10-K 1 chfr10k13.htm

 

U.S. Securities and Exchange Commission

Washington, D.C. 20549

 

 

FORM 10-K

 

 

[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2013

 

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

 

 

Commission File Number: 1-10559

 

 

CHINA FRUITS CORP.

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

 

 

Nevada 90-0315096
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)  

 

Fu Xi Technology & Industry Park, Nan Feng County

Jiang Xi Province, P. R. China

(Address of principal executive offices)

 

(86794) 326-6199

(Issuer's telephone number)

 

 

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

 

Title of each class  

Name of each exchange

on which registered

     
None   Not Applicable

 

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

 

Common Stock, $.001 par value

(Title of Class)

 

(1)

 

 

 

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

Yes [ ] No [ x ]

 

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

Yes [ ] No [ x ]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ x ] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes [ x ] No [ ]

 

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

Yes [ ] No [ x ]

 

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

 

Large accelerated filer  ☐
Non-accelerated filer  ☐(Do not check if a smaller reporting company) 
Accelerated filer  ☐
Smaller reporting company  ☒

 

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the exchange act).

Yes [ ] No [ x ]

 

The Registrant’s revenues for its fiscal year ended December 31, 2013 were $9,369,901.

 

The aggregate market value of the voting stock on March 25, 2014 (consisting of Common Stock, $0.001 par value per share) held by non-affiliates was approximately $1,232,145 based upon the most recent sales price ($0.025) for such Common Stock on said date March 25, 2014, there were 49,951,223 shares of our Common Stock issued and outstanding, of which approximately 49,285,807 shares were held by non-affiliates.

 

Number of shares of common stock, par value $.001, outstanding as of March 25, 2014: 49,951,223

Number of shares of preferred stock outstanding as of March 25, 2014:

Series A, par value $.001 - 13,150

Series B, par value $.001 - 12,100,000

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

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

 

(2)

 

 

 

TABLE OF CONTENTS

 

PART I:

 

Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. (Removed and Reserved)

 

PART II:

 

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

Item 6. Selected Financial Data

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

Item 9A(T). Controls and Procedures

Item 9B. Other Information

 

PART III:

 

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

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

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

Item 14. Principal Accounting Fees and Services

 

PART IV:

 

Item 15. Exhibits, Financial Statement Schedules

 

SIGNATURES:

 

(3)

 

 

 

 

 

ITEM 1. BUSINESS

 

History

 

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

 

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

    

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

 

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

 

 

 

Business Description of the Issuer

 

Since the reverse merger was consummated, we have continued operations of Tai Na, a company which is principally engaged in the manufacturing, trading and distributing of fresh tangerines and other fresh fruits in the PRC. Tai Na is located in Nan Feng County, Jiang Xi Province, a well known agricultural area for tangerines in China. The geographic advantage offers additional benefits us with our quality control and lower manufacturing costs. We own our primarily facility in Nan Feng County which consists of a total land area of 755,228 square feet, including manufacturing plants of 340,570 square feet and office buildings of 19,267 square feet. We have been focused within our industry since 2005 and we believe we have obtained a solid reputation and a good working relationship with the local government due to our continuous contributions to the local economy. During 2012, with the support from our local government, we utilized an area of 98,505 square feet to establish an Express Export Zone (“EEZ”) with the purpose of exporting fresh tangerines and other fresh fruits. The government departments including Customs, Inspections and Clearing have setup a satellite office onsite to facilitate the process. We believe the setup of this EEZ is good for us to improve our operating efficiencies and also serves as a bridge connecting local enterprises to the world and benefits our local economy.

 

In order to effectively maintain the quality of tangerine, we have a set of temperature and humidity auto-control equipments with capacity of 1,500 tons. We also have two automatic product lines to select fruits, the hourly process capacity of which is 10 ton/hour and 15 ton/hour, respectively. During the year of 2013, our total production was 8,400 tons. We expect the production capacity will reach 15,000 tons in 2014 due to the improvement of production efficiency.

 

Since 2007, we have expanded our sales network by setting up the franchise retail stores for fresh fruits and related products. We also relocated our headquarters to Beijing, which we believe will have a positive effect on our corporate image and marketing strategy. In order to create our brand identity efficiently, we plan to acquire or form joint venture with the existing profitable and middle-size retail stores. We provide the stores with our standard management systems, supplies, as well as remodeling to unify store display, color and sign pursuant to the franchise requirements. We currently have seven franchise retail stores in Beijing area, of which two stores are wholly owned by us under direct management, and five stores are managed by the franchisees. In 2014, we will evaluate the operation in the existing stores and replace those in poor performance with new stores. After several years experience in operating franchise retail stores, we believe 2014 is the right timing for us to expand our retail stores network. We expect the total number of franchise stores to be increased to sixty four via acquisitions by the end of 2014.

 

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

 

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

 

(4)

 

 

Overview of Our Market Area

 

China's citrus industry currently experiences transition from quantity concentration to quality concentration, from production only to diversified business segments covering pre-production to post-production. According to China Citrus Industry Development Report (2013), citrus production in China has the following features: 

 

* Planting area for citrus fruit and its output have been at the first place in the World for several years. In 2012, the planting area for citrus fruit in China was approximately 2.3 million hectares and its output was approximately 31.7 million tons, which was 24.98% and 24.56% of the World, respectively, compared to global citrus planting area of approximately 9.2 million hectares and global citrus output of approximately 129 million tons.

 

*

Planting area for citrus fruit was also at the first place amongst various fruit in China; its output was at the second place, less than the output of apple. In China, the planting area for all kinds of fruit was 121.4 million hectares, 19.0% of which was planting citrus fruit; the total fruit output was 151.0 million tons, 21.0% of which was citrus fruit. Compared to the planting area of 32.7 thousand hectares and 177.9 thousand hectares in 1952 and 1978, respectively, the planting area for citrus fruit increased 70 times and 12 times in 2012. Compared to the output of 206.6 thousand tons and 382.7 thousand tons in 1952 and 1978, respectively, the output increased 152 times and 82 times in 2012.

 

 

*

Increase in global fresh fruit trading. According to the data from Global Trading Information Services Co. (“GTI”), global fresh fruit trading revenues were $120.4 billion, increased by 11% compared to the trading revenues in 2010. China was at the seventh place with respect to fruit export, which was $2.3 billion, increased by 18.5% compared to the previous year. China was at the ninth place with respect to fruit import, which was $2.35 billion, increased by $58% compared to the previous year.

 

*

Increase in fruit revenues. The total revenues generated from fruit industry in China was approximately $100 billion (RMB 629.1 billion) in 2012, increased by approximately $11.4 billion (RMB 72.1 billion), or 12.9%, compared to 2011. It was approximately 13.4% of total agricultural revenues. In the past decade, the revenues from fruit industry have been increasing with the expansion in production capacity. The fruit revenues in 2012 were 4 times of the fruit revenues in 2003. The average increasing rate of fruit revenues was 14.87% per year in the past decade. The fruit industry becomes a significant portion of modern agriculture in China.

