U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

 

FORM 10-K

 

 

[X]	Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2012

 

[   ]

Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from _______ to _______

 

 

Commission File Number: 1-10559

 

 

CHINA FRUITS CORP.

(Exact name of small business issuer as specified in its charter) 

 

 

Nevada	58-2027283
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

 

Fu Xi Technology & Industry Park, Nan Feng County

Jiang Xi Province, P. R. China

(Address of principal executive offices)

 

(86794) 326-6199

(Issuer's telephone number)

 

 

Securities registered under Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
None		Not Applicable

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, $.001 par value

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [ x ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [ x ]

 

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 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ x ] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 such shorter period that the registrant was required to submit and post such files).

Yes [ x ] No [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.

Yes [ ] No [ x ]

 

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	£
Non-accelerated filer	£(Do not check if a smaller reporting company)
Accelerated filer	£
Smaller reporting company	S

 

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 Registrant’s revenues for its fiscal year ended December 31, 2012 were $3,709,101.

 

The aggregate market value of the voting stock on April 10, 2013 (consisting of Common Stock, $0.001 par value per share) held by non-affiliates was approximately $1,478,574 based upon the most recent sales price ($0.03) for such Common Stock on said date April 10, 2013, there were 49,951,223 shares of our Common Stock issued and outstanding, of which approximately 49,285,807 shares were held by non-affiliates.

 

Number of shares of common stock, par value $.001, outstanding as of April 10, 2013: 49,951,223

Number of shares of preferred stock outstanding as of April 10, 2013:

Series A, par value $.001 - 13,150

Series B, par value $.00 - 12,100,000

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

The discussion contained in this 10-K under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-K. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-K that are not historical facts are forward-looking statements that are subject to the "safe harbor" created by the Private Securities Litigation Reform Act of 1995.

 

 

TABLE OF CONTENTS

 

PART I:

 

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. (Removed and Reserved)

 

PART II:

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 6. Selected Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9A(T). Controls and Procedures

Item 9B. Other Information

 

PART III:

 

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accounting Fees and Services

 

PART IV:

 

Item 15. Exhibits, Financial Statement Schedules

 

SIGNATURES:

 

 

ITEM 1. BUSINESS

 

History

 

As used herein the terms "We", the "Company", "CHFR", the "Registrant," or the "Issuer" refers to China Fruits Corporation, its subsidiary and predecessors, unless indicated otherwise. We were incorporated in the State of Delaware on January 6, 1993, as Vaxcel, Inc. On December 19, 2000, we changed our name to eLocity Networks Corporation. On August 6, 2002, we changed our name to Diversified Financial Resources Corporation. In May 2006, our board decided to redomicile from the State of Delaware to the State of Nevada. Their decision was approved by the holders of a majority of the voting rights and common stock. On August 18, 2006, we changed our name to China Fruits Corporation.

 

We began operating as a holding company in 2005. The primary objectives involved creating and managing a comprehensive portfolio of companies in key industry sectors. We did not meet our primary objectives in 2005.  As a result, during 2005 we decided to sell all of our real estate properties, and discontinued the operations of all of our subsidiaries. In the first quarter of 2006, our operations from continuing activities consisted of its investment in an oil and gas property in Texas, which was disposed during the second quarter of 2006.

    

As of April 1, 2006, we entered into a Plan of Exchange (the “Agreement”), between and among us, Jiang Xi Tai Na Guo Ye You Xian Gong Si, a corporation organized and existing under the laws of the Peoples’ Republic of China (“PRC”), which changed its corporate name to Jiangxi Taina Nanfeng Orange Co., Ltd. in February of 2007 (collectively referred to herein as “Tai Na”), the shareholders of Tai Na (the “Tai Na Shareholders”) and our Majority Shareholder.

 

Pursuant to the terms of the Agreement, two simultaneous transactions were consummated at closing, as follows: (i) our Majority Shareholder delivered 13,150 of our convertible Series A preferred shares and 12,100,000 non-convertible Series B preferred shares to the Tai Na Shareholders in exchange for total payments of $500,000 in cash and (ii) we issued to the Tai Na Shareholders an amount equal to 30,000,000 new investment shares of our common stock pursuant to Regulation S under the Securities Act of 1933, as amended, in exchange for all of their shares of registered capital of Tai Na. Upon completion of the exchange, Tai Na became our wholly-owned subsidiary. All of these conditions to closing have been met, and we, Tai Na, the Tai Na Shareholders and our Majority Shareholders declared the exchange transaction consummated on May 31, 2006. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree.

 

Business Description of the Issuer

 

Since the reverse merger was consummated, we have continued operations of Tai Na, a company which is principally engaged in the manufacturing, trading and distributing of fresh tangerines and other fresh fruits in the PRC. Tai Na is located in Nan Feng County, Jiang Xi Province, a well known agricultural area for tangerines in China. The geographic advantage offers additional benefits us with our quality control and lower manufacturing costs. We own our primarily facility in Nan Feng County which consists of a total land area of 782,765 square feet, including manufacturing plants of 391,081 square feet and office buildings of 50,720 square feet. We have been focused within our industry since 2005 and we believe we have obtained a solid reputation and a good working relationship with the local government due to our continuous contributions to the local economy. During 2012, with the support from our local government, we utilized an area of 98,505 square feet to establish an Express Export Zone (“EEZ”) with the purpose of exporting fresh tangerines and other fresh fruits. The government departments including Customs, Inspections and Clearing have setup a satellite office onsite to facilitate the process. We believe the setup of this EEZ is good for us to improve our operating efficiencies and also serves as a bridge connecting local enterprises to the world and benefits our local economy.

 

In order to effectively maintain the quality of tangerine, we have a set of temperature and humidity auto-control equipments with capacity of 1,500 tons. We also have two automatic product lines to select fruits, the hourly process capacity of which is 10 ton/hour and 15 ton/hour, respectively. During the year of 2012, our total production was 2,000 tons. We expect the production capacity will reach 2,500 tons in 2013 due to the improvement of production efficiency.

 

Since 2007, we have expanded our sales network by setting up the franchise retail stores for fresh fruits and related products. We also relocated our headquarters to Beijing, which we believe will have a positive effect on our corporate image and marketing strategy. In order to create our brand identity efficiently, we plan to acquire or form joint venture with the existing profitable and middle-size retail stores. We provide the stores with our standard management systems, supplies, as well as remodeling to unify store display, color and sign pursuant to the franchise requirements. We currently have six franchise retail stores in Beijing area, of which four stores are wholly owned by us under direct management, and two stores are managed by the franchisees. In 2012, we will evaluate the operation in the existing stores and replace those in poor performance with new stores. We expect the total number of franchise stores to be increased to seven by the end of 2013.

 

The franchise retail stores build up the direct channel between the end users and us, which facilitates the process from our manufacturing plants to the markets, benefits us in adjusting our business strategies when market changes. In addition to our own products, we also work with our strategic partners to diversify the fruits in our store and ensure the prompt delivery. We believe we can expand our market shares through an effective and efficient franchise retail network. We expect more market shares via brand recognition in the near future.

 

In addition, we believe a sound warehouse and logistics center will help us to improve efficiency and reduce operating expenses. Especially for fresh fruits, the prompt handling and delivery is significant to reduce loss from spoilage. Therefore, we focus on establishing a systematic logistics center to support the expanding retail network. On March 3, 2012, we entered into a five-year lease agreement for warehouse and logistic space of approximately 26,700 square feet to store, select, pack and deliver fresh fruits. After the full operation of the logistics center, we believe both operating expenses and cost of goods sold will be reduced due to large-scale purchases and delivery.

 

 

Overview of Our Market Area

 

China's citrus industry currently experiences transition from quantity concentration to quality concentration, from production only to diversified business segments covering pre-production to post-production. Citrus production in China has the following features: 

 

*	Changes in Market Shares. Before the 1990s, approximately 70% of total citrus output was tangerine, 20% of the total were oranges. The percentages were changed to 55% for tangerine and 30% for orange in the past decade due to the improved quality of oranges with respect to size, outlook and taste.

 

*	Concentration on Chinese Market. Citrus products are primarily marketed in China. Approximately 2% of total citrus products are exported to different countries.

 

*	Increasing Fresh Fruits Consumption. Currently, the average consumption for fresh fruit is approximately 80 kg per person per year in the world, of which fruit consumption of approximately 150 kg per person per year in the developed countries. In China, the average fruit consumption is 69.3 kg per person per year, approximately 46.2% of the consumption level in the developed countries and 86.6% of global average level. Therefore, Chinese fruit consumption is still on an upward trend, which becomes a trigger for the whole citrus industry in China
*	Preference to Fresh Fruits. 95% of citrus products in China are consumed as fresh fruit. Fruit manufacturing is not popular in China, most of which is for export only. In addition, the orange juices on Chinese markets are primarily made from concentrated or non-concentrated juices imported from Brazil and the United States.

 

In general, citrus output increased tremendously in China in the past decades due to the increases in orchards. However, compared to the world's market, the citrus industry in China is undeveloped in terms of quality, output, manufacture and efficiency. There are four barriers in China's citrus industry: a) small manufacturing magnitude, primarily based on household; b) lack of technology input, primarily based on nature growth; c) undeveloped commercial systems, particularly in storage and transportation; d) no clear segments in the industry, particular in household base. It is a long-term goal to rid us of all these barriers. After China entered the World Trade Organization ("WTO"), the sales channels for citrus products should be more facilitated due to the open markets. In the long run, the export of Chinese citrus will increase constantly, for both fresh fruits and processed products.

