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EX-31.2 - EXHIBIT 31.2 - China Health Industries Holdings, Inc.v360040_ex31-2.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2013

 

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

 

       For the transition period from ____________ to ____________

 

Commission File Number: 000-51060

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 86-0827216
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

 

168 Binbei Street, Songbei District

Harbin City, Heilongjiang Province

People’s Republic of China 150028

(Address of principal executive offices) (Zip Code)

 

86-451-88100688

(Issuer's telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

 

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 o

 

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

 

Large accelerated filer     o Accelerated filer             o

Non-accelerated filer o

( Do not check if a smaller reporting company )

Smaller reporting company    x

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 7, 2013, there are 62,239,737 shares of common stock $0.0001 par value, issued and outstanding.

 

 
 

 

TABLE OF CONTENTS

 

PART I         FINANCIAL INFORMATION   Page
         
Item 1.   Financial Statements (Unaudited)   4
         
    Consolidated Condensed Balance Sheets    
    As of September 30, 2013 and June 30, 2013 (Unaudited)   4
         
    Consolidated Condensed Statements of Income and Comprehensive Income   5
    For the Three Months Ended September 30, 2013 and 2012 (Unaudited)    
         
    Consolidated Condensed Statements of Cash Flows   6
    For the Three Months Ended September 30, 2013 and 2012 (Unaudited)    
         
    Notes to Consolidated Condensed Financial Statements   7
    As of September 30, 2013 (Unaudited)    
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   21
         
Item 4.   Controls and Procedures   21
         
PART II        OTHER INFORMATION   23
         
Item 1.   Legal Proceedings.   23
         
Item 1A.   Risk Factors.   23
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.   23
         
Item 3.   Default Upon Senior Securities.   23
         
Item 4.   Mine Safety Disclosures.   23
         
Item 5.   Other Information.   23
         
Item 6.   Exhibits.   23
         
Signatures   24
     
Exhibits/Certifications    

 

 
 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

  

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

   

   September 30, 2013   June 30, 2013 
   (Unaudited)   (Audited) 
ASSETS        
         
Current assets          
Cash and cash equivalents  $28,612,081   $28,839,609 
Accounts receivable   4,699    4,686 
Inventory   135,762    161,636 
Other receivables   25,284    24,987 
Deposit for an acquisition   16,339,869    16,293,544 
Prepaid expenses   65,311    221,876 
Total current assets   45,183,006    45,546,338 
           
Property & equipment - net   3,228,981    1,108,027 
Intangible assets - net   5,474,411    5,627,608 
Construction-in-progress   1,961    2,156,402 
Total assets  $53,888,359   $54,438,375 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable and accrued expenses  $91,351   $123,484 
Advances from customers   29,412    - 
Related party debt   431,889    431,802 
Wages payable   154,089    191,702 
Tax payable   238,744    245,481 
Total current liabilities   945,485    992,469 
           
Stockholders' equity          
           
Common stock, ($0.0001 par value, 300,000,000 shares authorized, 62,239,737 issued and outstanding as of September 30, 2013 and June 30, 2013, respectively)   6,224    6,224 
Additional paid-in capital   1,462,227    1,462,227 
Accumulated other comprehensive income   4,654,306    4,501,780 
Statutory reserve   38,679    38,679 
Retained earnings   46,781,438    47,436,996 
Total stockholders' equity   52,942,874    53,445,906 
           
Total liabilities and stockholders' equity  $53,888,359   $54,438,375 

  

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

 

4
 

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

  

For the Three Months Ended

September 30,

 
   2013   2012 
         
REVENUE  $1,385,784   $1,453,308 
           
COST OF GOODS SOLD   1,326,688    1,116,648 
           
GROSS PROFIT   59,096    336,660 
           
OPERATING EXPENSES          
Selling, general & administrative expenses   407,088    354,065 
Depreciation and amortization expenses   199,577    16,000 
Research & development   157,060    118,081 
Total operating expenses   763,725    488,146 
           
LOSS FROM OPERATIONS   (704,629)   (151,486)
           
OTHER INCOME          
Interest income   39,276    61,480 
Other income   9,795    - 
Total other income   49,071    61,480 
           
LOSS BEFORE INCOME TAXES   (655,558)   (90,006)
           
Provision for income taxes   -    7,743 
           
NET LOSS  $(655,558)  $(97,749)
           
OTHER COMPREHENSIVE INCOME          
Foreign currency translation gain   152,526    569,347 
           
Total other comprehensive income (expense)  $(503,032)  $471,598 
           
Loss per share:          
Basic & diluted loss per share  $(0.0105)  $(0.0016)
           
Weighted average shares outstanding:          
Basic & diluted weighted average shares outstanding   62,239,737    62,239,737 

 

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

 

5
 

  

