UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE EXCHANGE ACT

For the transition period from ___________ to _____________

 

CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT, INC.

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

 

Commission File No. 333-170480

 

Nevada	80-0638212
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

Room 2119 Mingyong Building, No. 60 Xian Road.

Shahekou District, Dalian, China 116021

(Address of Principal Executive Offices)

 

0086-13909840703

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 o No þ *

 

* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.

 

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 þ 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	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

 

As of November 19, 2014, there were 46,450,000 shares of common stock of the registrant outstanding.

Table of Contents

 

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3. Defaults Upon Senior Securities	19
Item 4. Mine Safety Disclosures	19
Item 5. Other Information	19
Item 6. Exhibits	19
SIGNATURES	20

 

 

Forward-Looking Statements

 

Various statements contained in this report constitute “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “plan,” “intend” or “anticipate” or the negative thereof or comparable terminology, or by discussion of strategy. Forward-looking statements represent as of the date of this report our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. Such forward-looking statements are based largely on our current expectations and are inherently subject to risks and uncertainties. Our actual results could differ materially from those that are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, a number of factors, such as: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles and the other risks and uncertainties that are set forth in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results.  Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the Securities and Exchange Commission (“SEC”) pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this report will in fact transpire.

 

As used in this Quarterly Report on Form 10-Q, unless the context requires or is otherwise indicated, the terms “we,” “us,” “our,” the “Registrant,” the “Company,” “our company” and similar expressions include the following entities (as defined below):

 

(i) China Liaoning Dingxu Ecological Agriculture Development, Inc. (“CLAD”), formerly known as Hazlo! Technologies, Inc., a Nevada corporation;

 

(ii) China Liaoning DingXu Ecological Agriculture Development Co, Ltd., a BVI company (“DingXu BVI”), a wholly-owned subsidiary of CLAD;

 

(iii) Panjin Hengrun Biological Technology Development Co., Ltd. 盘锦恒润生物技术开发有限公司, a limited liability company organized under the laws of the People’s Republic of China and a ninety-nine percent owned subsidiary of DingXu BVI (“Panjin Hengrun”);

 

(iv) Liaoning Dingxu Ecological Agriculture Development Co., Ltd.辽宁鼎旭生态农业发展有限公司, a limited liability company organized under the laws of the People’s Republic of China and an affiliated entity of Panjin Hengrun through contractual arrangements (“Liaoning Dingxu”). 

 

“China” or “PRC” refers to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan.  

 

“RMB” or “Renminbi” refers to the legal currency of China and “$” or “U.S. Dollars” refers to the legal currency of the United States.   We make no representation that the RMB or U.S. Dollar amounts referred to in this report could have been or could be converted into U.S. Dollars or RMB, as the case may be, at any particular rate or at all.  

 

“GAAP” unless otherwise indicated refers to accounting principles generally accepted in the United States.

Item 1. Financial Statements

 

CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT, INC AND SUBSIDIARIES

 CONSOLIDATED BALANCE SHEETS

(AMOUNTS EXPRESSED IN US DOLLARS)

 

		As of				As of
		September 30,				December 31,
		2014				2013
		(Unaudited)
ASSETS
Cash and cash equivalents		$	666,106			$	11,797
Inventories			254,946				103,913
Advances to suppliers			2,007,916				82,195
Other receivables, net			—				166,310
Other current assets			89,367				90,182
Total Current Assets			3,018,335				454,397
Property and equipment, net			11,079,858				11,015,908
Construction in progress			888,655				896,438
Land use right			5,496,349				5,721,651
Prepaid lease for land			1,737,234				1,836,789
Other Assets			2,438,033				—
Total Assets		$	24,658,464			$	19,925,183
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Account payable		$	37,941			$	3,842
Accrued expenses			17,809				18,539
Other payable			653				1,148
Due to related parties			2,331,434				2,181,401
Total Current Liabilities			2,387,837				2,204,930
Long term payable			1,548,644				1,548,644
Total Liabilities			3,936,481				3,753,574
Stockholders' Equity:
Common stock ($0.001 par value; 75,000,000 shares authorized;  46,450,000 and 46,450,00 shares issued and outstanding at September 30, 2014 and December 31, 2013)			46,450				46,450
Additional paid-in capital			9,317,137				8,533,116
Retained earnings			10,434,659				6,499,673
Accumulated other comprehensive income			727,946				933,042
Non-controlling interests			195,791				159,328
Total Stockholders' Equity			20,721,983				16,171,609
Total Liabilities and Stockholders' Equity		$	24,658,464			$	19,925,183

 

 

See accompanying notes to unaudited consolidated financial statements

 

CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT, INC AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)

 

