10-K 1 v197574_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549

(Mark One)
FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2010
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to ________________

Commission file number:  000-51060
 
CHINA HEALTH INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
86-0827216
State of other jurisdiction of
incorporation or organization
 
(I.R.S. Employer Identification No.)
 
168 Binbei Street, Songbei District, HarbinCity
HeilongjiangProvince, People’s Republic of China
 
150028
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: 011-86-451-5553-9531

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
     
     
     
     
Securities registered pursuant to section 12(g) of the Act:
 
Common Stock, $0.0001 par value
Title of Class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ¨ Yes x No

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 x No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ¨ Yes ¨ 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨
   
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   ¨ Yes     x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Note.—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and , the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

The aggregate market value of the voting and non-voting common stock of the issuer held by non-affiliates as of  December 31, 2009 was approximately$19,003,821.85 (29,236,649 shares of common stock held by non-affiliates)  based upon the closing price of the common stock as quoted by OTC Bulletin Board on such date.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes ¨ No

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
As of September 27, 2010, there are presently 62,239,737shares of common stock, par value $0.0001issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
 
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 
 

 

Table of Contents
 
       
Page
         
Part I
       
         
Item 1
 
Business
 
3
         
Item 1A
 
Risk Factors
 
13
         
Item 1B
 
Unresolved Staff Comments
 
21
         
Item 2
 
Properties
 
21
         
Item 3
 
Legal Proceedings
 
21
         
Item 4
 
 (Removed and Reserved)
 
21
         
Part II
       
         
Item 5
 
Market for the Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
22
         
Item 6
 
Selected Financial Data
 
23
         
Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
23
         
Item 8
 
Financial Statements and Supplementary Data
 
31
         
Item 9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
32
         
Item 9A
 
Controls and Procedures
 
32
         
Item 9B
 
Other Information
 
33
         
Part III
       
         
Item 10
 
Directors, Executive Officers and Corporate Governance
 
33
         
Item 11
 
Executive Compensation
 
37
         
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
38
         
Item 13
 
Certain Relationships and Related Transactions, and Director Independence
 
39
         
Item 14
 
Principal Accounting Fees and Services
 
39
         
Part IV
       
         
Item 15
 
Exhibits, Financial Statement Schedules
 
40

 
2

 

PART I

Item 1.  Business.

Our History and Corporate Structure

We were incorporated in the state of Arizona on July 11, 1996 and were the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (Edmonds 6) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.

We began manufacturing systems for outdoor cooling in Arizona and quickly expanded to distribute throughout the United States.  Our primary product was a misting system which consisted of a high pressure pump assembled to specifications.

Pursuant to the Securities Purchase Agreement dated as of September 10, 2007 between the Company, Bontems and Sun Xin, we experienced a change in control whereby Sun Xin acquired a total of 22,000,545 shares of common stock of the Company from Bontems and the Company issued 2,061,200 shares of common stock of the Company to Sun  Xin, such that upon consummation of the agreement, Sun Xin held an aggregate of 24,061,745 shares, or 51.53% of the total issued and outstanding shares of common stock of the Company on a fully-diluted basis.

Pursuant to the Asset Purchase and Sale Agreement dated  September  10, 2007 between the Company and Universal Fog Systems, Inc., we then transferred all our liabilities to the latter on September 10, 2007 and similarly, all our assets on December 31, 2008.

On December 31, 2008, we acquired the business of Harbin Humankind Biology Technology Co. Limited through the acquisition of all the share capital of China Health Industries Holdings Limited under the Share Exchange Agreement dated October 15, 2007.

As a result of the above, China Health Industries Holdings Limited is now our wholly-owned subsidiary. Because Harbin Humankind Biology Technology Co., Limited (“Harbin Humankind”) is a wholly-owned subsidiary of China Health Industries Holdings Limited and Harbin Huimeijia Medicine Company (“Huimeijia”) is in turn a subsidiary whose 99% of its shares are owned by Harbin Humankind, both Harbin Humankind and Huimeijia are our indirect owned subsidiaries.

Business Overview

Harbin Humankind Biology Technology Co., Limited was incorporated under the People’s Republic of China on December 14, 2003 and completed its GMP certification on April 24, 2007.  It is in the business of the manufacture and sale of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies.

Harbin Huimeijia Medicine Company was incorporated on October 14, 2008.   Huimeijia completed its GMP certification on July 23, 2009 and will be producing and selling our medical drugs.

Our business is conducted through chain-stores and, with regard to the sale of our products, eventually over the internet. 

 
3

 

Products

We presently have, through Huimeijia, the license to manufacture 27 medical drugs and have obtained a State Drug Approval Issue number for each of these drugs.  Huimeijia completed its GMP certification on July 23, 2009 and is now authorized to commercially manufacture and sell medical drugs.

We have, through Harbin Humankind, the license to manufacture and sell two health supplement products which have a State Good Health Issue number assigned to each product (as provided below).  In additional Harbin Humankind distributes and sells 52 kinds of health food.

 (i)           Health Supplements

Our “QunLe” brand Sailuozhi soft capsule, which is made from frog oil, soybean isoflavone,  procyanidine (made from grape seeds) and vitamin C, is for freckle removal and supplementing the water content of the skin. The certification number issued by the State Food and Drug Administration on August 29, 2007 is 2007B0837.

In May 12, 2010, we received a patent for this product (200610010394.4) under the name “Run Chao” (which has now been changed to “Qunle”) with the National Bureau of Intellectual Property and are awaiting the application’s approval.

Pursuant to a Technology Transfer Agreement dated October 12, 2007, we purchased one other health product known as “Kindlink” brand propolis and black ant capsule made from propolis, black ant, acanthopanax, astragalus root from Beijing Jindelikang Bio-Technology Co.,Ltd (“Jindelikang”). The change of the ownership has been approved by the State Food and Drug Administration.  This product is consumed to boost one’s immunity. The certification number issued by the State Food and Drug Administration on August 20, 2004 for the license to manufacture the product is GuoShiJianZi G20040906.

(ii)           Health Food and Organic “Green” Food

Our health and organic “green” food products include (i) abalone, sea cucumber and frog oil soft capsules (Serial Number 016-2007), (ii) ganodermalucidum and aweto soft capsules (Serial Number 017-2007), (iii) propolis soft capsules, (v) deep sea fish oil (Serial Number 012-2006),  (vi) liquid calcium (Serial Number 013-2006),  (vii) multi-vitamins (Serial Number  010-2007), (viii) soybean isoflavone (Serial Number 012-2006)  and (ix) royal jelly (Serial Number 011-2006).

The major suppliers of raw materials for these products in FY 2010 and 2009 are:
 
   
Name of
Supplier
 
Products Supplied
 
Sales in 2010
(in dollars)
   
Sales in 2009
(in dollars)
 
                     
1
 
Shukui Wang
 
Raw materials
    14,299,161       2,698,464  
2
 
Heilongjiang Medicine Company
 
Aweto
            307,018  
3
 
Degang Zhao
 
Raw materials
    923,554       85,259  
4
 
Henan Purui Bee Co.,Ltd.
 
Propolis
            2,474  
5
 
Green Agriculture Development Co. of Heilongjiang Land Reclamation
 
Soybean Oil
            190  
6
  Zhiyun Zheng   Package Supplies     3,878,933          

(iii)          Medical Drugs
 
Huimeijia purchased  license of Harbin Dong Feng Medicine Company to manufacture 27 medical drugs on September 16, 2008. Huimeijia is now the registered owner of the license, approved by the Heilongjiang Food and Medicine Supervising Bureau.

A description of these 27 medical drugs is as follows:

 
4

 

Serial
No
 
Product
 
Efficacy
1
 
Stomach-Tonic Tablets
 
Invigorating stomach and relieving pain. Used in the treatment of pain from stomach distention, eructation with fetid odor and fecal disorders caused by gasterasthenia and dyspeptic retention.
         
2
 
Pediatric Compound Sulfamethoxazole  Tablets (0.125g)
 
Used in the treatment of 1. Urinary tract infection caused by sensitive strains of Escherichia coli, Klebsiella, Enterobacter, Proteus mirabilis, Bacillus proteus and Proteus morganli. 2. Acute otitis media in children over 2 years old caused by Streptococcus pneumoniae or Hemophilus influenza. 3. Acute episode of adult chronic bronchitis caused by Streptococcus pneumoniae or Hemophilus influenza. 4. Intestinal infection and Shigella infection caused by sensitive strains of Shigellaflexneri and Shigellasonnei. 5. Pneumonia caused by Pneumocystis carinii. 6. Prevention of pneumonia caused by Pneumocystis carinii. This  product can be used for patients with a history of pneumonia caused by Pneumocystis carinii or adult HIV-infected patients whose CD4 lymphocyte count is ≤200/mm3 or is less than 20% of lymphocyte count. 7. Turista caused by enterotoxicEscherichia coli.
         
3
 
Pediatric Compound Sulfamethoxazole  Tablets (0.25g)
 
Same as above.
         
4
 
Pipemidic Acid Tablets
 
Used to treat urinary tract infection and bacterial infection of the intestines caused by sensitive gram negative bacilli.
         
5
 
Metamizole Sodium Tablets
 
Used to relieve fever caused hyperpyrexia and also for headache, migrainous headache, courbature, arthralgia, menalgia etc. The product also has strong anti-rheumatism effects and can be used for acute rheumatic arthritis, but because the product may induce severe adverse reaction, it is seldom applied in the treatment of  rheumatic diseases.
         
6
 
Paracetamol Tablets
 
Used for fever caused by common cold or epidemic influenza and also for relieving light and moderate pain such as headache, arthralgia, migraines, tooth ache, courbature, neuralgia and menalgia.
7
 
Pediatric Paracetamol, Artificial Cow-bezoar and Chlorphenamine Maleate Tablets
 
Used to relieve fever, headache, aching pain in extremities, sneezing, rhinorrhea, nasal obstruction, pharyngodynia and other symptoms in children caused by common cold or epidemic influenza.
         
