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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-K


 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013


[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:

 

For the transition period from______ to ______


Commission File Number 0-25765


CHINA FORESTRY, INC.

(Exact name of Registrant as specified in its charter)


Nevada

 

87-0429748

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)


Economic Development Zone of Hanzhong City,

Shaan’xi Province, The People’s Republic of China

(Address of principal executive offices)


(011) (86) 29-85257870

(Registrant's telephone number)


Copy of Communications to:

Bernard & Yam, LLP

140-75 Ash Avenue, Suite 2D,

Flushing, NY 11355

Phone: 212-219-7783

Fax: 212-219-3604

 

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.   Yes [   ]    No  [X]


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

Yes [   ]     No  [X]


Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  [X]    No[   ] 


Indicated by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best  of Registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer [   ] 

Accelerated Filer [   ] 

Non-accelerated Filer [   ] 

Smaller Reporting Company  [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [   ]    No  [X]


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: as of December 31, 2013, 15,600,007 shares of common stock and as of March 21, 2014, 15,600,007 shares of common stock.

 




1




TABLE OF CONTENTS

 

 

PART I

 

 

 

Item 1.

Business

 

 

 

 

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 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, Related Transactions and Director Independence

 

 

 

 

Item 14.

 

Principal Accounting Fees and Services

 

 

 

 

PART IV

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

 

 

 

Signatures

 


Attachments: Financial Statements

 



PART I


Item 1.    Business


Forward-looking Statements


This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may,” "will,” "should,” "expects,” "plans,” "anticipates,” "believes,” "estimates,” "predicts,” "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.


Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements so as to conform these statements to actual results.


As used in this annual report, the terms "we,” "us,” "our,” “the Company,” and "China Forestry" mean China Forestry, Inc. and all of our subsidiaries, unless otherwise indicated.


All dollar amounts refer to US dollars unless otherwise indicated.


Overview


We were originally incorporated in Nevada on January 13, 1986. Since inception, we have not had active business operations and were considered a development stage company. In 1993, we entered into an agreement with Bradley S. Shepherd in which Mr. Shepherd agreed to become an officer and director and use his best efforts to organize and update our books and records and to seek business opportunities for acquisition or participation. The acquisition of the share capital of Hong Kong Jin Yuan was such an opportunity.


As a result of a Share Exchange, Hong Kong Jin Yuan became our wholly-owned subsidiary, Harbin SenRun became our indirect wholly-owned subsidiary, and we succeeded to the business of Harbin SenRun Forestry Development Co., Ltd., a producer of forest products with approximately 1,561 hectares of State forest assets located mainly over the Small Xing An Mountains, Jin Yin County, and the Harbin Wu Chang District of Heilongjiang Province of Northern China.


Harbin SenRun was founded in 2004. Historically, it had a workforce of approximately 8 full time employees, mainly in sales, administration and in supporting services. It recruited temporary part-time workers to carry out felling, cutting and forestry plantation and protection.  Its principal revenue was log sales.


Harbin SenRun lost its wood-cutting quota for log sales from the Bureau of Forestry for the year ended December 31, 2007, and, as a result, did not have any revenues for that period.  While Harbin Senrun has applied for a wood cutting quota in subsequent years, it has not been successful in acquiring one.


On December 14, 2010, we simultaneously entered into and closed the transactions contemplated by a Sale and Purchase Agreement with Land Synergy Limited (as Purchaser), a company incorporated in the British Virgin Islands (“Land Synergy”) and sold to Land Synergy 100% of the share capital of Hong Kong Jin Yuan, including its wholly-owned subsidiary, Harbin SenRun, for US$2,000. As a result, we no longer engage in the timber business operations.

 

On July 15, 2010, we entered into a Share Exchange with Financial International (Hong Kong) Holdings Co. Limited (“FIHK”).  




2




From April 1, 2010 to May 20, 2011, FIHK had a series of contractual arrangements with Hanzhong Hengtai Bio-Tech Limited (“Hengtai”), a company organized and existing under the laws of the People’s Reuplic of China that is engaged in the plantation and sale of garden plants used for landscaping, including Chinese Yew, Aesculus, Dove Tree and Dendrobium.


On May 20, 2011, FIHK exercised its rights under the Exclusive Option Agreement to direct Xi’An Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Xi’An Qi Ying”), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai.  The Exclusive Option Agreement was exercised in a manner that the shareholders of Hengtai transferred all of their equity capital in Hengtai to Xi’An Qi Ying.  At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China (“Spone”), acquired all of the capital stock of Xi’An Qi Ying, so that it became a direct wholly owned subsidiary of Spone.  FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK and also accordingly became the indirect wholly owned subsidiary of us.


Hengtai was incorporated on October 22, 2003 with a registered capital of 15.0 million RMB.  The registered address of Hengtai is in Economic Development Zone of Hanzhong City, Shaan’xi Province, China.  Hengtai possesses several permits and licenses for its plantation business, including a Seedling Production Permit, a Forestry User Right, and a Seedling Operations Permit.


Chinese Yew is the major product of Hengtai and the company plants two types that carry the biological names Taxus chinensis var. mairei and Taxus media.  Currently, they take up approximately 28% of the planting area of the company.


Hengtai currently has 29 full-time employees, including 3 members of management, 19 agricultural experts, 5 employees in sales and marketing, and 2 administrative employees.

 

A diagram depicting the organizational structure of the Registrant after the termination of the VIE Contracts and the exercise of the Exclusive Option Agreement follows:




3




[chfyform10k12312013v5001.jpg]

There were no material early termination penalties incurred by the Registrant in connection with the termination of the VIE Contracts described herein.



Description of Business of Hengtai


Overview.  Hengtai is engaged in the business of plantation and sale of garden plants including Chinese Yew, as well as Aesculus, Dove Tree and Dendrobium, among others. Hengtai was incorporated on October 22, 2003 with a



4




registered capital of RMB 15 million.  The registered address of the Company is located in Economic Development Zone of Hanzhong City, Shaan’xi Province, China.


In the year 2007, Hengtai was acknowledged by Hanzhong Forestry Bureau as the “Leading Business of Forestry Commercialization.” The planting methods applied to the Chinese Yew and Dendrobium by Hengtai are endorsed by the Ministry of Science & Technology of China under the China Spark Program with the license number “Guo Ke Fa Ji Zi [2006]-377” in year 2006.


Products and Production. Hengtai currently has 13 forestry centers and occupies approximately 16.0 square kilometers (or 24,000 Mu). It is estimated that Hengtai has over 11,000,000 valuable plants, including 8,000,000 Chinese Yews, 1,000,000 Chinese Dove Trees, 300,000 Aesculus, 2,000,000 Dendrobium (and 30+ other species, including Crape Myrtle, Magnolia Denudate, Osmanthus Fragrans etc.).


Chinese Yew is the primary product of Hengtai and the Company is focusing its efforts on planting two types of Chinese Yews that carry the biological names Taxus chinensis var. mairei and Taxus media. Currently they take up approximately 28% (4.5 sq km or 6750 Mu) of the planting area of the Company.


According to a finding of the Chinese government, Chinese Yews species like Taxus media and Taxus chinensis have Paclitaxel content in their bark.  Paclitaxel is an FDA approved chemical for use in the treatment of certain cancers and is marketed by Bristol Myers Squibb Corp., among other companies, in many countries as a chemotherapy agent for the treatment of cancer.


Hengtai’s open wood field planting area also carries a variety of other plants among Chinese Yew in order to optimize the use of the terrain. Mixed planting of taller plants not only will provide shade for Chinese Yews in the field; but also will diversify the income source of the Company. Currently, Chinese Yew is mixed planted with species including magnolia grandiflora, fragrans, crape myrtle, ginkgo, Davidia involucrate and horse chestnut.


Leveraging on the current land policy of China, which allow farmers to trade, purchase or sell their land rights, Hengtai works with local small farmers to commercialize their farm land by growing and selling Chinese Yew under the coordination of the Company. Training and technology transfer to the farmers is backed up by agricultural associations and academic institutes, namely Xi’an Agricultural University and Shaan’xi Agricultural Science & Technology Academy.


Sales and Marketing


Currently our Chinese Yew and other plants are all sold as garden plants in potted form used in landscaping across China. Hengtai develops the landscaping markets for Chinese Yew and other plantations in key Chinese cities including Beijing, Shanghai, Chongqing, among others by virtue of establishing garden plants landscape exhibitions in selected cities. The management believes that sales of Chinese Yew will also promote the sales of other seedlings and garden plants provided by the Company.


Seven sales areas throughout China are identified by Hengtai, namely (a) Eastern China; (b) Southern China; (c) Central China; (d) Northern China; (e) Northwest China; (f) Southeast China; and (g) Northeast China. Sales agencies were appointed in each sales district in order to distribute its ornamental plant products.


Research and Development


None.


Competition and Market Position


Competition in the gardening plantation industry of China is mostly fragmented. We see no strong competitor to the Company in Shaan’xi Province of China. There are, however, two to three Chinese Yew producers in China in possession of total plantation area of over 33.3 sq km (or 50,000 Mu), compared to the 16 sq km (or 24,000 Mu) of



5




Hengtai. Each of these competitors has an annual production capacity of 50 million Chinese Yew, mainly of the species Taxus Chinensis.


Our competitive position will depend on our ability to attract and retain sufficient farm land for open wood field, develop effective gardening solutions, achieve economies of scale, develop and implement production and marketing plans, and secure adequate capital resources. We believe that we compete primarily on the basis of our product quality, reliability, economies of scale, experienced and stable management and plantation team, customer value and stability in supply and cost of Chinese Yew.  Furthermore, Hengtai is situated in Hanzhong City, Shannxi province,.  We believe that the geographical location of Hanzhong City, which is in a subtropical basin area with sufficient rainfall and moist climate, constitutes the optimal biological environment for the growth of the Yew across China and hence one of the key factors that allows us to compete favorably in the long term.


Regulatory Environment


Overview.  China is transitioning from a planned economy to a market economy. While the Chinese government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Chinese economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the Chinese government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the Chinese government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating revenue may be reduced by changes in China's economic and social conditions as well as by changes in the policies of the Chinese government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.