		The three months ended				The three months ended				The nine months ended				The nine months ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
NET REVENUES		$	3,260,343			$	3,118,017			$	9,889,474			$	9,582,529
COST OF REVENUES			1,357,497				1,184,850				3,916,673				3,752,063
GROSS PROFIT			1,902,846				1,933,167				5,972,801				5,830,466
OPERATING EXPENSES:
Depreciation and amortization			181,390				177,969				543,480				529,479
Bad debt			—				—				1,141,225				—
General and administrative			46,725				32,932				197,068				436,600
Total Operating Expenses			228,115				210,901				1,881,773				966,079
INCOME FROM OPERATIONS			1,674,731				1,722,266				4,091,028				4,864,387
OTHER INCOME (EXPENSE):
Interest expense			(45,001	)			(42,097	)			(133,961	)			(257,573	)
Other income			(71	)			—				16,449				—
INCOME BEFORE PROVISION FOR INCOME TAX			1,629,659				1,680,169				3,973,516				4,606,814
PROVISION FOR INCOME TAXES			—				—				—				—
NET INCOME (LOSS) BEFORE NON-CONTROLLING  INTERESTS		$	1,629,659			$	1,680,169			$	3,973,516			$	4,606,814
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTERESTS			14,418				17,212				38,530				48,231
NET INCOME (LOSS)		$	1,615,241			$	1,662,957			$	3,934,986			$	4,558,583
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain(loss)			2,897				123,293				(207,168	)			385,208
LESS: OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS			29				1,233				(2,072	)			3,852
COMPREHENSIVE INCOME		$	1,618,109			$	1,785,017			$	3,729,890			$	4,939,939
NET INCOME PER COMMON SHARE:
Basic		$	0.03			$	0.04			$	0.08			$	0.10
Diluted		$	0.03			$	0.04			$	0.08			$	0.10
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			46,450,000				46,450,000				46,450,000				46,962,821
Diluted			46,450,000				46,450,000				46,450,000				46,962,821

 

 

See accompanying notes to unaudited consolidated financial statements

CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)

 

		For the nine months Ended
		September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,934,986			$	4,558,583
Net income attributable to non-controlling interests			38,530				48,231
Adjustments to reconcile net income to net cash Provided  by operating activities:
Bad debt			1,141,225				—
Depreciation and amortization			677,350				669,473
Imputed interest			133,767				256,775
Changes in assets and liabilities:
Inventories			(151,033	)			(49,714	)
Other receivables			166,310				(1,325	)
Other current assets			815				(3,642	)
Prepaid expense			38,658				31,838
Accounts payable and accrued liabilities			352,171				(3,298,336	)
NET CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES			6,332,779				2,211,883
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for fixed assets			(2,546,054	)			—
Cash paid for long term  investment			(2,438,033	)			—
Loan to related parties			(1,141,225	)			—
NET CASH USED IN INVESTING ACTIVITIES			(6,125,312	)			—
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from  related parties			654,010				—
Repayment to related parties							(2,043,932	)
NET CASH  PROVIDED BY FINANCING ACTIVITIES			654,010				(2,043,932	)
EFFECT OF EXCHANGE RATE ON CASH			(207,168	)			385,208
NET INCREASE IN CASH AND CASH EQUIVALENTS			654,309				553,159
CASH AND CASH EQUIVALENTS - beginning of period			11,797				21,245
CASH AND CASH EQUIVALENTS - end of period		$	666,106			$	574,404
SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:
Cancellation of common shares by shareholder		$	—			$	20,000

 

 

See accompanying notes to unaudited consolidated financial statements

CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2014

 

 

NOTE 1.   ORGANIZATION AND DESCRIPTION OF BUSINESS

 

China Liaoning Dingxu Ecological Agriculture Development Inc. (the "Company") was incorporated under the laws of State of Nevada on August 19, 2010.  The Company is primarily engaged in the growing, marketing, producing and selling of agriculture products in People’s Republic of China (“PRC”).

 

On December 12, 2011, the Company entered a Share Exchange Agreement with DingXu BVI Shareholder (Chin Yung Kong) under which the Company issued  60,000,000 shares of common stock to Chin Yung Kong to acquire 100% of the issued and outstanding shares of DingXu BVI.

 

China Liaoning DingXu Ecological Agriculture Development Co, Ltd., a BVI company (“DingXu BVI”) was incorporated under the laws of British Virgin Islands on April 15, 2011. Chin Yung Kong was the sole shareholder and director of DingXu BVI.

 

On July 5, 2011, DingXu BVI formed Panjin Hengrun Biological Technology Development Co, Ltd., a limited liability company organized under the laws of the PRC (“Panjin Hengrun”). DingXu BVI owns 99% of the total ownership of Panjing Hengrun.

 

On November 28, 2011, Panjin Hengrun entered into a set of contractual arrangements with Liaoning Dingxu Ecological Agriculture Development Co., Ltd., a limited liability company organized under the laws of the PRC and an affiliated entity of Panjin Hengrun through contractual arrangements (“Liaoning Dingxu”). The contractual arrangements are comprised of a series of agreements, including a Consulting Service Agreement and an Operating Agreement, through which Panjin Hengrun has the right to advise, consult, manage and operate Liaoning Dingxu and to collect and own all of Liaoning Dingxu’s net profits and net losses. Additionally, under a Proxy Agreement, the shareholders of Liaoning Dingxu have vested their voting control over Liaoning Dingxu to Panjin Hengrun. In order to further reinforce Panjin Hengrun’s rights to control and operate Liaoning Dingxu. Liaoning Dingxu and its shareholders have granted Panjin Hengrun, under an Option Agreement, the exclusive right and option to acquire all of their equity interests in Liaoning Dingxu, or, alternatively, all of the assets of Liaoning Dingxu. Further, the shareholders of Liaoning Dingxu agreed to pledge all of their rights, titles and interests in Liaoning Dingxu under an Equity Pledge Agreement.

 

Upon entry of these contractual arrangements, Liaoning Dingxu became the Variable Interest Entity (“VIE”) of Panjin Hengrun pursuant to ASC-810-10-05 and Panjin Hengrun was able to carry out business operations through Liaoning Dingxu.

 

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

 

These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The company maintains its books and accounting records in Renminbi (“RMB”), and its reporting currency is United States dollars.