8
 
Compound Theophylling Hydrochloride Tablets
 
Used to treat bronchial asthma.
         
9
 
Powerful Loquat Syrup
 
Used for the treatment of coughing and reduction of sputum caused by bronchitis.
         
10
 
Purple Orange Cough Syrup
 
Relieving cough and eliminating sputum. Used to relieve coughing and excessive phlegm as well as expectoration.
         
 11
 
Cough Syrup of Loquat Leaf
 
Used to clear lungs, relieve coughs and eliminate sputumand excessive phlegm.
         
12
 
Children's Cough Syrup
 
Eliminating phlegm and relieving cough. Used to relieve coughs caused by the common cold in children.

 
5

 
 
13
 
Pentoxyverine Citrate and Ammonium Chloride Syrup
 
Used for cough and expectoration.
         
14
 
Schisandra Syrup
 
Tonifying vital energy and invigorating the kidneys. Used in the treatment for neurastheria, dizziness and insomnia.
         
15
 
Ginseng Oral Liquid
 
Used to nourish renal “qi” and promote fluid production to quench thirst. Used to treat fatigue and acratia caused by deficiency of vital energy as well as poor appetite, cardiopalmus and shortness of breath, insomnia and forgetfulness.
         
16
 
Compound Fluououracil Oral Solution
 
Used in the therapeutic treatment of digestive tract cancer (colon carcinoma and gastric carcinoma), mammary adenocarcinoma, primary hepatic carcinoma.
         
17
 
Gossypol, Potassium Chloride and Vitamins B Capsules
 
Used in the treatment of uterine bleeding brought on by menopause.
         
18
 
Compound Belladonna and Aluminum Hydroxide Powder
 
Used for relieving stomach pain, brash (heartburn) and acid reflux caused by gastric hypersecretion.
         
19
 
Gentian and Sodium Bicarbonate Powder
 
Used for anorexia, gastric hypersecretion and dyspepsia.
         
20
 
Sleeping Beauty Capsule
 
Its main components include Melatonin, Suanzaoren, Lyophilized Royal Jelly powder, Cordyceps. Its main functions are neuroregulation and sleeping aid.
         
21
 
Virility Max Capsule
 
Its main components include Malubian, Deer Bones, Oysters, Cornus, Wolfberry fruit and Starch. Its main function is aphrodisiac.
         
22
 
Ruddy Granule
 
Its main components include Sea Cucumber Peptide, Donkey-hide Gelatin, Luxinxue, Ferrous Gluconate, Wolfberry and Jujube. Its main function is blood enrichment.
         
23
 
Blood Cleanser Soft Capsule
 
Its main components include Seabuckthorn Oil, Sea Fish Oil and Unsaturated Fatty Acids. Its main function is blood fat regulation.
         
24
 
Chao BaoCapsule
 
Its main component is Rana Oil. Its main function is ovarian protection.
         
25
 
Jianwei Calcium Tablet
 
its main component is calcium supplement
         
26
 
Waterlilies Soft Capsule (Sailuozhi)
 
Its main components include Toad Oil, Soy Isoflavones and Proanthocyanidins. Its main functions are skin moisturizing and freckle dispelling.
 
       
27
 
Colon Cleanser Capsule
 
Its main components include Xylo-oligosaccharides and Aloe Vera Powder. Its main function is laxative.
  
Distribution

We signed a non-exclusive cooperation agreement with the Commercial Bureau of Qing’an County, Heilongjiang on September 17, 2008.  Under the agreement, various affiliated companies of the Commercial Bureau will provide organic food and green food products to us for distribution and sale throughout the PRC.

We will order products from the Commercial Bureau and such products will be delivered within 20 days of placing the order.  The price for these products fluctuate within a 3% range from its wholesale price, but we are not restricted in any way in dictating the retail price for such products.  We typically have an average profit margin of approximately 20%.  We presently sell these products through our store and will eventually sell them over the internet.

The organic health food we order from the Commercial Bureau and sell under the brand names of the affiliated companies of the Commercial Bureau includes:
 
 
·
AuriculariaAuricula Extracts,
 
·
Polysaccharide Of Group Mushroom,
 
·
Grape Seed,
 
·
Momordica Charantia Extracts,
 
·
Pumpkin Polysaccharide,
 
·
Carotene,
 
·
Wheat Germ Oil,
 
·
Seabuckthorn Oil,
 
·
Health Gruel Series: Red Date Gruel, Agaric Gruel, Eight-Treasure Gruel, Medlar Gruel, Walnut Gruel, Chinese Yam Rhizome Gruel, Longan Gruel, Gingko Gruel, Lipid-Lowering Gruel,
 
·
Health Tea Series: Fire Clearing Tea, Antihypertensive Tea, Glucose-Lowering Tea, Lipid-Lowering Tea, Detumescence Tea, Throat Smoothing Tea, Skin Nourishing Tea,Heat-Relieving Tea, Pharyngitis Tea, Precious Eight-Treasure Tea, IT Tea,

 
6

 
 
 
·
Cold-Region Grains: Green And Harmless Series, Barley, Buckwheat, Maize Debris, Kidney Bean, Adzuki Bean, Mung Bean, Sorghum Rice, Semen Coicis, Rice, Soy, Glutinous Rice, Milet, Oat,
 
·
Northeast Precious Mountain Product Series: Black Fungus, White Fungus, Arimillaria Mellea, Shiitake Fungus, Hericium Erinaceus,
 
·
Miscellaneous Mushrooms,
 
·
Pteridium Aquilinum, Swertia,
 
·
Dry Products Of Vegetables, Nuts, Filbert, Pine Nut, Cathay Hickory, Walnut, Peanut, Fig, Pistachio,
 
·
Dry Products of Fruits.

Gene Studies

Genes are the basic elements of life. The makeup of certain genetic predisposes someone to certain types of diseases.  Accordingly, the purpose of the genetic study services we provide to our customers is to educate them on their pre-dispositions or susceptibility to certain types of diseases.
 
We entered into a cooperation contract with Shanghai Hujing Bio Technology Co., Ltd (“Hujing”) on February 28, 2008.  Pursuant to this agreement, we will collect genetic samples from our customers using simple oral smear techniques and then send it to Hujing for analysis.  The test fee paid by the client to us is RMB 9800 per test. Hujing will then deliver a report to us for each sample which we will transmit to our customers.  
 
E-business

We are in the process of building the infrastructure to conduct our business over the internet. A B2C e-business call and sales center has been established and will become an integral part of our distribution channel in the future. We have employed graduates from Qinghua University, Harbin Industry University and Harbin Engineering University to develop the ERP, CRM and OA software for our e-business. OA software has been used in our daily operation.

Our Customers

For the fiscal year ended June 30, 2010, we had sales revenue of  $43,105,972.

Our top ten customers (of which none contributed to more than 5% of our total sales) are:

 
7

 

   
Name of
Customer
 
Products Sold
 
Sales in
2010
(in dollars)
   
% of
Sales
in 2010
 
                     
1
 
Lihang He
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
90,706
     
0.21
%
2
 
Ruo Feng
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
72,654
     
0.17
%
3
 
Qinghe Li
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
68,371
     
0.16
%
4
 
Jinzhong Sun
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
65,961
     
0.15
%
5
 
Lei Duan
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
65,469
     
0.15
%
6
 
Qingong Li
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
62,136
     
0.14
%
7
 
Yuhong Zhang
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
60,341
     
0.14
%
8
 
Shengyuan He
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
57,430
     
0.13
%
9
 
Fashun Li
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi) and Colon Cleanser Capsule
   
53,798
     
0.12
%
10
 
Qiang Wang
 
GanodermaLucidum and Aweto Soft Capsules, Abalone, Sea cucumber and Frog oil soft capsule, Propolis and Black Ant Capsule, Waterlilies Soft Capsule(Sailuozhi), Colon Cleanser Capsule, Sleeping Beauty Capsule, Blood Cleanser Soft Capsule, Ruddy Granule and Virility Max Capsule
   
50,887
     
0.12
%
11
 
Other customers
       
42,458,220
     
98.50
%
   
TOTAL
       
43,105,972
     
100
%

 
8

 

Manufacture

We manufacture our products on a plot of land located in Jin Xing Industrial Park, Songbei District, Harbin. On June 7, 2004, the Company entered into a Land Use Purchase Contract with the local government, pursuant to which the Company agreed to purchase the right to use a piece of land, approximately 8 acres (32,000 square meters), located in Harbin County, Heilongjiang Province for commercial purposes and a fifty-year period June 7, 2004 through June 6, 2054, for $637,261 (RMB5,248,000), which the Company has fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development of Harbin City approved this transaction. The Company is in the process of applying for the title certificate from the local government. The manufacturing facility on the land is 4,000 square meters and there are 5 lines which is sufficient for our purposes. We package our products in bottles, plastic containers and aluminum foil bags there.

We also plan to build a gene laboratory to conduct gene studies, drug screening and the development of new drugs and a new factory to manufacture our products. We have budgeted construction costs to be approximately RMB 80,000,000.  We have already purchased a 50-year right to use a piece of land from the Harbin Songbei District Construction and Development Management Committee for this purpose.  The plot of land is approximately 30,000 square meters and is located in the Duiqing Mountain Industrial Park, Harbin.  The full price of the land is RMB 31,500,000 and we have already paid  RMB21,000,000.  The remaining RMB10,500,000 shall be paid prior to the registration of our land use right with local authorities.

Our Development Strategy

We will continue the production and sale of our “Qunle” brand Sailuozhi soft capsules and “Kindlink” brand propolis and black ant capsule in 2011 and will set up the stores in large cities of Northeast China.
  
We will focus on combining our products with traditional Chinese medicine, the creation of new products, and developing our B2C e-business and chain-stores. We plan to implement health management projects in our stores throughout China and establish a database of our clients’ health from data obtained from our B2C e-business and call center.
 
