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EX-31.2 - China Tianfeihong Wine Inctfhw03311510qex31_2.htm

U. S. Securities and Exchange Commission

Washington, D. C. 20549

 

FORM 10-Q

 

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

             For the quarterly period ended February 28, 2015

 

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

For the transition period from _____ to _____

 

Commission File No. 0-54843

     

CHINA TIANFEIHONG WINE, INC.

(Name of Registrant in its Charter)

  Delaware   99-0360626  
  (State of Other Jurisdiction of incorporation or organization)   (I.R.S. Employer I.D. No.)  

 

 

1849 Licheng Middle Avenue, Longqiao Street, Chengxiang District

Putian City, Fujian Province, P.R. China 351100

(Address of Principal Executive Offices)

 

Issuer's Telephone Number: 86-1359-9873098

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [ ]     

 

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

 

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

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

 

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:

 

April 20, 2015

Common Voting Stock: 34,396,680

 
 

CHINA TIANFEIHONG WINE, INC.

QUARTERLY report on Form 10-Q

for the fiscal QUARTER ended FEBRUARY 28, 2015

 

Table of Contents

 

Part I Financial Information Page No.
Item 1

Financial Statements (unaudited):

 
  Consolidated Balance Sheets – February 28, 2015 and August 31, 2014 1
  Consolidated Statements of Income and Other Comprehensive Income - for the Three and Six Month Periods Ended February 28, 2015 and 2013 2
  Consolidated Statements of Changes in Stockholders’ Equity – for the Six Months Ended February 28, 2015 3
  Consolidated Statements of Cash Flows – for the Six Months Ended February 28, 2015 and 2013 4
  Notes to Consolidated Financial Statements 5
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4.

Controls and Procedures

30
     
Part II Other Information 31
Item 1 Legal Proceedings 31
Item 1 A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Mine Safety Disclosures 31
Item 5. Other Information 31
Item 6. Exhibits 32

   
 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. $)

 

   February 28,  August 31,
   2015  2014
   (Unaudited)   
ASSETS          
Current assets:          
   Cash  $6,798,855   $5,229,261 
   Accounts receivable   2,879,217    431,940 
   Inventory, net   1,734,300    375,750 
   Prepaid income taxes   —      50,348 
   Prepaid expenses   21,073    40,625 
           
     Total current assets   11,433,445    6,127,924 
           
   Fixed assets, net   33,979    48,113 
           
Total Assets  $11,467,424   $6,176,037 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
   Accounts payable  $4,069,472   $682,030 
   Taxes payable   284,977    19,465 
   Loans from stockholder   70,502    24,339 
   Accrued liabilities and other payables   83,258    72,981 
           
     Total current liabilities   4,508,209    798,815 
           
Stockholders’ equity:          
      Common stock, $0.0006 par value per share, 80,000,000 shares authorized; 34,396,680 shares issued and outstanding   as of February 28, 2015 and August 31, 2014   20,638    20,638 
   Additional paid-in capital   726,548    726,548 
   Statutory reserve fund   420,406    420,406 
   Retained earnings   5,395,991    3,865,318 
   Other comprehensive income   175,790    203,702 
           
 Stockholders’ equity before noncontrolling interests   6,739,373    5,236,612 
 Noncontrolling interests   219,842    140,610 
           
    Total stockholders’ equity   6,959,215    5,377,222 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $11,467,424   $6,176,037 

 

See accompanying notes to the consolidated financial statements.

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014 (UNAUDITED) (IN U.S. $)

 

   Three Months Ended  Six Months Ended
   February 28,  February 28,
   2015  2014  2015  2014
                     
Revenue  $7,639,171   $2,882,195   $10,775,557   $4,814,573 
Cost of goods sold   (5,089,375)   (1,889,147)   (7,184,415)   (3,200,407)
                     
  Gross profit   2,549,796    993,048    3,591,142    1,614,166 
                     
Operating expenses                    
    Selling and marketing   872,087    312,077    1,259,418    509,614 
    General and administrative   121,674    154,162    194,599    201,435 
                     
      Total operating expenses   993,761    466,239    1,454,017    711,049 
                     
Income from operations   1,556,035    526,809    2,137,125    903,117 
    Interest income   5,577    4,130    10,694    7,632 
                     
Income before provision for income taxes   1,561,612    530,939    2,147,819    910,749 
Provision for income taxes   390,401    128,977    536,956    223,602 
                     
Net income   1,171,211    401,962    1,610,863    687,147 
    Noncontrolling interests   (58,384)   (24,986)   (80,190)   (34,361)
                     
Net income attributable to common stockholders  $1,112,827   $376,976   $1,530,673   $652,786 
                     
Earnings per common share, basic and diluted  $0   $0   $0   $0 
                     
Weighted average shares outstanding, basic and diluted   34,396,680    33,597,787    34,396,680    32,798,893 
                     
Comprehensive Income:                    
Net Income  $1,171,211   $401,962   $1,610,863   $687,147 
     Foreign currency translation adjustment   (37,777)   76,490    (28,870)   109,246 
                     
Comprehensive income   1,133,434    478,452    1,581,993    796,393 
Comprehensive income attributable to noncontrolling interests   (56,737)   (40,574)   (79,232)   (40,589)
                     
Net comprehensive income attributable to common stockholders  $1,076,697   $437,878   $1,502,761   $755,804 

 

 

See accompanying notes to the consolidated financial statements.

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED FEBRUARY 28, 2015 (UNAUDITED) (IN U.S. $)

 

   Common
Stock
  Additional Paid-in Capital  Statutory
Reserve Fund
  Retained Earnings  Other Comprehensive Income  Noncontrolling Interests  Total
                                    
Balance, August 31, 2014  $20,638   $726,548   $420,406   $3,865,318   $203,702   $140,610   $5,377,222 
                                    
  Net income   —      —      —      1,530,673    —      80,190    1,610,863 
                                    
Foreign currency
translation adjustment
   —      —      —      —      (27,912)   (958)   (28,870)
Balance, February 28, 2015
(Unaudited)
  $20,638   $726,548   $420,406   $5,395,991   $175,790   $219,842   $6,959,215 

 

 

See accompanying notes to the consolidated financial statements.

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014 (UNAUDITED) (IN U.S. $)

 

   Six Months Ended
February 28,
   2015  2014
           
Cash flows from operating activities:          
Net income  $1,610,863   $687,147 
Adjustments to reconcile net income to net cash provided by operating activities:          
   Depreciation   23,761    33,260 
  Changes in operating assets and liabilities:          
       (Increase) in accounts receivable   (2,447,277)   (301,677)
   (Increase) in inventory   (1,358,550)   (47,411)
   Decrease (Increase) in prepaid expenses   69,900    (15,795)
   Decrease in advances to suppliers   —      45,670 
   Increase in accounts payable   3,387,442    790,579 
   Increase in taxes payable   265,512    41,408 
   Increase in accrued liabilities and other payables   10,277    24,316 
           
              Net cash provided by operating activities   1,561,928    1,257,497 
           
Cash flows from investing activities:          
Purchase of equipment   (9,694)   (852)
           
 Net cash (used in) investing activities   (9,694)   (852)
           
Cash flows from financing activities:          
Proceeds from stockholder loans   46,312    26,880 
           
              Net cash provided by financing activities   46,312    26,880 
           
Effect of exchange rate changes on cash   (28,952)   24,394 
           
Net change in cash   1,569,594    1,307,919 
Cash, beginning   5,229,261    3,994,502 
Cash, end  $6,798,855    $$5,302,421 
           
Supplemental disclosure of cash flow information          
Cash paid for:          
Interest  $—     $—   
Income taxes  $300,527   $187,213 

 

 See accompanying notes to the consolidated financial statements.

