UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2014
| ¨ | 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 or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
168 Binbei Street, Songbei District
Harbin City, Heilongjiang Province
People’s Republic of China 150028
(Address of principal executive offices) (Zip Code)
86-451-88100688
(Issuer's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) 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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of May 12, 2014, there are 62,239,737 shares of common stock, $0.0001 par value, issued and outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(Unaudited)
| March 31, 2014 | June 30, 2013 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 27,052,042 | $ | 28,868,533 | ||||
| Notes receivable | 15,864 | 34,413 | ||||||
| Accounts receivable, net | 1,829,038 | 136,414 | ||||||
| Inventory | 1,129,339 | 1,004,642 | ||||||
| Other receivables, net | 84,242 | 108,029 | ||||||
| Advance to suppliers | 48,436 | 171,598 | ||||||
| Prepaid expenses | 5,791 | 156,750 | ||||||
| Total current assets | 30,164,752 | 30,480,379 | ||||||
| Property, plant and equipment, net | 4,525,568 | 2,561,067 | ||||||
| Intangible assets, net | 5,801,217 | 6,316,925 | ||||||
| Construction in progress | 186,834 | 2,345,026 | ||||||
| Total assets | $ | 40,678,371 | $ | 41,703,397 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities | ||||||||
| Short-term loans | $ | 1,608,648 | $ | 1,140,548 | ||||
| Accounts payable and accrued expenses | 721,909 | 679,554 | ||||||
| Advance from customers | 209,910 | 200,761 | ||||||
| Related party debts | 1,934,045 | 2,138,454 | ||||||
| Wages payable | 61,289 | 185,096 | ||||||
| Taxes payable | 370,944 | 255,588 | ||||||
| Total current liabilities | 4,906,745 | 4,600,001 | ||||||
| Equity | ||||||||
| Common stock, ($0.0001 par value, 300,000,000 shares authorized, 62,239,737 issued and outstanding as of March 31, 2014 and June 30, 2013, respectively) | 6,224 | 6,224 | ||||||
| Additional paid-in capital | 27,317 | 27,317 | ||||||
| Accumulated other comprehensive income | 3,175,099 | 3,636,312 | ||||||
| Statutory reserve | 38,679 | 38,679 | ||||||
| Retained earnings | 32,524,063 | 33,394,548 | ||||||
| Total stockholders' equity | 35,771,382 | 37,103,080 | ||||||
| Non-controlling interests | 244 | 316 | ||||||
| Total equity | 35,771,626 | 37,103,396 | ||||||
| Total liabilities and equity | $ | 40,678,371 | $ | 41,703,397 | ||||
The accompanying notes are an integral part of these consolidated and combined financial statements.
| 1 |
| CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES |
| CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
| (Unaudited) |
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| March 31, 2014 | March 31, 2013 | March 31, 2014 | March 31, 2013 | |||||||||||||
| REVENUE | $ | 2,555,394 | $ | 2,725,308 | $ | 6,501,198 | $ | 6,882,237 | ||||||||
| COST OF GOODS SOLD | 1,781,580 | 2,514,732 | 5,030,815 | 5,752,659 | ||||||||||||
| GROSS PROFIT | 773,814 | 210,576 | 1,470,383 | 1,129,578 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling, general and administrative expenses | 540,192 | 353,995 | 1,594,887 | 1,561,247 | ||||||||||||
| Depreciation and amortization expenses | 42,684 | 48,914 | 587,283 | 255,066 | ||||||||||||
| Research and development expenses | 47 | 120,491 | 157,552 | 358,658 | ||||||||||||
| Total operating expenses | 582,923 | 523,400 | 2,339,722 | 2,174,971 | ||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 190,891 | (312,824 | ) | (869,339 | ) | (1,045,393 | ) | |||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Interest income | 23,644 | 66,951 | 87,746 | 190,490 | ||||||||||||
| Interest expense | 40,277 | 22,164 | 84,280 | 99,214 | ||||||||||||
| Other expenses, net | 38,810 | 48 | 4,682 | 166 | ||||||||||||
| Total other income (expenses), net | (55,443 | ) | 44,739 | (1,216 | ) | 91,110 | ||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 135,448 | (268,085 | ) | (870,555 | ) | (954,283 | ) | |||||||||
| Provision for income taxes | - | 93 | - | 23,816 | ||||||||||||
| NET INCOME (LOSS) | 135,448 | (268,178 | ) | (870,555 | ) | (978,099 | ) | |||||||||
| Less: net income (loss) attributable to non-controlling interests | 1 | (47 | ) | (70 | ) | (166 | ) | |||||||||
| Net income (loss) attributable to China Health Industries Holdings | 135,447 | (268,131 | ) | (870,485 | ) | (977,933 | ) | |||||||||
| Foreign currency translation gain (loss) | (970,760 | ) | 116,732 | (460,681 | ) | 847,865 | ||||||||||
| Comprehensive income (loss) | (835,312 | ) | (151,446 | ) | (1,331,236 | ) | (130,234 | ) | ||||||||
| Less: comprehensive income (loss) attributable to non-controlling interests | (7 | ) | (45 | ) | (73 | ) | (156 | ) | ||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHINA HEALTH INDUSTRIES HOLDINGS | $ | (835,305 | ) | $ | (151,401 | ) | $ | (1,331,163 | ) | $ | (130,078 | ) | ||||
| Net loss attributable to China Health Industries Holdings' shareholders per share are: | ||||||||||||||||
| Basic & diluted loss per share | $ | - | $ | - | $ | (0.01 | ) | $ | (0.02 | ) | ||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic & diluted weighted average shares outstanding | 62,239,737 | 62,239,737 | 62,239,737 | 62,239,737 | ||||||||||||
The accompanying notes are an integral part of these consolidated and combined financial statements.
| 2 |
| CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES |
| CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS |
| (Unaudited) |
| For the Nine Months Ended | ||||||||
| March 31, 2014 |
March 31, 2013 |
|||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss available to China Health Industries Holdings | $ | (870,485 | ) | $ | (977,933 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization expenses | 690,619 | 353,828 | ||||||
| Bad debt expenses | (2,166 | ) | - | |||||
| Non-controlling interests | (70 | ) | (166 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
| Accounts receivable | (1,722,779 | ) | 2,263,421 | |||||
| Notes receivable | 18,438 | (11,351 | ) | |||||
| Other receivables | 22,819 | 7,873 | ||||||
| Inventory | (139,946 | ) | 69,602 | |||||
| Due from related parties | (1,604 | ) | - | |||||
| Advance to Suppliers, prepaid expenses and long term deposit | 274,820 | 3,517,721 | ||||||
| Accounts payables and accrued expenses | 88,950 | 58,753 | ||||||
| Advance from customers and other payables | (25,153 | ) | 141,827 | |||||
| Wages payable | (123,648 | ) | 131,183 | |||||
| Taxes payable | 120,744 | (194,567 | ) | |||||
| Net cash provided by (used in) operating activities | (1,669,461 | ) | 5,360,191 | |||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property, plant and equipment | (102,151 | ) | (54,115 | ) | ||||
| Purchases of intangible assets | (11,464 | ) | (4,782,103 | ) | ||||
| Increase in construction in progress | - | (160,308 | ) | |||||
| Net cash used in investing activities | (113,615 | ) | (4,996,526 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Payment of related party debts | (184,056 | ) | (4,326 | ) | ||||
| Proceeds from related party debts | - | 848,032 | ||||||
| Payment of short-term loan | (1,146,381 | ) | (637,614 | ) | ||||
| Proceeds from short-term loan | 1,637,687 | - | ||||||
| Net cash provided by financing activities | 307,250 | 206,092 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (340,665 | ) | 518,634 | |||||
| Net increase (decrease) in cash and cash equivalents | (1,816,491 | ) | 1,088,391 | |||||
| Cash and cash equivalents, beginning balance | 28,868,533 | 28,770,157 | ||||||
| Cash and cash equivalents, ending balance | $ | 27,052,042 | $ | 29,858,548 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for income taxes | $ | - | $ | 240,951 | ||||
| Cash paid for interest expense | $ | 90,613 | $ | 88,298 | ||||
| Non-cash activities: | ||||||||
| Reclassification from construction in progress to property, plant and equipment | $ | 2,166,812 | $ | - | ||||
The accompanying notes are an integral part of these consolidated and combined financial statements.
| 3 |
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
China Health Industries Holdings, Inc. (“China Health US”) was incorporated in the State of Arizona on July 11, 1996 and was the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”), a Delaware corporation, and changed its name to Universal Fog, Inc. 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 HK”) was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability company. China Health HK 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 FASB ACS Topic 915 (“Development Stage Entities”).
