China Health Industries Holdings, Inc. - Quarter Report: 2010 September (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20-549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______________ to _____________

Commission file number: 000-51060

CHINA HEALTH INDUSTRIES HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		86-0827216 (I.R.S. Employer Identification No.)
168 Binbei Street, Songbei District, Harbin City Heilongjiang Province, People’s Republic of China (Address of principal executive offices)		(Zip Code)

011-86-451-51719407

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller reporting company x

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

As of November 12, 2010, there are 62,239,737 shares of $0.0001 par value common stock issued and outstanding.

FORM 10-Q

CHINA HEALTH INDUSTRIES HOLDINGS, INC.

INDEX

		Page
PART I	FINANCIAL INFORMATION	3

	Item 1. Financial Statements (Unaudited).	3

	Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and June 30, 2010.	5

	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended September 30, 2010 and September 30, 2009 (Unaudited).	6

	Condensed Consolidated Statements of Cash Flows for the Three Months ended September 30, 2010 and September 30, 2009 (Unaudited).	7

	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months ended September 30, 2010 (Unaudited).	8

	Notes to Financial Statements.	9

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22

	Item 3. Quantitative and Qualitative Disclosures About Market Risk.	27

	Item 4. Controls and Procedures.	27

PART II	OTHER INFORMATION	29

	Item 1. Legal Proceedings.	29

	Item 1A. Risk Factors.	29

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	29

	Item 3. Defaults Upon Senior Securities.	29

	Item 4. (Removed and Reserved).	29

	Item 5. Other Information.	29

	Item 6. Exhibits.	29

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets			F-2

Condensed Consolidated Statements of Operations and Comprehensive Income			F-3

Condensed Consolidated Statements of Cash Flows			F-4

Condensed Consolidated Statements of Stockholders’ Equity			F-5

Notes to Condensed Consolidated Financial Statements			F-6 - F-19

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2010 (Unaudited)		June 30, 2010 (Audited)
ASSETS

Current assets
Cash and cash equivalents	$	14,132,435	$	13,344,531
Accounts receivable		5,787		5,693
Inventory		327,395		184,522
Notes receivable		3,072,390		2,992,893
Prepaid expenses		812,980		764,738
Deposit		3,135,217		3,084,335

Total current assets		21,486,204		20,376,712

Property and equipment – net		988,826		987,310
Intangible Assets – net		843,704		835,183
Construction-in-progress		166,017		163,323

Total assets	$	23,484,751	$	22,362,528

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	367,740	$	228,629
Customer deposits		367		363
Related party debt		88,009		85,408
Wages payable		296,707		291,885
Self-insured reserve		219,912		216,343
Tax payable		1,839,992		3,629,951

Total current liabilities		2,812,727		4,452,579

Commitments and contingencies		909,833		968,484

STOCKHOLDERS’ EQUITY
Common stock ($0.0001 par value, 300,000,000 shares authorized, 62,239,737 and 62,239,737 issued and outstanding, respectively)		6,224		6,224
Additional paid-in capital		1,436,078		1,434,910
Accumulated other comprehensive income		814,171		589,618
Retained earnings		18,415,551		15,879,197

Total Stockholders' equity		20,672,024		17,909,949

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	23,484,751	$	22,362,528

See accompanying notes to the condensed consolidated financial statements

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended
	September 30, 2010			September 30, 2009
REVENUE	$	11,617,393		$	10,246,606
COST OF GOODS SOLD		5,985,295			4,486,366

Gross Profit		5,632,098			5,760,240

OPERATING EXPENSES
Selling, general & administrative expenses		1,261,392			516,325
Depreciation and amortization expenses		19,697			20,331
Research & development		737,428			-
Total operating expenses		2,018,517			536,656
Operating profit		3,613,581			5,223,584

OTHER INCOME (EXPENSES)
Interest expenses		(1,168	)		(15,899	)
Interest income		39,355			-
Other income					5
Total other income (expense)		38,187			(15,894	)

