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EX-16 - EXHIBIT 16 - CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LTDexhibit16.htm
EX-32.2 - EXHIBIT 32.2 - CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LTDexhibit32-2.htm
EX-31.1 - EXHIBIT 31.1 - CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LTDexhibit31-1.htm
EX-31.2 - EXHIBIT 31.2 - CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LTDexhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LTDexhibit32-1.htm

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2010

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-30183

CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(Exact Name of Registrant as Specified in Its Charter)

NEW YORK 13-3874771
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)  

8/F East Area
Century Golden Resources Business Center
69 Banjing Road
Haidian District
Beijing, People’s Republic of China, 100089
(Address of Principal Executive Offices)
 
+86-10-884-52568
(Registrant’s Telephone Number, Including Area Code)

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 [    ]

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

Yes [    ]             No [    ]

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer [    ]                 Accelerated filer [    ]             Non-accelerated filer [    ]             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 [    ]             No [ X ]

The numbers of shares outstanding of each of the issuer’s classes of common equity, as of August 15, 2010 are as follows:

Class of Securities Shares Outstanding
Common Stock, $0.01 par value 77,655,862


TABLE OF CONTENTS

  PART I Financial Information Page
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4 Controls and Procedures 23
     
  PART II Other Information  
     
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. [Removed and Reserved] 24
Item 5. Other Information 24
Item 6. Exhibits 25


Part I – FINANCIAL INFORMATION

CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
 
CONSOLIDATED FINANCIAL STATEMENTS
 
June 30, 2010

1



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS

    (UNAUDITED)     (AUDITED)  
    June 30,     December 31,  
ASSETS   2010     2009  
Current assets            
       Cash and cash equivalents $  8,213   $  26,132  
       Inventories   404,430     402,231  
       Other receivables   124,009     145,214  
       Interest receivable   152,955     137,429  
       Short term investment   541,681     692,699  
       Deposits and prepayments   12,280     34,161  
Total current assets   1,243,568     1,437,866  
             
Investment   10,053     -  
Property, plant and equipment (net)   508,400     525,785  
  $  1,762,021   $  1,963,651  
             
LIABILITIES AND EQUITY            
Current liabilities            
       Accounts payable $  167,090   $  166,226  
       Accrued liabilities   206,226     198,361  
       Due to directors   120,061     120,440  
       Due to related company   19,997     19,894  
       Other payables   173,361     165,739  
Total current liabilities   686,735     670,660  
             
Equity            
       Common stock: par value $.01; 
       200,000,000 shares authorized; 77,655,862 
       shares issued and outstanding
 

776,558
   

776,558
 
       Additional paid-in capital   28,877,540     28,877,540  
       Deficit accumulated during the 
       development stage
  (28,986,113 )   (28,752,286 )
       Accumulated other comprehensive income   180,124     153,144  
   Total China Longyi stockholders' equity   848,109     1,054,956  
Noncontrolling interest   227,177     238,035  
Total Equity   1,075,286     1,292,991  
  $  1,762,021   $  1,963,651  

See notes to consolidated financial statements

2



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

    Six months ended     Three months ended     Period from June 4,1997  
    June 30,     June 30,     (inception) to  
    2010     2009     2010     2009     June 30, 2010  
Revenues                              
 Sales $  1,963   $  35,004   $  811   $  11,291   $  688,908  
 Cost of sales   957     36,205     456     12,266     851,392  
    Gross margin   1,006     (1,201 )   355     (975 )   (162,484 )
Operating expenses                           -  
 General and administrative expenses   250,754     347,867     118,548     140,773     17,271,104  
 Goodwill impairment loss   -     -     -     -     5,408,584  
 Write-off inventory and bus licenses   -     -     -     -     3,322,712  
 Research and development costs   -     -     -     -     8,880,206  
    250,754     347,867     118,548     140,773     34,882,606  
Loss from operations   (249,748 )   (349,068 )   (118,193 )   (141,748 )   (35,045,090 )
Other income (expense)                           -  
 Interest income   14,750     18,865     6,810     6,799     303,140  
 Other income (expense)   10,260     5,638     4     2     1,050,383  
 Transaction exchange gain   (26,276 )   (508 )   (20,978 )   368     981,454  
 Gain on asset disposal   -     -     -           1,172  
 Gain on debt settlement               -           156,018  
 Gain on disposal subsidiary   -     -     -           4,093,455  
 Interest expense   -     -     -           (712,302 )
    (1,266 )   23,995     (14,164 )   7,169     5,873,320  
   Loss before income tax expense and
      noncontrolling interest
 
(251,014
)  
(325,073
)  
(132,357
)  
(134,579
)  
(29,171,770
)
 Income tax expense   -     -     -     -     -  
Net loss   (251,014 )   (325,073 )   (132,357 )   (134,579 )   (29,171,770 )
Less: Net loss attributable to
noncontrolling interest
 
17,187
   
28,752
   
8,879
   
12,884
   
185,657
 
Net loss attributable to China Longyi $  (233,827 ) $  (296,321 ) $  (123,478 ) $  (121,695 ) $  (28,986,113 )
                               
Basic and diluted loss per share $  (0.00 ) $  (0.00 ) $  (0.00 ) $  (0.00 )      
Weighted average number
of shares outstanding-basic and diluted
 
77,655,862
   
77,655,862
   
77,655,862
   
77,655,862
   
 
Comprehensive loss                              
 Net loss $  (251,014 ) $  (325,073 ) $  (132,357 ) $  (134,579 )      
 Foreign currency translation adjustment   33,309     462     27,991     305        
Comprehensive loss   (217,705 )   (324,611 )   (104,366 )   (134,274 )      
Comprehensive loss attributable to
noncontrolling interest
 
(10,858
)  
(28,664
)  
(3,561
)  
(12,826
)  
 
Comprehensive loss attributable to China
Longyi
 
$ (206,847
)  
$ (295,947
)  
$ (100,805
)  
$ (121,448
)  
 

See notes to consolidated financial statements

3



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
       CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