 

ACCOUNTING METHOD

 

The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a fiscal year ending on December 31.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included.  Actual results could differ from those estimates.

 

CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company had cash balances of $666,106 and $11,797 as of September 30, 2014 and December 31, 2013, respectively.  The Company had no cash equivalents as of September 30, 2014 and December 31, 2013.

 

INVENTORIES

 

Inventories are stated at the lower of cost or market value. Cost is determined using moving weighted average method. Inventories consist of raw materials, finished goods and growing crops. Cost of finished goods comprises direct material and direct production cost based on normal operating capacity.

 

PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Depreciation on property, plant and equipment is calculated on the straight-line method after taking into account their respective estimated residual values over the estimated useful lives of the assets as follows:

 

Building	20 years
Plant equipment	5-10 years
Office equipment	3-5 years
Vehicles	4  years

 

Maintenance and repair costs are expensed as incurred, whereas significant renewals and betterments are capitalized.

 

Construction in progress represents capital assets under construction or being installed and is stated at cost. Cost comprises original cost of plant and equipment, installation, construction and other direct costs prior to the date of reaching the expected usable condition. Construction in progress is transferred to the property, plant and equipment and depreciation commences when the asset has been substantially completed and reaches the expected usable condition.

 

LAND USE RIGHTS

 

The Company states land use right at cost less accumulated amortization. The land use right is amortized on straight line method during the contract period.

 

The Company has land use rights to 24,806 square meters of land. The term of the land use rights is 50 years, starting in March 2011. The land use right in the amount of $579,580 was fully paid during 2011.  For the nine months ended September 30, 2014 and 2013, the Company recorded amortization expense of $8,898 and $8,910, respectively. The Company recorded the land use right net value of $552,015 and $566,028 as of September 30, 2014 and December 31, 2013, respectively.

 

The Company has land use rights to 56,139 square meters of land. The term of the land use rights is 46 years, starting in March 2011. The land use right in the amount of $2,698,027 was fully paid before March 31, 2013.  For the nine months ended September 30, 2014 and 2013, the Company recorded amortization expense of $44,486 and $44,519, respectively. The Company recorded the land use right net value of $2,555,501 and $2,623,698 as of September 30, 2014 and December 31, 2013, respectively.

 

The Company has land use rights to 428,214 square meters of land. The term of the land use rights is 18 years, starting in January 2012. For the nine months ended September 30, 2014 and 2013, the Company recorded amortization expense of $117,399 and $116,034, respectively. The Company recorded the land use right net value of $2,388,833 and $2,531,925 as of September 30, 2014 and December 31, 2013, respectively.  As the land use right was not yet fully paid for as of September 30, 2014, the Company recorded long term liabilities related to this land use right in the amount of $1,548,644 and $1,548,644 as of September 30, 2014 and December 31, 2013, respectively.

 

LONG TERM PREPAID LEASE

 

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the consolidated statements of operations on a straight-line basis over the terms of the underlying lease.

 

The Company records lease payments at cost less accumulated rent. The Company entered into a long term agreement with certain unrelated parties to rent land in 2010. The lease payments are recorded as operating lease expenses using the straight line method during the contract period of 20 years beginning at January 1, 2010. The lease payments for the entire contract period of $1,030,000 were prepaid. For the nine months ended September 30, 2014 and 2013, the Company recorded lease expense of $41,703 and $41,734, respectively. The Company recorded prepaid lease expenses at net, in the amount of $802,655 and $852,682 as of September 30, 2014 and December 31, 2013, respectively.

 

The Company entered into a long term agreement with certain unrelated parties to rent land in 2013. The lease payments are recorded as operating lease expenses using the straight line method during the contract period of 17 years beginning at December 25, 2013. The prepaid lease expense at net, as of September 30, 2014 and December 31, 2013 in amounts of $934,579 and $984,107, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded lease expense of $40,634 and $0, respectively.

 

REVENUE RECOGNITION

 

The Company engages in the business of growing, producing, marketing and selling fresh mushrooms, dried mushrooms, and mushroom seeds through its affiliated VIE, LiaoNing DingXu.

 

Sales revenue is recognized at the date of shipment from the Company’s facilities to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, ownership has passed, no other significant obligations of the Company exist and collectability is reasonably assured.

 

The Company’s revenue consists of the invoiced value of goods, net of value-added tax (“VAT”).

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no other items that required fair value measurement on a recurring basis.

 

BASIC AND DILUTED LOSS PER SHARE

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.

 

STOCK-BASED COMPENSATION

 

The Company adopted FASB guidance on stock based compensation upon inception on September 9, 2010. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company did not issue any share-based payments for services or compensation to employees, or otherwise for the periods presented.

 

TAXATION

 

Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC where the Company operates after taking into account the benefits from any special tax credits or “tax holidays” allowed in the county of operations.

 

The Company does not accrue United States income tax since it has no operating income in the United States. The operating subsidiary is organized and located in the PRC and does not conduct any business in the United States.

 

Enterprise income tax

 

In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the operating subsidiary is exempted from enterprise income tax from 2010 to 2014. Accordingly, the Company statutory rate was 0% and 0% for the nine months ended September 30, 2014 and 2013, respectively.

 

Value added tax

 

The Provisional Regulations of The PRC concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

 

In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the Company is exempted from VAT from 2010 to 2014.

 

FOREIGN CURRENCY TRANSLATION

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries and variable interest entities is the RMB. For the subsidiaries and variable interest entities whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

In accordance with ASC Topic 230, cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 

ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In July 2013, FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.

