UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

FORM 10-Q

 

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

   

For the Quarterly Period Ended June 30, 2014

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

 

       For the Transition Period From ____to _____

 

Commission File Number: 000-22373

 

CHINA FRUITS CORP.

(Exact name of small business issuer as specified in its charter) 

 

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Nevada	90-0315096
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

 

Fu Xi Technology & Industry Park, Nan Feng County

Jiang Xi Province, P. R. China

(Address of principal executive offices)

 

(86794) 326-6199

(Issuer's telephone number)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [x]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

Yes [ ] No [x]

 

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [x] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 such shorter period that the registrant was required to submit and post such files).

Yes [x] No [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 if Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-Q or any amendments to this Form 10-Q.

Yes [ ] No [x]

 

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)
Accelerated filer	☐
Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the exchange act).

Yes [ ] No [x]

 

Number of shares of common stock, par value $.001, outstanding as of August 14, 2014: 49,951,223

Number of shares of preferred stock outstanding as of August 14, 2014:

Series A, par value $.001 - 13,150

Series B, par value $.001 - 12,100,000

 

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 Consolidated Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" 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.

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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10
ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK	12
ITEM 4. CONTROLS AND PROCEDURES   ITEM 4T. CONTROLS AND PROCEDURES	12   12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	13
ITEM 1A. RISK FACTORS	13
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	13
ITEM 4. MINE SAFETY DISCLOSURE	13
ITEM 5. OTHER INFORMATION	13
ITEM 6. EXHIBITS	13
SIGNATURES	14
INDEX TO EXHIBITS	15

 

 

ITEM 1. FINANCIAL STATEMENTS

 China Fruits Corporation

Consolidated Balance Sheets

As of June 30, 2014 and December 31, 2013

Unaudited

(Stated in US Dollars)

  

											(Audited)
							June 30, 2014				December 31, 2013
ASSETS
Current Assets			Notes
Cash & cash equivalents						$	200,576			$	40,217
Accounts receivable, Net			3				1,768,795				4,075,765
Other receivable, Net			4				763,911				141,363
Advance to supplies			5				3,364,911				2,162,844
Inventories			6				78,790				1,566,556
Prepaid expense			7				154,947				67,862
Refundable tax							94,065				266,719
Related party receivable							162,464				—
TOTAL CURRENT ASSETS							6,588,459				8,321,326
Noncurrent Assets
Investment			8				162,464
Property, plant & equipment, bet			9				3,236,423				3,370,148
Construction in progress							1,137				1,146
Intangible assets, net			10				318,354				331,697
Other long-term asset and deposits							24,370				24,548
Long term amortization							2,779				4,479
TOTAL NON-CURRENT ASSETS							3,745,527				3,732,018
TOTAL ASSETS						$	10,333,986			$	12,053,344
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and Accrued Expenses						$	913,825			$	4,238,843
Short-term loans			11				2,713,153				2,479,379
Customer Deposit			12				1,530,277				493,164
Taxes Payable							312,552				261,286
Other Payables							92,829				657,952
Due to Related Parties			13				1,446,251				1,074,031
Accrued liabilities and Payroll Tax Liabilities							428,007				354,489
TOTAL CURRENT LIABILITIES							7,436,894				9,559,144
TOTAL LIABILITIES						$	7,436,894			$	9,559,144

 

See Accompanying Notes to Financial Statements and Accountant’s Report

 

 

China Fruits Corporation

Consolidated Balance Sheets

As of June 30, 2014 and December 31, 2013

Unaudited

(Stated in US Dollars)

 

STOCKHOLDERS' EQUITY
		June 30, 2014				(Audited) December 31, 2013
Common stock, par value $.001, 100,000,000 shares authorized,  49,951,223 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively		$	49,951			$	49,951
Preferred stock, 200,000,000 shares authorized, designated as Series A and Series B. Series A: par value $.001; 2,000,000 shares authorized, 13,150 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively			13				13
Series B; par value $0.001, voting; 50,000,000 shares authorized, 12,100,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively			12,100				12,100
Additional paid in capital			3,789,864				3,789,864
Statutory reserve			170,950				170,950
Accumulated deficits			(1,572,728	)			(2,003,096	)
Accumulated other comprehensive income			446,942				474,419
TOTAL STOCKHOLDERS’ EQUITY			2,897,092				2,494,201
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	10,333,986			$	12,053,344

 

See Accompanying Notes to Financial Statements and Accountant’s Report

 

 

China Fruits Corporation

Consolidated Statements of Income

For the three-month and six-month periods ended June 30, 2014 and 2013

Unaudited

(Stated in US Dollars)

 

 

					Three Months Ended								Six Months Ended
REVENUES:	Note				June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
Sales	2 (d)			$	2,535,831			$	854,553			$	10,551,692			$	1,593,775
Cost of goods sold	2 (e)				(1,780,278	)			695,213				(8,879,022	)			1,319,288
GROSS PROFIT					755,553				159,340				1,672,670				274,487
OPERATING EXPENSES:
Selling expenses					96,438				100,701				692,908				262,348
General and administrative expenses					228,866				208,851				556,576				453,535
TOTAL OPERATING EXPENSES					325,304				309,552				1,249,484				715,883
INCOME (LOSS) FROM CONTINUING OPERATIONS					430,249				(150,212	)			423,186				(441,396	)
OTHER INCOME (EXPENSE):
Other income					14,224				(220	)			28,532				5,606
Other expense					—				—				—				—
Interest income					—				—				59				—
Interest expense					(63,187	)			(27,496	)			(114,296	)			(59,322	)
Government grants					32,777				197,478				271,909				252,916
TOTAL OTHER INCOME (LOSS) & EXPENSE					(16,186	)			169,762				186,204				199,200
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES					414,063				19,550				609,390				(242,196	)
Income tax expense	2(k)				98,407				—				179,022				—
NET INCOME (LOSS)				$	315,656			$	19,550			$	430,368			$	(242,196	)
Other compressive income
-Foreign currency translation gain (Loss)	2(m)				3,717				34,945				(27,477	)			41,194
COMPREHENSIVE INCOME (LOSS)					319,373				(54,495	)			402,891				(201,002	)
(Loss) per common share:
Basic and fully diluted				$	0.01				**			$	0.01				**
Weighted average number of common shares outstanding – Basic and fully diluted					49,951,223				49,951,223				49,951,223				49,951,223