China’s legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

 

Permits. We are subject to many general regulations governing business entities and their activities in China including, among other things, the Permits for Seedling Operation, Permit for Seedling Production and Forest User Rights. We are required to renew, pass an examination with respect to, or make a filing in connection with these licenses and certifications on a regular basis. At provincial level we are also required to report our Chinese Yew sales and processing to the Shaan’xi Forestry Bureau of China. We are not aware of any material violations of permits, licenses or approvals that have been issued with respect to our operations. We expect to comply with all applicable laws, rules and regulations relating to our business, and at this time, we do not anticipate incurring any material capital expenditures to comply with any environmental regulations or other requirements.


Intellectual Properties


None.


Employees


As of March 21, 2014, there are currently 29 full-time employees, including 8 members of management and administrative staff, 12 agricultural experts and 9 marketing employees.    



6





All employees of the company are located in China. We believe that we maintain good relationships with our employees, and have not experienced any strikes or shutdowns and have not been involved in any labor disputes.


Item 2.   Properties


Hengtai.  Hengtai has the following land user right:


Xiao He Forestry Center


This forest land is located near Lan Jia Wan, Cheng Gu County, Shaan’xi Province of China, with an area of approximately 0.49 sq km (or 737 Mu) recorded under the Forest Right Certificate. Hengtai held the forest land use right, woodland ownership right and woodland use right for a period of up to March 26, 2077. We have the right to grow Chinese Yew on this land.


The following table illustrates our 14 forestry centers in detail, which comprise land rented from local farmers:


 

 

 

 

 

 

Area

 

 

No.

 

Forestry Center

 

Location

 

sq km

 

Mu

 

Major Plantation

1

 

Xiao He Forestry Center

 

Xiaohe Town, Chenggu County, Hanzhong City

 

15.3553

 

23,033

 

Chinese Yew

2

 

Xi Xiang Forestry Center

 

Xixiang County, Hanzhong City

 

0.1600

 

240

 

Aesculus

3

 

Lan Kong Forestry Center

 

Economic Development Zone, Hanzhong City

 

0.1430

 

214

 

Aesculus

4

 

Chen Jia Ying Forestry Center

 

Hantai District, Hanzhong City

 

0.0907

 

136

 

Taxus Media

5

 

Tian Ming Forestry Center

 

Tianming Town, Chenggu County, Hanzhong City

 

0.0787

 

118

 

Aesculus

6

 

Jin Hua Forestry Center

 

Hantai District, Hanzhong City

 

0.0740

 

111

 

Chinese Yew

7

 

Ping Wu Forestry Center

 

Pingwu County, Sichuan province

 

0.0400

 

60

 

Dove Tree

8

 

Hu Xian Forestry Center

 

Hu County, Hanzhong City

 

0.0400

 

60

 

Aesculus

9

 

Jia You Zhan Forestry Center

 

Economic Development Zone, Hanzhong City

 

0.0308

 

46

 

Chinese Yew

10

 

Yuan Shang Forestry Center

 

North Economic Development Zone, Hanzhong City

 

0.0200

 

30

 

Chinese Yew

11

 

Long Jiang Forestry Center

 

Hantai District, Hanzhong City

 

0.0201

 

30

 

Dove Tree, Magnolia Denudate

12

 

Tang Ying Forestry Center

 

Hantai District, Hanzhong City

 

0.0155

 

23

 

Aesculus

13

 

Shi Hu Forestry Center

 

Economic Development Zone, Hanzhong City

 

0.0093

 

14

 

Dendrobium

14

 

Others

 

 

 

0.0047

 

7

 

 

 

 

Total

 

 

 

16.0821

 

24,122

 

 


Item 3.    Legal Proceedings


We know of no material, active or pending legal proceedings against us, our subsidiaries or our property, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholders are an adverse party or have a material interest adverse to us.




7




Item 4.    Removed and Reserved


None.




8




PART II

 

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

 

Market Information


Our common stock is currently quoted on a limited basis on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol “CHFY.” The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists. We cannot predict whether a more active market for our common stock will develop in the future. In the absence of an active trading market:


 

1)

Investors may have difficulty buying and selling or obtaining market quotations;

 

2)

Market visibility for our common stock may be limited; and


 

3)

A lack of visibility of our common stock may have a depressive effect on the market price for our common stock.


The following table sets forth the range of high and low prices of our common stock as quoted on the OTCBB during the periods indicated. The prices reported represent prices between dealers, do not include markups, markdowns or commissions and do not necessarily represent actual transactions.

 

 

 

 

High

 

 

Low

 

 

 

 

 

 

 

 

 

2012

First Quarter

 

$

0.20

 

 

$

0.03

 

 

Second Quarter

 

$

0.18

 

 

$

0.04

 

 

Third Quarter

 

$

0.10

 

 

$

0.01

 

 

Fourth Quarter

 

$

0.09

 

 

$

0.04

 

2013

First Quarter

 

$

0.05

 

 

$

0.01

 

 

Second Quarter

 

$

0.04

 

 

$

0.01

 

 

Third Quarter

 

$

0.02

 

 

$

0.01

 

 

Fourth Quarter

 

$

0.01

 

 

$

0.01

 


The transfer agent for our common stock is Interwest Transfer Co., Inc., 1981 East 4800 South, Ste 100, Salt Lake City, UT  84111, Attn Melinda Orth; Tel: (801) 272-9294.



Holders


As of March 21, 2014 there were approximately 147 holders of record of 15,600,007 outstanding shares of common stock of the Company, which does not include shareholders who own our shares in so-called “street name.”


Dividends


Holders of our common stock are entitled to dividends if declared by the Board of Directors out of funds legally available therefore. As of December 31, 2013 no cash dividends have been declared.


Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operation, financial condition, contractual and legal restrictions and other factors the board of directors deem relevant.


Equity Compensation Plans



9





As of December 31, 2013, we did not have any equity compensation plans.


Recent Sales of Unregistered Securities


None in the fiscal year ended December 31, 2013


Recent Purchases of Equity Securities by us and our Affiliated Purchasers


We have not repurchased any of our common stock and have no publicly announced repurchase plans or programs as of December 31, 2013.


Item 6.    Selected Financial Data


Not applicable.

 

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


Forward-Looking Statements


This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including, "could" "may,” "will,” "should,” "expect,” "plan,” "anticipate,” "believe,” "estimate,” "predict,” "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.


While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Annual Report.


Overview of our Business


We were engaged through our Harbin SenRun subsidiary in the forestry business in Heilongjiang Province, People’s Republic of China. We managed four major forest centers having a total of 1,561 hectares of land, and cut timber in order to sell the logs in the commercial market. However, for the year ended December 31, 2007 and subsequent years, Harbin SenRun lost its wood cutting quota for log sales from the Heilongjiang Bureau of Forestry and has had no revenues. The Board of Directors of our company decided to sell the stock of Jin Yuan Global Ltd., the parent of Harbin SenRun, on December 14, 2010, to Land Synergy, Ltd., a British Virgin Islands company, for US$2,000.00.


As of July 15, 2010, we closed on the acquisition of Hanzhong Hengtai Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Hengtai”). Hengtai is a variable interest entity  controlled by our subsidiary, Financial International (Hong Kong) Holdings, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China. Hengtai’s business is the plantation and sale of garden plants including Chinese Yew, as well as Aesculus, Dove Tree and Dendrobium, among others. Hengtai was incorporated on October 22, 2003 with a registered capital of RMB 15 million. The registered address of the Company is located in Economic Development Zone of Hanzhong City, Shaan’xi Province, People’s Republic of China.


Hengtai currently has 13 forestry centers and occupies approximately 16.0 square kilometers (or 24,000 Mu). It is estimated that Hengtai has over 11,000,000 valuable plants, including 8,000,000 Chinese Yews, 1,000,000 Chinese Dove Trees, 300,000 Aesculus, 2,000,000 Dendrobium (and 30+ other species, including Crape Myrtle, Magnolia Denudate, Osmanthus Fragrans etc.).




10




Chinese Yew is the primary product of Hengtai and the Company is focusing its efforts on planting two types of Chinese Yews that carry the biological names Taxus chinensis var. mairei and Taxus madia. Currently they take up approximately 28% (4.5 sq km or 6750 Mu) of the planting area of the Company.


According to a finding of the Chinese government, Chinese Yews species like Taxus madia and Taxus chinensis have Paclitaxel content in their bark. Paclitaxel is an FDA approved chemical for use in the treatment of certain cancers and is marketed by Bristol Myers Squibb Corp., among other companies, in many countries as a

chemotherapy agent for the treatment of cancer.


Hengtai’s open wood field planting area also carries a variety of other plants among Chinese Yew in order to optimize the use of the terrain. Mixed planting of taller plants not only will provide shade for Chinese Yews in the field; but also will diversify the income source of the Company. Currently, Chinese Yew is mixed planted with species including magnolia grandiflora, fragrans, crape myrtle, ginkgo, Davidia involucrate horse chestnut.


Currently, our Chinese Yew and other plants are all sold as garden plants in potted form used in landscaping across China. Hengtai develops the landscaping markets for Chinese Yew and other plantations in key Chinese cities including Beijing, Shanghai, Chongqing, among others by virtue of establishing garden plants landscape exhibitions in selected cities. The management believes that sales of Chinese Yew will also promote the sales of other seedlings and garden plants provided by the Company.


The results of operations of Hengtai are consolidated in our financial statements since Hengtai is a controlled by our subsidiary, FIHK.


Results of Operations


For the year ended December 31, 2013 Compared to the year ended December 31, 2012


For the Year ended December 31

 

2013

 

 

2012

 

Net Sales

 

$

1,778,363

 

 

$

1,546,063

 

Cost of Goods Sold

 

$

1,293,060

 

 

$

1,154,917

 

Operating Expenses

 

$

499,850

 

 

$

416,888

 

Other Income (Expenses)

 

$

(577,303)

 

 

$

148,911

 

Income Taxes

 

$

-

 

 

$

-

 

Net Income

 

$

(591,850)

 

 

$

123,169

 


Net Sales


We had net sales of $1,778,363 for the year ended December 31, 2013 and $1,546,063 for the year ended December 31, 2012. Our sales increased by $232,300 or approximately 15%.  The Company has increased its sales of a specific product known as Taxus Yew which is considered one of the most endangered plants in China. The trees were previously reserved and maintained by the Company in order to extract certain chemical compound from the trees. 