    Six months ended June 30,     Period from Jun 4, 1997  
    2010     2009     (inception) to 06.30, 2010  
Cash flows from operating activities:                  
 Net loss $ (251,014 ) $  (296,321 ) $  (29,171,770 )
  Adjustments to reconcile net loss to
    net cash used in operations:
 
   
   
 
     Depreciation and amortization   20,018     21,588     1,140,216  
     Loss on sales of property and equipment         26,490     9,873  
     Impairment loss for fixed assets   -     -     1,052,950  
     Write-off goodwill and inventory   -     (28,752 )   7,101,506  
     Stock issued for services and debt   -     -     1,869,100  
     (Gain) loss on disposition in subsidiary   -           (3,882,796 )
     Research and development expenses recorded in organization   -     -     8,612,730  
     Reorganization expenses recorded in organization   -     -     455,830  
     Changes in operating assets and liabilities:                  
         Other receivables   21,396     7,439     5,238,902  
         Interest receivable   (14,737 )   22,177     (147,815 )
         Deposits and prepayment   21,948     472     696,260  
         Inventory   (107 )   35,585     (871,123 )
         Other payables   6,934     13,444     (393,285 )
         Accounts payable and accrued liabilities   7,528     (66,927 )   (3,347,780 )
         Net cash used in operations   (188,034 )   (264,805 )   (11,637,202 )
                   
Cash flows from investing activities:                  
 Reorganization - net of cash acquired   -     -     (320,579 )
 Purchase of subsidiaries   -     -     (1,690,474 )
 Redemption of short term investment   153,843     226,846     100,950  
 Purchase of investment   (10,053 )   -     (10,053 )
 Purchases of intangible assets   -     -     (833,357 )
 Purchases of property and equipment   -     -     (556,247 )
 Purchases of construction in progress   -     -     (169,081 )
 Sales of property and equipment   -     -     711,409  
 Deposit on subsidiary   -     -     (10,922 )
         Net cash provided by (used in) investing activities   143,790     226,846     (2,778,354 )
                   
Cash flows from financing activities:                  
 Addition of short term loans   -     -     1,612  
 Collection from shareholders   -     -     503,171  
 Payments to stockholders   -     -     (1,634,763 )
 Proceeds from issuance of stock   -     -     13,149,845  
 Proceeds from convertible promissory note   -     -     3,128,225  
 Dividends paid   -     -     (1,000,000 )
 Proceeds to notes payable   -     -     649,492  
 Payments on notes payable   -     -     (612,582 )
         Net cash provided by financing activities               14,185,000  
 Effect of foreign exchange rate fluctuation   26,325     4,417     238,769  
 Increase(decrease) in cash and cash equivalents   (17,919 )   (33,542 )   8,213  
 Cash and cash equivalents, beginning of period   26,132     51,307     -  
 Cash and cash equivalents, end of period $ 8,213   $  17,765   $  8,213  
                   
Supplemental disclosures of cash flow information:                  
 Cash paid for interest $ -   $  -   $  -  
 Cash paid for income taxes $ -   $  -   $  -  
 Cash paid for interest   -     -     -  
 Cash paid for income taxes   -     -     -  

See notes to consolidated financial statements

4



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements of China Longyi Group International Holdings Limited (the “Company” or “China Longyi”) include the accounts of China Longyi and its wholly-owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

1. BUSINESS DESCRIPTION AND ORGANIZATION

BUSINESS

Overview of Our Business

We are a holding company that only operates through our indirect Chinese subsidiaries Beijing SOD and Chongqing SOD. Through our Chinese subsidiaries, we develop, manufacture and market our SOD products in China. SOD is a naturally occurring enzyme which may act as a potent antioxidant defense in cells that are exposed to oxygen. Certain research has shown that under certain biological conditions, SOD revitalizes cells and reduces the rate of cell destruction. It neutralizes the most common free radical—superoxide radical—by converting it into hydrogen peroxide and water. Because superoxide is harmful to human cells, and certain forms of SOD exist naturally in most humans, many studies show that SOD is valuable in protecting human cells from the harmful effects of superoxide. SOD is thought to be more powerful than antioxidant vitamins as it activates the body's productions of its own antioxidants. As a result, SOD is referred to as the “enzyme of life.” Commercially, SOD has a wide range of applications and is widely applied in foods, drinks, skin care productions, pharmaceuticals, to combat ailments ranging from sunburn to rheumatoid arthritis.

History and Corporate Structure

We are a New York corporation that was incorporated on February 29, 1996, as United Network Technologies, Inc. and we changed our name to Panagra International Corporation on October 2, 1998. From our inception until 2001, we were relatively inactive with limited operations. On August 2, 2001 we changed our name to Minghua Group International Holdings Limited and at that time we also increased the authorized common shares of our common stock from 40,000,000 shares to 200,000,000 shares. On October 16, 2007, we effectuated a 1-for-20 reverse stock split of all our issued and outstanding shares of common stock, or the Reverse Split, and changed our name to China Longyi Group International Holdings Limited.

Reverse Acquisition

In June 2001 we formed Minghua Acquisition Corp., a Delaware corporation, and acquired all the equity interests of Minghua Group International Holding (Hong Kong) Limited, or Minghua Hong Kong, a Hong Kong limited company formed on June 4, 1997, for a purchase price of $1,000,000 in cash and 28,000,000 (pre Reverse Split) shares of our common stock. The shares received by the Minghua Hong Kong shareholders equaled 70% of our issued and outstanding shares of common stock, resulting in a change of control to the Minghua Hong Kong shareholders.

5



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

1. BUSINESS DESCRIPTION AND ORGANIZATION (Continued)

At that time, the sole asset of Minghua Hong Kong was an 85% equity interest in the Shenzhen Minghua Environmental Protection Vehicle Co., Ltd., or Minghua EPV, a PRC corporation. The remaining 15% equity minority interest in China Minghua EPV was owned by a related party, Asia Key Group Limited, through its wholly-owned subsidiary Minghua Real Estate (Shenzhen) Ltd., formerly known as Minghua Investment Co., Ltd., or Minghua Real Estate. On January 29, 2004, the Company acquired this 15% minority interest held by Minghua Real Estate, in a related party transaction by paying $990,638 in cash and issuing 28,210,000 (prereverse split) shares of our common stock. Through Minghua EPV, our business became the development and commercialization of mass transit, hybrid electric vehicles, primarily buses.