** Less than $0.01

  

See Accompanying Notes to Financial Statements and Accountant’s Report 

 

China Fruits Corporation

Consolidated Statements of Cash Flows

For the six-month period ended June 30, 2014 and 2013

Unaudited

(Stated in US Dollars) 

 

			For the six-month period ended
			June 30, 2014				June 30, 2013
Cash Flows from Operating Activities
Net Income/(loss)		$	430,368			$	(242,196	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			128,703				133,487
(Increase) decrease in operating assets:
Accounts receivable			2,307,270				323,103
Inventories			1,487,766				(77,261	)
Prepaid expenses and other current assets			(1,738,868	)			857,894
Related party receivable			(162,464	)			—
Increase (decrease) in operating activities:
Accounts payable			(3,325,018	)			309,669
Other payables and accrued liabilities			(491,605	)			(27,047	)
Tax payable			51,266				813
Customer deposit			1,037,113				—
Net cash (used in) provided by operating activities		$	(275,469	)		$	1,278,462
Cash Flows from Investing Activities
Purchase of property and equipment		$	(14,916	)		$	(22,760	)
Investment			(162,464	)
Net cash provided (used in) by investing activities		$	(177,380	)		$	(22,760	)
Cash Flows from Financing Activities
Proceeds from short-term loans		$	251,820			$	—
Advance from (to) a third party			3,653,821				(355,514	)
Repayment of advance from (to) a third party			(3,366,259)				—
Proceeds from /(Payments on) Notes Payable							(945,345	)
Due to stockholders			84,658				86,164
Net cash provided by (used in) Financing Activities		$	624,040			$	(1,214,695	)
Foreign currency translation adjustment			(10,832	)			1,056
Net increase/(decrease) in cash & cash equivalents for the periods			160,359				42,063
Cash & cash equivalents:
Beginning of period		$	40,217			$	47,399
End of period		$	200,576			$	89,462
Supplementary disclosures of cash flows information:
Interest received		$	793			$	—
Interest paid		$	87,797			$	58,261
Income taxes paid		$	13,030			$	—

 

See Accompanying Notes to Financial Statements and Accountant’s Report 

 

 

 

China Fruits Corporation

Notes to Financial Statements

As of June 30, 2014 and December 31, 2013

(Stated in US Dollars)

 

1.

ORGANIZATION AND PRINCIPAL ACTIVITIES

 

China Fruits Corporation (the “Company” or “CHFR”) was incorporated in the State of Delaware on January 6, 1993 as Vaxcel, Inc. On December 19, 2000, CHFR changed its name to eLocity Networks Corporation.  On August 6, 2002, CHFR further changed its name to Diversified Financial Resources Corporation.  The principal activities of CHFR at that time was seeking and consummating a merger or acquisition opportunity with a business entity.  On May 12, 2006, CHFR was re-domiciled to the State of Nevada.

 

On May 31, 2006, CHFR completed a stock exchange transaction with Jiangxi Taina Guo Ye Yon Xian Gong Si (“Tai Na”).  Tai Na was incorporated as a limited liability company in the People’s Republic of China (“PRC”) on October 28, 2005 with its principal place of business in Nanfeng Town, Jiangxi Province, the PRC.  Tai Na is principally engaged in manufacturing, trading, and distributing of Nanfeng tangerine, and operating franchise retail stores for fresh fruits through its wholly-owned subsidiary, Tai Na International Fruits (Beijing) Co. Ltd. (“Tai Na Beijing”)

 

The stock exchange transaction involved two simultaneous transactions:

 

The majority shareholder of CHFR delivered the 13,150 convertible Series A preferred shares and 12,100,000 non-convertible Series B preferred shares of CHFR to Tai Na’s owners in exchange for total payments of $500,000 in cash and;

 

CHFR issued to Tai Na’s owners an amount equal to 30,000,000 new investment shares of common stock of CHFR pursuant to Regulation S under the Securities Act of 1933, as amended, in exchange for all of the registered capital of Tai Na.

 

Upon completion of the exchange, Tai Na and its wholly-owned subsidiary, Tai Na Beijing, became wholly-owned subsidiaries of CHFR and the former owners of Tai Na then owned 99% of the issued and outstanding shares of the Company.

 

On August 18, 2006, CHFR changed its name to its current name “China Fruits Corporation”.

 

The stock exchange transaction has been accounted for as a reverse acquisition and recapitalization of the CHFR whereby Tai Na is deemed to be the accounting acquirer (legal acquiree) and CHFR to be the accounting acquiree (legal acquirer).  The accompanying consolidated financial statements are in substance those of Tai Na and Tai Na Beijing, with the assets and liabilities, and revenues and expenses, of CHFR being included effective from the date of stock exchange transaction.  CHFR is deemed to be a continuation of the business of Tai Na.  Accordingly, the accompanying consolidated financial statements include the following:

 

(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost; 

 

(2) The financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.

 

On June 16, 2014, CHFR incorporated a subsidiary entity, US-China Fruits Company Limited, in the British Virgin Island.

 

CHFR, Tai Na, Tai Na Beijing, and US-China Fruits Company Limited are hereinafter referred to as (the “Company”).

 

Basis of Presentation and Organization.

 

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

 

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2013 and 2012 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2013.

 

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)	Use of estimates

 

In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported.  Actual results may differ from these estimates.

 

(c)	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.