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 the PRC. Humankind is engaged in the manufacturing and sale of health products and “green” (or organic) food, and the detection of disease susceptibility or pre-disposition through genetic studies.
On August 20, 2007, the sole shareholder of China Health HK entered into a share purchase agreement (the “Share Purchase Agreement”) with the owners of Humankind. Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the ownership in Humankind for a cash consideration of $60,408 (the “Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind became a wholly-owned subsidiary of China Health HK. The Share Purchase was accounted for as a “reverse merger” since the owner of Humankind owned a majority of the outstanding shares of China Health HK’s common stock immediately following the execution of the Share Purchase Agreement, it was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that have been reflected in the financial statements for periods prior to the Share Purchase are those of Humankind and have been recorded at the historical cost basis. After completion of the Share Purchase, China Health HK’s consolidated financial statements include the assets and liabilities of both China Health HK and Humankind, the historical operations of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the Share Purchase.
On October 14, 2008, Humankind set up a 99% owned subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”), with its primary business being manufacturing and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of Huimeijia. Huimeijia is consolidated in the consolidated financial statements of China Health HK.
On December 31, 2008, China Health HK entered into a reverse merger with Universal Fog, Inc., a U.S. publicly traded shell company (the “Transaction”). China Health HK is the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US. After the Transaction and a 20:1 reverse stock split, Mr. 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 China Health US. 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 China Health US, or approximately 53.03% of the total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries Holdings, Inc. on February 19, 2009.
On November 22, 2013, Humankind completed the acquisition of Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”) for a total purchase price of $16,339,869 (RMB100,000,000) (the “Purchase Price”). HLJ Huimeijia was founded on October 30, 2003, and is engaged in the manufacturing and distribution of tincture, ointments, rubber paste (including hormones), topical solution, suppositories, liniment (including traditional Chinese medicine extractions), enemas and oral liquids. HLJ Huimeijia’s predecessor is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which has established its brand name in the market through its supply of high quality medical products. HLJ Huimeijia is categorized as a “high and new technology” enterprise by the Science Technology Department in Heilongjiang Province. HLJ Huimeijia has 21 products which have been approved by, and have received approval numbers issued by, the China State Food and Drug Administration (the “CFDA”). In addition, HLJ Huimeijia is the holder of one patent for utility models, five patents for external design and two trademarks in China, including the Chinese brand name of “Xue Du” which has an established reputation among customers in northeastern China.
China Health US, China Health HK, Humankind, Huimeijia and HLJ Huimeijia are collectively referred herein to as the “Company.”
| 4 |
As of March 31, 2014, the Company’s corporate structure is as follows:
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated and combined financial statements have been prepared by Company without audit pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These consolidated and combined financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the years ended June 30, 2013 and 2012. These consolidated and combined financial statements include all adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. The results of operations for the nine months ended March 31, 2014 may not be indicative of results that may be expected for the year ended June 30, 2014.
Principles of Consolidation
The accompanying consolidated and combined financial statements include China Health US and its four subsidiary companies, including China Health HK, Humankind Huimeijia, and HLJ Huimeijia. All significant intercompany balances and transactions have been eliminated in consolidation and combination.
| 5 |
On November 22, 2013, China Health US, through its wholly owned subsidiary Humankind, completed the acquisition of HLJ Huimeijia. HLJ Huimeijia and Humankind are under the common control of Mr. Xin Sun, the CEO of the Company before and after the date of transfer. Humankind’s accounting policy adopted the guidance in ASC 805-50-05-5 for the transfer of net assets between entities under common control to apply a method similar to the pooling-of-interests method. Under this method, the financial statements of Humankind shall report results of operations for the period in which the transfer occurs as though the transfer of net assets had occurred at the beginning of the period. Results of operations for that period will thus comprise both those of the previously separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations from that date to the end of the period. Similarly, Humankind shall present the statements of financial position and other financial information as of the beginning of the period as though the assets and liabilities had been transferred at that date. Financial statements and financial information of Humankind presented for prior years also shall be retrospectively adjusted to furnish comparative information.
Segment Reporting
ASC 280, “Segment Reporting”, established standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments. The Company has three reportable operating segments: Humankind, HLJ Huimeijia and others. The segments are grouped based on the types of products provided.
Statement of Cash Flows
In accordance with Statement FASB ASC Topic 230, Statement of Cash Flows, cash flow from the Company's operations is calculated based upon the local currencies and translated to the reporting currency using an average foreign exchange rate for the reporting period. As a result, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company 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 of 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. Significant estimates and assumptions by management include, among others; useful lives of long-lived assets and intangible assets, valuation of inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, construction in progress, intangible assets and deferred taxes. While the Company believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.
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.
As of March 31, 2014 and June 30, 2013, the Company’s uninsured bank balance was mainly maintained at financial institutions located in the PRC and HK, totaled $27,052,042 and $28,868,533 respectively. The Company has no insured bank balance as of March 31, 2014 and June 30, 2013, respectively.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment and bad debt history, the customer’s current credit worthiness, changes in customer payment patterns and the economic environment. As of March 31, 2014 and June 30, 2013, the balances of allowance for doubtful accounts were $7,725 and $9,979, respectively.
Advance to Suppliers
Advance to suppliers principally includes advances to suppliers. The Company periodically makes advances to certain vendors for purchases of raw materials, and records these purchases as advance to suppliers. As of March 31, 2014 and June 30, 2013, advance to suppliers amounted to $48,436 and $171,598, respectively.
Prepaid Expenses
Prepaid expenses are amounts paid to secure the use of assets or the receipt of services at a future date or continuously over one or more future periods. As of March 31, 2014 and June 30, 2013, prepaid expenses amounted to $5,791 and $156,750, respectively.
| 6 |
Inventory
Inventory consists of raw materials, work in progress and finished goods of manufactured products.
Inventory is stated at lower of cost or market and consists of materials, labor and overhead. HLJ Huimeijia uses the weighted average method for inventory valuation. The other entities of the Company use the first-in, first-out (“FIFO”) method is used for inventory valuation. Overhead costs included in finished goods include direct labor cost and other costs directly applicable to the manufacturing process. The Company evaluates inventory for excess, slow moving, and obsolete inventory as well as inventory the volume of which is in excess of its net realizable value. This evaluation includes analysis of sales levels by product and projections of future demand. If future demand or market conditions are less favorable than the Company’s projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made. There was no inventory allowance provided for the nine months ended March 31, 2014 and 2013, respectively.
Impairment of Long-Lived Assets
The Company’s long-lived assets and other assets are reviewed for impairment in accordance with the guidance of the FASB ASC Topic 360-10, “Property, Plant, and Equipment,” and FASB ASC Topic 205“Presentation of Financial Statements.” The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial position. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. As of March 31, 2014 and June 30, 2013, the Company has not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of long-lived assets in the future.
Property, Plant and Equipment
Property, plant and equipment are carried at the lower of cost or fair value. 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 the results of operations 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 | |
| Office Equipment | 3 to 7 years | |
| Transportation Equipment | 5 to 15 years | |
| Machinery and Equipment | 7 to 15 years |
Intangible Assets
The Company evaluates intangible assets in accordance with FASB ASC Topic 350, “Intangibles — Goodwill and Other.” Intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required. The value of our intangible assets could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology, including the valuation of our common stock, (iii) a significant slowdown in the worldwide economy or (iv) any failure to meet the performance projections included in our forecasts of future operating results. In accordance with FASB ASC Topic 350, the Company tests intangible assets for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period. Based on such evaluations, there was no impairment recorded for intangible assets for the nine months ended March 31, 2014 and 2013, respectively.
| 7 |
Construction in Progress
Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. Costs classified as construction in progress include all costs of obtaining the asset and bringing it to the location and condition necessary for its intended use. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service.
The Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment recorded for construction in progress for the nine months ended March 31, 2014 and 2013, respectively.
Translation of Foreign Currencies
Humankind, Huimeijia and HLJ Huimeijia maintain their books and accounting records in PRC currency “Renminbi” (“RMB”), which has been determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the date of the transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains and losses resulting from these transactions are included in operations.
Humankind, Huimeijia and HLJ Huimeijia’s financial statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of the above entities are translated at the prevailing exchange rate at each reporting period end date. 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 the translation of these financial statements are reflected as accumulated other comprehensive income in shareholders’ equity and noncontrolling interests.
Revenue Recognition
The Company 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. The Company records revenue at the discounted selling price and allows its customers to return products for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. There has been no provision recorded for returns based upon historical experience for the nine months ended March 31, 2014 and 2013, respectively.
Cost of Goods Sold
Cost of goods sold consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead costs associated with the manufacturing process and commission expenses.
Income Taxes
The Company adopts FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
In July 2006 the FASB issued FIN 48(ASC 740-10), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (ASC 740)”, which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under FIN 48(ASC 740-10), tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
| 8 |
As a result of the implementation of FIN 48 (ASC 740-10), the Company undertook a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48 (ASC 740-10). The Company recognized no material adjustments to liabilities or stockholders’ equity as a result of the implementation. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.
Enterprise Income Tax
Under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC (the “EIT Law”), income tax is payable by enterprises at a rate of 25% of their taxable income.
Value Added Tax
The Provisional Regulations of PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in, or imported into, the PRC and on processing, repair and replacement services provided within the PRC.
Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year. Value added taxes for the nine months ended March 31, 2014 and 2013 were $885,387 and $925,923, respectively.
Sales Taxes and Sales-Related Taxes
Pursuant to the tax law and regulations of the PRC, the Company is obligated to pay 7% and 5% of the annual VAT paid as taxes on maintaining and building cities and education additional fees, both of which belong to sales-related taxes. Sales-related taxes are recorded when sales revenue is recognized. Sales taxes and sales-related taxes for the nine months ended March 31, 2014 and 2013 were $112,614 and $114,565, respectively.
Concentrations of Business and Credit Risks
All of the Company’s manufacturing is located in the PRC. There can be no assurance that the Company will be able to successfully continue to manufacture its products and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, prices of raw materials, competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to the risks of restrictions on transfer of funds, domestic customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.
The Company operates in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between U.S. dollars and the Chinese currency RMB. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting periods.
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. For the nine months ended March 31, 2014 and 2013, the Company had no potential dilutive common stock equivalents outstanding.
| 9 |
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.
FASB ASC Topic 260, “Earnings Per Share”, requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.
NOTE 3 - ACQUISITION
On November 22, 2013, the Company, through its wholly owned subsidiary Humankind, completed the acquisition of HLJ Huimeijia for a total purchase price of $16,339,869 (RMB100,000,000) (the “Purchase Price”). We have accounted for this acquisition in accordance with the FASB’s revised accounting standards for business combinations under common control. We have included the financial results of HLJ Huimeijia according to their carrying value in our consolidated results from the acquisition date. The assets and liabilities of HLJ Huimeijia shall be measured according to their book value as of closing of the acquisition on November 22, 2013. The difference between the book value of net assets of the HLJ Huimeijia and the book value of the consolidation price paid had been adjusted the capital public reserve, due to the capital public reserve is not enough to be deducted, and the retained earnings have been adjusted.
NOTE 4 - ACCOUNTS RECEIVABLE
The Company’s accounts receivable amounted to $1,829,038 and $136,414, respectively, net of allowance for doubtful accounts amounting to $7,725 and $0 as of March 31, 2014 and June 30, 2013, respectively. The Company offered thirty (30) day payment terms for sales before November 2013 and ninety (90) day payment terms for sales after November 2013.
NOTE 5 - INVENTORIES
Inventories consisted of following:
| March 31, 2014 | June 30, 2013 | |||||||
| Raw Materials | $ | 553,677 | $ | 430,282 | ||||
Work in Progress | 240,205 | 230,897 | ||||||
| Finished Goods | 335,457 | 343,463 | ||||||
| Total | $ | 1,129,339 | $ | 1,004,642 | ||||
NOTE 6 - CONSTRUCTION IN PROGRESS
Construction in progress consisted of the following:
| March 31, 2014 | June 30, 2013 | |||||||
| Plant - HLJ Huimeijia | $ | 150,318 | $ | 153,593 | ||||
| Warehouse - HLJ Huimeijia | 34,586 | 35,031 | ||||||
| Plant and Production Lines - Huimeijia | 1,930 | 1,955 | ||||||
| Interior Decoration - Humankind | - | 814,677 | ||||||
| Warehouse - Humankind | - | 684,330 | ||||||
| Office Building - Humankind | - | 655,440 | ||||||
| Total | $ | 186,834 | $ | 2,345,026 | ||||
| 10 |
As of March 31, 2014, a plant was completed and $150,318 (RMB 942,662) was recorded as a cost of construction in progress at HLJ Huimeijia. The project is now waiting for final inspection, examination and government approval. The balance will be transferred to property, plant and equipment upon receipt of government approval, and the plant will be placed in service.
On December 8, 2012, Humankind entered into an agreement with a contractor for the interior decoration of the office building and the warehouse. As of March 31, 2014, the project was completed and the cost of construction in progress had been transferred to the property, plant and equipment account. The estimated total cost of construction was $0 and $814,677 (RMB 5,000,000) as of March 31, 2014 and June 30, 2013, respectively.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| March 31, 2014 | June 30, 2013 | |||||||
| Building, Warehouses and Improvements | $ | 4,696,118 | $ | 2,602,119 | ||||
| Machinery and Equipment | 961,395 | 871,799 | ||||||
| Office Equipment | 107,889 | 108,276 | ||||||
| Transportation Equipment | 231,093 | 234,068 | ||||||
| Other | 24,130 | 24,440 | ||||||
| Less Accumulated Depreciation | (1,495,057 | ) | (1,279,635 | ) | ||||
| Total | $ | 4,525,568 | $ | 2,561,067 | ||||
Depreciation expense was $235,866 and $185,500 for the nine months ended March 31, 2014 and 2013, respectively. Depreciation expense charged to operations was $132,530 and $86,738 for the nine months ended March 31, 2014 and 2013, respectively. Depreciation expense charged to cost of goods sold was $103,336and $98,762 for the nine months ended March 31, 2014 and 2013, respectively.
The Company transferred construction in progress to property, plant and equipment in the amount of $2,166,812 for the nine months ended March 31, 2014.
As of March 31, 2014, the building of HLJ Huimeijia in the book value of $1,452,329 has been mortgaged for the working capital loan in the principal amount of $1,608,648 (RMB 10,000,000). As of June 30, 2013, the building of HLJ Huimeijia in the book value of $1,471,024 has been mortgaged for the working capital loan in the principal amount of $1,140,548 (RMB 7,000,000).
| 11 |
NOTE 8 - INTANGIBLE ASSETS
The following is a summary of intangible assets:
| March 31, 2014 | June 30, 2013 | |||||||
| Land Use Rights – Humankind | $ | 1,019,559 | $ | 1,032,682 | ||||
| Health Supplement Product Patents – Humankind | 4,825,944 | 4,888,064 | ||||||
| Pharmaceutical Patents - HLJ Huimeijia | 144,132 | 134,582 | ||||||
| Land Use Rights - HLJ Huimeijia | 697,363 | 706,339 | ||||||
| Less: Accumulated Amortization | (885,781 | ) | (444,742 | ) | ||||
| Total | $ | 5,801,217 | $ | 6,316,925 | ||||
All land in the PRC belongs to the State. Enterprises and individuals can pay the State a fee to obtain the right to use a piece of land for commercial purposes or residential purposes 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 have the right to use the land for the time remaining on the initial period.