Acquisition of the Bus Installation Company

On March 13, 2003, our indirect subsidiary, Ming Hua Environmental Protection Science and Technology Limited, a Hong Kong limited company, or Minghua Science, acquired an 89.8% equity interest in the Guangzhou City View Bus Installation Company, or the Bus Installation Company, through its acquisition of Good View Bus Manufacturing (Holdings) Company Limited, a Hong Kong limited company and Eagle Bus Development Limited, a Hong Kong limited company, which own 23.8% and 66% of the Bus Installation Company, respectively. The Bus Installation Company manufactured motor coaches for domestic sale in China and for export under the “Eagle” brand name. We sold 6 standard diesel buses in 2005 and 5 standard diesel buses in 2004, however, once we sold off the inventory of diesel buses and parts that we acquired along with our acquisition of the Bus Installation Company, we no longer sold or manufactured diesel buses.

Acquisition of Beijing Cardinal

On June 16, 2004, Minghua Hong Kong formed a wholly owned subsidiary in the PRC, named Beijing China Cardinal Real Estate Consulting Co., Ltd., or Beijing Cardinal. We intended to use Beijing Cardinal as a vehicle to make future real estate investments in the PRC. However, at December 31, 2006, Beijing Cardinal had not begun significant operations.

Sale of Environmental Vehicle Business

Through Minghua Hong Kong, we had been focused on the development and commercialization of mass transit, hybrid electric vehicles, primarily buses. However, although prototype hybrid vehicles and a limited number of other vehicles have been produced, we have not been able to successfully commercialize these vehicles. As a result, on September 28, 2006, we disposed of our entire interests in Minghua Hong Kong and Minghua Science to Messrs. Han Lian Zhong and Niu Rui Cheng for 1 HK$, in exchange for their assumption of Minghua Hong Kong and Minghua Science’s debt. However, we retained our interests in China Cardinal, which were transferred to our subsidiary, Euromax International Investments Limited, or Euromax, and in the Guangzhou City View Bus Installation Company, which was transferred to our subsidiary, Top Team Holdings Limited (BVI), or Top Team.

6



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

1. BUSINESS DESCRIPTION AND ORGANIZATION (Continued)

Qiang Long Investment

On January 29, 2004, we entered into a subscription agreement with Qiang Long Real Estate Development Co., Ltd., or Qiang Long, a PRC company, pursuant to which, as amended and supplemented from time to time, Qiang Long was obligated to purchase 140,000,000 (pre reverse split) shares of our common stock, par value $0.01 at an aggregate purchase price of US$29,400,000, or $0.21 per share. An amount equaling US$653,795 was paid to us as a performance bond and an additional US$632,911 was paid to us in 2006 in exchange for3,013,862 (pre reverse split) shares. The balance of US$28,113,294 was to be paid in full by June 30, 2007, for the remaining 136,986,138 (pre reverse split) shares. On June 29, 2007, we consummated our obligations under the contract, pursuant to a letter agreement between the Company and Qiang Long. Pursuant to the letter agreement, we acknowledged our receipt of the final payment in cash from Qiang Long as fulfillment of Qiang Long’s investment obligation, and agreed to issue 50,000,000 (pre reverse split) shares to Qiang Long on or before July 23, 2007, and the remaining 86,986,138 (pre reverse split) shares within fifteen (15) business days following the effective date of an amendment to our Certificate of Incorporation to effect a one-for-twenty reverse split of our outstanding common stock, which will be equal to 4,349,307 shares post-reverse split. Accordingly, on August 2, 2007, 50,000,000 shares were issued to Qiang Long.

As a result of the closing of the investment transaction with Qiang Long, our Chairman, Mr. Changde Li, now beneficially owns and controls 155,000,000 (pre reverse split) shares (7,750,000 shares post-reverse split) or 54.0% of the Company’s issued and outstanding common stock, 15,000,000 (pre reverse split) of which he holds indirectly through Qiang Long, 136,986,137 (pre reverse split) of which he holds indirectly through Qiang Long’s affiliate, Jolly Concept Management Limited, a BVI company, and 3,013,863 (pre reverse split) of which he holds through Qiang Long’s affiliate, Chinese Dragon Heritage Investment Management Limited, a PRC company.

Acquisition of Top Time

From the time when we sold the 6 standard diesel buses in the first quarter of 2005 until November 12, 2007 when we completed the acquisition transaction with Daykeen Group Limited, or Daykeen, discussed herein, we had limited operations and did not engage in active business operations other than our search for, and evaluation of, potential business opportunities for acquisition or participation.

On November 12, 2007, we completed an acquisition transaction with Top Time International Limited, a Hong Kong Company, or Top Time, whereby we paid Daykeen, Top Time’s sole shareholder, a total consideration of $54.9 million (RMB 407 million, based on an exchange ratio of $1=RMB 7.414) in exchange for 100% ownership of Top Time, consisting of $30 million in cash and $24.9 million in shares of our common stock issuable within 90 days of the closing. $30 million of cash was paid to Daykeen by three transactions, Beijing Cardinal, De Qiu Hong, and Mr. Chen Zhiping paid $29 million, $0.4 million, and $0.6 million on behalf of the Company, respectively. As a result, the Company offset the same amounts of balance of the three parties’ current accounts. The equity portion of the purchase price amounts to a total of 62,250,000 (post reverse split) shares of our common stock (based upon $0.02/share, the average of the closing price of the Company’s common stock on the OTCBB for the 365 calendar days prior to May 31, 2007, which was adjusted for our stock split which occurred on October 16, 2007 and resulted an effective purchase price of $0.40 per share). Top Time thereby became our wholly owned subsidiary and Daykeen will become our controlling stockholder upon our issuance to Daykeen of the equity portion of the purchase price in accordance with the Share Purchase Agreement.

