Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - China Senior Living Industry International Holding CorpFinancial_Report.xls
EX-31 - EXHIBIT 31 - China Senior Living Industry International Holding Corpex312.htm
EX-32 - EXHIBIT 32 - China Senior Living Industry International Holding Corpex321.htm
EX-32 - EXHIBIT 32 - China Senior Living Industry International Holding Corpex322.htm
EX-31 - EXHIBIT 31 - China Senior Living Industry International Holding Corpex311.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q


 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2014


[  ] 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,

Queens, NY 11355

Phone: 212-219-7783

Fax: 212-219-3604

 

Check 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 o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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 o    No [X]


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: as of June 30, 2014 and August 13, 2014, 15,600,000 shares of common stock.

 


 

 



1




CHINA FORESTRY, INC.


FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2014


TABLE OF CONTENTS


 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

 

 

 

 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

 

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

 

 

 

 

ITEM 4 - CONTROLS AND PROCEDURES

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.  LEGAL PROCEEDINGS

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

 

 

 

 

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

 

 

 

ITEM 5.  OTHER INFORMATION

 

 

 

 

 

 

ITEM 6 – EXHIBITS

 

 

 

 

 




 

 



2





 

PART I - FINANCIAL INFORMATION


ITEM 1 - FINANCIAL STATEMENTS




CHINA FORESTRY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

          65,771

 

          23,347

Accounts receivable, net (Note 5)

 

 

        210,582

 

        348,698

Other receivables

 

 

        317,030

 

          10,688

Other receivables-related parties (Note 16)

 

            4,508

 

                  -   

Inventories (Note 6)

 

 

     2,101,304

 

     2,205,264

Prepayment (Note 7)

 

 

          31,302

 

          66,756

Total Current Assets

 

 

     2,730,497

 

     2,654,753

 

 

 

 

 

 

Property, plant and equipment, net (Note 8)

 

          78,612

 

          88,498

Intangible assets (Note 9)

 

 

            9,319

 

            9,673

Total Assets

 

$

     2,818,428

 

     2,752,924

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

 

 

 

Current Liabilities

 

 

 

 

 

Short-term loans (Note 10)

 

$

     1,333,707

 

     1,076,096

Accounts payable

 

 

          13,588

 

          61,604

Other payables

 

 

          85,623

 

          82,006

Due to related parties (Note 16)

 

 

        253,560

 

        261,284

Accrued expenses

 

 

        182,535

 

        204,808

Interest payable

 

 

        687,484

 

        622,480

Advance from customers

 

 

          17,672

 

          27,985

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

 

          80,629

 

          82,630

Total Current Liabilities

 

 

     2,654,798

 

     2,418,893

Convertible promissory note-shareholders (Note 12)

 

     1,000,000

 

     1,000,000

Contingent obligations (Note 17)

 

 

        537,731

 

        551,079

Total Liabilities

 

 

     4,192,529

 

     3,969,972

 

 

 

 

 

 

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,

 

 

 

     15,600,000 shares issued and outstanding

 

        156,000

 

        156,000

     Additional Paid-in Capital

 

 

     1,361,768

 

     1,361,768

     Accumulated Deficit

 

 

    (3,110,869)

 

    (2,960,239)

 Accumulated other comprehensive income

 

        219,000

 

        225,423

          Shareholders' Deficit

 

 

    (1,374,101)

 

    (1,217,048)

          Total Liabilities and Shareholders' Deficit

$

     2,818,428

 

     2,752,924

 

 

 

 

 

 

See Notes to Consolidated Financial Statements



4





CHINA FORESTRY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)



 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Net sales

 

$

         224,638

$

         314,298

$

         397,951

$

         709,398

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

       (148,539)

 

       (230,350)

 

       (315,102)

 

       (515,507)

Gross Profit

 

           76,099

 

           83,948

 

           82,849

 

         193,891

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

   Selling expenses

 

           14,400

 

           21,793

 

           42,556

 

           32,095

   General and administrative expenses (Note 13)

 

           81,766

 

           77,187

 

         156,069

 

         158,816

Total operating expenses

 

           96,166

 

           98,980

 

         198,625

 

         190,911

Income (Loss) from operations

 

         (20,067)

 

         (15,032)

