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EX-32.1 - EXHIBIT 32.1 - China Liaoning Dingxu Ecological Agriculture Development, Inc.clad0814form10qexh32_1.htm
EX-31.1 - EXHIBIT 31.1 - China Liaoning Dingxu Ecological Agriculture Development, Inc.clad0814form10qexh31_1.htm
EX-31.2 - EXHIBIT 31.2 - China Liaoning Dingxu Ecological Agriculture Development, Inc.clad0814form10qexh31_2.htm
EX-32.2 - EXHIBIT 32.2 - China Liaoning Dingxu Ecological Agriculture Development, Inc.clad0814form10qexh32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2015

 

☐  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 ☐ No ☑ *

 

* 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 ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 

 

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

Yes ☐ No ☑

 

As of August 14, 2015, there were 7,845,617 shares of common stock of the registrant outstanding.

   
 

Table of Contents

 

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

 

 

 

 

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)

(UNAUDITED)

           
    As of    As of 
   June 30, 2015  December 31, 2014
           
ASSETS          
           
Cash and cash equivalents  $785,652   $82,776 
Inventories   155,990    307,260 
Other receivables, net   —      56,862 
Other current assets   89,710    89,348 
Total Current Assets   1,031,352    536,246 
           
Property and equipment, net   12,621,663    11,089,999 
Advances to suppliers, long-term   —      1,864,416 
Land use right   5,344,139    5,436,351 
Prepaid lease for land   1,658,904    1,707,203 
Total Assets  $20,656,058   $20,634,215 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities:          
Account payable  $105,637   $105,211 
Accrued expenses   18,796    18,989 
Due to related parties   486,982    2,545,915 
Total Current Liabilities   611,415    2,670,115 
           
Long term payable   1,588,199    1,581,775 
           
Total Liabilities   2,199,614    4,251,890 
           
Stockholders' Equity:          
           
Common stock ($0.001 par value; 75,000,000 shares authorized; 7,845,233 and 211,900  shares issued and outstanding at June 30, 2015 and December 31, 2014)   7,845    212 
Additional paid-in capital   20,147,904    15,108,456 
Retained earnings   (2,608,492)   432,585 
Accumulated other comprehensive income   744,882    677,494 
Non-controlling interests   164,305    163,578 
           
Total Stockholders' Equity   18,456,444    16,382,325 
           
Total Liabilities and Stockholders' Equity  $20,656,058   $20,634,215 
           
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 six months ended   The six months ended 
   June 30, 2015   June 30, 2014   June 30, 2015   June 30, 2014 
                     
NET REVENUES  $329,441   $3,181,583   $2,107,586   $6,629,131 
                     
COST OF REVENUES   371,531    1,323,833    1,619,713    2,559,176 
                     
GROSS PROFIT   (42,090)   1,857,750    487,873    4,069,955 
                     
OPERATING EXPENSES:                    
Depreciation and amortization   198,169    174,621    425,793    362,090 
Bad debt   —      —      —      1,141,225 
General and administrative   27,679    56,753    565,908    150,343 
Total Operating Expenses   225,847    231,374    991,701    1,653,658 
                     
INCOME (LOSS) FROM OPERATIONS   (267,937)   1,626,376    (503,828)   2,416,297 
                     
OTHER INCOME (EXPENSE):                    
Interest expense   (58,288)   94    (2,537,247)   16,520 
Other income   —      (45,312)   —      (88,960)
Total Other Income (Expense)   (58,288   (45,218   (2,537,247   (72,440
                     
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAX   (326,225)   1,581,158    (3,041,075)   2,343,857 
                     
PROVISION FOR INCOME TAXES   —      —      —      —   
                     
NET INCOME (LOSS) BEFORE NON-CONTROLLING
 INTERESTS
  $(326,225)  $1,581,158   $(3,041,075)  $2,343,857 
                     
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTERESTS   (2,628)   15,812    (663)   24,112 
                     
NET INCOME (LOSS)  $(323,597)  $1,565,346   $(3,040,412)  $2,319,745 
                     
OTHER COMPREHENSIVE INCOME (LOSS):                    
                     
Unrealized foreign currency translation gain (loss)   (34,125)   (166)   68,069    (210,065)
                     
LESS: OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTERESTS   (341)   (2)   681    (2,101)
                     
COMPREHENSIVE INCOME (LOSS)  $(357,381)  $1,565,182   $(2,973,024)  $2,111,781 
                     
NET INCOME (LOSS) PER COMMON SHARE:                    
Basic  $(0.18)  $10.21   $(1.01)  $15.14 
Diluted  $(0.18)  $10.21   $(1.01)  $15.14 
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic   4,416,662    159,833    3,001,521    159,833 
Diluted   4,416,662    159,833    3,001,521    159,833 
                     
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 six months Ended
   June 30,
   2015  2014
           
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)   (3,040,412)   2,319,745 
Net income attributable to non-controlling interests   (663)   24,112 
Adjustments to reconcile net income to net cash Provided by operating activities:          
Bad debt   —      1,141,225 
Depreciation and amortization   425,793    449,488 
Imputed interest   27,127    88,816 
Debt discount amortization   2,510,000    —   
Changes in assets and liabilities:          
Inventories   151,270    (137,730)
Other receivables   56,862    166,310 
Other current assets   (363)   820 
Prepaid expense   (7,573)   76,019 
Accounts payable and accrued liabilities   512,766    337,794 
NET CASH PROVIDED BY (USED IN)  OPERATING ACTIVITIES   634,807    4,466,599 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Loan to related parties   —      (1,141,225)
Cash paid for fixed asset   —      (681,230)
Cash paid for long term  investment   —      (2,437,914)
NET CASH USED IN INVESTING ACTIVITIES   —      (4,260,369)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from  related parties   —      654,010 
          
           
NET CASH  PROVIDED BY FINANCING ACTIVITIES   —      654,010 
           
EFFECT OF FOREIGN EXCHANGE RATE   68,069    (210,065)
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   702,876    650,175 
           
CASH AND CASH EQUIVALENTS - beginning of period   82,776    11,797 
           
CASH AND CASH EQUIVALENTS - end of period   785,652    661,972 
           
           
NON-CASH INVESTING AND FINANCING ACTIVIIES          
Fixed assets received from prepaid building  $1,871,989   $—   
AP converted into note payable  $2,510,000   $—   
Debt converted into common shares  $2,510,000   $—   
Beneficial conversion feature  $2,510,000   $—   
           
SUPPLEMENTAL INFORMATION          
Income tax paid  $—    —   
Interest paid  $—   —   
           
See accompanying notes to unaudited consolidated financial statements.

   
 


CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2015

 

 

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 $785,652 and $82,776 as of June 30, 2015 and December 31, 2014, respectively.  The Company had no cash equivalent as of June 30, 2015 and December 31, 2014.

 

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 six months ended June 30, 2015 and 2014, the Company recorded amortization expense of $5,949 and $5,910, respectively. The Company recorded the land use right net value of $545,193 and $548,922 as of June 30, 2015 and December 31, 2014, 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 six months ended June 30, 2015 and 2014, the Company recorded amortization expense of $29,724 and $29,656, respectively. The Company recorded the land use right net value of $2,520,662 and $2,540,116 as of June 30, 2015 and December 31, 2014, 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 six months ended June 30, 2015 and 2014, the Company recorded amortization expense of $78,436 and $78,257, respectively. The Company recorded the land use right net value of $2,278,284 and $2,347,313 as of June 30, 2015 and December 31, 2014, respectively.  As the land use right was not yet fully paid for as of June 30, 2015, the Company recorded long term liabilities related to this land use right in the amount of $1,588,199 and $1,581,775 as of June 30, 2015 and December 31, 2014, 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 six months ended June 30, 2015 and 2014, the Company recorded lease expense of $27,994 and $27,801, 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 lease payments for the entire contract period $984,107 were prepaid. For the six months ended June 30, 2015 and 2014, the Company recorded lease expense of $27,150 and $27,088, 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 2016. Accordingly, the Company statutory rate was 0% and 0% for the six months ended June 30, 2015 and 2014, 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 2016.

 

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

 

On August 2014, The Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements – Going Concerns (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position or results of operations.

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance requires that share-based compensation that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 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.

Finished goods consist of dried mushrooms.

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. Costs included in growing crops related to the current crop year.

Inventories at June 30, 2015 and December 31, 2014 consisted of the following:

 

  

June 30,

2015

 

December 31,

2014

           
Raw materials and supplies  $48,816   $14,005 
Finished goods   38,758    —   
Growing crops   68,416    254,248 
Others   —      39,007 
Total Inventories  $155,990   $307,260 

 

NOTE 4. ADVANCES TO SUPPLIER

 

Advances to suppliers were mainly used to record the advances paid as deposits on raw materials, equipment, or other fixed assets being purchased. Advances to suppliers at June 30, 2015 and December 31, 2014 consist of the following:

 

  

June 30,

2015

 

December 31,

2014

       
Advances to suppliers – long-term      
PanJin XingHua Real Estate Development Co., Ltd  $—     $1,864,416 
Total advances to suppliers – long-term  $—     $1,864,416 

 

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 $1,864,416 to PanJin XingHua Real Estate Development Co., Ltd for the purchase of this building. The building was completed during April 2015 at which time it was transferred into fixed assets and put into use by the Company.

NOTE 5. RECEIVABLES

 

Receivables consisted of account receivables due from the sales of mushroom products and advances made to Company employees for future business related expenses. The balances as of June 30, 2015 and December 31, 2014 are as follows:

 

  

June 30,

2015

 

December 31,

2014

           
Account receivable  $—     $56,862 
Employee advances   —      —   
Total receivables  $—     $56,862 

 

NOTE 6.  PROPERTY, PLANT AND EQUIPMENT

 

Property, Plant and Equipment at June 30, 2015 and December 31, 2014 consists of the following:

 

  

June 30,

2015

 

December 31,

2014

           
Building  $14,191,313   $12,276,999 
Plant   777,856    774,705 
Vehicles   34,225    34,087 
Office equipment   75,455    75,154 
Total fixed assets   15,078,849    13,160,945 
           
Less: Accumulated depreciation   2,457,186    2,070,946 
Property, plant and equipment, net  $12,621,663   $11,089,999 

 

During April 2015, the Company transferred prepaid $1,871,989 into fixed assets for an apartment building purchased from PanJin XingHua Real Estate Development Co., Ltd. The building was completed and the Company has put into use. As June 30, 2015, the Company has submitted application for property certification. The building is in the process of being transferred to Company’s name.

 

For the six months ended June 30, 2015 and 2014, the Company recorded depreciation expense of $386,240 and $335,555, respectively.

 

   
 

NOTE 7. 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 $486,982 and $2,545,915 as of June 30, 2015 and December 31, 2014, respectively.

 

During the six months ended June 30, 2014, the Company advanced a loan in the amount of $1,141,225 to the director of the Company’s operating VIE, Liaoning Dingxu. This loan has no stated term of repayment and interest rate.  The Company conservatively recorded a full allowance for the loan and recorded bad debt expenses of $1,141,225 as of June 30, 2014.

 

Convertible Debt

 

On January 10, 2015, the Company converted $2,000,000 of related party payables due to Chin Yung Kong into a convertible note. The note has a maturity date of June 10, 2015, and is convertible into Company common stock at the fixed rate of $1.5 per share. The note does not bear any interest.

 

The Company evaluated the convertible note to Chin Yung Kong and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has the appropriate number of shares available to be issuable if settlement were to occur. The beneficial conversion feature discount resulting from the conversion price of $77.25 below the market price on January 10, 2015 of $78.75 provided a value of $2,000,000. On January 15, 2015, Chin Yung Kong exercised the convertible note and converted it into 1,333,333 shares of common stock, in accordance with the note agreement. As a result, no gain or loss was recognized on the conversion as it was made within the terms of the agreement. In addition, as a result of the full conversion, the debt discount recorded of $2,000,000 as of January 10, 2015 was completely amortized into interest expense in the same amount.

 

On May 22, 2015, the Company converted $60,000 of related party payables due to Chin Yung Kong into a convertible note. The note has a maturity date of May 22, 2015, and is convertible into Company common stock at the fixed rate of $0.01 per share. The note does not bear any interest.

 

The Company evaluated the convertible note to Chin Yung Kong and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has the appropriate number of shares available to be issuable if settlement were to occur. The beneficial conversion feature discount resulting from the conversion price of $5.99 below the market price on May 22, 2015 of $6.00 provided a value of $60,000. On May 22, 2015, Chin Yung Kong exercised the convertible note and converted it into 6,000,000 shares of common stock, in accordance with the note agreement. As a result, no gain or loss was recognized on the conversion as it was made within the terms of the agreement. In addition, as a result of the full conversion, the debt discount recorded of $60,000 as of May 22, 2015 was completely amortized into interest expense in the same amount.

 

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 $27,127 and $88,816 for the six months ended June 30, 2015 and 2014, respectively.

 

NOTE 8 STOCKHOLDERS’ EQUITY

 

The Company’s capitalization is 75,000,000 common shares with a par value of $0.001 per share. There are a total of 7,845,617 common shares issued and outstanding at June 30, 2015. No preferred shares have been authorized or issued.

During the six months ended June 30, 2015 and 2014, the Company recorded imputed interest on outstanding due to related parties balance as a contribution of paid-in capital in the amount of $27,127 and $88,816, respectively.

 

On October 9, 2014, we completed a 1-for-20 reverse stock split of our outstanding common stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented.

On October 31, 2014, the Company issued 57,067 common shares to a consultant in consideration for providing business development services. The total fair value of the common stock was $6,334,400 based on the closing price of the Company’s common stock on the date of grant.

On January 10, 2015, the Company converted $2,000,000 of related party payables due to Chin Yung Kong (a related party) into a convertible note. The note has a maturity date of June 10, 2015, and is convertible into Company common stock at the fixed rate of $1.5 per share. The note does not bear any interest. On January 15, 2015, Chin Yung Kong exercised the convertible note and converted it into 1,333,333 shares of common stock, in accordance with the note agreement. As a result, no gain or loss was recognized on the conversion as it was made within the terms of the agreement. In addition, as a result of the full conversion, the debt discount recorded of $2,000,000 as of January 10, 2015 was completely amortized into interest expense in the same amount.

 

On January 10, 2015, the Company converted $450,000 of account payables due to five consultants into five separate convertible notes. Each note has a maturity date of January 10, 2016, and is convertible into Company common stock at the fixed rate of $1.5 per share. The notes also bear interest at the rate of 10% per year. On January 15, 2015, the five consultants exercised each of the five convertible notes and converted them into at total of 300,000 shares of common stock, in accordance with the note agreements. As a result, no gain or loss was recognized on the conversions as they were made within the terms of the agreements. In addition, as a result of the full conversions, the debt discounts recorded of $450,000 as of January 10, 2015 were completely amortized into interest expense in the same amount.

 

On May 19, 2015, we completed a 1-for-15 reverse stock split of our outstanding common stock. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented.

On May 22, 2015, the Company converted $60,000 of related party payables due to Chin Yung Kong (a related party) into a convertible note. The note has a maturity date of May 22, 2015, and is convertible into Company common stock at the fixed rate of $0.01 per share. The note does not bear any interest. On May 22, 2015, Chin Yung Kong exercised the convertible note and converted it into 6,000,000 shares of common stock, in accordance with the note agreement. As a result, no gain or loss was recognized on the conversion as it was made within the terms of the agreement. In addition, as a result of the full conversion, the debt discount recorded of $60,000 as of May 22, 2015 was completely amortized into interest expense in the same amount.

 

The Company has not granted any stock options and has not recorded any stock-based compensation since inception.

   
 

NOTE 9 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 June 30, 2015:

 

      Fair Value Measurements at
Balance as of June 30, 2015     Level 1     Level 2     Level 3  
                             
$ —       $ —       $ —       $ —    

 

 

The following table provides a summary of the fair values of assets and liabilities as of December 31, 2014:

 

      Fair Value Measurements at
Balance as of December 31, 2014     Level 1     Level 2     Level 3  
                             
$ —       $ —       $ —       $ —    

 

NOTE 10. 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 $64 and $22,016 for the six months ended June 30, 2015 and 2014, respectively. The Company recorded $164,305 and $163,578 of non-controlling interest as of June 30, 2015 and December 31, 2014, respectively.

 

NOTE 11. 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:      
2015   $ —    
2016     —    
2017     —    
2018     —    
2019     16,969  
Remaining payments     1,571,230
Total future minimum payments   $ 1,588,199  

 

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 June 30, 2015 and December 31, 2014, respectively.

 

   
 

NOTE 12. CONVERTIBLE DEBT

 

On January 10, 2015, the Company converted $2,000,000 of related party payables due to Chin Yung Kong (a related party) into a convertible note. The note has a maturity date of June 10, 2015, and is convertible into Company common stock at the fixed rate of $1.5 per share. The note does not bear any interest.

 

The Company evaluated the convertible note to Chin Yung Kong and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has the appropriate number of shares available to be issuable if settlement were to occur. The beneficial conversion feature discount resulting from the conversion price of $77.25 below the market price on January 10, 2015 of $78.75 provided a value of $2,000,000. On January 15, 2015, Chin Yung Kong exercised the convertible note and converted it into 1,333,333 shares of common stock, in accordance with the note agreement. As a result, no gain or loss was recognized on the conversion as it was made within the terms of the agreement. In addition, as a result of the full conversion, the debt discount recorded of $2,000,000 as of January 10, 2015 was completely amortized into interest expense in the same amount.