Cost of Goods Sold and Gross Profit


For the years ended December 31, 2013 and 2012, cost of goods sold amounted to $1,293,060 and $1,154,917. Gross profit for the year ended December 31, 2013 was $485,303 as compared to $391,146 for the year ended December 31, 2012. The gross margin percentage for the year ended December 31, 2013 and 2012 were approximately 27.3% and 25.3%. The increase in gross margin resulted from a specific product sold by the Company due to values of the plants. In addition, due to higher sales revenues, the cost of goods sold increased accordingly.


Operating Expenses


For the year ended December 31, 2013, total operating expenses were $499,850 as compared to $416,888 for the year ended December 31, 2012, an increase of $82,962, or approximately 19.9%. The selling expenses decreased



11




because the Company has received sales from its regular and old customers without spending additional promotions and advertisement. The general and administrative expenses increase as result of bad debts reserved for the Company’s outstanding accounts receivables as determined by the management.



The breakdown of the operating expenses as follows:


For the Year ended December 31

 

2013

 

 

2012

Selling Expenses

 

$

72,932

 

 

$

89,911

General and Administrative Expenses

 

$

426,918

 

 

$

326,977

Total Operating Expenses

 

$

499,850

 

 

$

416,888


The breakdown of the general and administrative expenses as follows:


  

 

For the Year ended

 

  

 

December 31,

 

  

 

2013

 

 

2012

 

Office expense

 

$

17,564

 

 

$

15,653

 

Salary and welfare

 

 

68,730

 

 

 

61,116

 

Employee insurance

 

 

30,223

 

 

 

26,331

 

Audit and accounting

 

 

43,307

 

 

 

41,088

 

Legal service fee

 

 

30,000

 

 

 

35,132

 

Entertainment fee

 

 

16,538

 

 

 

24,002

 

Depreciation expense

 

 

7,875

 

 

 

7,602

 

Bad debt expense

 

 

106,219

 

 

 

21,386

 

Others

 

 

106,462

 

 

 

94,667

 

Total

 

426,918

 

 

326,977

 



Other Income (Expenses)


Our other income (expenses) during the year ended December 31, 2013 amounted to $(577,303) as compared to $148,911 for the same period in 2012. The result was mainly due to contingent loss accrued in 2013. The interest expenses were $296,260 and $215,383 for the year ended December 31, 2013 and 2012, respectively. The increase of interest expense resulted from higher outstanding balance and higher interest rate on the short-term loans. In addition, the Company experience a loss of $542,549 for the year ended December 31, 2013 as a result of loan default where the Company is a guarantor of the loan.


Net Income (Loss)


Net loss was $591,850 for the year ended December 31, 2013, as compared to a net income of $123,169 for the same period in 2012. The decrease of net income was due to increase in general and administrative expense and other loss from loan defaulted by the Company’s related party along with a decrease in government grant received.


Liquidity and Capital Resources


At December 31, 2013, we had cash and cash equivalents of $23,347.




12




Working Capital

 

 

At

December 31,

2013

 

 

At

December 31,

2012

 

Current assets

$

2,654,753

 

$

2,551,626

 

Current liabilities

 

2,418,893

 

 

2,296,364

 

Working capital

$

235,860

 

$

255,262

 



Operating Activities


Net cash used in operating activities for the year ended December 31, 2013 was $295,918 as compared to net cash provided by operating activities $115,304 for the year ended December 31, 2012.


For the year ended December 31, 2013, we had net loss of $591,850. Our inventories increased by $114,803, accounts payable decreased by $293,678, accounts receivable increased by $285,373, prepayments decreased by $114,714, other receivables increased by $15,123, interest payable increased by $190,271, accrued liabilities and other current liabilities increased by $27,775, contingent obligations increased by $551,079 , offset by non-cash items such as depreciation and amortization of $14,851 and bad debts provision of $106,219.


For the year ended December 31, 2012, we had net income of $123,169, our inventories increased by $463,741, accounts payable increased by $298,943, accounts receivable increased by $89,393, prepayments increased by $51,653, other receivables increased by $10,590, interest payable increased by $129,755, accrued liabilities and other current liabilities increased by $146,230, offset by non-cash items such as depreciation and amortization of $11,198, and bad debts provision of $21,386.


The inventory increased as a result of management’s decision to reserve and to maintain the trees for a longer period in order to extract certain chemical compound from the trees.


Investing Activities


Net cash used in investing activities for the year ended December 31, 2013 was $4,079 as compared to net cash provided by investing activities of $52,853 for the year ended December 31, 2012.


For the year ended December 31, 2013, we spent $4,079 in acquisitions of properties, plant and equipment.


For the years ended December 31, 2012, we have received cash repayment of $75,279 from our related parties for the loan previously made to our related parties, and we spent $22,426 in acquisitions of properties, plant and equipment.


Financing Activities


Net cash provided by financing activities for the year ended December 31, 2013 was $198,160. We have repaid $40,702 to our related parties. We borrowed $110,362 in short and long term bank loans as well as $128,500 from our related parties.


Net cash used in financing activities for the year ended December 31, 2012 was $76,371. For the year ended December 31, 2012, we repaid $86,254 of outstanding loans and we borrowed $9,071 from related parties and $812 from banks.




13




The Company has increased its borrowing from the bank and related parties in order to generate sufficient cash flow to maintain operations. The proceeds from the loans were used to purchase inventory and to reduce accounts payable balances.


We have not generated sufficient cash flows from operations. If we do not generate enough revenues from the sales of our products to meet the cash needs, we will need other financing to continue to operate. As we work to increase sales of our products, we expect to increase cash flows from operations. However, we may choose at any time to raise capital through private debt or equity financing to strengthen our financial position and facilitate growth.


Related Parties Transactions


We have historically funded our cash needs through a series of debt transactions, primarily with related parties. Amounts due to related parties as of December 31, 2013 and December 31, 2012 were $261,284 and $173,486, respectively. Interest expense for related party loans was $11,373 and $14,709 for the years ended December 31, 2013 and 2012, respectively.


The Company is a guarantor of a loan for a related party. On December 31, 2013, the balance of the loan principle and interest payable was $551,079. The loan was due on July 1, 2013 and the related party has not made any payment. The contingent loss was accrued as it is probable the liability has incurred.  


Off-Balance Sheet Arrangements


We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.


Inflation


China Forestry believes that inflation has not had a material effect on its operations to date.


Critical Accounting Policies


The discussion and analysis of China Forestry’s financial condition presented in this section are based upon the audited financial statements of the company, which have been prepared in accordance with the generally accepted accounting principles in the United States. During the preparation of the financial statements, the company was required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the company evaluates its estimates and judgments, including those related to investments, fixed assets, income taxes and other contingencies. The company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under current conditions. Actual results may differ from these estimates under different assumptions or conditions.


Financial Instruments


The carrying amount reported in the balance sheet for cash, accounts receivable, inventory, other receivables, short-term loans, accounts payable, other payables, accrued expenses, interest payable and long-term loans approximate fair value because of the immediate or short-term maturity of these financial instruments.


Fair Value Accounting


The Company adopted the standard “Fair Value Measurements,” codified with ASC 820 and effective January 1, 2008.  The provisions of ASC 820 are to be applied prospectively.


ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e. the exit price at



14




the measurement date).  Under ASC 820, fair value measurements are not adjusted for transaction cost.  ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:


Level 1:

Unadjusted quoted prices in active markets for identical assets or liabilities.


Level 2:

Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.


Level 3:

Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.


An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.


Cash and Cash Equivalents


Cash and cash equivalents include cash on hand and demand deposits with banks. Cash deposits with banks are held in financial institutions in China, which have no federally insured deposit protection. Accordingly, the Company has a concentration of credit risk related to these uninsured deposits.


Accounts Receivable


Accounts receivable are stated at the amount management expects to collect from outstanding balances.  Management provides for probable uncollected amounts through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of individual accounts.  Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for bad debts and a credit to accounts receivable.


Inventories


Inventories are stated at the lower of cost, as determined on a standard cost basis, or net present value.  Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Management also regularly evaluates the composition of the Company’s inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.


Property, Plant, and Equipment


Property, plant and equipment are initially recognized recorded at cost.  Gains or losses on disposals are reflected as gain or loss in the period of disposal.  The cost of improvements that extend the life of plant and equipment are capitalized.  These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.


Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:


Buildings

10  years

Machinery and equipment

5  years

Transportation equipment

5  years

Office equipment

5  years


Intangible Assets


Intangible assets are stated in the balance sheet at cost less accumulated amortization. The costs of the intangible assets are amortized on a straight-line basis over their estimated useful lives. The respective amortization periods for the intangible assets are as follows:


Land use right                                         

  30-70 years


Impairment of Long-Lived Assets


The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with the standard, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,” codified with ASC 360, which requires the Group to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.


Comprehensive Income


The standard, “Reporting Comprehensive Income,” codified with ASC 220, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  The comprehensive income arose from the effect of foreign currency translation adjustments.


Revenue Recognition


The Company generates revenues from the sales of plants, such as Taxus mairei and etc. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.  Sales are presented net of value added tax (VAT). No return allowance is made as product returns are insignificant based on historical experience.


Income Taxes


The Company accounts for income taxes in accordance with the standard, "Accounting for Income Taxes," codified with ASC 740. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years.  Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future deductibility is uncertain.



Segment Information


The standard, “Disclosures about Segments of an Enterprise and Related Information,” codified with ASC 280, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Company believes that it operates in one business segment (research, development, production, marketing and sales) and in one geographical segment (China), as all of the Company’s current operations are carried out in China.


Foreign Currency Translation




16




The Company’s functional currency is Chinese Renminbi (“RMB”) and its reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.


The consolidated financial statements of the Company are translated into U.S. dollars in accordance with the standard, “Foreign Currency Translation,” codified with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency consolidated financial statements into U.S. dollars are included in determining comprehensive income. At December 31, 2013 and 2012, the cumulative translation adjustments of $225,423 and $211,906, respectively, were classified as items of accumulated other comprehensive income in the stockholders’ equity section of the balance sheet. For the years ended December 31, 2013 and 2012, other comprehensive income was $13,517 and $7,556, respectively.

 

The exchange rates used to translate amounts in RMB into U.S. dollars for the purposes of preparing the consolidated financial statements were as follows:  As of December 31, 2013 and 2012, the Company used the period-end rates of exchange for assets and liabilities of $1 to RMB6.054 and $1 to RMB6.2303, respectively. For the years ended December 31, 2013 and 2012, the Company used the period’s average rate of exchange to convert revenues, costs, and expenses of $1 to RMB6.1492 and $1 to RMB6.3072, respectively. The Company used historical rates for equity.


Related Parties


A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company.  Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.


Commitments and Contingencies 


Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. 


 




17





Recently Issued Accounting Pronouncements


In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. For the Company, this ASU is effective beginning January 1, 2013, with early adoption permitted under certain conditions. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations or financial condition.


In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. For the Company, this ASU is effective beginning January 1, 2013, and interim periods within those annual periods. The adoption of this standard is not expected to have an impact on the Company’s financial results or disclosures.


The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.



Item 7A.    Quantitative and Qualitative Disclosures about Market Risk


Not required for smaller reporting company.


Item 8.    Financial Statements and Supplementary Data  

 

The financial statements are attached immediately after the signature page of this Form 10-K Annual Report.



18





 


 

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


None


Item 9A.    Controls and Procedures


Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance 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 SEC’s rules, regulations and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.


Management Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.


Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.


This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.


Changes in Internal Controls


During the year ended December 31, 2013, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Evaluation of Disclosure Control


Our Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of December 31, 2013, that the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed in the



19




reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.


Item 9B.   Other Information


None.

 



20






PART III


Item 10.    Directors, Executive Officers and Corporate Governance


All directors hold office for one-year terms until the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board.



The following table setforth the information of our current directors and officers:


Name

 

Age

 

Position

Shengli Liu

 

44

 

Chairman, President and Director

Yueping Li

 

49

 

Chief Executive Officer and Director

Shuncheng Ma

 

49

 

Chief Financial Officer and Director

Chunli Li

 

52

 

Secretary


Mr. Shengli Liu, Chairman, President and Director, age 43, has over 15 years working experience in corporate management. Since 2007, Mr. Liu served as the chairman of Xi’an Edward Co., Ltd. From 1999 to 2006, he served as the chairman of Shaanxi Henglida Business Co. Ltd. In 1998 Mr. Liu served as the manager of Xi’an Railway Bureau Labor Service Co. Ltd. He acquired a Bachelors Degree in Economic Management from Shaanxi Provincial China’s Communist Party College in 1990.  


Mr. Yueping Li, Chief Executive Officer and Director, age 48, has more than 20 years business and management experience. From 2005 to present, he served as chairman of Shaanxi Yinlian Credit Guarantee Co. Ltd. In 2003 and 2004, Mr. Li was the vice-manager of Shaanxi International Trust and Investment Corporation Holding Company. From 1996 to 2002, he served as General Manager in Beijing Boming Castor-oil Plant Co., Ltd. Mr. Li served as project manager in China Machinery and Equipment Import & Export Company from 1992 to 1996. He worked as Northwest commissioner in Mechanical Engineering Company of Shougang Group from 1989 to 1991. Mr. Li acquired his Bachelors Degree of Engineering at Beijing Institute of Technology in 1986, and received his Masters of Engineering Degree in 1989.  


Mr. Shuncheng Ma, Chief Financial Officer and Director, age 48, worked as general manager in Shaanxi Hongbao Green Engineering Co. Ltd. since 1999. He worked as general manager in Lvbao Industrial Co. Ltd. from 1995 to 1999. Mr. Ma graduated from Northwest University in 1986 with a Bachelors Degree in Mathematics and received an EMBA at Northwest University Economic Management College in 2005. 


Chunli Li.  Secretary. From 2010 to present, Mr. Li., age 51, has acted as manager of the Engineering Department of Shaanxi Libao Ecology Techonology Co. Ltd. From 2005 to 2006, he was the vice -manager of Xi’an Shili Electric Power Co., Ltd. From 2001 to 2004, he served as General Manager of Shaanxi Naide High-Tech Development Co., Ltd. Mr. Li received his Bachelors Degree from Shaanxi Province Agriculture College in 1984.



 

21




 

Meetings of Our Board of Directors

 

The Registrant’s Board of Directors took all actions by unanimous written consent without a meeting during the fiscal year ended December 31, 2013.

 

The Registrant’s Board of Directors took all actions by unanimous written consent without a meeting during the fiscal year ended December 31, 2012.


Board Committees


Audit Committee. The Company intends to establish an audit committee of the board of directors, which will consist of soon-to-be-nominated independent directors. The audit committee’s duties would be to recommend to the Company’s Board of Directors the engagement of independent auditors to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of the Company’s Board of Directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.


Compensation Committee. The Company intends to establish a compensation committee of the Board of Directors. The compensation committee would review and approve the Company’s salary and benefits policies, including compensation of executive officers.


Director Compensation


We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.


Significant Employees


Other than the directors and officer described above, we do not expect any other individuals to make a significant contribution to our business.


Family Relationships


There are no familial relationships between or among our officers and directors.


No Legal Proceedings


None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past five years:


any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;


any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

 

being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Section 16(a) Beneficial Ownership Compliance Reporting


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 the Company is required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 31, 2013.  During the fiscal years ended December 31, 2013 and 2012, all our directors and officers have complied with the Section 16(a) of the Exchange Act 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 except that Shengli Liu and Shuncheng Ma did not file Form 4 and Zhengheng Shao did not file Form 3 when they changed the percentage of ownership.


Code of Ethics


The Company adopted a Code of Ethics that applies to the Company’s principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as other employees (the "Code of Ethics"), a copy of which is attached as Exhibit 10.1 to our Form 8-K filed on December 19, 2008. The Code of Ethics is 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

Compliance with applicable governmental laws, rules and regulations

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


Item 11.    Executive Compensation


The following Summary Compensation Table sets forth, for the years indicated, all cash compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by the Company’s chief executive officer and all other executive officers who received or are entitled to receive remuneration in excess of $100,000 during the stated periods.



SUMMARY COMPENSATION TABLE


Name of Officer

Year

 

Salary

 

Bonus

 

Stock

Awards

 

Option

Awards

 

Non-Equity Incentive Plan Compensation

 

Nonqualified Deferred Compensation

 

All Other

Compensation

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shengli Liu

2013

 

$ -

 

--

 

--

 

--

 

--

 

--

 

--

 

--

Yueping Li

2013

 

$ -

 

--

 

--

 

--

 

--

 

--

 

--

 

--

Shuncheng Ma

2013

 

$ -

 

--

 

--

 

--

 

--

 

--

 

--

 

--

Chunli Li

2013

 

$ -

 

--

 

--

 

--

 

--

 

--

 

--

 

--

 


Option Grants in Last Fiscal Year




23




There were no options granted to any of the named executive officers during the year ended December 31, 2013.


During the year ended December 31, 2013, none of the named executive officers exercised any stock options.


Pension, Retirement or Similar Benefit Plans


There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.


Employment Agreements


The Company has no employment agreements with any of its employees.


Equity Compensation Plan


The Company currently does not have any equity compensation plans; however the Company is currently deliberating on implementing an equity compensation plan.


Directors’ and Officers’ Liability Insurance


The Company currently does not have insurance insuring directors and officers against liability; however, the Company is in the process of investigating the availability of such insurance.


Compensation Committee


We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.


Compensation of Directors


We did not pay our directors any compensation for services rendered as a director in the year ended December 31, 2013.


We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.


Change of Control Compensatory Plans


As of December 31, 2013, we had no pension plans or compensatory plans or other arrangements which provide compensation on the event of termination of employment or change in control of us.


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

 

The following table sets forth the information concerning the number of shares of our common stock beneficially owned as of March 21, 2014 by: (i) each of our directors, (ii) each of our named executive officers and (iii) owners of 5% or more of our common shares. There was no other person or group known by us to beneficially own more than 5% of our outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own.



24





Except as otherwise specified below, the address of each beneficial owner listed below is Economic Development Zone of Hanzhong City, Shaan’xi Province, The People’s Republic of China




 

Number of Shares of Common Stock Owned

Percent of Voting Power(1)

Directors and Executive Officers   

 

 

Shengli Liu, President, Director  (2)

4,552,048

22.76%

Shuncheng Ma, Director, CFO

1,100,000

5.50%

Yueping Li, Director, CEO

 

 

Chunli Li, Secretary

 

 

All Officers and Directors as a Group (5 persons)

5,652,048

28.26%

 

 

 

Principal Stockholders (5%)

 

 

Shuncheng Ma

1,100,000

5.5%

Shengli Liu

4,552,048

22.76%

Wealthstand Limited(2)

Palm Grove House Po Box 438 Road Town Tortolla Bvi

1,328,610

6.64%

Zhengheng Shao

2,100,000

10.50%

All Principal Stockholders (5%)

9080658

45.40%


(1)

For purposes of the calculations in this table, there are 20,000,007 issued and outstanding shares of Common Stock because 4,400,000 of the shares underlying the $1.0 million convertible promissory note are deemed to be beneficially owned.

(2)

Shengli Liu is the beneficial owner of 1,912,048 shares of Common Stock, and a 60% interest in the principal amount of a $1.0 million convertible promissory note, which currently entitles him to convert his principal amount into 2,640,000 shares of Common Stock.



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


We have historically funded our cash needs through a series of debt transactions, primarily with related parties. Amounts due to related parties as of December 31, 2013 and December 31, 2012 were $261,284 and $173,486, respectively. Interest expense for related party loans was $11,373 and $14,709 for the years ended December 31, 2013 and 2012, respectively.




25




The Company is a guarantor of a loan for a related party. On December 31, 2013, the balance of the loan principle and interest payable was $551,079. The loan was due on July 1, 2013 and the related party has not made any payment. The contingent loss was accrued as it is probable the liability has incurred.  



Director Independence


Our securities are quoted on the OTCQB tier of OTC Markets Group inter-dealer quotation and trading system, which does not have any director independence requirements.  Once we engage further directors and officers, we will develop a definition of independence and examine the composition of our Board of Directors with regard to this definition.


Item 14.    Principal Accounting Fees and Services.


Audit and Non-Audit Fees


The following table represents fees for the professional audit services and fees billed for other services rendered by our auditors for the audit of our annual financial statements for the years ended December 31, 2013 and December 31, 2011 and any other fees billed for other services rendered by our auditors during these periods.