Our business model is to establish a one-stop shop for our customer’s health needs. From conducting a genetic profile of our customer to determine his/her susceptibility to certain types of diseases and then customizing health supplements and organic/green  food to meet his/her needs, we plan to cater to our customer’s needs at all levels.  With the distribution network we hope to establish through our chain stores and B2C e-businesses, we plan to eventually branch into the sale and distribution of beauty products and medical appliances.

The Future

Within next 10 years, our goal is to:

1.   Increase product coverage in target markets; achieve 20%-30% coverage
2.   Enter into the medicine, health product, health industry top 500 companies in China
3.   Form a diversified management group
4.   Create an internationally famous brand
5.   Enter into the international market

Our Business Plan

The plans designed to meet our sales and profit targets include:

 
·
Manufacturing :

 
(a)
improving the manufacturing techniques and staff training;
 
(b)
guaranteeing high quality material supply;
 
(c)
strengthening the working procedure controls;
 
(d)
implementing Good Manufacturing Practices (“GMP”)* to ensure a compliant standard in the food and medical industries;
 
(e)
ensuring that all employees have adequate training in health regulations

 
9

 

 
·
Marketing: Adopt an effective marketing mode to:

 
(a)
utilize direct distribution of products to chain stores nationwide;
 
(b)
build business alliances with well-known enterprises to create private label brands;
 
(c)
expand the marketing of our products beyond the traditional methods;

 
·
Product Distribution:

 
(a)
enlarge our sales and marketing force while developing new markets;
 
(b)
strengthen the distribution channel by developing promotion strategies and participating in trade shows;
 
(c)
develop 3-5 new products to market each year;
 
(d)
develop new markets through innovation and research
 
Our approach to manufacturing, marketing, cost control and products distribution, which is detailed above, is designed to minimize production costs and increase revenue at the same time. We feel that our procedures will enable us to reach our sales goals with an optimal manufacturing cost. The result should yield profits and a return to our investors.

*
Good Manufacturing Practice or “GMP” is a term that is recognized worldwide for the control and management of manufacturing and quality control testing of foods and pharmaceutical products. An important part of GMP is documentation of every aspect of the process, activities, and operations involved with drug and medical device manufacture. Additionally, GMP requires that all manufacturing and testing equipment has been qualified as suitable for use, and that all operational methodologies and procedures (such as manufacturing, cleaning, and analytical testing) utilized in the drug manufacturing process have been validated (according to predetermined specifications), to demonstrate that they can perform their purported function(s).

The Market for Healthcare and Beauty Products

The health product industry is one of the mainstay industries in the People’s Republic of China, since it has a high level recognition and importance. Recently there have been new policies for health products, which control quality, manufacturing, manufacturing environments and techniques. With China’s large and aging population there will be a steady demand for healthcare products. It is predicted that the healthcare and beauty industry will flourish over the next 50 years.

The Healthcare Product Market in the People’s Republic of China

At present, the Chinese healthcare market is growing rapidly and the demand for Chinese medicine and healthcare products has doubled every year. According to certain estimates, the PRC is the world’s fifth largest healthcare product market and by the year 2020, the size of the Chinese healthcare product market may exceed the United States and become the number one largest healthcare market.

Production: According to certain estimates, approximately 5,500 healthcare manufacturers and companies have passed China’s Good Manufacturing Practice standards. This includes over 500 Sino-Foreign Joint Ventures.  At present, we estimate that China can produce approximately 40 chemical pharmaceutical preparations, approximately 4,000 varieties, and over 1,500 varieties of chemical pharmaceutical raw materials.

Sales: According to “Forecasts for China’s Medical Economy in 2010” published by the South Economic Research Institute of the State Food and Drug Administration, at present, 80% of Chinese medicines are sold at hospitals and about 20% at retail drugstores.

 
10

 

The Healthcare Product Market in the Heilongjiang Province, People’s Republic of China

The healthcare product industry is the major industry in Heilongjiang Province. Harbin Pharmaceutical Group Health Technology has been the market leader in China for many years. According to a study conducted by Harbin Pharmaceutical Group in 2008, over the last 10 years products of the Harbin Pharmaceutical Group Sixth Pharm Factory, and Flaming Sun Group have been among the most popular healthcare foods and products in China.
 
Competition in the Healthcare Products Industry

We believe our competitors are:
 
Harbin DaZhong Pharmaceutical Co., Ltd.
Harbin ShenXinJianKang Co., Ltd.
Tsinghua Unisplendour Corporation Limited
Yeecare Company

Our Competitive Advantages and Strategy

We believe that we have the following competitive advantages over our competitors:

 
·
We have more categories of products and a diversified production line.
 
·
We have lower cost and operating expenses.
 
·
We have a strong and effective research and development team.
 
·
We are a self-owned enterprise, and have the support of the local government.
 
·
We have a geographical advantage being located in Heilongjiang Province, the center of the healthcare industry in China.
 
·
As a new-styled industrial enterprise, we enjoy some financial support from the local government.
 
Sales and Marketing

We presently operate a 200 square meters distribution store which we have leased from the Harbin Huadong Plaza Realty Management Co., Ltd located at 16th Floor of Ha’er International Plaza,  66-3, Heping Road, Harbin .

We plan to open more such stores throughout the PRC.  Customers who are members of our stores will enjoy discount privileges off our products and services. Complementing these stores, we plan to develop a 24-hour delivery system for our B2C e-business.

We have budgeted approximately $700,000for advertising and promotion for the current fiscal year.
 
Intellectual Property

We have received a patent (200610010394.4) for our “Qunle” brand Sailuozhi soft capsule from the National Bureau of Intelligence Property.   We had initially applied for and used the trade name of “RunChao” soft capsules but  the trade name was changed to “Qunle”, and the change has been approved by the National Bureau of Intellectual Property.

Pursuant to a Technology Transfer Agreement dated October 12, 2007 (“Kindlink Technology Transfer Agreement”), we purchased for a total of RMB350,000 the technology, manufacturing, and trademark rights to the health product known as “Kindlink” brand propolis and black ant capsule made from propolis, black ant, acanthopanax, astragalus root from Jindelikang. The change of the ownership has been approved by the State Food and Drug Administration. This product is consumed to boost one’s immunity. The certification number issued by the State Food and Drug Administration on August 20, 2004 to permit the manufacture of the product is GuoShiJianZi G20040906.

 
11

 

We have following 7 trademarks:
 
Trademark
     
Certificate
No.
     
Category
   
Registrant
   
Valid Term
                 
“Qunle”
 
No.3895929
 
No.5 : Dietetic foods adapted for medical purposes; Food preparations adapted for medical purposes; Albuminous milk; Dietetic beverages adapted for medical purposes; Milk sugar; Diabetic bread; Albuminous foodstuffs for medical purposes; Food for babies; Dietetic substances adapted for medical use; Nutritional additives for medical purposes
 
Harbin Humankind
 
7/7/2006 to 7/6/2016
                 
“Qunle”
 
No.3896026
 
No.5 :   Food preparations adapted for medical purposes; Albuminous milk; Dietetic beverages adapted for medical purposes; Milk sugar; Diabetic bread; Albuminous foodstuffs for medical purposes; Food for babies; Dietetic substances adapted for medical use; Nutritional additives for medical purposes
 
Harbin Humankind
 
7/7/2006 to 7/6/2016
                 
“Wangzu”
 
No.4857905
 
No.30: Molasses for food; Honey; pollen healthy grease; tortoise tuchahoe paste; breed columbine extract; helix alga; non-medicial nutrition liquid; non-medicial nutrition powder; non-medicial nutrition capsule; sugar candy bird’s nest
 
Harbin Humankind
 
5/14/2008 to 5/13/2018
                 
“Kindlink”
 
No.3236981
 
No.5: Food preparations adapted for medical purposes; Dietetic substances adapted for medical use
 
Harbin Humankind
 
12/7/2003 to 12/06/2013
                 
“Huimeijia”
 
No.5280303
 
No.5 : Medicine for human consumption;  Medical nutrition capsule;  Fibres (Edible plant) [non-nutritive]; Injection; Raw material drug;  Troche; suppository; Food preparations adapted for medical purposes; Dietetic foods adapted for medical purposes; Dietetic substances adapted for medical use
 
Harbin Humankind
 
7/21/2009 to 7/20/2019
                 
“Huide”
 
No.5280304
 
No.5 : Medicines for human consumption;  Medical nutrition capsule;  Fibres (Edible plant) [non-nutritive]; Injection; Raw material drug;  Troche; suppository; Food preparations adapted for medical purposes; Dietetic foods adapted for medical purposes; Dietetic substances adapted for medical use
 
Harbin Humankind
 
7/21/2009 to 7/20/2019
                 
“KDLK”
 
No.3230404
 
No.5 : Food preparations adapted for medical purposes; Dietetic foods adapted for medical purposes; Dietetic substances adapted for medical use
 
Harbin Humankind
 
9/28/2003 to 9/27/2013

Regulation

The laws governing our business are as follows:

 
·
Pharmaceutical administration law of the People’s Republic of China enacted January 12, 2001
 
·
Healthcare registration and administration law, enacted January 7, 2005
 
·
Measures for the Administration of Pharmaceutical Trade License, enacted January 4, 2004

 
12

 

 
·
Measures for the Supervision Over and Administration of Pharmaceutical Production, enacted May 8, 2004
 
·
Food Safety Law of the People’s Republic of China, enacted June 1, 2009
 
·
Regulation on the Implementation of the Food Safety Law of the People’s Republic of China, enacted July 20, 2009
 
·
Regional regulation:  Heilongjiang Regional Medicinal Materials Resource Protection Bylaw, enacted January 8, 2005
 
 Employees

We have 81 employees including 7 officers, 14 administrators, 45 salespersons and 15 workers in manufacturing.We believe that we are in compliance with local prevailing wage, contractor licensing and insurance regulations, and have good relations with our employees.

We also have 39 independent workers for packing.

Item 1A.        Risk Factors.

An investment in our common stock involves a high degree of risk.  You should carefully consider the risks described below and other information contained in this Annual Report on Form 10-K before to deciding to invest in our common stock.
 