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

NOTE 1. ORGANIZATION

 

China Tianfeihong Wine, Inc. (“China Tianfeihong”), formerly known as Zenitech Corporation, was incorporated under the laws of the State of Delaware on July 28, 2005. From its inception until the closing of the reverse acquisition transaction, the Company was a development-stage company in the business of developing, manufacturing, distributing and marketing environmentally friendly floral sleeves and wrappers for the floriculture industry.

 

On August 1, 2013, China Tianfeihong filed a certificate of amendment to its articles of incorporation to change its name from “Zenitech Corporation” to “China Tianfeihong Wine Inc. ” (the “Name Change”) and to effect a 1 for 6  reverse stock split (the “Reverse Split”) of its outstanding shares of common stock.  The Name Change and the Reserve Split were effective on August 12, 2013.  Upon the effectiveness of the Reverse Split, the number of outstanding shares of China Tianfeihong’s common stock decreased from 14,380,266 to 2,396,680 shares. The number of authorized shares of common stock remained at 80,000,000 shares.

 

On December 30, 2013, China Tianfeihong completed a reverse acquisition transaction through a share exchange with the stockholders of Fanwei Hengchang Co., Ltd (BVI) (“Fanwei Hengchang”), whereby China Tianfeihong acquired 100% of the outstanding shares of Fanwei Hengchang in exchange for the issuance of 32,000,000 shares of China Tianfeihong’s common stock, representing 93.03% of the issued and outstanding shares of common stock. As a result of the reverse acquisition, Fanwei Hengchang became China Tianfeihong’s wholly-owned subsidiary and the former Fanwei Hengchang’s stockholders became our controlling stockholders. The share exchange transaction was treated as a reverse acquisition, with Fanwei Hengchang as the acquirer and China Tianfeihong as the acquired party for accounting purposes. Unless the context suggests otherwise, when we refer in this report to the business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Fanwei Hengchang and its consolidated subsidiaries and variable interest entity. 

 

As a result of the acquisition of Fanwei Hengchang, China Tianfeihong now owns all of the issued and outstanding capital stock of Changshi Tongrong Limited (Hong Kong) (“Changshi Tongrong”), which in turn owns all of the issued and outstanding capital stock of Changshitong Consulting (Shenzhen) Co. Ltd (“Changshitong Consulting”). In addition, China Tianfeihong effectively and substantially controls Fujian Tianfeihong Wine Co., Ltd (“Fujian Tianfeihong”) through a series of captive agreements with Changshitong Consulting. China Tianfeihong with its wholly owned subsidiaries, and its VIE, Fujian Tianfeihong, are collectively the “Company”.

 

Subsequent to the closing of the reverse acquisition transaction, the Company conducts operations through its controlled consolidated affiliate, Fujian Tianfeihong. Fujian Tianfeihong is primarily engaged in distributing fruit wine including green plum wine, loquat wine, olive wine and pomegranate wine to supermarkets and liquor stores in the People’s Republic of China (“PRC”).

 

On November 26, 2013, prior to the reverse acquisition transaction, Changshitong Consulting and Fujian Tianfeihong and its shareholders Jinxiang Fang and Zhiliang Fang entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which Fujian Tianfeihong became Changshitong  Consulting’s contractually controlled affiliate. The VIE Agreements included:

 

Exclusive Technical Service and Business Consulting Agreement: Pursuant to the Exclusive Technical Service and Business Consulting Agreement, Changshitong Consulting (“WFOE”) is to provide technical support and consulting services to Fujian Tianfeihong in exchange for (i) 95% of the total annual net profit of  Fujian Tianfeihong plus (ii) RMB10,000 per month (U.S.$1,627). The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

Proxy Agreement: Pursuant to the Proxy Agreement, Zhiliang Fang and Jinxiang Fang, each authorize Changshitong Consulting to designate someone to exercise their entire shareholder decision rights with respect to Fujian Tianfeihong. The Agreement has an unlimited term and only can be terminated upon written notice agreed to by both parties.

 

Call Option Agreement: a Call Option Agreement among Zhiliang Fang and Jinxiang Fang (together referred to as “Fujian Tianfeihong Shareholders”), and Changshitong Consulting under which they have granted to Changshitong Consulting the irrevocable right and option to acquire all of the equity interests in Fujian Tianfeihong to the extent permitted by PRC law. If PRC law limits the percentage of Fujian Tianfeihong that Changshitong Consulting may purchase at any time, then Changshitong Consulting may repeatedly exercise its option in such increments as may be allowed by PRC law. The exercise price of the option is RMB1.00 (US$0.16) or the minimum price required by PRC laws if at that time there is any regulatory PRC laws regulating the minimum price. The Fujian Tianfeihong Shareholders agreed to refrain from taking certain actions which might harm the value of Fujian Tianfeihong or Changshitong Consulting’s option. This Agreement remains effective until all equity interest under the Agreement have been transferred to Changshitong Consulting or its designated entities or natural persons.

 

Share Pledge Agreement: a Share Pledge Agreement among Zhiliang Fang and Jinxiang Fang, Fujian Tianfeihong, and Changshitong Consulting under which the Fujian Tianfeihong Shareholders agree to pledge all of their equity in Fujian Tianfeihong to Changshitong Consulting to guarantee Fujian Tianfeihong’s and its shareholders’ performance of their obligations under the Exclusive Technical Service and Business Consulting Agreement, the Call Option Agreement and the Proxy Agreement. This Agreement remains effective until the obligations under the Exclusive Technical Service and Business Consulting Agreement, Call Option Agreement and Proxy Agreement have been fulfilled or terminated.

 

The VIE Agreements with the Company’s Chinese affiliate and its shareholders, which relate to critical aspects of the Company’s operations, may not be as effective in providing operational control as direct ownership. In addition, these arrangements may be difficult and costly to enforce under PRC law.

 

As a result of the entry into the foregoing agreements, the Company has a corporate structure which is set forth as follows:

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF ACCOUNTING AND PRESENTATION

 

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting. The unaudited consolidated financial statements for the three and six months ended February 28, 2015 and 2014 include China Tianfeihong Wine, Inc., Fanwei Hengchang, Changshi Tongrong, Changshitong Consulting and its VIE, Fujian Tianfeihong. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

The unaudited interim consolidated financial statements of the Company as of February 28, 2015 and for the three and six months periods ended February 28, 2015 and 2014 have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (the “SEC”) which apply to interim financial statements. Accordingly, they do not include all of the information and footnotes normally required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim consolidated financial information should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Form 10-K filed with the SEC. The results of operations for the three and six months ended February 28, 2015 are not necessarily indicative of the results to be expected for future quarters or for the year ending August 31, 2015.

 

All consolidated financial statements and notes to the consolidated financial statements are presented in United States dollars (“US Dollar” or “US$” or “$”).

 

VARIABLE INTEREST ENTITY

 

Pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company is required to include in its consolidated financial statements the financial statements of its variable interest entities (“VIEs”). ASC 810 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.

