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:  June 30, 2012
|_|	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 June 30, 2012:  177,435,953 shares of Common Stock of par value US $0.001

 

 

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)	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4T.	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	27
SIGNATURES		27
INDEX TO EXHIBITS		28

 

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS 

 

 

			Page
ITEM 1.	FINANCIAL STATEMENTS
	Index to Financial Statements		1
	Unaudited Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		2
	Unaudited Consolidated Statements of Operations for Three and Six Months ended June 30, 2012 and 2011		3
	Unaudited Consolidated Statements of Cash Flows for Six Months ended June 30, 2012 and 2011		4
	Unaudited Condensed Consolidated Statement of Equity (Deficit)		5
	Notes to Unaudited Consolidated Financial Statements for the Six Months ended June 30, 2012 and 2011		6

 

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 Six Months ended June 30, 2012 are not necessarily indicative of the results that can be expected for the full year.

 

 

China Health Resource, Inc. and Subsidiaries

Consolidated Balance Sheets

As of June 30, 2012 and December 31, 2011

 

 

ASSETS		June 30, 2012				December 31, 2011
Current Assets
Cash and Cash Equivalents		$	930,343			$	241,755
Accounts Receivable			4,973,360				5,386,455
Advance to Suppliers			1,008,346				32,231
Prepayment For Land Usage			3,506,775				3,520,131
Deferred Inventory Cost			3,942,113				3,079,930
Inventory			2,393,181				1,276,642
Total Current Assets			16,754,118				13,536,964
Fixed Assets
Property, Plant and Equipment, Net			794,291				831,341
Total Assets		$	17,548,408			$	14,368,305
LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable and Accrued Liabilities		$	904,008			$	875,080
Other Payable			165,888				201,271
Due to Shareholder			376,457				376,457
Taxes Payable			886,957				21,200
Notes Payable			-				1,206,177
Short-Term Loan Payable			1,422,947				-
Total Current Liabilities			3,756,258				2,680,185
Total Liabilities		$	3,756,258			$	2,680,185

STOCKHOLDERS' EQUITY
Common Stock Class A (500,000,000 shares authorized, 177,435,953 and 177,435,953 issued and outstanding, par value US $0.001) at June 30, 2012 and December 31, 2011.		$	177,436			$	177,436
Preferred Stock (50,000,000 shares authorized , 0 issued and outstanding)			-				-
Additional Paid in Capital			1,736,497				1,728,539
Retained Earnings			11,270,206				9,120,832
Accumulated Other Comprehensive Income			608,012				661,313
Total Stockholders’ Equity			13,792,150				11,688,120
Total Liabilities & Stockholders’ Equity		$	17,548,408			$	14,368,305

 

See Accompanying Notes to the Financial Statements and Accountant’s Report

 

 

China Health Resource, Inc. and Subsidiaries

Unaudited Consolidated Statement of Operations

 

 

		For the three months ended								For the six months ended
		June 30, 2012				June 30, 2011				June 30 2012				June 30, 2011
REVENUES
Sales		$	6,305,200			$	8,034,698			$	15,260,561			$	12,413,009
Cost of Sales			4,891,526				5,574,025				11,863,616				8,456,203
Gross Profit			1,413,674				2,460,673				3,396,945				3,956,806
Operating Expenses
Selling, General and Administrative Expense			293,054				173,259				492,859				453,931
Interest Expense			7,495				9,537				29,743				18,865
Total Operating Expenses			300,549				182,796				522,602				472,796
Operating Income			1,113,125				2,277,877				2,874,343				3,484,010
OTHER INCOME / (EXPENSES)
Other Expense			-				(10	)			(1	)			(10	)
Total Other Income/(Expense)			-				(10	)			(1	)			(10	)
Net Income (Loss) Before Taxes			1,113,124				2,277,867				2,874,341				3,484,000
Income Tax Expense			280,281				573,916				724,968				920,442
Net Income (Loss)			832,843				1,703,951				2,149,373				2,563,558
Other Comprehensive Income (Loss)
Foreign Currency Translation Gain (Loss)			(88,483	)			88,237				(72,495	)			140,093
Comprehensive Income (Loss)		$	744,631			$	1,792,188			$	2,076,879			$	2,703,651
Weighted Average Common Shares Outstanding
Basic			177,435,953				168,769,286				177,435,953				168,769,286
Fully diluted			177,453,953				168,769,286				177,453,953				168,769,286
Net Gain Per Common Share
Basic		$	0			$	0.01			$	0.01			$	0.02
Fully diluted		$	0			$	0.01			$	0.01			$	0.02