7



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

1. BUSINESS DESCRIPTION AND ORGANIZATION (Continued)

Top Time was incorporated in Hong Kong in December 2006 and currently has two subsidiaries: Beijing SOD and Chongqing SOD. Beijing SOD was incorporated in China in March 2005 and is 90% owned by Top Time and 10% owned by Ms. Ran Wang.

For accounting purposes, the acquisition of Top Time was treated as a reorganization of entities under common control. When we refer in this report to business and financial information for periods prior to the consummation of the acquisition, we are referring to the business and financial information of Top Time on a consolidated basis unless the context suggests otherwise.

Sale of Top Team Subsidiaries

Through acquisition of Top Time, our business became the development, manufacture and sale of SOD products. As a result, on November 28, 2007, we disposed of five subsidiaries held by Top Team Holdings Limited (BVI): Euromax International Investments Limited, Beijing China Cardinal Real Estate Consulting Co., Ltd, Eagle Bus Development Limited (HK), Good View Bus Manufacturing Company Limited (HK), and Guangzhou City View Bus Installation Company Limited (PRC), to Mr. Zhiping Cheng, for an aggregate sale price of RMB5,000,000 (approximately $715,000).

The following chart reflects our organizational structure as of the date of this report.


According to all reasonably circumstances facing the company, the management prepared the financial report on the development stage company basis.

8



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

1. BUSINESS DESCRIPTION AND ORGANIZATION (Continued)

CAPITAL RESOURCES AND BUSINESS RISKS

The Company remains in the development stage and only operates through indirect Chinese subsidiaries Beijing SOD and Chongqing SOD. Through Chinese subsidiaries, we develop, manufacture and market our SOD products in China. SOD is a naturally occurring enzyme which may act as a potent antioxidant defense in cells that are exposed to oxygen. All of the company’s future business operations are subject to all of the risks inherent in the establishment of a new business enterprise. The Company has no proven revenue stream from the sales of its products. Additional capital resources through current and future offerings of securities will be needed in order to accomplish the Company's present marketing, development and manufacturing plans. The manufacturing facility and other operations in China, as well as the business financial conditions and results of operations are, to a significant degree, subject to economic, political and social events in China.

The Company had incurred losses since inception and had little working capital until June 29, 2007. However, the substantial doubt about its ability to continue as a going concern, which contemplated the realization of assets and the payment of liabilities in the ordinary course of business, was alleviated on July 27, 2007, when management obtained $28,113,294 in funding through the issuance of additional stock to one of the Company’s shareholders. On November 12, 2007, the Company completed an acquisition transaction with Top Time whereby it paid Daykeen, Top Time’s sole shareholder, a total consideration of $54.9 million, in exchange for 100% ownership of Top Time, consisting of $30 million in cash and $24.9 million in shares of our common stock issuable within 90 days of the closing. The equity portion of the purchase price amounts to a total of 62,250,000 post reverse split shares of the Company’s common stock.

On July 27, 2007, the Company instructed the prior Transfer Agent to issue the 2,500,000 post reverse split shares of common stock deliverable to Qiang Long in the name of Jolly Concept Management Limited, in accordance with Qiang Long’s instructions. On December 14, 2007, the Company instructed present Transfer Agent to issue the replacement certificate showing the new name of the company and the correct number of shares, post reverse-split, and the remaining 4,349,307 shares of common stock issuable to Qiang Long, to Jolly Concept Management Limited and to Zhang, Lifang. The Company also agreed to issue 1,131,026 shares of common stock post-reverse-split to Luck Pond Enterprises Limited or its designee, for its services as finder in connection with the Qiang Long investment. On December 14, 2007, the Company instructed present Transfer Agent to issue the total amount of 62,250,000 shares of the Company’s common stock, post-reverse-split, issuable to Daykeen, to Daykeen Investment Limited.

RESTRICTIONS ON TRANSFER OF ASSET OUT OF CHINA

Dividend payments by the Company’s operating subsidiaries are limited by certain statutory regulations in China. No dividends may be paid by these subsidiaries without first receiving prior approval from the State Administration of Foreign Exchange. Dividend payments are restricted to 85% of profits, after tax. Repayments of loans or advances from subsidiaries to China Longyi, unless certain conditions are met, will be restricted by the Chinese government.

CONTROL BY PRINCIPAL STOCKHOLDERS

The directors, executive officers, affiliates and related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, if they voted their shares uniformly, directors, executive officers and affiliates would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of China Longyi and the dissolution, merger or sale of the Company's assets.

9



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements for all periods presented include the financial statements of China Longyi Group International Holdings Limited, and its subsidiaries Top Team Holdings Limited, Full Ample Group Limited (Daykeen Group, BVI), Top Time International Limited (HK), Beijing SOD, and Chongqing SOD. The consolidated financial statements have been prepared in accordance with US GAAP. All significant intercompany accounts and transactions have been eliminated.

The Company has determined the People’s Republic of China Chinese Yuan Renminbi (“RMB”) to be its functional currency. The accompanying consolidated financial statements are presented in United States (US) dollars. The consolidated financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

NONCONTROLLING INTEREST IN SUBSIDIARIES

The Company owns 90% of the equity interests in Beijing SOD, and the remaining 10% is owned by Miss Ran Wang. Therefore, the Company records noncontrolling interest expense to allocate 10% of the loss of the Beijing SOD to Miss Ran Wang, its noncontrolling shareholder.

The Company owns 81% of the equity interest in Chongqing SOD 9% is owned by Miss Ran Wang, and the remaining 10% by Mr. Guoqing Tan. Therefore, the Company records noncontrolling interest charge in the statement of operations to allocate 19% of the results of operations of Chongqing SOD to its noncontrolling shareholders.

USE OF ESTIMATES

The preparation of financial statements in conformity with US GAAP 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

SIGNIFICANT ESTIMATES

Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to property and equipment, accrued liabilities, and the useful lives for depreciation.

