10-Q 1 f10q1213_chinaginseng.htm QUATERLY REPORT f10q1213_chinaginseng.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2013
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
  
For the transition period from ______________ to ______________

China Ginseng Holdings, Inc.
(Exact name of registrant as specified in its charter)

Nevada
 
20-3348253
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
1562 Jie Fang Great Road
16 FL  Zhongji Building,  Suite 1062-1063
Nanguan District, Changchun City, China
 
130022
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone (01186) 43188952022

SEC File Number:  000-54072

N/A
(Former name, former address and former three months, if changed since last report)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interative 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 o  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
o
Accelerated filer
o
Non-accelerated file
o
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

As of February 14, 2014 there were 44,397,297shares issued and outstanding of the registrant’s common stock.
 


 
 

 
 
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
 
   
Item 1.     Financial Statements
F-1
   
Item 2.     Management’s Discussion and Analysis or Plan of Operation.
3
   
Item 3.     Quantitative and Qualitative Disclosure about Market Risk
19
   
Item 4.     Controls and Procedures.
19
   
PART II — OTHER INFORMATION
 
   
Item 6.     Exhibits.
21
 
 
 

 

PART I — FINANCIAL INFORMATION
 
Contents 
 
   
Consolidated Balance Sheets as of December 31, 2013 (Unaudited) and June 30, 2013
  F-2
   
Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended December 31, 2013 and 2012 (Unaudited) 
  F-3
   
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2013 and 2012 (Unaudited)
  F-4
   
Notes to Consolidated Financial Statements, December 31, 2013 (Unaudited)
  F-6
 
 
F-1

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 
   
December 31,
2013
   
June 30,
2013
 
 
(Unaudited)
     
ASSETS
 
CURRENT ASSETS
       
Cash
 
$
142,969
   
$
19,454
 
Accounts receivable, net
   
3,276,790
     
2,448,466
 
Inventory
   
263,025
     
263,661
 
Due from related parties
   
31,066
     
37,355
 
Prepaid expenses
   
396,899
     
347,546
 
Total Current Assets
   
4,110,749
     
3,116,482
 
                 
PROPERTY AND EQUIPMENT, net
   
7,612,802
     
1,530,390
 
                 
OTHER ASSETS
               
Ginseng crops, non-current portion
   
-
     
681,967
 
Intangible assets-patents, net
   
211
     
4,780
 
Investments
   
25,095
     
24,762
 
Deferred income tax asset
   
8,969
     
8,850
 
Total Assets
 
$
11,757,826
   
$
5,367,231
 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
CURRENT LIABILITIES
               
Note payable – building purchase
 
$
1,312,142
   
$
485,540
 
Note payable
   
6,119,238
     
52,600
 
Notes payable – related parties
   
1,228,768
     
1,279,982
 
Accounts payable
   
2,626,871
     
1,687,529
 
Accrued expenses
   
532,713
     
286,925
 
Taxes payable
   
162,122
     
149,988
 
Payments received in advance
   
401,858
     
397,678
 
Total Current Liabilities
   
12,383,712
     
4,340,242
 
OTHER LIABILITIES
               
Note payable – building purchase, net of current portion
   
-
     
809,231
 
Liabilities of discontinued operations
   
515,167
     
508,347
 
Payable to farmers
   
881,977
     
870,300
 
Total Liabilities
   
13,780,856
     
6,528,120
 
                 
STOCKHOLDERS’ DEFICIT
               
Common Stock, $0.001 par value; 50,000,000 shares authorized; 44,397,297 shares issued and outstanding at December 31 and June 30, 2013, respectively
   
44,398
     
44,398
 
Additional paid-in capital
   
7,540,852
     
7,498,051
 
Accumulated deficit
   
(10,275,344
)
   
(9,407,413
)
Accumulated other comprehensive income
   
667,064
     
704,075
 
Total Stockholders’ Deficit
   
(2,023,030
)
   
(1,160,889
)
Total Liabilities and Stockholders’ Deficit
 
$
11,757,826
   
$
5,367,231
 
 
See accompanying notes to consolidated financial statements.
 
 
F-2

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
 
  
 
For the Three Months Ended
   
For the Six Months Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
REVENUES
 
$
2,484,432
   
$
1,688,947
   
$
2,546,825
   
$
2,192,719
 
                                 
COSTS AND EXPENSES
                               
Cost of goods sold
   
2,070,925
     
1,439,961
     
2,077,579
     
1,940,400
 
Selling, general and administrative expenses
   
581,182
     
368,864
     
841,517
     
699,924
 
Impairment of ginseng crops
   
-
     
-
     
-
     
920,840
 
Bad debt expense
   
(16,138
)
   
-
     
(55,348
   
-
 
Depreciation and amortization
   
128,299
     
29,898
     
158,775
     
58,726
 
Total Costs and Expenses
   
2,764,268
     
1,838,723
     
3,022,523
     
3,619,890
 
                                 
LOSS FROM OPERATIONS
   
(279,836
)
   
(149,776
)
   
(475,698
)
   
(1,427,171
)
                                 
NON OPERATING EXPENSE
                               
Interest expense
   
332,213
     
77,035
     
392,233
     
159,696
 
Net Other Expense
   
332,213
     
77,035
     
392,233
     
159,696
 
                                 
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
   
(612,049
)
   
(226,811
)
   
(867,931
)
   
(1,586,867
)
                                 
PROVISION FOR INCOME TAXES
   
-
     
-
     
-
     
-
 
                                 
LOSS FROM CONTINUING OPERATIONS
   
(612,049
)
   
(226,811
)
   
(867,931
)
   
(1,586,867
)
                                 
LOSS FROM DISCONTINUED OPERATIONS
   
-
     
(30,049
   
-
     
(63,195
                                 
NET LOSS
   
(612,049
)
   
(256,860
)
   
(867,931
)
   
(1,650,062
)
                                 
OTHER COMPREHENSIVE INCOME (LOSS)
                               
Translation Adjustment
   
(59,238
   
16,133
     
(37,011
)
   
(27,275)
 
                                 
COMPREHENSIVE LOSS
 
$
(671,287
)
 
$
(240,727
)
 
$
(904,942
)
 
$
(1,677,337
)
                                 
NET LOSS PER COMMON SHARE (Basic and diluted)
                               
Loss from continuing operations per share
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
)
Loss from discontinued operations per share
   
-
     
-
     
-
     
-
 
    Net loss per share
 
$
(0.01
)
 
$
(0.01
)
 
$
(0.02
)
 
$
(0.04
                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING –
                               
Basic
   
44,397,297
     
44,397,297
     
44,397,297
     
44,397,297
 
Diluted
   
44,397,297
     
44,397,297
     
44,397,297
     
44,397,297
 
 
See accompanying notes to consolidated financial statements.
 
 
F-3

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   
For the Six Months Ended
 
   
December 31,
 
   
2013
   
2012
 
             
Cash Flows from Operating Activities:
           
Net loss
 
$
(867,931
)
 
$
(1,650,062
)
Loss from discontinued operations
           
63,195
 
Adjustments to reconcile net loss to net cash from operating activities:
               
      Impairment of ginseng crops
   
-
     
920,840
 
      Depreciation and amortization
   
158,775
     
58,725
 
      Imputed interest
   
42,801
     
73,770
 
     Changes in assets and liabilities:
               
(Increase) decrease in accounts receivable
   
(796,201
)
   
(794,212
)
(Increase) decrease in inventory
   
695,290
     
616,636
 
(Increase) decrease in prepaid expense
   
(44,690
)
   
(30,905
)
(Increase) decrease in due from related parties
   
6,364
     
(74,803
)
(Increase) decrease in amounts due from farmers
   
-
     
(92,841
)
Increase (decrease) in accounts payable
   
927,731
     
754,655
 
Increase (decrease) in taxes payable
   
10,122
     
-
 
Increase in receivables in advance
   
(1,156
   
78,079
 
Increase (decrease) in accrued expenses
   
242,785
     
38,766
 
Increase (decrease) in amounts due to farmers
   
-
     
40,102
 
Net cash provided by (used in) operating activities- continuing operations
   
373,890
     
1,945
 
Net cash provided by (used in) operating activities- discontinued operations
   
-
     
(2,469)
 
Net cash provided by (used in) operating activities
   
373,890
     
(524)
 
                 
Cash Flows from Investing Activities:
               
  Purchase of property and equipment
   
(6,164,805
)
   
(272
)
 Net cash provided by (used in) investing activities
   
(6,164,805
)
   
(272
)
                 
Cash Flows from Financing Activities:
               
  Proceeds from loans
   
6,065,932
     
-
 
  Proceeds from loans payable to related parties
   
-
     
71,953
 
  Repayment of loans payable to related parties
   
(58,278
   
-
 
 Net cash provided by (used in) financing activities
   
6,007,654
     
71,953
 
                 
Effect of exchange rate on cash
   
(93,224
)
   
(30,558
)
                 
Increase (decrease) in cash
   
123,515
     
40,599
 
                 
Cash at beginning of period
   
19,454
     
24,183
 
                 
Cash at end of period
 
$
142,969
   
$
64,782
 
 
See accompanying notes to consolidated financial statements.
 
 
F-4

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES (CONTINUED)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
   
For the Six Months Ended
 
   
December 31,
 
   
2013
   
2012
 
             
Supplemental Disclosure of Cash Flow
           
Information:
           
Cash paid for:
           
Interest  
 
$
-
   
$
-
 
Income taxes
   
-
     
-
 
                                                                                       
See accompanying notes to consolidated financial statements.
 
 
F-5

 

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE A – PRESENTATION, NATURE OF BUSINESS, AND GOING CONCERN

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended June 30, 2013.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the consolidated financial statements not misleading have been included.  Results for the three months and six months ended December 31, 2013, are not necessarily indicative of the results that may be expected for the year ending June 30, 2014.
 
Reclassifications

Certain reclassifications have been made to the consolidated financial statements for the three and six months ended December 31, 2012 to make them comparable to the presentation for the three and six months ended December 31, 2013.

Nature of Business

China Ginseng Holdings, Inc. and Subsidiaries (the “Company”), was incorporated under the laws of Nevada on June 24, 2004.

On November 24, 2004, the Company acquired 55% of Yanbian Huaxing Ginseng Industry Co. Limited (“Yanbian Huaxing”), which is located in China and, is in the business of farming, processing, distribution, and marketing of Asian Ginseng products.  In 2010, the Company ceased marketing ginseng and is presently utilizing the harvest to produce a ginseng beverage.  However, it continues to buy ginseng for the resale market.  In August 2005, the Company acquired the remaining 45% of Yanbian Huaxing. Yanbian Huaxing controls, through 20 year leases (the "Leases") granted by the Chinese Government, approximately 1,500 hectors (3,705 acres) of land used to grow ginseng.  The Company had no operations prior to November 24, 2004. These leases expire in 2024.

