, which was the result of a decrease in other receivables of $196,773, offset by spending for the acquisition of property and equipment of $193,633 and the purchase of intangible assets of $6,484.  During the three months ended March 31, 2011, we had net cash used in investing activities due to an increase in other receivables of $68,648, an increase in restricted cash of $706,802, and spending for the acquisition of property and equipment of $211,130, offset by cash of $76,075 acquired as a result of the VIE agreement with China Flying in the first quarter of 2011.

Financing Activities

Net cash used in financing activities was $139,210 for the three months ended March 31, 2012 due a paydown of bank borrowings of $304,738, offset by a reduction in notes receivables from related parties of $165,528.   During the three months ended March 31, 2011, we had net cash provided by financing activities of $3,496,236, resulting primarily from the net proceeds from the issuance of convertible notes of $6,522,563, proceeds from bank borrowings of $696,551, and a scheduled payment from the shareholder of $277,112 from an outstanding note receivable.  This was offset by the cash investment from China Flying to Kanghui of $3,999,990 which was quarantined by the State Administration of Foreign Exchange as of March 31, 2011, and the fund was received by Kanghui as at April 12, 2011.
 
 
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We have historically funded our operation primarily through cash generated from operations. Over the next twelve months, we intend to pursue organic and acquisitive growth and increase our market share in mainland China. We believe that our cash on hand and cash flow from operations will meet our present operating cash needs for the next 12 months. However, we will require additional cash resources to meet the cash requirements of our planned growth.

Additionally, we may require additional cash resources due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity, securities, convertible notes or warrants in the future.

Effect of Changes in the Foreign Exchange Rate

Upon translation of the Company’s financial statements into US Dollars for the purpose of financial reporting in the United States, the exchange rate between the Chinese Renminbi and the US Dollar can have an impact on the amount of reported cash on hand.

However all of the Company’s revenue is generated in China, and currently over 90% of its cost is within China. As a result, from an operational standpoint, a change in the exchange rate has relatively little impact on the Company. Such change is not expected to affect the Company’s liquidity in any significant way.

Economy and 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.

We have not experienced any significant cancellation in orders due to the downturn in the economy. Furthermore, we have also had only a small number of customer-requested delays in delivery or production.

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 statements.

Seasonality

Our operating results and operating cash flows historically have not been subject to significant seasonal variations. However, sales around Chinese New Year are typically comparatively lower than other months. This pattern may change as a result of new market opportunities or new product introduction.

Recent Accounting Pronouncements

See Note 2 of the accompanying consolidated financial statements for a description of recent accounting pronouncements. We do not anticipate that the adoption of these recent accounting pronouncements will have a material impact on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable because we are a smaller reporting company.
 
Item 4. Controls and Procedures.

Disclosure Controls and Procedures
 
 
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We maintain disclosure controls and procedures as required under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, 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 of March 31, 2012, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.

Based on that assessment, management identified material weaknesses in internal control over financial reporting related to the maintenance of our books and records in accordance with GAAP used in the Peoples’ Republic of China, and the conversion of those books and records to GAAP used in the United States of America. Specifically, the material weaknesses related to (1) our process for periodic financial reporting, including documentation of procedures and timely review of financial reports and statements, particularly as it relates to the conversion from Chinese to US GAAP, (2) adequate qualified staff necessary to effectively apply the process, and (3) methods and practices employed to report unusual transactions such as our reverse merger. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Based on this assessment, management concluded that the Company's internal control over financial reporting was not effective as of March 31, 2012. Our management has discussed the material weakness described above with our audit committee.

In an effort to remediate the identified material weaknesses, we have hired a new Chief Financial Officer. We also plan to document our process and procedures governing our internal reporting. Furthermore, we plan to implement additional changes to our internal control over financial reporting, including (1) timely review of reports prior to issuance, (2) a re-evaluation of our staffing needs, and (3) analysis of unusual transactions as they are occurring to allow adequate time for multiple levels of review.

Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. There is no assurance that our disclosure controls or our internal controls over financial reporting can prevent all errors. An internal control system, no matter how well designed and operated, has inherent limitations, including the possibility of human error. Because of the inherent limitations in a cost-effective control system, misstatements due to error may occur and not be detected. We monitor our disclosure controls and internal controls and make modifications as necessary. Our intent in this regard is that our disclosure controls and our internal controls will improve as systems change and conditions warrant.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings.

The nature of our business exposes us to the potential for legal proceedings related to labor and employment, personal injury, property damage, and environmental matters. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of each particular claim, as well as our current reserves and insurance coverage, we do not expect that any known legal proceeding will in the foreseeable future have a material adverse impact on our financial condition or the results of our operations.
 
 
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Item 1A. Risk Factors.

There has been no material change to our Risk Factors from those presented in our Form 10-K for the fiscal year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.
 
Exhibit  Description
No.  
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1
Certification of Principal Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
32.2
Certification of Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
 101.INS
XBRL Instance Document
 101.SCH
XBRL Taxonomy Extension Schema Document
 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith.
** 
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.
 
 
27

 
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.

 
Tanke Biosciences Corporation
   
     
Date: May 17, 2012
By:
/s/ Guixiong Qiu
 
Guixiong Qiu
Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
     
     
Date: May 17, 2012
By:
/s/ Gilbert Lee
 
Gilbert Lee
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 
 
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