 

(d)	Revenue recognition

 

The Company derives revenues from the resale of tangerine and other fresh fruits purchased from third parties, net of value added taxes (“VAT”).  The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales.  Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

In accordance with guidance issued by the FASB, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.  The Company’s sales arrangements are not subject to warranty.

 

The Company recognizes revenue from the sale of products upon delivery to the customers and the transfer of title and risk of loss. The Company did not record any product returns for the quarter ended June 30, 2014.

 

(e)	Cost of revenue

 

Cost of revenues consists primarily of material costs, direct labor, depreciation and overheads, which are directly attributable to the manufacture of products and the provision of services.

 

 

(f)	Accounts receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment.

 

(g)	Inventories

 

Inventories consist of finished goods and are valued at lower of cost or market value, cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  The spoilage will be written-off directly to the profit and loss when it occurs.

 

 

(h)	Plant and equipment, net

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

	Depreciable life		Residual value
Plant and machinery	10-12 years		5%
Furniture, fixture and equipment	5-6 years		5%

 

Expenditure for maintenance and repairs is expensed as incurred.

 

(i)	Impairment of long lived assets

 

The Company evaluated the recoverability of its property, plant, equipment, and other long-lived assets in accordance with FASB ASC 360, “Property, Plant and Equipment”, which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. No impairments of these types of assets were recognized during the quarter ended June 30, 2014 and the year ended December 31, 2013.

 

(j)	Comprehensive income (loss)

 

FASB ASC 220, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances.  Comprehensive income as defined includes all changes in equity during the year from non-owner sources. Accumulated comprehensive income, as presented in the accompanying consolidated statement of stockholders’ equity consists of changes in unrealized gains and losses on foreign currency translation.  This comprehensive income is not included in the computation of income tax expense or benefit.

 

(k)	Income taxes

 

The Company accounts for income tax using FASB ASC 740 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the consolidated statement of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

 

(l)	Net earnings (loss) per share

 

The Company reports earnings (loss) per share in accordance with FASB Accounting Standards Codification 260 “Earnings per Share” (“ASC 260”). This statement requires dual presentation of basic and diluted earnings (loss) with a reconciliation of the numerator and denominator of the earnings (loss) per share computations. Basic earnings per share amounts are based on the weighted average shares of common outstanding. If applicable, diluted earnings per share assume the conversion, exercise or issuance of all common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. Accordingly, this presentation has been adopted for the periods presented. There were no adjustments required to net income for the periods presented in the computation of diluted earnings per share.

 

(m)	Foreign currencies translation

 

The reporting currency of the Company is the United States dollar (“U.S. dollars”).  Transactions denominated in currencies other than U.S. dollar are calculated at the average rate for the period.  Monetary assets and liabilities denominated in currencies other than U.S. dollar are translated into U.S. dollar at the rates of exchange ruling at the balance sheet date.  The resulting exchange differences are recorded in the other comprehensive income/expenses in the consolidated statement of operations and comprehensive income.

 

The Company’s subsidiary maintains its books and records in its local currency, the Renminbi Yuan (“RMB”), which is functional currency as being the primary currency of the economic environment in which its operations are conducted.  In general, for consolidation purposes, the Company translates the subsidiary’s assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of operations is translated at average exchange rates during the reporting period.  Adjustments resulting from the translation of the subsidiary’s financial statements are recorded as accumulated other comprehensive income/expenses.

 

(n)	Retirement plan costs

 

Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the consolidated statements of income and comprehensive income as and when the related employee service is provided.

 

(o)	Related parties

 

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence. A material related party transaction has been identified in Note 13 in the financial statements.

 

(p)	Fair value of financial instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification (“ASC”) for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below: 

 

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.

 

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis. Consequently, the Company has neither fair value adjustments for assets and liabilities measured at fair value at June 30, 2014 and December 31, 2013 nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the quarter ended June 30, 2014 and for the year ended December 31, 2013, respectively.

 

(q)	Subsequent Events

 

The Company evaluated for subsequent events through the issuance date of the Company’s financial statements.

 

 

3.

ACCOUNTS RECEIVABLE, NET

 

The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. The Company did not experience significant losses from uncollectible accounts in the past; accordingly, the management decided to accrue one percent of the accounts receivable outstanding within one year and a hundred percent of the accounts receivable outstanding for longer than one year as bad debt allowance as of June 30, 2014 and December 31, 2013, respectively.

 

			6/30/2014		12/31/2013
Accounts receivable		$	1,809,665	$	4,116,934
Less: Allowance for bad debt			(40,870)		(41,169)
Accounts receivable, net		$	1,768,795	$	4,075,765

 

 

4.

OTHER RECEIVABLES

 

The Company advances money to several third parties during business operation. These receivables bear no interest and due on demand except otherwise noted. As of June 30, 2014 and December 31, 2013, the Company had other receivables of $763,911 and $141,363, respectively.

  

5.

ADVANCE TO SUPPLIERS

 

As of June 30, 2014 and December 31, 2013, the Company had made advance to suppliers of $3,364,911 and $2,162,844, respectively, for the purchases of inventories.

 

			6/30/2014		12/31/2013
Deposit for purchases of tangerines		$	3,018,147	$	2,152,312
Deposit for purchases of other fruits			267,758
Others			79,006		10,532
		$	3,364,911	$	2,162,844

 

6.

INVENTORIES

 

Inventories as of June 30, 2014 and December 31, 2013 consisted of the following:

 

		6/30/2014		12/31/2013
Finished goods	$	30,305	$	77,059
Raw materials		-		1,461,932
Packing materials		48,755		27,454
Other supplies		-		111
	$	78,790	$	1,566,566

 

The Company performs physical inventory count on a regular basis and instead of recording an allowance for spoilage, the spoilage will be written-off directly to the income statement when it occurs. The spoilage rate is approximately 2% of average inventory.

 

7.

