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EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - Ziyang Ceramics Corpexh31-2.htm
EX-32.1 - SECTION 1350 CERTIFICATION - Ziyang Ceramics Corpexh32-1.htm
EX-10.19 - EQUITY PURCHASE CONTRACT DATED JULY 19, 2010 ENTERED INTO BETWEEN SHANGHAI AOHONG CHEMICAL CO., LTD. AND GUORONG CHEN AND YULING LI. - Ziyang Ceramics Corpexh10-19.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION - Ziyang Ceramics Corpexh31-1.htm
EX-10.18 - SHANGHAI ADVANCE SALE FOR COMMERCIAL/RESIDENTIAL BUILDING DATED JUNE 10, 2010 BETWEEN SHANGHAI ZHONGYE XIANGTENG INVESTMENT CO., LTD. AND SHANGHAI AOHONG CHEMICAL CO. LTD. - Ziyang Ceramics Corpexh10-18.htm

 



 

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

(MARK ONE)
FORM 10-Q

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

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

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

COMMISSION FILE NUMBER: 000-53874
 
CHINA AMERICA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Florida
82-0326560
(State or other jurisdiction of  incorporation or organization)
(I.R.S. Employer Identification No.)

333 E. Huhua Road, Huating Economic & Development Area, Jiading District, Shanghai, China
201811
(Address of principal executive offices)
(Zip Code)

 86-21-59974046
(Registrant's telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer
[  ]
Accelerated filer
[  ]
Non-accelerated filer
[  ]
Smaller reporting company
[X]
(Do not check if smaller reporting company)
     

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

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, 168,710,792 shares of common stock are issued and outstanding as of August 11, 2010.

 
 

 
 


TABLE OF CONTENTS

   
Page No.
PART I. - FINANCIAL INFORMATION
Item 1.
Financial Statements.
  1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
  35
Item 4
Controls and Procedures.
  35
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings.    
  36
Item 1A.
Risk Factors.
  36
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
  36
Item 3.
Defaults Upon Senior Securities.
  36
Item 4.
(Removed and Reserved).
  36
Item 5.
Other Information.
  36
Item 6.
Exhibits.
  37
Signatures
  38


 
i

 
INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

“China America” “we,” “us,” “ours,” and similar terms refers to China America Holdings, Inc., a Florida corporation formerly known as Sense Holdings, Inc., and our subsidiaries;

“China Chemical” refers to China Chemical Group, Inc., a Florida corporation and a wholly owned subsidiary of China America;

“AoHong” refers to Shanghai AoHong Chemical Co., Ltd., a Chinese limited liability company which is a majority owned subsidiary of China America, together with AoHong’s wholly owned subsidiaries Shanghai Binghong Trading Co., Ltd., a Chinese limited liability company, (“Binghong”), and Shanghai Wuling Environmental Material Co., Ltd., a Chinese limited liability company, (“Wuling”),  AoHong (Tianjin) Chemical Co., Ltd. a Chinese limited liability company (“AoHong Tianjin”); Shanghai Jinqian Chemical Co. Ltd. a Chinese limited liability company (“Jinqian”), and Guangzhou Jianxin Enterprise Co., Ltd., a Chinese limited liability company (“Jianxin”);

“PRC” or “China” refers to the People’s Republic of China, and

Effective September 7, 2009, we changed our fiscal year end from December 31 to September 30. We have defined various periods that are covered in this report as follows:

   
“three months ended June 30, 2010” — April 1, 2010 through June 30, 2010.
   
“three months ended June 30, 2009” — April 1, 2009 through June 30, 2009.
   
“first nine months ended June 30, 2010” — October 1, 2009 through June 30, 2010.
   
“nine months ended June 30, 2009” — October 1, 2008 through June 30, 2009.
   
“fiscal 2010” — October, 1, 2009 through September 30, 2010.
   
“2009 transition period” — January 1, 2009 through September 30, 2009.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to,

 
our ability to raise sufficient capital to satisfy our obligations,
  the possible deconsolidation of AoHong,
 
continuing operating losses and lack of profitable operations,
 
pricing pressure which has decreased our gross margins,
 
the risk of doing business in the People's Republic of China,
 
our ability to raise capital as needed,
 
risks associated with the lack of experience of our sole officer with U.S. public companies,
 
volatility in raw material costs,
 
restrictions on currency exchange,
 
dependence on key personnel,
 
difference in legal protections under Chinese and U.S. laws,
 
enhanced government regulation,
 
compliance with environmental laws,
 
limited insurance coverage,
 
market overhang from outstanding warrants and options,
 
absence of corporate governance protections, and
 
the impact of the penny stock rules on the trading in our common stock.
 
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety and review the risks described in "Item 1A. - Risk Factors" in our Transition Report Form 10-KT for the nine month period ended September 30, 2009 as filed with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Our web sites are www.chinaamericaholdings.com and www.china-aohong.com. The information which appears on our web sites is not part of this report.
 
ii

 
 


PART 1 - FINANCIAL INFORMATION
Item 1.  Financial Statements

CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2010
   
September 30, 2009
 
ASSETS
 
Unaudited
       
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 3,312,067     $ 1,721,231  
Accounts receivable, net
    4,186,056       2,782,814  
Notes receivable
    80,817       829,890  
Inventory
    3,647,027       2,165,567  
Taxes receivable
    -       43,137  
Prepaid expense and other current assets
    1,026,310       159,083  
Total current assets
    12,252,277       7,701,722  
LONG-TERM ASSETS:
               
Restricted cash
    3,071,184       877,501  
Property and equipment, net
    6,559,083       4,442,662  
Land use right, net
    819,424       828,654  
Other assets
    29,375       29,250  
Total other assets
    10,479,066       6,178,067  
Total assets
  $ 22,731,343     $ 13,879,789  
                 
LIABILITIES AND EQUITY
               
CURRENT LIABILITIES:
               
Notes payable
  $ 7,426,071     $ 3,036,290  
Notes payable-related party
    494,000       400,000  
Accounts payable and accrued expenses
    2,942,870       893,391  
Advances from customers
    1,141,962       199,905  
Taxes payables
    637,804       458,570  
Derivative liability
    71,711       -  
Due to related parties
    451,687       228,467  
Total current liabilities
    13,166,105       5,216,623  
EQUITY:
               
China America Holdings, Inc. shareholders' equity
               
Common stock: $.001 par value, 500,000,000 shares authorized; 168,710,792 and 151,810,792 shares issued and outstanding at June 30, 2010 and September 30, 2009, respectively
    168,711       151,811  
Additional paid-in capital
    20,266,787       20,014,547  
Statutory reserves
    826,521       704,321  
Accumulated deficit
    (17,740,586 )     (17,650,606 )
Accumulated other comprehensive income
    472,839       428,109  
Total China America Holdings, Inc. shareholders' equity
    3,994,272       3,648,182  
Noncontrolling interest
    5,570,966       5,014,984  
Total equity
    9,565,238       8,663,166  
Total liabilities and equity
  $ 22,731,343     $ 13,879,789  
See notes to unaudited consolidated financial statements.
 