Our future revenue will be derived from the sale of healthcare products and the manufacturing of the same. Our business, financial condition and/or results of operations may be materially adversely affected by the nature and impact of these risks. In such case, the market value of our securities could be detrimentally affected, and investors may lose part or all of their investment. Please refer to the information contained under “Business” in this report for further details pertaining to our business and financial condition.

Risks Related To Our Company

If the Company does not obtain financing when needed, its business will fail.

As of June 30, 2010, we had cash and cash equivalents on hand in the amount of $13,344,531 (audited). We predict that we will need approximately $30 million to implement our business plan and meet our capital expenditure needs over the next three years.  We currently do not have any arrangements for additional financing and we may not be able to obtain financing when required. Obtaining additional financing would be subject to a number of factors, including the market prices for our products, production costs, availability of credit, prevailing interest rates and the market prices for our common stock.

The success of our business depends upon the continuing contributions of our Chief Executive Officer and other key personnel and its ability to attract other employees to expand the business, whereas the loss of key individuals or our inability to attract new employees could have a negative impact on our business.
 
We rely heavily on the services of Mr. Xin Sun, our Chief Executive Officer, as well as several other senior management personnel. Loss of the services of any of such individuals would adversely impact our operations. In addition, we believe that our technical personnel represent a significant asset and provide us with a competitive advantage over many of our competitors. We believe that our future success will depend upon our ability to retain these key employees and our ability to attract and retain other skilled financial, engineering, technical and managerial personnel. For example, we presently do not have any directors or officers experienced with public company SEC reporting and financial reporting requirements and we will be required to engage such persons, and independent directors, in order to satisfy the quotation standards of the Over-the-Counter-Bulletin Board on which our common stock is traded (not currently required by OTCBB or SEC).  In addition, as a result of failure to engage qualified personnel we may be unable to meet our responsibilities as a public reporting company under the rules and regulations of the SEC.  In this regard, we currently engage consultants to prepare SEC reporting and financial reporting documents, and, in the future, may not be able to retain such consultants due to a shortage of financial resources. None of our key personnel is a party to any employment agreement. We do not currently maintain any “key man” life insurance with respect to any of such individuals.

 
13

 

Future sales of our equity securities will dilute existing stockholders.

To fully execute our long-term business plan, we may need to raise additional equity capital in the future. Such additional equity capital, when and if it is raised, would result in dilution to our existing stockholders.

Subject to the receipt of additional capital required, we plan to grow very rapidly, which will place strains on management and other resources.

We plan to grow rapidly and significantly expand our operations. This growth will place a significant strain on management systems and resources.  We will not be able to implement our business strategy in a rapidly evolving market without an effective planning and management processes. We have a short operating history and have not implemented sophisticated managerial, operational and financial systems and controls. We are required to manage multiple relationships with various strategic partners, and other third parties. These requirements will be strained in the event of rapid growth or in the number of third party relationships, and our systems, procedures or controls may not be adequate to support our operations and management may be unable to manage growth effectively. To manage the expected growth of our operations and personnel, we will be required to significantly improve or replace existing managerial, financial and operational systems, procedures and controls, and to expand, train and manage our growing employee base. We will be required to expand our finance, administrative and operations staff. We may be unable to complete in a timely manner the improvements to our systems, procedures and controls necessary to support future operations, management may be unable to hire, train, retain, motivate and manage required personnel and management may be unable to successfully identify, manage and exploit existing and potential market opportunities.

The Company does not carry insurance to cover any losses due to fire, casualty or theft at our production facility located in Harbin, China.

We have not obtained fire, casualty or theft insurance and there is no insurance coverage for our raw materials, goods, merchandise, furniture or building located in China. Any losses incurred by us will have to be borne by us without assistance. We may not have sufficient capital to cover material damage, or the loss of, our production facility due to fire, severe weather, flood or other cause. Such damage would have a material adverse effect on our financial condition and business operation.

The production of our health supplements and medicine depends on the supply of high quality Traditional Chinese Medicine raw materials

The production of our health supplements and medicines depends on the supply of Chinese raw materials of suitable quality. The quality and the market prices of these raw materials may be adversely affected by various factors such as the weather condition, the occurrence of nature disasters and sudden increases in demand that would impact cost of our production. Bad quality and increased market price of raw materials may adversely affect our business operation.
 
The products of our Company may have side effects. If side effects associated with our current or future products are not identified prior to their marketing and sale, we may suffer as a result of product liability. We may be required to withdraw such products from the market, change the labeling of our product, or suffer product liability claim against us.
 
All heath supplements and medicines have certain side effect. Although all of our heath supplements and medicines sold on market have passed proper testing and are approved by State Food and Drug Administration, or SFDA, the products may still inadvertently adverse effects on the health of the consumer. If such side effect is identified after marketing and sale of the product, the product may be required to be withdrawn from the market, or have a change in labeling. If a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with consumers, decreased demand for our products, costly litigation and loss of revenue.

 
14

 

Risks Related to the Healthcare Businesses
 
There are risks of increasing regulation of the healthcare industry in the People’s Republic of China and internationally that could have a material adverse impact on our business.

In the next 20 years, our central government as well as international regulatory bodies will focus more attention on the healthcare and beauty industry. As a result, our enterprise will have to satisfy both Chinese regulations and international regulations applicable to our industry. The cost of compliance may be high and may make the production of some healthcare and beauty products too expensive to successfully market. In such event, our business could be negatively impacted and revenues and earnings could decline.

GMP certification threatens our business with standards that will make all manufacturers produce similar products, which will take away any competitive edge.

After a company passes the GMP standards and is certified, its production methods may become homogeneous. As a result, many products will become identical and there will be little differentiation in the marketplace. This will cause profits for the manufacturer to decline and there will be few manufacturers with a competitive edge.

The Company must be successful in executing a complex business plan or it may fail to remain competitive in the industry.

Our business plan includes an emphasis on increasing research and development, strengthening our marketing and distribution capabilities and assuring a quality product. In the event that we fail to deliver on any of these strategies, we may fail to remain competitive in our industry.

Foreign companies with more capital, well developed business strategies and superior technology represent a threat to our business.

Foreign companies often have more capital, superior technology and well developed business strategies when they come to compete in the Chinese market.  They threaten our existence and we must develop systems and strategies to deal with them or we will go out of business. The protectionism of domestic industry that once existed is gone when it comes to international competitors.

Risks Related to Doing Business in the PRC

The Company faces the risk that changes in the policies of the PRC government could have a significant impact upon the business the Company may be able to conduct in the PRC and the profitability of such business.
 
The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social life.

 
15

 

The PRC laws and regulations governing the Company’s current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on the Company’s 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, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Company and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, 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. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.

A slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our products and our business.

All of our operations are conducted in the PRC and all our revenue is generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure investors that such growth will continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC could materially reduce the demand for our products and materially and adversely affect our business.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

Governmental control of currency conversion may affect the value of an investment in the Company.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive all our revenue in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations.  Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
 
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of its expenses as they come due.

 
16

 

The fluctuation of the Renminbi may materially and adversely affect investments in the Company.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. As we rely principally on revenue earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flow, revenue and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi that we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new 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 3.2% appreciation of the Renminbi against the U.S. dollar as of May 15, 2006. While the international reaction to the Renminbi revaluation has generally been positive, 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 Renminbi against the U.S. dollar.

Recent PRC State Administration of Foreign Exchange (“SAFE”) Regulations regarding offshore financing activities by PRC residents have undergone a number of changes that may increase the administrative burden the Company faces. The failure by the Company’s stockholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent the Company from being able to distribute profits and could expose the Company and its PRC resident stockholders to liability under PRC law.

SAFE issued a public notice (the “October Notice”) effective November 1, 2005, which requires registration with SAFE by the PRC resident stockholders of any foreign holding company of a PRC entity.  Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise; however, it is uncertain how the October Notice will be interpreted or implemented regarding specific documentation requirements for a foreign holding company formed prior to the effective date of the October Notice, such as in the Company’s case. While the Company’s PRC counsel advised it that only the PRC resident stockholders who receive the ownership of the foreign holding company in exchange for ownership in the PRC operating company are subject to the October Notice, there can be no assurance that SAFE will not require the Company’s other PRC resident stockholders to make disclosure. In addition, the October Notice requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however, there is no indication of what the penalty will be for failure to comply or if stockholder non-compliance will be considered to be a violation of the October Notice by the Company or otherwise affect the Company.

In the event that the proper procedures are not followed under the SAFE October Notice, we could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions. Our PRC resident stockholders could be subject to fines, other sanctions and even criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.

 Any recurrence of severe acute respiratory syndrome, or SARS, H1N1 Flu or another widespread public health problem, could adversely affect our operations.

A renewed outbreak of SARS, H1N1 Flu or another widespread public health problem in the PRC, such as bird flu where most of our revenue is derived, could have an adverse effect on our operations.  Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

 
17

 

Because our principal assets are located outside of the United States and all of our sole director and officer resides outside of the United States, it may be difficult for investors to enforce their rights based on U.S. federal securities laws against the Company and our officer and director in the U.S. or to enforce U.S. court judgment against the Company or him in the PRC.

Our sole director and officer reside outside of the United States. In addition, China Health is located in the PRC and substantially all of its assets are located outside of the United States; it may therefore be difficult or impossible for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against the Company in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against the Company or our officers and directors of criminal penalties, under the U.S. federal securities laws or otherwise.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has not adopted a western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.

Risks Relating to the Securities Purchase Agreement

Our Chief Executive Officer, Mr. Xin Sun, beneficially owns 53.03%  of our outstanding common stock, which gives him working control over certain major decisions on which our stockholders may vote, which may discourage an acquisition of the Company.

As a result of the closing under the Securities Purchase Agreement, our sole executive officer, Mr. Xin Sun, will have the right and ability to control virtually all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:

 
·
Electing or defeating the election of directors;
 
·
Amending or preventing amendment of the Company’s Certificate of Incorporation or By-laws;
 
·
Effecting or preventing a merger, sale of assets or other corporate transaction; and
 
·
Controlling the outcome of any other matter submitted to the stockholders for vote.