 

 

See Accompanying Notes to the Financial Statements and Accountant’s Report

 

 

China Health Resource, Inc. and Subsidiaries

Unaudited Consolidated Statement of Cash Flows

 

		For the six months ended
		June 30, 2012				June 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	2,149,373			$	2,563,558
Adjusted to reconcile net income to net cash used in operating activities
Depreciation			28,839				22,849
Stock-based compensation			7,958				15,916
Accounts Receivable			393,776				(398,390	)
Employee Advance and Other Receivable			(979,028	)			(38,209	)
Prepayment for land usage			(876,336	)			-
Inventory			(1,124,770	)			(2,685,329	)
Accounts Payable and Accrued Liabilities			53,225				182,683
Other Payable			(34,718	)			41,791
Others			5,153				4,967
Tax Payable			846,046				579,620
Net Cash Provided by (used in) Operating Activities			469,488				289,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment			-				(519	)
Net Cash Provided by (used in) Investing Activities			-				(519	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed on short-term Loan Payable			1,427,009				-
Payment From short-term Notes payment			(1,205,029	)
Net Cash Provided by Financing Activities			221,979				-
Foreign Currency Translation			(2,879	)			5,272
Net Increase (Decrease)in Cash and Equivalents			688,588				294,209
CASH AND CASH EQUIVALENTS:
Beginning of period			241,755				90,306
End of period		$	930,343			$	384,515

 

See Accompanying Notes to the Financial Statements and Accountant’s Report

 

 

 

China Health Resource, Inc. and Subsidiaries

Unaudited Consolidated Statement of Equity (Deficit)

For the six month ended June 30, 2012

 

 

																	Accumulated Other Comprehensive Income	Total
	Common Stock							Preferred Stock				Additional Paid-in Capital			Retained Earnings (Deficit)
	Class A Shares		par value 0.001	Class B Shares		par value 0.01		Shares		Amount
Balance at January 1, 2011	159,935,953		$ 159,936	-		-		-		-			$ 1,274,144		$ 2,149,372		$ 235,737	$ 3,819,189
Issuance for CEO's appointment and bonus																		-
Conversion of consulting service fee	10,000,000		10,000										70,000					80,000
Issuance for CEO's performance bonus payable	6,000,000		6,000										294,000					300,000
Share-based compensation (option expenses)													31,831					31,831
Shares issued to investment banking service	1,500,000		1,500										28,500					30,000
Contribution from shareholder's loan imputed interest													30,063					30,063
Net Income (Loss) for the period															6,971,460			6,971,460
Other comprehensive income																	425,576	425,576
Balance at December 31, 2011	177,435,953		$ 177,436	-		-		-		-			$ 1,728,539		$ 9,120,832		$ 661,313	$ 11,688,119
Balance at January 1, 2012	177,435,953		$ 177,436	-		-		-		-			$ 1,728,539		$ 9,120,832		$ 661,313	$ 11,688,119
Share-based compensation (option expenses)													7,958					7,958
Net Income(Loss) for the period															2,149,373			2,149,373
Other comprehensive income																	(53,301)	(53,301)
Balance at June 30, 2012	177,435,953		$ 177,436	-		-		-		-			$ 1,736,497		$ 11,270,205		$ 608,012	$ 13,792,150

See Accompanying Notes to the Financial Statements and Accountant’s Report

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

1.

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.

 

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.