PREPAID EXPENSES

 

As of June 30, 2014 and December 31, 2013, the Company had prepayment of $154,947 and $67,862, respectively, which consisted of the following:

		June 30, 2014				December 31, 2013
Prepaid Rent		$	125,639			$	60,007
Other			29,308				7,855
		$	154,947			$	67,862

 

8.

INVESTMENT COMMITMENT

 

On February 28, 2014, China Fruits Corp, through its wholly owned subsidiary, Taina International Fruits (Beijing) Co., Ltd, entered into an acquisition agreement with Baojia Guoye Co. Ltd. for the acquisition of three retail stores in Hangzhou, Zhejiang Province, China. The total consideration of the transaction amounted to $162,464 (RMB 1,000,000). The Company has already fully paid Baojia Guoye Co. Ltd as of June 30, 2014.

 

As of the date of the report, the transaction is still not yet completed because the transfer of business registrations and related licenses has not been completed. Thus, the accounts for these three retail stores are not consolidated.

  

9.

PLANT AND EQUIPMENT, NET

 

Plant and equipment, net as of June 30, 2014 and December 31, 2013 consisted of the following:

 

6/30/2014			At Cost				Accumulated Depreciation				Net
Buildings		$	3,614,002			$	(779,017	)		$	2,834,985
Machinery & equipment			223,107				(52,808	)			170,229
Motor vehicles			145,497				(73,167	)			72,330
Office equipment			281,329				(149,250	)			132,079
Others			38,035				(11,305	)			26,730
		$	4,301,970			$	(1,065,547	)		$	3,236,423

  

12/31/2013			At Cost				Accumulated Depreciation				Net
Buildings		$	3,643,458			$	(703,963	)		$	2,939,496
Machinery & equipment			211,471				(42,617	)			168,854
Motor vehicles			146,564				(69,740	)			76,823
Office equipment			278,678				(123,509	)			155,169
Others			38,314				(8,508	)			29,806
Total		$	4,318,485			$	(948,337	)		$	3,370,148

 

 

10.

INTANGIBLE ASSETS, NET

 

Intangible assets, net as of June 30, 2014 and December 31, 2013 consisted of the following:

 

		June 30, 2014				December 31, 2013
Land use right		$	477,230			$	480,729
Computer Software			6,921				6,972
Less: accumulated amortization			(165,797	)			(156,004	)
		$	318,354			$	331,697

  

 

11.

SHORT TERM LOANS

 

As of June 30, 2014 and December 31, 2013, the Company had short-term loan of $2,713,153 and $2,479,379, respectively, from various local banks and local government. The detailed terms were set forth as follows:

 

		June 30, 2014				December 31, 2013
Bank of China, 7.0% annual interest, due on July 20, 2014		$	974,786			$	981,932
Bank of China, 7.0% annual interest, due on December 20, 2014			974,786				981,932
Local Government, zero interest, due on no later than November 30, 2013  (Applying for extension)			511,671				515,515
Bank of China, 7.2% annual interest, due on March 18, 2015			251,820				—
		$	2,713,153			$	2,479,379

  

The subsidiary of the Company, Jiangxi Taina Nanfeng Orange Co., Ltd. has borrowed two loans with total amount of $1,949,571 (RMB 12,000,000) from Bank of China with a 7.0% annual interest rate and due dates on July 20, 2014 and December 20, 2014. As written in the agreement, the lender, Bank of China, requires the borrower, Jiangxi Taina Nanfeng Orange Co., Ltd, to secure this loan with collaterals of its land and real estates located in Nanfeng, Jiangxi Province, China. 

 

On March 18, 2014, Taina International Fruits (Beijing) Co., Ltd, the other subsidiary of the Company, entered into a loan agreement with Bank of China in the amount of $251,820 (RMB 1,550,000) with a 7.2% annual interest rate and due date on March 18, 2015.

 

Jiangxi Taina Nanfeng Orange Co., Ltd. has also borrowed loans from local government with the following provisions:

 

			June 30, 2014			December 31, 2013
Local Government, zero interest, due on no later than November 30, 2012		$	73,109			$	73,645
Local Government, zero interest, due on no later than November 30, 2013			73,109				73,645
Local Government, zero interest, due on no later than November 30, 2012			182,772				184,112
Local Government, zero interest, due on no later than November 30, 2013			182,772				184,112
		$	511,762			$	515,515

 

All balances were due on or before November 30, 2013. However, Jiangxi Taina is applying for extension of the repayment date and no repayment has been made as of June 30, 2014.

 

12.

CUSTOMER DEPOSIT

 

As of June 30, 2014 and December 31, 2013, the Company had customer deposits of $1,530,277 and $493,164, respectively, representing payments received for orders not yet shipped or payments from customers for prepaid membership cards.

 

 

13.

DUE TO RELATED PARTIES

 

As of June 30, 2014 and December 31, 2013, the Company had loan payable to related party of $1,446,251 and $1,074,031, respectively. These loans are due within one year.

 

		June 30, 2014				December 31, 2013
Due to shareholders		$	520,433			$	435,774
Due to Related parties:			925,818				638,257
Total		$	1,446,251			$	1,074,031

 

The shareholders paid all necessary overseas consulting and advising fees, lawyer fees, and accounting fees from period to period out of their own personal bank accounts in the United States due to the strict laws and regulations imposed by the Chinese government on out-going foreign currency wire transfers. The amount outstanding as of June 30, 2014 and December 31, 2013 was $520,433 and $435,774, respectively.

 

On March 31, 2014, the Company entered into convertible promissory notes with four shareholders (the holders) with the maximum accumulated principal of USD 600,000, in accordance with the terms of the convertible promissory notes with the interest at 6% without collateral. The breakdown of the four convertible promissory notes as of June 30, 2014 were set forth as follows:

 

		Outstanding balance as of 6/30/2014				Maximum accumulated principal set forth in convertible promissory note
Shareholder A		$	143,200			$	150,000
Shareholder B			233,978				250,000
Shareholder C			56,616				100,000
Shareholder D			86,639				100,000
		$	520,433			$	600,000

  

Holders may demand repayment of all amounts loaned to the Company though the date of its repayment request upon thirty (30) days written notice to the Company after five (5) years from effective date (March 31, 2014).