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

For the Three Months Ended

September 30,

 
   2013   2012 
         
Cash Flows from Operating Activities        
Net loss  $(655,558)  $(97,749)
Adjustments to reconcile net loss to net cash          
provided by operating activities:          
Depreciation and amortization   211,781    27,578 
(Increase) / decrease in operating assets:          
Accounts receivables and other receivables   (226)   991,520 
Inventory   26,311    7,474 
Prepaid expenses and long-term deposit   157,060    119,581 
Increase/(decrease) in operating liabilities:          
Accounts payable and other payables   (78,003)   (194,377)
Advance from customers   29,386    - 
           
Net cash provided by (used in) operating activities   (309,249)   854,027 
           
Cash Flows from Financing Activities          
Repayment of related parties loan   -    (4,326)
           
Net cash provided by (used in) financing activities   -    (4,326)
           
Effect of exchange rate changes on cash and cash equivalents   81,721    491,943 
           
Net increase (decrease) in cash and cash equivalents   (227,528)   1,341,644 
           
Cash and cash equivalents, beginning balance   28,839,609    44,504,531 
           
Cash and cash equivalents, ending balance  $28,612,081   $45,846,175 
           
Supplemental cash flow information          
           
Cash paid for income taxes  $-   $7,743 
Cash paid for interest expense  $-   $- 
           
Non-cash activities:          
Reclassification from construction in progress to property and equipment  $2,158,711   $- 

 

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

 

6
 

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES

 

China Health Industries Holdings, Inc. (“China Health US”) was incorporated in the State of Arizona on July 11, 1996 and was the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”), a Delaware corporation, and changed its name to Universal Fog, Inc. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.

 

China Health Industries Holdings Limited (“China Health HK”) was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability company. China Health HK was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship as defined by FASB ACS topic 915 (“Development Stage Entities”).

 

Harbin Humankind Biology Technology Co., Limited (“Humankind”) was incorporated in Harbin City, Heilongjiang Province, the People’s Republic of China (the “PRC”) on December 14, 2003, as a limited liability company under the Company Law of the PRC. Humankind is engaged in the manufacture and sale of health products and “green” (or organic) food, and the detection of disease susceptibility or pre-disposition through genetic studies.

 

On August 20, 2007, the sole shareholder of China Health HK entered into a share purchase agreement (the “Share Purchase Agreement”) with the owners of Humankind. Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the ownership in Humankind for a cash consideration of $60,408 (the “Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind became a wholly-owned subsidiary of China Health HK. The Share Purchase was accounted for as a “reverse merger”: since the owner of Humankind owned a majority of the outstanding shares of China Health HK’s common stock immediately following the execution of the Share Purchase Agreement, it was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that have been reflected in the financial statements for periods prior to the Share Purchase are those of Humankind and have been recorded at the historical cost basis. After completion of the Share Purchase, China Health HK’s consolidated financial statements include the assets and liabilities of both China Health HK and Humankind, the historical operations of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the Share Purchase.

 

On October 14, 2008, Humankind set up a 99% owned subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”), with its primary business being manufacturing and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of Huimeijia. Huimeijia is consolidated in the consolidated financial statements of China Health HK.

 

On December 31, 2008, China Health HK entered into a reverse merger with Universal Fog, Inc., a U.S. publicly traded shell company (the “Transaction”). China Health HK is the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US. After the Transaction and a 20:1 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737 total outstanding shares of common stock of China Health US. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of China Health US, or approximately 53.03% of the total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries Holdings, Inc. on February 19, 2009.

 

China Health US, China Health HK, Humankind, and Huimeijia are collectively referred herein to as the “Company.”

 

7
 

 

Our present corporate structure is as follows:

 

 

 

BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Company without audit pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the years ended June 30, 2013 and 2012. These condensed consolidated financial statements include all adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. The results of operations for the three months ended September 30, 2013 may not be indicative of results that may be expected for the year ending June 30, 2014.

 

8
 

 

Translation of Foreign Currencies

 

Humankind and Huimeijia maintain their books and accounting records in PRC currency “Renminbi” (“RMB”), which has been determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the date of the transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains and losses resulting from these transactions are included in operations.

 

Humankind and Huimeijia’s financial statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of China Health are translated at the prevailing exchange rate at each reporting period end date. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from the translation of these financial statements are reflected as accumulated other comprehensive income in shareholders’ equity.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. China Health bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. The more significant estimates and assumptions by management include, among others; useful lives and residual value of long-lived assets, valuation of inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, intangible assets and deferred taxes. While the Company believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.

 

Statement of Cash Flows

 

In accordance with Statement FASB ASC Topic 230, Statement of Cash Flows, cash flow from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase. 

 

The company maintains cash and cash equivalents at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC). As of September 30, 2013, the Company’s uninsured bank balance which was mainly maintained at financial institutions located in the PRC, totaled $28,610,733 The Company’s insured bank balance, which was maintained at US financial institutions, totaled $0.

 

Revenue Recognition

 

The Company recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations. The Company records revenue net of sales taxes. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. As of September 30, 2013, the Company’s provision for such returns amounted to $6,935.