On August 24, 2005, the Company acquired Jilin Ganzhi Ginseng Produce Co. Limited, whose principal business is the manufacture of ginseng drinks.

On October 19, 2005, the Company incorporated a new company, Jilin Huamei Beverage Co. Limited (“Jilin Huamei”), which operates as a sales department for the Company’s canned ginseng juice and wine, which are produced by other subsidiaries of the Company.

On March 31, 2008, the Company acquired Tonghua Linyuan Grape Planting Co. Limited (“Tonghua Linyuan”) whose principal activity is the growing, cultivation and harvesting of a grape vineyard. The Company plans to produce wine and grape juice but to date has not commenced production. In June 2012, the Company decided to abandon the growing and harvesting of grapes due to the poor quality of recent harvests, which were not suitable for the production of wine or grape juice.  Instead, the Company began purchasing grapes in the open market to produce wine and grape juice and did not to renew the Leases with the Chinese Government when the leases expired on December 31, 2013, since it no longer needed them for its business. On June 30, 2013, the Company sold the assets and liabilities of Tonghua Linyuan to a third party.
 
 
F-6

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE A – PRESENTATION, NATURE OF BUSINESS, AND GOING CONCERN (CONTINUED)

Nature of Business (Continued)

On March 2, 2012, the Company approved the incorporation of a new subsidiary, Hong Kong Huaxia International Industrial Co., Limited (“Hong Kong Huaxia”) in Hong Kong in order to sell health and specialized local products. Hong Kong Huaxia was incorporated in Hong Kong on March 18, 2012, and began operations in April 2012. Hong Kong Huaxia has registered 880,000,000 shares of 1 HKD par value stock in Hong Kong. None of the $113,443,000 (880,000,000 HKD) registered capital of Hong Kong Huaxia has been funded.

On September 27, 2013, the Company established a new wholly owned subsidiary of Hong Kong Huaxia, Jilin Huaxia Ginseng Co., Ltd  (“Jilin Huaxia”) in order to open online store through Taobao Marketplace, the biggest online Business to Consumer and Consumer to Consumer platform in Asia, a subsidiary company of Alibaba Group, and to acquire machinery and equipment in China.  Hong Kong Huaxia registered capital of $6,000,000 in Jilin Huaxia.

Consolidated Financial Statements

The consolidated financial statements include the accounts and activities of China Ginseng Holdings, Inc. and its wholly-owned subsidiaries, Yanbian Huaxing Ginseng Co. Limited, Jilin Huamei Beverage Co. Limited, Jilin Ganzhi Ginseng Products Co. Limited, Tonghua Linyuan Grape Planting Co. Limited and Hong Kong Huaxia International Industrial, Co. Limited (which included Jilin HuaxiaGinseng Co., Ltd). All intercompany transactions have been eliminated in consolidation.

Going Concern

As indicated in the accompanying financial statements, the Company had net losses of $867,931and $1,650,062 for the six months ended December 31, 2013 and 2012, respectively, and an accumulated deficit of $10,275,344 as of December 31, 2013 and there are existing uncertain conditions the Company foresees relating to its ability to obtain working capital and operate successfully. Management’s plans include the raising of capital through the debt and equity markets to fund future operations and the generating of revenue through its businesses. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations.

Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenues will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 
F-7

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013(UNAUDITED)

NOTE B - PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost and is depreciated using the straight line method over the estimated useful lives of the respective assets, as follows:
 
Buildings and improvements
6 - 40 years
Machinery and equipment
5 - 15 years
Motor vehicles
5 - 10 years
Office equipment
5 - 10 years
 
Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized.  When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized in operations.

Property and equipment is comprised of the following at:

   
December 31,
   
June 30,
 
   
2013
   
2013
 
Buildings and improvements
 
$
1,476,160
   
$
1,456,618
 
Machinery and equipment
   
6,610,616
     
387,826
 
Motor vehicles
   
30,584
     
30,179
 
Office equipment
   
25,248
     
25,021
 
     
8,142,608
     
1,899,644
 
Less accumulated depreciation
   
(529,806
   
(369,254
   
$
7,612,802
   
$
1,530,390
 
 
Substantially all of the property and equipment is located in China.

Total Depreciation was $154,357 and $56,242 for the six months ended December 31, 2013 and 2012, respectively. Depreciation is recorded in the financial statements as follows:

   
Six Months Ended
 
   
December 31,
 
   
2013
   
2012
 
Depreciation Expense
 
$
153,962
   
$
54,253
 
Capitalized Ginseng Crops
   
395
     
1,989
 
   
$
154,357
   
$
56,242
 

Depreciation expense is included within Deprecation and amortization on the consolidated Statements of Operations.  Capitalized Ginseng Crops is included in the consolidated Balance Sheet in this report.

NOTE C –INVENTORY

Inventory is comprised of the following at:
 
   
December 31,
   
June 30,
 
   
2013
   
2013
 
Raw materials
 
 $
211,806
   
 $
213,209
 
Finished goods
   
46,808
     
46,100
 
Operating supplies
   
4,411
     
4,352
 
   
$
263,025
   
$
263,661
 
 
 
F-8

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE C –INVENTORY (Continued)

In March 2013, the Company determined that the grape juice inventory held at Tonghua Linyuan is no longer saleable. As such, the Company wrote off inventory with a value of RMB 8,855,286 ($1,410,149) at June 30, 2013.

At December 31, 2013 and June 30, 2013, there were no shipments of Ginseng at customer locations awaiting inspection and approval that may be subject to invoicing.

NOTE D – INVESTMENTS

In December 2010, the Company invested $25,095 (RMB 153,000) in Changchun Zhongshen Beverage Co. Ltd. (“Zhongshen”). This investment represented a 17% interest in Zhonghsen. Zhongshen is a retailer of ginseng juice and wine. The Company accounts for this investment utilizing the cost method.

In September 2011, the Company entered into an agreement with three other companies to establish a new entity, Jilin Province Jiliang Beverage Investment Management Co., Ltd (“Jilin Jiliang”). The purpose of Jilin Jiliang is to provide investment and project consultation. Under the agreement, the Company is required to invest a total of $82,009 (RMB 500,000) for a 10% interest in Jilin Jiliang by September 25, 2012. In September 2011, the Company invested $16,402 (RMB 100,000) in Jilin Jiliang.  During the year ended June 30, 2013, Jilin Jiliang returned the $16,402 (RMB 100,000) investment to the Company.

NOTE E – GINSENG CROPS

The Company’s business, prior to June 30, 2009, was primarily to harvest and sell fresh and dried Ginseng. The growth period takes approximately 5 to 6 years before harvest can commence and up to 8 years for improved harvest and seedling yields. The Company is changing its business model to utilize the harvested Ginseng to manufacture Ginseng juice and other Ginseng beverages. It commenced the juice operation in August 2011. The Company plants selected areas each year and tracks the costs expended each year by planting area. The Chinese government owns all the land in China.

Currently, the Company has land grants from the Chinese government for approximately 1,500 hectors of land (approximately 3,705 acres) to grow Ginseng which were awarded in April and May 2005.  These grants are for 20 years and the management of the Company believes that the grants will be renewed as the grants expire in different areas.  However, there are no assurances that the Chinese government will continue to renew these grants in the future. The planting of new Ginseng is dependent upon the Company’s cash flow and its ability to raise working capital.

The Company had planted approximately 287,984 square meters of land. The Company plans to plant, over the next 5 years, 100,000 square meters, representing approximately 20,000 square meters per year. In the succeeding five years, the Company plans to harvest approximately 60,945 square meters of Ginseng. The harvest plan by year is as follows: 2014-58,281 and 2017-2,664.

In August of 2012, a typhoon struck the Mudanjian Ginseng farm destroying approximately 111,839 square meters of planted ginseng, which had an approximate value of RMB 6,754,675 ($ 1,075,640).
 
 
F-9

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE E – GINSENG CROPS (CONTINUED)

An analysis of ginseng crop costs for each of the applicable periods is as follows:
 
   
December 31,
2013
   
June 30,
2013
 
Beginning Crop Costs
 
$
681,967
   
$
2,495,543
 
Currency Conversion Adjustment to Beginning Balance 
   
-
     
-
 
Capitalized Costs During Year:
               
       Wages
   
-
     
381,803
 
Fertilizer 
   
-
     
1,457
 
Ginseng shelf
   
-
     
59,701
 
Field clearing and cultivation 
   
-
     
81,400
 
Farmer lease fee net of management fee
   
-
     
301,473
 
Labor
   
12,095
     
-
 
Irrigation
   
-
     
-
 
Depreciation 
   
395
     
2,589
 
Other
   
3,108
     
4,385
 
Total Capitalized Costs
   
15,598
     
832,808
 
Less:
               
Cost of crops harvested 
   
(697,565
   
(1,570,744
)
Impairment adjustment
   
-
     
(1,075,640
     
(697,565
   
(2,646,384
)
Ending Crop Costs
   
-
     
681,967
 
Less: Current portion
   
-
     
-
 
Non-Current Portion of Crop Costs
 
$
-
   
$
681,967
 
 
The cost of harvest is calculated by reference to the planting area and the detailed costs maintained for each planting area.  Based upon the square meters planted by area, a square meter cost is calculated and applied to the square meters harvested, rendering a cost of harvest.

For each financial reporting period, the Ginseng crop harvested is valued at net realizable value.  If the net realizable value is lower than carrying value, a write down is made for the difference.

NOTE F – AGREEMENTS WITH FARMERS

The Company has executed agreements with a number of local farmers to grow, cultivate and harvest ginseng utilizing the land leased from the government. The farming contracts commenced in January 2008. In connection with these agreements, the Company (1) leases sections of the ginseng farm land to the farmers at approximately $1.50 (RMB 10) per square meter per year, (2) provides the seeds and fertilizer to the farmers and clears the land of large debris, (3) pays the farmers a management fee of approximately $0.50 (RMB 4.00) per square meter per year, and (4) the farmers are required to produce 2kg of ginseng for each square meter that they manage. The Company pays the farmers the market price for their ginseng. If the harvest is below 2kg per square meter, the difference will be deducted from the total payment for ginseng purchased. If the harvest produces more that 2kg per square meter, the Company pays approximately $3.00 for every extra kilo. The Company records these agreements on a net basis by individual farmers. The Company has recorded a receivable from the farmers for the rental income of the leased ginseng farm land of $0 and $0 at December 31, 2013 and June 30, 2013, respectively. The Company has also recorded a long-term Payable to Farmers for the management fee due to the farmers.  The liability at December 31, 2013 and June 30, 2013 was $881,977 and $870,300, respectively. The receivable and payable balances for the respective areas will be settled at harvest time when the Company purchases the harvest at the current market value for ginseng.
 