 

In 2011, Suining Yinfa DAR Industrial Co, Ltd. had invested 95,223 USD (600,000 RMB) to establish an agricultural planting business entity called Suining Yinfa DAR Planting Co, Ltd. This Yinfa DAR Planting Company is in process of obtaining business approval and certificate from different government departments, and no business activity has occurred.

 

CHRI and its wholly owned subsidiaries, Suining Yinfa DAR Industrial Co, Ltd. and Suining Yinfa DAR Planting Co, Ltd, are hereafter referred to as (the “Company”)

 

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)

Basis of Presentation

 

These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

 

(b)

Basis of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions within the Company and subsidiary have been eliminated upon consolidation.

 

(c)

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.

 

(d)

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 return.

 

(e)

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.

 

(f)

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.

 

(g)

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.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

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.

 

(h)

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.

(i)

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.

 

(j)

Advances to Suppliers

 

Advances to suppliers represent the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.

 

(k)

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.

 

(l)

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

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

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.

 

(m)

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.

 

(n)

Earnings (Loss) Per Common Share

 

Basic earnings (loss) per share are computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period.  

 

(o)

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.

 

(p)

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.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

(q)

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.

 

(r)

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.

 

(s)

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.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

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.

 

In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required.  Otherwise, no further testing is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.   We do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.

 

In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such; we do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.

 

3.

Supplemental Cash Flow Information

 

Supplemental disclosures of cash flow information for the period ended June 30, 2012 and 2011 are summarized as follows:

 

Cash paid during the six-month period ended June 30, 2012 and 2011 for interest and income taxes:

 

		June 30, 2012				June 30, 2011
Income Taxes		$	724,968			$	920,442
Interest		$	29,743			$	18,865

 

 

4.

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 June 30, 2012 and December 31, 2011 consist of the following:

 

		June 30, 2012				December 31 2011
Accounts receivable, gross		$	4,973,360			$	5,386,455
Less: allowance for doubtful accounts			—				—
Account receivable, net		$	4,973,360			$	5,386,455

 

All Accounts receivables are aging within 30 days. No provision of bad debt was accrued as of year-end.

 

5.

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 June 30, 2012 and December 31, 2011 are $1,008,346 and $32,231, respectively.

 

6.

PREPAYMENT FOR LAND USAGE

 

In November 2011, the company entered land usage agreement with 12 local village unions for future raw material DAR production. Prepayment for land usage as of June 30, 2012 and December 31, 2011 consist of the following:

 

		June 30, 2012				December 31, 2011
DAR production villages		$	3,506,775			$	3,520,131
Total		$	3,506,775			$	3,520,131

 

7.

DEFERRED INVENTORY COSTS

 

The deferred inventory costs represented prepayment to suppliers for future inventory delivery. As of June 30, 2012 and December 31, 2011, the balances of deferred inventory costs are $3,942,113 and $3,079,930 respectively. These costs will be transferred to inventories at the time of inventory delivery.

 

8.

INVENTORY

 

Inventories as of June 30, 2012 and December 31, 2011 consist of the following:

 

		June 30, 2012				December 31, 2011
Raw Materials		$	2,393,181			$	1,276,462
Low Value Consumables			—				—
Finished Goods		$	2,393,181			$	1,276,462

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

As of June 30, 2012 and December 31, 2011, 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 period 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 2011, 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.

 

9.	PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net as of June 30, 2012 and December 31, 2011 consists of the following:

 

		June 30, 2012				December 31, 2011
Property, Plant and Equipment		$	1,034,767			$	1,043,867
Less: accumulated depreciation			(240,477	)			(212,526	)
Property, Plant and Equipment, net		$	794,291			$	831,341

 

10.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities as of June 30, 2012 and December 31, 2011 consist of the following:

 

		June 30, 2012				December 31, 2011
Accounts payable		$	451,034			$	824,824
Accrued liabilities			452,974				50,256
Total accounts payable and accrued liabilities		$	904,008			$	875,080

 

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

 

11.