 

Under ASC 810, a reporting entity has a controlling financial interest in a VIE, and must consolidate that VIE, if the reporting entity has both of the following characteristics: (a) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and (b) the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The reporting entity’s determination of whether it has this power is not affected by the existence of kick-out rights or participating rights, unless a single enterprise, including its related parties and de facto agents, have the unilateral ability to exercise those rights. Fujian Tianfeihong’s actual stockholders do not hold any kick-out rights that affect the consolidation determination.

 

Through the VIE agreements disclosed in Note 1, the Company is deemed the primary beneficiary of Fujian Tianfeihong. Accordingly, the results of Fujian Tianfeihong have been included in the accompanying consolidated financial statements. Fujian Tianfeihong has no assets that are collateral for or restricted solely to settle their obligations. The creditors of Fujian Tianfeihong do not have recourse to the Company’s general credit.

 

The following financial statement amounts and balances of Fujian Tianfeihong have been included in the accompanying consolidated financial statements.

   February 28, 2015  August 31, 2014
   (Unaudited)   
             
 TOTAL ASSETS(1)   $11,467,054   $6,175,646 
 TOTAL LIABILITIES(1)   $4,478,205   $781,126 
(1)Total assets and liabilities of the VIE are reported net of intercompany balances that have been eliminated with the VIE consolidation.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

   For the three months ended
February 28,
  For the six months ended
February 28,
   2015  2014  2015  2014
   (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
                     
Revenue  $7,639,171   $2,882,195    10,775,557   $4,814,573 
Net income (2)  $1,167,667   $398,663    1,603,796   $687,211 
(2)Under the Exclusive Technical Service and Business Consulting Agreement, 95% of the net income is to be remitted to WFOE.

 

   For the six months ended February 28,
   2015  2014
   (Unaudited)  (Unaudited)
           
Net cash provided by operating activities  $1,552,236   $1,265,516 
Net cash (used in) investing activities   (9,694)   (852)
Net cash provided by financing activities   46,312    26,880 
Effect of exchange rate changes on cash   (19,240)   15,875 
Net increase in cash   1,569,615    $$1,307,419 

 

The Company believes that Changshitong Consulting’s contractual agreements with Fujian Tianfeihong are in compliance with PRC law and are legally enforceable. The stockholders of Fujian Tianfeihong are also the senior management of the Company and therefore the Company believes that they have no current interest in seeking to act contrary to the contractual arrangements. However, Fujian Tianfeihong and its stockholders may fail to take certain actions required for the Company’s business or to follow the Company’s instructions despite their contractual obligations to do so. Furthermore, if Fujian Tianfeihong or its stockholders do not act in the best interests of the Company under the contractual arrangements and any dispute relating to these contractual arrangements remains unresolved, the Company will have to enforce its rights under these contractual arrangements through PRC law and courts and therefore will be subject to uncertainties in the PRC legal system.

 

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements, which may make it difficult to exert effective control over Fujian Tianfeihong, and its ability to conduct the Company’s business may be adversely affected.

 

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

FOREIGN CURRENCY TRANSLATION

 

Almost all Company assets are located in the PRC. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”). The Company uses the United States Dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The financial statements of the Company have been translated into US dollars in accordance with FASB ASC 830, “Foreign Currency Matters.”

 

All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transactions occurred. Statements of income amounts have been translated using the average exchange rate for the periods presented. Adjustments resulting from the translation of the Company’s financial statements are recorded as other comprehensive income (loss).

 

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

 

   February 28, 2015  August 31, 2014
           
Consolidated balance sheet items, except for stockholders’ equity, as of the periods end   0.1621    0.1625 

 

   For the three months
ended February 28,
  For the six months
ended February 28,
   2015  2014  2015  2014
                     
Amounts included in the statements of income, statement of changes in stockholders’ equity and statements of cash flows for the periods   0.1626    0.1636    0.1627    0.1632 

 

For the three months ended February 28, 2015 and 2014, foreign currency translation adjustments of $(37,777) and $76,490, respectively, have been reported as other comprehensive (loss) income. For the six months ended February 28, 2015 and 2014, foreign currency translation adjustments of $(28,870) and $109,246 have been reported as other comprehensive income. Other comprehensive income of the Company consists entirely of foreign currency translation adjustments. Pursuant to ASC 740-30-25-17, “Exceptions to Comprehensive Recognition of Deferred Income Taxes,” the Company does not recognize deferred U.S. taxes related to the undistributed earnings of its foreign subsidiaries and, accordingly, recognizes no income tax expense or benefit from foreign currency translation adjustments.

 

Although government regulations now allow convertibility of the RMB for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that the RMB could be converted into US dollars at that rate or any other rate.

 

The value of the RMB against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the RMB may materially affect the Company’s financial condition in terms of US dollar reporting.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

REVENUE RECOGNITION

 

Revenues are primarily derived from selling fruit wines to contract distributors and retail establishments. The Company’s revenue recognition policies comply with FASB ASC 605 “Revenue Recognition.” The Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. The Company recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery. The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

 

The Company has no product returns or sales discounts and allowances because goods delivered and accepted by customers are normally not returnable.

 

The Company recognizes gift sample products as cost of goods sold in compliance with ASC 605-50-S99. As such, when the Company gives a customer a free product, the expense associated with this free product at the time of sale is classified as cost of goods sold.

 

SHIPPING COSTS

 

Shipping costs incurred by the Company are recorded in selling expenses. Shipping costs for the three months ended February 28, 2015 and 2014 were $320,972 and $125,154, respectively; shipping costs for the six months ended February 28, 2015 and 2014 were $454,812 and $210,148, respectively.

 

CASH AND CASH EQUIVALENTS

 

The Company considers all demand and time deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

ACCOUNTS RECEIVABLE

 

Accounts receivable are recorded at the contract amount after deduction of trade discounts, allowances, if any, and do not bear interest. The allowance for doubtful accounts, when necessary, is the Company’s best estimate of the amount of probable credit losses of accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

 

Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of February 28, 2015 and August 31, 2014, the Company considers accounts receivable to be fully collectible and has no allowance. For the periods presented, the Company did not write off any accounts receivable as bad debts.

 

INVENTORY

 

Inventory, comprised principally of bottled wine, is valued at the lower of cost or market value. The value of inventories is determined using the first-in, first-out method.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

The Company periodically estimates an inventory allowance for estimated unmarketable inventories. Inventory amounts are reported net of such allowances, if any. There were no allowances for inventory as of February 28, 2015 and August 31, 2014.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

FASB ASC 820, “Fair Value Measurement,” defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

 

FIXED ASSETS

 

Fixed assets are recorded at cost, less accumulated depreciation. Cost includes the prices paid to acquire the assets, and any expenditures that substantially increase the asset’s value or extends the useful life of an existing asset. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the periods benefited. Maintenance and repairs are generally expensed as incurred. The estimated useful lives for fixed asset categories are as follows:

 

Computers and equipment 3 years

Motor vehicles 4 years

Fixture and furnitures 5 years

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company applies FASB ASC 360, “Property, Plant and Equipment,” which addresses the financial accounting and reporting for the recognition and measurement of impairment losses for long-lived assets. In accordance with ASC 360, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company may recognize the impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to those assets. No impairment of long-lived assets was recognized for the periods presented.