 

On January 10, 2015, the Company converted $450,000 of account payables due to five consultants into five separate convertible notes. Each note has a maturity date of January 10, 2016, and is convertible into Company common stock at the fixed rate of $1.5 per share. The notes also bear interest at the rate of 10% per year.

 

The Company evaluated the convertible notes to the five consultants and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has the appropriate number of shares available to be issuable if settlement were to occur. The beneficial conversion feature discount resulting from the conversion price of $77.25 below the market price on January 10, 2015 of $78.75 provided a value of $450,000. On January 15, 2015, the five consultants exercised each of the five convertible notes and converted them into at total of 300,000 shares of common stock, in accordance with the note agreements. As a result, no gain or loss was recognized on the conversions as they were made within the terms of the agreements. In addition, as a result of the full conversions, the debt discounts recorded of $450,000 as of January 10, 2015 were completely amortized into interest expense in the same amount.

 

On May 22, 2015, the Company converted $60,000 of related party payables due to Chin Yung Kong into a convertible note. The note has a maturity date of May 22, 2015, and is convertible into Company common stock at the fixed rate of $0.01 per share. The note does not bear any interest.

 

The Company evaluated the convertible note to Chin Yung Kong and determined that the shares issuable pursuant to the conversion option were determinate due to the fixed conversion price and, as such, does not constitute a derivative liability as the Company has the appropriate number of shares available to be issuable if settlement were to occur. The beneficial conversion feature discount resulting from the conversion price of $5.99 below the market price on May 22, 2015 of $ 6 provided a value of $60,000. On May 22, 2015, Chin Yung Kong exercised the convertible note and converted it into 6,000,000 shares of common stock, in accordance with the note agreement. As a result, no gain or loss was recognized on the conversion as it was made within the terms of the agreement. In addition, as a result of the full conversion, the debt discount recorded of $60,000 as of May 22, 2015 was completely amortized into interest expense in the same amount.

 

NOTE 13. SUBSEQUENT EVENTS

 

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 83% and 62% of our total revenues in the first six months of 2015 and 2014, 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 was approximately 16% and 10% of our total revenues in the first six months of 2015 and 2014, 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 1% and 28% of our total revenues in the first six months of 2015 and 2014, 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 2016. Accordingly, the Company statutory rate was 0% and 0% for the six months ended June 30, 2015 and 2014, 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 2016.

   
 

 

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 six months ended June 30, 2015 and 2014

 

1. Revenue

 

The following table sets forth the breakdown of our revenue for the six months ended June 30, 2015 and 2014, respectively:

 

       
   2015  2014
Fresh Mushrooms  $1,760,368   $4,121,280 
Mushroom seeds   330,702    690,830 
Dried mushrooms  16,516    1,817,021 
Total revenue  $2,107,586   $6,629,131 

 

We derived our revenues predominantly from sales of our mushroom products. For the six months ended June 30, 2015 and 2014, revenues were $2,107,586 and $6,629,131, respectively, representing a decrease of $4,521,545.

 

The revenue from sales of our fresh mushrooms decreased $2,360,912 resulting from the decrease of sales price and volume. As the Chinese government has embarked on a high-profile anti-corruption campaign, the gifts and catering market has significantly decreased. So, in order to continue selling the fresh mushrooms in a reasonable time, we cut prices and the production quantity to reduce inventories.

 

The revenue from sales of our mushroom seeds decreased $360,128, resulting from the decrease of sales price and volume. As with the fresh mushrooms, the farmers needed fewer mushroom seeds to product mushrooms due to lower demand and therefore requested a lower price and quantity for the mushroom seeds.

 

The revenue from sales of our dried mushrooms decreased $1,800,505, also resulting from the above reasons. As the dried mushrooms are generally used for gifts, our sales of this product have significantly declined due to this situation.

 

   
 

2. Cost of revenue

 

The following table presents a breakdown of our cost of revenue of our mushroom products for the six months ended June 30, 2015 and 2014.

 

   2015  2014
           
Cost of fresh mushroom sales  $1,402,451 $  1,948,710 
           
Cost of mushroom seed sales   209,904    257,980 
           
Cost of dried mushroom sales   7,358    352,486 
           
Total  $1,619,713 $  2,559,176 
           

 

For the six months ended June 30, 2015 and 2014, cost of fresh mushroom sales were $1,402,451 and $1,948,710 respectively, representing a decrease of $546,259. The decrease in cost was mainly due from the comprehensive impact of two aspects, one was the spoilage of fresh mushrooms not sold out in time which resulted in the unit cost increased, the other was the production yield decreased which led our total cost decreased.