 
F-10

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE G – INTANGIBLE ASSETS

Intangible assets consist of the patent rights for Ginseng drinks. The cost and related amortization is as follows:
 
   
December 31,
   
June 30,
 
   
2013
   
2013
 
Cost
 
$
18,428
   
$
18,184
 
Less accumulated amortization
   
(18,217
)
   
(13,404
)
   
$
211
   
$
4,780
 

Amortization expense was $4,813 and $4,473 for the six months ended December 31, 2013 and 2012, respectively.
 
NOTE H – LOAN PAYABLE TO FINANCIAL INSTITUTION

In 2002, the Company’s subsidiary, Tonghua Linyuan Grape Co. Limited, borrowed 2,000,000 RMB from Ji’an Qingshi Credit Corporation at an interest rate of 6.325% per annum with a maturity date of February 4, 2004. The loan is currently in default. In March 2008, the lender verbally agreed that no principal or interest need be paid until the company is generating profits. Interest has been paid on the loan through June 30, 2009 and will be accrued in subsequent periods. The loan is secured by the Company’s inventory and equipment. The loan balance at December 31, 2013 and June 30, 2013 is $328,036 and $323,693, respectively. The loan balance is included in Liabilities of Discontinued Operations on the accompanying Balance Sheet.

NOTE I – NOTE PAYABLE – BUILDING PURCHASE

On March 2, 2011, the Company entered into an agreement with Meihekou Hang Yilk Tax Warehousing Logistics, an auctioneer, to purchase office and warehouse facilities. The purchase price was $1,325,479 (RMB 9,000,000). On June 24, 2011, the Company made payment of $73,804 (RMB 500,000) leaving a balance of $1,251,675 (RMB 8,500,000). On September 10, 2011, the Company paid 8,000,000 RMB through the proceeds of a loan with Merkekou City Rural Credit Union. The loan was due on August 12, 2012. The interest rate is a floating rate adjusted upwards by 90%. At June 30, 2012, the Central Bank Rate was 6.31%. Applying the adjustment factor yields a rate of 11.989%. The loan is secured by the building. The remaining 500,000 RMB was paid as follows: (a) 100,000 RMB in December 2010 and (b) 400,000 RMB in June 2011. On August 30, 2012, the loan was renegotiated extending the maturity date to August 29, 2014 and requires principal payments of 1,000,000 RMB (USD 164,018) in September 2012; 1,000,000 RMB (USD 164,018) on August 29, 2013; 1,000,000 RMB (USD 164,018) on December 20, 2013 and 5,000,000 RMB (USD 820,088) on August 29, 2014. The payments due in September 2012, August 2013 and December 2013 were not made by the Company and the note is thus in default.
 
 
F-11

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE J – NOTE PAYABLE – FIXED ASSET PURCHASE

On October 29, 2013, the Company borrowed $6,065,932 (RMB 36,983,383) in order to fund the acquisition of machinery and equipment by the Company.  The loan term is to February 28, 2014, and the Company is to pay $211,413 (RMB 1,300,000) in interest over the life of the loan.  The Company has recognized $109,172 (RMB 671,311) in interest expense on this loan in the six months ended December 31, 2013. The loan is secured by $6,217,586 (RMB 37,908,000) in machinery and equipment of the Jilin Huaxia.

NOTE K - RELATED PARTY TRANSACTIONS

The Company had been financing its operations with loans from individuals, principally residents of China, who are deemed to be related parties because of their ownership interest in the Company (shareholders).  The individuals have loaned the Company funds that are interest free, have no specific repayment date, and are unsecured.  The funds received are evidenced by receipt of cash acknowledgments.  As of December 31, 2013 and June 30 2013 funds borrowed to fund the current operations of the Company were $1,228,768 and $1,279,982, respectively.  In accordance with FASB ASC 835-30, the Company has imputed an interest charge of $42,801 and $73,770 which has been recorded in the financial statements for the six months ended December 31, 2013 and 2012, respectively.

As of December 31, 2013 and June 30, 2013, the Company had receivables from related parties amounting to$31,066 and $37,355, respectively.

NOTE L – PROVISION FOR INCOME TAXES

Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
 
 Deferred tax assets consist of the following at:

   
December 31,
   
June 30,
 
   
2013
   
2013
 
Timing difference related to inventory provisions
 
$
8,969
   
$
8,850
 
Net operating losses
   
1,593,754
     
1,376,771
 
Valuation allowance
   
(1,593,754
)
   
(1,376,771
)
Deferred tax asset
 
$
8,969
   
$
8,850
 

The deferred tax asset is the result of an inventory provision and related reserve. Under Chinese tax a law, the Company is not entitled to a deduction for the provision until the inventory is completely discarded.  Accordingly, the liability has been recorded as an offset by a deferred tax asset representing a timing difference.
 
 
F-12

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE L – PROVISION FOR INCOME TAXES (CONTINUED)

The Company has a net operating loss carry forward as follows:
 
   
December 31,
   
June 30,
 
   
2013
   
2013
 
International (China)
 
$
4,232,776
   
$
3,730,738
 
United States
   
2,142,239
     
1,776,346
 
   
$
6,375,015
   
$
5,507,084
 

The operating losses are available to offset future taxable income. The China net operating loss carryforwards can only be carried forward for five years and will commence expiring in the year 2013.  The Company does not file a consolidated tax return in China. Therefore, the profitability of the individual Chinese companies will determine the utilization of the carryforward losses. The U.S. carryforward losses are available to offset future taxable income for the succeeding 20 years and commence expiring in the year 2027.

The components of income before taxes are as follows:

   
For the Six Months Ended
December 31,
 
   
2013
   
2012
 
International (China)
 
$
(502,038
)
 
$
(1,392,656
)
United States
   
(365,893
)
   
(194,211
)
   
$
(867,931
)
 
$
(1,586,867
)
 
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and Federal statutory rate for the six months ended December 31, 2012 and 2011, respectively, are as follows:

   
2012
   
2012
 
Federal statutory rate
   
(34.0
)%
   
(34.0
)%
State income taxes, net of federal benefit
   
3.3
     
3.3
 
Valuation allowance
   
30.7
     
30.7
 
Effective tax rate
   
-
%
   
-
%

NOTE M– CONCENTRATIONS

In the six months ended December 31, 2013, three customers accounted for 91% of revenues.

In the six months ended December 31, 2012, three customers accounted for 53% of revenues.
 
 
F-13

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE N – DISCONTINUED OPERATIONS

On June 30, 2013, the Company discontinued its grape production operations.  The Company sold the assets and liabilities of Tonghua Linyuan and plans to close Tonghua Linyuan.  The following summarizes the operations of Tonghua Linyuan with the six months ended December 31, 2013 and 2012:

   
December 31,
 
   
2013
   
2012
 
Revenues
 
$
-
   
$
-
 
Total costs and expenses
   
-
     
(48,755
)
Operating loss
   
-
     
(48,755
)
Other expense
   
-
     
(14,440
Provision for taxes
   
-
     
-
 
Loss from discontinued operations
 
$
-
   
$
(63,195
)

The Company has retained $515,167 and $508,347 in contingent liabilities of Tonghua Linyuan at December 31, 2013 and June 30, 2013, respectively.

NOTE O –COMMITMENTS AND CONTINGENCIES

The Company has a three year employment contract with the Chief Executive Officer expiring on January 1, 2017 aggregating $15,108 per year.

The Company has a three year contract with the Chief Financial Officer expiring on January 1, 2017 aggregating $ 5,664 per year.

The Company has a three year employment contract with a staff accountant expiring on March 2, 2015 aggregating $5,316 per year.

The Company has a two year employment agreement with an office employee expiring in December 2014 aggregating $5,110 per year.

The Company has a three contract with the Chief Marketing Officer expiring on February 1, 2017 aggregating $17,564 per year.

The Company has a three year employment contract with two office employees expiring between June 2015 and November 2015 aggregating $6,972 per year.

The Company has a three year employment contract with the General Manager of Hong Kong Huaxia International Industrial Co., Limited expiring on August 18, 2015 aggregating $15,108 per year.

The Company has a one year lease for its corporate offices in China aggregating $109,432 RMB per year (USD $17,000) which expires on December 31, 2014.
 
 
F-14

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE O – COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Chinese government owns all the land in China. Currently, the Company has grants from the Chinese government for approximately 1,500 hectors of land (3,705 acres) to grow Ginseng. These grants are for 20 years. There is no assurance that the Chinese government will continue to renew these grants in the future.

The Company has a 15 year lease with the Representative of Group One Farmer, Si’An City, Qingshi, Qingshi Town, Qingshi Village, China to lease 750 acres to grow and harvest grapes. The lease expires December 31, 2014. The annual lease fee is 187,500 RMB or approximately $29,600 per year to lease the acreage. The land and buildings on the premises have a separate lease concurrent with the property lease. The company does not plan to renew the leases in 2014.

In 2008, the Company entered into a 5 year lease to refrigerate and store fresh Ginseng The annual lease fee approximates $15,500 per year.

Rent expense was $17,263 and $50,212 for the six months ended December 31, 2013 and 2012, respectively.

NOTE P – OPERATING SEGMENTS

The Company presently organizes its business into two reportable farming segments: (1) the cultivation and harvest of Ginseng for the production of Ginseng beverages and (2) the cultivation and harvest of grapes for the eventual production of wine and grape juice.

The Company’s reportable business segments are strategic business units that offer different products.  Each segment is managed separately because they require different production techniques and market to different classes of customers.