OTHER PAYABLE

 

As of June 30, 2012 and December 31, 2011,other payable consist of the following:

 

		June 30, 2012				December 31, 2011
Labor Union Fee		$	9,217			$	7,251
Pension Fund			66,681				51,699
Social Insurance			88,436				139,763
Risk Fund			158				159
Other			1,396				2,399
Total		$	165,888			$	201,271

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

12.

NOTES PAYABLE – CURRENT

 

As of June 30, 2012 and December 31, 2011, notes payable consist of the following:

 

		June 30, 2012				December 31, 2011
Secured bank loan to an unrelated party. Bearing 6.475% interest Principal payments due 07/12/2012		$	—			$	476,122
Secured bank loan to an unrelated party. Bearing 6.875% interest Principal payments due 10/12/2012			—				253,932
Non-secured note payable to a related party, bearing no interest Principal payments due 12/28/2012			—				476,123
Short term loan (see Note 13)			1,422,947
Total		$	1,422,947			$	1,206,177

 

 

13.

SHORT TERM LOAN

 

As of June 30, 2012 and December 31, 2011, short term loan consist of the following:

 

Name		Due Date		Interest Rate				June 30, 2012				December 31, 2011
Zhang Rende		07/15/2012			36%			$	316,211			$	—
Wang Lijun		07/13/2012			24%				316,210				—
Zeng Changhua		08/12/2012			42%				790,526				—
Total		00/00/2012			00%			$	1,422,947			$	—

 

1)

The loan provided by Zhang Rende was guaranteed by the Suining Yinfa Construction Co., Ltd. The borrower collateralized the loan with the Company’s subsidiary Suining Yinfa DAR Industry Co. Ltd’s intangible assets and net assets.

 

2)

The loan provided by Wang Lijun was guaranteed by the CEO Mr. Jiayin’s Wang’s and Mrs. Sulan Deng’s household assets.

 

3)

The loan provided by Zeng Changhua was guaranteed by the Suining Yinfa Construction Co., Ltd. The borrower collateralized the loan with the Company’s subsidiary Suining Yinfa DAR Industry Co. Ltd’s intangible assets and net assets.

 

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 June 30, 2012.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

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 six months ended June 30, 2012 and June 30, 2011.

 

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

 

		June 30, 2012				June 30, 2011
Loss subject to U.S. operation		$	(25,457	)		$	(197,798	)
Income (loss) subject to PRC operation			2,899,799				3,681,798
Income (loss) before income taxes		$	2,874,341			$	3,484,000

 

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 six-month period ended June 30, 2012, the U.S. operation had $25,457 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.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(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 six-month period ended June 30, 2012 and June 30, 2011 is as follows:

 

		June 30, 2012				June 30, 2011
Income (loss) before income taxes		$	2,899,799			$	3,681,799
Statutory income tax rate			25%				25%
			724,950				920,450
Expenses not deductible for tax purposes:
- Provisions			18				(8	)
Income tax expense		$	724,968			$	920,442

 

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

 

		June 30, 2012				June 30, 2011
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 the six-month period ended June 30, 2012 and June 30, 2011.

 

The charge for taxation is based on the results for the period 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.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

16.

MAJOR CUSTOMER/VENDOR AND CONCENTRATION

 

(a)

Sale breakdown

 

For the six-month period ended June 30, 2012, 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 six-months ended June 30, 2012, 38% of the total revenue is contributed by DAR, 36% of the total revenue is contributed by other TCM, and 26% of total revenue is contributed by Yishen 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.	Stockholders’ equity

 

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.

 

China Health Resource, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2012 and 2011

(Expressed in USD)

 

 

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.

  

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.

 

For the year ended December 31, 2010, total 17,647,059 shares of Common Stock in amount of $138,000 was issued and recognized as share-based compensation. $7,958 was recognized as option expenses for vested option as of December 31, 2010. The company has also accrued $140,000 expenses relating to CEO’s performance bonus as of December 31, 2010.

 

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.