 

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:

 

•

Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and

 

•

Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

 

The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.

 

In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.

NOTE 3. INVENTORIES

 

Inventories consist of raw materials, finished goods, growing crops and others.

 

Raw materials that were not put into production as of fiscal year end were stated at the lower of cost or market.

 

As fresh mushrooms were perishable goods, finished goods consist of dried mushrooms at fiscal year end.

 

Growing crops consist of expenditures valued at the lower of cost or market and are deferred and charged to cost of goods sold when the related crop is harvested and sold.   The deferred growing costs included in inventories in the consolidated balance sheets consist primarily of raw material of the crops, direct labor, depreciation of fixed assets used directly in growing, land lease payment for the field used to grow crops, and utilities used in the production site.  Cost included in growing crops related to the current crop year.

 

Inventories at September 30, 2014 and December 31, 2013 consisted of the following:

 

		September 30, 2014				December 31, 2013
Raw materials and supplies		$	15,712			$	8,145
Finished goods			129,873				—
Growing crops			108,536				91,860
Others			825				3,908
		$	254,946			$	103,913

 

NOTE 4. ADVANCES TO SUPPLIER

 

Advance to supplier was mainly used to record the advance paid as deposit on raw materials, equipment, or other fix assets being purchased. Advances to suppliers at September 30, 2014 and December 31, 2013 consist of the following:

 

		September 30, 2014				December 31, 2013
Au Rui Jin Packaging Co., Ltd		$	—			$	40,840
Chaoyang Co., Ltd			—				32,804
Soy Source Factory Equipment			145,632				—
PanJin XingHua Real Estate Development Co., Ltd			1,864,824				—
Others			(2,540	)			8,551
		$	2,007,916			$	82,195

 

On September 20, 2014, the Company signed a contract to purchase an apartment building which has six floors to be used as a dormitory for the Company’s workers. The Company paid $1,864,824 to PanJin XingHua Real Estate Development Co., Ltd for the purchase of this building. The building will be transferred into the Company’s name during April 2015 due to additional renovations and modifications that will be made prior to the completion of the purchase agreement. There are no further payments to be made in the future as the full payment was made on September 20, 2014.

 

NOTE 5. RECEIVABLES

 

Receivables consisted of account receivable due from sales of mushroom products and advances made to Company employee for future business related expenses, balance as of September 30, 2014 and December 31, 2013 are as follows:

 

		September 30, 2014				December 31, 2013
Account receivable		$	—			$	150,832
Employee advances			—				15,478
		$	—			$	166,310

 

NOTE 6.  PROPERTY, PLANT AND EQUIPMENT

 

Property, Plant and Equipment at September 30, 2014 and December 31, 2013 consist of the following:

 

		September 30, 2014				December 31, 2013
Building		$	12,276,022			$	11,699,426
Plant			564,387				569,533
Vehicles			34,094				34,405
Office equipment			75,171				75,857
			12,949,674				12,379,221
Less: Accumulated depreciation			(1,869,816	)			(1,363,313	)
Property, plant and equipment, net		$	11,079,858			$	11,015,908

 

For the nine months ended September 30, 2014 and 2013, the Company recorded depreciation expense of $506,503 and $500,591, respectively. Of these balance, the Company recorded depreciation expenses of $133,870 and $8,992 in Cost of Goods Sold, during the periods ended September 30, 2014 and 2013, respectively.

NOTE 7. CONSTRUCTION IN PROGRESS

 

Construction in progress activities for the nine months ended September 30, 2014 and the year ended December 31, 2013 as following:

 

		September 30, 2014				December 31, 2013
The beginning balance:
Greenhouse and planting structures		$	145,237			$	354,943
Factory workshop			751,201				728,661
			896,438				1,083,604
Activities:
Add : Investment this year			—				—
Unrealized foreign currency translation gain			(7,783	)			33,521
Less: Transfer to fixed assets			—				(220,687	)
			(7,783	)			(187,166
The ending balance:
Greenhouse and planting structures			144,242				145,237
Factory workshop			744,413				751,201
		$	888,655			$	896,438

 

NOTE 8. OTHER ASSETS

 

On June 10, 2014, Liaoning Dingxu entered into a contract with Liaoning Shenglande Biotechnology Co., Ltd., a limited liability company (the “Liaoning Shenlande”) organized under the laws of the PRC. Under the contract, Liaoning Dingxu invested $2,438,033 into Liaoning Shenglande to plant fresh mushroom from July 15, 2014 to July 15, 2019. During the period of cooperation, Liaoning Dingxu will get the 50% of profit after tax of Liaoning Shenglande. Liaoning Dingxu has the right to receive $2,438,033 at the end of cooperation period.

 

NOTE 9. RELATED PARTY TRANSACTIONS

 

Due to related parties: The total amount due to related parties consisted of the borrowing from shareholders to purchase land use rights and building greenhouses and planting structures.  The balance was $2,331,434 and $2,181,401 as of September 30, 2014 and December 31, 2013, respectively.

 

Imputed interest: Certain stockholders advanced funds to the Company with no stated interest rate. The interest is imputed at 8% annually.  The Company recorded imputed interest in the amount of $133,767 and $256,775 for the nine months ended September 30, 2014 and 2013, respectively.

 

Loan forgiveness: During the three months ended March 31, 2014, the Company loaned an officer $1,141,225 in cash and during the same period forgave the loan receivable which caused an increase in additional paid in capital of $1,141,225 and bad debt expense of $1,141,225 as a result of the receivable write-off.