Six months ended December 31, 2013:

   
Parent
Company
   
Ginseng
   
Continuing Operations
   
Wine
   
Total
 
Revenues
  $ -     $ 2,546,825     $ 2,546,825     $ -     $ 2,546,825  
Net loss
    (365,893 )     (502,038 )     (867,931 )     -       (867,931 )
Total assets
    365,451       11,392,375       11,757,826       -       11,757,826  
                                         
Other significant items:
                                       
Depreciation and amortization
    861       157,914       158,775       -       158,775  
Interest expense
    22,462       369,771       392,233       -       292,233  
Expenditures for fixed assets
    -       6,164,805       6,164,805       -       6,164,805  
Impairment of ginseng crops
    -       -       -       -       -  

 
F-15

 
 
CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 (UNAUDITED)

NOTE P – OPERATING SEGMENTS (Continued)

Six months ended December 31, 2012:

   
Parent
Company
   
Ginseng
   
Continuing Operations
   
Wine
   
Total
 
Revenues
  $ -     $ 2,192,719     $ 2,192,719     $ -     $ 2,192,719  
Net loss
    (194,211 )     (1,392,656 )     (1,586,867 )     (63,195 )     (1,650,062 )
Total assets
    147,508       6,006,375       6,153,883       1,417,564       7,571,447  
                                         
Other significant items:
                                       
Depreciation and amortization
    1,149       57,577       58,726       46,286       105,012  
Interest expense
    46,035       113,661       159,696       14,440       174,136  
Expenditures for fixed assets
    272       -       272       -       272  
Impairment of ginseng crops
    -       920,840       920,840       -       920,840  

 
F-16

 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This Form 10−Q contains forward-looking statements. Our actual results could differ materially from those set forth as a result of general economic conditions and changes in the assumptions used in making such forward-looking statements. The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of China Ginseng Holdings Inc. for the three months ended December 31, 2013 and 2012 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report on Form 10-K for the year ended June 30, 2013. The analysis set forth below is provided pursuant to applicable Securities and Exchange Commission regulations and is not intended to serve as a basis for projections of future events.
 
Company Overview

Our Company, China Ginseng Holdings Inc., was incorporated on June 24, 2004 in the State of Nevada.  The Company conducts business through its four wholly-owned subsidiaries located in China.  We have been granted 20-year leases to 3,705 acres of land by the Chinese government for ginseng planting and we control, through a lease, approximately 750 acres of grape vineyards. However, recent harvests of grapes showed poor quality for wine production, which indicates that the vineyards are no longer suitable for planting grapes for wine production. Therefore, we have decided not to renew our lease for the vineyards with the Chinese government upon expiration on December 31, 2013 and, going forward, we intend to purchase grapes from the open market in order to produce grape juice and wine.
 
Since our inception in 2004, we have been engaged in the business of farming, processing, distribution and marketing of fresh ginseng, dry ginseng, ginseng seeds, and seedlings.  Starting in August 2010, we have gradually shifted the focus of our business from direct sales of ginseng to canned ginseng juice production and wine production.
 
Since we shifted the focus of our business into the ginseng beverage business and the wine business, we have started to store our raw material and sell only a limited amount of our self-produced ginseng. We also purchase ginseng from outside sources, and then resell it to generate revenue, which sales are based on orders from the market. However, due to the global recession and local market conditions, demand for ginseng exports declined beginning in 2008, creating a significant oversupply in China. All those factors caused us to incur losses in 2012 and 2013. Additionally, in June 2012, we decided to abandon the growing and harvesting of grapes due to the poor quality of recent harvests, which were not suitable for the production of wine or grape juice.   We did not renew the leases for grape vineyard with the Chinese Government when the leases expired on December 31, 2013. On June 30, 2013, we discontinued our grape production operations and sold the assets and liabilities of Tonghua Linyuan. Going forward, we plan to purchase grapes from market to produce wine if we receive orders from customers. Due to limited capital at this moment, our current main focus is ginseng beverage business. However, we plan to further adjust our business strategy when our financial situation improves.

In addition, as our new business is in the initial stages, we need to spend capital to promote our new products and develop our marketing plan. There is no assurance that there will be sufficient demand for our beverages and wine to allow us to operate profitably initially, or at all. We have recurring operating losses and there is substantial doubt about our ability to continue as a going concern. As of December 31, 2013, the cash balance on hand for the Company was $142,969.
 
In order to meet the challenge, we raised capital to support our operation through a Regulation S private placement and we are recruiting distributors for ginseng beverage and wine products. In addition, we established Hong Kong Huaxia in Hong Kong as a sales company for health products and specialized local goods in March 2012. Hong Kong Huaxia was set up as a part of our adjusted marketing strategy so that we can explore the Asia market through Hong Kong Huaxia, while Jilin Huamei remains focused on domestic sales in China. The focus of Hong Kong Huaxia is the sale of our ginseng juice and wine in the Asia market. Hong Kong Huaxia is currently recruiting distributors for the Asia market in addition to its online shopping platform for direct sales of our ginseng juice and wine. And as a part of our market promoting, we plan to open online store through Taobao, the biggest online Business-to-Consumer and Consumer-to-Cobnsumer platform in Asia. Because Taobao only accepts business with domestic business address, we established a new wholly owned subsidiary of Hong Kong Huaxia, Jilin HuaxiaGinseng Co., Ltd  (“Jilin Huaxia”), which is located in Jilin, China. In the quarter ended December 31, 2013, Jilin Huaxia borrowed $6,065,932 (RMB 36,983,383) in order to fund the acquisition of machinery and equipment.

Although, we have generated only limited revenues from our ginseng beverage and wine businesses since we shifted the focus of our businesses, we believe there is future potential to do so because (i) the China ginseng market is recovering now; (ii) the demand and the price is in an uptrend due to Chinese government restrictions on the amount of land available for ginseng farming (land under our Company’s control has not been affected by the government restrictions); (iii)  as of the date of this filing, we have already entered into binding agreements through our subsidiary Jilin Huamei with 5  distributors to distribute our  beverage in different cities and 1 distributor to distribute our ginseng beverage in Singapore, Malaysia, and Thailand; and (iv) we set up Hong Kong Huaxia to promote our products in the Asia Market and initiate online direct sales of our ginseng juice and wine.
 
 
3

 

As the impact of the shift in the focus of our business away from the ginseng business and into the ginseng beverage business and the wine business is uncertain and the shift represents a material change in our business, our past revenues and other financial results do not provide a meaningful basis for future performance and there is no guarantee that we will be able to attain profitability in the foreseeable future.
 
Our Subsidiaries

Our business in China is currently mainly conducted through our wholly-owned subsidiaries : Yanbian Huaxia, Jilin Ganzhi, Jilin Huamei which are located in North China and Hong Kong Huaxia which is located in Hong Kong . On June 30, 2013, the Company discontinued its grape production operations.  The Company sold the assets and liabilities of Tonghua Linyuan and plans to close Tonghua Linyuan.  Below is the operational status of each of these businesses as of the date of this filing:
 
Yanbian Huaxing Ginseng Industry Co. Ltd. (“Yanbian Huaxing”) – Ginseng farming and sales.
 
 ●
On September 8, 2003, we and Jilin Dunhua Huaxing Ginseng Industry Co, Ltd. (“Dunghua Huaxing”, a PRC company) jointly and legally established Yanbian Huaxing as a joint venture company in which we held 25% equity interest and Dunhua Huaxing held 75% equity interest. We received a certificate of approval issued by the competent local approval authority on September 8, 2003, and a business license issued by the competent local registration authority on September 16, 2003. On November 24, 2004, we and Dunhua Huaxing adjusted the registered capital of Yanbian Huaxing and our respective shareholding percentage in Yanbian Huaxing, and, as a result, we then held 55% equity interest in Yanbian Huaxing. Subsequently in August 2005, we acquired the remaining 45% equity interest from Dunhua Huaxing at a purchase price of $164,000, pursuant to which we now hold 100% equity interest in Yanbian Huaxing and changed Yanbian Huaxing from a joint venture into a wholly foreign owned enterprise (“WFOE”). The purchase price of the remaining interest of Yanbian Huaxia was based upon its registered capital of $364,000. In October 2005, we increased the registered capital of Yanbian Huaxing by putting in an additional $250,000 in order to meet the requirement for foreign owned enterprise requirement for tax purposes. Now, the registered capital of Yanbian Huaxing is $614,000. We have applied with the relevant PRC approval and registration authorities for each of the aforesaid changes and have obtained all applicable approvals and registrations for such changes, including a certificate of approval issued by the local approval authority and a renewed business license issued by the local registration authority certifying Yanbian Huaxing as a WFOE lawfully owned by us. Yanbian Huaxing is operated to plant ginseng, and our revenue in the past was mainly from the sales of ginseng produced and sold by Yanbian Huaxing. With the shift of business focus to canned ginseng juice, we have started to reserve the high quality grown ginseng for ginseng beverage production and sold only those not qualified to make ginseng juice. However, due to excessive rain in the year ended June 30, 2011, 90% of our grown ginseng was oxidized and sold to the market. During the year ended June 30, 2013, we were unable to reserve our grown ginseng for ginseng juice production, compared with 20% in the year ended June 30, 2012.
 
Jilin Ganzhi Ginseng Products Co. Ltd. (“Jilin Ganzhi”) – Produces canned ginseng juice.
 
On August 24, 2005, we acquired 100% equity interest in Jilin Ganzhi at a price of $95,691.  We received a certificate of approval issued by the competent local approval authority on May 31, 2006 and a business license issued by the competent local registration authority on June 19, 2006.  Subsequently, on September 26, 2007 and August 31, 2008, we increased Jilin Ganzhi’s registered capital by $50,000 and $20,000, respectively.  Now the registered capital of Jilin Ganzhi is $100,000. We applied with the relevant PRC approval and registration authorities for each of the aforesaid capital increases and have obtained all applicable approvals and registrations for such changes, including a renewed certificate of approval issued by the local approval authority and a renewed business license issued by the local registration authority certifying Jilin Ganzhi as a WFOE lawfully owned by us. Jilin Ganzhi is operated to process ginseng and produce canned ginseng juice. Jilin Ganzhi started production of canned ginseng juice in the three months ended December 31, 2010.
 
 
4

 
 
Tonghua Linyuan Grape Planting Co. (“Tonghua Linyuan”) – Grew grapes and produced wine through a winery producer until June 30, 2013, when Tonghua Linyuan became a shell company and ceased operations.
 