10



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

REVENUE RECOGNITION

Revenues are recognized as earned when the following four criteria are met: (1) a customer issues a purchase order or otherwise agrees to purchase products; (2) products are delivered to the customer; (3) pricing is fixed or determined in accordance with the purchase order or agreement; and (4) collectability is reasonably assured.

CASH AND CASH EQUIVALENTS

The Company invests idle cash primarily in money market accounts, certificates of deposits and short-term commercial paper. Money market funds and all highly liquid debt instruments with an original maturity of three months or less are considered cash equivalents.

PROPERTY AND EQUIPMENT

Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. Under the provisions of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, the Company recognizes an “impairment charge” when the expected net undiscounted future cash flows from an asset's use and eventual disposition are less than the asset's carrying value and the asset's carrying value exceeds its fair value. Measurement of fair value for an asset or group of assets may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset or assets.

Expenditures for maintenance, repairs and betterments, which do not materially extend the normal useful life of an asset, are charged to operations as incurred. Upon sale or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or income (loss) is reflected in income.

Depreciation and amortization are provided for financial reporting purposes primarily on the straight-line method over the estimated useful lives of the respective assets as follows:

  Estimated
  Useful Life
Transportation equipment 5 years
Office, computer software and equipment 5 years
Furniture and fixtures 5 years
Production equipment 10 years
Building and improvements 20 years

11



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

INTANGIBLE ASSETS

The Company adopted the provisions of ASC Topic 350 (formerly SFAS No. 142, Goodwill and Other Intangible Assets), according to which goodwill and indefinite lived intangible assets are not amortized, but are reviewed annually for impairment, or more frequently, if indications of possible impairment exist. The Company has performed the requisite annual transitional impairment tests on intangible assets and made the impairment adjustments as necessary.

INCOME TAXES

Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with ASC Topic 740 (formerly SFAS No. 109, “Accounting for income taxes”) these deferred taxes are measured by applying currently enacted tax laws.

The Company did not provide any current or deferred income tax provision or benefit for any period presented to date because it has experienced operating losses since inception. The benefit of any tax income (loss) carry forwards is fully offset by a valuation allowance, as there is a more than fifty percent chance that the Company will not realize those benefits.

There are net operating loss carry forwards allowed under the Hong Kong and China Governments’ tax system.

RESEARCH AND DEVELOPMENT COSTS

Company sponsored research and development costs, related to both present and future products, are charged to operations when incurred and are included in operating expenses. Expenditures for research and development for the six months period ended June 30, 2010 and 2009 were both $0 and a cumulative amount of $8,880,206 for the period from June 4, 1997 (inception) to June 30, 2010.

EARNING (LOSS) PER SHARE

Basic earning (loss) per common share ("LPS") is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earning (loss) per common share is calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive stock options.

There were no stock options and potentially dilutive securities outstanding at June 30, 2010.

EQUITY BASED COMPENSATION

The Company accounts for employee stock options in accordance with ASC Topic 718, (formerly SFAS 123(R), “Share-Based Payment.”) which requires that share-based payment transactions be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period. The Company had no such compensation expense for the three months ended June 30, 2010.

12



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

COMPREHENSIVE INCOME (LOSS)

The accompanying financial statements are presented in U.S. dollars. The functional currency is the RMB. The financial statements are translated into U.S. dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Currency translation adjustments are presented as other comprehensive income.

RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The Company does not believe that this will have a material effect on its consolidated financial statements.

In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

SFAS No. 141 (Revised) (ASC Topic 805), Business Combinations. SFAS No. 141R broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS No. 141R expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations.

SFAS No. 160 (ASC Topic 810), Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent are to be included in the equity section of the balance sheet, but apart from the parent's equity. All changes in the parent's ownership interest in a subsidiary are to be accounted for as equity transactions. Any retained non-controlling equity interest in a deconsolidated subsidiary is to be initially measured at fair value, with any gain or loss on consolidation measured using this fair value.

In October 2009, the FASB concurrently issued the following ASC Updates (ASU), ASU No. 2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.

13



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

   

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010; early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2009-14 on its financial statements.

   

In January 2010, the FASB issued the following ASC Updates, ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of petroleum and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in ASC 810 subtopic 10).

   

We expect that the adoption of the above Updates issued in January 2010 will not have any significant impact on its financial position and results of operations.

   

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our Consolidated Financial Statements upon adoption.

   
3.

INVESTMENT

   

The Company has a one year deposit certificate with an investment company in the PRC. The certificate earns interest at 5.5% to 8% per annum. The principal amount for the three months ended June 30, 2010 was $541,681 and $692,699 for the year ended, 2009, and was recorded on the balance sheet as a short term investment.

   
4.

LONG TERM INVESTMENT

   

On January 5, 2010, the Company invested in Cangshan Duoha Vegetable Food Company (“Duoha”) with 50,000 shares of the Company’s common stock worth $10,000 as $0.2 per share to acquire 20% equity interest in of Duoha. According to the investment agreement, although we own 20% equity of Duoha, we do not have significant influence over tDuoha’s operating and financing policies. Therefore, the management of the Company implemented the cost method to account above investment.

   
5.

INCOME TAXES

   

Net operating loss carry forwards are allowed under the Hong Kong and Chinese governments’ tax systems. In China, the previous five years’ net operating losses are allowed to be carried forward to offset future taxable income. In Hong Kong, net operating losses can be carried forward indefinitely to offset future taxable income. No deferred tax asset has been recognized due to the uncertainty of the Company having future taxable profits.

   
6.

COMMITMENTS AND CONTINGENCIES

   

From time to time, the Company has disputes that arise in the ordinary course of its business. Currently, according to management, there are no material legal proceedings to which the Company is a party to or to which any of their property is subject that will have a material adverse effect on the Company’s financial condition.

14



CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements (Unaudited)

7.

SUBSEQUENT EVENTS

   

Management has considered all events occurring through August 15, 2010, the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements.