 

       (115,776)

 

             2,980

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

Interest expense

 

         (85,362)

 

         (64,194)

 

       (162,882)

 

       (131,328)

Other income

 

           85,351

 

           40,995

 

         129,121

 

         116,524

Other loss

 

                  12

 

                  

 -   

 

           (1,093)

 

                  

 -   

Total other income (expenses)

 

                    1

 

         (23,199)

 

         (34,854)

 

         (14,804)

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

         (20,066)

 

         (38,231)

 

       (150,630)

 

         (11,824)

Income taxes

 

                 

  -   

 

                  

 -   

 

                 

  -   

 

               

    -   

Net Loss

$

         (20,066)

$

         (38,231)

$

       (150,630)

$

         (11,824)

 

 

 

 

 

 

 

 

 

 

Net Loss per share - basic

$

(0.00)

$

(0.00)

$

(0.01)

$

(0.00)

Weighted average shares outstanding- basic

 

    15,600,000

 

    15,600,000

 

    15,600,000

 

    15,600,000

 

 

 

 

 

 

 

 

 

 

Net Loss per share – diluted

$

(0.00)

$

(0.00)

$

(0.01)

$

(0.00)

Weighted average shares outstanding- diluted

 

    15,600,000

 

    15,600,000

 

    15,600,000

 

    15,600,000

 

 

 

 

 

 

 

 

 

 

Comprehensive Loss

 

 

 

 

 

 

 

 

Net loss

$

         (20,066)

$

         (38,231)

$

       (150,630)

$

       (150,630)

Other comprehensive income (loss) - Foreign currency translation adjustment

 

              (731)

 

             9,469

 

           (6,423)

 

           10,962

Comprehensive loss

$

         (20,797)

$

         (28,762)

$

       (157,053)

$

       (139,668)

 

 

 

 

 

 

 

 

 

 


See Notes to Consolidated Financial Statements.



6





CHINA FORESTRY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

Net loss

 

$

         (150,630)

$

           (11,824)

Adjustments to reconcile income to net cash provided by operations

 

 

 

 

Depreciation

 

 

              8,772

 

               5,792

Provision (Recovery) for bad debts

 

             (7,767)

 

               4,003

Amortization of intangible assets

 

                 120

 

                  103

Loss on disposal of property, plant and equipment

 

              1,093

 

                     -   

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable, net

 

          142,294

 

             42,843

Other receivables

 

         (302,754)

 

           (22,599)

Inventories

 

          103,959

 

         (354,592)

Prepayment

 

            35,454

 

           131,962

Accounts payable

 

           (48,017)

 

         (100,548)

Other payables

 

              3,617

 

           (42,788)

Accrued expenses

 

             (7,273)

 

             34,975

Interest payable

 

            65,005

 

             89,078

Advance from customers

 

           (10,313)

 

             (5,749)

Net cash used in operating activities

 

         (166,440)

 

         (229,344)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchase of properties, plant and equipment

 

             (2,303)

 

             (4,053)

Proceeds from disposal of properties, plant and equipments

                 227

 

                     -   

Net cash used in investing activities

 

             (2,076)

 

             (4,053)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from short-term and long-term loans

 

          255,609

 

           133,676

Proceeds from related parties

 

                    

-  

 

               1,170

Repayment to related parties

 

           (27,232)

 

           (17,430)

Net cash provided by financing activities

 

          228,377

 

           117,416

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

           (17,437)

 

               9,395

 

 

 

 

 

 

Increase (Decrease) in cash and cash equivalents

 

            42,424

 

         (106,586)

Cash and cash equivalents at beginning of period

 

            23,347

 

           114,587

Cash and cash equivalents at end of period

$

            65,771

$

               8,001

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

Interest paid

 

$

            90,659

$

             45,356

Income taxes paid

 

$

                   

 -   

$

                     -   

 

 

 

 

 

 


See Notes to Consolidated Financial Statements.



8





CHINA FORESTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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



9




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.



10





2.      GOING CONCERN


As reflected in the accompanying financial statements, the Company has accumulated deficits of $3,110,869 at June 30, 2014. 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.      Interim Financials


These interim unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. They do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto contained in its report on Form 10-K for the year ended December 31, 2013.