On January 15, 2008, we acquired 100% equity interest in Tonghua Linyuan from two PRC individual shareholders at a price of $1,000,000.  The price was determined by arm’s-length negotiations based upon the appraised net asset value of Tonghua Linyuan at the time of acquisition which was approximately $1,332,248. Tonghua Linyuan was operated to plant grapes and produce wine.  As of June 2013, the planned production of wine and grape juice had not commenced due to the poor quality of the harvests from Tonghua Linyuan in recent years, which were not suitable for the production of wine or grape juice; therefore, the Company decided to abandon the growing and harvesting of grapes.  On June 30, 2013, Tonghua Linyuan entered into a sale agreement with Mr. Wenkai Wang to transfer all assets and debts of Tonghua Linyuan to Mr. Wenkai Wang for $0 (zero) consideration, including the ownership of machinery and equipment, the right to the use of the plant and the debt of $2 million of Tonghua Linyuan, effective immediately. Mr. Wang has been engaged in wine sale business in Tonghua City for many years and does not have any material relationship with the Company, or any of its affiliates, or any director or officer of the Company, or any associate of any such director or officer, other than in respect of the sale of Tonghua Linyuan. Pursuant to the sale of all assets and debts, Tonghua Linyuan became a shell with no operations. We believe that it is in the best interest of the Company to dispose of the assets and debts of Tonghua Linyuan. Going forward, the Company will purchase grapes in the open market to produce wine and grape juice. Contracts entered into by Tonghua Linyuan with a winery producer for production of wine remain valid and will be fulfilled by Jilin Huamei.
  
Jilin Huamei Beverage Co. Ltd. (“Jilin Huamei”) - Markets our canned ginseng juice and wine.
 
 ●
We incorporated Jilin Huamei as a WFOE on October 17, 2005. We received a certificate of approval issued by the competent local approval authority on October 17, 2005 and a business license issued by the competent local registration authority on October 19, 2005 certifying Jilin Huamei as a WFOE lawfully owned by us. The registered capital of Jilin Huamei is $200,000.  Jilin Huamei operates as a sales department for our canned ginseng juice and wine, which are produced by our other subsidiaries. We plan to recruit one general distributor for our canned ginseng juice and one general distributor for our wine in each big city in China through Jilin Huamei. We commenced sales of our ginseng beverage in October 2010 and Jilin Huamei started generating revenue in November 2010. As of the date of this filing, Jilin Huamei has five (5) general distributors for our ginseng beverage and one (1) general distributor for our wine. Jilin Huamei established one (1) sale branch office in Jiangsu Province from the period of June 2011 to May 2013. The Company decided to cease operating this branch because we did not have many sales from this branch and we did not have enough cash to support its operations. As of September 30, 2013, Jilin Huamei also conducts the purchase of grapes from the open market for the production of our own wine.  

Hong Kong Huaxia International Industrial Co., Ltd. (“Hong Kong Huaxia”) – Sells health products and specialized local goods
 
Hong Kong Huaxia was incorporated by us on March 18, 2012, as a wholly-owned subsidiary to sell health products and specialized local goods. The registered capital of Hong Kong Huaxia is HKD 880,000,000 (approximately $113,443,000), which has not been funded by the Company. Hong Kong Huaxia began operations in April 2012. On September 27, 2013, the Company established a new wholly owned subsidiary of Hong Kong Huaxia, Jilin Huaxia Ginseng Co., Ltd  (“Jilin Huaxia”).
 
Our Products

Previously, through Yanbian Huaxing, we focused on the farming, processing, distribution and marketing of Asian and American Ginseng and related byproducts in the following varieties:

Fresh Ginseng: For pharmaceutical, health supplement, cosmetic industry and fresh consumption.
 
Dry Ginseng: Dried form for pharmaceutical and health supplement consumption.
 
Ginseng Seeds: Selling of ginseng seeds.
 
Ginseng Seedling: Selling of ginseng seedling.
  
Also through Yanbian Huaxing, we obtained 20-year leases to 3,705 acres of land approved by the local government for ginseng growing on June 12, 2005, and we have developed 3% of the land resources.
 
 
5

 
 
Since August 2010, we have gradually shifted our business focus from direct sales of ginseng and ginseng byproducts to the production and sale of canned ginseng juice and wine. We have started reserving most of the ginseng produced by Yanbian Huaxing for use in the planned production of canned ginseng juice and grape juice produced by Tonghua Linyuan for use in the production of wine. Meanwhile, as there is a higher standard for ginseng used in canned ginseng juice, we are able to sell some of the ginseng produced by Yanbian Huaxing, which is not qualified for use in canned ginseng juice to the market through Yanbian Huaxing. Although we have shifted our business focus to the production and sale of ginseng juice and wine, we still receive orders for ginseng and its byproducts because of our reputation in the industry for selling high-quality ginseng. We intend to maintain this part of our business even though it is no longer our business focus. In addition, if we receive large orders for ginseng and/or ginseng byproducts, we will directly purchase ginseng and/or ginseng byproducts from the market if we can get a lower price of the products. This part of sale of ginseng is generated on an order-to-order basis and conditioned on whether we can get a lower price for such demanded products in the market.

Through Jilin Ganzhi, we produce two types of canned ginseng juice:

 
Ganzhi Asian Ginseng Beverage
 
 
Ganzhi American Ginseng Beverage
  
In addition to canned ginseng juice, we also shifted our business to wine production. Prior to the sale of the assets and debts of Tonghua Linyuan, we grew and crushed the grapes from our vineyards and had the juice reserved. In the future, we will purchase grapes in the open market to produce wine and grape juice. We contracted with Jinyuanshan Winery for the final production and bottling of the wine and commenced wine production through Jinyuanshan Winery in March 2011 and sales in April 2011. All of our wines are sold through Jinlin Huamei and Hong Kong Huaxia.
 
 We produce and sell three types of wine:
 
 
Bingqing Ice Wine
 
 
Pearl in the Snow (Red Wine)
 
 
Linyuan Hong Wine (Red Wine)
 
New Focus of Our Business

Canned Ginseng Juice

To produce canned ginseng juice, we take ginseng juice extracted from fresh ginseng as the main material and add natural extracts like xylitol, citric acid and steviosides as subsidiary ingredients. We have farming technicians periodically inspect farmers to ensure they follow our growing guidelines to control the quality of the fresh ginseng, and when we need to purchase fresh ginseng from the market for production of ginseng juice, we limit our choice to the highest quality of fresh ginseng. We use low residue pesticide and biodegradable fertilizer for ginseng planting. We use xylitol instead of sugar to lower calories, which also does not cause products to have a sour taste.

Currently, there are about 10 kinds of ginseng drinks on the market; all of them are imported from Korea.  Based on our market research, the price range for those products is RMB 4  to RMB 30 per can (about  $0.60-$4.51).
 
The most important component of ginseng is ginsenoside. Based upon reading our competitors’ product labels, all of their ginseng drinks are blended after extracting ginsenosides through chemical methods. The chemical extraction of ginsenosides will cause damage to its nutritional components. Our technology is different from the traditional method used by our competitors.  We squeeze-out the natural juice from fresh ginseng so as to preserve freshness and nutrition in the final product. 

Squeezing is not commonly used in canned ginseng juice because it requires fresh ginseng, the preservation of which is very difficult. Fresh ginseng rots very fast. The harvest time concentrates in September and October, which is a fairly short period. After that, one can only buy dried ginseng from the market such as sun-dried ginseng from which we cannot squeeze juice. However, our drink formula uses refrigerated ginseng as a raw material to produce canned ginseng juice, which enables us to maintain its freshness and nutrition in our final products. The drink formula for our ginseng beverages is a registered patent approved by the Chinese government, patent number ZL 03111397.6.  This patent was issued on January 23, 2008 and expires 20 years after issuance.
 
 
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This is the reason we store our fresh ginseng in refrigerated warehouse space. We are currently renting a refrigerated warehouse (-20 degrees Celsius) to store all fresh ginseng inventory necessary for production of the ginseng beverages.   Monthly rent for refrigerated warehouse is RMB 4,500 (about  $676.86). We commenced production in August 2010 and sales in October 2010, which was reflected in our financial statement for the three months ending December 31, 2010. We initiated our sales of canned ginseng juice in China, and we plan to expand our business to overseas markets in 2014 or 2015. Our Ganzhi Ginseng Beverage costs approximately $2.21 per 1600 ml bottle, and our American Ginseng Beverage costs approximately $2.66 per 1600 ml bottle. However, as we are in the initial stage of the ginseng beverage business, we cannot assure the demands for our ginseng beverage will be profitable in the short term and there is no guarantee that we will be able to generate the revenue from ginseng beverage business.
 
We own the production plant for ginseng juice.  The plant is certified by the Chinese government as a Good Manufacturing Process facility, which is required for our production of these products.  Good Manufacturing Process standards cover organization and personnel, building and facilities, equipment, materials, hygiene and sanitation, validation, documentation, production management, quality management, production distribution and recall, complaints and adverse reactions report, and self-inspections.

Wine
 
Our grapes grow on 750 acres of land leased from a group of individual farmers, paying approximately $37.50 per acre a year for 15 years.  This lease expires on December 31, 2013.   However, recent harvests from our vineyard showed poor quality indicating the vineyard is no longer suitable for the production of wine. We decided to abandon the growing and harvesting of grapes and not to renew the lease of the land when it expires. We will now purchase grapes in the open market to produce wine. 

We started production of wine in March 2011 and sales in April 2011. Through Tonghua Linyuan, we have a written production agreement with Tonghua Jinyuanshan Winery (“Jinyuanshan Winery”) to produce Pearl in Snow Wine and Bingqing Ice Wine for us from May 20, 2012 to May 19, 2017. Pursuant to the sale of all assets and liabilities of Tonghua Linyuan on June 30, 2013, the contract with Jinyuanshan Winery was fulfilled by our subsidiary, Jilin Huamei. Under the terms of the agreement, we provide Jinyuanshan Winery with grape juice, bottling supplies and packaging supplies, and Jinyuanshan Winery produces and bottles the wine with a charge of approximately $0.16-0.24 per bottle (approximately $0.16 a bottle for processing red wine and approximately $0.24 per bottle for processing ice wine). We have another written production agreement with Jinyuanshan Winery through Tonghua Linyuan (replaced by Jilin Huamei since June 30, 2013) to produce Linyuan Hong Wine for us at a charge of approximately $0.16 per bottle from May 20, 2012 to May 19, 2017. The agreement contains similar terms as the production written agreement we have with Jinyuanshan Winery for producing Pearl in Snow Wine and Bingqing Ice Wine.
 
 Distribution

We intend to recruit one general distributor for our products of ginseng beverage and wine in every city in China through Jilin Huamei.  The city level distributor can recruit the second level distributors.  In addition to recruiting general distributors, in some major cities, Jilin Huamei will establish sale branch offices to facilitate the local sales. Our direct sales will target customers of high-end retailers such as supermarkets, pharmacies, hotels, gift shops, entertainment centers, tourists attractions, airport and high-speed trains, etc.
 