Amortization expense charged to operations was $454,753 and $168,328 for the nine months ended March 31, 2014 and 2013, respectively.
As of March 31, 2014, land use rights of HLJ Huimeijia with the book value of $697,363 have been mortgaged for a working capital loan in the principal amount of $1,608,648 (RMB 10,000,000). As of June 30, 2013, land use rights of HLJ Huimeijia with a book value of $706,339 have been mortgaged for a working capital loan in the principal amount of $1,140,548 (RMB 7,000,000).
NOTE 9 - SHORT-TERM LOAN
On November 30, 2012, HLJ Huimeijia entered into a loan agreement with Longjiang Bank, Mudanjiang Hailin Branch (the “Bank”) for a working capital loan in the principal amount of $1,140,548 (RMB 7,000,000) at an interest rate of 7.8% per annum. The loan had a one-year term with a maturity date on November 29, 2013, and was secured by the land use right and the building of HLJ Huimeijia. As of June 30, 2013, the Company’s short-term loan was $1,140,548 (RMB 7,000,000). The loan was paid off on November 22, 2013.
On November 20, 2013, HLJ Huimeijia entered into a short-term loan agreement with the Bank for a working capital loan in the principal amount of $1,608,648 (RMB 10,000,000), at an interest rate that is 10% higher than the bench mark. The loan was secured by the land use right and the building of HLJ Huimeijia, with a maturity date of November 19, 2014. As of March 31, 2014, the Company’s short-term loan was $1,608,648 (RMB 10,000,000).
Interest expenses were $ $84,280 and $99,214 for the nine months ended March 31, 2014 and 2013, respectively.
NOTE 10 - RELATED PARTY DEBTS
Related party debts, which represent temporary short-term loans from Mr. Xin Sun, Mr Sun Kai and Ms Man Haiping, consisted of the following:
| March 31, 2014 | June 30, 2013 | |||||||
| Mr. Xin Sun | $ | 1,896,428 | $ | 2,051,472 | ||||
| Mr. Kai Sun | 37,617 | 38,101 | ||||||
| Ms. Haiping Man | - | 48,881 | ||||||
| Total | $ | 1,934,045 | $ | 2,138,454 | ||||
These loans are unsecured and non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand. Mr. Kai Sun and Ms. Haiping Man are PRC citizens and family members of Xin Sun, the CEO of the Company.
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NOTE 11 - INCOME TAXES
(a) Corporate income taxes
United States
China Health US was organized in the United States. China Health US had no taxable income for US income tax purposes for the three and nine months ended March 31, 2014. As of March 31, 2014, China Health US has a net operating loss carry forward for United States income taxes. Net operating loss carry forwards are available to reduce future years’ taxable income. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and the continued losses of the US entity. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. There were no changes in the valuation allowance for the three and nine months ended March 31, 2014 and 2013. Management reviews this valuation allowance periodically and makes adjustments accordingly.
Hong Kong
China Health HK was incorporated in the Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for income taxes have been made as China Health HK has no taxable income in Hong Kong.
People’s Republic of China
Under the EIT Law, the standard EIT rate is 25%. The PRC subsidiaries of the Company are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.
The provision for income taxes on income consists of the following for the three months ended March 31, 2014 and 2013:
Provision for income taxes consisted of:
| Three months ended | Nine months ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Current provision : | ||||||||||||||||
| USA | $ | - | $ | - | $ | - | $ | - | ||||||||
| China | - | 93 | - | 23,816 | ||||||||||||
| Total current provision | - | 93 | - | 23,816 | ||||||||||||
| Deferred provision: | ||||||||||||||||
| USA | - | - | - | - | ||||||||||||
| China | - | - | - | - | ||||||||||||
| Total deferred provision | - | - | - | - | ||||||||||||
| Total provision for income taxes | $ | - | $ | 93 | $ | - | 23,816 | |||||||||
Significant components of deferred tax assets were as follows:
| March 31, 2014 | June 30, 2013 | |||||||
| Deferred tax assets | ||||||||
| Net operating loss carryforward | $ | 88,338 | $ | 148,498 | ||||
Depreciation and amortization expenses | 48,613 | - | ||||||
Valuation allowance | (136,951 | ) | (148,498 | ) | ||||
| Deferred tax assets, net | $ | - | $ | - | ||||
As of March 31, 2014, the Company accrued a 100% valuation allowance on its deferred tax assets based on the assessment on the probability of future reversion.
(b) Uncertain tax positions
There were no unrecognized tax benefits as of March 31, 2014 and June 30, 2013. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions. For the three and nine months ended March 31, 2014 and 2013, the Company did not incur any interest and penalties arising from its tax payments.
| 13 |
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company’s assets are located in the PRC and revenues are derived from operations in the PRC.
In terms of industry regulations and policies, the economy of the PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the Chinese government. For example, all land is state owned and leased to business entities or individuals through the government’s granting of Land Use Rights. The granting process is typically based on government policies at the time of granting and can be lengthy and complex. This process may adversely affect the Company’s future manufacturing expansions. The Chinese government also exercises significant control over the PRC’s economic growth through the allocation of resources and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures.
The Company faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks, instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company’s performance.
Rental expense was nil and $26,532 for the nine months ended March 31, 2014 and 2013, respectively. Since the Company terminated its rental agreement on January 9, 2013, it had no rental commitment as of March 31, 2014.
NOTE 13 - MAJOR SUPPLIERS AND CUSTOMERS
The Company had one supplier that in the aggregate accounted for 85% of the Company’s purchases for the nine months ended March 31, 2014.
The Company had four customers that in the aggregate accounted for 46% of the Company’s total sales for the nine months ended March 31, 2014, with each customer accounting for 12%, 12%, 11% and 11%, respectively.
The Company had one supplier that in the aggregate accounted for 79% of the Company’s total purchases for the nine months ended March 31, 2013.
The Company had six customers that in the aggregate accounted for 71% of the Company’s total sales for the nine months ended March 31, 2013 with each customer accounting for 13%, 12%, 12%, 12%, 11% and 11%, respectively.
| 14 |
NOTE 14 - SEGMENT REPORTING
The Company was organized into three main business segments based on the types of products being provided to customers: HLJ Huimeijia, Humankind and others. Each of the three operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including revenue, gross margin, operating income, and net income produced from the various general ledger systems to make decisions about allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM is net income by segment.