 

On October 30, 2011, the Company entered an investment banking service agreement with a third party and issued 1,500,000 shares of comment stock for the service rendered. These common stocks were valued and recorded at market price ($0.02 per share) at the issuance.

 

For the year ended December 31, 2011, the company recognized $31,831 as option expenses for vested option (see above (c)).

 

For the year ended December 31, 2011, the company recognized $30,063 imputed interest expense from non-interest bearing shareholder’s loan as additional paid-in capital from shareholder.

 

 

18.

COMMITMENT AND CONTINGENCIES

 

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

 

The Company rented land (note 6) and warehouse space under a non-cancelable operating lease agreement.  Based on the current rental lease agreement, the future five years minimum rental payments required as of December 31 are as follows:

 

Year ended December 31	Lease payment
2012	880,033
2013	1,765,346
2014	1,770,642
2015	1,775,954
2016	1,781,282
Total	7,973,257

 

For the six months period ended June 30, 2012 and 2011, rental expense was $4,202 and $Nil.

 

 

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 June 30, 2012 were US $4,891,526, representing a decrease of 12% over the cost of sales of US $5,574,025 for the three months ended June 30, 2011. The increased costs of sales and comparatively lower gross profit rate for the three months ended June 30, 2012 were principally due to the decline in selling price.

 

 

Gross profit for the three months ended June 30, 2012 decreased by approximately 43% to US $1,413,674 from US $2,460,673 for the three months ended June 30, 2011.Gross profit margin for the three months ended June 30, 2012 was 22% compared to 31% for the three months ended June 30, 2011. This was primarily due to the changes in the price of raw materials.

 

Operating Expenses

 

The operating expenses for the three months ended June 30, 2012 were US $300,549, representing an increase of 69% over operating expenses of US $182,796 for the three months ended June 30, 2011. The interest costs for the three months ended June 30, 2012 were US $7,495, representing a decrease of 21% over interest costs of US $9,537 for the three months ended June 30, 2011. The operating expenses included selling, general and administrative (“SG&A”) expense and interest cost. SG&A expenses increased overall to US $293,054 for the three months ended June 30, 2012 compared to US $173,259 for the three months ended June 30, 2011. The increase of SG&A expenses for the recent quarter is primarily due to the increased competition in the market particularly in the non-branded products category; making operations relatively more expensive.

 

Other Comprehensive Income/Expense

 

For the three months ended June 30, 2012, we had a total Other Comprehensive Income of US $744,361, compared to other comprehensive income of US $1,792,188 for the three months ended June 30, 2011. This is primarily related to foreign currency translation between RMB and USD.

 

Impact of Inflation

 

We believe that inflation has had no significant effect on operations for the three months ended March 31, 2012. In the second quarter of 2012, the TCM market inflation was relatively in a stable condition.

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 June 30, 2012 were US $280,281, a decrease of 51% compare to income tax of US $573,916 for the three months ended June 30, 2011. For the three months ended June 30, 2012, we accrued income taxes of US $886,957. For the three months ended June 30, 2011, we accrued income taxes of US $582,325.

 

Net Income

 

We had net income for the three months ended June 30, 2012 of US $832,843, a decrease of 51% compared to a net income for the three months ended June 30, 2011 of US $1,703,951. The decrease in our net income for the three months ended June 30, 2012 is attributable principally to an increased cost of operation, cost of good combined with the reduction in sales especially in the non-branded TCM raw products. However the company believes through advertisement, an increase in awareness, along with focus on branded product net income can be increased.

 

Liquidity and Capital Resources

 

At June 30, 2012, we had current assets of $16,754,118, current liabilities of $3,756,258, working capital of $12,997,860 and retained earnings of $11,270,206. For the six months ending June 30, 2012, we had net cash flows provided by operating activities of $469,489, and net cash flows provided by financing activities of $221,979. We had $930,343 cash on hand as of June 30, 2012.

 

 

 

Off-Balance Sheet Arrangements

 

For the three months ended June 30, 2012, 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 first quarter of 2012, 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.

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.