 

Concentrations of Credit Risk

 

All of the Company’s manufacturing is located in the PRC. There can be no assurance that the Company will be able to successfully continue to manufacture its products and 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 is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, prices of raw materials, competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade in the PRC, the Company is 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, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.

 

9
 

 

The Company operates in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between U.S. dollars and the Chinese currency RMB. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.

 

Earnings Per Share

 

Basic earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. For the three months ended September 30, 2013 and 2012, the Company had no potential dilutive common stock equivalents outstanding.

 

Potential common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price of the common stock during the period.

 

FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. 

 

Comprehensive Income

 

The Company reports comprehensive income in accordance with FASB ASC Topic 220 Comprehensive Income, which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.

 

Total comprehensive income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation. Total comprehensive income was a loss of $503,032 and a gain of $471,598 for the three months ended September 30, 2013 and 2012, respectively.

 

While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily the cumulative balance related to adjustments for currency translation and increased overall equity by $ 4,654,306 and $4,501,780 as of September 30, 2013 and June 30, 2013, respectively.

 

Recent Accounting Pronouncements

 

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.

 

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.

 

10
 

 

In March 2013, the FASB issued guidance on a parent company’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent company release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for the Company beginning July 1, 2014. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.

 

Note 2 – ACCOUNTS RECEIVABLE

 

The Company’s accounts receivable totaled to $4,699 and $4,686 as of September 30, 2013 and June 30, 2013, respectively. Most of this represents the Company’s sale of its products to its sales agents, Company offers these agents sixty (60) to ninety (90) day terms for payment in order to increase the Company’s sales. Agents normally settle most accounts receivable within one (1) month.

 

Note 3 - INVENTORIES

 

Inventory consists of following:

 

   September 30, 2013   June 30, 2013 
Finished Goods  $30,567   $41,209 
Work-in-Progress   33,262    43,050 
Raw Materials   54,036    59,960 
Supplies and Packing Materials   17,897    17,417 
Total  $135,762   $161,636 

 

Note 4 –DEPOSITS FOR AN ACQUISITION

 

Deposits for an acquisition consist of the following:

 

   September 30, 2013   June 30, 2013 
Related Party-Liyuan Sun  $10,073,529   $10,044,969 
Related Party-Wenbin Zhang   4,632,353    4,619,220 
Third Party- Shouhui Tian   1,633,987    1,629,355 
Total  $16,339,869   $16,293,544 

 

On April 10, 2013, Humankind entered into an agreement with each of Liyuan Sun and Wenbin Zhang who are the shareholders of Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”) to purchase all of the equity interests of HLJ Huimeijia (together with the addendum to the agreement dated June 18, 2013, the “HLJ Share Transfer Agreements”) for a total purchase price of $16,339,869 (RMB100,000,000). Ninety percent (90%) of the payment was prepaid to Liyuan Sun and Wenbin Zhang as of September 30, 2013, who are siblings of Mr. Xin Sun, the CEO of the Company. The remaining ten percent (10%) of the payment was prepaid to a third party. The residual payment will be paid to Liyuan Sun and Wenbin Zhang after completion of the alternation procedures for business registration, which were completed on November 11, 2013.

 

Note 5 – CONSTRUCTION IN PROGRESS

 

The following is a summary of construction-in-progress:

 

   September 30, 2013   June 30, 2013 
Warehouse  $-   $686,285 
Office Building   1,961    655,440 
Interior Decoration   -    814,677 
Total  $1,961   $2,156,402 

 

On March 10, 2011, Humankind entered into an agreement with a contractor to construct a warehouse for the Company. As of September 30, 2013, the project was completed, the warehouse was ready for use, and the cost of construction-in-progress had been transferred to property and equipment. The estimated total cost of construction was $0 and $684,330 (RMB 4,200,000) as of September 30, 2013 and June 30, 2013, respectively.

 

11
 

 

On August 15, 2011, Humankind entered into an agreement with a contractor to construct an office building for the Company. As of September 30, 2013, the project was completed, the office building was ready for use, and the cost of construction-in-progress had been transferred to property and equipment. The estimated total cost of construction was $0 and $655,440 (RMB 4,022,700) as of September 30, 2013 and June 30, 2013, respectively.

   

On December 8, 2012, Humankind entered into an agreement with a contractor for the interior decoration of the office building and the warehouse. As of September 30, 2012, the project was completed and the cost of construction-in-progress had been transferred to property and equipment. The estimated total cost of construction was $0 and $814,677 (RMB 5,000,000) as of September 30, 2013 and June 30, 2013, respectively.

 

Huimeijia entered into an agreement with a contractor to construct plant and production lines for the Company, As of September 30, 2013, the construction had been completed and the project was waiting for final inspection and examination and government approval. The estimated total cost of construction was $1,961 (RMB 12,000) and $1,955 (RMB 12,000) as of September 30, 2013 and June 30, 2013, respectively.