 

Marketing Strategies

 

Expanding Retail Fruit Stores Network

 

We believe franchise retail stores will benefit us in our business expansion and brand recognition. We preferred the stores operated in form of joint ventures with the existing profitable and middle-size retail stores because those stores have certain operating history and customers base. We reorganize the stores and provide the stores with our standard management systems, supplies, as well as remodeling to unify store display, color, and sign pursuant to the franchise requirements. The franchise retail stores will help build a direct channel between the end users and us, which will facilitate the process of moving product from our plants to the markets, and benefitting us in adjusting our business strategies when markets change. As of December 31, 2012, we had six franchise retail stores in Beijing area with total 11,873 square feet, of which four stores are wholly owned by us under direct management, and two stores are managed by the franchisees. In 2013, we will evaluate the operation in the existing stores and replace those in poor performance with new stores. We expect the total number of franchise stores to be increased to seven by the end of 2013.

 

Expanding Logistic Center

 

We believe a sound warehouse and logistics center will help us to improve efficiency and reduce operating expenses. Especially for fresh fruits, the prompt handling and delivery is significant to reduce loss from spoilage. Therefore, we focus on establishing a systematic logistics center to support the expanding retail network. On March 3, 2012, we entered into a five-year lease agreement for warehouse and logistic space of approximately 26,700 square feet to store, select, pack and deliver fresh fruits. After the full operation of the logistics center, we believe both operating expenses and cost of goods sold will be reduced due to large-scale purchases and delivery.

  

Improving Management Systems

 

We have run retail fruit stores since 2007, experiencing economic boom and financial crisis, from which we summarize three key success factors, including good location, prompt delivery system and sophisticated leader. If good location is predetermined, prompt delivery and sophisticated leader will be significantly related to our management system. We will standardize our operating system; provide our employees with clear indicators in connection with sales skill, products display, storage, delivery, and marketing promotion. We will set up different modules to evaluate the store performance and employee performance. We believe an effective operating system will improve efficiency and encourage our employees.

 

Seeking for Opportunities to Develop International Markets

 

Our tangerines, known as "Nan Feng tangerine", are popular in the market due to the high quality, benefitting from the natural resources in Nan Feng County, which is a well known agricultural area for tangerines in China. Currently, we primarily market in China and hold a leading position in the Chinese market. However, this position is challenged since China’s accession to WTO in 2001. We believe the open-market policies will lower the barriers to entry, both in Chinese markets and global markets. WTO membership brought with it the opportunity to take advantage of new market access opportunities and new protections now available to China under the rules-based system of the WTO. In order to develop our international markets, we have set up a department in charge of oversea markets since 2010, which included 3 full-time employees as of December 31, 2012. Our target markets including Europe, Middle-east, and Southeast Asia. In 2012, our revenues generated from international markets included approximately $300,000 from Dubai, approximately $400,000 from Thailand and approximately $400,000 from Indonesia. We believe there is great growth potential in international markets and we will keep looking for the opportunities oversea.

 

Seeking for Strategic partners

 

For Nan Feng tangerine, other fresh fruit and certain related products, we intend to enter into collaborative arrangements with third parties. These collaborations may be necessary in order for us to:

 

• Enhance manufacturing capacities;

 

• Setup franchise retail stores in our target markets located in North China, East China and South China;

 

• Diversify the fresh fruit sold in the franchise stores;

 

• Expand the sales network;

 

• Increase sales revenue; and

 

• Successfully build brand identity.

 

Enhancing Manufacture Capacity

 

We own our primarily facility in Nan Feng County which consists of a total land area of 782,765 square feet, including manufacturing plants of 391,081 square feet and office buildings of 50,720 square feet. In order to effectively maintain the quality of tangerine, we have a set of temperature and humidity auto-control equipments with capacity of 1,500 tons. We also have two automatic product lines to select fruits, the hourly process capacity of which is 10 ton/hour and 15 ton/hour, respectively. During the year of 2012, our total production was 2,000 tons. We expect the production capacity will reach 2,500 tons in 2013 due to the improvement of production efficiency.

 

Seeking for Supports from local government

 

We have been focused within our industry since 2005 and we believe we have obtained a solid reputation and a good working relationship with the local government due to our continuous contributions to the local economy. During 2012, with the support from our local government, we utilized an area of 98,505 square feet to establish an Express Export Zone (“EEZ”) with the purpose of exporting fresh tangerines and other fresh fruits. The government departments including Customs, Inspections and Clearing have setup a satellite office onsite to facilitate the process. We believe the setup of this EEZ is good for us to improve our operating efficiencies and also serves as a bridge connecting local enterprises to the world and benefits our local economy. In order to encourage our efforts on modern agricultural development, we obtained the grants in amount of $1,219,731 from the local government in 2012.

 

Increasing Expenses in Marketing

 

We currently focus on Beijing as our target market. We plan to increase the marketing expenses on advertising to support our franchise retail stores in Beijing and build up the Beijing market as a showcase for our franchise retail business. Beijing is heart of North China, which has significant effects on the market in North China as a whole. The success in Beijing market is critical for us to develop the market in North China. We divide the Chinese market into three parts: North China, East China and South China. If our business model in North China succeeds, we will repeat it in East China and South China. In addition, we retain professional consultants to integrate our marketing strategies. We believe their expertise will benefit us in connection with target markets definition, corporate image, brand identity and media preference.

 

Competition 

 

The domestic and international markets for the citrus industry are intensely competitive and require us to compete against some companies possessing greater financial, marketing and other resources than ours. These include firms that compete in multiple geographic areas as well as firms that are primarily local in their operation. Competitive products include different fruits planted in domestic market and those imported from Southeast Asia, Japan, Taiwan, Europe, US and Canada. Competitive factors impacting our business include pricing, advertising, sales promotions, product innovation, increased efficiency in production techniques, the introduction of new packaging, and brand/trademark development and protection.

 

Our competitive strengths include good quality with a high level of consumer acceptance; a national distribution network; sophisticated marketing capabilities; and a talented group of dedicated employees. However, we cannot be certain that efforts in marketing will be successful.

  

Government Regulation 

 

The production, distribution and sale in the Chinese market of our products are subject to the PRC State Food, Drug, and Cosmetic Act, state consumer protection laws, the Occupational Safety and Health Act, various environmental statutes; and various other state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products.

 

Employees 

 

We have to make a rational allocation and use of personnel to match our business growth. As of December 31, 2012, we had 60 full-time employees, of which 35 are experienced personnel in franchising management, export trading and purchasing.

 

  

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or future results. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deems to be immaterial also may materially adversely affect our business, financial condition or results of operations.

 

We rely on its strategic partners for a significant portion of its business. If we are unable to maintain good relationships with its strategic partners, our business could suffer

 

For Nan Feng tangerine, other fresh fruit and certain related products, we intend to enter into collaborative arrangements with third parties. These collaborations may be necessary in order for us to:

 

• Enhance manufacturing capacities;

• Setup franchise retail stores in our target markets located in North China, East China and South China

• Diversify the fresh fruit sold in the franchise stores;

• Expand the sales network;

• Increase sales revenue; and

• Successfully build brand identity.

 

We cannot assure that we will be able to enter into collaborative agreements with partners on terms favorable to us, or at all, and any future agreement may expose us to risks that our partner might fail to fulfill its obligations and delay commercialization of our products. We also could become involved in disputes with partners, which could lead to delays in or terminations of our development and commercialization programs and time consuming and expensive litigation or arbitration. Our inability to enter into additional collaborative arrangements with other partners, or our failure to maintain such arrangements, would limit the number of product candidates which we could develop and ultimately, decrease our sources of any future revenues.

 

Increase in cost, disruption of supply or shortage of raw materials could harm our business.

 

The output of tangerine significantly relies on the local climate. The shortage of tangerine would increase our operating costs and could reduce our profitability. Increases in the prices of our finished products resulting from higher raw material costs could affect affordability in some markets and reduce our sales. An increase in the cost or a sustained interruption in the supply or shortage of the tangerine that may be caused by natural disasters could negatively impact our net revenues and profits.

 

Adverse weather conditions could reduce the demand for our products.

 

The sales of our products are influenced to some extent by weather conditions in the markets in which we operate. Unusually cold weather during the summer months may have a temporary effect on the demand for our products and contribute to lower sales, which could have an adverse effect on our results of operations for those periods.

  

If we are unable to maintain brand identity and product quality, our business may suffer.

 

Our success depends on our ability to maintain brand identity for our "Nan Feng Tangerine". We cannot assure you, however, that additional expenditures and our renewed commitment to advertising and marketing will have the desired impact on our products' brand image and on consumer preferences. Product quality issues, real or imagined, or allegations of product contamination, could tarnish the image of the affected brands and may cause consumers to choose other products.

 

Changes in accounting standards and taxation requirements could affect our financial results.

 

New accounting standards or pronouncements that may become applicable to us from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results for the affected periods. We are also subject to income tax in China in which we generate net operating revenues. In addition, our products are subject to sales and value-added taxes in China. Increases in income tax rates could reduce our after-tax income from affected jurisdictions, while increases in indirect taxes could affect our products' affordability and therefore reduce demand for our products.

 

 

If we are not able to achieve our overall long term goals, the value of an investment in us could be negatively affected.

 

We have established and publicly announced certain long-term growth objectives. These objectives were based on our evaluation of our growth prospects, which are generally based on the increase in our investment, and on an assessment of potential level or mix of product sales. There can be no assurance that we will achieve the required volume or revenue growth or mix of products necessary to achieve our growth objectives.