INCOME (LOSS) BEFORE INCOME TAXES		3,651,768			5,207,690
Income taxes		1,115,414			1,318,033
Net income (loss)	$	2,536,354		$	3,889,657

OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss)	$	224,553		$	184,455
Comprehensive income	$	2,760,907		$	4,074,112

Basic and diluted net loss per share		0.04			0.06
Weight average shares outstanding
Basic		62,239,737			62,234,737
Diluted		62,239,737			62,234,737

See accompanying notes to the condensed consolidated financial statements

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended September 30
	2010			2009
Cash flows from operating activities:

Net income (loss)	$	2,536,354		$	3,889,657

Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities

Depreciation & amortization		19,698			20,331
Imputed interest		1,168			15,899

Changes in assets and liabilities -
(Increase) decrease in:

Accounts receivables and other receivables		(50,976	)		15,841
Inventory		(142,873	)		(1,962	)
Prepaid expense		(48,242	)		(31,483	)
Accounts payable and other payables		(1,642,453	)		976,324
Net cash provided by (used in) operating activities		672,675			4,884,607

Cash flows from investing activities:

Purchases/ (transfer) of fixed assets		-			(5,643	)
Notes receivable		(79,497	)		-
Prepayment on acquisition					(8,043,758	)
Prepayment on land use right					(3,071,253	)
construction-in-progress		-			(160,886	)
Net cash provided by investing activities		(79,497	)		(11,281,540	)

Cash flows from financing activities:
Proceeds from related party debt		2,601			(17,201	)
Net cash provided by financing activities		2,601			(17,201	)

Effect of exchange rates on cash		192,124			184,454

Net increase (decrease) in cash and cash equivalents		787,904			(6,229,680	)

Cash and cash equivalents, at beginning of year		13,344,531			7,394,270

Cash and cash equivalents, at end of year	$	14,132,435		$	1,164,590

Supplemental cash flow information
Cash paid for income tax	$	2,408,152		$	-

See accompanying notes to the condensed consolidated financial statements

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common shares
	Shares		Amount		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income		Stockholders' Equity

Balances, June 30, 2010		62,239,737	$	6,224	$	1,434,910	$	15,879,197	$	589,618	$	17,909,949

Imputed interest on shareholder loan						1,168						1,168

Net income for the three months ended September 30, 2010								2,536,354				2,536,354

Other comprehensive income-Translation adjustment										224,553		224,553

Balances, September 30, 2010		62,239,737	$	6,224	$	1,436,078	$	18,415,551	$	814,171	$	20,672,024

See accompanying notes to the condensed consolidated financial statements

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - ORGANIZATION AND BUSINESS BACKGROUND

We were incorporated in the state of Arizona on July 11, 1996 and were the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (Edmonds 6) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.

China Health Industries Holdings Limited ("China Health") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability company. China Health was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship as defined by Statement of Financial Accounting Standards (SFAS) No. 7.

Harbin Humankind Biology Technology Co., Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC") on December 14, 2003, as a limited liability company under the Company Law of PRC. Harbin Humankind is engaged in the business of production and distribution of health food.

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

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

On December 31, 2008, China Health closed a reverse merger with Universal Fog, Inc; a U.S. public traded Shell Company. China Health is the accounting acquirer in the transaction and the transaction is treated as a recapitalization of the Company. After the transaction and a 1:20 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737 total outstanding shares of common stock of the Company. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of the Company, or approximately 53.03%. We changed our name from "Universal Fog, Inc." to "China Health Industries Holdings, Inc." on February 19, 2009.

Note 2 - SIGNIFICANT ACCOUNTING POLICIES

Principals of Consolidation

The accompanying consolidated financial statements include China Health Industries Holdings Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). This basis of accounting differs from that used in the statutory accounts of China Health, which are prepared in accordance with the “Accounting Principles of China” (“PRC GAAP”).

Translation of Foreign Currencies

China Health maintains its books and accounting records in PRC currency “Renminbi” (“RMB”), which is determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Foreign currency exchange gain and losses resulting from these transactions are included in operations.

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, 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. China Health bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. While China Health believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.

Earnings per share

Basic earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants.

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

Cash and Cash Equivalents

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

Accounts Receivable

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

Concentrations of Credit Risk

Financial instruments that subject China Health to concentrations of credit risk consist primarily of cash and cash equivalents. China Health maintains its cash and cash equivalents with high-quality institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and therefore bear minimal risk.

Self-Insured Reserve and Allowance

The Company is self-insured for all risks and carries no general liability or product insurance coverage of any kind. This account requires the use of estimates and judgment. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that such estimates are made with consistent and appropriate methods. Actual results may differ from these estimates under different assumptions or conditions.

Fair Value of Financial Instruments

The carrying value of financial instruments including cash and cash equivalents, receivables, accounts payable and accrued expenses, approximates their fair value at September 30, 2010 and 2009 due to the relatively short-term nature of these instruments.

Prepaid Expenses

Prepaid expenses principally include advances to raw material suppliers.

Inventory

Inventories are stated at the lower of cost or market using the weighted average method. China Health reviews its inventory on a regular basis for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence. No reserve was made in the three months ended September 30, 2010 and 2009, respectively.

Impairment of Long–Lived Assets

China Health reviews all of its long-lived assets, including tangible and intangible long-lived assets, for impairment indicators at least annually and performs detailed impairment testing for all long-lived assets whenever impairment indicators are present. When necessary, China Health records charges for impairments of long-lived assets for the amount by which the present value of future cash flows, or some other fair value measure, is less than the carrying value of these assets.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Maintenance, repairs and minor renewals are expensed as incurred; major renewals and improvements that extend the lives or increase the capacity of plant assets are capitalized.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the reporting period of disposition.

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets... The percentages or depreciable life applied are:

Building, warehouse and Improvements	20 to 30 years
Land use rights	50 years
Furniture & Equipment	5 to 7 years
Transportation Equipment	5 to 15 years
Machinery and Equipment	7 to 15 years

Property and equipment are evaluated for impairment in value whenever an event or change in circumstances indicates that the carrying values may not be recoverable. If such an event or change in circumstances occurs and potential impairment is indicated because the carrying values exceed the estimated future undiscounted cash flows of the asset, the Company will measure the impairment loss as the amount by which the carrying value of the asset exceeds its fair value.

Intangible assets

Intangible assets consist of patents and goodwill. Patent costs are amortized over an estimated life of ten years.

Intangible assets are accounted for in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Intangible assets with finite useful lives are amortized while intangible assets with indefinite useful lives are not amortized. As prescribed by SFAS 142, goodwill and intangible assets are tested periodically for impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly, the Company reviews its long-lived assets, including property and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows will be less than the carrying amount of the assets. Impairment costs, if any, are measured by comparing the carrying amount of the related assets to their fair value. The Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss thru a charge to operating results to the extent the present value of anticipated cash flows attributable to the assets are less than the asset’s carrying value. The Company would depreciate the remaining the remaining value over the remaining estimated useful life of the asset to operating results.

Pharmaceutical Patents

On June 9, 2007, China Health entered into a Purchase Agreement, pursuant to which China Health agreed to purchase pharmaceutical patents from a third party for $410,792 (RMB ¥ 3,180,000).

China Health recorded the pharmaceutical patents at the purchase price and amortizes the costs over their estimated beneficial period, 10 years, using the straight-line method as of June 30, 2008. The Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment loss thru a charge to operating results to the extent the present value of anticipated cash flows attributable to the assets are less than the asset’s carrying value. The Company would depreciate the remaining the remaining value over the remaining estimated useful life of the asset to operating results.

There were no impairments during the three months ended September 30, 2010 and 2009.