 
- 1 -

 
 


CHINA AMERICA HOLDNGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
   
For the Three Months Ended June 30,
   
For the Nine Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net revenues
  $ 14,018,162     $ 8,185,254     $ 33,832,116     $ 22,312,182  
Cost of sales
    12,762,408       7,320,478       30,415,883       20,735,197  
Gross profit
    1,255,754       864,776       3,416,233       1,576,985  
Operating expenses:
                               
Selling expenses
    424,943       314,058       1,334,822       648,925  
Loss on disposition of property and equipment
    -       -       236       61,958  
Consulting expense-related party
    68,000       109,000       307,024       274,812  
General and administrative
    394,458       257,723       1,192,631       606,976  
Total operating expenses
    887,401       680,781       2,834,713       1,592,671  
Total operating income (loss)
    368,353       183,995       581,520       (15,686 )
Other income (expenses):
                               
Interest expense
    (21,018 )     (123 )     (49,067 )     (55,050 )
Interest expense-related party
    (4,663 )     (7,934 )     (12,687 )     (11,966 )
Other income (expense)
    (65,456 )     1,875       (45,107 )     (1,906 )
Gain on acquisition
    -       -       200,978       -  
Realized loss on sale of marketable equity securities
    -       -       -       (280,975 )
Total other income (expenses)
    (91,137 )     (6,182 )     94,117       (349,897 )
Net income (loss) from continuing operations before income taxes
    277,216       177,813       675,637       (365,583 )
Discontinued operations:
                               
Loss from discontinued operations
    -       -       -       (174,560 )
Total loss from discontinued operations
    -       -       -       (174,560 )
Income (loss) before income taxes
    277,216       177,813       675,637       (540,143 )
Income taxes (expense) benefit
    (29,385 )     (102,699 )     (87,435 )     (115,031 )
Net income (loss)
    247,831       75,114       588,202       (655,174 )
Net income attributable to noncontrolling interest
    (209,589 )     (87,805 )     (555,982 )     (26,885 )
Net income (loss) attributable to China America Holdings, Inc.
  $ 38,242     $ (12,691 )   $ 32,220     $ (682,059 )
                                 
Basic and diluted loss per common share:
                               
Net income (loss) from continuing operations
  $ 0.00     $ 0.00     $ 0     $ (0 )
Net income (loss) from discontinued operations
    -       -       -       (0 )
Net loss per common share
  $ 0.00     $ 0.00     $ 0     $ (0 )
                                 
Weighted average number of shares outstanding:
                               
Basic and diluted
    161,377,459       141,272,331       156,986,616       137,631,304  
                                 
Amounts attributable to China America Holdings, Inc.
                               
Income (loss) from continuing operations, net of tax
  $ 38,242     $ (12,691 )   $ 32,220     $ (507,499 )
Loss from discontinued operations, net of tax
    -       -       -       (174,560 )
Net (loss) income
    38,242       (12,691 )   $ 32,220     $ (682,059 )
See notes to unaudited consolidated financial statements.
                 


 
- 2 -

 
 
 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
For the Nine Months Ended June 30,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income (loss)
  $ 588,202     $ (655,174 )
Less: Loss from discontinued operations
    -       (174,560 )
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) continuing operations:
               
Depreciation
    331,001       257,310  
Amortization of land use rights
    12,710       3,982  
Stock-based consulting fee
    364,724       209,000  
Warrant cost adjustment
    44,127       -  
Gain on acquisition
    (200,978 )     -  
Loss on disposition of property and equipment
    236       61,958  
Realized and unrealized loss on marketable equity securities
    -       280,975  
Changes in assets and liabilities:
               
Accounts receivable
    (1,385,978 )     (8,282 )
Notes receivable
    749,681       278,764  
Inventory
    (1,461,057 )     294,946  
Prepaid expenses and other current assets
    (595,448 )     822,428  
Taxes receivable
    43,152       -  
Taxes payable
    204,417       6,759  
Accounts payable and accrued expenses
    1,967,722       836,956  
Advances from customers
    937,545       422,982  
Net cash provided by continuing operations
    1,600,056       2,987,164  
Adjustments to reconcile loss from discontinued operations to net cash (used in) provided by discontinued operations:
               
Net liabilities from discontinued operations
    -       2,291  
Loss from discontinued operations
    -       (174,560 )
Net cash (used in) provided by discontinued operations
    -       (172,269 )
Net cash provided by operating activities
    1,600,056       2,814,895  
Cash flows from investing activities:
               
Cash acquired from acquisition
    42,308       -  
Cash used in acquisition
    (73,151 )     -  
Proceeds from sale of marketable equity securities
    -       87,793  
Purchase of property and equipment
    (2,420,101 )     (270,269 )
Proceeds from property and equipment disposal
    927       -  
Purchase land use rights
    -       (750,776 )
Net cash flows used in investing activities
    (2,450,017 )     (933,252 )
Cash flows from financing activities:
               
Proceeds from (repayment of) notes payable
    4,359,934       (890,442 )
Proceeds from (repayment of) related party advances
    248,894       (133,245 )
Increase in restricted cash
    (2,181,430 )     (180,435 )
Net cash flows provided by (used in) financing activities
    2,427,398       (1,204,122 )
Effect of exchange rate on cash
    13,399       69,268  
Net increase in cash
    1,590,836       746,789  
Cash - beginning of year
    1,721,231       1,090,753  
Cash - end of period
  $ 3,312,067     $ 1,837,542  
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 55,426     $ 60,403  
Cash paid for income taxes
  $ 66,122     $ 7,153  
 Supplemental disclosure of non cash investing and financing activities:
               
    Non cash Investing:
               
Reclassification from prepaid expense-deposit on
               
Tianjin construction to property and equipment
  $ 393,516     $ -  
    Acquisition details:
               
 Fair value of assets acquired
  $ 316,748     $ -  
 Liabilities assumed
  $ 42,630     $ -  
See notes to unaudited consolidated financial statements.
 
 
- 3 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
FOR THE PERIOD ENDED JUNE 30, 2010 AND SEPTEMBER 30, 2009
 
   
China America Holdings, Inc. Shareholders
                   
   
Common Stock, $.001 Par Value
                                           
   
Number of Shares
   
Amount
   
Additional Paid-in Capital
   
Statutory Reserves
   
Accumulated Deficit
   
Accumulated Other Comprehensive Income
   
Noncontrolling Interest
   
Comprehensive Income
   
Total Equity
 
Balance, December 31, 2008
    135,810,792     $ 135,811     $ 19,661,352     $ 687,717     $ (17,180,183 )   $ 415,630     $ 4,913,442           $ 8,633,769  
Common stock issued for services
    16,000,000       16,000       273,000       -       -       -       -       -       289,000  
Option expense for Aihua Hu
                    80,195                                               80,195  
Comprehensive loss:
                                                                       
Appropriation of statutory reserves
    -       -       -       16,604       (16,604 )     -       -       -       -  
Net loss for the period
    -       -       -       -       (453,819 )     -       91,768       (362,051 )     (362,051 )
Other comprehensive income, net of tax:
                                                                       
Foreign currency translation adjustment
    -       -       -       -       -       12,479       9,774       22,253       22,253  
Other comprehensive income
                                                            22,253       22,253  
Comprehensive loss
    -       -       -       -       -       -       -       (339,798 )     (339,798 )
Balance, September 30, 2009
    151,810,792       151,811       20,014,547       704,321       (17,650,606 )     428,109       5,014,984               8,663,166  
Common stock issued for services
    16,900,000       16,900       279,824       -       -       -       -       -       296,724  
Cumulative effect of change in accounting principle adoption of
                                                                       
ASC 815 effective January 1, 2009
                    (27,584 )                                             (27,584 )
Comprehensive income (loss):
                                                                       
Appropriation of statutory reserves
    -       -       -       122,200       (122,200 )     -       -       -       -  
Net (loss) income for the period
    -       -       -               32,220               555,982       588,202       588,202  
Other comprehensive income, net of tax:
                                                                       
Foreign currency translation adjustment
    -       -       -       -       -       44,730       -       44,730       44,730  
Other comprehensive income
                                                            44,730       44,730  
Comprehensive income (loss)
    -       -       -       -       -       -       -     $ 632,932       632,932  
Balance, June 30, 2010 (unaudited)
    168,710,792     $ 168,711     $ 20,266,787     $ 826,521     $ (17,740,586 )   $ 472,839     $ 5,570,966             $ 9,565,238  
See notes to unaudited consolidated financial statements.
 