 

Note 6 - PROPERTY AND EQUIPMENT

 

The following is a summary of property and equipment:

 

   September 30, 2013   June 30, 2013 
Building and Warehouses  $3,294,883   $1,131,095 
Machinery and Equipment   200,887    200,318 
Office Equipment   49,052    48,913 
Vehicles   166,890    166,417 
Other   24,510    24,440 
Less: Accumulated Depreciation   (507,241)   (463,156)
Total  $3,228,981   $1,108,027 

 

Depreciation expense was $42,731 and $22,493 for the three months ended September 30, 2013 and 2012, respectively. Depreciation expense charged to operations was $30,527 and $10,915 for the three months ended September 30, 2013 and 2012, respectively. Depreciation expense charged to cost of goods sold was $12,204 and $11,578 for the three months ended September 30, 2013 and 2012, respectively.

 

Note 7 - INTANGIBLE ASSETS

The following is a summary of intangible assets:

 

   September 30, 2013   June 30, 2013 
Land Use Right  $1,035,618   $1,032,682 
Health Supplement Product Patents   4,901,961    4,888,064 
Less: Accumulated Amortization   (463,168)   (293,138)
Total  $5,474,411   $5,627,608 

 

Amortization expense charged to operations was $169,050 and $5,085 for the three months ended September 30, 2013 and 2012, respectively.

 

Note 8 - RELATED PARTY DEBT

 

Related party debt represents loans from majority owner, Mr. Xin Sun, a PRC citizen. These loans are unsecured and non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand. Cash flow classified as due to Mr. Sun is classified as cash flow from financing activities. The total borrowings from Mr. Sun were $431,889 and $431,802 as of September 30, 2013 and June 30, 2013, respectively.

 

Note 9 - COMMITMENTS AND CONTINGENCIES

 

The Company’s assets are located in the PRC and revenues are derived from operations in the PRC.

 

In terms of industry regulations and policies, the economy of the PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the Chinese government. For example, all land is state owned and leased to business entities or individuals through the government’s granting of Land Use Rights. The granting process is typically based on government policies at the time of granting and can be lengthy and complex. This process may adversely affect the Company’s future manufacturing expansions. The Chinese government also exercises significant control over the PRC’s economic growth through the allocation of resources and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures.

 

12
 

 

The Company faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks, instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company’s performance.

 

Rental expense was approximately $0 and $5,510 for the three months ended September 30, 2013 and 2012, respectively. Since the Company terminated its rental agreement on January 9, 2013, it had no rental commitment for the three months ended September 30, 2013.

 

Note 10 – MAJOR SUPPLIERS AND CUSTOMERS

 

The Company had five suppliers in the three months ended September 30, 2013, of which one accounted for 85% of the Company’s purchases for the three months ended September 30, 2013.

 

The Company had four customers that in the aggregate accounted for 50% of the Company’s total sales for the three months ended September 30, 2013, with each customer accounting for 14%, 13%, 12% and 11%, respectively.

 

The Company had seven suppliers in the three months ended September 30, 2012, of which one accounted for 80% of the Company’s purchases for the three months ended September 30, 2012.

 

The Company had five customers that in the aggregate accounted for 60% of the Company’s total sales for the three months ended September 30, 2012, with each customer accounting for 13%, 12%, 12%, 12% and 11%, respectively.

 

Note 11 – SUBSEQUENT EVENTS

 

In accordance with ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before consolidated financial statements are issued, the Company has evaluated events and transactions for potential recognition or disclosure through the reporting date, the date the consolidated financial statements were available to be issued and disclose the following:

 

On November 11, 2013, Humankind completed the alternation procedures for business registration with the local State Administration of Industry and Commence in Hailin City, Heilongjiang Province.  As a result, once the remainder of the acquisition price is released to the two individual sellers, which is anticipated to take place by November 20, 2013, within seven business days from November 11, 2013, the acquisition of one hundred percent (100%) of the equity interests of HLJ Huimeijia by Humankind, as stated under Note 4 hereto, will be closed.  The financial statements of HLJ Huimeijia will be consolidated into the financial statements of the Company from the fourth quarter of the calendar year of 2013.

 

13
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD LOOKING STATEMENTS

 

We make certain forward-looking statements in this Quarterly Report on Form 10-Q (this “Report”). Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

 

The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:

 

  ¨ the effect of political, economic, and market conditions and geopolitical events;

 

  ¨ legislative and regulatory changes that affect our business;

 

  ¨ the availability of funds and working capital;

 

  ¨ the actions and initiatives of current and potential competitors;

 

  ¨ investor sentiment; and

 

  ¨ our reputation.

 

We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.

  

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.

 

Except as otherwise indicated by the context, references in this Report to “we,” “us,” “our,” “the Registrant,” “our Company,” or “the Company” are to China Health Industries Holdings, Inc., a Delaware corporation, China Health Industries Holdings Limited, a corporation incorporated under the laws of Hong Kong, its wholly owned subsidiary in China, Harbin Humankind Biology Technology Co. Limited and indirect 99% owned subsidiary, Harbin Huimeijia Medicine Company. Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are to Renminbi Yuan of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

 

Business Overview

 

Our principal business operations are conducted through our wholly owned subsidiary, Humankind.