15


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the notes thereto.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains “forward-looking statements” relating to the business of China Longyi Group International Holdings Limited and its subsidiary companies. The forward-looking statements include, among others, statements concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. These statements are based on assumptions and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Risks and uncertainties include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; and any of the factors mentioned in the “Risk Factors” section of the Company’s annual report on Form 10-K filed on April 15, 2010. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Use of Certain Defined Terms

Except as otherwise indicated by the context, references in this report to:

  • “China Longyi,” “we,” “us,” “our,” or the “Company” are references to the combined business of China Longyi Group International Holdings Limited (formerly known as Minghua Group International Holdings Limited) and/or its consolidated subsidiaries, as the case may be;

  • “Top Time” are references to Top Time International Limited, our indirect wholly-owned subsidiary, a Hong Kong company;

  • “Beijing SOD” are references to Beijing Longyi Biology Technology Co. Ltd., our indirect, 90% owned subsidiary, a PRC company;

  • “Chongqing SOD” are references to Chongqing JiuZhou Dismutase Biology Technology Co., Ltd., our indirect, majority- owned subsidiary, a PRC company;

  • “China” and “PRC” are references to the People’s Republic of China;

  • “RMB” refers to Renminbi, the legal currency of China;

  • “U.S. dollar,” “$” and “US$” are to the legal currency of the United States (for all U.S. dollar amounts reported, the dollar amount has been calculated on the basis that $1 = RMB 6.8263 (exchange rate used in the balance sheet) and $1 = RMB6.8269 (exchange rate used in the statements of operations) for financial statements for the three months ended March 31, 2010, and $1 = RMB 6.8263 for financial statements for the three months ended March 31, 2009, which were determined based on the currency conversion rate in effect at the balance sheet date for each respective quarter);

  • “Securities Act” means the Securities Act of 1933, as amended; and

  • “Exchange Act” means the Securities Exchange Act of 1934, as amended.

16


Overview of our Business

We are a holding company that only operates through our indirect Chinese subsidiaries Beijing SOD and Chongqing SOD. Through our Chinese subsidiaries, we develop, manufacture and market our SOD products in China. SOD is a naturally occurring enzyme which may act as a potent antioxidant defense in cells that are exposed to oxygen. Certain research has shown that under certain biological conditions, SOD revitalizes cells and reduces the rate of cell destruction. It neutralizes the most common free radical—superoxide radical—by converting it into hydrogen peroxide and water. Because superoxide is harmful to human cells, and certain forms of SOD exist naturally in most humans, many studies show that SOD is valuable in protecting human cells from the harmful effects of superoxide. SOD is thought to be more powerful than antioxidant vitamins as it activates the body's productions of its own antioxidants. As a result, SOD is referred to as the “enzyme of life.” Commercially, SOD has a wide range of applications and is widely applied in foods, drinks, skin care productions, pharmaceuticals, to combat ailments ranging from sunburn to rheumatoid arthritis.

Second Quarter of 2010 Financial Performance Highlights

The following are some financial highlights for the three months ended June 30, 2010:

  • Revenue: Revenue decreased $10,480, to $811 for the three months ended June 30, 2010, from $11,291 for the same period in 2009.

  • Expense from operations: Expense from operations decreased $22,225, or 15.8%, to $118,548 for the three months ended June 30, 2010, from $140,773 for the same period in 2009.

  • Net loss: Net loss decreased $2,222, or 37.8%, to $(132,357) for the three months ended June 30, 2010, from $(134,579) for the same period in 2009.

  • Fully diluted net income per share: Fully diluted net loss per share was $0 for the three months ended June 30, 2010, as compared to $0 for the same period in 2009.

Provision for Income Taxes

  • United States: China Longyi Group International Holdings Limited is subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as China Longyi Group International Holdings Limited had no income subject to United States taxation in the second quarter of 2010.

  • British Virgin Islands: Our wholly owned subsidiary Top Team Holdings Limited was incorporated in the British Virgin Islands, or the BVI, and, under the current laws of the BVI, is not subject to income taxes.

  • China: Before the implementation of the enterprise income tax, or EIT, Foreign Invested Enterprises or FIEs, established in the PRC were generally subject to an EIT rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax. On March 16, 2007, the National People’s Congress of China passed the new Corporate Income Tax Law, or EIT Law, and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law, or Implementing Rules, which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic- invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old tax laws applicable to FIEs, and its associated preferential tax treatments, beginning January 1, 2008.

    Despite these pending changes, the EIT Law gives the FIEs established before March 16, 2007, or Old FIEs, such as our subsidiaries Beijing SOD and Chongqing SOD, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT Law shall gradually increase their EIT rate by 2% per year until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT Law, are allowed to remain to enjoy their preference until these holidays expire. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse effect on any organization’s business, fiscal condition and current operations in China.

17


 

In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to a EIT of 25.0% on its global income. The Implementing Rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our consolidated global income will be subject to PRC income tax of 25.0% .

Results of Operations

Three Months Ended June 30, 2010 Compared to Three Months ended June 30, 2009

The following table summarizes the results of our operations for the three months ended June 30, 2010 and provides information regarding the dollar and percentage increase or (decrease) from the three months ended June 30, 2009 to the same period of 2010.

    Three Months Ended              
    June 30,     Increase     % Increase  
 Item   2010     2009     (Decrease)     (% Decrease)  
Revenue $  811   $  11,291   $  (10,480 )   (92.8% )
Cost of Revenue   456     12,266     (11,810 )   (96.3% )
Gross Profit   355     (975 )   1,330     136.4%  
Operating Expenses   118,548     140,773     (22,225 )   (15.8% )
Other Income   (14,164 )   7,169     (21,333 )   (297.6% )
Provision for Taxes   -     -     -     -  
Net loss before minority interests $  132,357   $  134,579   $  (2,222 )   (1.7% )

Revenues. Our revenues are derived primarily from sales of our SOD products. Revenues decreased $10,480 or 92.8%, to $811 for the three months ended June 30, 2010, from $11,291 for the same period in 2009. Our sales of SOD products decreased during the second quarter of 2010 due to the relocation of our Chongqing SOD facilities.