 
- 4 -

CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

China America Holding, Inc. (“we,” “us,” or “ours,”) is a Florida corporation formed on July 13, 1998. Prior to June 27, 2007, our core business was the design, development, manufacture and selling of fingerprint-based identification products and systems that incorporate state-of-the-art biometric technology to verify a person's identity. We had also licensed certain patented technology designed to detect chemical vapors and unexploded ordnance including bombs, grenades, shells, rockets, and other explosive devices.

Effective June 27, 2007, we entered into a membership interest exchange agreement with Shanghai AoHong Chemical Co., Ltd. ("AoHong"), a Chinese limited liability company, and its sole members Mr. Aihua Hu and his wife, Mrs. Ying Ye. Under the terms of the agreement, we acquired 56.08% of the membership interests of AoHong from that company in exchange for $3,380,000 to be invested in AoHong between September 30, 2007 and July 27, 2009. As part of the transaction, 12,500,000 shares of our common stock valued at $1,187,500 were issued to Mr. Hu. As of December 31, 2009 we owe $1,780,000 to AoHong which has orally agreed to extend the due date for payment of this amount to on or before November 20, 2010. See Note 13 – Commitments and Contingencies.

AoHong generates revenues through the sales of Freon-based chemical products, which are used as refrigerants in air-conditioning, refrigerators, and automobile air conditioning systems; and in petrochemical and pharmaceutical industries in the manufacturing of vesicants, sprays, fire extinguishers, and related products.
 
AoHong offers two broad categories of Freon-based products:
 
·  
Single Freon-based chemical products, which we buy in bulk and distribute in either bulk quantities or retail packages we repackage;
·  
Multiple Freon-based chemical products, which we custom mix based on our customers’ specifications and sold in either bulk or retail packages.

Customers of AoHong include manufacturers of automobiles, refrigerators, air conditioners, chemicals, and pharmaceuticals as well as distributors of coolants. Historically, AoHong has witnessed a seasonal surge in demand for refrigerant products from March to July.

AoHong was established in February 2000 as Shanghai AoHong Industry Co., Ltd. On July 5, 2007 AoHong changed its name to Shanghai AoHong Chemical Co., Ltd.. AoHong has five wholly-owned subsidiaries including Shanghai Binghong Trading Co., Ltd. which was established in March 2002, and Shanghai Wuling Environmental Material Co., Ltd. which was established in January 2005.

In November 2008, AoHong created AoHong (Tianjin) Chemical Co., Ltd., a Chinese limited liability company as a wholly owned subsidiary, (“AoHong Tianjin”), to expand its distribution channels to the Beijing region.  AoHong Tianjin serves as a second production base in northern China.

On September 30, 2009, Wuling, our 100% owned subsidiary, entered into a membership interest exchange agreement with Ms Cuiqin Xiang and Ms Lihua Hu, the sole members of Shanghai Jinqian Chemical Co., Ltd., a company established under the laws of the PRC (“Jinqian”) to acquire 100% of the outstanding ownership interest of Jinqing for $73,140, the amount of its original registered capital.  Jinqian provides inspection services for specialty gas cylinders.
 
        The consolidated financial statements include our operations, and that of all of our subsidiaries, including those operating outside the United States of America. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant inter-company account balances and transactions have been eliminated.


 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  The accompanying consolidated financial statements for the interim periods are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes for the nine month transition period ended September 30, 2009 and notes thereto contained in the Transition Report on Form 10-KT as filed with the SEC. The results of operations for the three and nine month periods ended June 30, 2010 are not necessarily indicative of the results for the full year ending September 30, 2010.  Our unaudited consolidated statements include wholly-owned and majority owned subsidiaries. All significant inter-company account balances and transactions have been eliminated.  The financial statements have been reclassified to reflect the impact of discontinued operations.

Restatement of Previously Filed Interim Financial Statements
 
On May 17, 2010 our Board of Directors determined that our previously issued financial statements for the three months ended December 31, 2009 as included in our Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on February 16, 2010 could no longer be relied upon.

We inadvertently booked a reverse entry twice while accounting a trade transaction with Jinqian and as a result we understated cost of goods sold by $738,382, tax payable by $712 and foreign currency translation gain by $126, and overstated our inventory by $737,544 as included in our financial statements for the three months ended December 31, 2009 as included in our Quarterly Report on Form 10-Q.  

Additionally, on September 30, 2009, we entered into a share purchase agreement with Ms Cuiqin Xiang and Ms Lihua Hu, the sole owners of Jinqian, to acquire 100% of the outstanding shares of Jinqian for 500,000 RMB (U.S. $73,140), the equivalent of Jinqian’s registered capital.  As of October 1, 2009 Jinqian’s net book value was $274,118 and its identifiable assets were the same as that of their respective fair market values.  As a result of this share purchase agreement, we should have consolidated this entity’s financial results and recognized a gain in the quarter ended December 31, 2009 on this bargain purchase equal to the difference between the $274,118 fair market value of the net assets and the $73,140 price we agreed to pay to acquire Jinqian.
 
Through our internal review we discovered these errors and determined that it would require a restatement to include our acquisition of Jinqian, its financial results and the related accounting error corrections, as part of our consolidated financial statements beginning October 1, 2009, as well as to account for a gain upon our acquisition of Jinqian. Accordingly, the consolidated balance sheets, consolidated statements of operations, consolidated statement of stockholders’ equity, and consolidated statement of cash flows for the three month period ended December 31, 2009 have been restated in our Quarterly Report on Form 10-Q for the three month period ended December 31, 2009 filed with the SEC on June 4, 2010. In addition, our financial statements for the nine months ended June 30, 2010 included in this report properly include Jinqian as a consolidated entity.
 
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for fiscal 2010 and the 2009 transition period include provisions made for sales and the related allowance for doubtful accounts, valuation of stock-based compensation, and the useful lives of property and equipment and other long-term assets.

We rely on assumptions such as volatility, forfeiture rate, and expected dividend yield when calculating the fair value of our derivative liability related to common stock purchase warrants.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, we consider all highly liquid investments with original maturities of three months or less to be cash equivalents.


 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

Concentration of Credit Risks

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We deposit our cash with high credit quality financial institutions in the United States and China. At June 30, 2010, we had deposits of approximately $3,287,341 in banks in China. In China, there is no equivalent federal deposit insurance as in the United States; as such these amounts held in banks in China are not insured. We have not experienced any losses in such bank accounts through June 30, 2010.