 

14
 

 

Humankind was incorporated in the PRC on December 14, 2003 and completed its Good Manufacturing Practice (“GMP”) certification on April 24, 2007. It is engaged in the manufacture and sale of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies.

 

Huimeijia, was incorporated in the PRC on October 14, 2008 and completed its GMP certification on July 23, 2009. It is anticipated that Huimeijia will be producing and selling our drugs. As of the date of this Report, Huimeijia has not started any production or sales.

 

Our business is conducted through our sales agents and sales personnel. We sell our products to our own sales personnel and our sales agents, who in turn sell our products to our end customers. We have sales agents located in Jiangsu, Zhejiang, Gansu, Shanghai, Anhui and Beijing, where most of our revenues is generated. Our sales through agents in Zhejiang, Beijing, Jiangsu, Shanghai, Gansu and Anhui provinces accounted for 14%, 13%, 12%, 12%, 10% and 10% of our total sales, respectively, for the three months ended September 30, 2013. Although we do not currently sell our products online, we expect to do so in the future. 

 

Through Humankind, we are licensed to manufacture and sell two health supplement products, which have a State Good Health Issue Number as provided below. Humankind distributes and sells seven kinds of health food and one kind of cosmetics product. In addition, the Company purchased 12 health supplement products on January 18, 2013 from a third-party company based in Guangdong province.

 

Currently, we are only licensed to sell our products in the PRC.

  

(i) Health Supplements

 

Our “QunLe” brand Sailuozhi soft capsule, which is made from frog oil, soybean isoflavone, procyanidine (made from grape seeds) and vitamin C, is an effective product for freckle removal and supplementing the water content of the skin. The certification number issued by the China State Food and Drug Administration (“CFDA”) on August 29, 2007 was GuoShiJianZi20070356. QunLe is a patented product in the PRC.

 

Another health product we have is the “Kindlink” brand propolis and black ant capsule, which is made from propolis, black ant, acanthopanax and astragalus root. This product is consumed to boost one’s immunity. The certification number issued by the CFDA on August 20, 2004 for the license to manufacture the product was GuoShiJianZi G20040906.

 

Pursuant to a technology transfer agreement dated January 18, 2013 (the “Technology Transfer Agreement”), we purchased twelve health products from Guangzhou Aoda Biology Beauty Healthy Technology Co., Ltd, a non-affiliated party. These twelve products, which the Company expects to sell in the market during the calendar year of 2014, are the following:

 

  - Dr. Xiao Brand Honeysuckle Pearl Capsule (Guo Shi Jian Zi G20100656), which is effective in acne removal,

  - Dr. Xiao Brand Multivitamin Tablet (Guo Shi Jian Zi G20080176), which is a multivitamin and mineral supplement,

  - Dr. Xiao Brand Zhengdian Capsule (Guo Shi Jian Zi 20070261), which is effective in relieving eyestrain,

  - Dr. Xiao Brand Shengui Capsule (Guo Shi Jian Zi G20080297), which is effective in increasing bone density,

  - Dr. Xiao Brand Multivitamin Tablet (Woman) (Guo Shi Jian Zi G20070338), which is an iron and multivitamin supplement,

  - Dr. Xiao Brand Shikong Soft Capsule (Guo Shi Jian Zi 20080096), which is effective in improving memory,

  - Dr. Xiao Brand Huangjingdanggui Tablet (Guo Shi Jian Zi G20080201), which is effective in improving nutritional anemia and chloasma,

  - Dr. Xiao Brand Xingxing Soft Capsule (Guo Shi Jian Zi G20080080), which is effective in improving memory,

  - Dr. Xiao Brand Vitamin A Fish Oil Soft Capsule (Guo Shi Jian Zi G20080406), which is effective in relieving eyestrain,

  - Dr. Xiao Brand Colon Cleanser Granules (Guo Shi Jian Zi G20060061), which is effective in relaxing bowels and promoting the discharge of lead,

  - Dr. Xiao Brand Jianli Soft Capsule (Guo Shi Jian Zi G20050710), which is effective in increasing immunity and relieving physical fatigue, and

  - LB Brand Xinpin Capsule (Guo Shi Jian Zi G20050770), which is effective in dispelling chloasma.

 

(ii) Health Food and Organic “Green” Food

 

Our health and organic “green” food products include (i) Sleeping Beauty Capsule, (ii) Virility Max Capsule, (iii) Ruddy Granule, (iv) Blood Cleanser Soft Capsule, (v) Colon Cleanser Capsule, and (vi) Energy Elemental Power.

 

(iii) Cosmetics

 

We are putting more effort into developing new products and increasing our customer base. As of September 30, 2013, we had only one cosmetics product named New Looks-28 Set.