The following tables present summary information by segment as of and for the nine and three months ended March 31, 2014 and 2013, respectively:
| As
of and For the Nine Months Ended March 31, 2014 | As
of and For the Nine Months Ended March 31, 2013 | |||||||||||||||||||||||||||||||
| HLJ Huimeijia | Humankind | Others | Consolidated | HLJ Huimeijia | Humankind | Others | Combined | |||||||||||||||||||||||||
| Revenues | $ | 980,495 | $ | 5,520,703 | $ | - | $ | 6,501,198 | $ | 943,375 | $ | 5,938,862 | $ | - | $ | 6,882,237 | ||||||||||||||||
| Cost of revenues | 712,868 | 4,317,947 | - | 5,030,815 | 692,741 | 5,059,918 | - | 5,752,659 | ||||||||||||||||||||||||
| Gross profit | 267,627 | 1,202,756 | - | 1,470,383 | 250,634 | 878,944 | - | 1,129,578 | ||||||||||||||||||||||||
| Interest expense | 84,280 | - | - | 84,280 | 99,214 | - | - | 99,214 | ||||||||||||||||||||||||
| Depreciation and amortization | 88,093 | 492,142 | 7,048 | 587,283 | 192,529 | 62,537 | - | 255,066 | ||||||||||||||||||||||||
| Income tax | - | - | - | - | - | 23,816 | - | 23,816 | ||||||||||||||||||||||||
| Total capital expenditures | 37,299 | 64,852 | - | 102,151 | 51,186 | 2,929 | - | 54,115 | ||||||||||||||||||||||||
| Total assets | $ | 3,508,374 | $ | 37,071,786 | $ | 98,211 | $ | 40,678,371 | $ | 3,512,199 | $ | 37,958,096 | $ | 107,568 | $ | 41,577,863 | ||||||||||||||||
| As
of and For the Three Months Ended March 31, 2014 | As
of and For the Three Months Ended March 31, 2013 | |||||||||||||||||||||||||||||||
| HLJ Huimeijia | Humankind | Others | Consolidated | HLJ Huimeijia | Humankind | Others | Combined | |||||||||||||||||||||||||
| Revenues | $ | 229,513 | $ | 2,325,881 | $ | - | $ | 2,555,394 | $ | 245,648 | $ | 2,479,660 | $ | - | $ | 2,725,308 | ||||||||||||||||
| Cost of revenues | 188,309 | 1,593,271 | - | 1,781,580 | 208,976 | 2,305,756 | - | 2,514,732 | ||||||||||||||||||||||||
| Gross profit | 41,204 | 732,610 | - | 773,814 | 36,672 | 173,904 | - | 210,576 | ||||||||||||||||||||||||
| Interest expense | 40,277 | - | - | 40,277 | 22,164 | - | - | 22,164 | ||||||||||||||||||||||||
| Depreciation and amortization | (131,801 | ) | 174,487 | (2 | ) | 42,684 | 18,417 | 30,497 | - | 48,914 | ||||||||||||||||||||||
| Income tax | - | - | - | - | - | 93 | - | 93 | ||||||||||||||||||||||||
| Total capital expenditures | (427 | ) | 18 | - | (409 | ) | 703 | 63 | - | 766 | ||||||||||||||||||||||
| Total assets | $ | 3,508,374 | $ | 37,071,786 | $ | 98,211 | $ | 40,678,371 | $ | 3,512,199 | $ | 37,958,096 | $ | 107,568 | $ | 41,577,863 | ||||||||||||||||
NOTE 15 - SUBSEQUENT EVENTS
Management has considered all events occurring through May 20, 2014, the date which the financial statements were available to be issued. All subsequent events requiring recognition as of March 31, 2014 have been incorporated into the accompanying consolidated and combined financial statements, and those requiring disclosure have been fully disclosed in accordance with FASB ASC Topic 855, “Subsequent Events”.
| 15 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD LOOKING STATEMENTS
We make certain forward-looking statements in this Quarterly Report on Form 10-Q (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. 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 Report 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, a corporation incorporated under the laws of Hong Kong, its wholly owned subsidiary in China, Harbin Humankind Biology Technology Co. Limited (“Humankind”) and indirect 99% owned subsidiary, Harbin Huimeijia Medicine Company and indirect wholly owned subsidiary, Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”).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 Renminbi Yuan 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.
| 16 |
Business Overview
Our principal business operations are conducted through our wholly owned subsidiary, Humankind and HLJ Huimeijia.
Our business is conducted through our sales agents and sales personnel. We sell our products to our own sales personnel and our sales agents, who in turn sell our products to our end customers. We have sales agents located in Jiangsu, Zhejiang, Gansu, Shanghai, Anhui and Beijing, where most of our revenues are generated. Our sales through agents in Beijing, Zhejiang, Jiangsu, Shanghai, Gansu and Anhui provinces accounted for 12%, 12%, 11%, 11%, 10% and 9% of our total sales, respectively, for the nine months ended March 31, 2014. Although we do not currently sell our products online, we expect to do so in the future.
| 1. | Humankind |
Humankind was incorporated in the PRC on December 14, 2003 and completed its Good Manufacturing Practice (“GMP”) certification on April 24, 2007. It is engaged in the manufacture and sale of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies.
Through Humankind, we are licensed to manufacture and sell two health supplement products, which have a State Good Health Issue Number as provided below. Humankind distributes and sells six kinds of health food and one kind of cosmetics product. In addition, the Company purchased 12 health supplement products on January 18, 2013 from a third-party company based in Guangdong province for a total $4,825,944 (RMB30,000,000).
Currently, we are only licensed to sell our products in the PRC.
| (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 an effective product for freckle removal and supplementing the water content of the skin. The certification number issued by the CFDA on August 29, 2007 was GuoShiJianZi20070356. QunLe is a patented product in the PRC.
Another health product we have is the “Kindlink” brand propolis and black ant capsule, which is made from propolis, black ant, acanthopanax and astragalus root. This product is consumed to boost one’s immunity. The certification number issued by the CFDA on August 20, 2004 for the license to manufacture the product was GuoShiJianZi G20040906.
Pursuant to a technology transfer agreement dated January 18, 2013 (the “Technology Transfer Agreement”), we purchased twelve health products from Guangzhou Aoda Biology Beauty Healthy Technology Co., Ltd, a non-affiliated party. These twelve products are the following:
| - | Dr. Xiao Brand Honeysuckle Pearl Capsule (Guo Shi Jian Zi G20100656), which is effective in acne removal; |
| - | Dr. Xiao Brand Multivitamin Tablet (Guo Shi Jian Zi G20080176), which is a multivitamin and mineral supplement; |
| - | Dr. Xiao Brand Zhengdian Capsule (Guo Shi Jian Zi 20070261), which is effective in relieving eyestrain; |
| - | Dr. Xiao Brand Shengui Capsule (Guo Shi Jian Zi G20080297), which is effective in increasing bone density; |
| - | Dr. Xiao Brand Multivitamin Tablet (Woman) (Guo Shi Jian Zi G20070338), which is an iron and multivitamin supplement; |
| - | Dr. Xiao Brand Shikong Soft Capsule (Guo Shi Jian Zi 20080096), which is effective in improving memory; |
| - | Dr. Xiao Brand Huangjingdanggui Tablet (Guo Shi Jian Zi G20080201), which is effective in improving nutritional anemia and chloasma; |
| - | Dr. Xiao Brand Xingxing Soft Capsule (Guo Shi Jian Zi G20080080), which is effective in improving memory; |
| - | Dr. Xiao Brand Vitamin A Fish Oil Soft Capsule (Guo Shi Jian Zi G20080406), which is effective in relieving eyestrain; |
| - | Dr. Xiao Brand Colon Cleanser Granules (Guo Shi Jian Zi G20060061), which is effective in relaxing bowels and promoting the discharge of lead; |
| - | Dr. Xiao Brand Jianli Soft Capsule (Guo Shi Jian Zi G20050710), which is effective in increasing immunity and relieving physical fatigue; and |
| - | LB Brand Xinpin Capsule (Guo Shi Jian Zi G20050770), which is effective in dispelling chloasma. |
| (ii) | Health Food and Organic “Green” Food |
Our health and organic “green” food products include (i) Sleeping Beauty Capsule, (ii) Virility Max Capsule, (iii) Ruddy Granule, (iv) Blood Cleanser Soft Capsule, (v) Colon Cleanser Capsule, and (vi) Energy Elemental Power.
| 17 |
| 2. | HLJ Huimeijia |
HLJ Huimeijia was founded on October 30, 2003, and is engaged in the manufacture and distribution of tincture, ointments, rubber paste (including hormones), topical solution, suppositories, liniment (including traditional Chinese medicine extractions), enemas and oral liquids. Its predecessor is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which had established brand name in the market through its supply of high-quality drug products. HLJ Huimeijia is a “high and new technology” enterprise that provides the most comprehensive types of topical medical products in Heilongjiang Province, a northeastern province of China. HLJ Huimeijia has twenty one products with approval numbers issued by the CFDA. In addition, HLJ Huimeijia is the holder of one patent for utility models, five patents for external design, and two trademarks in China, including the Chinese characters of “Xue Du,” that have a good reputation amongst customers in northeastern in China.