At June 30, 2010 and September 30, 2009, our bank deposits by geographic area were as follows:
 
   
June 30, 2010
   
September 30, 2009
 
China
  $ 3,287,341       99.25 %   $ 1,721,002       99.99 %
United States
    24,726       0.75 %     229       0.01 %
Total cash and cash equivalents
  $ 3,312,067       100.00 %   $ 1,721,231       100.00 %
 
Customer Concentration

Shanghai 3F New Materials Co., Ltd. and Hangzhou Fuming Refrigeration Co., Ltd. represented 20% and 9% of our net revenues in the nine months ended June 30, 2010, while Shanghai 3F New Materials Co., Ltd. and Hangzhou Fuming Refrigeration Co., Ltd. represented 16% and 12% of net revenues in the nine months ended June 30, 2009.

Notes Receivable

Notes receivable represents trade accounts receivable due from various customers where a Chinese bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within three to six months. Historically, we have experienced no losses on notes receivable. Our notes receivable totaled $80,817 and $829,890 at June 30, 2010 and September 30, 2009, respectively.

Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, customer's payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts of collection. As of June 30, 2010 and September 30, 2009, we have recorded an allowance for doubtful accounts of $176,449 and $175,701, or approximately 4% and 6% of gross accounts receivable, respectively.

Inventory

Inventory is stated at the lower of average cost or market; and consists of raw materials and finished goods. We write down inventory for estimated obsolescence or unmarketable inventory based upon assumptions and estimates about future demand and market conditions. If actual market conditions are less favorable than those projected by us, additional inventory write-downs may be required.

Derivative Liability

Pursuant to FASB ASC 815, derivative instruments are recognized as either assets or liabilities, depending on the rights or obligations in each series of our derivative offerings. When these instruments clearly meet the definition of a derivative liability due to the inherent obligations, they are classified either as current or long-term derivative liabilities depending on whether they are currently exercisable or there are restrictions on the ability of the holders to exercise such derivative instruments, and to be recorded at their then current fair market value. We perform a mark-to-market valuation on a quarterly basis using the Black-Scholes Option Pricing Model with gains and losses to be recognized in the current earnings. As of June 30, 2010 our derivative liability associated with 8,350,001 common stock purchase warrants is $71,711.

 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of (i) prepayments to vendors for merchandise that had not yet been shipped, and (ii) other receivables. At June 30, 2010 and September 30, 2009, our consolidated balance sheets include prepaid expenses and other current assets of $1,026,310 and $159,083, respectively. In our Transition Report on Form 10-KT for the transition period ended September 30, 2009, our reported prepaid expenses and other current assets included $393,377 as a deposit on Tianjin’s construction in progress. In the third quarter of fiscal 2010 we reclassified it as Construction in Progress (CIP) in our long-term assets.

Plant, Property and Equipment

We sell and distribute assorted chemicals in China.  Our main products are liquid coolants, which are employed primarily as refrigerants in air conditioning systems.  Most of our plant and equipment are used to store such chemicals. They are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The costs of repairs and maintenance are expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. As part of our accounting policies and procedures we perform an impairment analysis on an annual basis. 

Our business is highly regulated.  Any negative change in regulatory and environmental policies, technical specifications, and customer acceptance of our products may have an adverse effect on our business operations, including any possible cessation of our operating activities, which could impair the usefulness and fair market value of our plant, property and equipment.  These changes in circumstances and other changes we may encounter in the future may require us to perform an impairment analysis of our plant, property and equipment more often, rather than on an annual basis. 

Impairment of Long-Lived Assets

We have adopted subtopic 360-10-35-17 of the FASB Accounting Standards Codification for long-lived assets. Our business is highly regulated.  Any negative change in regulatory and environmental policies, technical specifications, and customer acceptance of our products may have an adverse effect on our business operations, including any possible cessation of our operating activities, which could impair the usefulness and fair market value of our plant and equipment. These changes in circumstances and other changes we may encounter in the future may require us to perform an impairment analysis of our long-lived assets more often, rather than on an annual basis.

As part of our accounting policies and procedures we perform an impairment analysis on an annual basis. We performed our last impairment analysis on or around September 30, 2009, and determined that there was no impairment to our long-lived assets other than our scheduled depreciation on a straight-line basis. In addition, we have concluded that the fair value of our long lived assets were substantially in excess of the carrying values on our balance sheet included in this report.

Advances from Customers

Advances from customers represent prepayments to us for merchandise that had not yet been shipped. We will recognize the deposits as revenue as customers take delivery of the goods, in accordance with our revenue recognition policy. At June 30, 2010 and September 30, 2009, our consolidated financial statements include advance from customers of $1,141,962 and $199,905, respectively.

Fair Value of Financial Instruments

We follow subsection 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted subsection 820-10-35-37 of the FASB Accounting Standards Codification (“Subsection 820-10-35-37”) to measure the fair value of its financial instruments clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2
Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3
Inputs are unobservable inputs which reflect the reporting entity's own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.


 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 


The carrying amounts reported in the balance sheet for cash, accounts receivable, notes receivable, due from related party, accounts payable and accrued expenses, advances from customers, notes payable, loans and amounts due from related parties approximate their fair market value based on the short term maturity of these instruments.
 
Employee and Non-Employee Stock-Based Compensation

We account for stock based compensation in which we obtain employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification and accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of section 505-50-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

Revenue Recognition

We apply subsection 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. We recognize revenue when it is realized or realizable and earned less estimated future doubtful accounts. We consider revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The following policies reflect specific criteria for our various revenues streams:

 
We generate revenue from the sale of its products and records revenues from the sale of products when the goods are shipped, title passes, and collectability is reasonably assured. 
 
Revenue from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant obligations remain and collectability of the related receivable is probable.
 
Revenue from the performance of services is recognized upon completion of the service.

Loss per Common Share

Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of the unexercised stock options and warrants. For the three and nine months ended June 30, 2010 and 2009, the computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they were anti-dilutive.

The following table shows the weighted-average number of potentially outstanding dilutive shares excluded from the diluted net loss per share calculation as of June 30, 2010 and 2009 as these financial instruments were out-of-the-money and would be anti-dilutive using the treasury stock method:
 
   
As of June 30,
 
   
2010
   
2009
 
Stock options issued to employees with exercise prices
           
ranging from $0.07 to $0.20
  $ 8,500,000     $ 7,900,000  
Common stock purchase warrants with exercise prices
               
ranging from $0.04 to $0.55
    61,200,113       61,350,113  
Total outstanding potentially-dilutive shares
  $ 69,700,113     $ 69,250,113  


 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

Income Taxes

We account for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period that includes the enactment date.

We adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under Section 740-10-25, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement.  Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.  We had no material adjustments to our liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.

Foreign Currency Translation

Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Section 830-10-55 of the FASB Accounting Standards Codification and are included in determining net income or loss.

Our reporting currency is the U.S. dollar. The functional currency of our Chinese subsidiaries is the Chinese dollar or Renminbi ("RMB"). For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date and weighted average rates of exchange for the period for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. The cumulative translation adjustment and effect of exchange rate changes on cash at June 30, 2010 was $13,399. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining accumulated comprehensive loss. A summary of the conversion rates for the periods presented is as follows:

   
June 30,
2010
   
September 30,
2009
 
Year end RMB: U.S. dollar exchange rate
   
6.8086
     
6.8376
 
Average year-to-date RMB: U.S. dollar exchange rate
   
6.83518
     
6.8425
 

Non-controlling Interest
 
Non-controlling interests in our subsidiary are recorded as a component of our equity, separate from the parent’s equity.  Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.  Results of operations attributable to the non-controlling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.
 