 

15
 

 

Results of Operations

 

The following table summarizes the results of our operations for the three months ended September 30, 2013 and 2012, respectively:

 

   September 30,
2013
   September 30,
2012
   Variance   % 
Revenues  $1,385,784   $1,453,308   $(67,524)   -4.65%
Cost of goods sold  $1,326,688   $1,116,648   $210,040    18.81%
Gross Profit  $59,096   $336,660   $(277,564)     

 

Revenue

 

Total revenues decreased by $67,524, or 4.65% for the three months ended September 30, 2013 compared to the same period in 2012. The decrease in revenues was attributable to a decrease in product sales. According to the current PRC Health Food and Supplement Policy, all health products which have certifications issued by the local CFDA (CFDA at the level lower than national level, such as provincial level and city level) cannot renew their certification once it has expired. Only health products certified by the CFDA can renew their certifications and continue to be sold in the market. Currently, other than the twelve health supplement products we purchased in January 2013, Humankind has eight health products in our product portfolio, of which only Waterlilies Soft Capsule (Sailuozhi) and Propolis and Black Ant Capsule are certified by the CFDA. All other products were certified by the local CFDA, and their certifications had expired by May 2012. In order to reduce operation risk, the Company has decided to terminate its manufacture and sale of health products certified by the local CFDA.

 

Currently, only Propolis and Black Ant Capsule and Waterlilies Soft Capsule (Sailuozhi) are still sold in the market, reducing the number of our products for sale from four to two products for the three months ended September 30, 2013 compared to the same period in 2012. In addition, the “poison capsule” incidence caused by Jilin Xiuzheng Pharmaceuticals, Inc. in April 2012 raised concerns in consumers about consuming health foods made with capsule shells, soft capsule shells or gelatin (which is the main ingredient of capsule shell) in China. Most of our consumers prefer to buy product portfolios. The fact that we only had two products certified by the CFDA during the three months ended September 30, 2013 also resulted in fewer orders placed with us by customers. Nevertheless, the Company continues to focus on expanding its operations, developing new products and increasing its customer base.

As of September 30, 2013, the Company had 14 health supplement products, a cosmetics product named New Looks-28 Set in its product profile, and the two products referenced above in production and sale.

 

Our cost of sales increased $210,040 or 18.81% for the three months ended September 30, 2013 compared to the same period in 2012. This increase in the costs of sales was a direct result of the increase in sales volume between the respective periods.

 

Our gross margin decreased 18.90% from 23.17% for the three months ended September 30, 2012 to 4.26% for the three months ended September 30, 2013. This decrease was primarily attributable to the increased discounts in sales prices offered to the regional sales agents between the respective periods.

 

Sales by Product Line

 

The following table summarizes a break-down of our sales by major product line for the three months ended September 30, 2013 and 2012, respectively:

 

   September 30, 2013   September 30, 2012 
Product Category*  Quantity
(Unit)
   Sales
US$
   % of
Sales
   Quantity  
(Unit)
   Sales US$   % of
Sales
 
Virility Max Capsule   -    -    -    3,080    66,415    5%
Propolis and Black Ant Capsule   20,688    487,363    35%   11,985    295,500    20%
Waterlilies Soft Capsule(Sailuozhi)   18,858    898,421    65%   16,472    1,038,818    71%
Colon Cleanser Capsule   -    -    -    1,852    52,575    4%
Total       $1,385,784    100%       $1,453,308    100%

 

*All of the products are manufactured by the Company.

 

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Operating Expenses

 

The following table summarizes our operating expenses for the three months ended September 30, 2013 and 2012, respectively:

 

   September
30,2013
   September
30,2012
   Variance   % 
Operating Expenses                    
Selling, General and Administrative  $407,088   $354,065   $53,023    14.98%
Depreciation and Amortization   199,577    16,000    183,577    1147.36%
Research and Development   157,060    118,081    38,979    33.01%
Total Operating Expenses  $763,725   $488,146   $275,579    56.45%

 

Total operating expenses for the three months ended September 30, 2013 increased $275,579 or 56.45% compared to the corresponding period in 2012. The higher operating expenses were primarily attributable to the increase in depreciation and amortization in the amount of $183,577.

 

Interest Income and Interest Expense

 

Interest income was $39,276 for the three months ended September 30, 2013 as compared to $61,480 for the three months ended September 30, 2012. This decrease of $22,204 or 36.12% was primarily due to the decrease in interest income received from cash deposits in the bank.

 

Income Taxes

 

Income taxes decreased $7,743, or 100.00%, from $7,743 for the three months ended September 30, 2012 to $0 for the three months ended September 30, 2013. The Company had no income taxes because of a net loss in the amount of $655,558 for the three months ended September 30, 2013.

 

Net Income (Loss) and Earnings Per Share

 

Net loss was $655,558 for the three months ended September 30, 2013, compared to $97,749 for the three months ended September 30, 2012. The increase of $557,809 in net loss was primarily attributable to the increase in cost of goods sold and operating expenses in the amount of $553,143.