The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position at June 30, 2014, and the results of its operations and cash flows for the six month periods ended June 30, 2014 and 2013. The results of operations for the period ended June 30, 2014 are not necessarily indicative of the results to be expected for future quarters or the full year.


c.      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



11




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, 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



12




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.


d.      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.


e.      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.


f.      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.


g.      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.




13







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.


h.      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.


i.      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.


j.      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.


k.      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


l.      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


m.      Impairment of Long-Lived Assets




14




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.


n.      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.


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.


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


q.      Earnings (Loss) Per Share


Basic earnings (loss) per share is computed by dividing net income (loss) 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 June 30, 2014, 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 six months ended June 30, 2014 and 2013 as it will create an anti-dilutive effect. The basic and diluted earnings per share for the six months ended June 30, 2014 and 2013 as follows:


  

 

For the Six Months Ended

 

  

 

June 30,

 

  

 

2014

 

 

2013

 

Numerator

 

 

 

 

 

 

 

 

   Net income (loss)

 

(150,630)

 

 

(11,824)

 

   Net income without convertible interest expense

 

(101,041)

 

 

37,765

 

Denominator

 

 

 

 

 

 

 

 

   Weighted average common shares outstanding – basic

 

 

15,600,000

 

 

 

15,600,000

 

   Dilution associated with convertible debt

 

 

-

 

 

 

-

 

   Weighted average common shares outstanding – diluted

 

 

15,600,000

 

 

 

15,600,000

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

(0.01)

 

 

$

(0.001)

 

Diluted earnings (loss) per share

 

(0.01)

 

 

(0.001)

 



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, 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 June 30, 2014 and December 31, 2013, the cumulative translation adjustments of $219,000 and $225,423, respectively, were classified as items of accumulated other comprehensive income in the stockholders’ equity section of the balance sheet. For the six months ended June 30, 2014 and 2013, other comprehensive income (loss) was ($6,423) and $10,962, 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 June 30, 2014 and December 31, 2013, the Company used the period-end rates of exchange for assets and liabilities of $1 to RMB6.2043 and $1 to RMB6.054, respectively. For the six months ended June 30, 2014 and 2013, the Company used the period’s average rate of exchange to convert revenues, costs, and expenses of $1 to RMB6.167 and $1 to RMB6.1887, 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 



16





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 June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this Update remove the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915.


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 June 30, 2014 and December 31, 2013. 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 June 30, 2014 and December 31, 2013 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 six months ended June 30, 2014 and 2013 the Company’s sales were mainly made to customers located in the PRC. In addition, total accounts receivables as of June 30, 2014 and December 31, 2013 also arose from customers located in the PRC.



17





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


Customer Concentration


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 six months ended June 30, 2014 and 2013:

  

 

  

For the Six Months Ended

 

 

For the Six Months Ended

 

  

      June 30, 2014

 

 

      June 30, 2013

 

  

Amount

 

 

%

 

 

Amount

 

 

%

 

Guangyuan Zhengheng AG Tech Co., Ltd

 

 

 

 

 

 

 

$  91,374

 

 

 

13%

 

Gansu and Livestock Investment Co., Ltd

 

 

 

 

 

 

 

  111,808

 

 

16%

 

Mian County Forestry Industry Dev. Co., Ltd.

 

 

 

 

 

 

 

85,797

 

 

 

12%

 

Hanzhong City Forestry Science Institute

 

 

 

 

 

 

 

  114,110

 

 

 

16%

 

Jianxin Construction Investment Co., Ltd.

 

$ 102,856

 

 

26%

 

 

 

 

 

 

 

 




5.      ACCOUNTS RECEIVABLE


Accounts receivable consist of the following:

 

  

 

June 30

 

 

December 31

 

  

 

2014

 

 

2013

 

Accounts receivable

 

$

313,199

 

 

$

459,163

 

Less: Allowance for doubtful accounts

 

 

(102,617

)

 

 

(110,465

Accounts receivable, net

 

$

210,582

 

 

$

348,698

 


Bad debt expense (recovery income) was $(7,767) and $4,003 for the six months ended June 30, 2014 and 2013, respectively.