Our stock ownership profile may discourage a potential acquirer from seeking to acquire shares of the Company’s common stock or otherwise attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over the Company’s stock price.

Public company compliance may make it more difficult to attract and retain officers and directors.

The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public entity, we expect these new rules and regulations to increase compliance costs in 2011and beyond and to make certain activities more time consuming and costly. As a public entity, we also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve as directors or as executive officers.
 
Risks Relating to the Share Exchange Agreement

As a result of the Share Exchange, China Health has become a wholly-owned subsidiary of a company that is subject to the reporting requirements of U.S. federal securities laws, which can be expensive.

As a result of the Share Exchange, China Health has become a wholly-owned subsidiary of a Company that is a public reporting company and, accordingly, is subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including compliance with the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC (including reporting of the share exchange) and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if China Health had remained privately-held and did not consummate the share exchange.

 
18

 

In addition, it may be time consuming, difficult and costly for China Health to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. China Health may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures.  If China Health is unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, China Health may not be able to obtain the independent accountant certifications required by the Sarbanes-Oxley Act.

Because China Health became public by means of a share exchange, the Company may not be able to attract the attention of major brokerage firms.

There may be risks associated with China Health's becoming public through a share exchange. Specifically, securities analysts of major brokerage firms may not provide coverage of the Company since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on behalf of the Company.
 
Risks Relating to the Common Stock

Our stock price may be volatile.

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 
·
Additions or departures of key personnel;
 
·
Limited “public float” following the Securities Purchase Agreement, in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for the common stock;
 
·
Our ability to execute our business plan;
 
·
Operating results that fall below expectations;
 
·
Loss of any strategic relationship;
 
·
Industry developments;
 
·
Economic and other external factors; and
 
·
Period-to-period fluctuations in the Company’s financial results.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
 
There is currently no liquid trading market for our common stock and we cannot ensure that one will ever develop or be sustained.

There is currently no liquid trading market for our common stock.  We cannot predict how liquid the market for our common stock might become.  Our common stock is currently approved for quotation on the OTC Bulletin Board trading under the symbol “CHHE”.   Should we fail to satisfy the quotation standards for the OTC Bulletin Board, the trading price of our common stock could suffer, the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility.

 
19

 

Our common stock is deemed a “penny stock”, which will make it more difficult for investors to sell their shares.

The Company’s common stock is subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act.  The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. Since the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.

Furthermore, for companies whose securities are quoted on the OTC Bulletin Board, it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital.
 
Availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

If our stockholders sell substantial amounts of common stock in the public market, or upon the expiration of any statutory holding period, under Rule 144, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall.  The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

Provisions of our Articles of Incorporation and Delaware law could deter a change of control, which could discourage or delay offers to acquire the Company.

Provisions of our Articles of Incorporation and Delaware law may make it more difficult for someone to acquire control of the Company or for our stockholders to remove existing management, and might discourage a third party from offering to acquire the Company, even if a change in control or in management would be beneficial to stockholders.  For example, our Articles of Incorporation allows us to issue 10,000,000 shares of preferred stock without any vote or further action by stockholders.

Volatility in our common stock price may subject the Company 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.

 The elimination of monetary liability against the Company’s directors, officers and employees under the Company’s Articles of Incorporation, By-Laws and Delaware law, and the existence of indemnification rights to the Company’s directors, officers and employees may result in substantial expenditures by the Company and may discourage lawsuits against our directors, officers and employees.

Our Articles of Incorporation and By-Laws contain a provision that provides for indemnification of directors and officers against any and all expenses, including amounts paid upon judgments, counsel fees and amounts paid in settlement by any such person in any proceeding that they are made a party to by reason of being or having been directors or officers of the Company, except in relation to matters as to which any such director or officer shall be adjudged to be liable for his own negligence or misconduct in the performance of his duties.  Such indemnification shall be in addition to any other rights to which those indemnified may be entitled under any law.  The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup.  These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit the Company and our stockholders.

 
20

 

Item 1B.        Unresolved Staff Comments.

Not applicable.

Item 2.           Properties.

All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.

We manufacture our products on a plot of land located in Jin Xing Industrial Park, Songbei District, Harbin. On June 7, 2004, the Company entered into a Land Use Purchase Contract with the local government, pursuant to which the Company agreed to purchase the right to use a piece of land, approximately 8 acres (32,000 square meters), located in Harbin County, Heilongjiang Province for commercial purposes and a fifty-year period June 7, 2004 through June 6, 2054, for $637,261 (RMB5,248,000), which the Company has fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development of Harbin City approved this transaction. The Company is in the process of applying for the title certificate from the local government. The manufacturing facility on the land is 4,000 square meters and there are 5 lines which is sufficient for our purposes. We package our products in bottles, plastic containers and aluminum foil bags there.

 We presently operate a 200 square meters distribution store which we have leased from the Harbin Huadong Plaza Realty Management Co., Ltd. located at 16th Floor of Ha’er International Plaza, 66-3, Heping Road, Harbin . The lease contract was entered into by and between Harbin Huadong Plaza Realty Management Co.,Ltd. and Humankind with the term from 08/20/2008 to 08/19/2011 and the rent is RMB 50,000 per year (approximately $7,350) with a deposit of RMB10,000 (approximately, $1,470).

We also plan to build a gene laboratory to conduct gene studies, drug screening and the development of new drugs and a new factory to manufacture our products. We have budgeted construction costs to be approximately RMB 80,000,000.  We have already purchased a 50-year right to use a piece of land from the Harbin Songbei District Construction and Development Management Association for this purpose.  The plot of land is approximately 30,000 square meters and is located in the Duiqing Mountain Industrial Park, Harbin.  The full price of the land is RMB 31,500,000 and we have already paid RMB21,000,000.  The remaining RMB10,500,000 shall be paid prior to the registration of our land use right with local authorities.

Item 3.           Legal Proceedings.
 
We do not knowany material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.

Item 4.           (Removed and Reserved). 

 
21

 

PART II

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

Market Information

Our common stock is traded over-the-counter on the OTC Bulletin Board under the designation CHHE.OB (previously UFOG.OB) and the market for the stock has been relatively inactive. The range of high and low bid quotations for the quarters of the last two years ended June 30, 2010 and the subsequent interim period for which financial statements are included (adjusted for the 1-for-20 reverse split which occurred on November 13, 2008) is listed below. The quotations are taken from the OTC Bulletin Board. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

Calendar Quarter
 
High Bid
   
Low Bid
 
             
Fiscal Year ended June 30, 2009
               
2008 Third Quarter
 
$
0.24
   
$
0.14
 
2008 Fourth Quarter
 
$
2.00
*
 
$
0.02
*
2009 First Quarter
 
$
.40
*
 
$
0.0252
*
2009 Second Quarter
 
$
0.40
*
 
$
0.10
*
                 
Fiscal Year ended June 30, 2010
           
2009 Third Quarter
 
$
0.20
   
$
0.11
 
2009 Fourth Quarter
 
$
0.65
   
$
0.20
 
2010 First Quarter
 
$
2.00
   
$
0.41
 
2010 Second Quarter
 
$
1.18
   
$
0.78
 

*
Prices reflect a 1-for-20 reverse split of our common stock on November 13, 2008
 
As of September 27, 2010, we had approximately 367 shareholders of record of our common stock, including the shares held in street name by brokerage firms. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
 
Dividends

We have not paid dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from Harbin Humankind for our funds and PRC regulations may limit the amount of funds distributed to us from Harbin Humankind, which will affect our ability to declare any dividends.

Securities authorized for issuance under equity compensation plans

As of the date of this prospectus, we do not have any securities authorized for issuance under any equity compensation plans and we do not have any equity compensation plans.

Registrar and Stock Transfer Agent

Our stock transfer agent is Interwest Transfer Company, Inc. at 1981 Murray Holladay Road, Suite 100 Salt Lake City, UT  84117 Tel: (801)272-9294  Fax: (801)277-3147.

 
22

 

Shares Eligible for Future Sale

There is no established trading market for our common stock. Future sales of substantial amounts of our common stock in the trading market could adversely affect market prices.

Penny Stock Regulations

Our shares of common stock are subject to the "penny stock" rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, "penny stock" is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer's net tangible assets or revenues. In the last case, the issuer's net tangible assets must exceed $3,000,000 if in continuous operation for at least three years or $5,000,000 if in operation for less than three years or the issuer's average revenues for each of the past three years must exceed $6,000,000.

Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.

Recent Sale of Unregistered Securities 

None.

Repurchase of Equity Securities

None.

Item  6. Selected Financial Data

Not Applicable.

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

The financial and business analysis in this Annual Report on Form 10-K (the “Report”) provides information we believe is relevant to an assessment and understanding of our financial condition and results of operations. The following discussion should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8 of this Report.

FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto appearing elsewhere herein and in the risk factors and “Forward Looking Statements” summary set forth in the forepart of this Annual Report as well as the “Risk Factors” section above and are afforded the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Readers should carefully review the risk factors disclosed in this Annual Report and other documents filed by us with the SEC.

 
23

 

DISCUSSION

We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:

 
the effect of political, economic, and market conditions and geopolitical events;
 
legislative and regulatory changes that affect our business;
 
the availability of funds and working capital;
 
the actions and initiatives of current and potential competitors;
 
investor sentiment; and
 
our reputation.

We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.

Except as otherwise indicated by the context, references in this Form 10-Q to “we,” “us,” “our,” “the Registrant”, “our Company,” or “the Company” are to China Health Industries Holdings, Inc., a Delaware corporation, China Health Industries Holdings Limited, and its wholly owned subsidiary, Harbin Humankind Biology Technology Co. Limited. Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

 
24

 

Our History and Corporate Structure

We were incorporated in the state of Arizona on July 11, 1996 and were the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (Edmonds 6) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.