Through HLJ Huimeijia, we are licensed to manufacture and sell twenty one products with approval numbers issued by the CFDA as following:
| English Name | Efficacy | |||
| 1 | Enema Glycerini | Lubricating laxative. Used for constipation. | ||
| 2 | Umguentum Acidi Borici Camphoratum | Dermerethistica. Used for chilblain. | ||
| 3 | Ge Hong Beriberi Water | Dehumidification insecticide. Used for tinea pedis and tinea manuum caused by damp toxin brewing and binding, and other skin diseases caused by enzyme. | ||
| 4 | Pelvic Inflammation Suppository | Heat-clearing and detoxifying; activating blood to promote menstruation disperse swelling and relieve pain. Used for toxin and blood stasis stagnation in the uterus, distending pain in the lower abdomen, irregular menses, algomenorrhea and leukorrhagia, as well as pelvic inflammation and annexitis with the aforementioned symptoms. | ||
| 5 | Injury and Paralysis Tincture | Warm channel and expelling cold, promoting blood circulation to arrest pain. Used to relieve pain caused by traumatic injury and sprain. | ||
| 6 | Indometacin and Furazolidone Suppositories | Anti - inflammatory painkiller. Used to treat acute hemorrhoid, including internal hemorrhoids, external hemorrhoids, mixed hemorrhoids, anal fissure or archosyrinx and relieve pain; Used to ease pain after the operation of anal fissure, archosyrinx or hemorrhoids. | ||
| 7 | Injury and Rheumatism Relieving Paste | Dispelling rheumatism and relieving pain. Used for headache, rheumatalgia, neuralgia, sprain and muscular soreness. | ||
| 8 | Refining GouPi Cream | Relaxing tendon, invigorating the circulation of blood, dissipating cold and relieving pain. Used for arthralgia and myalgia, acute contusion, sprain, rheumatalgia, arthralgia, hypochondriac pain, muscular soreness, etc. | ||
| 9 | Muskiness Pain Relieving Paste | Expelling wind and removing dampness, relaxing the tendons and unblocking collateral. Used for rheumatic arthralgia, low back cold pain, traumatic injury, etc. | ||
| 10 | Muskiness Bone Strengthener Paste | Analgesia and anti-inflammatory. Used for rheumatalgia, arthralgia, backache, neuralgia, muscular soreness, sprain and contusion. | ||
| 11 | Matrine Suppositories | Antibacterial and antiphlogistic drugs. Used for trichomonas and candida vaginitis, chronic cervicitis, pelvic inflammation, etc. | ||
| 12 | Ethacriding Lactate Solution | Disinfectant and preservative drug. Used for disinfection of traumatic and disinfected wounds. | ||
| 13 | Triamcinolone Acetonide and Neomycin Paste | Used for neurodermatitis circumscripta and chronic eczema. Also used for small-scale psoriasis. | ||
| 14 | Double – Coptis Suppository | Course wind and resolving the exterior, heat-clearing and detoxifying. Used for influenza caused by affection of exogenous wind-heat, with symptoms of fever, cough and sore throat. Also used for upper respiratory tract infections and pneumonia, with symptoms of fever, cough and sore throat. | ||
| 15 | Methylrosanilinium Chloride Solution | Disinfectant and preservative drug. | ||
| 16 | Iodine Tincture | Disinfectant and preservative drug. | ||
| 17 | Mercurochrome Solution | Disinfectant and preservative drug.. | ||
| 18 | Hydrogen Peroxide Solution | Disinfectant and preservative drug. | ||
| 19 | Halcinonide Cream | Grucocorticoid. External use drug only to be used on the skin. Used for dermatoneuritis and psoriasis. | ||
| 20 | Compound Fluocinonide Tincture | Grucocorticoid. Used for dermatoneuritis and psoriasis. | ||
| 21 | Policresulen Vaginal Suppository | Anti-microbial and hemostasis drug. |
| 18 |
Results of Operations
The following table summarizes the results of our operations for the three months ended March 31, 2014 and 2013, respectively:
| March 31, 2014 | March 31, 2013 | Variance | % | |||||||||||||
| Revenues | $ | 2,555,394 | $ | 2,725,308 | $ | (169,914 | ) | -6.23 | % | |||||||
| Humankind | 2,325,881 | 2,479,660 | (153,779 | ) | -6.20 | % | ||||||||||
| HLJ Huimeijia | 229,513 | 245,648 | (16,135 | ) | -6.57 | % | ||||||||||
| Cost of Goods Sold | $ | 1,781,580 | $ | 2,514,732 | $ | (733,152 | ) | -29.15 | % | |||||||
| Humankind | 1,593,271 | 2,305,756 | (712,485 | ) | -30.90 | % | ||||||||||
| HLJ Huimeijia | 188,309 | 208,976 | (20,667 | ) | -9.89 | % | ||||||||||
| Gross Profit | $ | 773,814 | $ | 210,576 | $ | 563,238 | ||||||||||
Revenue
Total revenues decreased by $169,914, or 6.23%, for the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in revenues was primarily due to a decrease of $153,779 or 6.20% in Humankind’s revenues and a decrease of $16,135 or 6.57% in HLJ Huimeijia’s revenues for the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in revenues was mainly attributable to the decrease in sales volume as compared to the same period in 2013.
Our total cost of sales decreased $733,152 or 29.15% for the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in cost of sales was primarily due to a decrease of $712,485 or 30.90% in Humankind’s cost of sales and a decrease of $20,667 or 9.89% in HLJ Huimeijia’s cost of sales for the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in cost of sales was mainly a result of the decrease in sales volume.
Our gross margin increased 22.55%, from 7.73% for the three months ended March 31, 2013 to 30.28% for the three months ended March 31, 2014. This increase was attributable to the increase in Humankind’s sale prices since November 2013. The sales price for the Waterlilies Soft Capsule (Sailuozhi) increased 40%, and the sales price for the Propolis and Black Ant Capsule increased 31%, compared to the same period in 2013.
Sales by Product Line
The following table summarizes a breakdown of our sales by major product line for the three months ended March 31, 2014 and 2013, respectively:
| March 31, 2014 | March 31, 2013 | |||||||||||||||
| Product Category* | Sales US$ | % of Sales | Sales US$ | % of Sales | ||||||||||||
| Humankind | ||||||||||||||||
| Waterlilies Soft Capsule (Sailuozhi) | 1,452,095 | 56.84 | % | 1,557,001 | 57.13 | % | ||||||||||
| Propolis and Black Ant Capsule | 873,786 | 34.19 | % | 678,199 | 24.89 | % | ||||||||||
| Virility Max Capsule | - | - | 263 | 0.01 | % | |||||||||||
| Colon Cleanser Capsule | - | - | 209 | 0.01 | % | |||||||||||
| New Looks-28 Set | - | - | 243,988 | 8.95 | % | |||||||||||
| HLJ Huimeijia | ||||||||||||||||
| Muskiness Bone Strengthener Paste | 69,417 | 2.72 | % | 45,640 | 1.67 | % | ||||||||||
| Muskiness Pain Relieving Paste | 24,455 | 0.96 | % | 40,797 | 1.50 | % | ||||||||||
| Injury and Rheumatism relieving Paste | 24,073 | 0.94 | % | 43,885 | 1.61 | % | ||||||||||
| Refining GouPi Cream | 19,733 | 0.77 | % | 47,571 | 1.75 | % | ||||||||||
| Injury and Paralysis Tincture | 5,284 | 0.21 | % | 8,083 | 0.30 | % | ||||||||||
| Ge Hong Beriberi Water | 9,836 | 0.38 | % | 39 | 0.00 | % | ||||||||||
| Matrine Suppositories | 24 | 0.00 | % | 630 | 0.02 | % | ||||||||||
| Pelvic Inflammation Suppository | 5,184 | 0.20 | % | 5,536 | 0.20 | % | ||||||||||
| Indometacin and Furazolidone Suppositories | 5,325 | 0.21 | % | 6,874 | 0.25 | % | ||||||||||
| Triamcinolone Acetonide and Neomycin Paste | 3,391 | 0.13 | % | 5,694 | 0.21 | % | ||||||||||
| Compound Fluocinonide Tincture | - | - | 293 | 0.01 | % | |||||||||||
| Enema Glycerini | 49,127 | 1.92 | % | 33,783 | 1.24 | % | ||||||||||
| Hydrogen Peroxide Solution | 1,642 | 0.06 | % | 507 | 0.02 | % | ||||||||||
| Umguentum Acidi Borici Camphoratum | 11,914 | 0.47 | % | 5,904 | 0.22 | % | ||||||||||
| Ethacriding Lactate Solution | 108 | 0.00 | % | 368 | 0.01 | % | ||||||||||
| Policresulen Vaginal Suppository | - | - | 44 | 0.00 | % | |||||||||||
| Total | $ | 2,555,394 | 100.00 | % | $ | 2,725,308 | 100.00 | % | ||||||||
*All of the products are manufactured by the Company except the New Looks-28 Set.