We started negotiating distribution and sales agreements with potential general distributors. We are using the same distribution agreement for our general distributors although specific terms might differ based upon negotiations we have with each distributor. In specific regard to our ginseng juice business, we have signed five (5) distributors through Jilin Huamei as of the date of this filing. As for the distribution of our wine, we have signed one (1) distributor through Jilin Huamei as of the date of this filing.

In addition, as a part of our adjustment to our marketing strategy for our ginseng juice and wine, we established Hong Kong Huaxia in March 2012. Hong Kong Huaxia recruits distributors to sell wine and ginseng juice outside of China in Asia Markets and to build and maintain an online shopping platform through which to take orders directly from end user customers. In addition, we plan to open online shop via Taobao, the biggest online B2C and C2C platform in Asia, a subsidiary of Alibaba. Because Taobao requires business to have a domestic address, we set up Jinlin Huaxia, a subsidiary of Hong Kong Huaxia, which is located in Jinlin, China.
 
Competitive Environment
 
The market for ginseng products and wine is highly competitive. Our operations may be affected by technological advances by competitors, industry consolidation, patents granted to competitors, competitive combination products, new products offered by our competitors, as well as new information provided by other marketed products and/or other post-market studies.
 
Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the saleability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 
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In addition, past financial results are not indicative of future performance due to our emphasis on further commercializing ginseng juice with our crops as raw materials and broadening our offering, such as wine sale. Furthermore, we cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
 
Consolidated Financial Statements
 
The consolidated financial statements include the accounts and activities of China Ginseng Holdings, Inc. and its wholly-owned subsidiaries, Yanbian Huaxing Ginseng Co. Limited, Jilin Huamei Beverage Co. Limited, Jilin Ganzhi Ginseng Products Co. Limited, Tonghua Linyuan Grape Planting Co. Limited and Hong Kong Huaxia International Industrial, Co. Limited. All intercompany transactions have been eliminated in consolidation.

Inventory

Our inventory consists of fresh and dried ginseng as well as formerly crushed grapes, and is stated at the lower of cost or market value.  Cost is determined using the First-In, First-Out (FIFO) Method.

Ginseng Crops and Grape Crops

The Company uses the full absorption costing method to value its ginseng crops.  Included in crop costs are seeds, labor, applicable overhead including depreciation, and supplies. Common costs are allocated in each period based upon the total number of hectors under cultivation during the period.
  
The carrying value of the ginseng crops is reviewed on a regular basis for any impairment in value using management’s best estimate as to expect future market values, yields and costs to harvest.  Costs accumulated on the acres expected to be harvested during the next fiscal year have been classified as a current asset.

In March 2013, the Company determined that the grape juice inventory held at Tonghua Linyuan is no longer saleable. As such, the Company wrote off inventory with a value of RMB 8,855,286 ($1,410,149) at June 30, 2013.

At December 31, 2013 and June 30, 2013, there were no shipments of Ginseng at customer locations awaiting inspection and approval that may be subject to invoicing.

Revenue Recognition

The Company processes ginseng and stores the stock for ginseng juice production.  Any grown ginseng that is not suitable for the beverage production is sold.  The Company also purchases ginseng from farmers for its resale business. Ginseng is planted in the Spring (March) and Fall (September) of each year and is generally harvested in September. It usually takes 6 years for a ginseng root to mature although senior maturity can be as long as 8 years.

Harvested ginseng can be sold in two ways: (1) fresh ginseng, which can be sold immediately and stored in refrigerators for up to 3 years, and (2) dried ginseng, which is processed and dried via sunlight and steam machines. Drying is a two-month process.  Dried ginseng can be stored up to 5 years. The Company has focused on selling dried ginseng as it is more profitable than selling fresh ginseng. The Company has also been storing fresh ginseng for future juice manufacturing.

When the Company sells ginseng, it receives orders prior to harvest.  For major customers, approximately 20% to 30% is paid upon delivery as payment in advance.  The balance is billed after the customer’s inspection process is completed, which can take up to 60 days.  Until the customer finalizes its inspection and deems the shipment acceptable, the shipment is still the property of the Company.  Upon customer completion of inspection and approval, the sale is then recognized and the balance of the invoice price is wired to the Company. For smaller sales, customers pick up the ginseng from the Company, pay in cash at time of pick up and receive an invoice with the appropriate sales tax applied and a cash acknowledgement. On these orders, revenue is recognized upon shipment/payment.
 
 
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The Company has entered into several distribution agreements to sell ginseng juice and wine.  In accordance with these agreements, the distributors will advance funds to the Company for orders to be placed.  Upon the placement of orders by the distributor, the Company will ship the product to the distributor and title will pass to the distributor.  In relation to distribution agreements for ginseng beverages, it is the Company’s policy, commencing upon the execution of the distribution agreements, to allow the distributors to return all unsold products at the end of six (6) months from the shipment date should the product not be sold and the product has not exceeded the expiration date.  The Company is establishing history as to the quantity of the ginseng, which has been returned in order to determine if a reserve for returns and allowances is necessary.  To date, returns have been minimal. For each reporting period, the Company ascertains from each distributor its’ current on hand quantity and assesses the situation in order to establish a return allowance, if necessary.  As of December 31, 2013 and June 30, 2013, all distribution sales had been sold to third parties.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consists principally of trade receivables. When ginseng is shipped to a customer, the customer pays 20%-30% of the invoice and is entitled to an inspection process, which could take up to 60 days. Upon completion of the inspection and approval process, the customer notifies the company, and a sale is recorded. The allowance for doubtful accounts represents management’s estimate of the amount of probable credit losses, determined by reviewing past due balances and other information.  Account balances are written off against the allowance if management determines the receivable is uncollectible. The Company’s standard terms stipulate payment in 60 days and consider a receivable to be uncollectible after one year.
 
Vineyard Development Costs

In June 2012, the Company decided to abandon the growing and harvesting of grapes due to the poor quality of recent harvests indicating that the vineyard land was no longer suitable for the production of wine or grape juice. Accordingly, the Company has abandoned the vineyard and recorded a charge to operations of $872,568, which is included under discontinued operations in the financial statements for the quarter ended June 30, 2012. The Company has also decided not to renew its leases with the Chinese Government when it expires in December 2013.  Going forward, the Company will purchase grapes in the open market to produce wine and grape juice.
 
Going Concern

As indicated in the accompanying financial statements, the Company had net losses of $867,931 and $1,650,062 for the six months ended December 31, 2013 and 2012, respectively, and an accumulated deficit of $10,275,344 as of December 31, 2013 and there are existing uncertain conditions the Company foresees relating to its ability to obtain working capital and operate successfully. Management’s plans include the raising of capital through the debt and equity markets to fund future operations and the generating of revenue through its businesses. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations.

Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenues will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
 
Result of Operations

The following tables present certain consolidated statement of operations information. Financial information is presented for the three months and six months ended December 31, 2013 and 2012, respectively.

   
For the Three Months Ended December 31, 2013
 
               
Change
 
   
2013
   
2012
   
Amount
   
%
 
Revenues
  $ 2,484,432     $ 1,688,947     $ 795,485       47 %
Cost of goods sold
    2,070,925       1,439,961       630,964       44 %
Gross profit
  $ 413,507     $ 248,986       164,521       66 %
Selling, general and administrative Expenses
    581,182       368,864       212,318       58 %
Bad Debt Expense
    (16,138 )     -       (16,138 )     -  
Depreciation and amortization
    128,299       29,898       98,401       329 %
Interest expense
    332,213       77,035       255,178       331 %
Loss from discontinued operations
    -       30,049       30,049       100 %
Net Loss
  $
(612,049
)     (256,860 )    
(355,189
)     138 %
 
 
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For the Six Months Ended December 31, 2013
 
               
Change
 
   
2013
   
2012
   
Amount
   
%
 
Revenues
  $ 2,546,825     $ 2,192,719     $ 354,106       16 %
Cost of goods sold
    2,077,579       1,940,400       137,179       7 %
Gross profit
  $ 469,246     $ 252,319       216,927       86 %
Selling, general and administrative expenses
    841,517       699,924       141,593       20 %
Bad Debt Expense
    (55,348 )     -       (55,348 )     -  
Impairment of ginseng corps
    -       920,840       (920,840 )     (100 %)
Depreciation and amortization
    158,775       58,726       100,049       170 %
Interest expense
    392,233       159,696       232,537       146 %
Loss from discontinued operations
    -       63,195       63,195       100 %
Net Loss
  $
(867,931
)   $ (1,650,062 )   $
782,131
      (47 %)
 
Revenue
                       
   
Three Months Ended
 
2013-2012
       
   
December 31,
 
Dollar
       
Products
 
2013
   
2012
 
Variance
   
% change
 
Ginseng (Production)
 
$
820,280
     
1,068,037
   
$
(247,757
)    
(23
%)
Ginseng (Purchase for Resale)
   
1,658,363
     
542,197
     
1,116,166
     
206
%
Ginseng Beverage
   
-
     
10,883
     
(10,883
)
   
(100
%)
Ruiersui Capsules
   
1,561
     
----
     
1,561
     
-
 
Aoweisi Cosmetic Products
   
4,228
     
67,830
     
(63,602
)
   
(94
%)
Total
 
$
2,484,432
     
1,688,947
   
$
795,485
     
47
%
 
Net revenues are comprised of sales of self-production ginseng and purchased, Aoweisi cosmetic product and Ruiersui Capsules during the three months ended December 31, 2013. Our total revenue increased from $1,688,947 for the three months ended December 31, 2012 to $2,484,432 for the three months ended December 31, 2013, an increase of $795,485 or 47%. The increase was primarily attributable to the resale of purchased ginseng.

We generated $1,658,363, or 66.75% of sales from our purchased ginseng for the three months ended December 31, 2013, an increase of $1,116,166, or 206%. We generated $820,280, or 33.02% of sales from our self-production ginseng for the three months ended December 31, 2013, a decrease of $247,757, or 23%. The increases were primarily due to increased market price of ginseng and quantity we sold to the market. The market price increased by $50.26/kg, or 106% compared to the same period in 2012 due to nation-wide inflation in the three months ended December 31, 2013. And the quantity of our self-production ginseng increased by 2,188 kg during the three months ended December 31, 2013, compared to the same period in 2012. The increase in quantity we sold was due to the fact that ginseng harvested in calendar year 2013 was damaged by typhoon in August 2012 and not qualified for producing ginseng juice production.
 