 

*

Preference to fresh fruits. 95% of citrus products in China are consumed as fresh fruit. Fruit manufacturing is not popular in China, most of which is for export only. In addition, the orange juices on Chinese markets are primarily made from concentrated or non-concentrated juices imported from Brazil and the United States. As a result of the improved life quality in China and the awareness of health, the consumption of fresh fruit has changed from the enjoyable goods to be the necessity for life. The consumption habit also changes from seasonal consumption to be daily consumption.

 

 

In general, citrus output increased tremendously in China in the past decades due to the increases in orchards. However, compared to the world's market, the citrus industry in China is undeveloped in terms of quality, output, manufacture and efficiency. There are four barriers in China's citrus industry: a) small manufacturing magnitude, primarily based on household; b) lack of technology input, primarily based on nature growth; c) undeveloped commercial systems, particularly in storage and transportation; d) no clear segments in the industry, particular in household base. It is a long-term goal to rid us of all these barriers. After China entered the World Trade Organization ("WTO") in 2001, the sales channels for citrus products should be more facilitated due to the open markets. In the long run, the export of Chinese citrus will increase constantly, for both fresh fruits and processed products.

 

Marketing Strategies

 

Expanding Retail Fruit Stores Network

 

We believe franchise retail stores will benefit us in our business expansion and brand recognition. We preferred the stores operated in form of joint ventures with the existing profitable and middle-size retail stores because those stores have certain operating history and customers base. We reorganize the stores and provide the stores with our standard management systems, supplies, as well as remodeling to unify store display, color, and sign pursuant to the franchise requirements. The franchise retail stores will help build a direct channel between the end users and us, which will facilitate the process of moving product from our plants to the markets, and benefitting us in adjusting our business strategies when markets change. As of December 31, 2013, we had seven franchise retail stores in Beijing area, of which two stores are wholly owned by us under direct management, and five stores are managed by the franchisees. In 2014, we will evaluate the operation in the existing stores and replace those in poor performance with new stores. After several years experience in operating franchise retail stores, we believe 2014 is the right timing for us to expand our retail stores network. We expect the total number of franchise stores to be increased to sixty four via acquisitions by the end of 2014.

 

Expanding Logistic Center

 

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

 

(5)

 

 

 

Improving Management Systems

 

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

 

Seeking for Opportunities to Develop International Markets

 

Our tangerines, known as "Nan Feng tangerine", are popular in the market due to the high quality, benefitting from the natural resources in Nan Feng County, which is a well known agricultural area for tangerines in China. Currently, we primarily market in China and hold a leading position in the Chinese market. However, this position is challenged since China’s accession to WTO in 2001. We believe the open-market policies will lower the barriers to entry, both in Chinese markets and global markets. WTO membership brought with it the opportunity to take advantage of new market access opportunities and new protections now available to China under the rules-based system of the WTO. In order to develop our international markets, we have set up a department in charge of oversea markets since 2010, which included 10 full-time employees as of December 31, 2013. Our target markets including Europe, Middle-east, and Southeast Asia. In 2013, our revenues generated from international markets included approximately $236,540 from Dubai, approximately $6,000,000 from Thailand and approximately $36,736 from Malaysia. We believe there is great growth potential in international markets and we will keep looking for the opportunities oversea.

 

Seeking for Strategic partners

 

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

 

• Enhance manufacturing capacities;

 

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

 

• Diversify the fresh fruit sold in the franchise stores;

• Expand the sales network;

• Increase sales revenue; and

• Successfully build brand identity.

 

 

Enhancing Manufacture Capacity

 

We own our primarily facility in Nan Feng County which consists of a total land area of 755,228 square feet, including manufacturing plants of 340,570 square feet and office buildings of 19,267 square feet. In order to effectively maintain the quality of tangerine, we have a set of temperature and humidity auto-control equipments with capacity of 1,500 tons. We also have two automatic product lines to select fruits, the hourly process capacity of which is 10 ton/hour and 15 ton/hour, respectively. During the year of 2013, our total production was 8,400 tons. We expect the production capacity will reach 15,000 tons in 2014 due to the improvement of production efficiency.

 

Seeking for Supports from local government

 

We have been focused within our industry since 2005 and we believe we have obtained a solid reputation and a good working relationship with the local government due to our continuous contributions to the local economy. During 2012, with the support from our local government, we utilized an area of 98,505 square feet to establish an Express Export Zone (“EEZ”) with the purpose of exporting fresh tangerines and other fresh fruits. The government departments including Customs, Inspections and Clearing have setup a satellite office onsite to facilitate the process. We believe the setup of this EEZ is good for us to improve our operating efficiencies and also serves as a bridge connecting local enterprises to the world and benefits our local economy. In order to encourage our efforts on modern agricultural development, we obtained the grants in amount of $409,160 and $1,220,920 from the local government in 2013 and 2012, respectively.

 

Increasing Expenses in Marketing

 

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

 

Competition 

 

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

 

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

  

Government Regulation 

 

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

 

Employees 

 

We have to make a rational allocation and use of personnel to match our business growth. As of December 31, 2013, we had 62 full-time employees, of which 38 are specialized in franchising management, export trading and purchasing.

 

(6)

 

 

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

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

 

• Enhance manufacturing capacities;

 

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

• Diversify the fresh fruit sold in the franchise stores;

• Expand the sales network;

• Increase sales revenue; and

• Successfully build brand identity.

 

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

 

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

 

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

 

Adverse weather conditions could reduce the demand for our products.

 

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

  

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

 

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

 

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

 

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

 

(7)

 

 

 

 

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

 

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

 

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

    

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

 

Political and economic risks

    

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

 

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

  

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

 

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

 

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

 

(8)

 

 

 

Declining economic conditions could negatively impact our business

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(9)

 

 

 

 

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

 

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

 

Our corporate actions are substantially controlled by a single stockholder.

 

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

 

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

 

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

 

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

 

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

 

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

 

(10)

 

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS 

 

None.

 

ITEM 2. PROPERTIES

 

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

 

We also lease two stores in Beijing area for retail business under our direct management.. The total store area is 3,230 square feet with annual rental payment of approximately $125,400.

 

Our main operation is located in the Fu Xi Technology & Industry Park, Nan Feng County, Jiang Xi Province, People’s Republic of China, which is self-owned property with a total land area of 755,228 square feet, including manufacturing plants with total area of 340,570 square feet and office buildings with total area of 19,267 square feet. This space is adequate for our present operations. No other businesses operate from this office.