 

Our assets are located in China and its revenues are derived from its operations in China

    

In terms of industry regulations and policies, the economy of China has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China are still owned by the Chinese government. For example, all lands are state owned and are leased to business entities or individuals through governmental granting of State-owned Land Use Rights. The granting process is typically based on government policies at the time of granting and it could be lengthy and complex. This process may adversely affect our future manufacturing expansions. The Chinese government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures. At present, our development of research and development technologies and products is subject to approvals from the relevant government authorities in China. Such governmental approval processes are typically lengthy and complex, and never certain to be obtained.

 

Political and economic risks

    

China is a developing country with a young market economic system overshadowed by the state. Its political and economic systems are very different from the more developed countries and are still in the stage of change. China also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationship with other countries, including but not limited to the United States. Such shocks, instabilities and crises may in turn significantly and adversely affect our performance.

 

Risks related to interpretation of China laws and regulations which involves significant uncertainties

  

China’s legal system is based on written statutes and their interpretation by the Supreme People’s Court. Prior court decisions may be cited for reference but have limited value as precedents. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. In addition, as the Chinese legal system develops, we cannot assure that changes in such laws and regulations, and their interpretation or their enforcement will not have a material adverse effect on our business operations.

 

Fluctuations in the exchange rate could have a material adverse effect upon our business.

 

We conduct our business in the Renminbi. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade old policy of pegging its currency to the U.S. currency. Under the current policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 6.5% appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and August 31, 2007. However, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. To the extent our future revenues are denominated in currencies other the United States dollars, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse affect on our financial condition and operating results since our operating results are reported in United States dollars and significant changes in the exchange rate could materially impact our reported earnings.

 

 

Declining economic conditions could negatively impact our business

 

Our operations are affected by local, national and worldwide economic conditions.  Markets in the United States and elsewhere have been experiencing extreme volatility and disruption for more than 12 months, due in part to the financial stresses affecting the liquidity of the banking system and the financial markets generally.  In recent weeks, this volatility and disruption has reached unprecedented levels.  The consequences of a potential or prolonged recession may include a lower level of economic activity and uncertainty regarding energy prices and the capital and commodity markets. While the ultimate outcome and impact of the current economic conditions cannot be predicted, a lower level of economic activity might result in a decline in energy consumption, which may adversely affect the price of oil, liquidity and future growth.  Instability in the financial markets, as a result of recession or otherwise, also may affect the cost of capital and our ability to raise capital.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in this current report.

 

We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, most of our senior executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside of China upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts. 

 

To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings from our operations.

 

The application of the "penny stock" rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

 

As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.

 

Our common shares are thinly traded and, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Our common shares have historically been sporadically or "thinly-traded" on the “Over-the-Counter Bulletin Board”, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.

 

The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current revenues that could lead to wide fluctuations in our share price. The price at which you purchase our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or "risky" investment due to our lack of revenues or profits to date and uncertainty of future market acceptance for our current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results; adverse outcomes, additions or departures of our key personnel, as well as other items discussed under this "Risk Factors" section, as well as elsewhere in this Current Report. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

 

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.

 

 

Volatility in our common share price may subject us to securities litigation.

 

The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.

 

Our corporate actions are substantially controlled by a single stockholder.

 

Chen, Quan Long currently owns approximately 100% of our outstanding Series A and B Preferred shares, representing a majority of our voting power. This stockholder could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in the principal stockholder, elections of our board of directors will generally be within the control of this stockholder. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with this principal stockholder. As such, it would be extremely difficult for shareholders to propose and have approved proposals not supported by the Chen, Quan Long. There can be no assurances that matters voted upon by the Chen, Quan Long will be viewed favorably by all shareholders of our company.

 

We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.

 

We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

 

PRC laws and regulations governing our business are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business. We are considered a foreign person or foreign invested enterprise under PRC law. As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS 

 

None.

 

ITEM 2. PROPERTIES

 

We are headquartered in Beijing, PRC with office area of 2,260 square feet, which is under a three-year lease agreement due on March 31, 2012. On March 3, 2012, we entered into a five-year lease agreement for warehouse and logistic space of approximately 26,700 square feet to store, select, pack and deliver fresh fruits. The logistics center includes office space of approximately 8,800 square feet. We believe the new warehouse and logistics center is adequate for our current operations.

 

We also lease 4 stores in Beijing area for retail business, of which the total store area is 8,900 square feet with annual rental payment of approximately $230,000.

 

Our main operation is located in the Fu Xi Technology & Industry Park, Nan Feng County, Jiang Xi Province, People’s Republic of China, which is self-owned property with a total land area of 782,765 square feet, including manufacturing plants with total area of 391,081 square feet and office buildings with total area of 50,720 square feet. This space is adequate for our present operations. No other businesses operate from this office.

 

There is no private ownership of land in China; all land ownership is held by the government of China, its agencies and collectives. Land use rights are obtained from government for periods ranging from 50 to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required transfer fee.

 

ITEM 3. LEGAL PROCEEDINGS

 

We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

 

ITEM 4. (REMOVED AND RESERVED)

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Trading Market for Common Equity

 

Our common stock is quoted on the Electronic Bulletin Board under the symbol, CHFR. Trading of our common stock in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions. Further, these prices reflect inter-dealer prices without retail mark-up, mark-down, or commission, and may not necessarily reflect actual transactions. The following tables set forth the high and low sale prices for our common stock as reported on the Electronic Bulletin Board for the periods indicated.

 

Interim Period		Low			High
Interim Period ended December 31, 2012	$	0.002		$	0.006
Fiscal 2012
Quarter ended March 31, 2012	$	0.01		$	0.03
Quarter ended June 30, 2012	$	0.006		$	0.01
Quarter ended September 30, 2012	$	0.002		$	0.006
Quarter ended December 31, 2012	$	0.002		$	0.006
Fiscal 2011
Quarter ended March 31, 2011	$	0.02		$	0.05
Quarter ended June 30, 2011	$	0.02		$	0.04
Quarter ended September 30, 2011	$	0.02		$	0.03
Quarter ended December 31, 2011	$	0.01		$	0.03

  

Dividends

 

We have never paid a cash dividend on our common stock. The payment of dividends may be made at the discretion of our Board of Directors, and will depend upon, among other things, our operations, capital requirements, and overall financial condition. There are no contractual restrictions on our ability to declare and pay dividends.

 

Preferred Stock

 

On September 16, 2004, we filed with the Delaware Secretary of State a Certificate of Designation of the Rights and Preferences of Preferred Stock of Diversified Financial Resources Corporation, n/k/a China Fruits Corporation. This designation created 200,000,000 shares, no stated par value, of Series A and Series B Convertible Preferred Stock. On May 18, 2006, we filed with the Nevada Secretary of State and Articles of Exchange to redomicile from Delaware State to Nevada State, the designation regarding the Rights and Preferences of Preferred Stock remains unchanged except that the par value of Preferred Stock was changed to $.001. A Certificate of Designation was filed with the Nevada Secretary of State accordingly.

 

The Series A Convertible Preferred Stock has the following rights and privileges:

 

1. The shares are convertible at the option of the holder at any time into common shares, at a conversion rate of one share of Series A Convertible Preferred Stock for 100 shares of common stock for a period of 10 years from the issuance date

 

2. Requires two-thirds voting majority to authorize changes to equity.

 

3. Redemption provision at option of directors for $10 per share plus the greater of $3 per share or 50% of market capitalization divided by 2,000,000. 

 

4. The holders of the shares are entitled to one hundred (100) votes for each share held.

 

5. Upon our liquidation, the holders of the shares will be entitled to receive $10 per share plus redemption provision before assets distributed to other shareholders.

 

6. The holders of the shares are entitled to dividends equal to common share dividends.

 

 

The Series B Convertible Preferred Stock has the following rights and privileges:

 

1. The shares are not convertible into any other class or series of stock.

 

2. The holders of the shares are entitled to five hundred (500) votes for each share held. Voting rights are not subject to adjustment for splits that increase or decrease the common shares outstanding.

 

3. Upon our liquidation, the holders of the shares will be entitled to receive $.001 per share plus redemption provision before assets distributed to other shareholders.

 

4. The holders of the shares are entitled to dividends equal to common share dividends.

 

5. Once any shares of Series B Convertible Preferred Stock are outstanding, at least two-thirds of the total number of shares of Series B Convertible Preferred Stock outstanding must approve the following transactions:

 

a) Alter or change the rights, preferences or privileges of the Series B Preferred Stock.

b) Create any new class of stock having preferences over the Series B Preferred Stock.

c) Repurchase any of our common stock.

d) Merge or consolidate with any other company, except our wholly-owned subsidiaries.

e) Sell, convey or otherwise dispose of, or create or incur any mortgage, lien, or charge or encumbrance or security interest in or pledge of, or sell and leaseback, in all or substantially all of our property or business.

f) Incur, assume or guarantee any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or guaranteed by us, except for operating leases and obligations assumed as part of the purchase price of property.

 

Number of Holders

 

As of April 10, 2013, we had 3,634 common shareholders of record.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of the date of this Report, we have not authorized any equity compensation plan, nor has our Board of Directors authorized the reservation or issuance of any securities under any equity compensation plan.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

None.

 

Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers

 

None.

 

Transfer Agent

 

Our transfer agent is Guardian Registrar & Transfer, Inc. located at 7951 SW 6th Street, Suite 216, Plantation, Florida 33324.

 

  

ITEM 6. SELECTED FINANCIAL DATA

 

If the registrant qualifies as a smaller reporting company as defined by Rule 229.10(f)(1), it is not required to provide the information required by this Item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

 

Forward Looking Statements

 

Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Consolidated Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion strategy, our ability to achieve operating efficiencies, our dependence on distributors, capacity, suppliers, industry pricing and industry trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop and deliver our products on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives.