Cost of Revenues. Our cost of revenues is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of revenues decreased $11,810, or 96.3%, to $456 for the three months ended June 30, 2010, from $12,266 during the same period in 2009. This decrease was mainly due to the suspension of the operations of Chongqing SOD. As a percentage of revenues, the cost of revenues decreased to 56.2% during the three moths ended June 30, 2010 from 108.6% in the same period in 2009.

Gross Profit. Our gross profit increased by $1,330, or 92.6%, to $355 for the three months ended June 30, 2010 from $(975) during the same period in 2009. Gross profit as a percentage of revenues was 43.8% for the three months ended June 30, 2010, an increase of 52.4% from (8.6%) during the same period in 2009.

Operating Expenses. Our total operating expenses for the three months ended June 30, 2010 decreased $22,225, or 15.8%, to $118,548, from $140,773 for the same period in 2009. This decrease was mainly attributable to the reduction of General and Administration expenses as a result of the suspension of the operations of Chongqing SOD during the second financial quarter 2010.

18


Other Income. Other income was $(14,164) during the three months ended June 30, 2010 a decrease of $21,333 from $7,169 during a same period in 2009. This decrease was mainly attributable to the reduction of exchange gain as a result of the deprecation of HK$ against US$ during the second financial quarter 2010.

Net Loss attributable to China Longyi. As a result of the factors described above, our net loss decreased by $1,783 , or 1.5%, to $(123,478) for the three months ended June 30, 2010, from $(121,695) for the same period in 2009.

Six Months Ended June 30, 2010 Compared to Six Months ended June 30, 2009

The following table summarizes the results of our operations for the six months ended June 30, 2010 and provides information regarding the dollar and percentage increase or (decrease) from the six months ended June 30, 2009 to the same period of 2010.

    Six Months Ended              
    June 30,     Increase     % Increase  
 Item   2010     2009     (Decrease)     (% Decrease)  
Revenue $  1,963   $  35,004   $  (33,041 )   (94% )
Cost of Revenue   957     36,205     (35,248 )   (97% )
Gross Profit   1,006     (1,201 )   2,207     184%  
Operating Expenses   250,754     347,867     (97,113 )   (28% )
Other Income   (1,266 )   23,995     (25,261 )   (105% )
Provision for Taxes   -     -     -     -  
Net loss before minority interests $  251,014   $  325,073   $  (74,059 )   (23% )

Revenues. Revenues decreased $33,041 or 94%, to $1,963 for the six months ended June 30, 2010, from $35,004 for the same period in 2009. Our sales of SOD products decreased during the six months ended June 30, 2010 due to the relocation of our Chongqing SOD facilities.

Cost of Revenues. Our cost of revenues decreased $35,248, or 97%, to $957 for the six months ended June 30, 2010, from $36,205 during the same period in 2009. This decrease was a result of the suspension of the operations of Chongqing SOD. As a percentage of revenues, the cost of revenues decreased to 48.8% during the six moths ended June 30, 2010 from 103.4% in the same period in 2009.

Gross Profit. Our gross profit increased by $2,207, or 184%, to $1,006 for the six months ended June 30, 2010 from $(1,201) during the same period in 2009. Gross profit as a percentage of revenues was 51.2% for the six months ended June 30, 2010, an increase of 54.7% from (3.4%) during the same period in 2009.

Operating Expenses. Our total operating expenses for the six months ended June 30, 2010 decreased $97,113, or 28%, to $250,754, from $347,867 for the same period in 2009. This reduction was mainly attributable to the decrease of general and administration expenses as a result of the suspension of the operations of Chongqing SOD during the first financial quarter 2010.

Other Income. Other income was $(1,266) during the six months ended June 30, 2010 a decrease of $25,261 from $23,995 during a same period in 2009. This decrease was mainly attributable to the reduction of exchange gain as a result of the deprecation of HK$ against US$ from January to June, 2010.

19


Net Loss attributable to China Longyi. As a result of the factors described above, our net loss decreased by $62,494, or 21%, to $233,827 for the six months ended June 30, 2010, from $296,321 for the same period in 2009.

Liquidity and Capital Resources

We had $8,213 in cash and cash equivalents as of June 30, 2010, and a one year cash investment of $541,681. As of such date, we also had total current assets of $1,243,568 and total assets of $1,762,021. We had total current liabilities (consisting of accounts payable, accrued liabilities, due to directors and other payables) in the amount of $686,735. Our stockholders’ equity as of June 30, 2010 was $848,109. Since inception, we have accumulated a net loss of $(28,986,113).

The following table summarizes the statements of cash flows from the financial statements for the six months ended June 30, 2010 compared to the six months ended June 30, 2009:

    Six months Ended June 30,  
    2010     2009  
Net Cash Used In Operating Activities $  (188,034 ) $  (264,805 )
Net Cash Provided By Investing Activities  143,790     226,846  
Net Cash Used In/Provided By Financing Activities   -     -  
Net increase (decrease) in Cash and Cash Equivalents   (17,919 )   (33,542 )
Cash and Cash Equivalents - Beginning of Period   26,132     51,307  
Cash and Cash Equivalents – End of Period   8,213     17,765  

Operating Activities

Net cash used in operating activities was $188,034 for the six-month period ended June 30, 2010, which is a decrease of $76,771 from $264,805 of net cash used in the operating activities for the same period of 2009. The decrease of the cash used in operating activities was mainly attributed to the fact that daily operations of Chongqing SOD were suspended and the related cash used in operations was reduced accordingly.

Investing Activities

Net cash provided by investing activities for the six-month period ended June 30, 2010 was $143,790, which is a decrease of approximately $83,056 from net cash provided by investing activities of $226,846 for the same period of 2009. The decrease in the net cash provided by investing activities was mainly due to the fact that the redemption from the short term investment in the first and second fiscal quarters 2010 was less than the same period of 2009. Our main use of cash investing activities in the first and second quarters of 2010 was an investment in an amount of $10,000 in Cangshan Duoha Vegetable Food Company.