 

NOTE 10. COMMON STOCK

 

During the nine months ended September 30, 2014 and 2013, the Company recorded imputed interest on outstanding due to related parties balance as a contribution of paid-in capital in the amount of $133,767 and $256,775, respectively.

 

On January 8, 2013, majority shareholder, Chin Yung Kong, cancelled 20,000,000 common shares.

 

The Company’s capitalization is 75,000,000 common shares with a par value of $0.001 per share. There are a total of 46,450,000 common shares issued and outstanding both at September 30, 2014 and December 31, 2013. No preferred shares have been authorized or issued. The Company has not granted any stock options and has not recorded any stock-based compensation since inception.

 

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no other items that required fair value measurement on a recurring basis.

 

The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

The following table provides a summary of the fair values of assets and liabilities as of September 30, 2014:

 

				Fair Value Measurements at
	Balance as of September 30,
	2014				Level 1				Level 2				Level 3
$	—			$	—			$	—			$	—

 

 

The following table provides a summary of the fair values of assets and liabilities as of December 31, 2013:

 

				Fair Value Measurements at
	Balance as of December 31,
	2013				Level 1				Level 2				Level 3
$	—			$	—			$	—			$	—

 

NOTE 12. NON-CONTROLLING INTEREST

 

Non-controlling interest represents the 1% interest in the subsidiaries. The net income, unrealized foreign currency translation gain and imputed interest attributable to the non-controlling interest total $36,488 and $53,419 for the nine months ended September 30, 2014 and 2013, respectively. The Company recorded $195,791 and $159,328 non-controlling interest as of September 30, 2014 and December 31, 2013, respectively.

 

NOTE 13. COMMITMENT AND CONTINGENCIES

 

The Company had a long term payable for the acquisition of a land use right. Based on the contract agreement, the future minimum rental payments required for the coming years are as follows:

 

Years ending December 31:
	2019				16,544
	2020				153,210
	2021				153,210
	2022				153,210
	2023				153,210
	Remaining payments				919,260
	Total future minimum payments			$	1,548,644

 

Besides the long term payable for land use right, the Company will make payment to shareholders time to time.

 

The Company did not have other significant capital commitments, or significant guarantees as of September 30, 2014 and December 31, 2013, respectively.

 

NOTE 14. BUSINESS COMBINATION

 

On December 12, 2011, the Company entered a Share Exchange Agreement with DingXu BVI Shareholder (Chin Yung Kong) under which the Company issued  60,000,000 shares of common stock to Chin Yung Kong to acquire 100% of the issued and outstanding shares of DingXu BVI.

 

China Liaoning DingXu Ecological Agriculture Development Co, Ltd., a BVI company (the “DingXu BVI”) was incorporated under the laws of British Virgin Islands on April 15, 2011. Chin Yung Kong was the sole shareholder and director of DingXu BVI.

 

On July 5, 2011, DingXu BVI formed Panjin Hengrun Biological Technology Development Co, Ltd., a limited liability company organized under the laws of the PRC (“Panjin Hengrun”). DingXu BVI owns 99% of the total ownership of Panjing Hengrun.

 

On November 28, 2011, Panjin Hengrun entered into a set of contractual arrangements with Liaoning Dingxu Ecological Agriculture Development Co., Ltd., a limited liability company organized under the laws of the PRCand an affiliated entity of Panjin Hengrun through contractual arrangements (“Liaoning Dingxu”). The contractual arrangements are comprised of a series of agreements, including a Consulting Service Agreement and an Operating Agreement, through which Panjin Hengrun has the right to advise, consult, manage and operate Liaoning Dingxu to collect and own all of Liaoning Dingxu’s net profits and net losses. Additionally, under a Proxy Agreement, the shareholders of Liaoning Dingxu have vested their voting control over Liaoning Dingxu to Panjin Hengrun. In order to further reinforce Panjin Hengrun’s rights to control and operate Liaoning Dingxu.  Liaoning Dingxu and its shareholders have granted Panjin Hengrun, under an Option Agreement, the exclusive right and option to acquire all of their equity interests in Liaoning Dingxu, or, alternatively, all of the assets of Liaoning Dingxu. Further, the shareholders of Liaoning Dingxu agreed to pledge all of their rights, titles and interests in Liaoning Dingxu under an Equity Pledge Agreement.

 

Upon entry of these contractual arrangements, Liaoning Dingxu became the Variable Interest Entities (“VIE”) of Panjin Hengrun pursuant to ASC-805-10-05 and Panjin Hengrun was able to carry out business operations through Liaoning Dingxu.

 

Per ASC-805-50-45,”Transactions Between Entities Under Common Control”, the presentation of the financial statements pertain to financial statements of all consolidating subsidiaries for the period January 1, 2013 through December 31, 2013 for fiscal year 2013, January 1, 2013 through September 30, 2013 for the first nine months of 2013, and for the period January 1, 2014 through September 30, 2014 for first nine months of 2014.

 

NOTE 15. SUBSEQUENT EVENTS

 

On October 9, 2014, the Company sought to affect a reverse split of its common stock at the rate of 1 for 20 for the purpose of increasing the per share price for the Company’s stock in an effort to attract future investors who might otherwise shy away from a good company because of its low stock price. This filing was submitted to FINRA on October 9, 2014 and the Company is currently in the process of providing documentation to FINRA to effectuate the reverse split.

 

The Company has performed an evaluation of subsequent events in accordance with ASC Topic 855 and the Company is not aware of any other subsequent events which would require recognition or disclosure in the financial statements.