 

Critical Accounting Policies

 

Revenue recognition

 

The Company derives revenues from the resale of tangerine and other fresh fruits purchased from third parties, net of value added taxes (“VAT”).  The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales.  Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

In accordance with guidance issued by the FASB, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.  The Company’s sales arrangements are not subject to warranty.

 

The Company recognizes revenue from the sale of products upon delivery to the customers and the transfer of title and risk of loss. The Company did not record any product returns for the year ended December 31, 2012.

 

Inventory

 

Inventories consist of finished goods and are valued at lower of cost or market value, cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.  The spoilage will be written-off directly to the profit and loss when it occurs. As of December 31, 2012 and 2011, the Company did not record an allowance for obsolete or spoiled inventories.

 

 

Property, Plant, and Equipment

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

	Depreciable life		Residual value
Plant and machinery	10-12 years		5%
Furniture, fixture and equipment	5-6 years		5%

 

Expenditure for maintenance and repairs is expensed as incurred.

  

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

Revenues

 

Gross revenues were $3,709,101 and $3,476,158 for the years ended December 31, 2012 and 2011, respectively. We generate our revenues from sales of fresh fruits and related products, including our signature tangerine. The revenues are recognized when persuasive evidence of a sale exists, transfer of title has occurred, the selling price is fixed or determinable and collectability is reasonably assured. Our sales arrangements are not subject to warranty. We did not record any product returns during the year ended December 31, 2012.

 

The increase in revenues by $232,943 during the year ended December 31, 2012 was due primarily to increasing traffic in our retail stores. After our efforts on marketing and brand recognition over years, more and more local customers know about our stores and turn into our regular customers. The revenue increased in 2012 was also due to the development in international markets, including Indonesia, Thailand, Dubai, and so on. The revenues generated from these three countries in 2012 were $406,180, $396,503 and $301,916, approximately 11%, 11% and 8% of total revenues, respectively.

 

We expect our sales to increase during 2013 as our moves toward implementing our business plan, including the increase in franchise retail stores, the increase in marketing budgets. We currently have six franchise retail stores in Beijing area, of which four stores are wholly owned by us under direct management, and two stores are managed by the franchisees. In 2013, we will evaluate the operation in the existing stores and replace those in poor performance with new stores. We expect the total number of franchise stores to be increased to seven by the end of 2013.

 

Income / Loss

 

We had net income of $128,421 for the year ended December 31, 2012, compared to net loss of $376,002 in the year of 2011. The net income during the year of 2012 was also due to the grants received from the local government in amount of $1,219,731, which was to encourage our efforts on modern agricultural development. Without the government grant, we suffered loss of $1,091,310 from operations.

 

There can be no assurance that we will achieve or maintain profitability, or that any revenue growth will take place in the future.

 

Expenses

 

Operating expenses for the years ended December 31, 2012 and 2011 were $1,478,753 and $1,074,619, respectively. The increase in operating expenses in 2012 was attributable to the increase in selling and marketing expenses, such as advertising, shipping and handling, and exhibition expenses, etc. and the increase in general administrative expenses.

  

Cost of Goods Sold

 

Cost of goods sold included expenses directly related to the manufacturing and selling our products. Product delivery and direct labor would be examples of cost of goods sold items. During the year ended December 31, 2012, we had $3,053,873 in cost of goods sold, or 82.3% of sales revenue. During the year ended December 31, 2011, we had $2,943,600 in cost of goods sold, or 84.7% of sales revenue. The gross margin of fresh fruits products typically ranges between 5-10%.We expect to reduce the cost of goods sold through collaboration with more non-related suppliers, which will also help us to reduce the risk of concentration.

 

 

Liquidity and Capital Resources

 

Cash flows provided by operating activities were $740,564 for the year ended December 31, 2012, compared to cash flows of $1,646,362 used in operating activities for the year ended December 31, 2011. Positive cash flows from operations in 2012 were due primarily to net income of $128,421, plus the decrease in inventories in the amount of $260,351 and the increase in other payables and accrued liabilities by $352,341, partially offset by the increase in accounts receivable by $269,411, and the decrease in accounts payable and tax payable in amounts of $66,864 and 16,405, respectively.

 

Negative cash flows from operations in 2011 were due primarily to the net loss of $376,002, plus the increase in accounts receivable and prepaid expenses in the amount of $244,438 and $1,142,878, respectively, and the decrease in other payables and accrued liabilities in an amount of $17,725, partially offset by the increase in accounts payable by $57,326.

 

Cash flows used in investing activities were $1,022,805 and $836,576 during the years ended December 31, 2012 and 2011, respectively, due primarily to construction in progress, which was $683,470 and $688,005 during the year of 2012 and 2011, respectively, and purchase of property and equipment, which was $355,173 and $148,571 during the year of 2012 and 2011, respectively, offset by proceeds of $15,838 from disposal of fixed assets in 2012.

 

Cash flows used in financing activities were $189,091 for the year ended December 31, 2012, compared to cash flows of $2,668,910 provided by financing activities for the year ended December 31, 2011. Negative cash flows from financing activities in 2012 were due primarily to payments of $2,187,175 on notes payable, offset by the proceeds of $1,878,118 from notes payable, advance from a third party in amount of $24,566, and due to stockholders by $95,400.

 

Cash flows from financing activities in 2011 were due primarily to advance from a third party in amount of $1,377,101, the proceeds from notes payable in total of $2,909,587, including a note of $2,321,479 (RMB 15,000,000) bearing annual interest of 7.872% due on November 25, 2012, a note of $309,530 (RMB2,000,000) bearing annual interest of $7.544% due on December 6, 2012, and a note of $278,578 (RMB 1,800,000.00) bearing annual interest of 18% due on February 11, 2012, partially offset by the payments to notes payable in amount of $1,857,183.

 

 

We project that we will need additional capital to fund operations over the next 12 months. We anticipate we will need an additional $1,000,000 for the year of 2013.

 

Overall, we have funded our cash needs from inception through December 31, 2012 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.

    

We had cash of $47,399 on hand as of December 31, 2012. Currently, we have enough cash to fund our operations for about six months. This is based on current cash flows from operating activities and projected revenues. However, if the projected revenues fall short of needed capital we may not be able to sustain our capital needs. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $1,000,000 per year starting in 2013. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.

 

On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, and additional infusions of capital and debt financing. Our current capital and revenues are insufficient to fund such expansion. If we choose to launch such an expansion campaign, we will require substantially more capital. The funds raised from this offering will also be used to market our products and services as well as expand operations and contribute to working capital. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected and we will have to significantly modify our plans. For example, if we unable to raise sufficient capital to develop our business plan, we may need to:

 

·	Curtail new product launches
·	Limit our future marketing efforts to areas that we believe would be the most profitable.

Demand for the products and services will be dependent on, among other things, market acceptance of our products, citrus market and fresh fruits market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recession periods.

        

Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We manufacture, trade and distribute fresh fruits, including our signature tangerine, to retail consumers and wholesale buyers. We plan to strengthen our position in these markets. We also plan to expand our operations through aggressively marketing our products and our concept. 

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not use derivative financial instruments in our investment portfolio and has no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.

 

Foreign Exchange Rates

 

All of our sales are denominated in Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.

 

Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We recorded net foreign currency gains of $32,201 in fiscal 2012. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

 

Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.

 

The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the consolidated financial statements or otherwise stated in this MD&A were as follows:

 

			2012				2011
Balance sheet items, except for the registered and paid-up capital as of December 31, 2012 and 2011			USD 0.161:RMB 1				USD 0.151:RMB 1
Amounts included in the statement of operations, statement of changes in stockholders’ equity and statement of cash flows for the years ended December 31, 2012 and 2011			USD 0.158:RMB 1				USD 0.155:RMB 1

  

 

ITEM 8. FINANCIAL STATEMENTS

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of China Fruits Corporation

 

We have audited the accompanying consolidated balance sheets of China Fruits Corporation and Subsidiaries (the “Company”) as of December 31, 2012 and 2011 and related consolidated statements of operations, stockholders’ deficit, comprehensive income and cash flows for each of the years in the two-year period ended December 31, 2012 and 2011. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit 

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Fruits Corporation and Subsidiaries as of December 31, 2012 and 2011 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 and 2011 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 22, the Company has suffered accumulated deficit and negative cash flow from operations that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/Lake & Associates CPA’s LLC

Lake & Associates CPA’s LLC

Schaumburg, IL

April 12, 2013

 

 

 

China Fruits Corpration And Subsidiaries
Audited Condensed Consolidated Balance Sheets
As of December 31, 2012 and 2011
(Expresed in US Dollars, except for number of shares)
ASSETS
		12/31/2012				12/31/2011
CURRENT ASSETS
Cash and cash equivalents		$	47,399			$	518,850
Accounts receivable, trade			654,087				376,926
Receivable from third parties			126,427				149,601
Inventories			122,986				382,306
Prepayment and Deferred expense			1,549,673				1,477,402
Refundable tax			99,146				149,313
TOTAL CURRENT ASSETS			2,599,718				3,054,398
PLANT AND EQUIPMENT, NET			3,644,221				2,931,885
OTHER ASSETS			2,247				5,346
TOTAL ASSETS		$	6,246,186			$	5,991,629
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,024			$	67,968
Loan and related party payable			40,130				39,677
Notes payable-current portion			2,407,782				2,253,646
Customer deposit			553,071				335,570
Accrued liabilities and payroll tax liabilities			227,530				100,177
TOTAL CURRENT LIABILITIES			3,229,537				2,797,038
LONG-TERM LIABILITIES
Note Payable-Long term			219,911				653,875
Due to stockholders			305,333				209,933
TOTAL LONG-TERM LIABILITIES			525,244				863,808
TOTAL LIABILITIES			3,754,781				3,660,846
STOCKHOLDERS' EQUITY
Preferred stock, 200,000,000 shares authorized, designated as Series A and Series B
Series A; par value $.001; 2,000,000 shares authorized, 13,150 shares issued			13				13
and outstanding as of December 31, 2012 and 2011, respectively
Series B; par value $0.001, voting; 50,000,000 shares authorized, 12,100,000 shares issued			12,100				12,100
and outstanding as of December 31, 2012 and 2011, respectively
Common stock, par value $.001, 100,000,000 shares authorized,  49,951,223 shares issued			49,951				49,951
and outstanding as of December 31, 2012 and 2011, respectively
Additional paid-in capital			3,789,864				3,789,864
Statutory reserve			129,636				62,719
Accumulated other comprehensive income			421,808				389,607
Accumulated (deficit)			(1,911,967	)			(1,973,471	)
TOTAL STOCKHOLDERS' EQUITY			2,491,405				2,330,783
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	6,246,186			$	5,991,629
The accompanying notes are an integral part of these  consolidated  financial statements