We began manufacturing systems for outdoor cooling in Arizona and quickly expanded to distribute throughout the United States.  Our primary product was a misting system which consisted of a high pressure pump assembled to specifications.

Pursuant to the Securities Purchase Agreement dated as of September 10, 2007 between the Company, Bontems and Sun Xin, we experienced a change in control whereby Sun Xin acquired a total of 22,000,545 shares of common stock of the Company from Bontems and the Company issued 2,061,200 shares of common stock of the Company to Sun  Xin, such that upon consummation of the agreement, Sun Xin held an aggregate of 24,061,745 shares, or 51.53% of the total issued and outstanding shares of common stock of the Company on a fully-diluted basis.

Pursuant to the Asset Purchase and Sale Agreement dated  September  10, 2007 between the Company and Universal Fog Systems, Inc., we then transferred all our liabilities to the latter on September 10, 2007 and similarly, all our assets on December 31, 2008.

On December 31, 2008, we acquired the business of Harbin Humankind Biology Technology Co. Limited through the acquisition of all the share capital of China Health Industries Holdings Limited under the Share Exchange Agreement dated October 15, 2007.

As a result of the above, China Health Industries Holdings Limited is now our wholly-owned subsidiary. Because Harbin Humankind Biology Technology Co., Limited (“Harbin Humankind”) is a wholly-owned subsidiary of China Health Industries Holdings Limited and Harbin Huimeijia Medicine Company (“Huimeijia”) is in turn a subsidiary whose 99% of its shares are owned by Harbin Humankind, both Harbin Humankind and Huimeijia are our indirect owned subsidiaries.

Business Overview

Harbin Humankind Biology Technology Co., Limited was incorporated under the People’s Republic of China on December 14, 2003 and completed its GMP certification on April 24, 2007.  It is in the business of the manufacture and sale of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies.

Harbin Huimeijia Medicine Company was incorporated on October 14, 2008.   Huimeijia completed its GMP certification on July 23, 2009 and will be producing and selling our medical drugs.

Our business is conducted through chain-stores and, with regard to the sale of our products, eventually over the internet.

Termination of  Acquisition of Tiefeng

On August 24, 2009, the Company’s wholly-owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Harbin Humankind”), entered into a share transfer agreement with the shareholders of Heilongjiang Tiefeng Rice Company Limited (“Tiefeng”) to purchase all the equity interest of Tiefeng (“the Share Transfer Agreement”).

 
25

 

Pursuant to the Share Transfer Agreement, Harbin Humankind was to pay a total of RMB 102,600,000 (approximately $15 million) in cash for all the equity in Tiefeng as follows:

 
(i)
RMB 50,000,000 (approximately, $7.3 million) within 3 days of signing of the Share Transfer Agreement;
 
(ii)
RMB5,000,000 (approximately $700,000) as a deposit towards the purchase price; and
 
(iii)
The remainder RMB 47,600,000 (approximately, $7 million) within 7 days of the effective transfer of the equity interests to Harbin Humankind.

If the transfer of equity interest was not effected within 60 days from the date of the Share Transfer Agreement, the shareholders had to pay to Harbin Humankind 5% of the total purchase consideration as compensation to Harbin Humankind.  In addition, the shareholders had to pay liquidated damages of 0.04% of the total purchase consideration for every day of delay beyond the 60-day period and Harbin Humankind shall then have the right to terminate the Share Transfer Agreement forthwith.

On July 23, 2009 and August 19, 2009, cash in the amount of $734,482 (RMB 5,000,000) and $7,304,815 (RMB 50,000,000) respectively, were paid to Tiefeng.

Tiefeng did not get all organic certified documents from the local government agencies to complete the transaction on the final extension date of February 28, 2010.  Accordingly, we terminatedthe contract Share Transfer Agreement. Tiefeng agreed to pay interest to us for retaining the purchasing price from August 19, 2009 to February 27, 2010.

We received interest income from Tiefeng in the amount of $226,482 on February 27, 2010. Tiefeng paid back approximately $1.46 million (RMB 10,000,000) to the Company on March 31, 2010, the additional $1.46 million (RMB 10,000,000) was paid on April 30, 2010 as part of the deposit refund.  Another $1.46 million (RMB 10,000,000) was paid on May 31, 2010.  $2.92 million (RMB 20,000,000) is converted to a loan made by the Company to Tiefeng. The balance $734,482 (RMB 5,000,000) is converted as advances to Tiefeng for future purchases of its inventory.

Results Of Operations

For the year ended June 30, 2010 as compared to June 30, 2009

Our principal business operations are conducted through our wholly owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Humankind”) and Humankind’s subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”) which was incorporated on October 14, 2008.   Huimeijia received GMP certification on July 23, 2009 and will be producing and selling our medical drugs.

   
June 30
 
   
2010
   
Variance
   
2009
 
REVENUES
                 
Product Sales (net of sales allowance)
  $ 43,105,972       293 %   $ 10,967,828  
Total revenues
  $ 43,105,972               10,967,828  
                         
COST OF GOODS SOLD
                       
Cost of goods sold
    20,160,420       313 %     4,877,286  
Gross Profit
  $ 22,945,552       277 %   $ 6,090,542  

 
26

 

Total revenues increased by 293% for the year ended June 30, 2010 compared to the same period in 2009.  The $32,138,144 increase in revenue is attributable to strong performances from our sales distribution channels.

This growth in sales is attributable to volume and our efforts to continue to develop our distribution channels by hiring additional sales agents to assure that our products and their associated benefits are seen by those making or influencing the purchasing decisions.

Our cost of sales increased $15,283,134, or 313% in the year ended June 30, 2010 compared to 2009. The costs is in tandem with our increased sales.

Sales by Product Line

A break-down of our sales by major product line for each of the years ended June 30, 2010 and 2009 is as follows:
 
 
   
For the Year Ended June 30
 
   
2010
               
2009
             
Product Category
 
Quantity
(Unit)
   
Sales USD
   
% of Sales
   
Quantity
(Unit)
   
Sales USD
   
% of
Sales
 
Sleeping Beauty Capsule
    102,951       1,544,548       3.58 %                  
Virility Max Capsule
    122,945       1,537,094       3.57 %                  
Ruddy Granule
    69,868       2,096,424       4.86 %                  
Blood Cleanser Soft Capsule
    78,546       2,356,811       5.47 %                  
Abalone, Sea cucumber and Frog oil soft capsule
    11,733       2,523,057       5.85 %     7,940       1,704,461       15.54 %
Ganodermalucidum and Aweto Soft Capsules
    8,640       1,857,940       4.31 %     7,835       1,681,922       15.34 %
Chao BaoCapsule
                            1,500       28,082       0.26 %
Jianwei Calcium Tablet
                            36,320       22,448       0.2 %
Propolis and Black Ant Capsule
    52,667       4,859,420       11.27 %     23,796       2,191,789       19.98 %
Waterlilies Soft Capsule(Sailuozhi)
    130,730       17,290,732       40.11 %     13,546       3,144,578       28.67 %
Colon Cleanser Capsule
    202,731       9,026,882       20.94 %     30,090       2,133,088       19.45 %
OEM Sales
            13,064       0.03 %             61,460       0.56 %
Total
            43,105,972       100 %           $ 10,967,828       100 %

 
27

 

Operating Expenses

The following table summarizes the changes in our operating expenses from $1,717,170 to $5,479,124 for each of the years ended June 30, 2010 and 2009, respectively:
 
   
For the Year Ended June 30
 
   
2010
   
Variance
   
2009
 
Operating Expenses
                 
Selling , General and Administrative expenses
 
$
4,841,842
     
196
%
 
$
1,634,236
 
Depreciation and amortization
   
79,388
     
48
%
   
53,729
 
Research and Development
   
557,894
     
1,810
%
   
29,205
 
Total operating expenses
 
$
5,479,124
     
219
%
 
$
1,717,170
 

Total operating expenses for the year ended June 30, 2010 increased $3,761,954 or 219% over the same period in 2009. The higher operating expenses were primarily attributable to the increased costs of marketing and distribution of our products for sale to generate our increased product sales increased by 293% from $10,967,828 in fiscal year ended June 30, 2009 to $43,105,972 in fiscal year ended June 30, 2010.

Research and Development

During the fiscal years ended June 30, 2010 and 2009, the Company spent approximately $558,000, and $29,205 respectively, on research and development. The Company’s research and development program seeks to discover and substantiate the efficacy and safety of ingredients and products that have a significant nutritional therapeutic value to consumers.

Interest income and interest expense

Interest income is $226,536 in fiscal year 2010 compared to $307 in fiscal year 2009. The primary reason for the increase is Tiefeng paid interest to the Company for retained the purchasing price from August 19, 2009 to February 27, 2010.

 
28

 

We incurred imputed interest expenses in the amount of $20,315 on the loans due to Mr. Xin Sun, the executive officer and major shareholder of company, these loans are unsecured, non-interest bearing and have no fixed terms of repayment.

Provision for Income Taxes.

Income tax expense was $4,447,467 for fiscal 2010 as compared to $1,483,486 for fiscal 2009.  The provision is primarily related to income generated by our PRC subsidiaries.  The provision for income taxes differs from the amount which would result from applying the statutory federal income tax rate due to the taxes imposed on the foreign subsidiaries as well as the fact that the Company is not fully valuing a tax asset and benefit of the net operating loss carry forward.

CRITICAL ACCOUNTING ESTIMATES

Method of Accounting

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.

Accounts Receivable – Trade

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is made when recovery of the full amount is doubtful.

Inventories

Inventories are stated at the lower of cost or market value. Cost is computed using the first-in, first-out method and includes all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. Market value is determined by reference to the sales proceeds of items sold in the ordinary course of business or estimates based on prevailing market conditions.  If actual market conditions are less favorable than those projected by management write-downs may be required.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost.  Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized.  When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized.
Property, plant and equipment, patents, trademarks and other intangible assets owned by the Company are depreciated or amortized, over their estimated useful lives.  Useful lives are based on management’s estimates over the period that such assets will generate revenue.  Intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  Future adverse changes in market conditions or poor operating results of underlying capital investments or intangible assets could result in losses or an inability to recover the carrying value of such assets, thereby possibly requiring an impairment charge in the future.