 

Yichien Yeh, CPA

 

Year ended December 31, 2013

 

Audit fees

 

$

41,000

 

Audit-related fees

 

$

 

 

Tax fees

 

$

 

 

All other fees

 

$

 

 

Total

 

$

41,000

 


Yichien Yeh, CPA

 

Year ended December 31, 2012

 

Audit fees

 

$

41,000

 

Audit-related fees

 

$

 

 

Tax fees

 

$

 

 

All other fees

 

$

 

 

Total

 

$

41,000

 




26




PART IV


Item 15.    Exhibits and Financial Statement Schedules


(a) (1) Financial Statements


The financial statements are attached immediately after the signature page of this Form 10-K Annual Report.


(a) (2) Financial Statement Schedules


None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto.


Exhibits


Exhibit

Number

Exhibit

Description

3.1

Articles of Incorporation of the Company (1)

3.2

Bylaws of the Company (1)

10.1

Share Exchange Agreement by and among Patriot Investment Corporation, Bradley Shepherd, Everwin Development, Ltd., Harbin SenRun Forestry Development Co., Ltd., Jin Yuan Global Limited and Jin Yuan Global Limited Trust (2)

10.2

Share Exchange Agreement by and between China Forestry, Inc., Financial International (Hong Kong) Holdings Co. Ltd., LIU, Shengli, LI, Bin, and Hanzhong Hengtai Bio-Tech Limited (3)

10.3

Operating Agreement by and among China Forestry, Inc., Financial International (Hong Kong) Holdings Co. Ltd., LIU, Shengli, LI, Bin, and Hanzhong Hengtai Bio-Tech Limited (4)

10.4

Sale and Purchase Agreement between China Forestry, Inc. and Land Synergy Limited (5)

21.1

List of Subsidiaries

 

Financial International (Hong Kong) Holdings Co. Limited

31.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)

31.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)


(1)

Incorporated by reference from Exhibit 3 to Patriot Investment Corporation’s Form 10-SB12G filed with the Commission on April 13, 1999.

(2)

Included as an exhibit to our Form 8-K filed with the Commission on July 2, 2007.


(3)

Included as an exhibit to our Form 8-K filed with the Commission on June 16, 2010.

(4)

Included as an exhibit to our Form 8-K filed with the Commission on July 16, 2010.


(5)

Included as an exhibit to our Form 8-K filed with the Commission on December 17, 2010.

(6)

Filed herewith.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


 

CHINA FORESTRY, INC.

 

 

Date :  March 26, 2014

By:

/s/ Shengli Liu

 

Shengli Liu

 

President, Director




28




CHINA FORESTRY, INC. AND SUBSIDIARIES


TABLE OF CONTENTS

TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012


  

 

 

 

  

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2013 and 2012

 

 

 

  

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2013 and 2012

 

 

 

  

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012

 

 

 

  

 

 

 

 

Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income for the Years Ended December 31, 2013 and 2012

 

 

 

  

 

 

 

 

Notes to the Consolidated Financial Statements

 

 

 




29





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

and Stockholders of China Forestry, Inc.


We have audited the accompanying consolidated balance sheets of China Forestry, Inc. as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2013. 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 audits.


We conducted our audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Forestry, Inc. as of December 31, 2013 and 2012 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred accumulated deficits of $2,960,239 and $2,368,389 as of December 31, 2013 and 2012, respectively. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 


[chfyform10k12312013v5003.gif]

 


Yichien Yeh, CPA

Oakland Gardens, New York

March 24, 2014



30





CHINA FORESTRY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

ASSETS

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

          23,347

 

        114,587

Accounts receivable, net (Note 5)

 

 

        348,698

 

        130,426

Other receivables

 

 

          10,688

 

          34,682

Inventories (Note 6)

 

 

     2,205,264

 

     2,090,461

Prepayment (Note 7)

 

 

          66,756

 

        181,470

Total Current Assets

 

 

     2,654,753

 

     2,551,626

 

 

 

 

 

 

Property, plant and equipment, net (Note 8)

 

          88,498

 

          96,386

Intangible assets (Note 9)

 

 

            9,673

 

            9,637

Total Assets

 

$

     2,752,924

 

     2,657,649

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

Current Liabilities

 

 

 

 

 

Short-term loans (Note 10)

 

$

     1,076,096

 

        968,073

Accounts payable

 

 

          61,604

 

        355,282

Other payables

 

 

          82,006

 

          69,642

Due to related parties (Note 17)

 

 

        261,284

 

        173,486

Accrued expenses

 

 

        204,808

 

        191,117

Interest payable

 

 

        622,480

 

        432,208

Advance from customers

 

 

          27,985

 

          26,265

Long-term loans due within one year (Note 11)

 

          82,630

 

          80,291

Total Current Liabilities

 

 

     2,418,893

 

     2,296,364

Convertible promissory note-shareholders (Note 12)

 

     1,000,000

 

     1,000,000

Contingent obligations (Note 18)

 

 

        551,079

 

                  -   

Total Liabilities

 

 

     3,969,972

 

     3,296,364

 

 

 

 

 

 

Commitments & Contingencies (Note 18 and 19)

 

 

 

 

 

 

 

 

 

 

Shareholders' Deficit

 

 

 

 

 

     Preferred stock, $0.001 par value; 10,000,000 shares authorized;

 

 

 

         0 shares issued and outstanding

 

 

                  -   

 

                  -   

     Common stock, $0.01 par value; 20,000,000 shares authorized,

 

 

 

     15,600,007 shares issued and outstanding

 

        156,000

 

        156,000

     Additional Paid-in Capital

 

 

     1,361,768

 

     1,361,768

     Accumulated Deficit

 

 

    (2,960,239)

 

    (2,368,389)

 Accumulated other comprehensive income

 

        225,423

 

        211,906

          Shareholders' Deficit

 

 

    (1,217,048)

 

       (638,715)

          Total Liabilities and Shareholders' Deficit

$

     2,752,924

 

     2,657,649

 

 

 

 

 

 

See Notes to Consolidated Financial Statements







32





CHINA FORESTRY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended

 

 

 

 

December 31,

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Net sales

 

$

      1,778,363

$

      1,546,063

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

    (1,293,060)

 

    (1,154,917)

 

Gross Profit

 

         485,303

 

         391,146

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

   Selling expenses

 

           72,932

 

           89,911

 

   General and administrative expenses (Note 13)

 

         426,918

 

         326,977

 

Total operating expenses

 

         499,850

 

         416,888

 

Income (Loss) from operations

 

         (14,547)

 

         (25,742)

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

Interest expense

 

       (296,260)

 

       (215,383)

 

Other loss

 

       (542,549)

 

                   -   

 

Other income

 

         261,506

 

         364,294

 

Total other income (expenses)

 

       (577,303)

 

         148,911

 

 

 

 

 

 

 

 

Income (Loss) before income taxes

 

       (591,850)

 

         123,169

 

Income taxes

 

                   -   

 

                   -   

 

Net Income (Loss)

$

       (591,850)

$

         123,169

 

 

 

 

 

 

 

 

Net Loss per share - basic

$

(0.038)

$

0.008

 

Weighted average shares outstanding- basic

 

    15,600,007

 

    15,600,007

 

 

 

 

 

 

 

 

Net Loss per share - diluted

$

(0.038)

$

0.008

 

Weighted average shares outstanding- diluted

 

    15,600,007

 

    15,600,007

 

 

 

 

 

 

 

 

Comprehensive Income (loss)

 

 

 

 

 

Net income (loss)

$

       (591,850)

$

         123,169

 

Other comprehensive income (loss) - Foreign currency translation adjustment

 

13,517

 

7,556

 

 

Comprehensive income (loss)

$

       (578,333)

$

         130,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 
















34





CHINA FORESTRY, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (Deficit)

For the Years Ended December 31, 2013 and 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional Paid-In Capital

 

Accumulated Other Comprehensive Income

 

Accumulated Deficit

 

Total

 

 

Shares

 

Par ($0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2011

 

15,600,007

 

156,000

 

1,361,768

 

204,350

 

(2,491,558)

 

(769,440)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year

 

 

 

 

 

 

 

 

 

123,169

 

123,169

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

7,556

 

 

 

7,556

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

15,600,007

 

156,000

 

1,361,768

 

211,906

 

(2,368,389)

 

(638,715)

.

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

 

 

 

 

(591,850)

 

(591,850)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

13,517

 

 

 

13,517

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2013

 

15,600,007

 

156,000

 

1,361,768

 

225,423

 

(2,960,239)

 

(1,217,048)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements





35





CHINA FORESTRY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended

 

 

 

 

December 31,

 

 

 

 

2013

 

2012

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$

             (591,850)

$

                123,169

 

Adjustments to reconcile income to net cash provided by operations

 

 

 

 

 

Depreciation

 

 

                 14,610

 

                  10,996

 

Provision for bad debts

 

               106,219

 

                  21,386

 

Amortization of intangible assets

 

                       241

 

                        202

 

Loss on disposal of property, plant and equipment

 

                          -   

 

                           

-   

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

             (285,373)

 

                (89,393)

 

Other receivables

 

               (15,123)

 

                (10,590)

 

Inventories

 

             (114,803)

 

              (463,741)

 

Prepayment

 

               114,714

 

                (51,653)

 

Accounts payable

 

             (293,678)

 

                298,943

 

Other payables

 

                 12,364

 

                  64,597

 

Accrued expenses

 

                 13,691

 

                  57,751

 

Interest payable

 

               190,271

 

                129,755

 

Advance from customers

 

                    1,720

 

                  23,882

 

Contingent obligations

 

               551,079

 

                           -   

 

Net cash provided by (used in) operating activities

 

             (295,918)

 

                115,304

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

Purchase of properties, plant and equipment

 

                  (4,079)

 

                (22,426)

 

Proceeds from disposal of properties, plant and equipments

 

                          -   

 

                           

 - 

 

Loan made to related parties

 

                          -   

 

                          - 

 

Proceeds from repayment of loan made to related parties

 

                          -   

 

                  75,279

 

Net cash provided by (used in) investing activities

 

                  (4,079)

 

                  52,853

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

Proceeds from short-term and long-term loans

 

               110,362

 

                        812

 

Proceeds from related parties

 

               128,500

 

                    9,071

 

Repayment to related parties

 

               (40,702)

 

                           -   

 

Repayment of loans

 

 

                          -   

 

                (86,254)

 

Proceeds from capital contribution

 

                          -   

 

                          

 -   

 

Net cash provided by (used in) financing activities

 

               198,160

 

                (76,371)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

                 10,597

 

                    6,493

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

               (91,240)

 

                  98,279

 

Cash and cash equivalents at beginning of period

 

               114,587

 

                  16,308

 

Cash and cash equivalents at end of period

$

                 23,347

$

                114,587

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Interest paid

 

$

               111,883

$

                  87,564

 

Income taxes paid

 

$

                          -   

$

                           

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.





37





CHINA FORESTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.      ORGANIZATION AND BUSINESS BACKGROUND


The Company was incorporated under the name of Patriot Investment Corp. on February 13, 1986 under the laws of the State of Nevada. In January 2008, the Company filed an amendment to its articles of incorporation to change the name to China Forestry Inc. (“the Company”). The Company is principally engaged in the growing and harvesting of timber and manufacture and marketing of lumber in the People’s Republic of China (“PRC”) through its holdings and subsidiaries.


On June 26, 2007, the Company closed the share exchange transaction and acquired 100% Jin Yuan Global Limited, HK Holding Company, who directly owns 51% of Harbin Senrun Forestry Development Co., Ltd. (“Harbin Senrun”) and indirectly owns 49% of Harbin SenRun  through a wholly 100% owned subsidiary Jin Yuan Global Limited Trust. Harbin Senrun was a PRC operating company that principally engaged in the growing and harvesting of timber and manufacture and marketing of lumber in the People’s Republic of China (“PRC”).


On July 15, 2010, the Company closed the transactions contemplated by the Share Exchange Agreement and acquired Financial International (Hong Kong) Holdings Co. (“FIHK”), a holding company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China on January 8, 2009, as its wholly owned subsidiary. FIHK has no other material operations except it has entered into a series of contractual obligations with Hanzhong Hengtai Bio-Tech Limited (“Hengtai”), a company organized and existing under the laws of the People’s Republic of China on October 22, 2003.


Hanzhong Hengtai Bio-Tech Limited (“Hengtai”) is a company incorporated under the laws of the People’s Republic of China (“China”) that engaged in the plantation and sale of garden plants used in landscaping, such as Chinese Yews of the types Taxus chinensis var. mairei and Taxus media, as well as the holders of 100% of the voting shares of Hengtai.


The Company’s relationship with Hengtai and its shareholders is governed by a series of contractual arrangements among FIHK, Hengtai and the 100% holders of the share capital of Hengtai (the “Hengtai Shareholders”) entered on April 1, 2010. The contractual arrangements include a Consulting Services Agreement, a Business Operating Agreement, an Equity Pledge Agreement, an Exclusive Option Agreement, and a Voting Rights Proxy Agreement (collectively the “VIE Agreements”). Under the laws of China, the VIE Agreements constitute valid and binding obligations of the parties of such agreements. Each of the VIE Agreements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of China.  


On December 14, 2010, following the resolution of the Board of Directors to terminate the timber business, the Company closed a sale and purchase transaction contemplated by a Sale and Purchase Agreement and sold 100% of Jin Yuan Global Limited along with all its directly or indirectly owned subsidiaries Harbin Senrun for $2,000. A loss of $640,786 was recognized from the disposal.


On May 20, 2011, the Board of Directors of the Company authorized the termination of the VIE Agreements. In connection with the termination of the VIE Agreements, FIHK exercised its rights under the Exclusive Option Agreement to direct Xi’An Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Xi’An Qi Ying”), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai.  As a result, Hengtai became an indirect wholly owned subsidiary of FIHK.


The Exclusive Option Agreement was exercised in a manner that the Hengtai Shareholders transferred all of their equity capital in Hengtai to Xi’An Qi Ying.  At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China (“Spone”), acquired all of the



38




capital stock of Xi’An Qi Ying, so that it became a direct wholly owned subsidiary of Spone.  FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK.


As a result of the termination of the VIE Agreements, Hengtai became an indirect wholly owned subsidiary of the Company, and a direct wholly owned subsidiary of Xi’An Qi Ying. Previously, the status of Hengtai under the VIE Agreements was a company that was controlled by FIHK pursuant to contractual provisions of the VIE Agreements whose equity capital was owned by the original Hentai Shareholders.


As a result of a series of reverse acquisition transactions above, the Company now owns all of the issued and outstanding capital stock of its subsidiaries. Since there is common control between the Company and all the subsidiaries, for accounting purposes, the acquisition of Xi’An Qi Ying and Henngtai has been treated as a recapitalization with no adjustment to the historical basis of the assets and liabilities of the consolidated company based on Financial Accounting Standards Board (FASB) rules on business combinations and transactions among entities under common control. The restructuring has been accounted for using the “as if” pooling method of accounting and the operations were consolidated as if the restructuring had occurred as of the beginning of the earliest period presented in our consolidated financial statements and the current corporate structure had been in existence throughout the periods covered by our consolidated financial statements.


China Forestry, Inc. (CHFY)

 

100%

 

Financial International (Hong Kong) Holdings Company Limited (FIHK)

 

100%

 

Spone Limited (Spone)

 

100%

 

Xi'An Qi Ying Bio-Tech Limited (Xi'An Qi Ying)

 

100%

 

Hanzhong Hengtai Biotech Limited (Hengtai)



On June 15, 2012, the Company effected a 1-for-10 reverse stock split of the Company’s issued and outstanding shares of common stock.The par value and number of authorized shares of the common stock remained unchanged. All references to number of shares and per share amounts included in these consolidated financial statements and the accompanying notes have been adjusted to reflect the reverse stock split retroactively.



39





2.      GOING CONCERN


As reflected in the accompanying financial statements, the Company has accumulated deficits of $2,960,239 and $2,368,389 at December 31, 2013 and 2012, respectively. The Company’s owners have funded the losses and cash shortfalls allowing management to develop sales and contingency plans. The Company is also arranging for additional funding. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.



3.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


a.      Basis of Preparation


The accompanying financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("US GAAP").  All significant intercompany accounts and transactions have been eliminated in consolidation.


b.      Variable Interest Entities


Prior to May 11, 2011, Hengtai is considered a variable interest entity (“VIE”), and FIHK, the Company’s wholly owned subsidiary, is the primary beneficiary. The Company’s relationships with Hengtai and its shareholders are governed by a series of contractual arrangements between the Company and Hengtai, which is an operating company in the PRC. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On April 1, 2010, FIHK entered into the following contractual arrangements with Hengtai:


(1) Consulting Services Agreement. Pursuant to the consulting services agreement between FIHK and Hengtai, dated April 1, 2010, FIHK has the exclusive right to provide Hengtai with consulting services and daily operations, including general business operations in relation to business development, human resources, research and development, and business growth, and support the daily operation costs and daily expenses. Hengtai pays an annual consulting service fee to FIHK that is equal to 100% of Hengtai’s net revenue for such year, based on the annual financial statements. This agreement shall remain in force unless otherwise terminated. FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement. All intercompany transactions, including this service fee, have been eliminated in the consolidated financial statements presented.


(2) Business Operating Agreement. Pursuant to the business operating agreement among FIHK and Hengtai, dated April 1, 2010, FIHK provides Hengtai guidance and instruction on Hengtai’s daily operations, financial management and employment issues. FIHK has the right to appoint or remove Hengtai’s directors and executive officers. In addition, FIHK agrees to guarantee Hengtai’s performance under any agreements or arrangements relating to its business arrangement with any third party. Upon the request of Hengtai, FIHK agrees to provide loans to support its operation’s capital requirements and to provide a guarantee if the Company needs to apply for loans from a third party. In return, Hengtai agrees to pledge its accounts receivable and all of its assets to FIHK. The term of this agreement is ten years; and may be extended or terminated only by 30-day prior written notice served by FIHK (or its designated party). FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement.


(3) Equity Pledge Agreement. Under the equity pledge agreement between FIHK and Hengtai, dated April 1, 2010, Hengtai’s 100% shareholders pledged all of their equity interests in Hengtai to FIHK to guarantee its performance of its obligations under the Business Operating Agreement. If Hengtai or its shareholders breaches their respective contractual obligations, FIHK, as Pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The 100% shareholders of Hengtai also agreed that upon occurrence of any event of default,



40




FIHK shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the 100% shareholders of Hengtai to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that FIHK may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The 100% shareholders of Hengtai agreed not to dispose of the pledged equity interests or take any actions that would prejudice FIHK’s interest. This equity pledge agreement shall expire two years after Hengtai’s obligations under the Consulting Services Agreement have been fulfilled. FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement.


(4) Exclusive Option Agreement. Under the exclusive option agreement between FIHK and Hengtai, dated on April 1, 2010, all the shareholders of Hengtai irrevocably granted to FIHK (or its designated person) an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Hengtai for the minimum amount of consideration permitted by applicable PRC law. FIHK (or its designated person) has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is ten (10) years from April 15, 2009 and may be extended prior to its expiration by written agreement of the parties.


(5) Voting Right Proxy Agreement. Under the voting right proxy agreement between FIHK and Hengtai, dated on April 1, 2010, all shareholders of Hengtai agreed to irrevocably grant FIHK with the right to exercise the 100% shareholders of Hengtai’s voting rights and their other rights, including the attendance at and the voting of the all the shares held by 100% shareholders of Hengtai at shareholders’ meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and its Articles of Association, including but not limited to the rights to sell or transfer all or any of his equity interests of the Hengtai, and appoint and vote for the directors and Chairman as the authorized representative of the shareholders of the Hengtai. The proxy agreement may be terminated by joint consent of the parties or upon 30-day written notice from FIHK.


Under Article 1.06(c) of the Share Exchange Agreement, if FIHK does not execute and deliver the Exclusive Option Agreement described above to acquire Hengtai on or before September 30, 2010, the Company has the option to rescind the Share Exchange Agreement by delivering notice of rescission to FIHK and the shareholders of FIHK.  The parties are to be returned to such position that they were in prior to entering into the Share Exchange Agreement, including, but not limited to, the return to the Company of the share certificates for 100,000,000 shares of common stock of the Company and the $1.0 million convertible promissory note issued by the Company, and the return to the shareholders of FIHK of the share certificates representing the FIHK Share Capital.   The $50,000 cash payment by Hengtai as part of the Share Exchange Agreement will not be returned by the Company.  The option agreement has not been exercised to date.  However, FIHK is going through the approval process with the Chinese government to exercise the option to acquire Hengtai and it intends to do so.  Nonetheless, the Company still has a right of rescission under the Share Exchange Agreement until the exercise of that option.  There can be no assurances that the Chinese government will approve the exercise by FIHK of the option agreement to acquire Hengtai.