 

 

China Fruits Corpration And Subsidiaries
Audited Condensed Consolidated Statements of Operations
For The Years Ended December 31, 2012 and 2011
(Expresed in US Dollars, except for number of shares)

 

		For the years ended
		12/31/2012				12/31/2011
REVENUES:
Sales		$	3,709,101			$	3,476,158
Cost of goods sold			3,053,873				2,943,600
GROSS PROFIT			655,228				532,558
OPERATING EXPENSES:
Selling and marketing			545,456				446,961
Professional and legal expenses			94,700				95,264
General and administrative			838,597				532,394
TOTAL OPERATING EXPENSES			1,478,753				1,074,619
(LOSS) FROM CONTINUING OPERATIONS			(823,525	)			(542,061	)
OTHER INCOME (EXPENSE):
Interest income			—				—
Interest expenses			(143,936	)			(121,343	)
Government & other grant			1,219,731				297,761
Loss from disposal of fixed assets			(143,806	)			—
Other			19,957				(10,359	)
TOTAL OTHER INCOME (EXPENSES)			951,946				166,059
INCOME(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		$	128,421			$	(376,002	)
Income tax expense			—				—
NET (LOSS)		$	128,421			$	(376,002	)
Other comprehensive income
- Foreign currency translation gain (loss)		$	32,201				131,817
COMPREHENSIVE (LOSS)		$	160,622			$	(244,185	)
(Loss) per common share:
Basic			**			$	(0.01	)
Weighted average number of common shares outstanding
Basic			49,951,223				44,365,456
**Less than $0.01
The accompanying notes are an integral part of these consolidated financial statements.

 

 

China Fruits Corpration And Subsidiaries
Audited Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2012 and 2011
(Expresed in US Dollars, except for number of shares)
		Series"A"				Preferred				Series "B"				Preferred				Common stock								Additional				Statutory				Accumulated other comprehensive				Accumulated				Total
		shares				Amount				shares				Stock				shares				Amount				Paid-in Capital				reserve				income(loss)				deficit				Equity
Balances as of December 31, 2010			13,150			$	13				12,100,000			$	12,100				38,779,689			$	38,779			$	3,465,890			$	16,805			$	257,790			($	1,551,555	)		$	2,239,822
New common stock issued for liabilities																			11,171,534				11,172				323,974																335,146
Foreign currency adjustment																																			131,817								131,817
Statutory reserve allocation																															45,914								(45,914	)			—
Net (loss)																																							(376,002	)			(376,002	)
Balances as of December 31, 2011			13,150			$	13				12,100,000			$	12,100				49,951,223			$	49,951			$	3,789,864			$	62,719			$	389,607			($	1,973,471	)		$	2,330,783
Foreign currency adjustment																																			32,201								32,201
Statutory reserve allocation																															66,917								(66,917	)			—
Net (loss)																																							128,421				128,421
Balances as of December 31, 2012			13,150			$	13				12,100,000			$	12,100				49,951,223			$	49,951			$	3,789,864			$	129,636			$	421,808			($	1,911,967	)		$	2,491,405
The accompanying notes are an integral part of these consolidated financial statements

 

 

China Fruits Corpration And Subsidiaries
Audited Condensed Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012 and 2011
(Expresed in US Dollars)
		For the years ended
		12/31/2012				12/31/2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)			128,421				(376,002	)
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation			208,698				148,247
Loss from disposal of fixed assets			143,806				—
(Increase) decrease in operating assets:
Accounts receivable			(269,411	)			(244,438	)
Inventories			260,351				(75,279	)
Other assets			3,120				(4,333	)
Prepaid expenses and other current assets			(3,493	)			(1,142,878	)
Increase (decrease) in operating liabilities:
Accounts payable			(66,864	)			57,326
Other payables and accrued liabilities			352,341				(17,725	)
Tax payable			(16,405	)			8,720
Deferred income			—				—
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES			740,564				(1,646,362	)
CASH FLOWS FROM INVESTING ACTIVITIES
Construction in progress			(683,470	)			(688,005	)
Purchase of property and equipment			(355,173	)			(148,571	)
Proceeds from disposal of property and equipment			15,838				—
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES			(1,022,805	)			(836,576	)
CASH FLOWS FROM FINANCING ACTIVITIES
Loan from related party			—				89,283
Advance from (to) a third party			24,566				1,377,101
Proceeds from Notes Payable			1,878,118				2,909,587
Payments on Notes Payable			(2,187,175	)			(1,857,183	)
Proceeds from issuance of note payable-related party			—				150,122
Due to stockholders			95,400				—
NET CASH PROVIDED  BY FINANCING ACTIVITIES			(189,091	)			2,668,910
Foreign currency translation adjustment			(119	)			20,660
NET INCREASE IN CASH AND CASH EQUIVALENTS			(471,451	)			206,632
CASH AND CASH EQUIVALENTS:
Beginning of period		$	518,850			$	312,218
End of period		$	47,399			$	518,850
Supplemental disclosures of cash flow information:
Cash paid for interest		$	142,831			$	116,567
Cash paid for income taxes		$	—			$	4,064
The accompanying notes are an integral part of these consolidated financial statements

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

1. ORGANIZATION AND BUSINESS BACKGROUND 

 

China Fruits Corporation (the “Company” or “CHFR”) was incorporated in the State of Delaware on January 6, 1993 as Vaxcel, Inc. On December 19, 2000, CHFR changed its name to eLocity Networks Corporation.  On August 6, 2002, CHFR further changed its name to Diversified Financial Resources Corporation.  The principal activities of CHFR at that time was seeking and consummating a merger or acquisition opportunity with a business entity.  On May 12, 2006, CHFR was re-domiciled to the State of Nevada.

 

On May 31, 2006, CHFR completed a stock exchange transaction with Jiangxi Taina Guo Ye Yon Xian Gong Si (“Tai Na”).  Tai Na was incorporated as a limited liability company in the People’s Republic of China (“PRC”) on October 28, 2005 with its principal place of business in Nanfeng Town, Jiangxi Province, the PRC.  Tai Na is principally engaged in manufacturing, trading, and distributing of Nanfeng tangerine, and operating franchise retail stores for fresh fruits through its wholly-owned subsidiary, Tai Na International Fruits (Beijing) Co. Ltd. (“Tai Na Beijing”)

 

The stock exchange transaction involved two simultaneous transactions:

 

The majority shareholder of CHFR delivered the 13,150 convertible Series A preferred shares and 12,100,000 non-convertible Series B preferred shares of CHFR to Tai Na’s owners in exchange for total payments of $500,000 in cash and;

 

CHFR issued to Tai Na’s owners an amount equal to 30,000,000 new investment shares of common stock of CHFR pursuant to Regulation S under the Securities Act of 1933, as amended, in exchange for all of the registered capital of Tai Na.

 

Upon completion of the exchange, Tai Na and its wholly-owned subsidiary, Tai Na Beijing, became wholly-owned subsidiaries of CHFR and the former owners of Tai Na then owned 99% of the issued and outstanding shares of the Company.

 

On August 18, 2006, CHFR changed its name to its current name “China Fruits Corporation”.

 

The stock exchange transaction has been accounted for as a reverse acquisition and recapitalization of the CHFR whereby Tai Na is deemed to be the accounting acquirer (legal acquiree) and CHFR to be the accounting acquiree (legal acquirer).  The accompanying consolidated financial statements are in substance those of Tai Na and Tai Na Beijing, with the assets and liabilities, and revenues and expenses, of CHFR being included effective from the date of stock exchange transaction.  CHFR is deemed to be a continuation of the business of Tai Na.  Accordingly, the accompanying consolidated financial statements include the following:

 

(1)           The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost; 

(2)           The financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.

 

CHFR, Tai Na and Tai Na Beijing are hereinafter referred to as (the “Company”).

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

 

Use of estimates

 

In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported.  Actual results may differ from these estimates.

 

Basis of consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiaries.

 

All significant inter-company balances and transactions within the Company and subsidiary have been eliminated upon consolidation.

 

Revenue recognition

 

The Company derives revenues from the resale of tangerine and other fresh fruits purchased from third parties, net of value added taxes (“VAT”).  The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales.  Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

In accordance with guidance issued by the FASB, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.  The Company’s sales arrangements are not subject to warranty.

 

The Company recognizes revenue from the sale of products upon delivery to the customers and the transfer of title and risk of loss. The Company did not record any product returns for the year ended December 31, 2012.

 

Cost of revenue

 

Cost of revenues consists primarily of material costs, direct labor, depreciation and overheads, which are directly attributable to the manufacture of products and the provision of services.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

Accounts receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. As of December 31, 2012 and 2011, the Company did not record an allowance for uncollectible accounts.