Statutory Reserve

Statutory reserve refer to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and, are to be used to expand production or operation. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, from its earnings, an amount to the statutory reserve to be used for future company development. Such an appropriation is made until the reserve reaches a maximum equaling 50% of the enterprise’s capital.

 
29

 

Recognition of Revenue

Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which generally happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain which is usually the case); (3) the price must be fixed or determinable; and (4) collectability must be reasonably assured. Shipping revenue is included in net sales while the related costs, including shipping and handling costs, are included in the cost of products sold. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience.

Foreign Currency Translation

The Company’s two operating subsidiaries maintain their financial statements in the functional currency, which is the Renminbi (RMB). Another subsidiary maintains its financial statements in the functional currency, which is Hong Kong Dollar.  Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction.  Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

For financial reporting purposes, the financial statements of subsidiaries, which are prepared using the functional currency, have been translated into United States dollars.  Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates, and stockholders’ equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

The Company has adopted “Stock-based Compensation and Other Stock-based Payments”. This Section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services, and applies to transactions, including non-reciprocal transactions, in which an enterprise grants shares of common stock or other equity instruments, or incurs liabilities based on the price of common stock or other equity instruments. The Company uses the fair-value based method to account for all stock-based payments to employees and non-employees by measuring the compensation cost of the stock-based payments using the Black-Scholes option-pricing model.

The fair value of the stock-based compensation is recorded as a charge to operations over the vesting period with a credit to contributed surplus.

2011 Outlook

We anticipate our total revenues in 2011 versus 2010 to increase by 40% or approximately $17.2 million with growth in all categories of our product sales. Our gross profit margin in 2011 is expected to be approximately 53% due to raw material cost inflation.  We estimate our overall 2011 net profit margins to be approximately 28%.  However, there is no assurance that these predictions will be reached.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents position, our working capital, and our cash flow activity as of June 30, 2010 and 2009 and for each of the years then ended:

 
30

 

   
2010
   
2009
 
             
As of June 30:
           
Cash and cash equivalents
 
$
13,344,531
   
$
7,394,270
 
Working capital
 
$
15,924,133
   
$
2,410,264
 
Inventories
 
$
184,522
   
$
150,652
 
For the Year Ended June 30:
               
Cash provided by (used in):
               
Operating activities
 
$
9,515,621
   
$
7,051,480
 
Investing activities
 
$
(3,110,533
)
 
$
(55,147
)
Financing activities
 
$
(783,144
)
 
$
320,034
 
 
As of June 30, 2010, cash and cash equivalents were $13,344,531 as compared to $7,394,270 at June 30, 2009. The increased cash and cash equivalents position of 5,950,261 or 80%  as on June 30, 2010 was primarily due to our cash flows provided by operating activities in 2010 of approximately $9.5 million.

Our current ratio was 4.58 versus 1.47 and the quick ratio was 4.53 versus 1.44 at June 30, 2010 and 2009, respectively.  Management endeavors to ensure that funds are available to take advantage of new investment opportunities and that funds are sufficient to meet future liquidity and capital needs.

Cash flows provided by operating activities was $9,515,621 for the year ended June 30, 2010 compared to cash flows provided by operation activities of $7,051,480 for the same period in 2009.  The increase in cash provided by operating activities of $2,464,141 is primarily attributable to the increased net income of approximately $13.3 million in 2010 versus $2.8 million in 2009.

Our working capital position at June 30, 2010 was $15,924,133 compared to $2,410,264 at June 30, 2009. Our increased working capital position in 2009 was principally funded by the increased net income of approximately $10.4 million.  Management considers current working capital and borrowing capabilities adequate to cover our current operating and capital requirements for the full fiscal year 2010.

Currency Exchange Fluctuations

All of our revenues and majority of the expenses during the year ended June 30, 2010 were denominated primarily in Renminbi (“RMB”), the currency of China, and was converted into US dollars at the exchange rate of 6.83667 RMB to 1 U.S. Dollar.  There can be no assurance that RMB-to-U.S. dollar exchange rates will remain stable. A devaluation of RMB relative to the U.S. dollar would adversely affect our business, financial condition and results of operations. We do not engage in currency hedging.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 8. Financial Statements and Supplementary Data.

The financial statements required by this item are set forth beginning on page F-1.

 
31

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm
  F-2  
       
Consolidated Balance Sheets
  F-3  
       
Consolidated Statements of Operations and Comprehensive Income
  F-4  
       
Consolidated Statements of Cash Flows
  F-5  
       
Consolidated Statements of Stockholders’ Equity
  F-6  
       
Notes to Consolidated Financial Statements
  F-7 - F-22  
 
 
F-1

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
China Health Industries Holdings, Inc.
 
We have audited the accompanying consolidated balance sheets of China Health Industries Holdings, Inc. and subsidiaries (the Company) as of June 30, 2010 and 2009 and the related consolidated statements of operations, 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 audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Health Industries Holdings, Inc. and subsidiary as of June 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ e-FANG Accountancy Corp & CPA
City of Industry, California
September 22, 2010

 
F-2

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
June 30, 2010
   
June 30, 2009
 
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 13,344,531     $ 7,394,270  
Accounts receivable
    5,693       21,510  
Inventory
    184,522       150,652  
Notes receivable
    2,992,893       -  
Prepaid expenses
    764,738       9,533  
Deposit
    3,084,335       -  
                 
Total current assets
    20,376,712       7,575,965  
                 
Property and equipment – net
    987,310       1,032,328  
Intangible Assets – net
    835,183       849,285  
Construction-in-progress
    163,323       10,519  
                 
Total assets
  $ 22,362,528     $ 9,468,097  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 228,629     $ 574,325  
Customer deposits
    363       2,922  
Related party debt
    85,408       868,552  
Wages payable
    291,885       671,193  
Self-insured reserve
    216,343          
Tax payable
    3,629,951       3,048,709  
                 
Total current liabilities
    4,452,579       5,165,701  
                 
Commitments and contingencies
    968,484       175,316  
                 
STOCKHOLDERS’ EQUITY
               
Common stock ($0.0001 par value, 300,000,000 shares authorized, 62,239,737 and 62,234,737 issued and outstanding, respectively)
    6,224       6,223  
Additional paid-in capital
    1,434,910       1,409,846  
Accumulated other comprehensive income
    589,618       261,301  
Retained earnings
    15,879,197       2,625,026  
                 
Total Stockholders' equity
    17,909,949       4,302,396  
                 
TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY
  $ 22,362,528     $ 9,468,097  

See accompanying notes to the consolidated financial statements

 
F-3

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
For the Year Ended
 
   
June 30, 2010
   
June 30, 2009
 
REVENUE
  $ 43,105,972     $ 10,967,828  
COST OF GOODS SOLD
    20,160,420       4,877,286  
                 
Gross Profit
    22,945,552       6,090,542  
                 
OPERATING EXPENSES
               
Selling, general & administrative expenses
    4,841,842       1,634,236  
Depreciation and amortization expenses
    79,388       53,729  
Research & development
    557,894       29,205  
Total operating expenses
    5,479,124       1,717,170  
Operating profit
    17,466,428       4,373,372  
                 
OTHER INCOME (EXPENSES)
               
Interest expenses
    (20,580 )     (65,995 )
Interest income
    226,536       307  
Other income
    29,254       256  
Total other income (expense)
    235,210       (65,432 )
                 
INCOME (LOSS) BEFORE INCOME TAXES
    17,701,638       4,307,940  
Income taxes
    4,447,467       1,483,486  
Net income (loss)
  $ 13,254,171     $ 2,824,454  
                 
OTHER COMPREHENSIVE INCOME
               
Foreign currency translation gain (loss)
  $ 327,761     $ 15,297  
Comprehensive income
  $ 13,581,932     $ 2,839,751  
                 
Basic and diluted net loss per share
    0.21       0.05  
Weight average shares outstanding
    62,239,737       62,234,737  

See accompanying notes to the consolidated financial statements

 
F-4

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
For the Year Ended
June 30
 
   
2010
   
2009
 
Cash flows from operating activities:
           
             
Net income (loss)
  $ 13,254,171     $ 2,824,454  
                 
Adjustments to reconcile net income (loss)  to net cash
               
provided by (used in) operating activities
               
                 
Depreciation & amortization
    79,388       74,513  
Imputed interest
    20,315       65,995  
Wrote off intangible assets
    -       289,636  
Share-based compensation
    4,750       -  
Self-insured reserve
    216,343       -  
                 
Changes in assets and liabilities -
               
(Increase) decrease in:
               
                 
Accounts receivables and other receivables
    (39,615 )     (21,510 )
Inventory
    (33,870 )     (43,527 )
Prepaid expense
    (3,839,539 )     25,411  
Accounts payable and other payables
    (146,322 )     3,836,508  
Net cash provided by (used in) operating activities
    9,515,621       7,051,480  
                 
Cash flows from investing activities:
               
                 
Purchases/ (transfer) of fixed assets
    (20,268 )     (44,628 )
Notes receivable
    (2,937,461 )     -  
construction-in-progress
    (152,804 )     (10,519 )
Net cash provided by investing activities
    (3,110,533 )     (55,147 )
                 
Cash flows from financing activities:
               
Contributed capital
    -       1,464  
Proceeds from related party debt
    (783,144 )     318,570  
Net cash provided by financing activities
    (783,144 )     320,034  
                 
Effect of exchange rates on cash
    328,317       42,652  
                 
Net increase (decrease) in cash and cash equivalents
    5,950,261       7,359,019  
                 
Cash and cash equivalents, at beginning of year
    7,394,270       35,251  
                 
Cash and cash equivalents, at end of year
  $ 13,344,531     $ 7,394,270  
                 
Supplemental cash flow information
               
  Cash paid for income tax
  $ 3,310,900     $ 226,986  
                 
Noncash investing and financing activities
               
  Adjustment of fixed asset value for wrote off
  $ -     $ 289,636  

See accompanying notes to the consolidated financial statements

 
F-5

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

   
Common shares
                         
                               
   
Shares
   
Amount
   
Additional
Paid-in
Capital
   
Retained
Earnings
(Accumulated
Deficit)
   
Accumulated
Other
Comprehensive
Income
   
Stockholders'
Equity
 
                                     
Balances, June 30, 2009
    62,234,737     $ 6,223     $ 1,409,846     $ 2,625,026     $ 261,301     $ 4,302,396  
                                                 
Stock based compensation
    5,000       1       4,749                       4,750  
                                                 
Imputed interest on shareholder loan
                    20,315                       20,315  
                                                 
Net income for the year ended June 30, 2010
                            13,254,171               13,254,171  
                                                 
Other comprehensive income-Translation adjustment
                                        328,317       328,317  
 
                                               
Balances, June 30, 2010 
    62,239,737     $ 6,224     $ 1,434,910     $ 15,879,197     $ 589,618     $ 17,909,949  

See accompanying notes to the consolidated financial statements

 
F-6

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - ORGANIZATION AND BUSINESS BACKGROUND

We were incorporated in the state of Arizona on July 11, 1996 and were the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (Edmonds 6) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.