On May 20, 2011, the Board of Directors of the Company authorized the termination of variable interest entities (“VIE”) contracts. In connection with the termination of the VIE Contracts, FIHK exercised its rights under the Exclusive Option Agreement to direct Xi’An Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Xi’An Qi Ying”), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai.  As a result, Hengtai became an indirect wholly owned subsidiary of FIHK.


The Exclusive Option Agreement was exercised in a manner that the Selling Shareholders transferred all of their equity capital in Hengtai to Xi’An Qi Ying.  At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China (“Spone”), acquired all of the capital stock of Xi’An Qi Ying, so that it became a direct wholly owned subsidiary of Spone.  FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK.


As a result of the termination of the VIE Agreements, Hengtai became an indirect wholly owned subsidiary of the Company, and a direct wholly owned subsidiary of Xi’An Qi Ying. Previously, the status of Hengtai under the VIE Agreements was a company that was controlled by FIHK pursuant to contractual provisions of the VIE Agreements whose equity capital was owned by the original Hentai Shareholders.



41





c.      Reclassification


Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.

d.      Use of Estimates


In preparing these 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. The Company regularly evaluates estimates and assumptions related to obsolete inventory, useful life and recoverability of long lived assets. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.


e.      Financial Instruments


The carrying amount reported in the balance sheet for cash, accounts receivable, inventory, other receivables, short-term loans, accounts payable, other payables, accrued expenses, interest payable and long-term loans approximate fair value because of the immediate or short-term maturity of these financial instruments.


f.      Fair Value Accounting


The Company adopted the standard “Fair Value Measurements,” codified with ASC 820 and effective January 1, 2008.  The provisions of ASC 820 are to be applied prospectively.


ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e. the exit price at the measurement date).  Under ASC 820, fair value measurements are not adjusted for transaction cost.  ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:


Level 1:

Unadjusted quoted prices in active markets for identical assets or liabilities.


Level 2:

Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.


Level 3:

Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.


An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.


g.      Cash and Cash Equivalents


Cash and cash equivalents include cash on hand and demand deposits with banks. Cash deposits with banks are held in financial institutions in China, which have no federally insured deposit protection. Accordingly, the Company has a concentration of credit risk related to these uninsured deposits.



42





h.      Accounts Receivable


Accounts receivable are stated at the amount management expects to collect from outstanding balances.  Management provides for probable uncollected amounts through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of individual accounts.  Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for bad debts and a credit to accounts receivable.


i.      Inventories


Inventories are stated at the lower of cost, as determined on a standard cost basis, or net present value.  Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Management also regularly evaluates the composition of the Company’s inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.


j.      Property, Plant, and Equipment


Property, plant and equipment are initially recognized recorded at cost.  Gains or losses on disposals are reflected as gain or loss in the period of disposal.  The cost of improvements that extend the life of plant and equipment are capitalized.  These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.


Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:


Buildings

10  years

Machinery and equipment

5  years

Transportation equipment

5  years

Office equipment

5  years


k.      Intangible Assets


Intangible assets are stated in the balance sheet at cost less accumulated amortization. The costs of the intangible assets are amortized on a straight-line basis over their estimated useful lives. The respective amortization periods for the intangible assets are as follows:


Land use right                                           30-70 years


l.      Impairment of Long-Lived Assets


The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with the standard, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,” codified with ASC 360, which requires the Group to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.


m.      Comprehensive Income


The standard, “Reporting Comprehensive Income,” codified with ASC 220, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  The comprehensive income arose from the effect of foreign currency translation adjustments.



43





n.      Revenue Recognition


The Company generates revenues from the sales of plants, such as Taxus mairei and etc. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.  Sales are presented net of value added tax (VAT). No return allowance is made as product returns are insignificant based on historical experience.


o.      Advertising expense


The advertising costs are expensed as incurred and included in selling expenses.


p.      Income Taxes


The Company accounts for income taxes in accordance with the standard, "Accounting for Income Taxes," codified with ASC 740. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years.  Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future deductibility is uncertain.


q.      Earnings Per Share


Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.  Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.  At December 31, 2013, the Company has an outstanding convertible debenture that is convertible into 6,800,000 shares of common stock.  The potential dilution associated with convertible debt was excluded from the calculation for the years ended December 31, 2013 and 2012 as it will create an anti-dilutive effect. The basic and diluted earnings per share for the years ended December 31, 2013 and 2012 as follows:


  

 

For the Years Ended

 

  

 

December 31,

 

  

 

2013

 

 

2012

 

Numerator

 

 

 

 

 

 

 

 

   Net income(loss)

 

(591,850)

 

 

123,169

 

   Net income without convertible interest expense

 

(491,850)

 

 

223,443

 

Denominator

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding – basic

 

 

15,600,007

 

 

 

15,600,007

 

   Dilution associated with convertible debt

 

 

-

 

 

 

-

 

   Weighted average common shares outstanding – diluted

 

 

15,600,007

 

 

 

15,600,007

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

(0.038)

 

 

$

0.008

 

Diluted earnings per share

 

(0.038)

 

 

0.008

 



r.      Segment Information


The standard, “Disclosures about Segments of an Enterprise and Related Information,” codified with ASC 280, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Company believes that it operates in one business segment (research,



44




development, production, marketing and sales) and in one geographical segment (China), as all of the Company’s current operations are carried out in China.


s.      Foreign Currency Translation


The Company’s functional currency is Chinese Renminbi (“RMB”) and its reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.


The consolidated financial statements of the Company are translated into U.S. dollars in accordance with the standard, “Foreign Currency Translation,” codified with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency consolidated financial statements into U.S. dollars are included in determining comprehensive income. At December 31, 2013 and 2012, the cumulative translation adjustments of $225,423 and $211,906, respectively, were classified as items of accumulated other comprehensive income in the stockholders’ equity section of the balance sheet. For the years ended December 31, 2013 and 2012, other comprehensive income was $13,517 and $7,556, respectively.

 

The exchange rates used to translate amounts in RMB into U.S. dollars for the purposes of preparing the consolidated financial statements were as follows:  As of December 31, 2013 and 2012, the Company used the period-end rates of exchange for assets and liabilities of $1 to RMB6.054 and $1 to RMB6.2303, respectively. For the years ended December 31, 2013 and 2012, the Company used the period’s average rate of exchange to convert revenues, costs, and expenses of $1 to RMB6.1492 and $1 to RMB6.3072, respectively. The Company used historical rates for equity.


t.      Related Parties


A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company.  Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.


u.      Commitments and Contingencies 


Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. 


v.      Recently Issued Accounting Pronouncements



In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. For the Company, this ASU is effective beginning January 1, 2013, with early adoption permitted under certain conditions. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of operations or financial condition.




45




In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this standard, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. For the Company, this ASU is effective beginning January 1, 2013, and interim periods within those annual periods. The adoption of this standard is not expected to have an impact on the Company’s financial results or disclosures.


In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This standard provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a foreign entity of a parent company. The ASU differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. For the Company, this ASU is effective prospectively beginning January 1, 2014, with early adoption permitted. This ASU would impact the Company’s consolidated results of operations and financial condition only in the instance of an event/transaction as described above.


The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.


4.      SIGNIFICANT CONCENTRATIONS


Credit Risk


Financial instruments which potentially expose the Company to concentrations of credit risk consist of cash and accounts receivable as of December 31, 2013 and 2012. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.


The major part of the Company’s cash at December 31, 2013 and is maintained at one financial institution in the PRC which does not provide insurance for amounts on deposit.  The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.


Geographic Concentration


For years ended December 31, 2013 and 2012 the Company’s sales were mainly made to customers located in the PRC. In addition, total accounts receivables as of December 31, 2013 and 2012 also arose from customers located in the PRC.


All net assets of the Company are also located in the PRC.


Customer Concentration




46




In 2009, the Company changed its sales strategy by switching the focused product in the market. This change resulted in concentration on certain customers for the Company’s sales. The following table sets forth information as to the revenue derived from those customers that accounted for more than 10% of our revenue for the years ended December 31, 2013 and 2012:

  

 

  

For the Year Ended

 

 

For the Year Ended

 

  

 December 31, 2013

 

 

December 31, 2012

 

  

Amount

 

 

%

 

 

Amount

 

 

%

 

Ruby Green Engineering Co., Ltd. Shanxi

 

 

 

 

 

 

 

$289,920

 

 

 

19%

 

Luye Pharma Group Limited

$

443,266

 

 

25%

 

 

 

 

 

 

 

Jiangxi Wanmao Tech Co., Ltd

 

230,264

 

 

13%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


5.      ACCOUNTS RECEIVABLE


Accounts receivable consist of the following:

 

  

 

December 31

 

 

December 31

 

  

 

2013

 

 

2012

 

Accounts receivable

 

$

459,163

 

 

$

171,537

 

Less: Allowance for doubtful accounts

 

 

(110,465

)

 

 

(41,111

Accounts receivable, net

 

$

348,698

 

 

$

130,426

 


Bad debt expense was $106,219 and $21,386 for the years ended December 31, 2013 and 2012, respectively.







6.      INVENTORIES


Inventories consist of the following:

 

  

 

December 31

 

 

December 31

 

  

 

2013

 

 

2012

 

Inventories

 

$

2,261,754

 

 

$

2,145,352

 

Less: Allowance for obsolescence

 

 

(56,490

)

 

 

(54,891

)

Inventories, net

 

$

2,205,264

 

 

$

2,090,461

 




7.      PREPAYMENT


As of December 31, 2013 and 2012, the Company made prepayment for rental of land, use of vehicle, and advance to suppliers for $66,756 and $181,470, respectively.


8.      PROPERTY, PLANT, AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

  

 

December 31

 

 

December 31

 

  

 

2013

 

 

2012

 

Buildings

 

$

79,578

 

 

$

21,408

 

Machinery and equipment

 

 

11,522

 

 

 

11,195

 

Transportation equipment

 

 

97,071

 

 

 

94,324

 

Office equipment

 

 

20,550

 

 

 

17,645

 

  Total

 

 

208,721

 

 

 

144,572

 

Less: Accumulated depreciation

 

 

(120,223

)

 

 

(102,401

)

Add: Construction in process

 

 

-

 

 

 

54,215

 

Property, plant, and equipment, net

 

$

88,498

 

 

$

96,386

 


The depreciation was $14,610 and $10,996 for the years ended December 31, 2013 and 2012, respectively. They are broken down as follows:

 

  

 

For the Years Ended

 

  

 

December 31,

 

  

 

2013

 

 

2012

 

Cost of goods

 

$

6,735

 

 

$

3,394

 

Operating expenses

 

 

7,875

 

 

 

7,602

 

Total

 

$

14,610

 

 

$

10,996

 


9.      INTANGIBLE ASSETS


Intangible assets consist of the following:

 

  

 

December 31

 

 

December 31

 

  

 

2013

 

 

2012

 

Land use right

 

$

12,058

 

 

$

11,717

 

Less: Accumulated amortization

 

 

(2,385

)

 

 

(2,080

)

Intangible assets, net

 

$

9,673

 

 

$

9,637

 

 




The amortization for land use right was $241 and $202 for the years ended December 31, 2013 and 2012, respectively. They are broken down as follows:

 

  

 

For the Years Ended

 

  

 

December 31,

 

  

 

2013

 

 

2012

 

 

 

 

 

 

 

 

Cost of goods

 

$

241

 

 

$

202

 

Operating expenses

 

 

-

 

 

 

-

 

Total

 

$

241

 

 

$

202

 

 

As of December 31, 2013 and 2012, land use right of the Company, was pledged as collateral under certain loan agreements (see Note 10)


10.      SHORT-TERM LOANS


Short-term loans consist of the following:


December 31, 2013

 



48







  

 

Loan Amount

 

Duration

 

Annual Interest Rate

 

Collateral

Agricultural Development Bank of China-Hanzhong Branch

 

$

532,048

 

2009.9.8-2010.9.7

 

8.58%  

 

737 mu (491,357.9 square meters) of forest land use right

Loans from nonfinancial institutions and individuals

 

 

  544,048

 

 

 

 

 

  

  Total

 

$

1,076,096

 

 

 

 

 

  



December 31, 2012

 

  

 

Loan Amount

 

Duration

 

Annual Interest Rate

 

Collateral

Agricultural Development Bank of China-Hanzhong Branch

 

$

536,250

 

2009.9.8-2010.9.7

 

9.38%  

 

737 mu (491,357.9 square meters) of forest land use right

Chang'An Bank-Hanzhong Branch

 

 

208,658

 

2007.7.9- 2008.7.8

 

15.77%  

 

Credit loan

  

 

 

744,908

 

 

 

 

 

  

Loans from nonfinancial institutions and individuals

 

 

223,165

 

 

 

 

 

  

  Total

 

$

968,073

 

 

 

 

 

  


Interest expense for short-term loans was $182,934 and $98,497 for the years ended December 31, 2013 and 2012, respectively.


Forest land use right secured for short-term loans is use right of 737 MU (491,357.9square meters) forest land granted from government with carrying value as the followings:

 

  

 

December 31

 

 

December 31

 

  

 

2013

 

 

2012

 

Land use right

 

$

354

 

 

$

358

 


Loans from nonfinancial institutions and individuals are made for the Company’s operational need. The loans are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. The interest rates for loans to nonfinancial institutions and individuals are from 10%~60%.


The loan from Agricultural Development Bank is currently past due and the related interest expense has been accrued.  


11.      LONG-TERM LOANS


Long-term loans consist of the following:


December 31, 2013

 

  

 

Loan Amount

 

 

Duration

 

Annual Interest Rate

 

Collateral

The Bureau of Finance of Chenggu County

 

$

82,630

 

 

2006.3.9 - 2010.11.30

 

2.40%  

 

Credit Loan

Less: principal due within one year

 

 

(82,630

)

 

 

 

 

 

  

 Total, net

 

$

-

 

 

 

 

 

 

  




49




December 31, 2012

   

 

Loan Amount

 

 

Duration

 

Annual Interest Rate

 

Collateral

The Bureau of Finance of Chenggu County

 

$

80,291

 

 

2006.3.9 - 2010.11.30

 

2.40%  

 

Credit Loan

Less: principal due within one year

 

 

(80,291

)

 

 

 

 

 

  

  Total, net

 

$

-

 

 

 

 

 

 

  


Total Interest expense for long-term loans was $1,952 and $1,904 for the years ended December 31, 2013 and 2012, respectively.


The loan is currently past due and the related interest expense has been accrued. The Company is subject to related penalty from the Bureau of Finance of Chenggu County due to default.


12.      CONVERTIBLE PROMISSORY NOTE-SHAREHOLDERS


The $1,000,000 convertible promissory note was issued to FIHK’s prior shareholders to execute Shares Exchange Agreement between the Company and FIHK on July 15 2010. The outstanding principal amount of this Note, together with all accrued and unpaid interest due thereunder is convertible into Six Million and Eight Hundred Thousand (6,800,000) shares of the Company’s common stock. The note bears a 10% annual interest rate and its principal and accrued interest are due on June 3, 2015 or on such earlier date that the note is converted.


On September 15, 2012, $400,000 convertible promissory note as well as associated accrued interest was transferred to 8 individuals who were not the Company’s shareholders as of December 31, 2013.


For the years ended December 31, 2013 and 2012, the interest expense for this note was $100,000 and $100,274, respectively.


13.      GERNERAL AND ADMINISTRATIVE


For the years ended December 31, 2013 and 2012, the amount of general and administrative expenses mainly composed of the following events:




 

  

 

For the Years Ended

 

  

 

December 31,

 

  

 

2013

 

 

2012

 

Office expense

 

$

17,564

 

 

$

15,653

 

Salary and welfare

 

 

68,730

 

 

 

61,116

 

Employee insurance

 

 

30,223

 

 

 

26,331

 

Audit and accounting

 

 

43,307

 

 

 

41,088

 

Legal service fee

 

 

30,000

 

 

 

35,132

 

Entertainment fee

 

 

16,538

 

 

 

24,002

 

Depreciation expense

 

 

7,875

 

 

 

7,602

 

Bad debt expense

 

 

106,219

 

 

 

21,386

 

Others

 

 

106,462

 

 

 

94,667

 

Total

 

426,918

 

 

326,977

 


14.      CHINA CONTRIBUTION PLAN


Full time employees of the Company participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a



50




stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations. The Company has no further commitments beyond its monthly contribution. For the years ended December 31, 2013 and 2012, the total provisions for such employee benefits were $30,223 and $26,331, respectively.


Though provisions were made, the Company did not make full monthly contribution to these funds.  In the event that any current or former employee files a complaint with the PRC government, the Company may be subject to administrative fines. As the Company believes that these fines would not be material, no accrual for such fines has been made in this regard.


15.      STATUTORY RESERVES


Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC ("PRC GAAP") at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss. Therefore, the Company did not make any appropriations to the reserve funds mentioned above.


16.      INCOME TAX


The Company accounts for income taxes pursuant to the standard, “Accounting for Income Taxes,” codified with ASC 740 which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.


Prior to January 1, 2008, the Company was governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the previous income tax laws and rules). Pursuant to the previous income tax laws and rules, wholly-owned foreign enterprises were subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax).


In March 2007, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which were effective January 1, 2008. The Corporate Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. The previous income tax laws and rules, which stipulated income tax rates for domestic and foreign invested enterprises at different rates, expired upon the effectiveness of the Corporate Income Tax Law.


The Company was exempt from paying income tax in China as it produces the products which fall into the tax exemption list issued by the Chinese government.


The Company has no United States corporate income tax liability as of December 31, 2013 and 2012.



17.      RELATED PARTY TRANSACTION


All transactions associated with the following companies or individuals are considered to be related party transactions.

 

Name

  

Relationship

  

  

  

Hanzhong Bashan God Grass Biological Development Co., Ltd.

  

A company controlled by relative of Hengtai's CEO

Yang, Yung Li

  

*Previous owner of Hengtai

Shau, Jen Heng

  

*Previous owner and CEO of Hengtai

Qinba Taxus Association

  

An organization controlled by the Company

Liu, Sheng Li

  

Chairman, President and Director,

*In September 2010, Xian Qiying Bio-Tech Limited acquired 100% capital of Hengtai from previous owners.


Due to related parties

 

  

 

December 31

 

 

December 31

 

Name

 

2013

 

 

2012

 

Yang, Yung Li

 

79,426

 

 

77,178

 

Shau, Jen Heng

 

 

53,028

 

 

 

95,987

 

Qinba Taxus Association

 

 

330

 

 

 

321

 

Liu, Shengli

 

 

128,500

 

 

 

-

 

Total

 

$

261,284

 

 

$

173,486

 

 

"Due to related parties" represents loans payable that are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. Due to related parties is subject to interest rate from 8%~10%.


Interest expense for related party loans was $11,373 and $14,709 for the years ended December 31, 2013 and 2012, respectively.


18.      CONTINGENCIES, RISKS AND UNCERTAINTIES


Country Risk


The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in or have a material adverse effect upon the Company’s business and financial condition.


Loss Contingencies


The Company guarantees a loan of Hanhuang group, related party of Shau, Jen Heng.. On December 31, 2013, balance of the loan, including interest payable is $551,079. The loan was due on July 1, 2013 and Hanhuang Group has not made any payment. The contingent loss was accrued since it is probable the liability has been incurred.  


19.      OPERATING LEASE COMMITMENT


The Company leases land under operating leases which are for 3~30 years and, expire beginning on April 30, 2011. The rents were $28,714 and $42,059 for the years ended December 31, 2013 and 2012, respectively.


They are broken down as follows:

 

  

 

For the Years Ended

 

  

 

December 31,

 

  

 

2013

 

 

2012

 

Cost of goods

 

$

28,714

 

 

$

42,059

 

Operating expenses

 

 

-

 

 

 

-

 

Total

 

$

28,714

 

 

$

42,059

 




52




Future minimum lease payments for operating leases with initial or remaining noncancelable terms in excess of one year are as follows:



Year ending December 31,

 

 

 

2014

 

$

42,710

 

2015

 

 

40,949

 

2016

 

 

38,826

 

2017

 

 

36,290

 

2018

 

 

20,858

 

 

 

$

179,633

 







53