 

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

 

ITEM 3. LEGAL PROCEEDINGS

 

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

 

ITEM 4. (REMOVED AND RESERVED)

 

(11)

 

 

PART II

 

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

 

Trading Market for Common Equity

 

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

 

Interim Period   Low     High
Interim Period ended March 25, 2014 $ 0.015   $ 0.0399
           
Fiscal 2013          
Quarter ended March 31, 2013 $ 0.003   $ 0.050
Quarter ended June 30, 2013 $ 0.018   $ 0.101
Quarter ended September 30, 2013 $ 0.022   $ 0.070
Quarter ended December 31, 2013 $ 0.013   $ 0.044
           
Fiscal 2012          
Quarter ended March 31, 2012 $ 0.01   $ 0.03
Quarter ended June 30, 2012 $ 0.006   $ 0.01
Quarter ended September 30, 2012 $ 0.002   $ 0.006
Quarter ended December 31, 2012 $ 0.002   $ 0.006

  

Dividends

 

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

 

Preferred Stock

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(12)

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 a) Alter or change the rights, preferences or privileges of the Series B Preferred Stock.
 b)Create any new class of stock having preferences over the Series B Preferred Stock.
 c)Repurchase any of our common stock.
 d)Merge or consolidate with any other company, except our wholly-owned subsidiaries.
e)Sell, convey or otherwise dispose of, or create or incur any mortgage, lien, or charge or encumbrance or security interest in or pledge of, or sell and leaseback, in all or substantially all of our property or business.
f)Incur, assume or guarantee any indebtedness maturing more than 18 months after the date on which it is incurred, assumed or guaranteed by us, except for operating leases and obligations assumed as part of the purchase price of property. 

 

Number of Holders

 

As of March 25, 2014, we had 3,634 common shareholders of record.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

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

 

None.

 

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

 

None.

 

Transfer Agent

 

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

 

(13)

 

ITEM 6. SELECTED FINANCIAL DATA

 

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

 

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

 

Forward Looking Statements

 

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

 

Critical Accounting Policies

 

Revenue recognition

 

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

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

The Company recognizes revenue from the sale of products upon delivery to the customers and the transfer of title and risk of loss. The Company did not record any product returns for the year ended December 31, 2013.

 

Inventory

 

Inventories consist of finished goods and are valued at lower of cost or market value, cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  The spoilage will be written-off directly to the profit and loss when it occurs.

(14)

 

 Property, Plant, and Equipment

 

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

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

 

Expenditure for maintenance and repairs is expensed as incurred.

  

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

 

Revenues

 

Gross revenues were $9,369,901 and $3,550,674 for the years ended December 31, 2013 and 2012, respectively. We generate our revenues from sales of fresh fruits and related products, including our signature tangerine. The revenues are recognized when persuasive evidence of a sale exists, transfer of title has occurred, the selling price is fixed or determinable and collectability is reasonably assured. Our sales arrangements are not subject to warranty. We did not record any product returns during the year ended December 31, 2013.

 

The increase in revenues by $5,819,227 during the year ended December 31, 2013 was due primarily to increasing traffic in our retail stores. After our efforts on marketing and brand recognition over years, more and more local customers know about our stores and turn into our regular customers. The sales in retail stores increased approximately 28% in 2013. In addition, the fund from shareholders gave us sufficient cash flow to develop internatonal markets, including Thailand, Dubai, Malaysia and so on. The revenues generated from these three countries in 2013 were approximately $6,000,000, $236,540 and $36,736, or approximately 68%, 2.5% and 0.4% of total revenues, respectively.

 

We expect our sales to increase during in 2014 as our moves toward implementing our business plan, including the increase in franchise retail stores, the increase in marketing budgets. As of December 31, 2013, we had seven franchise retail stores in Beijing area, of which two stores are wholly owned by us under direct management, and five stores are managed by the franchisees. In 2014, we will evaluate the operation in the existing stores and replace those in poor performance with new stores. After several years experience in operating franchise retail stores, we believe 2014 is the right timing for us to expand our retail stores network. We expect the total number of franchise stores to be increased to sixty four via acquisitions by the end of 2014.

 

Income / Loss

 

We had net income of $166,622 for the year ended December 31, 2013, compared to net loss of $88,016 in the year of 2012. The net income during the year of 2013 was also due to the grants received from the local government in amount of $409,160, which was to encourage our efforts on modern agricultural development. Without the government grant, we suffered loss of $143,124 from operations.

 

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

 

Expenses

 

Operating expenses for the years ended December 31, 2013 and 2012 were $2,114,426 and $1,516,430, respectively. The increase in operating expenses in 2013 was attributable to the increase in selling and marketing expenses, such as advertising, shipping and handling, and exhibition expenses, etc.

  

Cost of Goods Sold

 

Cost of goods sold included expenses directly related to the manufacturing and selling our products. Product delivery and direct labor would be examples of cost of goods sold items. During the year ended December 31, 2013, we had $7,286,184 in cost of goods sold, or 77.8% of sales revenue. During the year ended December 31, 2012, we had $3,065,050 in cost of goods sold, or 86.3% of sales revenue. The gross margin of fresh fruits products typically ranges between 5-10%.We expect to reduce the cost of goods sold through collaboration with more non-related suppliers, which will also help us to reduce the risk of concentration.

 

(15)

 

Liquidity and Capital Resources

 

Cash flows used in operating activities were $599,157 for the year ended December 31, 2013, compared to cash flows of $865,680 provided by operating activities for the year ended December 31, 2012. Negative cash flows from operations in 2012 were due primarily to the increase in accounts receivable, inventories, prepaid expenses and advance to suppliers in the amount of $3,589,453, $1,455,726, $156,215 and $597,458, respectively, partially offset by the net income of $166,622, plus the increase in accounts payable and other payables and accrued liabilities in amount of $4,151,415 and $479,903, respectively.

 

Positive cash flows from operations in 2012 were due primarily to the decrease in inventories and prepaid expenses in the amount of $271,476 and $1,452,803, respectively, and the increase in other payables and accrued liabilities by $432,361 and increase in customer deposit by $249,771, partially offset by the increase in accounts receivable and advance to suppliers by $109,387 and $1,565,386, respectively.

 

Cash flows used in investing activities were $396,195 and $830,051 during the years ended December 31, 2013 and 2012, respectively, due primarily to the purchase of property and equipment, which was $380,291 and $488,896 during the year of 2013 and 2012, respectively, and purchase of intangible assets, which was $14,758 and $341,155 during the year of 2013 and 2012, respectively.

 

Cash flows provided by financing activities were $904,041 for the year ended December 31, 2013, compared to cash flows of $507,763 used in financing activities for the year ended December 31, 2012. Cash flows from financing activities in 2013 were due primarily to the proceeds of $511,599 from related parties’ loan, and proceeds from notes payable in total of $1,963,864, bearing annual interest at a rate of 7.0% per annum, of which $981,932 is due on July 20, 2014, and the remaining balance is due on December 20, 2014, partially offset by the payments to notes payable in amount of $1,571,422.

 

Negative cash flows from financing activities in 2012 were due primarily to payments on notes payable and due to stockholders in amount of $820,584 and $209,933, respectively, offset by the proceeds of $522,754 from issuance of note payable to related party.

 

We project that we will need additional capital to fund operations over the next 12 months. We anticipate we will need an additional $1,000,000 for the year of 2014.

 

Overall, we have funded our cash needs from inception through December 31, 2013 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.