6.      INVENTORIES


Inventories consist of the following:

 

  

 

June 30

 

 

December 31

 

  

 

2014

 

 

2013

 

Inventories

 

$

2,156,425

 

 

$

2,261,754

 

Less: Allowance for obsolescence

 

 

(55,121)

 

 

 

(56,490

)

Inventories, net

 

$

2,101,304

 

 

$

2,205,264

 


7.      PREPAYMENT


As of June 30, 2014 and December 31, 2013, the Company made prepayment for rental of land, purchase of vehicle, and advance to suppliers for $31,302 and $66,756, respectively.


8.      PROPERTY, PLANT, AND EQUIPMENT

 

Property, plant and equipment consist of the following:



18




 

  

 

June 30

 

 

December 31

 

  

 

2014

 

 

2013

 

Buildings

 

$

77,650

 

 

$

79,578

 

Machinery and equipment

 

 

12,016

 

 

 

11,522

 

Transportation equipment

 

 

94,720

 

 

 

97,071

 

Office equipment

 

 

20,025

 

 

 

20,550

 

  Total

 

 

204,411

 

 

 

208,721

 

Less: Accumulated depreciation

 

 

(125,799

)

 

 

(120,223

)

Property, plant, and equipment, net

 

$

78,612

 

 

$

88,498

 


The depreciation was $8,772 and $5,792 for the six months ended June 30, 2014 and 2013, respectively. They are broken down as follows:

 

  

 

For the Six Months Ended

 

  

 

June 30,

 

  

 

2014

 

 

2013

 

Cost of goods

 

$

4,812

 

 

$

1,909

 

Operating expenses

 

 

3,956

 

 

 

3,883

 

Total

 

$

8,772

 

 

$

5,792

 


9.      INTANGIBLE ASSETS


Intangible assets consist of the following:

 

  

 

June 30

 

 

December 31

 

  

 

2014

 

 

2013

 

Land use right

 

$

11,766

 

 

$

12,058

 

Less: Accumulated amortization

 

 

(2,447

)

 

 

(2,385

)

Intangible assets, net

 

$

9,319

 

 

$

9,673

 

 

The amortization for land use right was $120 and $103 for the six months ended June 30, 2014 and 2013, respectively. They are broken down as follows:

 

  

 

For the Six Months Ended

 

  

 

June 30,

 

  

 

2014

 

 

2013

 

 

 

 

 

 

 

 

Cost of goods

 

$

120

 

 

$

103

 

Operating expenses

 

 

-

 

 

 

-

 

Total

 

$

120

 

 

$

103

 

 

As of June 30, 2014 and December 31 2013, 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:


June 30, 2014

 



19







  

 

Loan Amount

 

Duration

 

Annual Interest Rate

 

Collateral

Agricultural Development Bank of China-Hanzhong Branch

 

$

465,971

 

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

 

 

867,736

 

 

 

 

 

  

  Total short-term loans

 

$

1,333,707

 

 

 

 

 

  



December 31, 2013

 

  

 

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

 

 

 

 

 

  


Interest expense for short-term loans was $107,455 and $73,693 for the six months ended June 30, 2014 and 2013, 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:

 

  

 

June 30

 

 

December 31

 

  

 

2014

 

 

2013

 

Land use right

 

$

341

 

 

$

354

 


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:


June 30, 2014

 

  

 

Loan Amount

 

 

Duration

 

Annual Interest Rate

 

Collateral

The Bureau of Finance of Chenggu County

 

$

80,629

 

 

2006.3.9 - 2010.11.30

 

2.40%  

 

Credit Loan

Less: principal due within one year

 

 

(80,629

)

 

 

 

 

 

  

 Total, net

 

$

-

 

 

 

 

 

 

  


December 31, 2013



20







   

 

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

 

$

-

 

 

 

 

 

 

  


Total Interest expense for long-term loans was $973 and $950 for the six months ended June 30, 2014 and 2013, 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 June 30, 2014.


For the six months ended June 30, 2014 and 2013, the interest expense for this note was $49,589 and $49,589, respectively.