 

INCOME TAXES

 

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred income taxes for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequences for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. As of February 28, 2015 and August 31, 2014, the Company has no deferred tax assets or liabilities.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

ASC 740 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions. As of February 28, 2015 and August 31, 2014, the Company does not have accruals for uncertain tax positions.

 

The income tax laws of various jurisdictions in which the Company and its subsidiaries operate are summarized as follows:

 

United States

 

The Company is subject to United States tax at graduated rates from 15% to 35%. No provision for income taxes in the United States has been made as the Company had no U.S. taxable income for the three and six months ended February 28, 2015 and 2014 because it is the Company's intention to indefinitely reinvest such earnings in its foreign subsidiaries. If such earnings were distributed, the Company would be subject to additional U.S. income tax expense. Determination of the amount of the unrecognized deferred income tax liability related to these earnings is not practicable.

 

PRC

 

Changshitong Consulting and its VIE, Fujian Tianfeihong are subject to an Enterprise Income Tax of 25% and file their own tax returns. Consolidated tax returns are not permitted in China.

 

BVI

 

Fanwei Hengchang is incorporated in the BVI and is governed by the income tax laws of the BVI. According to the current BVI income tax law, the applicable income tax rate for the Company is 0%.

 

Hong Kong

 

Changshi Tongrong is incorporated in Hong Kong. Pursuant to the income tax laws of Hong Kong, the Company is not subject to tax on non-Hong Kong source income.

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. For the three months ended February 28, 2015 and 2014, advertising expense was $375,606 and $94,888, respectively. For the six months ended February 28, 2015 and 2014, advertising expense was $530,402 and $135,782, respectively.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

Statutory Reserve Funds

 

Pursuant to corporate law of the PRC, a company is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory reserve fund until such reserve balance reaches 50% of the company’s registered capital. The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or used to increase registered capital, provided that the remaining reserve balance after use is not less than 25% of registered capital. As of August 31, 2014, the statutory reserves for Fujian Tianfeihong had been fully funded.

 

NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARDS

 

In August 2014, the FASB issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016, with early adoption permitted. This accounting standard update is not expected to have any impact on the Company’s financial statements.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for our first quarter of fiscal 2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Companies are permitted to adopt this new rule following either a full or modified retrospective approach. Early adoption is not permitted. The Company has not yet determined the potential impact of this updated authoritative guidance on its consolidated financial statements.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which amends the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. This accounting standard update is not expected to have a material impact on the Company’s consolidated financial statements.

 

NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

FASB ASC 820, “Fair Value Measurement,” specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:

 

Level 1 Inputs - Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
   
Level 2 Inputs -  Inputs other than the quoted prices in active markets that are observable either directly or indirectly.
   
Level 3 Inputs -  Inputs based on prices or valuation techniques that are both unobservable and significant to the overall fair value measurements.

 

ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. As of February 28, 2015 and August 31, 2014, none of the Company’s assets and liabilities were required to be reported at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash, accounts receivable, payables and accrued liabilities, approximate their fair values due to the short term nature of these financial instruments. There were no changes in methods or assumptions during the periods presented.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

NOTE 5. FIXED ASSETS

 

Fixed assets are summarized as follows:

 

   February 28,
2015
  August 31,
2014
   (Unaudited)   
           
Computers and equipment  $34,216   $24,618 
Motor vehicles   148,138    148,504 
Fixtures and furniture   13,844    13,878 
    196,198    187,000 
Less: Accumulated depreciation   (162,219)   (138,887)
           
Fixed Assets - net  $33,979   $48,113 

 

For the three months ended February 28, 2015 and 2014, depreciation expense was $11,850 and $22,700, respectively. For the six months ended February 28, 2015 and 2014, depreciation expense was $23,761 and $33,260, respectively.

 

NOTE 6. ACCRUED LIABILITIES AND OTHER PAYABLES

 

Accrued liabilities and other payables consisted of the following:

 

  

February 28,

2015

  August 31,
2014
   (Unaudited)   
           
Accrued payroll  $12,040   $9,250 
Professional fees   33,802    47,941 
Other   37,416    15,790 
   $83,258   $72,981 

 

NOTE 7. LEASES

 

The Company leases office space under an eight-year operating lease from an unrelated third party, expiring on June 30, 2017. This lease has a renewal option and requires the Company to pay the year's rent in advance.

 

The Company leases another office space from an unrelated third party, expiring on December 31, 2016. This lease has a renewal option. This lease requires the Company to pay the total rent in advance for one year from Jan 1, 2015 to December 31, 2015 of RMB 36,000 (US$5,854). The annual rent charge will be increased to RMB 39,600 (US$ 6,439) for the year ended December 31, 2016.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

The minimum future rentals under this lease as of February 28, 2015 are as follows:

 

Period Ending   
August 31,  Amount
        
 2015    54,600 
 2016    65,000 
     $119,600 

 

Rent expense for the three months ended February 28, 2015 and 2014 was $13,171 and $15,109, respectively, and for the six months ended February 28, 2015 and 2014 was $25,381 and $30,144 respectively.

 

NOTE 8. INCOME TAXES

 

The provision for income taxes consisted of the following:

 

  For the three months ended
February 28,
  For the six months ended
February 28,
   2015  2014  2015  2014
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
             
 Current   $390,401   $128,977   $536,956   $223,602 
 Deferred    —      —      —      —   
     $390,401   $128,977   $536,956   $223,602 

 

The Company did not generate any income in the United States or otherwise have any U.S. taxable income. The Company does not believe that it has any U.S. federal income tax liabilities with respect to any transactions that the Company or any of its subsidiaries may have engaged in through February 28, 2015. However, there can be no assurance that the IRS will agree with this position, and therefore the Company ultimately could be liable for U.S. federal income taxes, interest and penalties. (See Note 10)

 

NOTE 9. RELATED PARTY TRANSACTIONS

 

The majority stockholder has loaned money to the Company, primarily to meet the non-RMB cash requirements. The loans are non-interest bearing and are due on demand. The balance of $70,502 and $24,339 at February 28, 2015 and August 31, 2014, respectively, represents professional and legal fees incurred in the U.S. paid by this stockholder. The balance is reflected as loans from stockholder on the consolidated balance sheets.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

NOTE 10. CONTINGENCIES

 

The Company did not file its U.S. Federal income tax returns, including, without limitation, information returns on Internal Revenue Service (“IRS”) Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations” for the fiscal year ended December 31, 2013. In addition, the Company did not file with the IRS the information report for the year ended December 31, 2013 concerning its interest in foreign bank accounts on Form TDF 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBAR”). Not complying with the FBAR reporting and recordkeeping requirements will subject the Company to civil penalties up to $10,000 for each of its foreign bank accounts. The Company has not determined the amount of any penalties that may be assessed at this time and believes that penalties, if any, that may be assessed would not be material to the consolidated financial statements.

 

NOTE 11. CONCENTRATION OF CREDIT AND BUSINESS RISKS

 

Substantially all of the Company’s assets and bank accounts are in banks located in the PRC and are not covered by protection similar to that provided by the FDIC on funds held in United States banks.