 

Inventories

 

Inventories consist of finished goods and are valued at lower of cost or market value, cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.  The spoilage will be written-off directly to the profit and loss when it occurs. As of December 31, 2012 and 2011, the Company did not record an allowance for obsolete or spoiled inventories.

 

Plant and equipment, net

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

	Depreciable life		Residual value
Plant and machinery	10-12 years		5%
Furniture, fixture and equipment	5-6 years		5%

 

Expenditure for maintenance and repairs is expensed as incurred.

 

Impairment of long lived assets

 

The Company evaluated the recoverability of its property, plant, equipment, and other long-lived assets in accordance with FASB ASC 360, “Property, Plant and Equipment”, which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. No impairments of these types of assets were recognized during the years ended December 31, 2012 and 2011.

Comprehensive income (loss)

 

FASB ASC 220, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances.  Comprehensive income as defined includes all changes in equity during the year from non-owner sources. Accumulated comprehensive income, as presented in the accompanying consolidated statement of stockholders’ equity consists of changes in unrealized gains and losses on foreign currency translation.  This comprehensive income is not included in the computation of income tax expense or benefit.

 

Income taxes

 

The Company accounts for income tax using FASB ASC 740 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the consolidated statement of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

Net loss per share

 

The Company reports earnings (loss) per share in accordance with FASB Accounting Standards Codification 260 “Earnings per Share” (“ASC 260”). This statement requires dual presentation of basic and diluted earnings (loss) with a reconciliation of the numerator and denominator of the earnings (loss) per share computations. Basic earnings per share amounts are based on the weighted average shares of common outstanding. If applicable, diluted earnings per share assume the conversion, exercise or issuance of all common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Accordingly, this presentation has been adopted for the periods presented. There were no adjustments required to net income for the periods presented in the computation of diluted earnings per share.

 

Foreign currencies translation

 

The reporting currency of the Company is the United States dollar (“U.S. dollars”).  Transactions denominated in currencies other than U.S. dollar are calculated at the average rate for the period.  Monetary assets and liabilities denominated in currencies other than U.S. dollar are translated into U.S. dollar at the rates of exchange ruling at the balance sheet date.  The resulting exchange differences are recorded in the other comprehensive income/expenses in the consolidated statement of operations and comprehensive income.

 

The Company’s subsidiary maintains its books and records in its local currency, the Renminbi Yuan (“RMB”), which is functional currency as being the primary currency of the economic environment in which its operations are conducted.  In general, for consolidation purposes, the Company translates the subsidiary’s assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of operations is translated at average exchange rates during the reporting period.  Adjustments resulting from the translation of the subsidiary’s financial statements are recorded as accumulated other comprehensive income/expenses.

 

Retirement plan costs

 

Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the consolidated statements of income and comprehensive income as and when the related employee service is provided.

 

Related parties

 

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence. A material related party transaction has been identified in Note 12 in the financial statements.

 

Fair value of financial instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification (“ASC”) for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below: 

 

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.

 

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2012 and 2011 nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the for the years ended December 31, 2012 and 2011, respectively.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

Subsequent Events

 

The Company evaluated for subsequent events through the issuance date of the Company’s financial statements.

 

Recently issued accounting standards

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.

 

In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”).  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively.  The adoption of this standard did not materially expand its financial statement note disclosures.

 

In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance.  This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted.  The Company reviewed ASU 2011-05 to ascertain its impact on the Company’s financial position, results of operations or cash flows as it only required a change in the format of the current presentation.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, which allows, but does not require, an entity when performing its annual goodwill impairment test the option to first do an initial assessment of 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 for purposes of determining whether it is even necessary to perform the first step of the two-step goodwill impairment test. Accordingly, based on the option created in ASU 2011-08, the calculation of a reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. If it is less, the quantitative impairment test is then required. ASU 2011-08 also provides for new qualitative indicators to replace those currently used. Prior to ASU 2011-08, entities were required to test goodwill for impairment on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is performed to measure the amount of impairment loss, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 during the first quarter of fiscal 2013. The adoption of ASU 2011-08 did not impact the Company’s results of operations or financial condition.

In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, the adoption of this standard had no a material impact on its results of operations, cash flows or financial condition.

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.

ASU 2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for any indefinite-lived intangible in any period.

ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its consolidated financial statements.

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 3. ACCOUNTS RECEIVABLE, NET

 

The majority of the Company’s sales is cash on delivery, or secured by customer deposits. A small portion of our revenues is on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. The Company did not experience significant losses from uncollectible accounts in the past; accordingly, the management has determined that allowance was $6,301 and $0 as of December 31, 2012 and 2011, respectively.

 

		As of December 31,
		2012				2011
Accounts receivable, gross			660,388				376,926
Less: allowance for doubtful accounts			6,301				-0-
Accounts receivable, net			654,087				376,926

 

4. RECEIVABLE FROM THIRD PARTIES

 

The Company advances money to several third parties during business operation, $80,259 as deposit for tangerine purchase. These receivables bear no interest and due on demand, except otherwise noted. As of December 31, 2012 and 2011, the balances of receivable from third parties consisted of the following:

 

		As of December 31,
		2012				2011
Third party advances			126,427				117,860
Bank security deposit			0				31,741
Receivable from third parties			126,427				149,601

 

 

5. INVENTORIES

 

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

 

		As of December 31,
		2012				2011
Raw materials			26,780				339,205
Finished goods			96,206				43,101
			122,986				382,306

 

The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. Accordingly, the Company did not record an allowance for obsolete inventories as of December 31, 2012 and 2011, respectively, nor have there been any write-offs during the years ended December 31, 2012 and 2011, respectively.

 

The spoilage will be written-off directly to the profit and loss when it occurs. The spoilage rate is approximately 1 ‰ of average inventory. The Company did not record an allowance for spoilage as of December 31, 2012 and 2011, respectively.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

6. PREPAYMENT 

 

As of December 31, 2012 and 2011, the Company had prepayment of $1,549,673 and $1,477,402, respectively, consisted of the following:

 

		As of December 31,
		2012				2011
Paid in advance (production)			1,495,898				1,382,623
Prepaid rent			53,775				94,779
			1,549,673				1,477,402

 

7. PLANT AND EQUIPMENT, NET

 

Plant and equipment, net as of December 31, 2012 and 2011 consisted of the following:

 

		As of December 31,
		2012				2011
Plant and machinery			4,046,993				2,869,734
Construction in progress			0				645,680
Furniture, fixture and equipment			409,620				60,325
			4,456,613				3,575,739
Less: accumulated depreciation			(812,392	)			(643,854	)
Plant and equipment, net			3,644,221				2,931,885

 

Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction.  No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use.  Construction in progress as of December 31, 2012 was $0, representing buildings under construction.

 

8. LOAN AND RELATED PARTY PAYABLE

 

As of December 31, 2012 and 2011, the Company had loans payable to related party of $40,130 and $39,677, respectively. These loans bear no interest and are due within one year.

 

9. NOTES PAYABLE – CURRENT PORTION

 

As of December 31, 2012 and 2011, the Company had short-term loan of $2,407,782 and $2,253,646, respectively, from various local banks. The detailed terms were set forth as follows:

 

		As of December 31,
		2012				2011
Bank of China, 7.8% annual interest, due on November 17, 2013			1,605,188				1,587,075
Industrial and Commercial Bank of China, 7.544% annual interest, due on December 6, 2012			0				317,415
Nanfeng County Hongli Small Fund Co., Ltd, 18% annual interest, due on February 11, 2012			0				285,673
Note payable to related party, zero interest, due on May 19, 2012			0				63,483
Note payable to third party, zero interest, due on March 7, 2013			288,934				0
Note payable to third party, zero interest, due on December, 2013			8,026				0
Local Government, zero interest, due on no later than November 30, 2013			505,634				0
			2,407,782				2,253,646

 

10. CUSTOMER DEPOSIT

 

As of December 31, 2012 and 2011, the Company had customer deposits of $553,071 and $335,570, respectively, representing payments received for orders not yet shipped.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

11. ACCRUED LIABILITIES

 

Accrued liabilities as of December 31, 2012 and 2011consisted of following:

 

		As of December 31,
		2012				2011
Salary and welfare payable			105,840				13,393
Tax payable			5,496				0
Accrued expenses			116,194				86,784
			227,530				100,177

 

12. NOTE PAYABLE – LONG TERM

 

Long-term notes payable as of December 31, 2012 and 2011 consisted of following:

 

		As of December 31,
		2012				2011
Note payable to related party, zero interest, due on March 31, 2014			64,208				0
Note payable to related party, zero interest, due on February 28, 2014			155,703				153,946
Local Government, zero interest, due on no later than November 30, 2013			0				499,929
			219,911				653,875

 

13. AMOUNT DUE TO STOCKHOLDERS

 

The shareholder paid all necessary overseas consulting and advising fees, lawyer fees, and accounting fees from period to period out of his own personal bank accounts in the United States due to the strict laws and regulations imposed by the Chinese government on out-going foreign currency wire transfers. The amount outstanding was $305,333 and $209,933 as of December 31, 2012 and 2011, respectively. The balance due to stockholders was not evidenced by a promissory note, but rather is an oral agreement between the shareholder and the Company.

 

14. CAPITAL TRANSACTIONS

 

Pursuant to a conversion agreement dated June 30, 2011, the stockholders agreed to settle the amount of $335,146 in advances due as of December 31, 2009 in exchange for a total of 11,171,534 shares of Common Stock issued by the Company at the market price of $0.03 per share.