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

 

OVERVIEW

 

We mainly engage in the business of growing mushrooms and marketing, producing and selling mushrooms and related agricultural products through our affiliated VIE Liaoning Dingxu.

 

We mainly produce and sell three types of products:

 

(1) Fresh mushrooms. We grow fresh mushrooms in our greenhouses and sell them to stores that sell products directly to individual customers. Our fresh mushrooms include oyster mushrooms, king oyster mushrooms, shiitake mushrooms, king trumpet mushrooms and button mushrooms.

 

The revenues from the sales of fresh mushrooms constitute approximately 62.2% and 62.8% of our total revenues in the nine months of 2014 and 2013, respectively.

 

(2) Mushroom seeds. We sell mushroom seeds to farmers in the form of stick shaped containers filled with fertilizers on which the mushrooms grow and bottles of mushroom seeds which are also used to grow mushrooms.

 

The revenues from the sales of mushroom seeds were approximately 10.4% and 10.8% of our total revenues in the nine months of 2014 and 2013, respectively.

 

(3) Dried Mushrooms. We dry and package fresh mushrooms and sell them to stores that sell products directly to individual customers. Our dried mushrooms include eryngii mushrooms, white jade mushrooms, white king oyster mushrooms and Ganoderma mushrooms.

 

The revenue from the sales of dried mushrooms was approximately 27.4% and 27.0% of our total revenues in the nine months of 2014 and 2013, respectively.

 

Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included.  Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

 

Inventories

 

Inventories are stated at the lower of cost or market value. Cost is determined using moving weighted average method. Inventories consist of raw materials, finished goods and growing crops. Cost of finished goods comprises direct material and direct production cost based on normal operating capacity.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Depreciation on property, plant and equipment is calculated on the straight-line method after taking into account their respective estimated residual values over the estimated useful lives of the assets as follows:

 

Building	20 years
Plant equipment	5-10 years
Office equipment	3-5 years
Vehicles	4  years

  

Maintenance and repair costs are expensed as incurred, whereas significant renewals and betterments are capitalized.

 

Construction in progress represents capital assets under construction or being installed and is stated at cost. Cost comprises original cost of plant and equipment, installation, construction and other direct costs prior to the date of reaching the expected usable condition. Construction in progress is transferred to the property, plant and equipment and depreciation commences when the asset has been substantially completed and reaches the expected usable condition.

 

Land Use Rights

 

The Company states land use right at cost less accumulated amortization. The land use right is amortized on straight line method during the contract period.

 

Long Term Prepaid Lease

 

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the consolidated statements of operations on a straight-line basis over the terms of the underlying lease.

 

The Company records lease payments at cost less accumulated rent.

 

Revenue Recognition

 

The Company engages in the business of growing, producing, marketing and selling fresh mushrooms, dried mushrooms, and mushroom seeds through its affiliated VIE, LiaoNing DingXu.

 

Sales revenue is recognized at the date of shipment from the Company’s facilities to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, ownership has passed, no other significant obligations of the Company exist and collectability is reasonably assured.

 

The Company’s revenue consists of the invoiced value of goods, net of value-added tax (“VAT”).

 

Fair Value of Financial Instruments

 

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no other items that required fair value measurement on a recurring basis.

 

Basic and Diluted Loss Per Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.

 

Stock-Based Compensation

 

The Company adopted FASB guidance on stock based compensation upon inception on September 9, 2010. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company did not issue any share-based payments for services or compensation to employees, or otherwise for the periods presented.

 

Taxation

 

Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC where the Company operates after taking into account the benefits from any special tax credits or “tax holidays” allowed in the county of operations.

 

The Company does not accrue United States income tax since it has no operating income in the United States. The operating subsidiary is organized and located in the PRC and does not conduct any business in the United States.

 

Enterprise income tax

 

In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the operating subsidiary is exempted from enterprise income tax from 2010 to 2014. Accordingly, the Company statutory rate was 0% and 0% for the nine months ended September 30, 2014 and 2013, respectively.

 

Value added tax

 

The Provisional Regulations of The PRC concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

 

In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the Company is exempted from VAT from 2010 to 2014.

 

Foreign Currency Translation

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries and variable interest entities is the RMB. For the subsidiaries and variable interest entities whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company. In accordance with ASC Topic 230, cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 

Accumulated and Other Comprehensive Income

 

Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments.

 

FINANCIAL CONDITION

 

Results of Operations for the nine months ended September 30, 2014 and 2013

 

1. Revenue

 

The following table sets forth the breakdown of our revenue for the nine months ended September 30, 2014 and 2013, respectively:

 

		2014				2013
Fresh Mushrooms		$	6,149,302			$	6,018,925
Mushroom seeds			1,032,811				1,034,974
Dried mushrooms			2,707,361				2,528,630
Total revenue		$	9,889,474			$	9,582,529

 

We derived our revenues predominantly from sales of our mushroom products. For the nine months ended September 30, 2014 and 2013, revenues were $9,889,474 and $9,582,529, respectively, representing an increase of $306,945.

 

The revenue from sales of our fresh mushrooms increased $130,377 resulting from our increased production capacity since that we completed 4 new greenhouses in fourth quarter of 2013.

 

The revenue from sales of our mushroom seeds decreased by $2,163, resulting from normal marketing fluctuation, not a significant change since our production capacity and sales price have remained relatively steady from 2013 till now.

 

The revenue from sales of our dried mushrooms increased $178,731, resulting from both of our increased sales volume 8.5% and decreased sales price 1.4% as that we engage to grow our market through appropriately reduce our sales price.