13.      GERNERAL AND ADMINISTRATIVE


For the six months ended June 30, 2014 and 2013, the amount of general and administrative expenses mainly composed of the following events:

 

  

 

For the Six Months Ended

 

  

 

June 30,

 

  

 

2014

 

 

2013

 

Office expense

 

$

10,604

 

 

$

8,883

 

Salary and welfare

 

 

30,980

 

 

 

23,218

 

Employee insurance

 

 

15,194

 

 

 

14,889

 

Audit and accounting

 

 

18,027

 

 

 

12,212

 

Legal service fee

 

 

15,000

 

 

 

15,000

 

Entertainment fee

 

 

9,597

 

 

 

9,360

 

Depreciation expense

 

 

3,956

 

 

 

3,883

 

Bad debt expense

 

 

-

 

 

 

4,003

 

Others

 

 

52,711

 

 

 

67,368

 

Total

 

156,069

 

 

158,816

 


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 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



21




beyond its monthly contribution. For the six months ended June 30, 2014 and 2013, the total provisions for such employee benefits were $15,194 and $14,889, 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.      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

 

  

 

June 30

 

 

December 31

 

Name

 

2014

 

 

2013

 

Yang, Yung Li

 

109,738

 

 

79,426

 

Shau, Jen Heng

 

 

-

 

 

 

53,028

 

Qinba Taxus Association

 

 

322

 

 

 

330

 

Liu, Shengli

 

 

143,500

 

 

 

128,500

 

Total

 

$

253,560

 

 

$

261,284

 

 

"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%~15%.


Interest expense for related party loans was $4,865 and $7,076 for the six months ended June 30, 2014 and 2013, respectively.


Other receivables-related parties



22





  

 

June 30

 

 

December 31

 

Name

 

2014

 

 

2013

 

Shao, Jen Heng

 

4,508

 

 

-

 


17.      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 in 2013 since it is probable the liability has been incurred.


18.      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 $25,158 and $52,218 for the six months ended June 30, 2014 and 2013, respectively.


They are broken down as follows:

 

  

 

For the Six Months Ended

 

  

 

June 30,

 

  

 

2014

 

 

2013

 

Cost of goods

 

$

25,158

 

 

$

52,218

 

Operating expenses

 

 

-

 

 

 

-

 

Total

 

$

25,158

 

 

$

52,218

 


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

 

$

42,516

 

2015

 

 

40,798

 

2016

 

 

38,727

 

2017

 

 

36,253

 

2018

 

 

21,194

 

 

 

$

179,488

 






ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




23





FORWARD LOOKING STATEMENTS


Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements.


GENERAL DESCRIPTION OF BUSINESS


Introduction


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”).  


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.



24





In 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.


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.


Results of Operations


For the three months ended June 30, 2014 Compared to the three months ended June 30, 2013


For the Three Months ended June 30

 

2014

 

 

2013

 

Net Sales

 

$

224,638

 

 

$

314,298

 

Cost of Goods Sold

 

$

148,539

 

 

$

230,350

 

Operating Expenses

 

$

96,166

 

 

$

98,980

 

Other Income (Expenses)

 

$

1

 

 

$

(23,199)

 

Income Taxes

 

$

-

 

 

$

-

 

Net Loss

 

$

(20,066)

 

 

$

(38,231)

 


Net Sales


We had net sales of $224,638 for the three months ended June 30, 2014 and $314,298 for the three months ended June 30, 2013. Our sales decreased by $89,660 or approximately 29%.  The Company revenues decreased due to decreased in demand of the Company’s product.


Cost of Goods Sold and Gross Profit


For the three months ended June 30, 2014 and 2013, cost of goods sold amounted to $148,539 and $230,350. Gross profit for the three months ended June 30, 2014 was $76,099 as compared to $83,948 for the three months ended June 30, 2013. The gross margin percentage for the three months ended June 30, 2014 and 2013 were approximately 33.9% and 26.7%. The increase in gross margin resulted from sales of products with lower profit margin in April 2013 .




25




Operating Expenses


For the three months ended June 30, 2014, total operating expenses were $96,166 as compared to $98,980 for the three months ended June 30, 2013, an decrease of $2,814, or approximately 2.8%. The changes in selling expenses and general and administrative expenses are comparable  to the  prior period.