 

15. CHINA CONTRIBUTION PLAN

 

Under the PRC Law, full-time employees of the Company’s subsidiaries, Tai Na and Tai Na Beijing, are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. Tai Na and Tai Na Beijing are required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $56,311 and $42,829 for the years ended December 31, 2012 and 2011, respectively.

 

16. STATUTORY RESERVES

 

Under PRC Company Law, the Company’s subsidiaries, Tai Na and Tai Na Beijing are required to make appropriations to the statutory reserve based on after-tax net income and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of Tai Na’s registered capital.  The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.

 

For the years ended December 31, 2012 and 2011, Tai Na and Tai Na Beijing contributed $66,917 and $45,914 respectively to statutory reserve.

 

 CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

17. INCOME TAXES

 

The Company conducts all its operating business through its subsidiaries in China. The subsidiaries are governed by the income tax laws of the PRC and do not have any deferred tax assets or deferred tax liabilities under the income tax laws of the PRC because there are no temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company by itself does not have any business operating activities in the United States and is therefore not subject to United States income tax.

 

The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the previous laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate previously applicable to both DEs and FIEs.

 

The components of (loss) income before income taxes separating U.S. and PRC operations are as follows:

 

		2012				2011
Loss subject to U.S. operation		$	(94,700	)		$	(95,332	)
Government & other grant subject to tax exempt			1,219,731				297,761
Loss subject to PRC operation			(996,610	)			(578,431	)
Income (loss) before income taxes		$	128,421			$	(376,002	)

 

United States of America

 

The Company is registered in the State of Nevada and is subject to United States of America tax law.

 

As of December 31, 2012, the U.S. operation had net operating losses of $1,979,085 available for federal tax purposes, which are available to offset future taxable income.  The net operating loss carry forwards begin to expire in 2032.  The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

 

The PRC

 

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes stated in the consolidated statement of operations for the years ended December 31, 2012 and 2011 is as follows:

		2012				2011
Income (loss) before income taxes		$	223,121			$	(280,670	)
Government & other grant subject to tax exempt			1,219,731				297,761
Loss subject to PRC operation			(996,610	)			(578,431	)
Statutory income tax rate			25	%			25	%
Expenses not deductible for tax purposes:			—				—
- Provisions
Effect of tax losses			—				—
Income tax expense		$	—			$	—

 

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of December 31, 2012 and 2011:

 

		2012				2011
Deferred tax assets:
- Net operating loss carryforwards		$	672,889			$	640,691
Less: valuation allowance			(672,889	)			(640,691	)
Deferred tax assets		$	-			$	-

 

For the years ended December 31, 2012 and 2011, valuation allowances of $672,889 and $640,691 were provided to the deferred tax assets due to the uncertainty surrounding their realization.

 

The following table reconciles the U.S. statutory rate to the Company’s effective tax rate:

 

		2012				2011
U.S. Statutory rate			34	%			34	%
Foreign income not recognized in USA			(34	)			(34	)
China income taxes			25				25
China exemption			(25	)			(25	)
Total provision for income taxes		$	-			$	-

 

The Company accounts for income taxes under ASC topic 740, Income Taxes, ASC topic 740 defines an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. ASC topic 740 further requires that a tax position must be more likely than not to be sustained before being recognized in the financial statements, as well as the accrual of interest and penalties as applicable on unrecognized tax positions.

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period, if any, and the change during the period in deferred tax assets and liabilities.

Valuation allowance are recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income taxes.

Because the Company has no operations within the United States, there is no provision for US income taxes and there are no deferred tax amounts as of December 31, 2012 and 2011.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

18. GOVERNMENT & OTHER GRANTS

 

For the years ended December 31, 2012 and 2011, the Company received grants and rewards from local government and other resources in amount of $1,219,731 and $297,761, respectively. The governmental grants were to encourage the Company’s efforts on modern agricultural development. These grants were interest-free and bear no repayment requirements.

 

19. NET LOSS PER SHARE

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the years.  There were no dilutive earnings per share for the year ended December 31, 2012 due to immateriality.  

 

The following table sets forth the computation of basic net loss per share for the years indicated:

 

		2012				2011
Numerator:
- Net loss		$	128,421			$	(376,002	)
Denominator:
- Weighted average common shares outstanding			49,951,223				44,365,456
Basic loss per share			**			$	(0.01	)

 

** Less than $.01 

 

20. CONCENTRATION AND RISK

 

(a) Major customers

 

For the years ended December 31, 2012 and 2011, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues and purchases were derived from customers and vendors located in the PRC.

 

For the year ended December 31, 2012, major customers and vendors with their revenues and purchases are presented as follows:

 

Customers			Revenues									Accounts Receivable
Customer A			$	406,180				11	%			$	329,392
Customer B				396,503				11	%
Customer C				301,916				8	%				316,904
Customer D				158,496				4	%				-
Customer E				70,898				2	%				-
	Total		$	1,333,993				36	%	Total:		$	646,296

 

For the year ended December 31, 2011, major customers and vendors with their revenues and purchases are presented as follows:

 

Customers			Revenues									Accounts Receivable
Customer A			$	694,462				20	%			$	257,634
Customer B				405,819				12	%				52,729
Customer C				112,584				3	%				10,999
Customer D				36,123				1	%				-
Customer E				16,720				0.4	%				-
	Total		$	1,265,708				36.4	%	Total:		$	321,363

 

(b) Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.

 

 

CHINA FRUITS CORPORATION AND SUBSIDIARIES

NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(Expressed in USD)

 

21. COMMITMENT AND CONTINGENCIES

 

The Company rented plant, office, and retailing spaces under a non-cancelable operating lease agreement. On March 3, 2012, the Company entered into a five-year lease agreement for warehouse and logistic space to store, pack and deliver fresh fruits. The lease term is from March 10, 2012 through March 9, 2017, and the total rental payment is approximately $712,420. Accordingly, the future four years minimum rental payments required as of December 31 are as follows:

 

Year ended December 31				Lease payment
	2013			$	126,652
	2014			$	142,484
	2015			$	158,316
	2016			$	174,147
	Total			$	601,599

 

For the year ended December 31, 2012, rental expense was $110,821.

 

22. GOING CONCERN UNCERTAINTIES

 

These consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

 

As of December 31, 2012, the Company had an accumulated deficit of $1,911,967. Management has taken certain action and continues to implement changes designed to improve the Company’s financial results and operating cash flows.  The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in headcount and corporate overhead expenses; and (b) expansion into new market.  Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through December 31, 2013.  As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company’s ability to continue as a going concern.

 

23. SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to December 31, 2012 to the date these consolidated financial statements were issued. In addition to the transactions disclosed below, the Company does not have other material subsequent events to disclose in these financial statements.

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There have been no changes in and disagreements with accountants on accounting and financial disclosure in the past two fiscal years.

ITEM 9A(T). CONTROLS AND PROCEDURES

(a) Conclusions regarding disclosure controls and procedures. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Exchange Act as of December 31, 2012, and, based on their evaluation, as of the end of such period, the our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.  

(b)

Management’s report on internal control over financial reporting. It is management’s responsibilities to establish and maintain adequate internal controls over the Company’s financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management of the issuer; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, internal controls over financial reporting were effective as of the end of the period covered by this Annual Report on Form 10-K.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

(c)

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter of fiscal 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

 

Directors and Executive Officers

 

Our directors are elected at the annual meeting of shareholders and hold office for one year and until their successors are elected and qualified. Our officers are appointed by the Board of Directors and serve at the pleasure of the Board. We have not entered into any employment agreements with our executive officers.

 

Name	Age	Position	Date to Start
Chen, Quan Long	53	President, Chief Executive Officer and Chairman	June 1, 2006
Li, Ze	30	Chief Financial Officer	September 1, 2011

 

Chen, Quan Long - President, Chief Executive Officer and Chairman

 

Mr. Chen, Quan Long, aged 53, obtained a Master of Business Administration degree at Beijing University. His prior work experience is primarily in corporate. He was chairman of Fei Huan Group, a corporation organized and existing under the laws of the Peoples' Republic of China ("Fei Huan Group"), from October 1988 to December 2001. Since January 2002, he was Chairman of Fei Huan Wine, Inc., an affiliate of Fei Huan Group. Mr. Chen’s duties with Fei Huan Group included management of their beverage processing and distribution. Mr. Chen is a member of the Chinese Entrepreneurial Association.

 

Li, Ze - Chief Financial Officer

 

Mr. Li, Ze, aged 30, received his bachelor degree in business administration from Northern Industrial University, major in Accounting. From July 2006 through March 2009, Mr. Li worked as accountant in Beijing Agricultural, Industrial & Commercial Trading Company. Prior to the appointment as our Chief Financial Officer, Mr. Li has worked as senior accountant, assistant manager, and manager of Accounting Department in Tai Na International Fruits (Beijing) Co. Ltd. since June 2009. Mr. Li has systematic knowledge about accounting and finance. He is experienced in accounting regulations, rules and policies, sophisticated in taxation, corporate finance and internal control system.

 

Family Relationships.

 

None.

 

Legal Proceedings.

 

No officer, director, or persons nominated for such positions and no promoter or significant employee has been involved in legal proceedings that would be material to an evaluation of our management.