 

2. Cost of revenue

 

The following table presents a breakdown of our cost of revenue of our mushroom products for the nine months ended September 30, 2014 and 2013.

 

		2014				2013
Cost of fresh mushroom sales		$	2,998,191			$	2,929,068
Cost of mushroom seed sales			361,975				390,804
Cost of dried mushroom sales			556,507				432,191
Total		$	3,916,673			$	3,752,063

 

For the nine months ended September 30, 2014 and 2013, cost of fresh mushroom sales were $2,998,191and $2,929,068 respectively, representing an increase of $69,123. The increase in cost was mainly related to a corresponding increase of the sales.

 

For the nine months ended September 30, 2014 and 2013, cost of mushroom seed sales were $361,975 and $390,804, respectively, representing a decrease of $28,829. The decrease in cost was mainly related to a decrease in in-house manufacturing cost due to a continuously improved production skill.

 

For the nine months ended September30, 2014 and 2013, cost of dried mushroom sales were $556,507 and $432,191, respectively, representing an increase of $124,316. The increase in cost was consistent with the increase in sales volume of dried mushrooms in the first nine months of 2014 compared to the period of 2013.

 

3. Gross profit

 

The following table presents the gross profit of our businesses for the nine months ended September 30, 2014 and 2013:

 

Production Category		2014				2013
Fresh mushrooms sales		$	3,151,111			$	3,089,857
Mushroom crops and seeds sales			670,836				644,170
Dried Mushroom sales			2,150,854				2,096,439
Total gross profit		$	5,972,801			$	5,830,466

 

Gross profit from our mushroom growing business increased $142,335 for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase primarily resulted from the cumulative effect of sales volume increase from our business developed and cost reduce from our production skill improved continuously. The gross margin of our fresh mushrooms and mushroom seeds increased $87,920 because the 4 new greenhouses were completed in the fourth quarter of 2013 and our sales increased accordingly, which improved our gross margin. In addition, dried mushrooms, usually purchased as gifts by customers, have large added value and high gross margin as before. The gross margin of dried mushrooms increased $54,415 mainly resulted from the cumulative effect of sales price decreased 1.4% and the sales volume increased 8.5% as that we engage to grow our market through appropriately reduce our sales price.

 

4. Depreciation and amortization

 

For the nine months ended September 30, 2014, our depreciation and amortization was $543,480, representing an increase of $14,001 compared to the nine months ended September 30, 2013. The increase was primarily a result of the increased fixed assets transferred from CIP in fourth quarter of 2013, the increased prepaid lease for land in December of 2013 that was be amortized beginning at January of 2014 and the new built workshop for soy source in June of 2014 that was be depreciated from July of 2014. Additionally, $133,870 and $8,992 of depreciation expense was recorded in Cost of Goods Sold for the nine periods ended September 30, 2014 and 2013, respectively.

 

5. Bad debt

 

The bad debt represented an allowance for doubtful receivable accounts. For the nine months ended September 30, 2014, our bad debt was $1,141,225, representing an increase of $1,141,225 compared to the nine months ended September 30, 2013 resulting from the total $1,141,225 due from a related party was write off .

 

6. Other income

 

Other income is used to record the Company’s non-operating income, such as government grant and adjustments of allowance for doubtful receivable accounts. For the nine months ended September 30, 2014, the other income was $16,449, representing an increase of $16,449 compared to the nine months ended September 30, 2013 because the Company collected $16,449 other receivable which has been written off before, which has been recorded as other income.

 

7. Income taxes

 

In accordance with the relevant tax laws, the Company statutory rate was 0% and 0% for the nine months ended September 30, 2014 and 2013, respectively.

 

Liquidity and Capital Resources:

 

To date, our operations have been funded by contributions from “due to related parties” and the net cash provided by operations. As a result, at September 30, 2014 we had $3,018,335 current assets and $2,387,837 current liabilities mainly consisted of the $2,331,434 due to related parties and $56,403 other payables and accrued liabilities. We had a working capital of $630,498 as of September 30, 2014. Considering that our current assets included $1,864,824 “advances to suppliers” for purchasing the building within fixed assets, there is a liquidity risk for the coming period.  Although we believe management will continue to fund the Company on an as needed basis, we do not have a written agreement requiring such funding. For the due to related party, the shareholders promised that they would not demand repayment from the Company with in next fiscal year.

 

We believe that our operations will provide sufficient net cash to fund our business for the next 12 months. During the nine months ended September 30, 2014, we had net income of $3,973,516 and cash provided by operating activities was $6,332,779. Over the long term, our expectation is to see steadily growing sales of our mushroom products as we continue to invest in and to develop our fresh mushroom and begin to manufacture processed products such as mushrooms soy sauce and mushroom drinks.

 

Cash flow for the nine months ended September 30, 2014 and 2013

 

Operating Activities

 

Net cash provided by operating activities for the nine months ended September 30, 2014 was $6,332,779, which was primarily due to (i) net income before non-controlling interests of $3,973,516, (ii) depreciation and amortization of fixed assets and land use rights in the amount of $677,350, (iii) bad debt of $1,141,225, (iv) imputed interest of $133,767 and (v) a total increase of $406,921in assets and liabilities.

 

Net cash provided by operating activities for the nine months ended September 30, 2013 was $2,211,883 which was primarily due to (i) an increase of the net income $4,606,814 and (ii) a total increase of $669,473 of the depreciation and amortization of fixed assets, land use right and (iii) an increase of the imputed interest $256,775 and (iv) a total decrease of $3,321,179 in assets and liabilities.