 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income or loss. Other comprehensive income or loss refers to revenue, expenses, gains and losses that are provided under accounting principles generally accepted in the United States are included in comprehensive income but excluded from net income as these amounts are recorded directly as an adjustment to equity. Our comprehensive loss for the three and nine months ended June 30, 2010 and 2009 included net loss, unrealized gain on marketable equity securities and foreign currency translation adjustments.
 
   
For the Three Months Ended June 30,
   
For the Nine Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income (loss)
  $ 247,831     $ 75,114     $ 588,202     $ (655,174 )
Other comprehensive (loss) income, net of tax
                               
Unrealized gain on marketable equity securities, net of tax
    -       -       -       157,727  
Unrealized foreign currency translation gain, net of tax
    42,688       463       44,730       18,142  
Total other comprehensive income, net of tax
    42,688       463       44,730       175,869  
Comprehensive (loss) income
    290,519       75,577       632,932       (479,305 )
Less: comprehensive income attributable to
                               
 the noncontrolling interests
    (209,589 )     (87,805 )     (555,982 )     (26,885 )
Comprehensive (loss) income attributable to
                               
 China America holdings, Inc.
  $ 80,930     $ (12,228 )   $ 76,950     $ (506,190 )
 
Segment Information

For transition period of 2009 and fiscal 2010, we operate in only one segment, Chemical Distributions.

Recent Accounting Pronouncements

The FASB issued Accounting Standards Update (ASU) No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, on July 21, 2010, requiring companies to improve their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The extra disclosures for financing receivables include aging of past due receivables, credit quality indicators, and the modifications of financing receivables.  We do not expect the adoption of this update to have a material impact on our consolidated financial position, results of operations or cash flows.

Accounting for decreases in ownership of a subsidiary - In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary,” which clarifies the scope of the guidance for the decrease in ownership of a subsidiary in ASC 810, “Consolidations,” and expands the disclosures required for the deconsolidation of a subsidiary or de-recognition of a group of assets. This guidance was effective on January 1, 2010.   We have adopted this guidance and it did not have an effect on the accompanying consolidated financial statements. Accounting for distributions to shareholders - In January 2010, the FASB issued ASU 2010-01, “Accounting for Distributions to Shareholders with Components of Stock and Cash,” which clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend for purposes of applying ASC 505, “Equity,” and ASC 260, “Earnings Per Share.” This guidance is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements.

In January 2010, the FASB issued changes to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). These changes become effective for us beginning February 1, 2010. Other than the additional disclosure requirements, management has determined these changes will not have an impact on the Consolidated Financial Statements.

 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 


In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We are currently evaluating this new ASU.

            In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We are currently evaluating this new ASU
 
In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per Share – Amendments to Section 260-10-S99”, which represents technical corrections to topic 260-10-S99, Earnings per share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock. We do not expect the adoption of this update to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-09 “Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based Payments to Non-Employees”.  This update represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee. Additionally, it adds observer comment Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees to the Codification. The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-12 “Fair Value Measurements and Disclosures Topic 820 – Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent)”, which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with Topic 820. The amendments in this update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this update, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be make by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph 320-10-50-1B. The disclosures are required for all investments within the scope of the amendments in this update regardless of whether the fair value of the investment is measured using the practical expedient. The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements.
 
         In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-04 “Accounting for Redeemable Equity Instruments - Amendment to Section 480-10-S99” which represents an update to section 480-10-S99, distinguishing liabilities from equity, per EITF Topic D-98, Classification and Measurement of Redeemable Securities.  The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements.

 
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CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
 
In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement and Disclosures Topic 820 – Measuring Liabilities at Fair Value”, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities.  This update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1. A valuation technique that uses: a. The quoted price of the identical liability when traded as an asset b. Quoted prices for similar liabilities or similar liabilities when traded as assets. 2. Another valuation technique that is consistent with the principles of topic 820; two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments in this update also clarify that both a quoted price in an active market for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  The application of the requirements of this guidance had no effect on the accompanying consolidated financial statements. 

There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

NOTE 2 – ACQUISITION

Jinqian
 
On September 30, 2009, we entered into a share purchase agreement with Ms Cuiqin Xiang and Ms Lihua Hu, the sole owners of Jinqian, a company established under the laws of the PRC, to acquire 100% of the outstanding shares of Jinqian for 500,000 RMB (US $73,140), the equivalent of Jinqian’s registered capital.  In accounting for this acquisition we followed ASC 805-20-25 and ASC 805-30-25, which requires us to account for the acquisition of Jinqian under the acquisition method. Under this method, we identified the acquirer, determined the acquisition date and purchase price and recognized at their acquisition date fair market values of the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquisition. We are required to re-evaluate the measurements of the recognized assets and liabilities at the acquisition date and recognize a gain on the date if an excess remained as a bargain purchase. As of October 1, 2009 Jinqian’s net book value was $274,118 and its identifiable assets were the same as that of their respective fair market values.  As a result of this acquisition, we recognized a gain on the acquisition of $200,978 in the quarter ended December 31, 2009 on this bargain purchase equal to the difference between the $274,118 fair market value of the net assets acquired and the $73,140 price we agreed to pay to acquire Jinqian.
 
The following is a breakdown of the acquired nets assets and purchase price, including a $200,978 gain from bargain purchase price on the acquisition of Jinqian:

Purchase price
 
$
73,140
 
Cash
 
$
42,299
 
Other Receivable(1)
   
267,708
 
Inventory
   
5,452
 
Total Current Assets
   
315,459
 
Fixed Assets
   
1,289
 
Total Assets:
   
316,748
 
Minus: Liabilities Assumed
   
(42,630
)
Total Net Assets Acquired
   
274,118
 
100% ownership
       
    Net Assets Acquired:
   
274,118
 
         
Net assets acquired in excess of purchase price
       
Gain on acquisition
 
$
200,978
 

   (1) Upon reevaluating the measurements we determined that 99.6% of acquired identifiable assets and 100% of liabilities assumed were current assets and liabilities (including $267,708 in other receivables, a short-term non-interest bearing working capital loan to Nanchang Chemical Co. Ltd, an unrelated party, which was subsequently collected in full as of June 30, 2010), and their book values were equal to their fair market values.
 
- 13 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
     
The bargain purchase gain of $200,978 was based on the excess of the identifiable assets acquired and liabilities assumed over the purchase price. The excess took into account of the following compulsory factors:

 
·
Jinqian was established with the assistance of Mr. Hu, the principal shareholder of the Company and CEO of AoHong; and
 
·
AoHong was the major customer of Jinqian as the majority of its retained earnings were derived from sales to AoHong.

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Jinqian had occurred as of the following periods:
 
CHINA AMERICA HOLDNGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
   
For the nine months ended June 30, 2009
 
   
China America Holdings, Inc.
   