 

Audit Committee

 

We do not have a separately designated standing audit committee. Pursuant to Section 3(a)(58)(B) of the Exchange Act, the entire Board of Directors acts as an audit committee for the purpose of overseeing the accounting and financial reporting processes, and audits of our financial statements. The Commission recently adopted new regulations relating to audit committee composition and functions, including disclosure requirements relating to the presence of an "audit committee financial expert" serving on its audit committee. In connection with these new requirements, our Board of Directors examined the Commission's definition of "audit committee financial expert" and concluded that we do not currently have a person that qualifies as such an expert. We have had minimal operations for the past two (2) years. Presently, there are only four (4) directors serving on our Board, and us are not in a position at this time to attract, retain and compensate additional directors in order to acquire a director who qualifies as an "audit committee financial expert", but we intend to retain an additional director who will qualify as such an expert, as soon as reasonably practicable. While neither of our current directors meets the qualifications of an "audit committee financial expert", each of our directors, by virtue of his past employment experience, has considerable knowledge of financial statements, finance, and accounting, and has significant employment experience involving financial oversight responsibilities. Accordingly, we believe that our current directors capably fulfill the duties and responsibilities of an audit committee in the absence of such an expert.

 

Code of Ethics

 

We have adopted a code of ethic (the "Code of Ethics") that applies to our principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is being designed with the intent to deter wrongdoing, and to promote the following:

 

•

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships

 

	•	Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by the small business issuer
	•	The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code
	•	Accountability for adherence to the code

 

Section 16(a) Beneficial Ownership Reporting Compliance

    

Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and we are required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 2008. We believe that all of these filing requirements were satisfied by our executive officers, directors and by the beneficial owners of more than 10% of our common stock. In making this statement, hawse have relied solely on copies of any reporting forms received by it, and upon any written representations received from reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was required to be filed under applicable rules of the Commission.

 

  

ITEM 11. EXECUTIVE COMPENSATION

 

The following table sets forth certain information regarding the annual and long-term compensation for services in all capacities to us for the prior fiscal years ended December 31, 2012, 2011 and 2010, of those persons who were either the chief executive officer during the last completed fiscal year or any other compensated executive officers as of the end of the last completed fiscal year, and whose compensation exceeded $100,000 for those fiscal periods.

 

SUMMARY COMPENSATION TABLE
Name and principal position (a)	Year (b)	Salary ($) (c)	Bonus ($) (d)	Stock Awards ($) (e)	Option Awards ($) (f)	Non-Equity Incentive Plan Compensation ($) (g)	Nonqualified Deferred Compensation Earnings ($) (h)	All Other Compensation ($) (i)	Total ($) (j)
Chen, Quan Long President, CEO & Chairman	2012	$8,559	0	0	0	0	0	0	$8,559
	2011	$7,260	0	0	0	0	0	0	$7,260
	2010	$9,080	0	0	0	0	0	0	$9,080
Li, Ze Chief Financial Officer	2012	$7,608	0	0	0	0	0	0	$7,608
	2011	$6,355	0	0	0	0	0	0	$6,355

 

We have not entered into any other employment agreements with our employees, Officers or Directors. We have no standard arrangements to compensate our directors for their services to us.

 

Stock Option Plan

 

We have not implemented a stock option plan at this time and since inception, have issued no stock options, SARs or other compensation. We may decide, at a later date, and reserve the right to, initiate such a plan as deemed necessary by the Board.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS.

 

As of April 10, 2013, we had 3,634 stockholders of record and 49,951,223 shares of our Common Stock, 13,150 shares of our Series A Preferred Stock and 12,100,000 Series B Preferred Stock issued and outstanding. The following table sets forth as of April 10, 2013, certain information with respect to the beneficial ownership of Common Stock by (i) each of our Director, nominee and executive officer; (i) each person who owns beneficially more than 5% of the common stock; and (iii) all Directors, nominees and executive officers as a group. The percentage of shares beneficially owned is based on there having been 49,951,223 shares of our Common Stock, 13,150 shares of our Series A Preferred Stock and 12,100,000 Series B Preferred Stock issued and outstanding as of April 10, 2013.

 

OFFICERS, DIRECTORS AND BENEFICIAL OWNERS, AS OF APRIL 10, 2013

 

Title of Class	Name & Address of Beneficial Owner(1)	Amount & Nature of Beneficial Owner	% of Class(2)
Series A Preferred Stock, $.001 par value	Chen, Quan Long Room 503, Building 53, QianXi District, DaDao Road, NanFeng County, JiangXi, P.R.China 344500	13,150	100%
Series A Preferred Stock, $.001 par value	All directors and executive officers as a group (one person)	13,150	100%
Series B Preferred Stock, $.001 par value	Chen, Quan Long Room 503, Building 53, QianXi District, DaDao Road, NanFeng County, JiangXi, P.R.China 344500	12,100,000	100%
Series B Preferred Stock, $.001 par value	All directors and executive officers as a group (one person)	12,100,000	100%
Common Stock, $.001 par value	Huang, Chun Feng 1 Chen Qiang Rd, Qin Cheng Town NanFeng County, JiangXi P.R.China	3,612,715	7.23%
Common Stock, $.001 par value	Tan, Mei 3 Lv You Gang, Qin Cheng Town NanFeng County, JiangXi P.R.China	4,580,815	9.17%
Common Stock, $.001 par value	Chen, Quan Long Room 503, Building 53, QianXi District, DaDao Road, NanFeng County, JiangXi, P.R.China 344500	665,416	1.33%
Common Stock $.001 par value	All directors and executive officers as a group (one person)	665,416	1.33%

 

** Represents less than 1%

 

(1)  Unless stated otherwise, the business address for each person named is c/o China Fruits Corp.

 

(2)  Calculated pursuant to Rule 13d-3(d) (1) of the Securities Exchange Act of 1934. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by a person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. We believe that each individual or entity named has sole investment and voting power with respect to the shares of common stock indicated as beneficially owned by them (subject to community property laws where applicable) and except where otherwise noted.

 

Changes in Control

 

None.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

None.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Fees Billed For Audit and Non-Audit Services

 

The following table represents the aggregate fees billed for professional audit services rendered to the independent auditor, Lake & Associates CPA’s LLC (“Lake”), for our audit of the annual financial statements for the years ended December 31, 2012 and 2011. Audit fees and other fees of auditors are listed as follows:

 

Year Ended December 31		2012(2)		2011 (3)
Audit Fees (1)		$        40,500		$        40,500
Audit-Related Fees (4)		--		--
Tax Fees (5)		--		--
All Other Fees (6)		--		--
Total Accounting Fees and Services		$        40,500		$        40,500

 

(1)

Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial statements included in our filings on Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements.

 

(2)

The amounts shown in 2012 relate to (i) the audit of our annual financial statements for the fiscal year ended December 31, 2012, and (ii) the review of the financial statements included in our filings on Form 10-Q for the quarters of 2013.

 

(3)

The amounts shown in 2011 relate to (i) the audit of our annual financial statements for the fiscal year ended December 31, 2011, and (ii) the review of the financial statements included in our filings on Form 10-Q for the quarters of 2012.

 

(4)

Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of our financial statements.

 

(5)

Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.

 

(6)

All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax Fees.

  

Pre-Approval Policy for Audit and Non-Audit Services

 

We do not have a standing audit committee, and the full Board performs all functions of an audit committee, including the pre-approval of all audit and non-audit services before we engage an accountant. All of the services rendered to us by Lake & Associates CPA’s LLC were pre-approved by our Board of Directors.

 

We are presently working with its legal counsel to establish formal pre-approval policies and procedures for future engagements of our accountants. The new policies and procedures will be detailed as to the particular service, will require that the Board or an audit committee thereof be informed of each service, and will prohibit the delegation of pre-approval responsibilities to management. It is currently anticipated that our new policy will provide (i) for an annual pre-approval, by the Board or audit committee, of all audit, audit-related and non-audit services proposed to be rendered by the independent auditor for the fiscal year, as specifically described in the auditor's engagement letter, and (ii) that additional engagements of the auditor, which were not approved in the annual pre-approval process, and engagements that are anticipated to exceed previously approved thresholds, will be presented on a case-by-case basis, by the President or Controller, for pre-approval by the Board or audit committee, before management engages the auditors for any such purposes. The new policy and procedures may authorize the Board or audit committee to delegate, to one or more of its members, the authority to pre-approve certain permitted services, provided that the estimated fee for any such service does not exceed a specified dollar amount (to be determined). All pre-approvals shall be contingent on a finding, by the Board, audit committee, or delegate, as the case may be, that the provision of the proposed services is compatible with the maintenance of the auditor's independence in the conduct of its auditing functions. In no event shall any non-audit related service be approved that would result in the independent auditor no longer being considered independent under the applicable rules and regulations of the Securities and Exchange Commission.

 

    (a) On December 31, 2012, our Chief Executive Officer and Chief Financial Officer made an evaluation of our disclosure controls and procedures. In our opinion, the disclosure controls and procedures are adequate because the systems of controls and procedures are designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows for the respective periods being presented. Moreover, the evaluation did not reveal any significant deficiencies or material weaknesses in our disclosure controls and procedures.

 

    (b) There have been no significant changes in our internal controls or in other factors that could significantly affect these controls since the last evaluation.

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)	Financial Statements

 

1. The following financial statements of China Fruits Corp. are included in Part II, Item 8:

 

Report of Independent Registered Public Accounting Firm Balance Sheet at December 31, 2012

Statements of Operations - for the years ended December 31, 2012 and 2011

Statements of Cash Flows - for the years ended December 31, 2012 and 2011

Statements of Stockholders’ Equity - for the years ended December 31, 2012 and 2011

Notes to Financial Statements 

 

2. Exhibits

 

14.1 Code of Ethics *

31.1. Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer

31.2. Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer

32.1. Section 1350 Certifications of Chief Executive Officer

32.2. Section 1350 Certifications of Chief Financial Officer

 

* Filed previously.

 

(b)	Reports on Form 8-K

 

None.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned majority of the Board of Directors, thereunto duly authorized.

 

			China Fruits Corporation
Date: April 12, 2013
			/s/ Chen, Quan Long
			Chen, Quan Long
			President