    

We had cash of $40,217 on hand as of December 31, 2013. Currently, we do not have enough cash to fund our operations for about six months. This is based on current cash flows from operating activities and projected revenues. In addition, if the projected revenues fall short of needed capital we may not be able to sustain our capital needs. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $1,000,000 per year starting in 2014. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.

 

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

 

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

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

        

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

 

(16)

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

Foreign Exchange Rates

 

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

 

Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We recorded net foreign currency gains of $84,886 in fiscal 2013. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.

 

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

 

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

 

  2013   2012  
Balance sheet items, except for the registered and paid-up capital as of December 31, 2013 and 2012

 

USD 1:RMB 6.1104

  

 

USD 1:RMB 6.3011

  
Amounts included in the statement of operations, statement of changes in stockholders’ equity and statement of cash flows for the years ended December 31, 2013 and 2012

 

USD 1:RMB 6.1905

  

 

USD 1:RMB 6.3034

  

  

(17)

 

 

ITEM 8. FINANCIAL STATEMENTS

 

To: The Board of Directors and Stockholders of

China Fruits Corp.

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

We have audited the accompanying consolidated balance sheets of China Fruits Corporation as of December 31, 2013 and 2012, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Fruits Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 18 to the financial statements, the Company had incurred substantial losses in previous years and has a working capital deficit, all of which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 18. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

San Mateo, California WWC, P.C.
March 25, 2014 Certified Public Accountants

 

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China Fruits Corporation
Consolidated Balance Sheets
As of December 31, 2013 and 2012
(Stated in US Dollars) 
      Dec 31, 2013   Dec 31, 2012
Current Assets   Notes                  
Cash & Cash Equivalents         $ 40,217     $ 46,642  
Accounts Receivable, Net   3       4,075,765       486,312  
Other Receivable, Net   4       141,363       80,811  
Advance to Supplies   5       2,162,844       1,565,386  
Inventories   6       1,566,556       110,830  
Prepaid Expense   7       67,862       24,599  
Refundable Tax           266,719       142,065  
TOTAL CURRENT ASSETS         $ 8,321,326     $ 2,456,645  
                       
Noncurrent Assets                      
Property, Plant & Equipment, Net   8     $ 3,370,148     $ 3,256,987  
Construction in Progress           1,146       —    
Intangible Assets, Net   9       331,697       346,501  
Other Long-term Asset Deposit           24,548       36,250  
Organization Cost/ L/T Amortization           4,479       28,567  
    TOTAL NON-CURRENT ASSETS           3,732,018       3,668,305  
                       
TOTAL ASSETS         $ 12,053,344     $ 6,124,950  
                       
LIABILITIES & STOCKHOLDERS' EQUITY                      
                       
CURRENT LIABILITIES                      
  Accounts payable         $ 4,238,843     $ 87,428  
Notes Payable – Current Portion   10       2,479,379       1,587,024  
                       
Customer Deposit   11       493,164       585,341  
Taxes Payable           261,286       27,582  
Other Payables           657,952       427,895  
Due to Related Parties   12       1,074,031       562,431  
Accrued liabilities and Payroll Tax Liabilities           354,489       104,643  
  TOTAL CURRENT LIABILITIES         $ 9,559,144     $ 3,382,344  
                       
                       
LONG-TERM LIABILITIES                      
Note Payable-Longterm   13       —         499,913  
Due to stockholders           —         —    
  TOTAL LONG TERM LIABILITIES           —         499,913  
                       
TOTAL LIABILITIES         $ 9,559,144     $ 3,882,257  
                       
STOCKHOLDERS' EQUITY                      
Common stock, par value $.001, 100,000,000 shares authorized, 49,951,223 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively         $ 49,951     $ 49,951  
Preferred stock, 200,000,000 shares authorized, designated as Series A and B.
Series A: par value $.001; 2,000,000 shares authorized, 13,150 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively		           13       13  
Series B; par value $0.001, voting; 50,000,000 shares authorized, 12,100,000 shares issued and outstanding as of December 31, 2013 and December 31, 2012, respectively           12,100       12,100  
Additional Paid in Capital           3,789,864       3,789,864  
Statutory Reserve           170,950       129,636  
Retained Earnings           (2,003,096 )     (2,128,404 )
Accumulated Other Comprehensive Income           474,419       389,533  
TOTAL STOCKHOLDERS’ EQUITY           2,494,201       2,242,693  
                       
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY           12,053,344       6,124,950  
 
See Accompanying Notes to Financial Statements and Accountant’s Report

 

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China Fruits Corporation
Consolidated Statements of Income
For the years ended December 31, 2013 and 2012
(Stated in US Dollars)
        Twelve Months Ended
  Note   Dec 31, 2013   Dec 31, 20132
                         
 REVENUES:                        
Sales           $ 9,369,901     $ 3,550,674  
Cost of Goods Sold             7,286,184       3,065,050  
   GROSS PROFIT             2,083,717       485,623  
                         
OPERATING EXPENSES:                        
Selling Expenses             1,262,369       545,988  
General and Administrative             852,056       970,442  
TOTAL OPERATING EXPENSES             2,114,426       1,516,430  
Operating Income/(Loss)             (30,708 )     (1,030,806 )
                         
OTHER INCOME (EXPENSE):                        
Other Income             18,780       22,064  
Other Expense             —         (156,910 )
Interest Income             120       305  
Interest Expense             (131,316 )     (143,589 )
Government Grants     14       409,160       1,220,920  
TOTAL OTHER INCOME (LOSS) & EXPENSE             296,744       942,790  
                         
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES             266,036       (88,016 )
Income Tax Expense             99,414       —    
NET Income/(loss)             166,622       (88,016 )
                         
Other compressive income                        
-Foreign currency translation gain/(loss)             84,886       (74 )
                         
COMPREHENSIVE (LOSS)             251,508       (88,090 )
(Loss) per common share:     15                  
Basic and fully diluted             $             **       $             **  
Weighted Average Number of Common Shares Outstanding – Basic and Fully Diluted             49,951,223       49,951,223  
**Less than $0.01                        
See Accompanying Notes to Financial Statements and Accountant’s Report

 

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China Fruits Corporation
Consolidated Statements of Stockholders’ Equity
As of December 31, 2013 and 2012
(Stated in US Dollars)
      Common Stock (Shares)       Series "A" Preperred (Shares)       Series "B" Preferred (Shares)       Common Stock (Amount)       Series "A" Preperred (Amount)       Series "B" Preferred (Amount)       Additional paid in capital       Statutory Reserve       Accumulated other Comprehensive Income (Loss)       Accumulated Deficit       Total  
                                                                                         
Balance at January 1, 2012     49,951,223       13,150       12,100,000       49,951       13       12,100       3,789,864       62,719       389,607       (1,973,471 )     2,330,783  
Net income                                                                             (88,016 )     (88,016 )
Appropriations to statutory reserves                                                             66,917               (66,917 )     —    
Foreign currency translation adjustment                                                                     (74 )             (74 )
Balance at December 31, 2012     49,951,223       13,150       12,100,000       49,951       13       12,100       3,789,864       129,636       389,533       (2,128,404 )     2,242,693  
                                                                                         