 

Loss per share was $0.0105 and $0.0016 for the three months ended September 30, 2013 and 2012 respectively. The decrease of $0.0090 was primarily attributable to the increase in net loss in the amount of $557,809.

 

Liquidity and Capital Resources

 

We believe our current working capital position, together with our expected future cash flows from operations, will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding in the future.

 

The following table summarizes our cash and cash equivalents position, our working capital, and our cash flow activity as of September 30, 2013 and 2012 and for each of the three months then ended:

 

   2013   2012 
As of September 30:          
Cash and cash equivalents  $28,612,081   $45,846,175 
Working capital  $44,237,521   $46,807,721 
Inventories  $135,762   $268,904 
           
For the Three Months Ended September 30:          
Cash provided by (used in):          
Operating activities  $(309,249)  $854,027 
Financing activities  $-   $(4,326)

 

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As of September 30, 2013, cash and cash equivalents were $28,612,081 as compared to $45,846,175 at September 30, 2012. The decrease in cash and cash equivalents was $17,234,094 or 37.59% at September 30, 2013. The decrease in cash and cash equivalents was primarily attributable to the Company’s deposit to an acquisition of $16,339,869 to Liyuan Sun and Wenbin Zhang, who are siblings of Mr. Xin Sun, the CEO of the Company, and a third party, Shouhui Tian to purchase all of the equity interests of HLJ Huimeijia on April 10, 2013.

 

Our working capital at September 30, 2013 was $44,237,521, compared to working capital of $46,807,721 at September 30, 2012. The decrease of $2,570,200 or 5.49% was primarily attributable to the decrease in account receivable, inventory, prepaid expenses and construction in progress in the amount of $2,336,993.

 

Cash flow used in operating activities was $309,249 for the three months ended September 30, 2013, and cash flow provided by operating activities was $854,027 for the three months ended September 30, 2012. This decrease in cash provided by operating activities of $1,163,276, or 136.21%, was primarily attributable to an increase in net loss in the amount of $557,809, and an increase in accounts receivable and other receivables in the amount of $991,746, offset by (1) an increase in depreciation and amortization in the amount of $184,203, and (2) a increase in accounts payable and other payables in the amount of $145,760.

 

Other than as described in this Report, we have no present agreements or commitments with respect to any material acquisitions of businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of, and/or investments in, products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

Plan of Operation

 

We will continue to focus on expanding our operations, developing new products and increasing our customer base. Additionally, we are putting more effort into developing our distribution channels by hiring more sales agents and sales people. We presently have enough liquidity to meet our expansion plans. However, depending on the level and speed of any growth, the Company may need additional funding in the future.

 

Currency Exchange Fluctuations

 

Aggregate net foreign currency transactions included in the income statement were gains of $152,526 and $569,347, respectively, for the three months ended September 30, 2013 and 2012, primarily as a result of the decline of the value of the USD to the RMB. The average rates of exchange from USD to RMB were 6.1253 to 1 and 6.3516 to 1 for the three months ended September 30, 2013 and 2012, respectively.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our financial position or results of operations.

 

Critical Accounting Policies and Estimates

 

This discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We evaluate our estimates on an on-going basis, including those related to property, plant and equipment, inventories, revenue recognition, accounts receivable, derivative warrant liability, warranty reserve, goodwill and intangibles, stock based compensation, and foreign currency transactions and translation. We base our estimates on historical experience and on various other market-specific assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ significantly from these estimates.

 

We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

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Method of Accounting

 

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of the management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.

 

Accounts Receivable

 

The accounts receivable incurred in the current reporting period were primarily due to the receivables from our sales agents. These sales agents are our customers and we offer these agents sixty (60) to ninety (90) day payment terms in order to increase our sales. Most of the Company’s products were sold to its sales agents. The PRC does not have a well-established system of sales on credit. Our sales agreements with our customers provide that the risk of loss passes to the customer upon delivery, and that we accept product exchanges but do not have a return policy. Accordingly, accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to our customers in the ordinary course of business, but mitigate the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness, and the economic environment. Accounts receivable will be recorded at the discounted price.

 

Inventory

 

We value our inventory at the lower of cost or market value. Our inventory includes various raw materials, semi-finished products, finished products, packages and low-value consumption goods, labors and overhead. Inventory is stated at cost using the weighted average cost method and includes any related production overhead costs incurred in bringing the inventory to its present location and condition. Inventory costs include purchase costs, processing costs and other related costs. Purchase costs include purchase price, related taxes, transportation fees, handling costs, insurance fees and other related fees. We evaluate inventory for excess, slow moving, and obsolete inventory as well as inventory the volume of which is in excess of its net realizable value. Our management uses estimates of future demand and sales prices for each product to determine appropriate inventory reserves.

 

Amortization of low-value consumption goods and packaging is based on the direct write-off method. The Company conducts a count of physical inventory at the end of each quarter.