| 19 |
Operating Expenses
The following table summarizes our operating expenses for the three months ended March 31, 2014 and 2013, respectively:
| March 31, 2014 | March 31, 2013 | Variance | % | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling, general and administrative | $ | 540,192 | $ | 353,995 | $ | 186,197 | 52.60 | % | ||||||||
| Depreciation and amortization | 42,684 | 48,914 | (6,230 | ) | -12.74 | % | ||||||||||
| Research and development | 47 | 120,491 | (120,444 | ) | -99.96 | % | ||||||||||
| Total Operating Expenses | $ | 582,923 | $ | 523,400 | $ | 59,523 | 11.37 | % | ||||||||
Total operating expenses for the three months ended March 31, 2014 increased $59,523, or 11.37%, as compared to the corresponding period in 2013. The increase in operating expenses was primarily attributable to an increase of $186,197, or 52.60%, in selling, general and administrative expense for the three months ended March 31, 2014 as compared to the same period in 2013, partially offset by a decrease of $120,444 or 99.96% in research and development expense.
Interest Income and Interest Expense
Interest income was $23,644 for the three months ended March 31, 2014, as compared to $66,951 for the three months ended March 31, 2013. This decrease of $43,307, or 64.68%, was primarily due to the decrease in deposits in the bank. The balance of deposits in the bank was $27,052,042 as of March 31, 2014 and $29,858,548 as of March 31, 2013.
Interest expense was $40,277 for the three months ended March 31, 2014, as compared to $22,164 for the three months ended March 31, 2013. This decrease of $18,113, or 81.72%, was primarily due to the increase in short-term loans. The average daily short-term loan was $1,638,681 and $1,124,900 for the three months ended March 31, 2014 and 2013, respectively.
Income Taxes
Income taxes decrease $93, or 100%, from $93 for the three months ended March 31, 2013 to $0 for the three months ended March 31, 2014. The Company had a decrease loss before income taxes in the amount of $135,448 for the three months ended March 31, 2014, as compared to loss before income taxes in the amount of $268,085 for the same period in 2013.
Net Income (Loss) and Loss Per Share
Net income was $135,448 for the three months ended March 31, 2014, as compared to loss of $21,336 for the three months ended March 31, 2013. This increase of $156,784, or 734.83%, in net income was primarily attributable to the decrease in cost of goods sold in the amount of $666,080, partially offset by the increase in general and administrative expense in the amount of $242,382.
Loss per share was $0.00 and $0.00 for the three months ended March 31, 2014 and 2013 respectively.
The following table summarizes the results of our operations for the nine months ended March 31, 2014 and 2013, respectively:
| March 31, 2014 | March 31, 2013 | Variance | % | |||||||||||||
| Revenues | $ | 6,501,198 | $ | 6,882,237 | $ | (381,039 | ) | -5.54 | % | |||||||
| Humankind | 5,520,703 | 5,938,862 | (418,159 | ) | -7.04 | % | ||||||||||
| HLJ Huimeijia | 980,495 | 943,375 | 37,120 | 3.93 | % | |||||||||||
| Cost of Goods Sold | $ | 5,030,815 | $ | 5,752,659 | $ | (721,844 | ) | -12.55 | % | |||||||
| Humankind | 4,317,947 | 5,059,918 | (741,971 | ) | -14.66 | % | ||||||||||
| HLJ Huimeijia | 712,868 | 692,741 | 20,127 | 2.91 | % | |||||||||||
| Gross Profit | $ | 1,470,383 | $ | 1,129,578 | $ | 340,805 | ||||||||||
| 20 |
Revenue
Total revenues decreased by $381,039, or 5.54%, for the nine months ended March 31, 2014 as compared to the same period in 2013. This decrease in revenues was primarily due to a decrease of $418,159, or 7.04%, in Humankind’s product sales for the nine months ended March 31, 2014 as compared to the same period in 2013, partially offset by an increase of $37,120, or 3.93%, in HLJ Huimeijia’s product sales. The decrease in Humankind’s product sales was mainly attributable to the decrease in sales volume as compared to the same period in 2013.
Our total cost of sales decreased $721,844, or 12.55%, for the nine months ended March 31, 2014 as compared to the same period in 2013. This decrease was primarily due to a decrease of $741,971, or 14.66%, in Humankind’s cost of sales, offset by an increase of $20,127, or 2.91%, in HLJ Huimeijia’s cost of sales. The decrease in Humankind’s cost of sales was due to the decrease in its sales volume, and the increase in HLJ Huimeijia’s cost of sales was attributable to the increase in its sales volume.
Our gross margin increased 6.21%, from 16.41% for the nine months ended March 31, 2013 to 22.62% for the nine months ended March 31, 2014. This increase was primarily due to a 6.99% increase in Humankind’s gross margin, from 14.80% for the nine months ended March 31, 2013 to 21.79% for the nine months ended March 31, 2014. The increase in gross margin was primarily attributable to an increase in the sales price of Waterlilies Soft Capsule (Sailuozhi) and a decrease in the cost of raw materials as compared to the same period in 2013.
Sales by Product Line
The following table summarizes a break-down of our sales by major product line for the nine months ended March 31, 2014 and 2013, respectively:
| March 31, 2014 | March 31, 2013 | |||||||||||||||
| Product Category* | Sales US$ | % of Sales | Sales US$ | % of Sales | ||||||||||||
| Humankind | ||||||||||||||||
| Waterlilies Soft Capsule (Sailuozhi) | $ | 3,491,329 | 53.69 | % | $ | 3,770,126 | 54.78 | % | ||||||||
| Propolis and Black Ant Capsule | 2,029,374 | 31.22 | % | 1,628,397 | 23.66 | % | ||||||||||
| Virility Max Capsule | - | - | 67,242 | 0.98 | % | |||||||||||
| Colon Cleanser Capsule | - | - | 53,232 | 0.77 | % | |||||||||||
| New Looks-28 Set | - | - | 419,865 | 6.10 | % | |||||||||||
| HLJ Huimeijia | ||||||||||||||||
| Muskiness Bone Strengthener Paste | 291,807 | 4.49 | % | 270,903 | 3.94 | % | ||||||||||
| Muskiness Pain Relieving Paste | 115,871 | 1.78 | % | 111,674 | 1.62 | % | ||||||||||
| Injury and Rheumatism relieving Paste | 94,254 | 1.45 | % | 105,608 | 1.53 | % | ||||||||||
| Refining GouPi Cream | 115,531 | 1.78 | % | 124,326 | 1.81 | % | ||||||||||
| Injury and Paralysis Tincture | 34,999 | 0.54 | % | 29,200 | 0.42 | % | ||||||||||
| Ge Hong Beriberi Water | 12,030 | 0.19 | % | 2,857 | 0.04 | % | ||||||||||
| Matrine Suppositories | 1,850 | 0.03 | % | 2,296 | 0.03 | % | ||||||||||
| Pelvic Inflammation Suppository | 14,771 | 0.23 | % | 19,868 | 0.29 | % | ||||||||||
| Indometacin and Furazolidone Suppositories | 17,527 | 0.27 | % | 17,768 | 0.26 | % | ||||||||||
| Triamcinolone Acetonide and Neomycin Paste | 20,771 | 0.32 | % | 27,801 | 0.40 | % | ||||||||||
| Compound Fluocinonide Tincture | 434 | 0.01 | % | 357 | 0.01 | % | ||||||||||
| Enema Glycerini | 128,087 | 1.97 | % | 122,902 | 1.79 | % | ||||||||||
| Hydrogen Peroxide Solution | 17,776 | 0.27 | % | 5,994 | 0.09 | % | ||||||||||
| Umguentum Acidi Borici Camphoratum | 102,936 | 1.58 | % | 84,092 | 1.22 | % | ||||||||||
| Ethacriding Lactate Solution | 11,851 | 0.18 | % | 6,584 | 0.10 | % | ||||||||||
| Policresulen Vaginal Suppository | - | - | 11,145 | 0.16 | % | |||||||||||
| Total | $ | 6,501,198 | 100.00 | % | $ | 6,882,237 | 100.00 | % | ||||||||
*All of the products are manufactured by the Company except the New Looks-28 Set.