 

The Company may, at its option, at any time and from time to time, prepay all or any part of the principal balance of the notes, without penalty or premium, provided that concurrently with each such prepayment the Company shall pay accrued interest on the principal, if any, so prepaid to the date of such prepayment.

 

Upon not less than five (5) days advance written notice of one party hereto to the other (“Conversion note”), at any time or from time to time, the holders or the Company, at each’s sole option, may convert the outstanding principal amount of the Notes, or any portion of the principal amount hereof, and any accrued interest, in whole or in part, into shares of the common stock of the Company. Any amount so converted will be converted into common stock at a conversion price which is equivalent to the previous day’s closing bid price of the day immediately prior to delivery of the Conversion Note (the “Conversion Price”).

 

In the event the Company should at any time after the date hereof do either of the following: i) fix a record date for the effectuation of a split or subdivision of the outstanding common stock of the Company, or ii) grant the holders of the Company common stock a dividend or other distribution payable in additional shares of common stock without the payment of any consideration by such holder for the additional shares of common stock (“Stock Adjustment”), then, as of the record date (or the date of suck Stock Adjustment if no record date is fixed), the conversion price of the notes shall be appropriately adjusted so that the number of shares of common stock issuable upon conversion of the notes shall be adjusted in proportion to such changein the number of outstanding shares in order to insure such Stock Adjustment does not decrease the conversion value of the notes.

 

Governming law of the notes shall be the laws of State of Nevada.

 

14.

GOVERNMENT GRANTS

 

For the six months ended June 30, 2014 and June 30, 2013, the Company received grants and rewards from local government in amount of $271,909 and $252,916, respectively. The governmental grants were to encourage the Company’s efforts on modern agricultural development. These grants were interest-free and bear no repayment requirements.

 

15.

NET INCOME/(LOSS) PER SHARE

 

Basic net income/(loss) per share is computed using the weighted average number of the ordinary shares outstanding during the periods. 

 

The following table sets forth the computation of basic net income/(loss) per share for the six months ended June 30, 2014 and 2013, respectively:

  

		For the six months ended
		6/30/2014				6/30/2014
Net Income/(Loss)			430,368			$	(242,196	)
Net Income/(Loss) Per Share – Basic			0.01				**
Weighted Average Number of Shares Outstanding – Basic			49,951,223				49,951,223

 

** Less than $0.01. 

 

16.

CONCENTRATION AND RISKS

 

(a) For the six months ended June 30, 2014 and 2013, 100% of the Company’s assets were located in the PRC. Approximately 33% of the Company’s revenues were derived from customers located in the PRC for the six months ended June 30, 2014 and approximately 100% of the Company’s revenues were derived from customers located in the PRC for six months ended June 30, 2013.

 

For the six months ended June 30, 2014, major customers with their revenues are presented as follows:

 

Customers		Revenue				%				Accounts Receivable
Customer A		$	5,683,479				54	%		$	—
Customer B			540,466				5.1	%			611,724
Customer C			247,651				2.4	%			—
Revenue as of June 30, 2014		$	6,471,596				61.5	%		$	611,724

  

For the six months ended June 30, 2013, major customers with their revenues are presented as follows:

 

Customers		Revenue				%				Accounts Receivable
Customer A		$	283,095				17.4	%		$	91,415
Customer B			209,388				12.9	%			—
Customer C			72,306				4.4	%			—
Revenue as of June 30, 2013		$	564,789				34.7	%		$	91,415

  

(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.

COMMITMENT AND CONTINGENCIES

 

The Company rented plant, office, and retailing spaces under a non-cancelable operating lease agreement. On March 3, 2012, the Company entered into a five-year lease agreement for an additional warehouse and logistic space to store, pack and deliver fresh fruits. The lease term is from March 10, 2012 through March 9, 2017, and the total rental payment is approximately $726,920. Accordingly, the remaining six years minimum rental payments for that warehouse required as of June 30, 2014 are as follows:

 

Year ended December 31				Lease payment
	2014			$	74,805
	2015				161,538
	2016				177,692
				$	484,614

 

For the six months ended June 30, 2014 and 2013, total rental expense for China Fruits Corporation was $104,783 and $179,912, respectively.

  

18.

GOING CONCERN UNCERTAINTIES

 

These financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

 

As of June 30, 2014, the Company had retained deficits of $(1,572,728) and working capital deficit of current liabilities exceeding current assets by $848,435 due to the substantial losses in operation in prior years and default of its notes payable. Management has taken certain action and continues to implement changes designed to improve the Company's financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in headcount and corporate overhead expenses; and (b) obtainment of new capital from investors and (c) obtainment of new short-term bank loans to finance their working capital, and long-term loans to fund our capital expenditure projects. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through December 31, 2014. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company's ability to continue as a going concern.

  

19.

SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to June 30, 2014 to the date these financial statements were issued. The following subsequent event is disclosed herin:

 

(1)

On July 25, 2014, the Company entered into a three-year lease agreement for an additional office space. The lease term is from August 18, 2014 through August 17, 2017, and the total rental payment is approximately $1,189,540. Accordingly, the remaining three years minimum rental payments for that warehouse required as of June 30, 2014 are as follows:

  

Year ended December 31				Lease payment
	2014			$	369,671
	2015				396,632
	2016				423,237
				$	1,189,540

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Forward Looking Statements

 

Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Consolidated Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion strategy, our ability to achieve operating efficiencies, our dependence on distributors, capacity, suppliers, industry pricing and industry trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop and deliver our products on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives.

 

History

 

As used herein the terms "We", the "Company", "CHFR", the "Registrant," or the "Issuer" refers to China Fruits Corporation, its subsidiary and predecessors, unless indicated otherwise. We were incorporated in the State of Delaware on January 6, 1993, as Vaxcel, Inc. On December 19, 2000, we changed our name to eLocity Networks Corporation. On August 6, 2002, we changed our name to Diversified Financial Resources Corporation. In May 2006, our board decided to redomicile from the State of Delaware to the State of Nevada. Their decision was approved by the holders of a majority of the voting rights and common stock. On August 18, 2006, we changed our name to China Fruits Corporation.

 

As of April 1, 2006, we entered into a Plan of Exchange (the “Agreement”), between and among us, Jiang Xi Tai Na Guo Ye You Xian Gong Si, a corporation organized and existing under the laws of the Peoples’ Republic of China (“PRC”), which changed its corporate name to Jiangxi Taina Nanfeng Orange Co., Ltd. in February of 2007 (collectively referred to herein as “Tai Na”), the shareholders of Tai Na (the “Tai Na Shareholders”) and our Majority Shareholder.

 

Pursuant to the terms of the Agreement, two simultaneous transactions were consummated at closing, as follows: (i) our Majority Shareholder delivered 13,150 of our convertible Series A preferred shares and 12,100,000 non-convertible Series B preferred shares to the Tai Na Shareholders in exchange for total payments of $500,000 in cash and (ii) we issued to the Tai Na Shareholders an amount equal to 30,000,000 new investment shares of our common stock pursuant to Regulation S under the Securities Act of 1933, as amended, in exchange for all of their shares of registered capital of Tai Na. Upon completion of the exchange, Tai Na became our wholly-owned subsidiary. All of these conditions to closing have been met, and we, Tai Na, the Tai Na Shareholders and our Majority Shareholders declared the exchange transaction consummated on May 31, 2006. 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.

 

 

Business Description of the Issuer

 

Since the reverse merger was consummated, we have continued operations of Tai Na, a company which is principally engaged in the manufacturing, trading and distributing of fresh tangerines and other fresh fruits in the PRC. Tai Na is located in Nan Feng County, Jiang Xi Province, a well known agricultural area for tangerines in China. The geographic advantage offers additional benefits to us with respect to our quality control and lower manufacturing costs. We own our primary facility in Nan Feng County which consists of a total land area of 755,228 square feet, including manufacturing plants of 340,570 square feet and office buildings of 19,267 square feet. We have been focused within our industry since 2005 and devoted to operating franchise retail stores since 2007. After several years experience in manufacturing, trading and distributing fresh fruits in the domestic and oversea markets, we believe our business will be expanded dramatically in 2014 due to the follows:

 

Increasing Numbers of Franchise Retail Stores 

 

The franchise retail stores build up the direct channel between the end users and us, which facilitates the process from our manufacturing plants to the markets, benefits us in adjusting our business strategies when market changes. We provide the stores with our standard management systems, supplies, as well as remodeling to unify store display, color and sign pursuant to the franchise requirements. In addition to our own products, we also work with our strategic partners to diversify the fruits in our store and ensure the prompt delivery. We expect the total number of franchise stores to be increased to around sixty four by the end of 2014. Such expansion will be accomplished via acquisitions, franchise sales or direct setups.

 

On February 28, 2014, we entered into an acquisition agreement with Baojia Guoye Co. Ltd. (“Baojia”), a corporation existing and organized under the laws of China, pursuant to which we paid cash of $162,464 (RMB 1,000,000) to acquire Baojia’s three retail stores in Hangzhou, Zhejiang Province, China. As of the date of this report, the acquisition transaction is not closed since the transfer of business registrations and related licenses has not been completed. Thus, the accounts for these three retail stores were not included in the consolidated financial statements as of June 30, 2014.

 

Except for the three retail stores acquired from Baojia, we currently have 19 franchise retail stores in the Beijing area, of which 2 stores are wholly owned by us under direct management, and 17 stores are managed by franchisees. In 2014, we will evaluate the operations in the existing stores and replace those in poor performance with new stores. We believe we can expand our market shares through an effective and efficient franchise retail network. We expect more market shares via brand recognition in the near future.

 

 

Developing E-commerce Market

 

In June of 2014, we decided to open our flagship store in Tmall, one of the popular e-commerce platforms associated with Alibaba. Developing e-commerce with Alibaba’s platform is one of our critical strategies in business expansion, which overcomes the geographic barrier and provides us with a powerful access to the non-China markets. According to our strategic plans, we will further expand our fruit e-commerce business to the leading business-to-consumer platforms like JD.com, Yhd.com, and other major group-buying websites. Working with these well developed e-commerce platforms, we expect to establish our competitive edge with respect to high quality, wide range of variety and efficient delivery.

 

In addition, we plan to develop an “Online Distribution and Franchise” system in order to build a comprehensive vertical fruit e-commerce platform with major fruit participants, operators and industry bodies. We believe such integration will increase our brand recognition and market shares in fruit e-commerce business.

 

As of June 30, 2014, there were 2 employees assigned to handling our e-commerce development. The initial investment in e-commerce is planned to be approximately $160,000 (RMB 1,000,000). We believe e-commerce market will share the same significance as traditional markets in the near future. Our goal is to combine e-commerce with our growing retail stores network to introduce a “online to offline” business model for our business.

 

Setting Up New BVI Subsidiary

 

In June of 2014, the Board of Directors of the Company authorized and approved to setup a new subsidiary called US-China Fruits Company Limited (“US-China Fruits”) under the laws of British Virgin Islands, of which we have 99.99% ownership. The articles of incorporation of US-China Fruits was filed on June 16, 2014 and had no activities as of June 30, 2014. We believe the new subsidiary will facilitate the process and increase the efficiency when we develop oversea markets.

 

Improving Efficiency

 

During 2012, with the support from our local government, we utilized an area of 98,505 square feet to establish an Express Export Zone (“EEZ”) with the purpose of exporting fresh tangerines and other fresh fruits. The government departments including Customs, Inspections and Clearing have setup a satellite office onsite to facilitate the process. We believe the setup of this EEZ is good for us to improve our operating efficiencies and also serves as a bridge connecting local enterprises to the world and benefits our local economy.

 

In order to effectively maintain the quality of tangerine, we have a set of temperature and humidity auto-control equipments with capacity of 1,500 tons. We also have two automatic product lines to select fruits, the hourly process capacity of which is 10 ton/hour and 15 ton/hour, respectively. During the year of 2013, our total production was 8,400 tons. We expect the production capacity will reach 15,000 tons in 2014 due to the improvement of production efficiency.

 

In addition, we believe a sound warehouse and logistics center will help us to improve efficiency and reduce operating expenses. Especially for fresh fruits, the prompt handling and delivery is significant to reduce loss from spoilage. Therefore, we focus on establishing a systematic logistics center to support the expanding retail network. On March 3, 2012, we entered into a five-year lease agreement for warehouse and logistic space of approximately 26,700 square feet to store, select, pack and deliver fresh fruits. After the full operation of the logistics center, we believe both operating expenses and cost of goods sold will be reduced due to large-scale purchases and delivery.

 

Hosting Brand Recognition Events

 

Simultaneously with expanding our infrastructure, we have attempted to enhance our brand recognition by hosting certain social events. During the first quarter of 2014, we launched the “Taina® Miss Fruit” Beauty Contest, the first national fruit-themed beauty contest in China that is aimed to advocate the fruit culture and healthy lifestyle in China’s growing urban population. As a recent move to enhance our retail fruit store brand name, Taina®, we believe the social events such as the beauty contest also sets a stage for the Company to present cross marketing opportunities in fruit planting, distributing, and retailing.

 

 

 

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013

 

Revenues

 

Gross revenues were $2,535,831 and $10,551,692 for the three and six months ended June 30, 2014, respectively, increased by $1,681,278, or 197%, and $8,957,917, or 562%, compared to gross revenues of $854,553 and $1,593,775 for the three and six months ended June 30, 2013, respectively. The increase during the first half of 2014 was due primarily to our efforts in developing oversea markets, including Thailand, Dubai and Indonesia. We started to develop the Thai market in 2011, which is becoming our significant oversea market as the result of consistent marketing. Our signature tangerines are popular in the market due to their good quality and reasonable price. During the six months ended June 30, 2014, the revenues from Thailand were approximately $5,650,000, or 54% of total revenues, which were $0 during the same period in 2013, and the revenues from Dubai and other markets were approximately $620,000, or 6% of total revenues, which were $0 during the same period in 2013.

 

In addition, our revenues generated from franchise retail stores increased to approximately $2,280,000 in 2014, or 22% of total revenue, from $1,520,000 in the same period ended June 30, 2013. Such increase was the direct result from the increase in our franchise stores, which totaled 19 stores as of June 30, 2014, compared to 6 stores in the same period in 2013.

 

We generate our revenues from sales of fresh fruits and related products, including our signature tangerine. The revenues are recognized when persuasive evidence of a sale exists, transfer of title has occurred, the selling price is fixed or determinable and collectability is reasonably assured. Our sales arrangements are not subject to a warranty. We did not record any product returns during three and six months ended June 30, 2014.

 

We expect our sales to increase during 2014 as we move toward implementing our businesses plan, including the increase in franchise retail stores, and an increase in our marketing budgets. We currently have 19 franchise retail stores in the Beijing area, of which 2 stores are wholly owned by us under direct management, and 17 stores are managed by franchisees. After the close of acquisition transaction with Baojia, there will be 3 more stores added into our system. In 2014, we will evaluate the operations in the existing stores and replace those in poor performance with new stores. After several years experience in operating franchise retail stores, we believe 2014 is the right time for us to expand our retail stores network. We expect the total number of franchise stores to be increased to around sixty four by the end of 2014. Such expansion will be accomplished via acquisitions, franchise sales or direct setups.

 

Net Income / (Loss)

 

We had net income of $315,656 and $430,368 for the three and six months ended June 30, 2014, respectively, compared to net income of $19,550 and net loss of $242,196 for the three and six months ended June 30, 2013, respectively.  The net income during the three and six months ended June 30, 2014 was due primarily to the increase in revenues, which generated sufficient gross profit to cover operating expenses. We also received grant from government in amount of $32,777 and $271,909 during the three and six months ended June 30, 2014, respectively, which was to encourage our contribution in modern agriculture.

 

There can be no assurance that we will achieve or maintain profitability, or that any revenue growth will take place in the future.

 

Expenses

 

Operating expenses for the three and six months ended June 30, 2014 were $325,304 and $1,249,484, respectively, increased by $15,752, or 5%, and $533,601, or 75%, compared to $309,552 and $715,883 for the three and six months ended June 30, 2013, respectively. The increase in operating expenses during the first half of 2014 was due primarily to the increase in selling expenses, which were $692,908 in the six months ended June 30, 2014, compared to $262,348 in the same period ended June 30, 2013.

 

 

Cost of Goods Sold

 

Cost of goods sold included expenses directly related to the manufacturing and selling our products. Product delivery and direct labor would be examples of cost of goods sold items. We had $1,780,278 in cost of goods sold, or approximately 70% of revenues, and had $8,879,022 in cost of goods sold, or approximately 84% of revenues, during the three and six months ended June 30, 2014, respectively. Comparatively, We had $695,213 in cost of goods sold, or approximately 81% of revenues, and had $1,319,288 in cost of goods sold, or approximately 83% of revenues, during the three and six months ended June 30, 2013, respectively. The gross margin of fresh fruits products typically ranges between 15-20%. We expect to reduce the cost of goods sold through collaboration with more non-related suppliers, which will also help us to reduce the risk of concentration.