                                                                                         
Balance at January 1, 2013     49,951,223       13,150       12,100,000       49,951       13       12,100       3,789,864       129,636       389,533       (2,128,404 )     2,242,693  
Net income                                                                             166,622       166,622  
Appropriations to statutory reserves                                                             41,314               (41,314 )     —    
Foreign currency translation adjustment                                                                     84,886                  
Balance at December 31, 2013     49,951,223       13,150       12,100,000       49,951       13       12,100       3,789,864       170,950       474,419       (2,003,096 )     2,494,201  
 
See Accompanying Notes to Financial Statements and Accountant’s Report

 

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China Fruits Corporation
Consolidated Statements of Cash Flows
For the years ended December 31, 2013 and 2012
(Stated in US Dollars)
   
Twelve Months Ended
    12/31/2013   12/31/2012
Cash Flows from Operating Activities    
 Net (loss)     166,622     $ (88,016 )
 Adjustments to reconcile net loss to net     —            
 Cash provided by (used in) operating activities:                
Depreciation and Amortization     320,782       163,794  
(Increase) decrease in operating assets:                
Accounts receivable     (3,589,453 )     (109,387 )
Inventories     (1,455,726 )     271,476  
Other assets     (60,552 )     11,221  
Prepaid expenses and other current assets     (156,215 )     1,452,803  
Advance to suppliers     (597,458 )     (1,565,386 )
 Increase (decrease) in operating activities:                
Accounts payable     4,151,415       19,460  
Other payables and accrued liabilities     479,903       432,361  
Tax payable     233,702       27,583  
Customer deposit     (92,177 )     249,771  
      Net cash (used in) provided by Operating Activities     (599,157 )     865,680  
                 
Cash Flows from Investing Activities                
Construction in progress     (1,146 )     —    
Increase in property and equipment     (380,291 )     (488,896 )
Increase in intangible assets     (14,758 )     (341,155 )
      Net cash provided (Used in) by Investing Activities     (396,195 )     (830,051 )
                 
Cash Flows from Financing Activities                
   Loan from related party     511,599       —    
Proceeds from Notes Payable     1,963,864          
Payments on Notes Payable     (1,571,422 )     (820,584 )
Proceeds from issuance of note payable-related party     -       522,754   
Due to stockholders           (209,933 ) 
   Net cash provided by (used in) Financing Activities     904,041       (507,763 )
                 
Foreign currency translation adjustment     84,886       (74 )
                 
Net increase/(decrease) in cash & cash equivalents for the periods     (6,425 )     (472,208 )
                 
Cash & cash equivalents:                
   Beginning of period     46,642       518,850  
   End of period     40,217       46,642  
                 
Supplementary disclosures of cash flows information:                
Cash paid for interest     124,937       143,588  
Cash paid for income taxes     —         —    
                 
See Accompanying Notes to Financial Statements and Accountant’s Report

 

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China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES

 

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

 

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

 

The stock exchange transaction involved two simultaneous transactions:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)  Basis of presentation

 

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

 

(b)  Use of estimates

 

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

 

(c)  Basis of consolidation

 

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

 

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

 

(d)  Revenue recognition

 

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

 

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

 

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

 

(e)  Cost of revenue

 

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

 

 

(f)  Accounts receivable

 

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

 

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China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

 

(g) Inventories

 

Inventories consist of finished goods and are valued at lower of cost or market value, cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  The spoilage will be written-off directly to the profit and loss when it occurs.

 

(h) Plant and equipment, net

 

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

 

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

 

Expenditure for maintenance and repairs is expensed as incurred.

 

(i)  Impairment of long lived assets

 

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

 

(j)  Comprehensive income (loss)

 

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

 

(k)  Income taxes

 

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

 

(l)  Net loss per share

 

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

 

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China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

 

(m)  Foreign currencies translation

 

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

 

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

 

(n)  Retirement plan costs

 

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

 

(o)  Related parties

 

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence. A material related party transaction has been identified in Note 10 in the financial statements.

 

(p)  Fair value of financial instruments

 

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

 

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

 

 

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

 

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2013 and December 31, 2012 nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the year ended December 31, 2013 and December 31, 2012, respectively.

 

(q)  Subsequent Events

 

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

 

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China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

(r)  Recently Issued Accounting Standards

 

In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”). The Update clarifies that ordinary trade receivables and receivables are not in the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, Update 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification® or subject to a master netting arrangement or similar agreement. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial position or results of operations.

 

For public entities, the amendments that are subject to the transition guidance is effective for fiscal periods beginning after December 15, 2012. Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial position or results of operations.

 

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The amendments require an organization to:

 

  a) Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income–but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.
     
  b) Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
     

 

The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial position or results of operations.

 

In February 2013, the FASB issued ASU No. 2013-03, “Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities” (“ASU 2013-03”). The amendment clarifies that the requirement to disclose the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (as Level 1, Level 2, or Level 3) does not apply to private companies and nonpublic not-for-profits for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. The amendments are effective upon issuance. Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial position or results of operations.

 

In March 2013, the FASB issued ASU No. 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”). The update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in US GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Management does not expect the adoption of this standard will have a significant effect on the Company’s consolidated financial position or results of operations.

 

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” (“ASU 2013-05”). The ASU clarifies that when a parent entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in Accounting Standards Codification 830-30 to release any related cumulative translation adjustment into net income. The ASU provides that the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The amendments take effect prospectively for public companies for fiscal years beginning after December 15, 2013, and interim reporting periods within those years. Management does not expect the adoption of this standard will have a significant effect on the Company’s consolidated financial position or results of operations.

 

In March 2013, the FASB issued ASU No. 2013-07, “Liquidation Basis of Accounting” (“ASU 2013-07”). The ASU requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation would be considered imminent when the likelihood is remote that the reporting entity would return from liquidation and either: (a) a plan for liquidation has been approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or the entity will return from liquidation, or (b) a plan for liquidation is imposed by other forces, and the likelihood is remote that the entity will return from liquidation. If a plan for liquidation was specified in an entity's governing documents at its inception (for example, limited-life entities), then liquidation would be imminent only if the approved plan for liquidation differs from the plan specified at the entity’s inception. The amendments take effect for all entities reporting under U.S. GAAP, except investment companies that are regulated under the Investment Company Act of 1940. The standard is effective for annual reporting periods beginning after December 31, 2013, and interim reporting periods therein. Early adoption is permitted. Management does not expect the adoption of this standard will have a significant effect on the Company’s consolidated financial position or results of operations.

 

In March 2013, the FASB issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not anticipate that the adoption of this standard will have a significant impact on the Company’s financial position, results of operations or cash flows. Management does not expect the adoption of this standard will have a significant effect on the Company’s consolidated financial position or results of operations.