Financing Activities

Net cash provided by/used in financing activities for the six-month period ended June, 2010 was $0 as compared to $0 provided by financing activities for the same period in 2009.

The Company did not have any bank loans as of June 30, 2010.

We believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets.

20


Critical Accounting Policies

Economic and Political Risks

The Company faces a number of risks and challenges as a result of having primary operations and marketing in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business.

Foreign Currencies

The company has determined that RMB to be its functional currency. The accompanying consolidated financial statements are presented in U.S. dollars. The consolidation financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

    June 30,     December 31,  
    2010     2009     2009  
    RMB     HK$     RMB     HK$     RMB     HK$  
Balance sheet items, except for equity accounts   6.7909     7.7842     6.8359     7.7502     6.8262     7.7597  
                                     
Items in the statements of income and
comprehensive income, and the statements of
cash flows
 

6.8251
   

7.7714
   

6.8360
   

7.7547
   

6.8311
   

7.7506
 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant Estimates

Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to property and equipment, accrued liabilities and, the useful lives for depreciation.

Restrictions on Transfer of Assets Out of the PRC

Dividend payments by Beijing SOD are limited by certain statutory regulations in the PRC. No dividends may be paid by Beijing SOD without first receiving prior approval from the Foreign Currency Exchange Management Bureau. Dividend payments are restricted to 85% of profits, after tax.

Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin No.104 “Revenue recognition” (“ASC Topic 605”). Revenues are recognized as earned when the following four criteria are met: (1) a customer issues purchase orders or otherwise agrees to purchase products; (2) products are delivered to the customer; (3) pricing is fixed or determined in accordance with the purchase order or agreement; and (4) collectability is reasonably assured.

21


New Accounting Pronouncements

In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The Company does not believe that this will have a material effect on its consolidated financial statements.

In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

SFAS No. 141 (Revised) (ASC Topic 805), Business Combinations. SFAS No. 141R broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS No. 141R expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations.

SFAS No. 160 (ASC Topic 810), Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent are to be included in the equity section of the balance sheet, but apart from the parent's equity. All changes in the parent's ownership interest in a subsidiary are to be accounted for as equity transactions. Any retained non-controlling equity interest in a deconsolidated subsidiary is to be initially measured at fair value, with any gain or loss on consolidation measured using this fair value.

In October 2009, the FASB concurrently issued the following ASC Updates (ASU), ASU No. 2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010; early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2009-14 on its financial statements.

In January 2010, the FASB issued the following ASC Updates, ASU No. 2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of petroleum and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in ASC 810 subtopic 10).

22


Inflation

Inflation does not materially affect our business or the results of our operations.

Seasonality

We may experience seasonal variations in our future revenues and our operating costs, however, we do not believe that these variations will be material.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEMS 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including Jie Chen, our Chief Executive Officer, and Xinmin Pan, our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010. Based on that evaluation, Ms. Chen and Mr. Pan concluded that as of June 30, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.

Internal Controls Over Financial Reporting

During the quarter ended June 30, 2010, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

23


PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company has disputes that arise in the ordinary course of its business. Currently, there are no material legal proceedings to which the Company is a party to or to which any of its property is subject that will have a material adverse effect on the Company's financial condition.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SHARES OF EQUITY SECURITIES AND USE OF PROCEEDS

We have not sold any equity securities during the fiscal quarter ended June 30, 2010 that were not previously disclosed in a current report on Form 8-K that was filed during that period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. [REMOVED AND RESERVED]
   
ITEM 5. OTHER INFORMATION

(a)

Dismissal of Previous Independent Registered Public Accounting Firm.

     
i.

Effective July 1st , 2010, our Board of Directors approved the dismissal of Bernstein & Pinchuk LLP (“BP”) as the Company's independent registered public accounting firm.

     
ii.

BP’s reports on the Company’s financial statements as of and for the fiscal years ended December 31, 2009 and 2008 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

     
iii.

During the Company’s two most recent fiscal years (ended December 31, 2009 and 2008) and during the subsequent interim period through July 1, 2010, there were (1) no disagreements with BP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of BP, would have caused BP to make reference to the subject matter of the disagreements in connection with its reports, and (2) no events of the type listed in paragraphs (A) through (D) of Item 304(a)(1)(v) of Regulation S-K.

     
(b)

Engagement of New Independent Registered Public Accounting Firm

     
i.

Concurrent with the decision to dismiss BP as the Company’s independent auditor, the Audit Committee approved the engagement of Stan J.H. Lee, CPA (“Stan”) as the Company’s new independent registered public accounting firm.

     
ii.

During the Company’s two most recent fiscal years (ended December 31, 2009 and 2008) and through the subsequent interim period to July 1, 2010, the Company did not consult Stan with respect to (a) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and neither a written report was provided to the Company or oral advice was provided that Stan concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (b) any matter that was the subject of either a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.

24


The Company provided BP with a copy of this disclosure on August 12, 2010, providing BP with the opportunity to furnish the Company with a letter addressed to the SEC containing any new information, clarification of the Company's expression of its views, or the respect in which BP does not agree with the statements contained herein. A letter from BP dated August 16, 2010 is attached as Exhibit 16 to this quarterly report.

ITEM 6. EXHIBITS

Exhibit  
Number Description
 

16

Letter from Bernstein & Pinchuk LLP to the U.S. Securities and Exchange Commission dated August 16, 2010.

 

31.1*

Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*

Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*

Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*

Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

25


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
DATED: August 16, 2010  
  By: /s/ Jie Chen
 
  Jie Chen
  Chief Executive Officer
  (Principal Executive Officer)
   
DATED: August 16, 2010 By: /s/ Xinmin Pan
 
  Xinmin Pan
  Chief Financial Officer
  (Principal Financial Officer and Accounting Officer)

26


EXHIBIT INDEX

Exhibit  
Number Description
   
16 Letter from Bernstein & Pinchuk LLP to the U.S. Securities and Exchange Commission dated August 16, 2010.
   
31.1 Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.