 

As of February 28, 2015 and August 31, 2014, no customer accounted for more than 10% of accounts receivable. There were no major customers which accounted for 10% or more of the total net revenue for the three months and six months ended February 28, 2015 and 2014. The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral. Credit losses have not been significant. Four vendors individually accounted for 32%, 22%, 19% and 10% of purchases for the three months ended February 28, 2015.

 

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than twenty years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent and effective or that it will continue.

 

Under PRC laws and regulations, the Company’s PRC subsidiary and VIE are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The restricted net assets of the Company’s PRC subsidiary and VIE amounted to $6,739,373 and $5,236,612 as of February 28, 2015 and August 31, 2014, respectively.

 

In addition, the Company’s operations and revenues are conducted and generated in the PRC; all of the Company’s revenues being earned and currency received are denominated in RMB. RMB is subject to the foreign exchange control regulations in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

NOTE 12.   CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

 

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of China Tianfeihong Wine, Inc. (“Parent Company”) to be filed when the restricted net assets of consolidated subsidiaries and VIE’s exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries and VIEs shall mean that amount of the registrant’s proportionate share of net assets of its consolidated subsidiaries and VIEs (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company in the form of loans, advances or cash dividends without the consent of a third party. The condensed Parent Company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiary and VIE exceed 25% of the consolidated net assets of the Company.

 

The following condensed financial information of the Parent Company includes the balance sheets as of February 28, 2015 and August 31, 2014, and the statements of operations, and cash flows for the three months and the six months ended February 28, 2015 and 2014:

 

Condensed Balance Sheets

 

  February 28, 2015  August 31,
2014
  (Unaudited)   
ASSETS          
 Other Receivable from VIE   1,523,606   $941,154 
 Investment in subsidiaries and VIEs   5,215,767    4,295,458 
TOTAL ASSETS   6,739,373   $5,236,612 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities          
 Accrued expenses and other payables   —     $—   
Total liabilities   —      —   
Stockholders’ equity          
Common stock, $0.0006 par value per share, 80,000,000 shares authorized; 34,396,680 shares issued and outstanding shares  issued and outstanding as of February 28, 2015 and August 31, 2014   20,638    20,638 
 Additional paid-in capital   726,548    726,548 
 Retained earnings   5,992,187    4,489,426 
  Total stockholders’ equity   6,739,393    5,236,612 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $6,739,393   $5,236,612 

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

Condensed Statements of Operations

 

  For the three months ended
February 28,
  For the six months ended
February 28,
   2015  2014  2015  2014
  (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
Revenues                    
Share of earnings from investment in subsidiaries and VIE  $1,076,696   $437,878    1,502,761   $755,804 
Operating expenses                    
 General and administrative   —      —      —      —   
Net income  $1,076,696   $437,878    1,502,761   $755,804 

 

Condensed Statements of Cash Flows

 

  For the three months ended February 28,
   2015  2014
  (Unaudited)  (Unaudited)
Cash flows from operating activities          
 Net income  $1,076,696   $437,878 
Adjustments to reconcile net income to net cash provided by (used in) operating activities          
Share of earnings from investment in subsidiaries and VIE   (1,076,696)   (437,878)
    Net cash (used in) operating activities   —      —   
Net increase in cash   —      —   
Cash, beginning of year   —      —   
Cash, end of year  $—     $—   

  

  For the six months ended
February 28,
   2015  2014
  (Unaudited)  (Unaudited)
Cash flows from operating activities          
 Net income  $1,502,761   $755,804 
Adjustments to reconcile net income to net cash provided by (used in) operating activities          
Share of earnings from investment in subsidiaries and VIE   (1,502,761)   (755,804)
    Net cash (used in) operating activities   —      —   
Net increase in cash   —      —   
Cash, beginning of year   —      —   
Cash, end of year  $—     $—   

 

 

CHINA TIANFEIHONG WINE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014

(UNAUDITED) (IN U.S. $)

 

Basis of Presentation

 

The Company records its investment in its subsidiaries and VIEs under the equity method of accounting. Such investment is presented as “Investment in subsidiaries and VIE” on the condensed balance sheets and shares of the subsidiaries and VIE’s profits are presented as “Share of earnings from investment in subsidiaries and VIE” in the condensed statements of operations.

 

Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. The parent only financial information has been derived from the Company’s consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements.

 

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

 

Overview

 

We conduct our operations through our consolidated affiliate, Fujian Tianfeihong Wine, Co., Ltd. (hereinafter referred to as “Fujian Tianfeihong”).  Fujian Tianfeihong, founded in April 2009, is primarily engaged in distributing a wide variety of fruit wine, including green plum wine, loquat wine, olive wine, and pomegranate wine, to supermarkets and liquor stores. The headquarters of Fujian Tianfeihong are located at 1600 Tai'an Block, Licheng Road, Chengxiang District, Putian City, Fujian Province, China.

 

Our U.S parent corporation was incorporated in the state of Delaware on July 28, 2005. Since its inception and until its acquisition of Fanwei Hengchang, China Tianfeihong Wine, Inc. was an inactive company without significant assets or any revenue.

 

On December 30, 2013, we completed a reverse acquisition transaction through a share exchange with the stockholders of Fanwei Hengchang Co., Ltd. (BVI) (“Fanwei Hengchang”), whereby we acquired 100% of the outstanding shares of Fanwei Hengchang in exchange for 32,000,000 shares of our common stock, representing 93.03% of our issued and outstanding shares of common stock.  As a result of the reverse acquisition, Fanwei Hengchang became our wholly-owned subsidiary and the former Fanwei Hengchang stockholders became our controlling stockholders. The share exchange transaction was treated as a reverse acquisition, with Fanwei Hengchang as the acquirer and China Tianfeihong Wine, Inc. as the acquired party for accounting purposes. Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Fanwei Hengchang and its consolidated subsidiaries and variable interest entity (“VIE”). 

 

As a result of our acquisition of Fanwei Hengchang and its wholly owned subsidiaries, we now own all of the issued and outstanding capital stock of Changshi Tongrong, which in turn owns all of the issued and outstanding capital stock of Changshitong Information Consulting (Shenzhen) Co., Ltd. ("Changshitong Consulting"). In addition, we effectively and substantially control Fujian Tianfeihong through a series of agreements between Changshitong Consulting and Fujian Tianfeihong and its stockholders. The consolidated group, including the VIE, is hereafter referred to as the “Company”.

 

Fanwei Hengchang was established in the British Virgin Islands on May 29, 2013.  It is a holding company whose sole asset is the capital stock of Changshi Tongrong Limited (Hong Kong), a holding company established in Hong Kong on August 10, 2012 whose sole asset is all of the registered equity of Changshitong Consulting. Changshitong Consulting was established by Changshi Tongrong as a wholly foreign owned enterprise (the “WFOE”) in the People's Republic of China (“PRC”) on September 23, 2013.

 

For accounting purposes, the acquisition of these entities has been treated as a recapitalization with no adjustment to the historical basis of their assets and liabilities.  The restructuring has been accounted for using the “as if” pooling method of accounting and the operations have been 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.