 
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5% of the increase was caused by increased quantity of sale
 
95% of the increase was caused by the increase of resale price of purchased ginseng
 
For the three months ended December 31, 2013, we had generated revenue of $1,561 and  $4,228 from sales of Ruiersui capsules and Aoweisi cosmetic products, respectively. Those two products were sold through Hong Kong Huaxia based on consumers’ special orders. We do not expect this to be a major source of our revenue in the future.

We had no ginseng juice sales for the three month ended December 31, 2013 since we did  not have enough capital to produce ginseng juice.

We had no wine production and sales for the three months ended December 31, 2013 because we did not receive orders from customers during that period.

Cost of Goods Sold
 
   
Three Months ended December 31,
 
   
2013
   
% of total
   
2012
 
% of total
 
2013-2012
Dollar
   
%
 
 
Cost Of
   
cost of
   
Cost Of
 
cost of
 
Goods
   
goods
   
Goods
 
goods
Products 
 
Sold
   
sold
   
Sold
 
sold
 
Variance
   
Change
 
Ginseng (production)
 
$
700,745
     
33.84
%
   
970,505
     
67.40
%
 
$
(269,760)
     
(27.80)
%
Ginseng (purchase)
   
1,369,633
     
66.13
     
452,805
     
31.45
     
916,218
     
202.48
%
Ginseng Beverage Production
   
-
     
-
     
4,450
     
0.31
     
(4,450
)
   
(100
%)
Ruiersui Capsules
   
173
     
0.01
                     
 173
     
-
 
Aoweisi Cosmetic Product
   
374
     
0.02
     
12,201
     
0.84
     
(11,827)
     
(96.93
)%
Total
 
$
2,070,925
     
100
%
   
1,439,961
     
100
%
 
$
630,964
     
43.82
%
 
Our total cost of goods sold increased from $1,439,961 for the three months ended December 31, 2012 to $2,070,925 for the three months ended December 31, 2013, an increase of $630,964 or 43.82%. The primary reasons for the increase were the cost of our purchased ginseng.

The cost of our purchased ginseng for sale increased $916,218, or 202.48% in the three months ended December 31, 2013, compared to the three months ended December 31, 2012. The cost of our own farming ginseng for sale decreased $269,760, or 27.80% in the three months ended December 31, 2013, compared to the three months ended December 31, 2012. The total increase was caused by the increased costs associated with the overall inflation in labor, seeds and other production costs.

Cost of sales as a percentage of revenue increased 2% in the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. The increase was primarily due to the increase in cost of goods sold attributable to purchased ginseng from Yanbian, as compared to the same period in 2012.

Gross Profit

Gross profit was approximately $413,507 for the three months ended December 31, 2013, compared to $248,986 for the three months ended December 31, 2012, an increase of $164,521 or 66%. The increase was primarily due to the increased costs associated with the harvest of ginseng in 2013 and the overall inflation in labor, seeds and other costs of production.
 
Selling, General and Administration Expenses
 
Selling, general expenses and administrative expenses increased from $368,864 for the three months ended December 31, 2012 to $581,182 for the three months ended December 31, 2013, an increase of $212,318, or 58%.  The increase is mainly due to the increase in our operation expense from Huaxing, such as salary for the workers who cleaned up the purchased ginseng and expense from Hong Kong Huaxia, such as commission fee for financing of approximate $6 million for the purchase of machinery and equipment.
 
 
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Bad Debt Expense

We had an amount of $(16,138) bad debt expense for the three month ended December 31, 2013. This was primary because we collected certain receivables from Huamei and Ganzhi that were previously written off..

Interest Expense

Our Interest expense increased by $255,178, from $77,035 for the three months ended December 31, 2012 to $332,213 for the three months ended December 31, 2013, an increase of 331%. This increase is mainly due to an increase in the interest on new loan of Hong Kong Huaxia.

Depreciation and amortization

Depreciation and amortization increased by $98,401, from $29,898 for the three months ended December 31, 2012 to $128,299 for the three months ended December 31, 2013, an increase of 329%. This increase is due to the depreciation on the $6,164,805 in new equipment purchased during the three months ended December 31, 2013.

Net Loss

The Net Loss for the three months ended December 31, 2013 was $612,049; a increase of $355,189 or 138%, compared to a net loss of $256,860 for the three months ended December 31, 2012. The increase is primarily due to the increase in operating expenses and administrative expenses, depreciation expenses and interest expense.
 
Other Comprehensive Income

We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”).  The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is intended to imply that the Renminbi amounts could have been, or could be, converted, realized or settled into USD at the rate on December 31, 2013 or at any other rate.

The value of RMB against U.S. dollar may fluctuate and is affected by changes in political and economic conditions. Our revenues, costs and financial assets are mostly dominated in RMB while our reporting currency is the U.S. dollar. Accordingly, this may result in gains or losses from currency translation on our financial statements.

Translation adjustments resulting from this process amounted to $(59,238) and $16,133 for the three months ended December 31, 2013 and 2012, respectively.  And we have comprehensive loss of $671,287 and $240,727 for the three months ended December 31, 2013 and 2012, respectively.  The assets and liabilities amounts with the exception of equity for the three months ended December 31, 2013 were translated at 6.0969 RMB to 1.00 USD as compared to 6.2855 RMB to 1.00 USD for the three months ended December 31, 2012. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the three months ended December 31, 2013 and 2012 were 6.1491 RMB and 6.31718 RMB, respectively.
 
Comparison of results for the six months ended December 31, 2013 and 2012:
 
Revenue
 
   
Six Months Ended December 31,
   
2013-2012
       
Products
 
2013
   
2012
   
Dollar Variance
   
% change
 
Ginseng (Production)
 
$
820,280
     
1,068,037
   
$
(247,757
)    
(23.20
)%
Ginseng (Purchase for Resale)
   
1,658,363
     
1,043,831
     
614,532
     
58.87
%
Ginseng Beverage
   
-
     
13,021
     
(13,021
)
   
(100
%)
Ruiersui Capsules
   
17,775
     
-
     
17,775
     
-
 
Aowei Si Cosmetic Products
   
50,407
     
67,830
     
(17,423
)
   
(25.69
%)
Total
 
$
2,546,825
     
2,192,719
   
$
354,106
     
16.15
.%
 
 
12

 
 
Our total sales increased from $2,192,719 for the six months ended December 31, 2012 to $2,546,825 for the six months ended December 31, 2013, an increase of $354,106 or 16%. The increase was primarily due to increased sales of purchased ginseng.

We generated $1,658,363, or 65.11% sales from our purchased ginseng for the six months ended December 31, 2013, an increase of $614,532, or 58.87%. We generated $820,280, or 32.21% sales from our self-production ginseng for the six months ended December 31, 2013, a decrease of $247,757, or 23.20%. The total increase was primarily due to increased market price of ginseng and quantity. The market price increased by $50.26/kg, or 106% compared to the same period in 2012 due to nation-wide inflation in the six months ended December 31, 2013. And the quantity of our self-production ginseng increased by 2,188 kg during the six months ended December 31, 2013, compared to the same period in 2012. The increase in quantity we sold was because our self-produced ginseng was damaged by typhoon in August 2012 and we had to harvest it as it was not qualified for producing ginseng juice.

5% of the increase was caused by decreased quantity of sale
 
95% of the increase was caused by the increase of resale price of purchased ginseng
 
For the six months ended December 31, 2013, we generated revenues of approximately $17,775 and $50,407 from Ruiersui capsules and Aoweisi cosmetic products, respectively. Those two products were sold through Hong Kong Huaxia based on consumers’ special orders. We do not expect this to be a major source of our revenue in the future.

We had no ginseng juice sales for the six month ended December 31, 2013 since we do not have enough capital to produce ginseng juice.

We had no wine sales for the six months ended December 31, 2013 since we did not receive any order from customers.

Cost of Goods Sold
 
   
Six Months ended December 31,
 
Products 
 
2013 Cost
of Goods
Sold
   
% of the
total cost
of goods
sold
   
2012 Cost
of Goods
Sold
   
% of the
total cost
of goods
sold
   
2013-2012
dollar
variance
   
% of
Change
 
Ginseng (Farming)
 
$
700,745
     
33.73
%
   
970,506
     
50.02
     
(269,761
)    
(27.80)
%
Ginseng (Purchase for Resale)
   
1,369,633
     
65.92
%    
952,261
     
49.07
     
417,372
     
43.83
%
Ginseng Beverage Production
   
-
     
-
     
5,432
     
0.28
     
(5,432
)
   
(100
%)
Ruiersui Capslues
   
5,368
     
0.26
%                    
5,368
     
-
 
Aoweisi Cosmetic Product
   
1,833
     
0.09
%    
12,201
     
0.63
     
(10,368
)
   
(84.98
%)
Total
 
$
2,077,579
     
100
%    
1,940,400
     
100
   
$
137,179
     
7.07
%
 
Our total cost of goods sold increased from $1,940,400 for the six months ended December 31, 2012 to $2,077,579 for the six months ended December 31, 2013, an increase of $137,179 or 7.07%. The primary reason for the increase was the cost of our purchased ginseng.

The cost of our purchased ginseng increased $417,372, or 43.83% in the six months ended December 31, 2013, compared to the six months ended December 31, 2012. The cost of our own farming ginseng for sale decreased $269,761, or 27.80% in the six months ended December 31, 2013, compared to the six months ended December 31, 2012. The total increase was caused by the overall inflation in labor, seeds and other production costs.
 
Cost of sales as a percentage of revenue for the six months ended December 31, 2013 decreased from 88% to 82% as compared to the comparative period in 2012.

Gross Profit

Gross profit was approximately $469,246 for the six months ended December 31, 2013, compared to $252,319 for the six months ended December 31, 2012, an increase of $216,927 or 86%. The increase was primarily due to the fact that the sales increased at a higher rate than the sales in the six months ended December 31, 2012.
 
 
13

 

Selling, General and Administrative Costs
 
Selling, general expenses and administrative expenses increased from $699,924 for the six months ended December 31, 2012 to $841,517 for the six months ended December 31, 2013, an increase of $141,593 or 20%.  The increase was mainly due to the increase in our operation expense from Yanbian Huaxing, such as salary for the workers who clearing purchased ginseng and financing expense from Hong Kong Huaxia.

Bad Debt Expense

We had an amount of ($55,348) bad bebt expense for the six month ended December 31, 2013. This was primary because we collected certain receivables from Huamei and Ganzhi that were previously written off.
 
Interest Expense

Our Interest expense increased by $232,537 or 146%, from $159,696 for the six months ended December 31, 2012 to $392,233 for the six months ended December 31, 2013.  The increase was primarily due to an increase in imputed interest on related party loans due to increased loan balance and interest on new loan from Hong Kong Huaxia.