The breakdown of the operating expenses as follows:


For the Three months ended June 30

 

2014

 

 

2013

Selling Expenses

 

$

14,400

 

 

$

21,793

General and Administrative Expenses

 

$

81,766

 

 

$

77,187

Total Operating Expenses

 

$

96,166

 

 

$

98,980


 

 

 

 

 

 

 

The breakdown of the general and administrative expenses as follows:


 

 

For the Three months ended

 

 

 

June 30,

 

 

 

2014

 

 

2013

 

Office expense

 

$

6,781

 

 

$

4,571

 

Salary and welfare

 

 

11,571

 

 

 

12,269

 

Employee insurance

 

 

7,515

 

 

 

7,612

 

Audit and accounting

 

 

12,044

 

 

 

5,877

 

Legal service fee

 

 

7,500

 

 

 

7,500

 

Entertainment fee

 

 

7,622

 

 

 

3,373

 

Depreciation expense

 

 

1,957

 

 

 

1,982

 

Bad debt expense

 

 

(688)

 

 

 

693

 

Others

 

 

27,464

 

 

 

33,310

 

Total

 

81,766

 

 

77,187

 


Other Income (Expenses)


Our other income (expenses) during the three months ended June 30, 2014 amounted to $1 as compared to $(23,199) for the same period in 2013. The result was mainly due to higher subsidy from government in 2014. The interest expenses were $85,362 and $64,194 for the three months ended June 30, 2014 and 2013, respectively. The increase of interest expense resulted from higher outstanding balance and higher interest rate on the short-term loans.


Net Loss


Net loss was $20,066 for the three months ended June 30, 2014, as compared to a net loss of $38,231 for the same period in 2013. The decrease of net income was due to higher other income from government’s subsidy.


For the six months ended June 30, 2014 Compared to the six months ended June 30, 2013


For the Six Months Ended June 30

 

2014

 

 

2013

 

Net Sales Revenue

 

$

397,951

 

 

$

709,398

 

Cost of Goods Sold

 

$

315,102

 

 

$

515,507

 

Selling, General and Administrative Expenses

 

$

198,625

 

 

$

190,911

 

Other Income (Expenses)

 

$

(34,854)

 

 

$

(14,804)

 

Income Taxes

 

$

-

 

 

$

-

 

Net Loss

 

$

(150,630)

 

 

$

(11,824)

 


Net Sales



26





We had net sales of $397,951 for the six months ended June 30, 2014 and $709,398 for the six months ended June 30, 2013. Our sales decreased by $311,447 or approximately 44%.  The Company revenues decreased due to decreased in demand of the Company’s product.


Cost of Goods Sold and Gross Profit


For the six months ended June 30, 2014 and 2013, cost of goods sold amounted to $315,102 and $515,507. Gross profit for the six months ended June 30, 2014 was $82,849 as compared to $193,891 for the six months ended June 30, 2013. The gross margin percentage for the six months ended June 30, 2014 and 2013 were approximately 20.8% and 27.3%. The decrease in gross margin resulted from a specific greening project performed in Yang County. The project is subject to a lower profit margin..


Operating Expenses


For the six months ended June 30, 2014, total operating expenses were $198,625 as compared to $190,911 for the six months ended June 30, 2013, an increase of $7,714, or approximately 4.04%. The changes in selling expenses and general and administrative expenses are comparable  to the  prior period.



The breakdown of the operating expenses as follows:


For the Six months ended June 30

 

2014

 

 

2013

Selling Expenses

 

$

42,556

 

 

$

32,095

General and Administrative Expenses

 

$

156,069

 

 

$

158,816

Total Operating Expenses

 

$

198,625

 

 

$

190,911


The breakdown of the general and administrative expenses as follows:


 

 

For the Six months ended

 

 

 

June 30,

 

 

 

2014

 

 

2013

 

Office expense

 

$

10,604

 

 

$

8,883

 

Salary and welfare

 

 

30,980

 

 

 

23,218

 

Employee insurance

 

 

15,194

 

 

 

14,889

 

Audit and accounting

 

 

18,027

 

 

 

12,212

 

Legal service fee

 

 

15,000

 

 

 

15,000

 

Entertainment fee

 

 

9,597

 

 

 

9,360

 

Depreciation expense

 

 

3,956

 

 

 

3,883

 

Bad debt expense

 

 

-

 

 

 

4,003

 

Others

 

 

52,711

 

 

 

67,368

 

Total

 

156,069

 

 

158,816

 


Other Income (Expenses)


Our other income (expenses) during the six months ended June 30, 2014 amounted to $(34,854) as compared to $(14,804) for the same period in 2013. The result was mainly due to contingent loss accrued in 2013. The interest expenses were $162,882 and $131,328 for the six months ended June30, 2014 and 2013, respectively. The increase of interest expense resulted from higher outstanding balance and higher interest rate on the short-term loans.