 

In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. The guidance further requires that when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company does not anticipate that the adoption of this standard will have a significant impact on the Company’s financial position. Management does not expect the adoption of this standard will have a significant effect on the Company’s consolidated financial position or results of operations.

 

As of December 31, 2013, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.

 

 

(27)

China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

3. ACCOUNTS RECEIVABLE, NET

 

The majority of the Company’s sales is cash on delivery, or secured by customer deposits. A small portion of our revenues is on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. The Company did not experience significant losses from uncollectible accounts in the past; accordingly, the management decided to accrue one percent of the accounts receivable outstanding within one year and a hundred percent of the accounts receivable outstanding for longer than one year as bad debt allowance as of December 31, 2013 and December 31, 2012, respectively.

 

 

Accounts Receivable                
      12/31/2013       12/31/2012  
Accounts receivable   $ 4,116,934     $ 498,026  
Less: Allowance for bad debt     (41,169 )     (11,714 )
Accounts receivable, net   $ 4,075,765     $ 486,312  

 

4. OTHER RECEIVABLES

 

The Company advances money to several third parties during business operation. These receivables bear no interest and due on demand except otherwise noted. As of December 31, 2013 and December 31, 2012, the Company had other receivables of $141,363 and $80,811, respectively. 

 

5. ADVANCE TO SUPPLIERS

 

As of December 31, 2013 and December 31, 2012, the Company had made advance to suppliers of $2,162,844 and $1,565,386, respectively for the purchases of inventories. 

 

Advance to Suppliers                
      12/31/2013       12/31/2012  
Deposit for purchases of tangerines   $ 2,152,312     $ 1,437,527  
Others     10,532       127,859  
Advance to Suppliers   $ 2,162,844     $ 1,565,386  

 

(28)

 

China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

 

6. INVENTORIES 

 

Inventories as of December 31, 2013 and December 31, 2012 consisted of the following:

 

      12/31/2013       12/31/2012  
Finished goods   $ 77,059     $ 84,352  
Raw materials     1,461,932       16,154  
Packing materials     27,454       10,324  
Other supplies     111       —    
Total   $ 1,566,556     $ 110,830  

 

The Company performs physical inventory count on a regular basis and instead of recording an allowance for spoilage, the spoilage will be written-off directly to the income statement when it occurs. The spoilage rate is approximately 2% of average inventory. 

 

7. PREPAID EXPENSES 

 

As of December 31, 2013 and December 31, 2012, the Company had prepayment of $67,862 and $24,599, respectively, consisted of the following:

 

      12/31/2013       12/31/2012  
Prepaid Rent   $ 60,007     $ 24,599  
Other     7,855       —    
Prepaid expenses   $ 67,862     $ 24,599  

 

8. PLANT AND EQUIPMENT, NET

 

Plant and equipment, net as of December 31, 2013 and December 31, 2012 consisted of the following: 

 

12/31/2013     At Cost       Accumulated Depreciation       Net  
Buildings   $ 3,643,458     $ (703,963 )   $ 2,939,496  
Machinery & equipment     211,471       (42,617 )     168,854  
Motor vehicles     146,564       (69,740 )     76,823  
Office equipment     278,678       (123,509 )     155,169  
Others     38,314       (8,508 )     29,806  
Total   $ 4,318,485     $ (948,337 )   $ 3,370,148  

 

 

12/31/2012     At Cost       Accumulated Depreciation       Net  
Buildings   $ 3,326,778     $ (529,876 )   $ 2,796,902  
Machinery & equipment     205,071       (21,391 )     183,680  
Motor vehicles     142,128       (36,736 )     105,392  
Office equipment     256,905       (87,378 )     169,527  
Others     7,313       (5,827 )     1,486  
Total   $ 3,938,195     $ (681,208 )   $ 3,256,987  

 

9. INTANGIBLE ASSET, NET

 

Intangible asset, net as of December 31, 2013 and December 31, 2012 consisted of the following:

 

      12/31/2013       12/31/2012  
Land use right     480,729       443,616  
Computer Software     6,972       6,761  
                 
Less:accumulated amortization     (156,004 )     (126,440 )
Intangible asset, net     331,697       346,501  

(29)

 

 

China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

10. NOTE PAYABLE - CURRENT PORTION 

 

As of December 31, 2013 and December 31, 2012, the Company had short-term loan of $2,479,379 and $1,587,024, respectively, from various local banks. The detailed terms were set forth as follows: 

 

      12/31/2013       12/31/2012  
Bank of China, 6.5% annual interest, due on November 17, 2013   $ —       $ 1,587,024  
Bank of China, 7.0% annual interest, due on July 20, 2014     981,932       —    
Bank of China, 7.0% annual interest, due on December 20, 2014     981,932       —    
Local Government, zero interest, due on no later than November 30, 2013     515,515       —    
    $ 2,479,379     $ 1,587,024  

 

The subsidiary of the Company, Jiangxi Taina Nanfeng Orange Co., Ltd. has borrowed two loans with the total amount of $1,963,865 (RMB 12,000,000) from Bank of China with a 7.8% annual interest rate and due date on June 2, 2014 and December 2, 2014 respectively. And as written in agreement, the lender, Bank of China, requires the borrower, Jiangxi Taina Nanfeng Orange Co., Ltd to secure this loan with collaterals of its land and real estates located in Nanfeng. 

 

Jiangxi Taina Nanfeng Orange Co., Ltd. has also borrowed loans from local government with the following provisions:

    12/31/2013   12/31/2012
Local Government, zero interest, due on no later than November 30, 2012     73,645       71,417  
Local Government, zero interest, due on no later than November 30, 2013     73,645       71,416  
Local Government, zero interest, due on no later than November 30, 2012     184,112       178,540  
Local Government, zero interest, due on no later than November 30, 2013     184,112       178,540  
      515,515       499,913  

 

 

All balances were supposed to be paid by or before November 30, 2013. However, Jiangxi Taina is applying for extension of the repayment date and no repayment were made by December 31, 2013.

 

11. CUSTOMER DEPOSIT

 

As of December 31, 2013 and December 31, 2012, the Company had customer deposits of $493,164 and $585,341, respectively, representing payments received for orders not yet shipped or payments from customers for prepaid membership cards. 

 

12. DUE TO RELATED PARTIES

 

As of December 31, 2013 and December 31, 2012, the Company had loan payable to related party of $1,074,031 and $562,431, respectively. These loans bear no interest and are due within one year.

 

      12/31/2013       12/31/2012  
Due to shareholders   $ 435,774     $ 305,333  
Loan from related party     638,257       —    
Related parties:                
Turner International Investment Management (Beijing) Co., Ltd.     —         103,157  
1)      Turner International Fruit Chain Management (Beijing) Co., Ltd.     —         153,941  
2)      Total   $ 1,074,031     $ 562,431  

 

 

The shareholder paid all necessary overseas consulting and advising fees, lawyer fees, and accounting fees from period to period out of his own personal bank accounts in the United States due to the strict laws and regulations imposed by the Chinese government on out-going foreign currency wire transfers. The amount outstanding as of December 31, 2013 and December 31, 2012 was $435,774 and $305,333 respectively. The balance due to stockholders was not evidenced by a promissory note, but rather is an oral agreement between the shareholder and the Company.