| 21 |
Operating Expenses
The following table summarizes our operating expenses for the nine months ended March 31, 2014 and 2013, respectively:
| March 31, 2014 | March 31, 2013 | Variance | % | |||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling, general and administrative | $ | 1,594,887 | $ | 1,561,247 | $ | 33,640 | 2.15 | % | ||||||||
| Depreciation and amortization | 587,283 | 255,066 | 332,217 | 130.25 | % | |||||||||||
| Research and development | 157,552 | 358,658 | (201,106 | ) | -56.07 | % | ||||||||||
| Total Operating Expenses | $ | 2,339,722 | $ | 2,174,971 | $ | 164,751 | 7.57 | % | ||||||||
Total operating expenses for the nine months ended March 31, 2014 increased $164,751, or 7.57%, as compared to the corresponding period in 2013. The increase in operating expenses was primarily attributable to the increase in depreciation and amortization expense in the amount of $332,217, partially offset by the decrease in research and development expense in the amount of $201,106.
Interest Income and Interest Expense
Interest income was $87,746 for the nine months ended March 31, 2014, as compared to $190,490 for the nine months ended March 31, 2013. This decrease of $102,744, or 53.94%, was primarily due to the decrease in deposits in the bank. The balance of deposits in the bank was $27,052,042 as of March 31, 2014 and $29,858,548 as of March 31, 2013.
Interest expense was $84,280 for the nine months ended March 31, 2014, as compared to $99,214 for the nine months ended March 31, 2013. This decrease of $14,934, or 15.05%, was primarily due to the decrease in short-term loans. The daily average short-term loan was $1,354,379 and $1,427,650 for the nine months ended March 31, 2014 and 2013, respectively.
Income Taxes
Income taxes decreased $23,816, or 100%, from $23,816 for the nine months ended March 31, 2013 to $0 for the nine months ended March 31, 2014. The decrease was primarily attributable to the increase in loss before income taxes in the amount of $132,341.
Net Loss and Loss Per Share
Net loss was $870,555 for the nine months ended March 31, 2014, as compared to $978,099 for the nine months ended March 31, 2013. This decrease of $107,544 in net loss was primarily attributable to the decrease in cost of goods sold in the amount of $719,893, partially offset by the increase in depreciation and amortization expense in the amount of $332,217, the increase in general and administrative expense in the amount of $193,142, and the decrease in interest income in the amount of $102,744.
Loss per share was $0.01 and $0.02 for the nine months ended March 31, 2014 and 2013 respectively. This decrease was primarily a result of the above decrease in net loss.
Liquidity and Capital Resources
We believe our current working capital position, together with our expected future cash flows from operations, will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding in the future.
| 22 |
The following table summarizes our cash and cash equivalents position, our working capital, and our cash flow activity as of March 31, 2014 and 2013 and for each of the nine months then ended:
| 2014 | 2013 | |||||||
| As of March 31: | ||||||||
| Cash and cash equivalents | $ | 27,052,042 | $ | 29,858,548 | ||||
| Working capital | $ | 25,258,007 | $ | 29,016,771 | ||||
| Inventories | $ | 1,129,339 | $ | 1,075,796 | ||||
| For the Nine Months Ended March 31: | ||||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (1,669,461 | ) | $ | 5,371,542 | |||
| Investing activities | $ | (113,615 | ) | $ | (5,007,877 | ) | ||
| Financing activities | $ | 307,250 | $ | 206,092 | ||||
As of March 31, 2014, cash and cash equivalents were $27,052,042, as compared to $29,858,548 as of March 31, 2013. Cash and cash equivalents decreased $1,816,491, from $28,868,533 as of June 30, 2013 to $27,052,042 as of March 31, 2014, primarily attributable to net cash used in operating activities in the amount of $1,669,461 and investing activities in the amount of of $113,615, partially offset by net cash provided in financing activities in the amount of $307,250 and the effect of exchange rate changes in the amount of ($340,665). Cash and cash equivalents increased $1,088,391 from $28,770,157 as of June 30, 2012 to $29,858,548 as of March 31, 2013, primarily attributable to net cash provided by operating activities in the amount of $5,360,191 and financing activities in the amount of $206,092, and the effect of exchange rate changes in the amount of $518,634, partially offset by net cash used in investing activities in the amount of $4,996,526.
Our working capital at March 31, 2014 was $25,258,007, compared to working capital of $29,016,771 at March 31, 2013. This decrease of $3,758,764, or 12.95%, was primarily attributable to a decrease in cash and cash equivalents of $2,806,506.
Net cash used in operating activities was $1,669,461 for the nine months ended March 31, 2014, primarily attributable to a net loss available to China Health Industries Holdings in the amount of $870,485 and net increase in accounts receivable of $1,722,779 resulting from Humankind’s extension of the credit period, partially offset by depreciation and amortization expenses of $690,619 as reconciled and net decrease in advance to suppliers and prepaid expense of $274,820. Net cash provided by financing activities was $307,250 for the nine months ended March 31, 2014, mainly attributable to proceeds of short-term loans in the amount of $491,306, partially offset by payment of related party debts in the amount of $184,056. The effect of exchange rate changes on cash and cash equivalents in the amount of ($340,665) for the nine months ended March 31, 2014 was mainly a result of the effect of the appreciation of the RMB to the USD on the significant amount of cash and cash equivalents held by the Company in RMB. The foreign exchange rate of USD to RMB was 6.1374 to 1 as of June 30, 2013 and 6.2164 to 1 as of March 31, 2014.
Other than as described in this Report, we have no present agreements or commitments with respect to any material acquisitions of businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of, and/or investments in, products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
| 23 |
Plan of Operation
We will continue to focus on expanding our operations, developing new products and increasing our customer base. Additionally, we are putting more effort into developing our distribution channels by hiring more sales agents and sales people. We presently have enough liquidity to meet our expansion plans. However, depending on the level and speed of any growth, the Company may need additional funding in the future.
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.
| 24 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
At the conclusion of the period ended March 31, 2014 we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting discussed below, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
In an effort to remedy this material weakness in the future, we intend to do the following:
| · | Develop a comprehensive training and development plan, for our finance, accounting and internal audit personnel, including our Chief Financial Officer, Financial Manager, and others, in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof. |
| · | Design and implement a program to provide ongoing company-wide training regarding the Company’s internal controls, with particular emphasis on our finance and accounting staff. |
| · | Implement an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control department. In the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting. |
| · | Hire an individual that possesses the requisite U.S. GAAP experience and education. |
Despite the material weakness reported above, our management believes that our consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
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Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting have come to management’s attention during the quarter ended March 31, 2014 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II
OTHER INFORMATION
The exhibits required by this item are set forth in the Exhibit Index attached hereto.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CHINA HEALTH INDUSTRIES HOLDINGS, INC. | ||
| /s/ Xin Sun | ||
| By: | Xin Sun | |
| Title: | Chief Executive Officer and Chief Financial Officer (principal executive officer, principal financial officer and principal accounting officer) | |
| Date: | May 20, 2014 | |
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| Exhibit No. | Description | |
| 31.1 | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* Attached as Exhibits 101 to this Quarterly Report on Form 10-Q are the following financial statements for the quarter ended March 31, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements. The XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
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