Net Loss


Net loss was $150,630 for the six months ended June 30, 2014, as compared to a net loss of $11,824 for the same period in 2013. The increase of net loss was due to significant decrease of our sales revenues.



27





Liquidity and Capital Resources


At June 30, 2014, we had cash and cash equivalents of $65,771


Working Capital

 

 

At

June 30,

2014

 

 

At

December 31,

2013

 

Current assets

$

2,730,497

 

$

2,654,753

 

Current liabilities

 

2,654,798

 

 

2,418,893

 

Working capital

$

75,699

 

$

235,860

 



Operating Activities


Net cash used in operating activities for the six months ended June 30, 2014 was $166,440 as compared to net cash used in operating activities $229,344 for the six months ended June 30, 2013.


For the six months ended June 30, 2014, we had net loss of $150,630. Our inventories decreased by $103,959, accounts payable decreased by $48,017, accounts receivable decreased by $142,294, prepayments decreased by $35,454, other receivables increased by $302,754, interest payable increased by $65,005, accrued liabilities and other current liabilities decreased by $13,969, offset by non-cash items such as depreciation and amortization of $8,892, loss on disposal of property, plant and equipment, and bad debts recovery of $7,767.


For the six months ended June 30, 2013, we had net loss of $11,824, our inventories increased by $354,592, accounts payable decreased by $100,548, accounts receivable decreased by $42,843, prepayments decreased by $131,926, other receivables increased by $22,599, interest payable increased by $89,078, accrued liabilities and other current liabilities decreased by $13,562, offset by non-cash items such as depreciation and amortization of $5,895, and bad debts provision of $4,003.



Investing Activities


Net cash used in investing activities for the six months ended June 30, 2014 was $2,076 as compared to net cash used in investing activities of $4,053 for the six months ended June 30, 2013.


For the six months ended June 30, 2014 and 2013, we spent $2,303 and 4,053 in acquisitions of properties, plant and equipment. We  received cash repayment of $227 from disposal of properties, plant and equipment for the six months ended June 30, 2014.


Financing Activities


Net cash provided by financing activities for the six months ended June 30, 2014 was $228,377. We have repaid $27,232 to our related parties. We also borrowed $255,609 in short and long term bank loans


Net cash provided by financing activities for the six months ended June 30, 2013 was $117,416. We have repaid $17,430 to our related parties. We also borrowed $133,676 in short and long term bank loans as well as $1,170 from our related parties.


The Company has increased its borrowing from the bank  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.




28




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 June 30, 2014 and December 31, 2013 were $253,560 and $261,284, respectively.

Interest expense for related party loans was $4,865 and $7,076 for the six months ended June 30, 2014 and 2013, 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.  


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not required for Smaller Reporting Company.


ITEM 4 - CONTROLS AND PROCEDURES


Management’s Report on Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on the evaluation performed, our management concluded that during the period covered by this report, our internal controls over financial reporting were effective.


Evaluation of Disclosure Controls and Procedures


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 June 30, 2014, 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 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.

 

Changes in internal control over financial reporting


During the quarter ended June 30, 2014, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

 

We are not aware of any legal proceedings to which we are a party or of which our property is the subject. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any



29




associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.

 

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

 

None in the quarter ended June 30, 2014.

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5.  OTHER INFORMATION

 

None.

 

ITEM 6 – EXHIBITS

 

31.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934

 

 

31.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934

 

 

32.1

Certification of the Company's Chief Executive Officer Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. SS. 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101

The following materials from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.


 

SIGNATURES


Pursuant to the requirements of  the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CHINA FORESTRY, INC.

(Registrant)

 

 

August 14, 2014

/s/ Shuncheng Ma

 

Shuncheng Ma

 

Chief Financial Officer

 

(Principal Accounting Officer)





30