Depreciation and amortization

Depreciation and amortization increased by $100,049, from $58,726 for the six months ended December 31, 2012 to $158,775 for the six months ended December 31, 2013, an increase of 170%. This increase is due to the depreciation on the $6,164,805 in new equipment purchased during the six months ended December 31, 2013.

Net Loss
 
We had a net loss of $867,931 for the six months ended December 31, 2013 and a net loss of $1,650,062 for the six months ended December 31, 2012, a decrease of $782,131, or 47 %.  The decrease is primarily due to the decrease in cost of sales as a percentage of revenue and impairment of ginseng crops which did not occur in the six month ended December 31, 2013.

Other Comprehensive Income

Translation adjustments resulting from this process amounted to $(37,011) and $(27,275) for the six months ended December 31, 2013 and 2012, respectively. And we have comprehensive loss of $904,942 and $1,677,337 for the six months ended December 31, 2013 and 2012, respectively. The assets and liabilities amounts with the exception of equity for the six months ended December 31, 2013 were translated at 6.0969  RMB to 1.00 USD as compared to at 6.2855 RMB to 1.00 USD for the six months ended December 31, 2012. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the six months ended December 31, 2012 and 2012 were 6.1491 RMB, 6.3178RMB, respectively.
 
Discussion of Cash Flow
 
Cash flows results for the six months ended December 31, 2013 and the six months ended December 31, 2012 are summarized as follows:
 
   
December 31, 
2013
   
December 31, 
2012
 
Net cash provided by(used in) operating activities
 
$
373,890
   
$
(524
)
Net cash provided by(used )in investing activities
 
$
(6,164,805
)
 
$
(272
)
Net cash provided by financial activities
 
$
     6,007,654
   
$
71,953
 

Operating activities
 
Cash flows used in operating activities amounted to $373,890 for the six months ended December 31, 2013, compared to the same period of 2012. This change was primarily due to a decrease in net losses of $ 867,931, in addition to an increase in accounts receivable of $796,201. These amounts were offset by a decrease in inventory of $695,290, an increase in accounts payable of $927,731 and an increase in accrued expense of $242,785.
 
The increase in accounts receivable was primarily due to the temporarily uncollected amount from the sales of ginseng held by Yanbian Huaxin; an increased accounts payable was due to our raw material purchase during the six months ended December 31, 2013; an increase in accrued expense was due to an increase in the expenses for our ginseng businesses incurred in the six months ended December 31, 2013.
 
The inventory decreased due to decreased amount of stored ginseng and ginseng juice.
 
 
14

 
 
Investing activities

Cash flows used in investing activities amounted to $6,164,805 for the six months ended December 31, 2013, which consisted of a purchase of equipments of $6,164,805. During the six months ended December 31, 2013,  Hong Kong Huaxia borrowed a short term loan of $6,065,932 to invest in Jinlin Huaxia so that Jinlin Huaxia can use the fund to purchase  an irrigation system, a temperature control system, two CNC machine tools for our operation use. The loan term is to February 28, 2014 and secured by $6,217,586 in the machinery and equipment purchased by Jinlin Huaxia.

Cash flows used in investing activities amounted to $272 for the six months ended December 31, 2012, which consisted of a purchase of office equipment of $272. In July, 2012, the Company purchased a cell phone for sales department.
 
Financing activities

Cash flows provided by financing activities for the six months ended December 31, 2013 was $6,007,654, primarily proceeds from a short term loan of $6,065,932, offset by repayment of loans payable to related parties of $58,278.

Cash flows provided by financing activities for the three months ended December 31, 2012 was $71,953, primarily from loans payable to related parties of $71,953.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. We have historically financed our operation and capital expenditures through loans from related parties, including officers, directors and other shareholders of the Company and have raised capital through a Regulation S private placement as well. Our current activities are related to developing our new business strategy: the sale of ginseng juice and wine products.
 
As of December 31, 2013, we had an outstanding loan of RMB 2,000,000 (approximately $328,036) to Ji’An Qingshi Credit Cooperatives (“Ji’An Qingshi”). The principal terms of the loan are as follows:

 
1.
Type of Loan: Short Term Agriculture Loan
     
 
2.
Loan Purpose: Planting
     
 
3.
Loan Amount: Principal of RMB 2,000,000 (approximately USD $328,036 with an annual interest of 6.325%
     
 
4.
Loan Period:  From February 4, 2002 to February 4, 2003; Repayment due date was February 4, 2003
     
 
5.
Security: The loan is secured by the assets of Tonghua Linyuan including 14 carbon-steel storage cans, 16 high-speed steel storage cans, and 150 tons of grape juice.

We have not paid any principal or interest of the loan; however, Ji’An Qingshi verbally agreed in March 2008 not to call the loan. The material terms for the verbal agreement are: no principal or interest payments are required to be made until the Company is generating profits and interest continues to accrue until we repay the loan. On June 30, 2013, the Company disposed all of the assets and liabilities of Tonghua Linyuan to a third party and plans to dissolve Tonghua Linyuan which has become a shell with no operation.  The Company has retained $515,167 in contingent liability of Tonghua Linyuan for the six months ended December 31, 2013.
 
On August 30, 2012, we refinanced the 8 million RMB bank loan, which we obtained from Meihekou City Rural Credit Union on November 8, 2010, by obtaining a new loan of 8 million RMB (approximately $1,312,142) from the same lender.  The principal terms of the new 8 million RMB bank loan agreement are as follows:
 
 
Parties: Jilin Ganzhi Ginseng Products Co., Ltd (“Jilin Ganzhi”) and Meihekou City Rural Credit Union (“Meihekou Credit Union”);
 
 
15

 
 
 
Meihekou Credit Union granted a loan of RMB 8 million (approximately $ 1,312,142) to Jilin Ganzhi to be used in calling in and refunding; the term of the loan is 24 months from August 30, 2012 to August 29, 2014. 
 
 
The loan carries a benchmark interest rate, which is the rate announced by the People’s Bank of China as an interest rate of the same type and class of loans at the date of the loan and changes with the adjustment of national bank rate.  Meihekou Credit Union calculates the interest on a monthly basis applying this annual floating rate, which is payable on the 21st day of each month. We paid interest of RMB 94,127 (approximately $14,838) on August 21, 2012. From September 2012 to December 31, 2013, we have not paid interest and we plan to pay all outstanding interest when we have sufficient cash.
     
 
Repay the principal by installments according to the following repayment plan: principal payment of RMB1M (approximately USD $164,018) on September 20, 2012, RMB 1 million (approximately $164,018) on August 29, 2013, RMB 1 million (approximately $164,018) on December 20, 2013 and RMB 5 million (approximately USD $820,088) on August 29, 2014.  The payments due in September 2012, August 2013 and December 2013 were not made by the Company and the note is thus in default.
 
Since the lender, Ji’An Qingshi Credit Cooperative has verbally agreed not to call the loan, we can repay this loan at our own discretion when funds are available. Thus, the debt in Tonghua Linyuan acquisition will not have an impact on our liquidity and capital resources before we start to repay the lender.

On October 27, 2013, Hong Kong Huaxia entered into a short term loan agreement with Fei Zhang, the principal terms of which are as follows:

 
Parties: Hong Kong Huaxia and Fei Zhang;
     
 
Fei Zhang agreed to lend a loan of US $ 6 million to Hong Kong Huaxia to be used to invest in Jinlin Huaxia to purchase assets; the term of the loan is 4 months from October 29, 2013 to February 28, 2014. 
 
 
The loan carries no interest, but Hong Kong Huaxia agreed to pay Fei Zhang an agency fee of RMB 1.3 million (approximately S213,115), payable upon Hong Kong Huaxia’s receipt of full amount of the loan.
     
 
Hong Kong Huaxia agreed to pay off the full amount of the loan on or prior to February 28, 2014, in the event that Hong Kong Huaxia fails to pay off the loan on time, Fei Zhang is entitled to recover from the assets of Jinlin Huaxia invested by Hong Kong Huaxia.
 
As of December 31, 2013 and 2012, we had notes payable of approximately $1,228,768 and $1,739,000 to related parties, respectively. These amounts are mainly due to the working capital demands of the business. Most of these related parties are our individual shareholders or immediate family members of our shareholders and friends of our shareholders.  The individuals loaned us interest free and unsecured funds, which have no specific repayment date.  The funds received are evidenced by receipt of cash acknowledgments.
 
As of December31, 2013, we had an outstanding short borrow of approximately $6 million which was used to purchase machinery and equipments. Other than that, we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business. We plan to fund operations and capital expenditures with cash from operations as well as loans from major shareholders and management members and their affiliates. We might also pursue additional financings in the form of debt, equity or convertible security offerings. There can be no assurance that we will be able to obtain such additional financing at acceptable terms to us, or at all.
 
Item 3. 
Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4. 
Controls and Procedures.
 
(a)
Evaluation of disclosure controls and procedures
 
As of the end of our last fiscal year ended June 30, 2013, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and procedures were not effective as of June 30, 2013 to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.  Management conducted a similar evaluation as of the period covered by this Report and management again concluded that our disclosure controls and procedures were similarly ineffective as of September 30, 2013.
 
 
16

 
 
(b)
Changes in internal control over financial reporting

Other than those disclosed in the Annual Report on Form 10K for the year ending June 30, 2013 that we continue to implement, there have not been any changes in our internal control over financial reporting identified in connection with the evaluation management performed at the end of the fiscal quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
Item 6. 
Exhibits.
 
(a)
Exhibits.
 
Exhibit
No.
 
Document Description
     
10.1
 
Loan Agreement between and among Hong Kong Huaxia and Fei Zhang, dated October 27, 2013
10.2
 
Employment Contract between the Company and Changzhen Liu, dated January 2, 2014
10.3
 
Employment Contract between the Company and Ren Ying, dated January 2, 2014
10.4
 
Employment Contract between the Company and Xiaohua Cai, dated February 2, 2014
31.1
 
CERTIFICATION of CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
     
31.2
 
CERTIFICATION of CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
     
32.1*
 
CERTIFICATION of CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002.
     
32.2*
 
CERTIFICATION of CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEYACT OF 2002.
 
*  This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
 
 
17

 
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:  February 14, 2014  China Ginseng Holdings, Inc.,  
       
 
By:
/s/ Changzhen Liu  
    Changzhen Liu  
    Principal Executive Officer  
 
 
By:
/s/ Ren Ying  
    Ren Ying  
    Principal Financial Officer and  
    Principal Accounting Officer  
 
 
18