China Health Industries Holdings Limited ("China Health") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability company. China Health was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship as defined by Statement of Financial Accounting Standards (SFAS) No. 7.

Harbin Humankind Biology Technology Co., Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC") on December 14, 2003, as a limited liability company under the Company Law of PRC.   China Health is engaged in the business of production and distribution of health food.

On August 20, 2007, the sole shareholder of China Health entered into a Share Purchase Agreement with the owners of Humankind. Pursuant to the Agreement, China Health purchased 100% of the ownership in Humankind for a cash consideration of $60,408. Subsequent to completion of the Agreement, Humankind became a wholly-owned subsidiary of China Health. The share purchase transaction is being accounted for as a “reverse merger,” since the owner of Humankind owns a majority of the outstanding shares of China Health’s common stock immediately following the execution of the Agreement.  Humankind is deemed to be the acquirer in the reverse merger.  Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements for periods prior to the Agreement will be those of Humankind and will be recorded at the historical cost basis.  After completion of the Agreement, China Health’s consolidated financial statements will include the assets and liabilities of both China Health and Humankind, the historical operations of Humankind and the operations of China Health and its subsidiaries from the closing date of the Agreement.

On October 14, 2008, Harbin Humankind set up a 99% owned subsidiary Harbin Huimeijia Medicine with its primary business being manufacturing and distributing medicine. Mr. Xin Sun, t the Company’s majority owner, owns 1% of this subsidiary. The subsidiary is consolidated in the consolidated financial statements of the Company

On December 31, 2008, China Health closed a reverse merger with Universal Fog, Inc; a U.S. public traded Shell Company.  China Health is the accounting acquirer in the transaction and the transaction is treated as a recapitalization of the Company. After the transaction and a 1:20 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737 total outstanding shares of common stock of the Company. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of the Company, or approximately 53.03%. We changed our name from "Universal Fog, Inc." to "China Health Industries Holdings, Inc." on February 19, 2009.

 
F-7

 

Note 2 - SIGNIFICANT ACCOUNTING POLICIES

Principals of Consolidation

The accompanying consolidated financial statements include China Health Industries Holdings Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). This basis of accounting differs from that used in the statutory accounts of China Health, which are prepared in accordance with the “Accounting Principles of China” (“PRC GAAP”).

Translation of Foreign Currencies

China Health maintains its books and accounting records in PRC currency “Renminbi” (“RMB”), which is determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Foreign currency exchange gain and losses resulting from these transactions are included in operations.

China Health’s financial statements are translated into the reporting currency, the United States Dollar (“US$”). Assets and liabilities of China Health are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these financial statements are reflected as accumulated other comprehensive income (loss) in the shareholders’ equity.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  China Health bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances.  Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.  While China Health believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.
 
Earnings per share

Basic earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants.

 
F-8

 

Potential common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price of the common stock during the period.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. China Health 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.

Concentrations of Credit Risk

Financial instruments that subject China Health to concentrations of credit risk consist primarily of cash and cash equivalents. China Health maintains its cash and cash equivalents with high-quality institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore bear minimal risk.

Self-Insured Reserve and Allowance

The Company is self-insured for all risks and carries no general liability or product insurance coverage of any kind. This account requires the use of estimates and judgment. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that such estimates are made with consistent and appropriate methods. Actual results may differ from these estimates under different assumptions or conditions. The self-insured reserve in the amount of $216,343 and Nil was made in the fiscal years ended June 30, 2010 and 2009, respectively

Fair Value of Financial Instruments

The carrying value of financial instruments including cash and cash equivalents, receivables, accounts payable and accrued expenses, approximates their fair value at June 30, 2010 and 2009 due to the relatively short-term nature of these instruments.

 
F-9

 

Prepaid Expenses

Prepaid expenses principally include advances to raw material suppliers.

Inventory

Inventories are stated at the lower of cost or market using the weighted average method. China Health reviews its inventory on a regular basis for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence. No reserve was made in the fiscal years ended June 30, 2010 and 2009, respectively.

Impairment of Long–Lived Assets

China Health reviews all of its long-lived assets, including tangible and intangible long-lived assets, for impairment indicators at least annually and performs detailed impairment testing for all long-lived assets whenever impairment indicators are present. When necessary, China Health records charges for impairments of long-lived assets for the amount by which the present value of future cash flows, or some other fair value measure, is less than the carrying value of these assets.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Maintenance, repairs and minor renewals are expensed as incurred; major renewals and improvements that extend the lives or increase the capacity of plant assets are capitalized.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the reporting period of disposition.

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The percentages or depreciable life applied are:

Building, warehouse and Improvements
20 to 30 years
Land use rights
50 years
Furniture & Equipment
5 to 7 years
Transportation Equipment
5 to 15 years
Machinery and Equipment
7 to 15 years

Property and equipment are evaluated for impairment in value whenever an event or change in circumstances indicates that the carrying values may not be recoverable. If such an event or change in circumstances occurs and potential impairment is indicated because the carrying values exceed the estimated future undiscounted cash flows of the asset, the Company will measure the impairment loss as the amount by which the carrying value of the asset exceeds its fair value.

 
F-10

 

Intangible assets

 Intangible assets consist of patents and goodwill. Patent costs are amortized over an estimated life of ten years.

Intangible assets are accounted for in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).  Intangible assets with finite useful lives are amortized while intangible assets with indefinite useful lives are not amortized. As prescribed by SFAS 142, goodwill and intangible assets are tested periodically for impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly, the Company reviews its long-lived assets, including property and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. Impairment costs, if any, are measured by comparing the carrying amount of the related assets to their fair value.  The Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If  the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss thru a charge to operating results to the extent the present value of anticipated cash flows attributable to the assets are less than the asset’s carrying value. The Company would depreciate the remaining the remaining value over the remaining estimated useful life of the asset to operating results.  

Pharmaceutical Patents

On June 9, 2007, China Health entered into a Purchase Agreement, pursuant to which China Health agreed to purchase pharmaceutical patents from a third party for $410,792 (RMB ¥ 3,180,000).   

China Health recorded the pharmaceutical patents at the purchase price and amortizes the costs over their estimated beneficial period, 10 years, using the straight-line method as of June 30, 2008.  The Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If  the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss thru a charge to operating results to the extent the present value of anticipated cash flows attributable to the assets are less than the asset’s carrying value. The Company would depreciate the remaining the remaining value over the remaining estimated useful life of the asset to operating results.  

There were no impairments during year ended June 30, 2010; the impairment during year ended June 30, 2009 was $289,636.
 
Land Use Right

All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner. On June 7, 2004, China Health enter into a purchase contract with the local government, pursuant to which China Health agreed to purchase the right to use a piece of land, approximately 8 acres, located in the Harbin County, Heilongjiang Province for commercial purpose over a fifty-year period from June 7, 2004 through June 6, 2054, for $637,261 (RMB ¥5,248,000), which China Health has fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development (“HUD”) of Harbin City approved this transaction. China Health recorded the land use right at its purchase price. The cost of the land use right is amortized over its prospective beneficial period, using the straight-line method with no residual value. China Health’s production facilities and office are located in this piece of land.  As of June 30, 2010, the land use right has net balance of $835,183 included land improvements in the amount of $293,618.

 
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Customer Deposits

Customer Deposit represents the money the Company has received from customers in advance for the purchase of goods. The Company considers customer deposits as a liability until the title of goods have been transferred at which point the balance will be credited to sales revenue.


China Health recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated returns and credit memos. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience.  As of June 30, 2010 and 2009, the Company had a reserve of $3,963 and $nil, respectively.

Sales Incentives — The Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense.

Research and Development Costs

Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred.

The Company recognizes in-process research and development in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method and the AICPA Technical Practice Aid, Assets Acquired in a Business Combination to be used in Research and Development Activities:  A Focus on Software, Electronic Devices, and Pharmaceutical Industries. Assets to be used in research and development activities, specifically, compounds that have yet to receive new drug approval and would have no alternative use, should approval not be given, are immediately charged to expense when acquired.  Certain assets and high technologies acquired that has a foreseeable future cash flows are capitalized as intangible assets.  Such intangible assets are amortized starting from the year revenue is generated and amortize over a period of 10 years. 

For the year ended June 30, 2010, the Company incurred $557,894 in research and development costs. There was $29,205 research and development costs for the fiscal year ended June 30, 2009

Advertising Costs

Advertising costs are expensed as incurred and included as part of selling and marketing expenses in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7, “Reporting for Adverting Costs”. Advertising costs were immaterial for the fiscal years ended June 30, 2010 and 2009, respectively.

 
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Income Taxes

China Health accounts for income tax using SFAS No. 109 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing a