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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934:

For the Quarterly Period ended:  September 30, 2011
   
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
   
For the transition period from             to

 

Commission File Number: 000-50029

 

CHINA HEALTH RESOURCE, INC.

(Name of Small Business Issuer in its Charter)

 

Delaware 73-1629948
(State or Other Jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

343 Sui Zhou Zhong Road

Suining, Sichuan Province, P.R. China

(Address of Principal Executive Offices)

 

+(86-825) 239-1788

(Issuer’s Telephone Number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 months (or for such shorter period that the registrant was required to submit and post such files). Yes |X| 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.

 

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|

 

Number of shares outstanding of each of the issuer’s classes of common equity, as of September 30, 2011:  175,935,953 shares of Common Stock of par value US $0.001

 

1
 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

 

The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties.  The issuer’s actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “the Company believes,” “management believes” and similar language, including those set forth in the discussions under “Notes to Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as those discussed elsewhere in this Form 10-Q.  We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the “safe harbor” created by the Private Securities Litigation Reform Act of 1995.

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

    Page
     
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
     
ITEM 4. CONTROLS AND PROCEDURES 25
     
PART II.  OTHER INFORMATION
     
ITEM 1. LEGAL PROCEEDINGS 26
     
ITEM 1A. RISK FACTORS AFFECTING FUTURE RESULTS 26
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 26
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 26
     
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
     
ITEM 5. OTHER INFORMATION 26
     
ITEM 6. EXHIBITS 26
     
SIGNATURES 26
   
INDEX TO EXHIBITS 27

 

 

2
 

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 

 

      Page
ITEM 1. FINANCIAL STATEMENTS    
       
  Index to Financial Statements   3
       
  Unaudited Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010   4
       
  Unaudited Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2011 and 2010   5
       
  Unaudited Consolidated Statements of Cash Flows for the  Nine Months ended September 30, 2011 and 2010   6
       
  Notes to Unaudited Consolidated Financial Statements for the Nine Months ended September 30, 2011 and 2010   7
       

 

 

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the period ended Nine Months ended September 30, 2011 are not necessarily indicative of the results that can be expected for the full year.

 

3
 

China Health Resource, Inc. and Subsidiary

Unaudited Condensed Consolidated Balance Sheets

As of September 30, 2011 and December 31, 2010

 

   September 30,
2011
  December 31,
2010
      (Audited)
ASSETS          
CURRENT ASSETS          
Cash and Cash Equivalents  $147,632   $90,306 
Accounts Receivable   3,847,158    1,701,812 
Advances to Suppliers   689    491 
Prepaid Expenses   2,254,324    2,453,892 
Inventory   4,652,887    653,695 
TOTAL CURRENT ASSETS   10,902,690    4,900,196 
           
FIXED ASSETS          
Property, Plant, and Equipment   1,038,583    991,883 
Accumulated Depreciation   (208,325)   (163,928)
TOTAL NET FIXED ASSETS   830,258    827,955 
           
TOTAL ASSETS  $11,732,948   $5,728,151 
           
LIABILITIES AND EQUITY          
CURRENT LIABILITIES          
Accounts Payable and Accrued Liabilities  $682,179   $436,015 
Other Payables   192,875    110,516 
Due to Shareholder   376,457    376,457 
Taxes Payable   636,195    —   
Notes Payable   944,153    905,974 
Convertible debt   —      80,000 
TOTAL CURRENT LIABILITIES   2,831,859    1,908,962 
           
TOTAL LIABILITIES   2,831,859    1,908,962 
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Common stock Class A ( 500,000,000 shares authorized, 175,935,953 and 159,935,953 issued and outstanding, par value $0.001)   175,936    159,936 
Preferred Stock (50,000,000 shares authorized, 0 issued and outstanding)   —      —   
Additional paid in capital   1,662,018    1,274,144 
Accumulated other comprehensive income   539,292    235,737 
Retained earnings (deficit)   6,523,843    2,149,372 
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)   8,901,089    3,819,189 
           
TOTAL LIABILITIES AND EQUITY  $11,732,948   $5,728,151 

 

The accompanying notes are an integral part of these financial statements.

 

4
 

China Health Resource, Inc. and Subsidiary

Unaudited Condensed Consolidated Statement of Operations

For the Three and Nine Months Ended September 30, 2011 and 2010

 

 

   For the 3 months ended  For the 9 months ended
   September 30,
2011
  September 30,
2010
  September 30,
2011
  September 30,
2010
REVENUES                    
Sales  $9,334,201   $2,925,676   $21,747,210   $6,425,332 
Cost of Sales   6,747,669    1,435,436    15,203,872    4,288,820 
GROSS PROFIT   2,586,532    1,490,240    6,543,338    2,136,512 
                     
OPERATING EXPENSES                    
Selling, General, and Administrative   156,479    382,200    610,410    531,098 
Interest Expense   9,969    15,772    28,834    24,645 
   TOTAL OPERATING EXPENSES   166,448    397,973    639,244    555,743 
                     
   OPERATING INCOME (LOSS)   2,420,084    1,092,267    5,904,094    1,580,769 
                     
OTHER INCOME / (EXPENSES)                    
Other   (474)   5    (484)   2,022 
   TOTAL OTHER INCOME / (EXPENSE)   (474)   5    (484)   2,022 
                     
   NET INCOME (LOSS) BEFORE TAXES   2,419,610    1,092,272    5,903,610    1,582,791 
                     
INCOME TAX EXPENSE   608,697    340,002    1,529,139    463,585 
                     
NET INCOME (LOSS)  $1,810,913   $752,270   $4,374,471   $1,119,207 
                     
OTHER COMPREHENSIVE INCOME (LOSS)                    
Foreign Currency Translation (Loss) Gain   163,461    40,270    303,555    54,810 
                     
COMPREHENSIVE INCOME (LOSS)   1,974,374    792,540   $4,678,026   $1,174,017 
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                    
Basic   174,935,953    150,132,031    169,447,064    144,903,273 
Fully diluted   174,935,953    150,132,031    169,447,064    144,903,273 
                     
NET INCOME (LOSS) PER COMMON SHARE                    
Basic   0.01   **    0.03   ** 
Fully diluted   0.01   **    0.03   ** 

 

** Less than $.01

 

The accompanying notes are an integral part of these financial statements.

 

5
 

China Health Resource, Inc. and Subsidiary

Unaudited Condensed Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2011 and 2010

 

   For the 9 months ended
   September 30,
2011
  September 30,
2010
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net Income  $4,374,471   $1,119,207 
Adjustments to reconcile net income to          
net cash used in operating activities:          
Depreciation   36,645    23,590 
Stock-based compensation   23,874    138,000 
Accounts receivable   (2,026,942)   (512,384)
Employee Advances and Other Receivable   (173)   15,437 
Prepaid Expenses   296,155    —   
Inventory   (3,882,223)   (1,166,089)
Accounts payable and accrued liabilities   533,276    130,534 
Other payable   75,953    (5,529)
Others   7,268    —   
Tax payable   626,112    509,155 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES   64,416    251,921 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property, plant, and equipment   (12,058)   —   
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   (12,058)   —   
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments on short-term-note payable   —      (235,008)
Proceed from short-term-note payable   —      —   
NET CASH PROVIDED BY FINANCING ACTIVITIES   —      (235,008)
           
FOREIGN CURRENCY TRANSLATION   4,968    4,663 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   57,326    21,576 
           
CASH AND CASH EQUIVALENTS:          
Beginning of period   90,306    18,211 
End of period  $147,632   $39,787 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Non-cash financing activity:          
Common stock issued for settlement of CEO performance bonus payable  $300,000   $—   
Common stock issued for settlement of convertible debt  $80,000   $—   
Inventory received in exchange for Note Receivable  $—     $350,384 

 

 

The accompanying notes are an integral part of these financial statements.

 

6
 

 

 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

1.    BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

 

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2010 and 2009 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2010.

 

 

2.    ORGANIZATION AND BUSINESS BACKGROUND

 

China Health Resource Inc., f/k/a Voice Diary Inc. (the “Company” or “CHRI”) was incorporated in the State of Delaware on February 26, 2002. In June and July 2002, the Company acquired approximately 99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation (“VDL”), through the exchange of shares of the Company with former shareholders of the Subsidiary. VDL was disposed of on August 22, 2006 pursuant to the agreement between the Company, VDL and Arie Hinkis, the former president of the Company. On May 21, 2007, the Company changed its name to “China Health Resource Inc.”.

 

On June 13, 2006, CHRI (“acquiree”) executed a Plan of Exchange with Sui Ning Shi Yin Fa Bai Zhi Chan Ye You Xian Gong Si, a corporation organized and existing under the laws of the Peoples’ Republic of China (“Yin Fa” or ‘acquirer”), the shareholders of Yin Fa (the “Yin Fa Shareholders”) and the Majority Shareholder of the CHRI, pursuant to which six simultaneous transactions were consummated at closing, as follows: (1) settlement of the liabilities of CHRI, (2) a deposit of 7,977,023 (pre-split) new shares of Class A Common Stock and 2,000 new shares of Class B Common Stock via hand delivery by Mr. Hinkis in exchange for a payment of $264,000 in cash , (3) a deposit of 1,305,000 (pre-split) shares of Class A Common Stock via hand delivery by Mr. Hinkis in exchange for a payment of $136,000 in cash, (4) the issuance of  30,000,000 (post-split) investment shares of Class A Common Stock of the Registrant to the Yin Fa shareholders pursuant to Regulation S under the Securities Act of 1933, as amended, in exchange for all of the shares of registered capital of Yin Fa, (5) vending out the CHRI subsidiary after closing, and (6) retirement of 744 shares of Class B Common Stock owned Mr. Hinkis at closing against payment of $74,000 and settlement of all unpaid salaries and severance pay to Mr. Hinkis in the amount of $100,000, of which both amounts was taken from the payment made to CHRI for the issued shares.

 

The Plan of Exchange was consummated on August 22, 2006; as a result, Yin Fa became a wholly-owned subsidiary of CHRI. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree.

 

Accordingly, the consolidated financial statements include the following:

 

  (1) The balance sheet consists of the net assets of the acquirer at historical cost and the net assets of the acquiree at historical cost.
  (2) The statement of operations includes the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the merger.

 

7
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

Yin Fa was founded on April 24, 2001 in China.  The main business plan includes the manufacturing, processing, and sales of Dahurian Angelica Root (DAR) and its related products.  DAR is one of the major herbs used in Chinese traditional medicines.  In 2004 and 2005, the company and Sichuan Yingfa Resource Development Co., Ltd., (Sichuan) began the process of applying for Good Agricultural Practice of Medical Plants and Animals (GAP) for DAR. The project passed the inspection of the State Food and Drug Administration (SFDA), and the SFDA made the final, official announcement on February 26, 2006.  

 

A GAP certificate means that the planning, quality, and manufacturing of DAR meet a high and certifiable standard.  The GAP certificate is in the name of Sichuan and the company manages the processing and sales of DAR.

 

CHRI and its wholly owned subsidiary Yin Fa are hereafter referred to as (the “Company”).

 

 

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements included herein were prepared under the accrual basis of accounting.

 

Cash and Cash Equivalents

 

For purposes of the Consolidated Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents.

 

Management’s Use of Estimates

 

The preparation of consolidated 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 disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue is recognized at the time the product is delivered and title has passed to the customer. Cash discounts are recognized as an expense in the period in which it actually occurs.  Sales allowances are recorded as a reduction of revenue in the period in which they occur. Revenue is presented net of returns.

 

Comprehensive Income (Loss)

 

The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 130 (FASB ASC 220), “Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements.

 

Foreign Currencies

 

Assets and liabilities denominated in respective functional currencies are translated into United States Dollars at the exchange rate as of the balance sheet date.  The share capital and retained earnings are translated at exchange rates prevailing at the time of the transactions. Revenues, costs, and expenses denominated in respective functional currencies are translated into United States Dollars at the weighted average exchange rate for the period. The effects of foreign currencies translation adjustments are included as a separate component of accumulated other comprehensive income.

 

8
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

Company’s Future Operations Are Dependent on Foreign Operations

 

The Company’s future operations and earnings will depend on the results of the Company’s operations in China. There can be no assurance that the Company will be able to successfully conduct such operations, and a failure to do so would have a material adverse effect on the Company’s financial position, results of operations, and cash flows.

 

Also, the success of the Company’s operations will be subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general and regional economic conditions, prices for the Company’s products, competition, and changes in regulation. Since the Company is dependent on international operations, specifically those in China, the Company will be subject to various additional political, economic, and other uncertainties. Among other risks, the Company’s operations will be subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

 

Accounts Receivable

 

Accounts receivable are stated at estimated net realizable value.  Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts.  In determining the collectability of the account, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowance which is 90 days. Bad debt provision is made if fail to collect the balance after the allowance period. And the uncollectable amount last more than one year, it will automatically account for bad debt.

 

Inventory

 

Inventory includes raw material, package material, low-value consumables and merchandise. The Company adopts perpetual inventory system and inventories are recorded at actual cost.  Raw material, package material and merchandise are priced at cost upon acquisition, and with the weighted average method upon issuance and shipment. Low-value consumables are amortized at 50% of the amount upon application and amortized an additional 50% upon obsolescence.

 

Property, Plant, and Equipment

 

Property, plant, and equipment are recorded at cost, less accumulated depreciation and impairment.  Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property, plant, and equipment, are expensed as incurred. The cost and related accumulated depreciation, applicable to sold or no longer in service property, plant, and equipment, are eliminated from the accounts and any gain or loss is included in the statement of operations.

 

Depreciation is calculated to write-off the cost or basis of the property, plant, and equipment over their estimated useful lives for the date on which they become fully operational and after taking into account their estimated residual values (salvage value), using the straight-line method, at the following rates per year:

 

  Equipment    Straight-line for 5 to 20 years with a 3% salvage value
  Building    Straight-line for 20 years with a 5% salvage value

 

The Company recognizes an impairment loss on property, plant, and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of the asset cannot be realized through sale.  Measurement of the impairment loss is based on the fair value of the assets.

 

9
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

Income Taxes

 

Income taxes are provided in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 (FASB ASC 740), “Accounting for Income Taxes.”  A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards.

 

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that, and some portion or the entire deferred tax asset will not be realized.  Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

 

Fair Value of Financial Instruments

 

The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and loans payable approximate fair value based on the short-term maturity of these instruments.  The carrying value of the Company’s long-term debt approximated its fair value based on the current market conditions for similar debt instruments.

 

Impairment of Long-Lived Assets

 

The Company evaluated the recoverability of its property and equipment, and other assets in accordance with Statements of Financial Accounting Standards (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed of,” which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate.

 

Stock-Based Compensation

 

Employee stock-based compensation is accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and the FASB interpretations thereof. Pursuant to those accounting pronouncements, compensation is recorded for share options granted to employees at the date of grant based on the difference between the exercise price of the options and the market value of the underlying shares at that date. Due to the terms of the grants, the fair value of the compensation in accordance with SFAS No. 123R, "Accounting for Stock-Based Compensation" approximates the values computed in accordance with APB No. 25. Stock-based compensation to non-employees is accounted for in accordance with SFAS No. 123R. Under both accounting pronouncements, as part of the necessary computations, management is required to estimate the fair value of the underlying shares. Fair value has generally been determined by management, as the price at which the Company's shares were issued at the most recent prior placement of the Company's Common Stock. Since the Company was approved for listing on the Over the Counter Bulletin Board - fair value is determined according to stock market price. The timing of the grant and measurement of stock-based awards will not have a material effect on the Company's results of operations and financial position.  Since no stock-based awards exist.

 

Subsequent Events

 

SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Company’s financial statements. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements.

 

10
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

Recently Issued Accounting Pronouncements

 

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.

 

In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”).  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively.  The Company anticipates that the adoption of this standard will not materially expand its financial statement note disclosures.

 

In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance.  This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted.  The Company is reviewing ASU 2011-05 to ascertain its impact on the Company’s financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

 

 

4.    SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental disclosures of cash flow information for the period ended September 30, 2011 and 2010 are summarized as follows:

 

Cash paid during the nine month period ended September 30, 2011 and 2010 for interest and income taxes:

 

   September 30,
2011
  September 30,
2010
Income Taxes   926,344    463,585 
Interest   28,834    24,645 

 

 

5.    ACCOUNTS RECEIVABLE

 

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. Accounts receivable as of September 30, 2011 and December 31, 2010 consist of the following:

 

   September 30,
2011
  December 31,
2010
Accounts receivable, gross  $3,847,158   $1,071,812 
Less: allowance for doubtful accounts   —      —   
Account receivable, net   3,847,158    1,071,812 

 

All accounts receivables are aging within 30 days. So no provision or bad debt needs to be accrual.

 

11
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

6.    ADVANCES TO SUPPLIERS

 

Due to the high demand of DAR product, the company advances money to third party suppliers to secure more DAR supply. These advances bear no interest and will be applied as the payment when purchases are received. The balance of advances to suppliers as of September 30, 2011 and December 31, 2010 are $689 and $491, respectively.

 

7.    INVENTORIES

 

Inventories as of September 30, 2011 and December 31, 2010 consist of the following:

 

   September 30,
2011
  December 31,
 2010
       
Raw materials  $4,652,887   $653,695 
Low value consumables   0    0 
Finished goods   0    0 
   $4,652,887   $653,695 

 

As of September 30, 2011 and December 31, 2010, no provision for obsolete inventories was recorded by the Company. The large amount of raw material are due to more TCM business started, larger volume demand of DAR, and higher purchasing than previous year. The company has largely increased its inventory in current quarter to take advantage of the increasing market demand. Low value consumables are the materials for the process of finished goods. Due to the different outsourcing process adopted for the same period in 2010, the processing party is having all the materials and processing cost in its total fees. The finished goods, Bailing Capsules, had been changed to process by order due to the upgrade of the sales strategy.

 

 8.     PREPAID EXPENSES

 

Prepaid expenses as of September 30, 2011 and December 31, 2010 consist of the following:

 

   September 30,
2011
  December 31,
2010
Prepaid expenses  $2,254,324   $2,453,892 

 

All prepaid expenses are paid to the contracting farmers as part of the raw material DAR purchasing amount.

 

 

9.    Note Receivable

 

For the first three quarters of 2011, there were no new issue related to or belong to note receivable.

 

10.    PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net as of September 30, 2011 and December 31, 2010 consists of the following:

 

   September 30,
2011
  December 31,
2010
Property, plant and equipment   1,038,583    991,883 
Less: accumulated depreciation   (208,325)   (163,928)
Property, plant and equipment, net  $830,258   $827,956 

 

 

12
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

11.    ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities as of September 30, 2011 and December 31, 2010 consist of the following:

 

   September 30,
2011
  December 31,
2010
Accounts payable   310,332    421,258 
Accrued liabilities   371,847    14,757 
Total accounts payable and accrued liabilities  $682,179   $436,015 

 

Accrued liabilities include accrued wage payable, accrued welfare payable, other taxes payable, and receipt in advance.

 

 

12.    NOTES PAYABLE - CURRENT

 

As of September 30, 2011 and December 31, 2010, notes payable consist of the following:

 

   September 30,
2011
  December 31,
2010
       
Secured note payable to an unrelated party, bearing 8.6625 % interest Principal payments due 12/26/2011  $472,076    452,987 
           
Non-secured note payable to a related party, bearing 6.95% interest Principal payments due 10/28/2011   472,077    452,987 
           
TOTAL  $944,153    905,974 

 

 

13.    OTHER PAYABLE

 

As of September 30, 2011 and December 31, 2010, notes payable consist of the following:

 

   September 30,
2011
  December 31,
2010
           
Labor union fee  $7,189   $6,898 
Pension fund   44,210    22,263 
Social insurance   141,319    81,204 
Risk Fund   157    151 
           
TOTAL  $192,875   $110,516 

 

13
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

14.    CONVERTIBLE DEBT

 

On July 1, 2010, the company issued a convertible note in amount of $80,000 for the consulting services rendered by a consultant. Pursuant to the agreement, the note bears 1% annual interest and convertible at $0.008 per share after September 1, 2010 per all outstanding principal amount and accrued interest and fees. In January, 2011, partial amount ($56,000) of convertible note was converted into 7, 000,000 shares. The remaining balance of convertible debt was $24,000, which was converted into 3,000,000 shares on May 4, 2011. There was no balance of convertible debt as of September 30, 2011.

 

 

15.    INCOME TAXES

 

The Company conducts all its operating business through its subsidiaries in China. The subsidiaries are governed by the income tax laws of the PRC and do not have any deferred tax assets or deferred tax liabilities under the income tax laws of the PRC because there are no temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company by itself does not have any business operating activities in the United States and is therefore not subject to United States income tax.

 

The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the previous laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate previously applicable to both DEs and FIEs.

 

Prior to 2008, under the Chinese Income Tax Laws, FIEs generally were subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income as reported in their statutory financial statements after appropriate tax adjustments unless the enterprise was located in specially designated regions for which more favorable effective tax rates apply. Beginning January 1, 2008, China has unified the corporate income tax rate on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.

 

The Company generated substantially its net income from its PRC operation and has recorded income tax provision for the nine months ended September 30, 2011 and 2010.

 

The components of (loss) income before income taxes separating U.S. and PRC operations are as follows:

 

   September 30,
2011
  September 30,
2010
       
Loss subject to U.S. operation  $(212,947)  $(272,000)
Income (loss) subject to PRC operation   6,116,557    1,854,791 
Income (loss) before income taxes  $5,903,610   $1,582,791 

 

United States of America

 

The Company is registered in the State of Delaware and is subject to United States of America tax law.

 

For the nine months ended September 30, 2011, the U.S. operation had $212,947 of net operating losses available for federal tax purposes, which are available to offset future taxable income.  The net operating loss carry forwards begin to expire in 2030.  The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized in the future.

 

14
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

The PRC

 

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes stated in the consolidated statement of operations for the nine months ended September 30, 2011 and September 30, 2010 is as follows:

 

   September 30,
2011
  September 30,
2010
           
Income (loss) before income taxes  $6,116,557   $1,854,791 
Statutory income tax rate   25%   25%
    1,529,139    463,585 
Expenses not deductible for tax purposes:          
- Provisions   —      —   
Effect of tax losses   —      —   
           
Income tax expense  $1,529,139   $463,585 

 

The following table reconciles the U.S. statutory rate to the Company’s effective tax rate:

 

   September 30,
2011
  September 30,
2010
       
U.S. Statutory rate   34%   34%
Foreign income not recognized in USA   (34)   (34)
China income taxes   25    25 
           
Total provision for income taxes  $25   $25 

 

The Company applies FASB ASC 740-10, “Accounting for Income Taxes”, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes. Because the Company has no operations within the United States, there is no provision for US income taxes and there are no deferred tax amounts as of nine months ended September 30, 2011 and September 30, 2010.

 

The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred taxes are accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

 

Deferred taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred taxes are charged or credited in the income statement, except when they relate to items credited or charged directly to equity, in which case the deferred taxes are also recorded in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption of FIN 48 had no effect on the Company’s financial statements.

 

15
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

16.    MAJOR CUSTOMER/VENDOR AND CONCENTRATION

 

(a)    Sale breakdown

 

For the nine months ended September 30, 2011, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from customers located in the PRC.

 

All customers are all non-related parties, mostly located in Sichuan province or southern China. The sole business relationship with Yinfa is to purchase raw DAR, other TCM, or Yishen Capsule. For the nine months ended September 30, 2011, 42% of the total revenue is contributed by DAR, 40% of the total revenue is contributed by other TCM, and 18% of total revenue is contributed byYishen Capsule.

 

(b)    Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.

 

 

17.    Share-based compensation

 

Effective August 20, 2010, the Company’s Board of Directors appointed Mr. Jiayin Wang Chief Executive Officer of the Company. The Board of Directors has approved the following compensation for Mr. Wang in his capacity as the Company’s Chief Executive Officer:  

 

(a) no annual base salary will be paid until such time as the Company achieves $1,000,000 in annual net income, whereupon Mr. Wang will receive an annual base salary of based upon the Company’s market capitalization and fair market rate of a public company chief executive officer;

 

(b) A signing bonus totaling $50,000, payable on August 20, 2010 in shares of the Company's Class A common stock (the "Common Stock") based on a price per share of $0.00782, the average of the closing prices of the Common Stock as quoted on the OTC Bulletin Board for the five (5) trading days ending on such date.  Mr. Wang received 6,393,862 shares of Common Stock as a signing bonus which shares are not registered under the U.S. Securities Act of 1933, as amended (the "1933 Act");

 

c) A grant of stock options to purchase 6,000,000 shares of Common Stock at an exercise price of $0.02 per share, vesting over 18 months in equal monthly installments.  The stock options were granted pursuant to the Company’s 2009 Omnibus Incentive Plan and have a grant date of August 20, 2010; and

 

(d) Performance bonuses payable in shares of the Common Stock (which shares will not registered under the 1933 Act) based upon milestones and terms as follows:

 

i. If the Company achieves $500,000 in net income for the three-month period ended September 30, 2010 as shown in the Company's financial statements contained in the Quarterly Report on Form 10-Q for such period, Mr. Wang will receive a bonus of $40,000 payable in shares of Common Stock valued at $0.02 per share.  
ii. If the Company achieves $1,000,000 in net income for the six-month period ended December 31, 2010, Mr. Wang will receive a bonus of $100,000 payable in shares of Common Stock valued at $0.05 per share.  
iii. If the Company achieves $1,500,000 in net income for the nine-month period ended March 31, 2011, Mr. Wang will receive a bonus of $160,000 payable in shares of Common Stock valued at $0.08 per share.  

 

Mr. Wang will also be eligible to receive periodic stock grants and participate in the Company's incentive plans and benefit plans for which he is eligible.  

 

16
 

China Health Resource, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2011 and 2010

(Expressed in USD)

 

In recognition of Mr. Wang's contributions to the Company's achievement of various corporate and financial milestones, effective August 20, 2010, the Board of Directors approved a bonus for Mr. Wang in the amount of $88,000 payable in shares of Common Stock based on a price per share of $0.00782, the average of the closing prices of the Common Stock as quoted on the OTC Bulletin Board for the five (5) trading days ending on such date.  Mr. Wang received 11,253,197 shares of Common Stock that are not registered under the 1933 Act under this bonus.

 

The company also recognized $23,874 as option expenses for vested option (see above (c) ) for the 9 months ended September 30, 2011.

 

On July 15, 2011, the Company issued 6,000,000 shares of common stock to Jiayin Wang to settle his performance bonuses payable accrued pursuant to his employment offer letter signed August 20, 2010 (see above (d) i, ii, and iii). Jiayin Wang has achieved the milestones pursuant to the employment offer letter and therefore was awarded accordingly.

 

 

18.    SUBSEQUENT EVENTS

 

On November 3, 2011, the Company’s wholly owned subsidiary Suining Yinfa DAR Industrial Co, Ltd. received 7 separated purchasing letters of intent totaling of over 7.5 million USD with the time period from November 4, 2011 to November 3, 2012

 

 

17
 

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

 

The following discussion should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto included in Item 1 of this report and is qualified in its entirety by the foregoing.

 

Forward Looking Statements

 

Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Consolidated Financial Statements, are “forward-looking statements”, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are subject to certain events, risks and uncertainties that may be outside our control.  The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to achieve operating efficiencies, our ability to successfully develop, manufacture and deliver Dahurian Angelica Root and related products on a timely basis and in the prescribed condition, evolving standards in the Traditional Chinese Medicine industry, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to raise sufficient capital in order to effectuate our business plan, our ability to find and retain skilled personnel and key executives, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the “Commission”).

 

General

 

All references in this Quarterly Report on Form 10-Q to the “Company,” “CHRI,” the “Registrant,” “we,” “us” or “our” are to China Health Resource, Inc., a Delaware corporation.  These terms also refer, where context requires, to our subsidiary corporation, Suining Shi Yinfa Bai Zhi Chan Ye You Xian Gong Si, a corporation organized and existing under the laws of the Peoples’ Republic of China (“Yinfa”), acquired in August 2006.

 

We were incorporated in the State of Delaware on February 26, 2002.  In June and July 2002, we acquired approximately 99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation (“VDL”), through an exchange of shares of the Company with shareholders of VDL.  On June 13, 2006, we, as the acquirer, executed a Plan of Exchange with Yinfa (acquiree), the shareholders of Yinfa and the Company’s then majority shareholders, pursuant to which we issued 30,000,000 (post-split) new shares of our Class A Common Stock to the Yinfa shareholders in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, in reliance upon Regulation S thereunder, in exchange for all of their shares of registered capital of Yinfa. As a result, Yinfa became our wholly-owned subsidiary.  Yinfa was founded on April 24, 2001, with registered capital of US $125,500 (RMB 1,000,000) and total assets of US $1,475,795.  Yinfa’s business incorporates a self-owned production base and a network of DAR (as defined below) associates, farmers and research and development affiliates.  The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree.  We disposed of VDL on August 22, 2006 pursuant to the agreement between the Company, VDL and Arie Hinkis, our former president.  On May 21, 2007, we changed our name to China Health Resource, Inc. to more accurately reflect our business operations.

 

18
 

Our Business

 

Since the completion of the Plan of Exchange with Yinfa, our core business has been in pharmaceuticals and the continued operations of Yinfa. Yinfa is a Chinese pharmaceutical company focused on producing, processing and commercializing Dahurian Angelica Root (“DAR”), a popular Traditional Chinese Medicine (“TCM”) herb employed extensively as an ingredient in food, medicine and cosmetics. The Suining district in China’s Sichuan Province is the major planting and production area in China for DAR as a result of the unique and ideal local climate and soil properties. Over 70% of DAR for general use and 100% of DAR for pharmaceutical use in China is produced in Suining. We have partnered with Chengdu University of Traditional Chinese Medicine for scientific development and technical support. Our business strategy involves continued development in research and development (“R&D”) base fields, retaining experienced DAR farmers, using scientific methods to develop new drugs , and leveraging the DAR Association (this association explained below) for DAR production and competitive market advantage. Besides the producing and sales of DAR, we also make further processing of DAR due to its functions in expelling wind (in TCM terminology, which describes wind-cold exterior syndrome manifested by headache, supraobital pain and nasal obstruction), detoxification, anti-inflammatory and pain relieving. The Company currently offers the following products:

 

1.    Yishen Capsule: the Yishen Capsule is a TCM health care product, with Sichuan DAR as main ingredient together with other TCM herbs, such as Panax quinquefolius (commonly known as Ginseng), Rhizoma gastrodiae (commonly known as Tian ma), Eriobotrya japonica (commonly known as loquat or medlar), etc. This Yishen Capsule is effective in treating weariness, caused by hypoxia (hypoxia is a pathological condition in which the body is deprived of adequate oxygen supply).

 

2.    Bailing Capsule: the Bailing Capsule is made from Sichuan DAR (main ingredient), Glossy ganoderma (Glossy ganoderma helps to strengthen blood function and improve leukocyte level. Also, it is highly effective for strengthening body's own anticancer activity), Coix seed (Coix seeds stimulate the digestive and cardiovascular systems, are anti-inflammatory, and induce diuresis. Coix seeds are also used to treat the symptoms of diarrhea and arthritis), Chrysanthemum (which has properties of anti-HIV-1, antibacterial and antimycotic), etc. The production process includes raw ingredient selecting, drying, raw ingredient crushing, raw ingredient mixing, sterilizing, filling and packaging. It is a good medicine for healing exogenous headaches, migraine headaches, vascular headache to name a few.

 

3.    Zhiyuan Fragrant Bag: In this fragrant bag, the Sichuan DAR, together with Rhizoma atractylodis, Patchouli, Borneol, Rhizoma ligustici wallichii, Chinese cinnamon, chrysanthemum, Eupatorium fortunei Turcz. and peppermint, can be effective in cleansing, refreshing, and strengthening the immune system with its aroma-therapy properties. This fragrant bag, a further developed health care product originated from the traditional fragrant bag, is effective in anti-flu and anti-carsickness. 4. Kimchee Mate: This Kimchee Mate, with Sichuan DAR as main ingredient, is produced in modernized, high-temperature sterilization and vacuum packing. Kimchee Mate is used for making kimchee, and helps make the kimchee more fragrant and crisp.

 

On February 26, 2006, Sichuan Yinfa Resource Development Co., Ltd (“Yinfa Resource”), an affiliate company, successfully obtained the Good Agricultural Practice of Medical Plants and Animals (“GAP”) certification for DAR. The standards which must be met to obtain certification include the inspections of our environmental quality, seed quality, and strict monitoring of chemical residue levels from pesticides and fertilizers. These standards were adopted by the Chinese State Food and Drug Administration (the “SFDA”). On January 1, 2007, Yinfa Resource entered into, with Yinfa, a contract for the exclusive right of using the DAR GAP certificate from January 1, 2007 to December 31, 2017. Our R&D Fields for GAP production involves approximately 133,334 square meters of R&D planting fields farmed directly by Yinfa, and 1,333,340 square meters of fields farmed under the instructions and directions of Yinfa, all of which passed inspection by the SFDA and meet the specifications for GAP.  In order to expand production and meet the DAR demand in market, Yinfa increased, in December 2008, fields farmed under the instructions and directions of Yinfa by 2,141,544 square meters, with such fields of a total 3,474,884 square meters.

 

19
 

In December 14, 2006, Sichuan Province Suining City DAR Association (“Association”) successfully obtained the “Suining Sichuan Angelica” certified trademark issued by the China State Administration of Industry and Commerce through December 13, 2016, and is renewable. Yinfa signed an agreement with the Association, in which Yinfa has exclusive rights to use and benefit from the trademark. The significance of the trademark is that it is commonly known that the best quality DAR comes from Suining, Sichuan. There are approximately 235 regional certification trademarks like these in China, including 65 for natural resources, of which over 20 are for natural herb resources, which shows that these trademarks for natural resources are difficult to obtain. The development of Suining Sichuan DAR with GAP standard is supported by the National Scientific and Technical Supporting Program of the Ministry of Science and Technology of PRC; and also the National Scientific and Technical Supporting Program of Sichuan Provincial Science and Technology Department of PRC.

 

The price of raw DAR depends on supply and demand. As our business grows, we intend to further expand the Suining Sichuan DAR trademark, which is the highest quality DAR available grown within GAP standards and is most ideal for pharmaceutical use.

 

We believe our business model will help facilitate the process of growing and commercializing DAR, research and development, sales and marketing. Our current DAR-related products include the Bailing Capsule, Yisheng Capsule, Kimchee-Mate and Fragrant Bag, all of which have been certified by the SFDA and are being sold into the market via regional distributors throughout China. We will continue to explore the development and addition of DAR products in a range of foods, medicines and cosmetics. In addition, we continue to consider and explore opportunities to expand our current asset base and product offerings to increase our revenues. These opportunities may include, but are not limited to, acquisitions or licensing of additional products and the partnership or merger of Yinfa with other Chinese companies in synergistic or complementary industries.

 

Seasonality

 

The planting of DAR is subject to seasonal fluctuations. DAR is planted during the winter months and is suitable for harvest in the summer. The prime season for harvest is typically from July through November, subject to climate conditions. As a result, we typically enter into contracts with farmers during the first quarter of the fiscal year for the purchase of raw DAR, and purchase raw DAR from farmers during the third and forth quarters. We then process the harvested DAR and sell products to our customers throughout the year. Therefore, our revenues occur throughout the year. 

 

Critical Accounting Policies

 

Revenue recognition

 

Our revenue recognition policies are in accordance with Staff Accounting Bulletin No. 104. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.

 

We recognize revenue when the goods are delivered and title has passed. Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of our products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by us on raw materials and other materials included in the cost of producing their finished product.

 

Inventory

 

Inventory includes raw material, package material, low-value consumables and merchandise. We have adopted a perpetual inventory system and inventories are recorded at actual cost. Raw material, package material and merchandise are priced at cost upon acquisition, and with the weighted average method upon issuance and shipment. Low-value consumables are amortized at 50% of the amount upon application and amortized an additional 50% upon obsolescence.

20
 

Property, Plant, and Equipment

 

Property, plant, and equipment are recorded at cost, less accumulated depreciation and impairment. Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property, plant, and equipment, are expensed as incurred. The cost and related accumulated depreciation, applicable to sold or no longer in service property, plant, and equipment, are eliminated from the accounts and any gain or loss is included in the statement of operations.

 

Depreciation is calculated to write-off the cost or basis of the property, plant, and equipment over their estimated useful lives for the date on which they become fully operational and after taking into account their estimated residual values (salvage value), using the straight-line method, at the following rates per year:

 

Equipment: Straight-line for 5 to 20 years with a 0% salvage value
Building: Straight-line for 20 years with a 5% salvage value
Useful life of land Straight-line for 15 years with a 5% salvage value

 

We recognize an impairment loss on property, plant, and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of the asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets.

 

FASB Accounting Standards Codification

 

(Accounting Standards Update (“ASU”) 2009-01)

 

In June 2009, FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification.  All other non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative.  The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database.  The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification.  There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended June 30, 2010.

 

As a result of the Company’s implementation of the Codification during the quarter ended June 30, 2010, previous references to new accounting standards and literature are no longer applicable.  In the current quarter financial statements, the Company will provide reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.

 

Results of Operations for the Nine months Ended September 30, 2011

 

Balance Sheet

 

Our total assets for the nine months ended September 30, 2011 were US $11,732,948 compared to the nine months ended September 30, 2010 were US $3,918,587. Total liabilities increased to US $2,831,859 for the nine months ended September 30, 2011 from US $1,719,219 for the nine months ended September 30, 2010, principally due to an increase of cash and cash equivalents, accounts receivable, prepaid expenses, inventory, accounts payable, notes payable, taxes payable.

 

Balance Sheet  September 30,
2011
  September 30,
2010
Total Assets  $11,732,948   $3,981,587 
Total Liabilities   2,831,859    1,719,219 
Net Assets  $8,901,089   $2,199,368 

 

21
 

Results of Operations

 

Profit/Loss  For the Nine Months Ended
   September 30,
2011
  September 30,
2010
Operating Income (Loss)  $5,904,094   $1,580,769 
Net Income (Loss) Before Tax   5,903,610    1,582,791 
Corp. Income Tax   1,529,139    463,585 
Net Income (Loss)  $4,374,471   $1,119,207 

 

Revenues

 

Our revenues for the nine months ended September 30, 2011 were US $ $21,747,210, an increase of 238% over revenues of US $6,425,332 for the nine months ended September 30, 2010. The revenues for the three months ended September 30, 2011 were US $9,334,201, representing an increase of 219% over revenues of US $2,925,676 for the three months ended September 30, 2010. The increase in sales revenues was due primarily to an increase in the volume of sales, the increase of unit sales price of Yishen capsule, and sales of other TCM received during the nine months ended September 30, 2011. Most of the revenue growth was attributable to increased volume sales in raw DAR and other TCM herbs. Our sales arrangements are not subject to any warranties. In this period, TCM prices including DAR retail prices decreased slightly due to the macro TCM market condition.

 

Cost of Sales; Gross Profit

 

Cost of sales are expenses directly related to manufacturing and selling our products, including costs of raw materials purchased from farmers, product delivery and direct labor cost. The cost of sales for the three months ended September 30, 2011 were US $6,747,669, representing an increase of 370% over the cost of sales of US $1,435,436 for the three months ended September 30, 2010. Our cost of sales for nine months ended September 30, 2011 was US $15,203,872, or approximately 70% of revenues, compared to US $4,288,820, or approximately 67% of revenues for the nine months ended September 30, 2010. The increased costs of sales and comparatively lower gross profit rate for the nine months ended September 30, 2011 were principally due to the costs related to the increase of sales volume. For the nine months ended September 30, 2010, rising DAR costs could not be passed on to consumers, but for the nine months ended September 30, 2011, retail DAR prices increased along with the retail prices in the TCM industry in general due to inflation.  This higher retail price resulted in higher cost of goods margins. From the beginning of the year 2010, drought hit many production places of DAR, resulting in a price increase for raw DAR. Also, we had to purchase additional raw DAR due to the increased demand, and with shortage of supply in the market, the result was an increased cost of sales for the nine months ended September 30, 2011. For the first quarter of 2011, the reason we can keep our cost of goods sold for raw DAR was favorably impacted by a strengthened relationship with the local government and the DAR Association, which increased our advantage in the supply chain of DAR. The other reason is because the Company elected to make prepaid deposits to secure exclusivity of the DAR harvest from DAR farmers in larger volume.

 

Gross profit for the nine months ended September 30, 2011 increased by approximately 206% to US $6,543,338 from US $2,136,512 for the nine months ended September 30, 2010. The gross profit for the three months ended September 30, 2011 were US $2,586,532, representing an increase of 74% over gross profit of US $1,490,247 for the three months ended September 30, 2010.Gross profit margin for the nine months ended September 30, 2011 was 30% compared to 33% for the nine months ended September 30, 2010. This was primarily due to the retail prices of DAR slightly decreased due to macro TCM market condition and increased volume demand of DAR and other TCM herbs.

 

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Operating Expenses

 

The operating expenses for the nine months ended September 30, 2011 were US $639,244, representing an increase of 15% over operating expenses of US $555,743 for the nine months ended September 30, 2010. The operating expenses for the three months ended September 30, 2011 were US $166,448, representing a decrease of 58% over operating expenses of US $397,973 for the three months ended September 30, 2010.The SG&A expenses for the three months ended September 30, 2011 were US $156,479, representing an decrease of 59% over SG&A expenses of US $382,200 for the three months ended September 30, 2010. And the interest costs for the three months ended September 30, 2011 were US $9,969, representing a decrease of 37% over interest costs of US $15,772 for the three months ended September 30, 2010. The operating expenses included selling, general and administrative (“SG&A”) expense and interest cost. SG&A expenses increased overall to US $610,410 for the nine months ended September 30, 2011 compare to US $531,098 for the nine months ended September 30, 2010.The increase of SG&A is primarily due to an increase in fees and expenses producing and distributing product, which was a result of higher volume of DAR, Yishen Capsule, and other TCM sales.  Selling expense for the nine months ended September 30, 2011 decreased to US $36,755 compared to US $78,228 for the nine months ended September 30, 2010. This decrease is primarily due to the change of transportation and delivery cost policy. The decrease of G&A expenses for the recent quarter is primarily due to last year’s CEO incentive plan, and some one-time expenses or expenses paid semi-annually such as Yinfa’s legal consulting fee, auditing fee, agency fee, maintenance fee. The interest cost for the nine months ended September 30, 2011 increased to US $28,834 compared to US $24,645 for the nine months ended September 30, 2010 due to an increase in the Company’s indebtedness.

 

Other Income/Expense

 

For the nine months ended September 30, 2011, we had a total Other Income of US $(484), compared to other income of US $2,022 for the nine months ended September 30, 2010. The other income for the three months ended September 30, 2011 were US $(484), representing a decrease of 9576% over operating expenses of US $5 for the three months ended September 30, 2010.The decrease in total other income was due primarily to the refund of the rent and maintenance to a third party in the third quarter of 2011.