Jianqian Chemical
   
China America Holdings, Inc.
Pro-forma
 
                   
Net revenues
  $ 22,312,182     $ 780,539     $ 23,092,721  
Cost of sales
    20,735,197       686,261       21,421,458  
Gross profit
    1,576,985       94,278       1,671,263  
                         
Operating expenses:
                       
Selling expenses
    648,925       799       649,724  
Consulting expense-related party
    274,812       -       274,812  
Loss on disposition of property and equipment
    61,958       -       61,958  
General and administrative
    606,976       32,668       639,644  
Total operating expenses
    1,592,671       33,467       1,626,138  
Total operating income (loss)
    (15,686 )     60,811       45,125  
                         
Other income (expenses):
                       
Interest expense
    (55,050 )     -       (55,050 )
Interest expense-related party
    (11,966 )     -       (11,966 )
Realized loss on sale of marketable equity securities
    (280,975 )     -       (280,975 )
Other income (expense)
    (1,906 )     -       (1,906 )
Total other expenses
    (349,897 )     -       (349,897 )
Net income (loss) from continuing operations before income taxes
    (365,583 )     60,811       (304,772 )
                         
Discontinued operations:
                       
Loss from discontinued operations
    (174,560 )     -       (174,560 )
Total loss from discontinued operations
    (174,560 )     -       (174,560 )
Income (loss) before income taxes
    (540,143 )     60,811       (479,332 )
Income taxes (expense) benefit
    (115,031 )     (33 )     (115,064 )
Net income (loss)
    (655,174 )     60,778       (594,396 )
Net income attributable to noncontrolling interest
    (26,885 )     -       60,920  
Net income (loss) attributable to China America Holdings, Inc.
  $ (682,059 )   $ 60,778     $ (533,476 )
                         
Basic and diluted loss per common share:
                       
Net (loss) income from continuing operations
                  $ (0 )
Net (loss) income from discontinued operations
                    (0 )
Net loss per common share
                  $ (0 )
                         
Weighted average number of shares outstanding:
                       
Basic and diluted
                    137,631,304  

 
- 14 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
CHINA AMERICA HOLDNGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
   
For the three months ended June 30, 2009
 
   
China America Holdings, Inc.
   
Jianqian Chemical
   
China America Holdings, Inc.
Pro-forma
 
Net revenues
  $ 8,185,254     $ 67,517     $ 8,252,771  
Cost of sales
    7,320,478       63       7,320,541  
Gross profit
    864,776       67,454       932,230  
                         
Operating expenses:
                       
Selling expenses
    314,058       492       314,550  
Consulting expense-related party
    109,000       -       109,000  
General and administrative
    257,723       7,395       265,118  
Total operating expenses
    680,781       7,887       688,668  
Total operating income (loss)
    183,995       59,567       243,562  
                         
Other income (expenses):
                       
Interest expense
    (123 )     -       (123 )
Interest expense-related party
    (7,934 )     -       (7,934 )
Other income (expense)
    1,875       -       1,875  
Total other expenses
    (6,182 )     -       (6,182 )
Net income (loss) from continuing operations before income taxes
    177,813       59,567       237,380  
                         
Income (loss) before income taxes
    177,813       59,567       237,380  
Income taxes (expense) benefit
    (102,699 )     (10 )     (102,709 )
Net income (loss)
    75,114       59,557       134,671  
Net income attributable to noncontrolling interest
    (87,805 )     -       (87,805 )
Net income (loss) attributable to China America Holdings, Inc.
  $ (12,691 )   $ 59,557     $ 222,476  
                         
Basic and diluted loss per common share:
                       
Net (loss) income from continuing operations
                  $ 0.00  
Net (loss) income from discontinued operations
                    -  
Net loss per common share
                  $ 0.00  
                         
Weighted average number of shares outstanding:
                       
Basic and diluted
                    141,333,014  
 
Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results.

NOTE 3 - DISPOSITION

On January 19, 2009, we entered into an Asset Purchase Agreement with Pearl Group Advisors, Inc. (“Pearl Group”) for the sale of certain assets related to our Biometrics segment. Pearl Group is wholly owned by Dore S. Perler, a member of our board of directors and its former Chief Executive Officer. Included in the Asset Purchase Agreement are the following assets of the Biometrics segment; customer and supplier lists, business records, trademarks and other intellectual property and manufacturers and vendors’ warranty claims. The consideration we received in connection with the Asset Purchase Agreement included the assumption of liabilities, if any, by Pearl Group related to the Biometrics segment and the termination of Mr. Perler’s May 1, 2007 employment agreement with us. Also, in connection with the termination of the employment agreement, we paid Mr. Perler during the first quarter of the 2009 transition period the sum of $75,000. As of January 19, 2009, we were no longer engaged in this business segment which was discontinued. We did not incur any costs or take any charges, and do not expect any in the future, related to the sale of the Biometrics segment pursuant to the Asset Purchase Agreement. The following table sets forth for the years indicated selected financial data of our discontinued operations, including the Toy Distribution segment and the Biometrics segment.

 
- 15 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
       The following table sets forth for the three and nine months ended June 30, 2010 and 2009 indicated selected financial data of our Biometrics segment discontinued operations.
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net Revenues
  $ -     $ -     $ -     $ -  
Cost of Sales
    -       -       -       -  
Gross profit
    -       -       -       -  
Operating and other non-operating expenses
    -       -       -       174,560  
Loss from discontinued operations
    -       -       -       (174,560 )
Gain from disposal of discontinued operations
    -       -       -       -  
Total loss from discontinued operations
  $ -     $ -     $ -     $ (174,560 )
 
NOTE 4 - INVENTORIES

At June 30, 2010 and September 30, 2009, inventories consisted of:

   
June 30, 2010
   
September 30, 2009
 
Packaging materials
 
$
2,830,279
   
$
1,987,680
 
Finished goods
   
816,748
     
177,887
 
Total
 
$
3,647,027
   
$
2,165,567
 

NOTE 5 – DUE TO RELATED PARTIES AND SIGNIFICANT HOLDERS

At June 30, 2010 and September 30, 2009, due to related parties, consists of the following:

   
June 30, 2010
   
September 30, 2009
 
Due to Aihua Hu
 
$
2,836
   
$
10,693
 
Due to Ying Ye
   
58,749
     
58,500
 
Due to Liang Wenjuan
   
14,687
     
14,625
 
Due to China Direct Industries, Inc.
   
375,415
     
144,649
 
   
$
451,687
   
$
228,467
 

Mr. Aihua Hu, CEO of AoHong and our principal shareholder, and Mrs. Ying Ye are the minority owners of AoHong. Mr. Hu and Mrs. Ye are husband and wife. Liang Wejuan is the aunt of Mr. Hu.

At June 30, 2010 and September 30, 2009, we reflected $375,415 and $144,649, respectively, due to China Direct Industries, Inc. comprised of the followings:

   
June 30, 2010
   
September 30, 2009
 
Interest payable
 
$
30,398
   
$
17,710
 
Professional fees
   
277,017
     
126,939
 
Consulting services
   
68,000
     
-
 
   
$
375,415
   
$
144,649
 

The interest payable of $30,398 reflects the interest expense for nine month period on the $494,000 promissory notes due to China Direct Industries, Inc., a significant shareholder of ours. See Note 8 – Notes Payable – Related Party.  The professional fees payable represent legal, auditing, public and investor relations fees that have been paid by China Direct Industries, Inc. on our behalf.  We have an oral agreement with China Direct Industries, Inc. to pay them for the amounts it advances on our behalf.  These amounts are payable to China Direct Industries, Inc. on demand and accrue no interest.
 

 
- 16 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

NOTE 6 - PROPERTY AND EQUIPMENT

At June 30, 2010 and September 30, 2009, property and equipment consisted of the following:
 
   
Estimated Life
   
June 30, 2010
   
September 30, 2009
 
Buildings
 
20 years
    $ 2,392,718     $ 1,515,412  
Auto and Truck
 
5 years
      309,964       303,365  
Manufacturing Equipment
 
10 years
      2,878,102       2,089,014  
Office Equipment
 
5-7 years
      238,815       52,349  
Construction in Progress
  -       1,636,387       1,071,762  
            7,455,986       5,031,902  
Less: Accumulated Depreciation
          (896,903 )     (589,240 )
          $ 6,559,083     $ 4,442,662  
 
For the nine months ended June 30, 2010 and 2009, depreciation expense amounted to $331,001 and $257,310, respectively. 