 

Liquidity and Capital Resources

 

Cash flows used in operating activities were $275,469 for the six months ended June 30, 2014, compared to cash flows of $1,278,462 provided by operating activities for the six months ended June 30, 2013. Negative cash flows from operations for the six months ended June 30, 2014 were due primarily to the increase in prepaid expenses and other current assets in the amount of $1,738,868, plus the decrease in accounts payable by $3,325,018 and decrease in other payable and accrued liabilities by $491,605, partially offset by the net income of $430,368, and the decrease in accounts receivable and inventories by $2,307,270 and $1,487,766, respectively. Positive cash flows from operations for the six months ended June 30, 2013 were due primarily to the decrease in accounts receivable in the amount of $323,103, the decrease in prepaid expenses by $857,391, plus the increase in accounts payable by $309,669, offset by the net loss of $242,196, and the increase in inventories by $77,261.

 

During the six months ended June 30, 2014, cash flows used in investing activities were $177,380 due primarily to the purchase of property and equipment in amount of $14,916, and the payment of $162,464 to acquire 3 retail stores from Baojia. Comparatively, cash flows used in investing activities were $22,760 during the six months ended June 30, 2013 due primarily to the purchase of property and equipment.

 

Cash flows provided by financing activities were $624,040 for the six months ended June 30, 2014, compared to cash flows of $1,214,695 used in financing activities for the six months ended June 30, 2013. Positive cash flows from financing activities during the six months ended June 30, 2014 were due primarily to the proceeds of 251,820 from short-term loans and the advance from a third party in an amount of $3,653,821, offset by the payments of $3,366,259 to the third party advance. Negative cash flows from financing activities in the first half of 2013 were due primarily to the advance to a third party in an amount of $355,514, plus the payments of $945,345 on notes payable.

 

We project that we will need additional capital to fund operations over the next 12 months. We anticipate we will need an additional $1,000,000 for the year of 2014.

 

Overall, we have funded our cash needs from inception through June 30, 2014 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.

    

We had cash of $200,576 on hand as of June 30, 2014. Currently, we do not have enough cash to fund our operations for the next twelve months. This is based on our negative cash flows from operations and working capital deficit. We will need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $1,000,000 per year starting in 2014. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.

 

On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, and additional infusions of capital and debt financing. Our current capital and revenues are insufficient to fund such expansion. If we choose to launch such an expansion campaign, we will require substantially more capital. The funds raised from this offering will also be used to market our products and services as well as expand operations and contribute to working capital. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected and we will have to significantly modify our plans. For example, if we unable to raise sufficient capital to develop our business plan, we may need to:

 

·	Curtail new product launches
·	Limit our future marketing efforts to areas that we believe would be the most profitable.

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

        

Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We manufacture, trade and distribute fresh fruits, including our signature tangerine, to retail consumers and wholesale buyers. We plan to strengthen our position in these markets. We also plan to expand our operations through aggressively marketing our products and our concept. 

  

 

Critical Accounting Policies

 

Revenue recognition

 

The Company derives revenues from the resale of tangerine and other fresh fruits purchased from third parties, net of value added taxes (“VAT”).  The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales.  Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

In accordance with guidance issued by the FASB, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.  The Company’s sales arrangements are not subject to warranty.

 

The Company recognizes revenue from the sale of products upon delivery to the customers and the transfer of title and risk of loss. The Company did not record any product returns for the three and six months ended June 30, 2014.

 

Inventory

 

Inventories consist of finished goods and are valued at lower of cost or market value, cost being determined on the first-in, first-out method.  The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.  The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.  The spoilage will be written-off directly to the profit and loss when it occurs. As of June 30, 2014, the Company did not record an allowance for obsolete or spoiled inventories.

 

Property, Plant, and Equipment

 

Plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

	Depreciable life		Residual value
Plant and machinery	10-12 years		5%
Furniture, fixture and equipment	5-6 years		5%

 

Expenditure for maintenance and repairs is expensed as incurred.

 

Off-balance sheet arrangements

 

We have not entered into, nor do we expect to enter into, any off-balance sheet arrangements.  We also have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties.  In addition, we have not entered into any derivative contracts that are indexed to our equity interests and classified as shareholders’ equity.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.  

 

  

ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and its 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 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

As of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of our disclosure controls and procedures. 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.

 

The Certifying Officers have also concluded, based on their evaluation of our controls and procedures that as of June 30, 2014, our internal controls over financial reporting are effective and provide a reasonable assurance of achieving their objective.

 

The Certifying Officers have also concluded that there was no change in our internal controls over financial reporting identified in connection with the evaluation that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 4T. CONTROLS AND PROCEDURES

 

(a) Conclusions regarding disclosure controls and procedures. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting.

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Exchange Act as of June 30, 2014, and, based on their evaluation, as of the end of such period, the our disclosure controls and procedures were effective as of the end of the period covered by the Quarterly Report,

 

(b) Management’s Report On Internal Control Over Financial Reporting. It is management’s responsibilities to establish and maintain adequate internal controls over the Company’s financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

 

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management of the issuer; and

 

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

  

As of the end of the period covered by the Quarterly Report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting.

 

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

 

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, internal controls over financial reporting were effective as of the end of the period covered by the Report.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Quarterly Report.

 

(c) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1.      LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

The information to be reported under this item has not changed since the previously filed 10K, for the year ended December 31, 2013.

 

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

 

None.

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.      MINE SAFETY DISCLOSURE

 

Not applicable

 

ITEM 5.      OTHER INFORMATION

 

None

 

 

ITEM 6. EXHIBITS

31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

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

 

	CHINA FRUITS CORP.
Date: August 14, 2014	By:	/s/ Chen, Quan Long
		Chen, Quan Long Chief Executive Officer

 

 

INDEX TO EXHIBITS

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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