 

Recognition of Revenue

 

Our revenue comprises of the fair value of the consideration received or receivable for the sale of goods and services, net of value-added tax and other sales taxes, discounts, and after eliminating sales within subsidiaries of the parent company.

 

Our principal sources of revenue are from sales of our products through our direct sales agents. These sales occur either through a purchase order submitted by our sales agents or through our direct marketing sales personnel. Our principal sources of revenue are from sales of our products through our sales agents. We recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of the goods to the customer.

 

The Company may offer sales incentives and cash discounts to customers or resellers, which it recognizes as an operating expense. For the three months ended September 30, 2013 and 2012, the Company did not provide any sales incentives to its customers or resellers.

 

We allow our customers to return products for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. We have reserves against revenue recognized for product exchange. The consumer credit system has not been well established and recognized by sellers in the PRC. With the exception of our sales agents, our customers pay us upon receipt of their orders.

 

Cost

 

The matching principle requires that costs have to be matched with revenues, and the Company ensures that our costs always match the corresponding revenue. The cost of production is calculated based on the actual number of products manufactured, and is matched with revenue as long as it is reasonable to do so. There has been no change in our calculation of the cost of production. There are no circumstances that cause variations in our calculation of the cost of production. Expenses are recognized not when the product is produced, but when the product actually makes its contribution to revenue. If no connection to revenue can be established in the current period, cost may be charged as an expense for the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance.

 

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We calculate the cost of production at the end of each month. If there is any work in progress, the cost of production is allocated between finished products and work in progress. Below is a detailed step-by-step description of our cost of production calculation:

 

  a. The Company determines end-of-period quantity and amount of finished goods, semi-finished products, raw materials, and packing materials.
  b. Based on the sales plan, the Company purchases raw materials and packing materials by batches and calculates stock-in and stock-out quantity and amount respectively. A summary calculation is made based on the actual quantity of consumption at the end of each month.
  c. The Company collects manufacturing overhead costs for each month, including depreciation, labor, water charge, electric charge, and the consumptions of low value consumables. The Company distributes manufacturing overhead costs based on the volume of production and creates an expense distribution sheet.
  d. The Company apportions raw materials, packing materials and manufacturing overhead costs of each product in each month to finished-goods and semi-finished products. Cost of Goods Sold is carried over according to sales quantity.

 

Foreign Currency Translation

 

The Company’s two operating subsidiaries maintain their financial statements in the functional currency, which is RMB. Another subsidiary maintains its financial statements in the Hong Kong Dollar (“HKD”). Monetary assets and liabilities denominated in currencies other than the functional currencies are translated into the functional currency at the exchange rates prevailing on the balance sheet dates. Transactions undertaken in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing on the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

 

For financial reporting purposes, the financial statements of subsidiaries, which are prepared using the functional currency, have been translated into the reporting currency, the United States Dollars (“USD”). Assets and liabilities are translated at the prevailing exchange rate on each reporting period end date, revenue and expenses are translated at the average exchange rates, and stockholders’ equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

At the conclusion of the period ended September 30, 2013 we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting discussed below, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.

 

In an effort to remedy this material weakness in the future, we intend to do the following:

 

·Develop a comprehensive training and development plan, for our finance, accounting and internal audit personnel, including our Chief Financial Officer, Financial Manager, and others, in the principles and rules of U.S. GAAP, SEC reporting requirements and the application thereof.

 

·Design and implement a program to provide ongoing company-wide training regarding the Company’s internal controls, with particular emphasis on our finance and accounting staff.

 

·Implement an internal review process over financial reporting to review all recent accounting pronouncements and to verify that the accounting treatment identified in such report have been fully implemented and confirmed by our internal control department. In the future, we will continue to improve our ongoing review and supervision of our internal control over financial reporting.

 

·Hire an individual that possesses the requisite U.S. GAAP experience and education.

 

Despite the material weakness reported above, our management believes that our consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

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Changes in Internal Control over Financial Reporting

 

No changes in our internal control over financial reporting have come to management’s attention during the quarter ended September 30, 2013 that have materially affected, or are likely to materially affect, our internal control over financial reporting.

 

Limitations on Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

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PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we may have disputes that arise in the ordinary course of our business. Currently, there are no material legal proceedings to which we are a party, or to which any of our property is subject, that we expect to have a material adverse effect on our financial condition.

 

Item 1A. Risk Factors.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  CHINA HEALTH INDUSTRIES HOLDINGS, INC.
   
   
   
  /s/ Xin Sun
  By: Xin Sun
  Title:   Chief Executive Officer and Chief Financial Officer
(principal executive officer, principal financial officer and
principal accounting officer)
  Date:   November 14, 2013

 

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EXHIBIT INDEX

 

Exhibit No.   Description
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Attached as Exhibits 101 to this Quarterly Report on Form 10-Q are the following financial statements for the quarter ended September 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements. The XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.