 

For the six months ended June 30, 2015 and 2014, cost of mushroom seed sales were $209,904 and $257,980, respectively, representing a decrease of $48,076. The decrease in cost was mainly related to the same reason with fresh mushroom.

 

For the six months ended June 30, 2015 and 2014, cost of dried mushroom sales were $7,358 and $352,486, respectively, representing a decrease of $345,128. The decrease in cost was related to that the Chinese government embarked on a high-profile anti-corruption. As the dried mushrooms are generally used for gifts, our sales of this product have significantly declined due to this situation.

 

3. Gross profit

 

The following table presents the gross profit of our businesses for the six months ended June 30, 2015 and 2014:

 

Production Category  2015  2014
           
Fresh mushrooms sales  $357,917   $2,172,570 
           
Mushroom seeds sales   120,798    432,850 
           
Dried Mushroom sales   9,158    1,464,535 
           
Total gross profit  $487,873   $4,069,955 

 

Gross profit from our mushroom growing business decreased $3,582,082 for the six months ended June 30, 2015 compared to the same period of 2014. The decrease primarily resulted from the cumulative effect of sales price and volume decreases for our fresh mushrooms, mushroom seeds and dried mushrooms due to the lower demand caused by the Chinese government anti-corruption campaign which led to fewer gifts of mushrooms.

 

4. Depreciation and amortization

 

For the six months ended June 30, 2015, our depreciation and amortization was $425,793, representing an increase of $63,703 compared to the six months ended June 30, 2014. The increase was primarily a result of the new built workshop for soy source in June of 2014 that was be depreciated from July of 2014 and the new buildings in April of 2015 that was be depreciated from May of 2015.

 

5. Bad debt

 

The bad debt represented an allowance for doubtful receivable accounts. For the six months ended June 30, 2015, our bad debt was $0, representing a decrease of $1,141,225 compared to the six months ended June 30, 2014, resulting from the total $1,141,225 due from a related party was written off in the first half year of 2014.

 

6. Other income (expense)

 

Other income (expense) is used to record the Company’s non-operating income, such as interest expense, government grants and adjustments of allowance for doubtful receivable accounts. For the six months ended June 30, 2015, the other income (expense) of ($2,537,247) compared to ($72,440) compared to the six months ended June 30, 2014. The increase in other expense is primarily due to the amortization of the convertible debt discount of $2,510,000 which was amortized into interest expense after the convertible debts were converted into common shares.

 

7. Income taxes

 

In accordance with the relevant tax laws, the Company statutory rate was 0% and 0% for the six months ended June 30, 2015 and 2014, 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 June 30, 2015 we had $1,031,352 of current assets and $611,415 of current liabilities mainly consisting of the $486,982 due to related parties and $124,433 of other payable and accrued liabilities. We had a working capital of $419,937 as of June 30, 2015. As our business went down as the bad market situation, the working capital is likely not enough and 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 six months ended June 30, 2015, we had cash provided by operating activities was $634,807.

Cash flow for the six months ended June 30, 2015 and 2014

 

Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2015 was $634,807, which was primarily due to (i) net loss before non-controlling interests of $3,041,075, (ii) depreciation and amortization of fixed assets and land use rights in the amount of $425,793, (iii) imputed interest of $27,127, (iv) debt discount amortization $2,510,000 and (v) a total increase of $712,962 in assets and liabilities.

 

Net cash provided by operating activities for the six months ended June 30, 2014 was $4,466,599, which was primarily due to (i) net income before non-controlling interests of $2,343,857, (ii) depreciation and amortization of fixed assets and land use rights in the amount of $449,488, (iii) bad debt of $1,141,225, (iv) imputed interest of $88,816 and (v) a total increase of $443,213 in assets and liabilities.

 

Investing Activities

 

No investing activity took place for the six months ended June 30, 2015.

 

Net cash used in investing activities was $4,260,369, which was primarily due to (i) the cash paid for fix assets $681,230, (ii) the cash paid for long term investment $2,437,914, (iii) the loan to a related party $1,141,225.

 

Financing activities

 

No financing activity took place for the six months ended June 30, 2015.

 

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

 

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 June 30, 2015 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 June 30, 2015. 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 June 30, 2015 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, 2014

 

In 2014 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 2014 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 second quarter of 2015 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 June 30, 2015 and 2014, 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.

 

 

August 19, 2015 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)