  

Contractual Arrangements with our Controlled Consolidated Affiliate and its Shareholders

 

On November 26, 2013, prior to the reverse acquisition transaction, Changshitong Consulting and Fujian Tianfeihong and its shareholders, Jinxiang Fang and Zhiliang Fang, entered into a series of agreements (the “VIE Agreements”) pursuant to which Fujian Tianfeihong became Changshitong  Consulting’s contractually controlled affiliate. The VIE Agreements included:

 

 

(1)an Exclusive Technical Service and Business Consulting Agreement between Changshitong Consulting and Fujian Tianfeihong pursuant to which Changshitong Consulting is to provide technical support and consulting services to Fujian Tianfeihong in exchange for (i) 95% of the total annual net profit of  Fujian Tianfeihong plus (ii) RMB10,000 per month (U.S.$1,627);
(2)a Call Option Agreement among Zhiliang Fang and Jinxiang Fang (together referred to as “Fujian Tianfeihong Stockholders”) and Changshitong Consulting under which the  Fujian Tianfeihong  Stockholders have granted to Changshitong Consulting the irrevocable right and option to acquire all of the equity interests in Fujian Tianfeihong to the extent permitted by PRC law. If PRC law limits the percentage of Fujian Tianfeihong that Changshitong Consulting may purchase at any time, then Changshitong Consulting may repeatedly exercise its option in such increments as may be allowed by PRC law. The exercise price of the option is RMB1.00 (U.S. $0.16) or the minimum price permitted by PRC laws if at that time there are any PRC laws regulating the minimum purchase price. The Fujian Tianfeihong Stockholders agreed to refrain from taking certain actions which might harm the value of Fujian Tianfeihong or Changshitong Consulting’s option;
(3)a Proxy Agreement by Zhiliang Fang, Jinxiang Fang, Changshitong Consulting and Fujian Tianfeihong pursuant to which the Fujian Tianfeihong  Stockholders authorize Changshitong Consulting to designate someone to exercise all of their stockholder decision rights with respect to Fujian Tianfeihong; and
(4)a Share Pledge Agreement among Zhiliang Fang and Jinxiang Fang, Fujian Tianfeihong, and Changshitong Consulting under which the Fujian Tianfeihong Stockholders pledge all of their equity in Fujian Tianfeihong to Changshitong Consulting to guarantee Fujian Tianfeihong’s and its stockholders’ performance of their obligations under the Exclusive Technical Service and Business Consulting Agreement, the Call Option Agreement and the Proxy Agreement.

 

The accounting effect of the VIE Agreements between Changshitong Consulting and Fujian Tianfeihong is to cause the balance sheets and financial results of Fujian Tianfeihong to be consolidated with those of Changshitong Consulting, with respect to which Fujian Tianfeihong is now a variable interest entity.  

 

 

Comparison of three month and six month periods ended Feb 28, 2015 and 2014

 

The following table sets forth key components of our results of operations during three months ended February 28, 2015 and 2014, and the percentage changes between 2015 and 2014.

 

   Feb. 28,  Feb. 28,   
   2015  2014  Change
   $  $  %
          
Revenue  $7,639,171   $2,882,195    165%
Cost of Sales   (5,089,375)   (1,889,147)   169%
Gross profit   2,549,796    993,048    157%
Selling and marketing expenses   872,087    312,077    179%
General and administrative expenses   121,674    154,162    (21)%
  Total operating expenses   993,761    466,239    113%
Income from operations   1,556,035    526,809    195%
Interest Income   5,577    4,130    35%
Income before provision for income taxes   1,561,612    530,939    194%
Provision for income taxes   390,401    128,977    203%
Net income   1,171,211    401,962    191%
Less: Non controlling interests   (58,384)   (24,986)   134%
Net income attributable to the Common Stockholders   1,112,827    376,976    195%

Comprehensive Income:

Net Income:

   1,171,211    401,962      
                
Foreign currency translation adjustment   (37,777)   76,490    149%
Total comprehensive income   1,133,434    478,452    137%
Less: Comprehensive income
attributable to non-controlling interests
   (56,737)   (40,574)   40%

Comprehensive income

attributable to common stockholders

   1,076,697    437,878    146%

 

 

The following table sets forth key components of our results of operations during the six month periods ended February 28, 2015 and 2014, and the percentage change between 2015 and 2014.

 

   Feb. 28,  Feb. 28,   
   2015  2014  Change
   $  $  %
          
Revenue  $10,775,557   $4,814,573    124%
Cost of Sales   (7,184,415)   (3,200,407)   124%
Gross profit   3,591,142    1,614,166    122%
Selling and marketing expenses   1,259,418    509,614    147%
General and administrative expenses   194,599    201,435    (3%)
  Total operating expenses   1,454,017    711,049    104%
Income from operations   2,137,125    903,117    137%
Interest Income   10,694    7,632    40%
Income before provision for income taxes   2,147,819    910,749    136%
Provision for income taxes   536,956    223,602    140%
Net income   1,610,863    687,147    134%
Less: Non controlling interests   (80,190)   (34,361)   133%
Net income attributable to the Common Stockholders   1,530,673    652,786    134%

Comprehensive Income:

Net Income:

   1,610,863    687,147    134%
                
Foreign currency translation adjustment   (28,870)   109,246    (126%)
Total comprehensive income   1,581,993    796,393    99%
Less: Comprehensive income
attributable to non-controlling interests
   79,232    (40,589)   (295%)
Comprehensive income attributable to common stockholders   1,502,761    755,804    99%

  

Sales. Our sales have increased dramatically in the first half of fiscal 2015. Sales for three months ended February 28, 2015 and 2014 were $7,639,171 and $2,882,195, respectively, representing a period-to-period increase of 165%. Our sales for the six months ended February 28, 2015 and 2014 were $10,775,557 and $4,814,573, respectively, an increase of 124%. In each case, the primary reason for increased sales was the increased effectiveness of our marketing efforts, as per-unit increases were modest.

 

Gross Profit. Our cost of sales primarily consists of the cost for wine purchases and the VAT surcharge. Our per-unit cost of goods sold decreased by 14% in both the second quarter and first half of fiscal 2015. Nevertheless, our gross margins decreased slightly, to 33.4% from 34.5% quarter-to-quarter and from to 33.3% in the first half of fiscal 2015 from 33.5% in the first half of fiscal 2014. The decrease, notwithstanding lower per-unit costs, was attributable to our aggressive marketing promotions. To stimulate new distribution channels, Fujian Tianfeihong has been offering rewards to customers, so that when the customer contracts to purchase a certain amount, we give the customer a certain amount of free goods. These rewards are recorded as an additional cost of sales. Rewards added $488,478 and $688,859 to the cost of goods sold during the three and six months ended February 28, 2015, while adding only $183,375 and $315,572 to cost of goods sold during the three and six months ended February 28, 2014. The increase in rewards caused the reduction in our gross margin. Nevertheless, due to the marked increase in our revenue, gross profit increased by 157% quarter-to-quarter and by 122% in the first half of fiscal 2015 from the first half of fiscal 2015.

 

 

Impact of Exchange RatesIn preparing our financial statements for inclusion in our SEC filings, we translate from the Chinese Renminbi to U.S. dollars the elements of our balance sheets at the exchange rate on the balance date, except for stockholders’ equity and our statements of income and cash flows. Accordingly, our year-to-year comparisons may be influenced by changes in the average exchange rate, resulting in increases or decreases that do not reflect actual changes in operating results. The exchange rates used to translate Renminbi into Dollars in the financial statements included in this report were all within 0.6% of each other. (See: Note 2 to The Consolidated Financial Statements: "Summary of Significant Accounting Policies - Foreign Currency Translation"). Accordingly, changes in exchange rates did not have a material impact on the comparison of financial results.