 

Investing Activities

 

Net cash used in investing activities was $6,125,312 for the nine months ended September 30, 2014, which was primarily due to (i) the cash paid for fix assets $2,546,054, (ii) the cash paid for long term investment $2,438,033, (iii) the loan to a related party $1,141,225.

 

No investing activity took place for the nine months ended September 30, 2013.

 

Financing activities

 

Net cash provided by financing activities was $654,010 for the nine months ended September 30, 2014, which was mainly attributable to the $654,010 advances from related parties.

 

Net cash used in financing activities was $2,043,932 for the nine months ended September 30, 2013, which was mainly attributable to the paid back to related party.

 

Impact of inflation

 

We are subject to commodity price risks arising from price fluctuations in the market prices of the raw materials. We have generally been able to pass on cost increases through price adjustments. However, the ability to pass on these increases depends on market conditions influenced by the overall economic conditions in China. We manage our price risks through productivity improvements and cost-containment measures. We do not believe that inflation risk is material to our business or our financial position, results of operations or cash flows.

 

Impact of foreign currency fluctuations

 

The reporting currency of the Company is the U.S. dollar. For the subsidiaries and variable interest entities whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

Financial Instruments

 

We have not used any financial instruments to manage funding or treasury since our inception.

 

Commitments for Capital Expenditures

 

We have no commitments for capital expenditures. For our business, we plan to obtain land use rights to more farmland and build additional greenhouses to expand our mushroom farms and increase the production of our fresh mushrooms. We have purchased, installed and tested equipment to be used in the production of dried-processed mushroom products, such as canned mushrooms and mushroom drinks. Our production of mushrooms is not sufficient to begin production of such products. We intend to begin production as soon as we purchase additional mushrooms and hire additional employees.

 

Research and Development

 

We have not incurred any research and development expenses since our inception.

 

Off-Balance Sheet Arrangements

 

We currently do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for a Smaller Reporting Company.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2014 in ensuring that information required to be disclosed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the Exchange Act rules and forms due to the material weakness described below. As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

Material Weaknesses

 

Management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. In making the assessment, management used the framework in “Internal Control –Integrated Framework” promulgated in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on that assessment, our principal executive officer and principal financial and accounting officer concluded that our internal control over financial reporting was not effective as of December 31, 2013 because a material weakness existed in our internal control over financial reporting related to the classification of certain costs and expenses.

 

As a result, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. This quarterly report on Form 10-Q does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

 

Description of Material Weaknesses at December 31, 2013

 

In 2013 the Company had pervasive material weaknesses existed in our internal control over financial reporting. Specifically, the Company does not have an independent board of directors or audit committee or adequate segregation of duties.  All of our financial reporting is carried out by our financial consultant. We do not have an independent body to oversee our internal controls over financial reporting and lack segregation of duties due to the limited nature and resources of the Company. 

Remediation of Material Weakness

 

The Company intends to establish the following remediation efforts:

 

(1)	Commence a process and procedure to locate, and nominate for election to the Company’s board of directors, independent directors, including at least one individual qualified to be an audit committee financial expert;

 

(2)	At such time as independent directors are elected to the Company’s board of directors, establish an independent audit committee;

 

(3)	Commence a process and procedure to locate and hire qualified individuals to act as Chief Financial Officer and/or Chief Accounting Officer; and

 

(4)

Under the supervision of the Audit Committee and with the assistance of the Chief Executive Officer and Chief Financial Officer procure the resources, appoint additional personnel and establish the procedures necessary to produce Internal Controls over Financial Reporting that will be effective as evaluated under the framework in “Internal Control – Integrated Framework” promulgated in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Conclusion

 

We believe the measures described above will remediate the material weaknesses we have identified and will continue to strengthen our internal controls over financial reporting. We are committed to continually improving our internal control processes and will diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal controls over financial reporting, we may determine that additional measures are necessary to address control deficiencies. Moreover, we may decide to modify certain of the remediation measures described above.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the third quarter of 2014 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

 

We are not currently a party to any legal proceedings and nor are we aware of any proceedings threatened against us.

 

Item 1A. Risk Factors

 

Not required for Smaller Reporting Company.

 

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

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (6)
31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (6)
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
101***		The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.
		101.INS****    XBRL Instance
		101.SCH***     XBRL Taxonomy Extension Schema
		101.CAL***     XBRL Taxonomy Extension Calculation
		101.DEF***      XBRL Taxonomy Extension Definition
		101.LAB***     XBRL Taxonomy Extension Labels
		101.PRE***      XBRL Taxonomy Extension Presentation

 

*** XBRL information is furnished and not 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, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

November 19, 2014	China Liaoning Dingxu Ecological Agriculture Development, Inc.
	By:	/s/ Chin Yung Kong
		Chin Yung Kong Chief Executive Officer, Chief Financial Officer, President, Secretary and Treasurer (Principal Executive, Financial and Accounting Officer)

 

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (6)
31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (6)
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
101***		The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.
		101.INS****    XBRL Instance
		101.SCH***     XBRL Taxonomy Extension Schema
		101.CAL***     XBRL Taxonomy Extension Calculation
		101.DEF***      XBRL Taxonomy Extension Definition
		101.LAB***     XBRL Taxonomy Extension Labels
		101.PRE***      XBRL Taxonomy Extension Presentation

 

*** XBRL information is furnished and not 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, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

 

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