NOTE 7 – INTANGIBLE ASSETS
 
AoHong has land use rights pursuant to an agreement with the Chinese government. The land use rights are valued at a fixed amount of RMB 600,082 (US $88,136), fluctuated by the exchange rate. Under the terms of the agreement, AoHong has rights to use certain land until November 3, 2053. AoHong amortizes these land use rights over the contract period beginning on June 27, 2007 (date of acquisition).

In May 2009, Tianjin Aohong paid Ji City Bureau of Land Resource an aggregate price of RMB 5,137,734 (USD $754,595) for the purchase of the land use rights located in Tianjin province. Under the terms of the land use right acquisition contract, Tianjin Aohong has land use rights with a maturity date of February 22, 2059.

At June 30, 2010 and September 30, 2009, intangible assets are valued at the following:

   
Useful Life
 
June 30, 2010
   
September 30, 2009
 
Land Use Rights - Shanghai AoHong
 
46 years
 
$
88.136
   
$
87,763
 
Land Use Rights - Tianjin AoHong
 
50 years
   
754,595
     
751,394
 
Less Accumulated Amortization
       
(23,307
)
   
(10,503
)
       
$
819,424
   
$
828,654
 

For the nine months ended June 30, 2010 and 2009, amortization expense amounted to $12,710 and $3,982, respectively.


 
- 17 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 

NOTE 8 - NOTES PAYABLE

Notes payable consisted of the following at June 30, 2010 and September 30, 2009:

   
June 30,
2010
   
September 30,
2009
 
 
           
Notes payable to Industrial and Commercial Bank of China Yangpu Road Branch, due on July 20, 2010. Interest only payable quarterly at an annual rate of 5.103%. Secured by Accounts Receivable of Shanghai 3F Material Co. Ltd. amount of $550,129. This note was satisfied at maturity.
  $ 439,151       435,825  
 
               
Notes payable to Industrial and Commercial Bank of China Yangpu Road Branch, due on September 15, 2010. Interest only payable quarterly at an annual rate of 5.103%. Secured by Accounts Receivable of Shanghai 3F Material Co., Ltd. amount of $541,595.
    433,275       381,713  
                 
Notes payable to Industrial and Commercial Bank of China Yangpu Road Branch, due on October 20, 2010. Interest only payable quarterly at an annual rate of 5.103%. Secured by Accounts Receivable of Shanghai 3F Material Co., Ltd. amount of $616,867.
    493,494       -  
                 
Notes payable to Industrial and Commercial Bank of China Yangpu Road Branch, due on November 18, 2010. Interest only payable quarterly at an annual rate of 5.103%. Secured by Accounts Receivable of Shanghai 3F Material Co., Ltd. amount of $545,266.
    436,213       -  
                 
Notes payable to Country Commercial Bank HuaTing Branch, due on October 9, 2010. Interest only payable quarterly at an annual rate of 5.841%. Secured by the buildings located at 333 and 338 Huhua E.Rd Jiading Shanghai.
    367,183       -  
 
               
Bank acceptances payable, non-interest bearing. Secured by restricted cash of $3,071,184 and 877,501 at June 30, 2010 and September 30, 2009 payable on demand.
    5,231,755       2,193,752  
                 
Note payable to individual, due on demand with interest due at 10% per annum and unsecured.
    25,000       25,000  
                 
Total
    7,426,071       3,036,290  
Less: current position
    (7,426,071 )     (3,036,290 )
Long-Term portion of notes payable
  $ -     $ -  
 
We periodically obtain notes from certain banks identified above by securing our receivables. These arrangements allow us to obtain cash upon the sale of goods to a customer with extended payment terms thereby increasing our liquidity. The loans are funded by the bank upon the collateral assignment to the bank of an invoice and the sales contract which gives rise to the sale. The amount of the loan is determined on a case by case basis depending on the credit quality of the customer and the payment terms set forth on the invoice or as agreed upon by us and our customer. In the event the customer fails to pay the invoice in accordance with its terms or we fail to pay the loan when due, the bank is entitled to take funds from our any other bank accounts maintained at the bank.

NOTE 9 - NOTES PAYABLE – RELATED PARTY

Notes payable – related party is comprised of an aggregate of $494,000 borrowed from China Direct Industries, Inc. for working capital.  The due date of the $400,000 note was initially June 30, 2009 and was amended during the second quarter of the 2009 transition period to extend the maturity date to June 30, 2010. In June 2010 the loan was extended to June 30, 2011. In August 2008, we borrowed $400,000 from China Direct Industries, Inc. under the terms of a secured promissory note. We used the proceeds to fund our commitments to AoHong and for working capital purposes. As collateral for the note we assigned China Direct Industries, Inc. the 53,654 shares of common stock of China Direct Industries, Inc. we owned which were tendered to us by Mr. Wei Lin as consideration for our sale to him of our 60% interest in Big Tree Toys, Inc. in April 2008. These shares were subsequently released as collateral by China Direct Industries, Inc. and were sold in December 2008 to provide funds for general working capital; therefore, the loan is currently unsecured.

 
- 18 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
 
On February 17, 2010, we borrowed $10,000 from China Direct Industries, Inc. for working capital purposes. This loan is due on February 17, 2011 with an annual interest rate of 4%.

During the three months ended June 30, 2010, we borrowed an additional $84,000 from China Direct Industries, Inc. for working capital purposes. These loans are due between April 5, 2011 and June 21, 2011 with an annual interest rate of 4%.
 
NOTE 10 - SHAREHOLDERS' EQUITY

Common Stock

Common Stock Issued For Services

In August 2009 we entered into a consulting and management agreement with China Direct Investments, Inc., a subsidiary of China Direct Industries, Inc. The agreement is for a term of 24 months from October 1, 2009 to September 30, 2011. The agreement may be extended for an additional 12 months upon mutual agreement of the parties. We engage the services of the consultant as our representative in the United States. The services provided includes but are not limited to general business consulting, management of professional resources, coordination of preparation and filing of public disclosures, assistance in financial management and the implementation of internal controls, managing investor road show/investment conferences, assisting in the implementation of acquisition deals, etc.  Under the term of the agreement, we agreed to issue China Direct Investments, Inc. a total of 64,000,000 shares of our common stock. 8,000,000 shares are payable by the end of each quarter starting October 1, 2009 and will be fair valued using the average stock price over the quarter the services were earned. This agreement also provides for the payment of discretionary award fees to be paid to the consultant and/or its designees. Upon the mutual agreement of the parties, the fees can be paid either in cash or marketable securities.

We have expensed a consulting fee related parties of $68,000 and $307,204 for the three months ended June 30, 2010 and nine months ended June 30, 2010, respectively.