 

During October and November 2013, four related parties issued four promissory notes to the Company amounting to $638,257 (RMB 3,900,000) with a term of one year with an interest rate of 6% per annum. Interest expense accrued for the four promissory notes for the year ended December 31, 2013 was $6,285. 

 

13. NOTE PAYABLE - LONG TERM

 

Long-term notes payable as of December 31, 2013 and December 31, 2012 consisted of following:

 

    12/31/2013   12/31/2012
Local Government, zero interest, due on no later than November 30, 2013     —         499,913  
Total   $ —       $ 499,913  

 

 

14. GOVERNMENT GRANTS

 

For the one year period ended December 31, 2013 and December 31, 2012, the Company received grants and rewards from local government in amount of $409,160 and $1,220,920 respectively. The governmental grants were to encourage the Company’s efforts on modern agricultural development. These grants were interest-free and bear no repayment requirements. 

 

 

15. NET GAIN/LOSS PER SHARE

 

Basic net gain/loss per share is computed using the weighted average number of the ordinary shares outstanding during the periods. 

 

The following table sets forth the computation of basic net gain/loss per share for the twelve months ended December 31, 2013 and 2012, respectively:

 

    For the twelve months ended
    12/31/2013   12/31/2012
  Net Gain/(Loss)     $ 172,907     $ (88,016 )
  Net Gain/(Loss) Per Share – Basic       **       **  
  Weighted Average Number of Shares Outstanding – Basic       49,951,223       49,951,223  

  

** Less than $0.01

 

 

 

(30)

 

China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

16. CONCENTRATION AND RISKS 

 

(a) For the twelve months ended December 31, 2013, 100% of the Company’s assets were located in the PRC and approximately 11% of the Company’s revenues were derived from customers located in the PRC, other revenues were mainly derived from customers located in Thailand, Dubai and Malaysian.

 

For the year ended December 31, 2013, major customers with their revenues are presented as follows:

 

Customers     Revenue       %  
Customer A   $ 1,615,489       17 %
Customer B     1,218,894       13 %
Customer C     579,939       6 %
Revenue as of December 31, 2013   $ 9,369,901          

 

 

 

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

 

Customers     Revenue       %  
Customer A   $ 406,180       11 %
Customer B     396,503       11 %
Customer C     301,916       9 %
Revenue as of December 31, 2012   $ 3,550,674          

 

 

(b) Credit risk

 

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

 

 

17. COMMITMENT AND CONTINGENCIES

 

 The Company rented plant, office, and retailing spaces under a non-cancelable operating lease agreement. On March 3, 2012, the Company entered into a five-year lease agreement for an additional warehouse and logistic space to store, pack and deliver fresh fruits. The lease term is from March 10, 2012 through March 9, 2017, and the total rental payment is approximately $726,920. Accordingly, the remaining three years minimum rental payments for that warehouse required as of January 1, 2014 are as follows:

 

 

Year ended December 31 Lease payment
2014  $                   145,384
2015  $                   161,538
2016  $                   177,692
Total  $                   484,614

 

 

For year ended December 31, 2013, total rental expense for China Fruits Corporation was $340,979.

 

(31)

 

China Fruits Corporation

Notes To Consolidated Financial Statements

December 31, 2013 and 2012

(Stated in USD)

 

 

 

18. GOING CONCERN UNCERTAINTIES

 

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

 

As of December 31, 2013, the Company had retained deficits of $1,996,811 and working capital deficit of current liabilities exceeding current assets by $593,276 due to the substantial losses in operation in previous years and default of its senior notes payable. Management has taken certain action and continues to implement changes designed to improve the Company's financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in headcount and corporate overhead expenses; and (b) obtainment of new capital from investors and (c) obtainment of new short-term bank loans to finance their working capital, and long-term loans to fund our capital expenditure projects. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through December 31, 2014. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company's ability to continue as a going concern. 

 

19. 2012 COMPARATIVE FIGURES

 

The 2012 comparative figures are from re-audit of 2012 by our firm as required by SEC as a result of PCAOB revoked the registration of the previous auditor Lake & Associates CPAs, LLC. whose 2012 audit report was dated April 12, 2013 filed with the issuer’s form 10-K to SEC on April 15, 2013. 

 

20. SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to December 31, 2013 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statement.

 

(32)

 

 

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

 

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

ITEM 9A(T). CONTROLS AND PROCEDURES

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

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Exchange Act as of December 31, 2013, and, based on their evaluation, as of the end of such period, the our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.  

(b)Management’s report on internal control over financial reporting. It is management’s responsibilities to establish and maintain adequate internal controls over the Company’s financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
  • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
  • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management of the issuer; and
  • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

 

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

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

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

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

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

(c)Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

(33)

 

 

PART III

 

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

 

Directors and Executive Officers

 

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

 

 Name Age Position Date to Start
Chen, Quan Long 54 President, Chief Executive Officer and Chairman   June 1, 2006
Li, Ze 31 Chief Financial Officer          September 1, 2011

 

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

 

Mr. Chen, Quan Long, aged 54, obtained a Master of Business Administration degree at Beijing University. His prior work experience is primarily in corporate. He was chairman of Fei Huan Group, a corporation organized and existing under the laws of the Peoples' Republic of China ("Fei Huan Group"), from October 1988 to December 2001. Since January 2002, he was Chairman of Fei Huan Wine, Inc., an affiliate of Fei Huan Group. Mr. Chen’s duties with Fei Huan Group included management of their beverage processing and distribution. Mr. Chen is a member of the Chinese Entrepreneurial Association.

 

Li, Ze - Chief Financial Officer

 

Mr. Li, Ze, aged 31, received his bachelor degree in business administration from Northern Industrial University, major in Accounting. From July 2006 through March 2009, Mr. Li worked as accountant in Beijing Agricultural, Industrial & Commercial Trading Company. Prior to the appointment as our Chief Financial Officer, Mr. Li has worked as senior accountant, assistant manager, and manager of Accounting Department in Tai Na International Fruits (Beijing) Co. Ltd. since June 2009. Mr. Li has systematic knowledge about accounting and finance. He is experienced in accounting regulations, rules and policies, sophisticated in taxation, corporate finance and internal control system.

 

Family Relationships.

 

None.

 

Legal Proceedings.

 

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

 

Audit Committee

 

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

 

Code of Ethics

 

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

 

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

 

  • Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by the small business issuer

• Compliance with applicable governmental laws, rules and regulations

The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code

• Accountability for adherence to the code

 

Section 16(a) Beneficial Ownership Reporting Compliance

    

Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and we are required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 2013. We believe that all of these filing requirements were satisfied by our executive officers, directors and by the beneficial owners of more than 10% of our common stock. In making this statement, hawse have relied solely on copies of any reporting forms received by it, and upon any written representations received from reporting persons that no Form 5 (Annual Statement of Changes in Beneficial Ownership) was required to be filed under applicable rules of the Commission.