 

Selling expenses. Our selling expenses increased by 179% to $872,087 for the three months ended February 28, 2015, and by 147% to $1,259,418 for the six months ended February 28, 2015. Our selling expenses are primarily comprised of transportation expenses, marketing expenses and any daily expenses incurred for sales functions, such as salaries, travelling expenses, entertainment and rent. The main reason for the increase in selling expenses was the period-to-period increase in goods sold, which caused the increase in transportation and other sales expenses.

 

General and administrative expenses. Despite the increase in our revenue, our general and administrative (“G&A”) expenses decreased by 21% to $121,674 for the three months ended February 28, 2015, and by 3% to $194,599 for the six months ended February 28, 2015. Our G&A expenses are primarily comprised of office expenses, entertainment expenses, travelling expenses, depreciation expenses, rent and salaries. The period-to-period decreases in G&A expenses were attributable to a sizeable attorney fee incurred in the second quarter of fiscal 2014, related to our preparation for the reverse merger that enabled us to list our common stock for trading in the U.S.

.

Other income. As we have no interest-bearing debts, our other income consisted entirely of interest income earned on our bank balances. Due to the increase in our cash position and a modest increase in prevailing interest rates, interest income increased to $5,577 for the three months ended February 28, 2015 from $4,130 for the three months ended February 28, 2014, and increased to $10,694 for the six months ended February 28, 2015 from $7,632 for the six months ended February 28, 2014.

 

Provision for income tax. Due to the 194% increase in our pre-tax income, our provision for income tax increased to $390,401 for the three months ended February 28, 2015 from $128,977 for the three months ended February 28, 2014, representing a 203% increase. Due to the 136% increase in our pre-tax income, our provision for income tax increased to $536,956 for the six months ended February 28, 2015 from $223,602 for the six months ended February 28, 2014, representing a 140% increase. Our effective tax rate was the same as the statutory rate of 25% for the three and six months ended February 28, 2015 and 2014.  

 

Net income. After deducting income tax, the Company reported net income of $1,171,211 and $401,962 for the three months ended February 28, 2015 and 2014, respectively, and $1,610,863 and $687,147 for the six months ended February 28, 2015 and 2014, respectively. The VIE agreements assign to Changshitong Consulting only 95% of the net profit generated from Fujian Tianfeihong.  For that reason, we deducted a “non-controlling interest” of $58,384 and $24,986, respectively, and $80,190 and $34,361, respectively, before recognizing net income attributable to the Company on our Consolidated Statements of Operations and Comprehensive Income.  After that deduction and taking into account the income and expenses incurred by the parent corporation, our net income attributable to common shareholders for the three months ended February 28, 2015 and 2014 was $1,112,827 and $376,976, respectively, a increase of 195%. and for the six months ended February 28, 2015 and 2014 was $1,530,673 and $652,786, respectively, an increase of 134%

 

 

Foreign Currency Translation Adjustment. Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the periods being reported upon, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the balance sheet date. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation. For the three months ended February 28, 2015 and 2014, we recorded foreign currency translation adjustments of $(37,777) and $76,490, respectively. For the six months ended February 28, 2015 and 2014, foreign currency translation adjustments of $(28,870) and $109,246 have been reported as other comprehensive income in the consolidated statements of income and other comprehensive income.

 

Liquidity and Capital Resources

 

As of February 28, 2015, our working capital totaled $6,925,236, an increase of $1,596,127 since August 31, 2014.  The increase was approximately equal to our net income for the six months ended February 28, 2015, as the funds used for capital investing and financing activities was insignificant. Cash and cash equivalents represented approximately 59% of our current assets at Feb 28, 2015. 

 

Since our operations provided approximately $1.56 million in cash during the six months ended February 28, 2015, and the Company has been cash flow positive for the past two years, we believe that our liquid assets are adequate to finance our operations for the next twelve months.

 

The following table sets forth a summary of our cash flows for the periods indicated:

 

Cash Flow

(all amounts in U.S. dollars)

  

Six Months 

Ended

Feb. 28,

2015

 

Six Months 

Ended

Feb. 28,

2014

       
Net cash provided by operating activities  $1,561,928   $1,257,497 
Net cash (used in) investing activities   (9,694)   (852)
Net cash provided by financing activities   46,312    26,880 
Effects of Exchange Rate Change in Cash   (28,952)   24,394 
Net  Increase in Cash and Cash Equivalents   1,569,594    1,307,919 
Cash and Cash Equivalent at Beginning of the Period   5,229,261    3,994,502 
Cash and Cash Equivalent at End of the Period   6,798,855    5,302,421 

 

Operating activities

 

Cash provided by operating activities was $1,561,928 for the six months ended February 28, 2015, as compared to $1,257,497 for the six months ended February 28, 2014. Cash provided by operation activities was approximately equal to our net income, primarily due to the fact that our increase in inventory and accounts receivable offset the increase in accounts and taxes payable.

 

Our operations provided cash in excess of our net income for the six months ended February 28, 2014 primarily as a result of the $790,579 increase in our trade accounts payable, as well as increases in advances to suppliers and taxes payable.

 

 

Investing activities

 

Cash used in investing activities for six months ended February 28, 2015 and 2014 was $9,694 and $ 852, respectively, all of which was incurred for the purchase of equipment.

 

The net book value of our fixed assets at February 28, 2015 was $33,979, reflecting the fact that our business activities do not require a significant investment in fixed assets.  Accordingly, unless we expand our business activities in the future, investing activities will involve similarly insignificant amounts of cash.

 

Financing activities

 

Cash provided by financing activities was $46,312 and $26,880 for the six months ended February 28, 2015 and 2014, respectively, which represented loans from a related party. From time to time, we will take modest loans from related parties, primarily to provide the dollars needed to pay expenses incurred by our parent company in the U.S. Because of our ample cash position and the profitability of our operations, we do not anticipate incurring significant additional debt.  Therefore, our liquidity should be adequate to sustain the full implementation of our business plan for the foreseeable future.

 

Transfer of Cash

 

All of our revenue is generated by Fujian Tianfeihong in the PRC, and often the payment of the monthly fee to Changshitong Consulting, 95% of the net income, is then assigned to Changshitong Consulting. PRC regulations restrict the ability of our PRC subsidiary, Changshitong Consulting, to make dividend and other payments to its offshore parent company.  PRC legal restrictions permit payments of dividends by our PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations.  Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amount of said fund reaches 50% of its registered capital. Allocations to this statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

 

The Chinese government strictly regulates conversion of RMB into foreign currencies.  Currently, Fujian Tianfeihong and Changshitong Consulting may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”), by complying with certain procedural requirements. Pursuant to applicable Chinese laws and regulations, foreign invested enterprises incorporated in China, such as Changshitong Consulting, are required to apply for “Foreign Exchange Registration Certificates.” Currently, conversion within the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, trade and service-related foreign exchange transactions, etc.) can be effected without requiring the approval of SAFE, but must be effected through authorized Chinese banks in accordance with regulatory procedures. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. Compliance with those procedural requirements can result in delays in obtaining foreign exchange, which could interfere with offshore activities by the Company, such as acquisitions, offshore investments, or the payment of dividends to the Company’s stockholders.  