 

Impact of Inflation

 

We believe that inflation has had a significant effect on operations for the nine months ended September 30, 2011. The inflation rate in the Sichuan Province has been lower than the average national inflation rate for China.  However, the beginning of the year 2010 was impacted by drought that hit many production places of DAR, resulting in a price increase for raw DAR. We believe this is a short-term impact on inflation. Also, significant increases in inflation throughout China have raised retail prices of DAR, and most TCM products in general. But in the third quarter of 2011, the china’s TCM market is in a relatively stable condition, and some of the TCMs appear to have a decrease in price. We also believe that we can offset any inflationary increases in the cost of sales by continuing to increase our sales of DAR and other TCM in response to continued demand and by improving operating efficiencies.

 

Taxes

 

According to the Corporate Income Tax Law of China, companies without any tax abatement programs are charged at a 25% income tax rate. The income tax for the three months ended September 30, 2011 were US $608,697, an increase of 79% compare to income tax of US $340,002 for the three months ended September 30, 2010. For the nine months ended September 30, 2011, we accrued income taxes of US $1,529,139. For the nine months ended September 30, 2010, we accrued income taxes of US $463,585.

 

Net Income

 

We had net income for the three months ended September 30, 2011 of US $1,810,913, an increase of 141% compared to a net income for the three months ended September 30, 2010 of US $752,270. The net income for the nine months ended September 30, 2011 were US $4,374,471, an increase of 291% compared to a net income for the nine months ended September 30, 2010 of US $1,119,207. The improvement in our net income for the nine months ended September 30, 2011 is attributable principally to increased sales revenue and a foreign currency translation gain between the RMB and U.S. dollar of US $303,555. The increased sales revenue is primary due to increased volume sales in raw DAR and other products. 

 

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We are working to strengthen our internal management processes and to grow our sales revenues, while maintaining an efficient cost structure. However, there can be no assurance that we will achieve or maintain continuing profitability, or that revenue growth will continue in the future.

 

Liquidity and Capital Resources

 

Net cash flow from operating activities was US $64,416 for the nine months ended September 30, 2011, compared to net negative cash flow of US $251,921 from operating activities for the nine months ended September 30, 2010. This was due to an increase of net profit of US $4,374,471 for the nine months ended September 30, 2011 from a net income of US $1,119,207 for the nine months ended September 30, 2010. Net expenditures for inventory were US $3,882,223 for the nine months ended September 30, 2011 compared to US $1,166,089 for the nine months ended September 30, 2010. This was also due to an increase of accounts receivable outflow to US $2,026,942 for the nine months ended September 30, 2011 from an outflow of US $512,384 for the nine months ended September 30, 2010. Accounts payable and accrued liabilities increased to US $533,276 for the nine months ended September 30, 2011 from US $130,534 for the nine months ended September 30, 2010. Taxes Payable increased to US $626,112 for the nine months ended September 30, 2011 from US $509,155 for the nine months ended September 30, 2010.

 

Net cash flow used in investing activities was US $12,058 for the nine months ended September 30, 2011, compared to net cash flow of US $0 from operating activities for the nine months ended September 30, 2010. This was due to a purchase of Property Plant and Equipment.

 

There were no net cash flows provided by or used in financing activities during the nine months ended September 30, 2011 compare to US$235,008 net cash flows used in financing activities for the nine months ended September 30, 2010.

 

Overall, we have funded our cash needs from inception through September 30, 2011 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.

 

We had cash of US $147,632 on hand for the nine months ended September 30, 2011, an increase of US $90,306 from the beginning of the year and attributable in substantial part to an increase in cash inflow. A significant amount of cash was used to purchase inventory. Currently, we have enough capital to fund our operations because we have a sizable accounts receivable to fund operations. Our accounts receivable increased significantly in this quarter. A significant part of accounts receivable was paid off and our new accounts receivable has been added with new customers. The Company expects to receive these funds on time. But if accounts receivable cannot be collected timely, we may not be able to sustain our capital needs. Therefore, we will strengthen the management toward accounts receivable to quicken the collection of such accounts receivable.

 

On a long-term basis, our liquidity is dependent on continuation and expansion of our operations, receipt of revenues, and additional infusions of capital and debt financing. Our current capital and revenues are insufficient to fund such expansion. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.

 

Demand for our products and services will be dependent on, among other things, market acceptance of our products, the Chinese TCM in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recessionary periods.

 

Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We manage the processing and DAR distribution business to retail consumers and wholesale buyers. We plan to strengthen our position in these markets and to expand our operations through aggressively marketing our products and our concept. 

 

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Off-Balance Sheet Arrangements

 

For the nine months ended September 30, 2011, we did not have any off-balance sheet arrangements.

 

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information to be reported under this Item is not required of smaller reporting companies.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods.  Our Chief Executive Officer and our Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures.  The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

During the third quarter of 2011, our Certifying Officers evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on the evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  We are aware that any system of controls, however well designed and operated, can only provide reasonable, and not absolute, assurance that the objectives of the system are met, and that maintenance of disclosure controls and procedures is an ongoing process that may change over time.

 

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PART II. OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.    RISK FACTORS

 

The information to be reported under this Item is not required for smaller reporting companies.

 

ITEM 2.   UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

 

None.

 

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5.   OTHER INFORMATION

 

None.

 

ITEM 6.    EXHIBITS

 

(1)    Exhibits: Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits following the signature page of this Form 10-Q, which is incorporated herein by reference.

 

SIGNATURES

 

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  CHINA HEALTH RESOURCE, INC.
   
   
Dated:   November 15, 2011 By:  /s/   Wang, Jiayin      
  Wang, Jiayin
  Chief Executive Officer and Director
  (Principal Executive Officer)
   
   
   
Dated:   November 15, 2011 By: /s/    Liu, Weihai      
  Liu, Weihai
  Chief Financial Officer and Director
(Principal Financial Officer)

 

 

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INDEX TO EXHIBITS

 

 

Exhibit

No.

  Description Incorporated Herein
by Reference to
Filed
Herewith
         
31.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X
         
31.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X
         
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X
        X
 101.INS    XBRL Instance Document    
         
 101.SCH    XBRL Taxonomy Extension Schema Document   X
         
101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document   X
         
 101.LAB   XBRL Taxonomy Extension Label Linkbase Document   X
         
 101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document   X
         
 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document   X

 

27