 

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 ITEM 11. EXECUTIVE COMPENSATION

 

The following table sets forth certain information regarding the annual and long-term compensation for services in all capacities to us for the prior fiscal years ended December 31, 2013, 2012 and 2011, of those persons who were either the chief executive officer during the last completed fiscal year or any other compensated executive officers as of the end of the last completed fiscal year, and whose compensation exceeded $100,000 for those fiscal periods.

 

SUMMARY COMPENSATION TABLE  

Name and principal position

(a)

Year

(b)

Salary ($)

(c)

Bonus ($)

(d)

Stock Awards ($)

(e)

Option Awards ($)

(f)

Non-Equity Incentive Plan Compensation ($)

(g)

Nonqualified Deferred Compensation Earnings ($)

(h)

All Other Compensation ($)

(i)

Total ($)

(j)

  

Chen, Quan Long

President, CEO & Chairman

 

 

2013

 

 $13,570  

 

0

 

0

 

0

 

0

 

0

 

$13,570

  

 

2012

 

 

$8,559

 

0

 

0

 

0

 

0

 

0

 

0

 

$8,559

  

 

2011

 

 $7,260 0 0 0 0 0 0 $7,260  
                   

Li, Ze

Chief Financial Officer

 

2013

 

 

$7,754

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

$7,754

 

      
2012 $7,608 0 0 0 0

 

 

0

 0 $7,608  
2011 $6,355 0 0 0 0

 

 

0

 0 $6,355  

 

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

 

Stock Option Plan

 

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

 

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

 

As of March 25, 2014, we had 3,634 stockholders of record and 49,951,223 shares of our Common Stock, 13,150 shares of our Series A Preferred Stock and 12,100,000 Series B Preferred Stock issued and outstanding. The following table sets forth as of March 25, 2014, certain information with respect to the beneficial ownership of Common Stock by (i) each of our Director, nominee and executive officer; (i) each person who owns beneficially more than 5% of the common stock; and (iii) all Directors, nominees and executive officers as a group. The percentage of shares beneficially owned is based on there having been 49,951,223 shares of our Common Stock, 13,150 shares of our Series A Preferred Stock and 12,100,000 Series B Preferred Stock issued and outstanding as of March 25, 2014.

 

OFFICERS, DIRECTORS AND BENEFICIAL OWNERS, AS OF MARCH 25, 2014

 

Title of Class Name & Address of Beneficial Owner(1) Amount & Nature of Beneficial Owner % of Class(2)
       
Series A Preferred Stock, $.001 par value

Chen, Quan Long

Room 503, Building 53, QianXi District, DaDao Road, NanFeng County, JiangXi, P.R.China 344500

 13,150 100%
Series A Preferred Stock, $.001 par value All directors and executive officers as a group (one person) 13,150 100%
       
Series B Preferred Stock, $.001 par value

Chen, Quan Long

Room 503, Building 53, QianXi District, DaDao Road, NanFeng County, JiangXi, P.R.China 344500

 12,100,000 100%
Series B Preferred Stock, $.001 par value All directors and executive officers as a group (one person) 12,100,000 100%
       

Common Stock,

$.001 par value

Huang, Chun Feng

1 Chen Qiang Rd, Qin Cheng Town

NanFeng County, JiangXi

P.R.China

 3,612,715 7.23%

Common Stock,

$.001 par value

Tan, Mei

3 Lv You Gang, Qin Cheng Town

NanFeng County, JiangXi

P.R.China

 4,580,815 9.17%

Common Stock,

$.001 par value

Chen, Quan Long

Room 503, Building 53, QianXi District, DaDao Road, NanFeng County, JiangXi, P.R.China 344500

 665,416 1.33%
       

Common Stock

$.001 par value

 All directors and executive officers as a group (one person) 665,416 1.33%

 

** Represents less than 1%

 

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

 

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

 

Changes in Control

 

None.

 

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

 

None.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Fees Billed For Audit and Non-Audit Services

 

The following table represents the aggregate fees billed for professional audit services rendered to the independent auditor, WWC, P.C. (“WWC”), for our audit of the annual financial statements for the years ended December 31, 2013 and 2012. Audit fees and other fees of auditors are listed as follows:

 

Year Ended December 31   2013(2)   2012 (3)
         
Audit Fees (1)   $       42,000   $        27,000
Audit-Related Fees (4)   --   --
Tax Fees (5)   --   --
All Other Fees (6)   --   --
Total Accounting Fees and Services   $        42,000   $        27,000
         

 

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

 

  (2) The amounts shown in 2013 relate to (i) the audit of our annual financial statements for the fiscal year ended December 31, 2013, and (ii) the review of the financial statements included in our filings on Form 10-Q for the quarters of 2014.

 

  (3) The amounts shown in 2012 relate to (i) the re-audit of our annual financial statements for the fiscal year ended December 31, 2012.

 

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

 

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

 

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

  

Pre-Approval Policy for Audit and Non-Audit Services

 

We do not have a standing audit committee, and the full Board performs all functions of an audit committee, including the pre-approval of all audit and non-audit services before we engage an accountant. All of the services rendered to us by WWC, P.C. were pre-approved by our Board of Directors.

 

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

 

    (a) On December 31, 2013, our Chief Executive Officer and Chief Financial Officer made an evaluation of our disclosure controls and procedures. In our opinion, the disclosure controls and procedures are adequate because the systems of controls and procedures are designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows for the respective periods being presented. Moreover, the evaluation did not reveal any significant deficiencies or material weaknesses in our disclosure controls and procedures.

 

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

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)   Financial Statements

 

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

 

Report of Independent Registered Public Accounting Firm Balance Sheet at December 31, 2013

Statements of Operations - for the years ended December 31, 2013 and 2012

Statements of Cash Flows - for the years ended December 31, 2013 and 2012

Statements of Stockholders’ Equity - for the years ended December 31, 2013 and 2012

Notes to Financial Statements 

 

2. Exhibits

 

14.1 Code of Ethics *

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

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

32.1. Section 1350 Certifications of Chief Executive Officer

32.2. Section 1350 Certifications of Chief Financial Officer

 

 101.INS XBRL Instance Document**
101.PRE XBRL Taxonomy Extension Presentation Linkbase **
101.LAE XBRL Taxonomy Extension Label Linkbase **
101.DEF XBRL Taxonomy Extension Definition Linkbase **
101.SCH XBRL Taxonomy Extension Schema **

 

* Filed previously.

 

(b)   Reports on Form 8-K

 

1.On October 30, 2013, the Company filed a current report on Form 8-K to announce changes in Registrant’s Certifying Accountant of the Company. An amendment to the Form 8-K was subsequently filed on November 12, 2013.

 

 

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SIGNATURES

 

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

 

     
     

China Fruits Corporation

 

   
Date: March 25, 2014   /s/ Chen, Quan Long
    Chen, Quan Long
    President
       

 

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