 

Chinese regulations also limit the ability of our parent company to transfer money into China, as needed to fund the operations of Fujian Tianfeihong.  If in the future, China Tianfeihong raises funds and wishes to utilize them in the operations of Fujian Tianfeihong, one of the following methods will have to be employed:

 

 

1.Acquisition.  China Tianfeihong could transfer capital to Fujian Tianfeihong by causing its Hong Kong subsidiary, Changshi Tongrong Limited, to apply to MOFCOM for approval of an acquisition of Fujian Tianfeihong by Changshi Tongrong Limited.  MOFCOM would approve such an acquisition only after a lengthy review process, and only if it determined that the price paid by Changshi Tongrong Limited for Fujian Tianfeihong represented a commercially fair price.

 

2.Joint venture.  If China Tianfeihong Wine, Inc. obtained capital that was less than the purchase price for Fujian Tianfeihong deemed acceptable by MOFCOM, Changshi Tongrong Limited could still inject the funds into Fujian Tianfeihong by complying with the provisions of the PRC Sino-Foreign Equity Joint Venture Law.  To accomplish this capital transfer, we would be required to apply to the Chinese government for approval to convert Fujian Tianfeihong into an equity joint venture, in which Changshi Tongrong Limited would be its equity joint venture partner. If approved, Changshi Tongrong would then own a portion of the equity in Fujian Tianfeihong, and the VIE agreements between Fujian Tianfeihong and Changshitong Consulting would be modified accordingly to reduce the portion of net income payable by Fujian Tianfeihong to Changshitong Consulting.

 

We have no current plans for China Tianfeihong Wine, Inc. to fund Fujian Tianfeihong, and expect the VIE structure to remain in place for the foreseeable future.

 

Critical Accounting Policies and Estimates

 

In preparing our financial statements we are required to formulate policies. In our preparation of the financial statements for three and six month periods ended February 28, 2015 and 2014, there was one determination made which was (a) subject to a high degree of uncertainty and (b) material to our results. This was the determination reflected in Note 2 to the financial statements to consolidate the balance sheet and historical financials of our variable interest entity, Fujian Tianfeihong.

 

Through the VIE agreements, our subsidiary, Changshitong Consulting, is deemed the primary beneficiary of Fujian Tianfeihong. Fujian Tianfeihong has no assets that are collateral for or restricted solely to settle its own obligations. The creditors of Fujian Tianfeihong do not have recourse to the Company’s general credit. Fujian Tianfeihong’s actual stockholders do not hold any kick-out rights that will affect the consolidation determination. Accordingly, the financials of Fujian Tianfeihong have been included in the accompanying consolidated financial statements.

 

There is a degree of uncertainty as to whether the VIE agreements would be enforceable within the Chinese legal system if, for any reason, we found it necessary to seek legal enforcement. To date, there has been very limited judicial comment on such agreements, and nothing that would serve as binding precedent if the enforceability of our VIE agreements were to be adjudicated. We believe that, if adjudicated, each of the four VIE agreements would be found enforceable by the Chinese legal system. Our bases for this conclusion are:

 

The Exclusive Technical Service and Business Consulting Agreement provides an exchange of money for services that is a fair and reasonable exchange and does not violate any principal of Chinese law.
The Call Option Agreement is, essentially, a stand-still agreement under which the parties agree to take no action that would prejudice the other pending an acquisition of Fujian Tianfeihong by Changshitong Consulting on terms that comply with Chinese law. A standstill agreement, in contemplation of a subsequent transfer is commonly enforced in China, where the transfer process can be lengthy.
The Proxy Agreement conforms to Chinese corporate law that permits equity holders to appoint proxies to exercise their voting rights.
The Share Pledge Agreement conforms to Chinese law that permits a pledge of equity to secure obligations.

 

 

The most likely challenge to the VIE agreements would arise under the New M&A Rules, which are designed to regulate foreign acquisitions of Chinese entities. Our analysis of the New M&A Rules, however, indicates that the New M&A Rules do not invalidate our VIE Agreements. The New M&A Rules require offshore “special purpose vehicles,” that are (1) formed for the purpose of overseas listing of the equity interests of Chinese companies via acquisition and (2) are controlled directly or indirectly by Chinese companies and/or Chinese individuals, to obtain the approval of the China Securities Regulatory Commission (“CSRC”) prior to the listing and trading of their securities on overseas stock exchanges. Our review of the New M&A Rules persuades us that this provision does not apply to our Company. We reached that conclusion by observing that:

 

1.Changshitong Consulting was incorporated by a foreign investor and therefore has no Chinese shareholders;
2.the share exchange between Fanwei Hengchang and China Tianfeihong Wine, Inc., is between two offshore companies and is not deemed as a transaction to acquire equity or assets of a “Chinese domestic company” as defined under the New M&A Rules; and
3.no provision in the New M&A Rules clearly classifies the contractual arrangements between Changshitong Consulting and Fujian Tianfeihong as a type of transaction falling within the New M&A Rules.

 

We believe, therefore, that under prevailing laws and policies, our VIE Agreements are enforceable in Chinese courts. Consideration must be given, however, to the possibility that the Chinese government could create a policy adverse to such arrangements, which would be likely to affect future adjudication of the enforceability of entrusted-management-type arrangements. Moreover, as there are no judicial decisions known to us regarding the enforceability of VIE agreements, it is possible that our analysis of their enforceability may not prevail in a Chinese court. There is a risk, therefore, that if it occurred that the counterparties to the VIE agreements failed to abide by the VIE agreements, we would be unable to secure effective relief in the Chinese legal system. In that eventuality, we would be required to de-consolidate Fujian Tianfeihong from the Company’s financial statements, and the Company would report no revenue nor earnings and only nominal assets.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

 

Recent accounting pronouncements

There were no recent accounting pronouncements that we believe have or will have a material effect on the Company’s financial position or results of operations.

 

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.  Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule13a-15(e) promulgated by the Securities and Exchange Commission) as of February 28, 2015. The evaluation revealed that there are material weaknesses in our disclosure controls, specifically:

 

The relatively small number of employees who are responsible for accounting functions prevents us from segregating duties within our internal control system.
Our accounting personnel lack expertise in identifying and addressing complex accounting issues under U.S. Generally Accepted Accounting Principles.

 

 

Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s system of disclosure controls and procedures was not effective as of February 28, 2015.

 

Changes in Internal Controls.  There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during the Company’s second fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 

 PART II   -   OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A Risk Factors

 

There have been no material changes from the risk factors included in Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2014.

 

Item 2. Unregistered Sale of Securities and Use of Proceeds

 

(a) Unregistered sales of equity securities

 

None.

 

(c) Purchases of equity securities

 

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 2nd quarter of fiscal 2015.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits

 

31.1Rule 13a-14(a) Certification – CEO
31.2Rule 13a-14(a) Certification – CFO
32Rule 13a-14(b) Certification
101.INSXBRL Instance
101.SCHXBRL Schema
101.CALXBRL Calculation
101.DEFXBRL Definition
101.LABXBRL Label
101.PREXBRL Presentation

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CHINA TIANFEIHONG WINE, INC.
     
Date: April 20, 2015 By: /s/ Zhiliang Fang
    Zhiliang Fang, Chief Executive Officer
     
  By: /s/ Lirong Zheng
    Lirong Zheng, Chief Financial Officer, Chief Accounting Officer