In March 2010, we entered into a consulting agreement with Bespoke Growth Partners, Inc. for a term of 6 months from March 31, 2010 to perform investor relations consulting services. Under the terms of the agreement, we agreed to pay Bespoke Growth Partners, Inc. as compensation, $24,000 in cash and 2,000,000 shares of our common stock.  On April 7, 2010, China Direct Investments, Inc. agreed to pay a portion of these fees by amending its consulting agreement with us and agreed to transfer to Bespoke Growth Partners, Inc. 2,000,000 shares of our common stock China Direct Investments, Inc. it would receive from us as consulting fees.  In exchange for its agreement, China Direct Investments, Inc. agreed with Bespoke Growth Partners, Inc. that it will perform certain investor relations services that China Direct Investments, Inc. will no longer be obligated to perform during the term of the Bespoke Growth Partners, Inc. consulting agreement.
 
In May 2010, we entered into a consulting agreement with GeoInvesting, LLC to provide investor relation service to us. The agreement is for a term of one year beginning on May 3, 2010.  Under the terms of the agreement, we agreed to issue GeoInvesting, LLC a total of 800,000 shares of our common stock.  During the nine months ended June 30, 2010, we issued 800,000 shares of our common stock with a value of $24,000 to GeoInvesting, LLC related to this agreement.
 
In May 2010, we entered into a consulting agreement with OptInvestor, LLC to provide investor relations services. The agreement was for a term of 4 weeks beginning on May 4, 2010. Under the terms of the agreement, we agreed to pay OptInvestor $1,500 in cash and issue them 100,000 shares of our common stock with a value of $2,700.  We paid these fees to OptInvestor during the nine months ended June 30, 2010.

 
- 19 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
Stock Option Grants
 
Stock option activity for the nine months ended June 30, 2010 is summarized as follows:

   
Number of
Options
   
Weighted Average
Exercise Price
 
Balance at December 30, 2008
    7,900,000     $ 0.08  
Granted(1)
    1,000,000       0.20  
Exercised
    -       -  
Forfeited
    -       -  
Balance at September 30, 2009
    8,900,000     $ 0.09  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (400,000 )     0.19  
Balance at June 30, 2010
    8,500,000     $ 0.09  
 
 
(1)
Stock options were awarded to Mr. Aihua Hu in connection with his June 27, 2007 employment agreement with Shanghai AoHong to serve as its Chief Executive Officer. The options are exercisable at $0.20 per share and expire five years from the date of grant. The options had a fair market value of $0.08 each at the date of award. Since the options vested in full when granted we should have expensed the entire fair value of $80,195 on the grant date. At September 30, 2009, we expensed a total of $80,195 for these options. To determine whether such an error required a restatement we assessed the materiality of this item, weighing both quantitative and qualitative factors. Our net loss for the year ended December 31, 2007 was $1.1 million, and therefore, the impact of this unrecognized non-cash compensation would have increased our loss by 7%. We reasoned that a 7% increase in our net loss would not have a material impact on our financial statements, or on an investor’s decision regarding our company as a whole.
 
The following table summarizes our stock options outstanding at June 30, 2010:

Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number Outstanding at June 30, 2010
 
Weighted Average Remaining Contractual Life
 
Weighted Average Exercise Price
 
Number Exercisable at June 30, 2010
 
Weighted Average Exercise Price
                     
 $                  0.07-0.08
 
7,250,000
 
2.04 Years
 
 $0.07
 
7,250,000
 
 $0.07
 0.19-0.20
 
1,250,000
 
1.50 Years
 
 0.20
 
 1,400,000
 
 0.20
   
8,500,000
     
 $0.09
 
8,650,000
 
 $0.09

Common Stock Warrants

Between August and October, 2007 we sold units of its securities consisting of 47,706,735 shares of common stock and granted common stock purchase warrants to purchase 52,477,408 shares of common stock with a par value of $0.001 per share, exercisable at $0.12 per share. Under this subscription agreement in the event we were to issue any shares of common stock or securities convertible into shares to any third party purchaser at a price less than the offering price, each purchaser has the right to apply the lowest such price. We noted the guidance provided under EITF Issue No. 07-5 “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,” effective for financial statements issued for fiscal years beginning after December 15, 2008 (including the pending content under FASB ASC Section 815-40-15), and determined that such a ratchet feature made these warrants not indexed to our own stock, and therefore we should have recorded the fair value of such warrants as a derivative liability.

In order to enhance our balance sheet by treating the warrants as equity rather than a derivative liability, we entered into an amendment with the original subscribers to waive the most favored nations provision from the subscription agreement. The amendment also included a one-time reduction in the exercise price of the warrants from $0.12 per share to $0.04 per share. To date 31 warrant holders covering 44,127,407 warrants have agreed to this amendment, leaving a balance of 8,350,001 warrants with the most favored nations provision. As a result of this amendment, we treated this reduction in exercise price prospectively as a modification of terms and an exchange of the original equity instrument, and valued this exchange as an increase in additional paid in capital – warrants, as described in FASB ASC paragraph 718-20-35-3 “Incremental compensation cost shall be measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date.” We believe this amendment closely ties the exercise price of the warrants to the fluctuations of our common stock price, or indexed to our stock, and therefore makes them eligible for the scope exception provided under paragraph 11(a) of SFAS 133 (FASB ASC 815-10-15-74), and to be classified as equity.
 
- 20 -

 
CHINA AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
 
        As a result of this amendment and the reduction in exercise price, we recorded an increase of $44,127 in additional paid in capital – warrants and recognized the same amount in expenses into our current earnings in the third quarter of fiscal 2010. We reclassified the remaining 8,350,001 currently exercisable common stock warrants not covered by the amendment in the third quarter of fiscal 2010 at their fair market value of $54,801 as a current derivative liability using the Black-Scholes Option Pricing Model.
 
Moreover, we reclassified an additional 8,722,705 (see the table below) currently exercisable common stock warrants from additional paid in capital – warrants in equity as a current derivative liability, with exercise prices ranging from $0.10 to $0.35 and expiration dates ranging from September 28, 2010 to March 31, 2012 at an aggregated fair market value of $16,910.

Our assumptions under the Black-Scholes Option Pricing Model took into considerations of the following inputs:
 
·  
Common stock prices
·  
Warrant exercise prices
·  
Days to expiration
·  
Our common stock’s historical volatility index
·  
Risk free rates
·  
Dividend yields
 
Stock warrant activity for the nine months ended June 30, 2010 is summarized as follows:
 
   
Number of Warrants
   
Weighted Average Exercise Price
 
Balance at December 31, 2008
    6,380,113     $ 0.16  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (2,450,000 )     0.50  
Balance at September 30, 2009
    61,350,113     $ 0.14  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (150,000 )     0.16  
Balance at June 30, 2010
    61,200,113     $ 0.08  
 
The following table summarizes our warrants to purchase its common stock outstanding at June 30, 2010:
 
Warrants Outstanding
 
Warrants Exercisable
Range of Exercise Prices
 
Number Outstanding at
June 30, 2010
 
Weighted Average Remaining Contractual Life
 
Weighted Average Exercise Price
 
Number Exercisable at
June 30, 2010
 
Weighted Average Exercise Price
                     
 $                   0.35-0.55
 
5,668,455
 
0.80 Years
 
 $0.35
 
5,668,455
 
 $0.35
 0.16-0.20
 
954,250
 
0.20 Years
 
 0.16
 
 954,250
 
 0.16
 0.12
 
8,350,001
 
2.25 Years
 
 0.12
 
 8,350,001
 
 0.12
 0.10
 
2,100,000
 
1.75 Years
 
 0.10
 
 2,100,000
 
 0.10
 0.04
 
44,127,407
 
2.25 Years
 
 0.04
 
 44,127,407
 
 0.04