Land Use Right

All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner. On June 7, 2004, China Health enter into a Purchase Contract with the local government, pursuant to which China Health agreed to purchase the right to use a piece of land, approximately 8 acres, located in the Harbin County, Heilongjiang Province for commercial purpose over a fifty-year period from June 7, 2004 through June 6, 2054, for $637,261 (RMB 5,248,000), which China Health has fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development (“HUD”) of Harbin City approved this transaction. China Health recorded the land use right at its purchase price. The cost of the land use right is amortized over its prospective beneficial period, using the straight-line method with no residual value. China Health’s production facilities and office are located in this piece of land. As of September 30, 2010, the land use right and improvement have net balance of $843,704.

Customer Deposits

Customer Deposit represents the money the Company has received from customers in advance for the purchase of goods. The Company considers customer deposits as a liability until the title of goods have been transferred at which point the balance will be credited to sales revenue.

Revenue Recognition

China Health recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated returns and credit memos. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. As of September 30, 2010 and 2009, the Company had a reserve of $nil and $nil, respectively.

Sales Incentives — The Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense.

Research and Development Costs

Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred.

The Company recognizes in-process research and development in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method and the AICPA Technical Practice Aid, Assets Acquired in a Business Combination to be used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries. Assets to be used in research and development activities, specifically, compounds that have yet to receive new drug approval and would have no alternative use, should approval not be given, are immediately charged to expense when acquired. Certain assets and high technologies acquired that has a foreseeable future cash flows are capitalized as intangible assets. Such intangible assets are amortized starting from the year revenue is generated and amortize over a period of 10 years.

For the three months ended September 30, 2010, the Company incurred $737,428 in research and development costs. There was $nil research and development costs for the three months ended September 30, 2009.

Advertising Costs

Advertising costs are expensed as incurred and included as part of selling and marketing expenses in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-7, “Reporting for Adverting Costs”. Advertising costs were immaterial for the three months ended September 30, 2010 and 2009, respectively.

Income Taxes

China Health accounts for income tax using SFAS No. 109 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Enterprise income tax

Under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income. Preferential tax treatment may, however, be granted pursuant to any law or regulations from time to time promulgated by the State Council.

Value added tax

The Provisional Regulations of 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.

Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year.

According to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value Added Tax Waiver” published by the Ministry of Finance and the National Tax Affairs Bureau, the value added tax for agriculture related products is to be taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant are by definition agriculture related products.

Accounting for uncertainty in income taxes – In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is intended to clarify the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under FIN 48, evaluation of a tax position is a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

The adoption of FIN 48 did not have a material effect on the Company’s results of operations and financial position.

Sales Taxes and Sales-related Taxes

Pursuant to the tax law and regulations of PRC, China Health is obligated to pay totally 6.66% of gross sales as sales tax and sales-related taxes.

Comprehensive Income

Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Accumulated comprehensive income, as presented in the accompanying statements of changes in shareholders’ equity consists of changes in cumulative foreign currency translation adjustment.

Pension and Employee Benefits

Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require China Health to accrue for these benefits based on certain percentages of the employees’ salaries. The Management believes full time employees who have passed the probation period are entitled to such benefits. The total provisions for such employee benefits were $4,798 and $1,036 for the three months ended September 30, 2010 and 2009, respectively.

Statutory Reserves

Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years ’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of China Health’s registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. No appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Since China Health has been accumulating deficiency until June 30, 2009, no statutory surplus reserve fund or statutory public welfare reserve fund have been made since its inception. (Refer to Note 14)

Segment Reporting

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with China Health’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. China Health currently operates in one principal business segment; therefore segment disclosure is not presented.

Recent Accounting Pronouncements

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition—Milestone Method (Topic 605) – Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in fiscal 2012 and should be applied prospectively. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated that residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15, 2009.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with U.S. GAAP. The ASC supersedes existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. While the adoption of the ASC as of July 1, 2009 changes how we reference accounting standards, the adoption did not have an impact on our consolidated financial position, results of operations or cash flows.

In January 2010, the FASB issued accounting standards update related to fair value measurements and disclosures. This update provides amendments to related guidance within U.S. GAAP to require disclosure of the transfers in and out of Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases, sales, issuances and settlements and requires more detailed disclosures regarding valuation techniques and inputs. We adopted this new standard effective January 1, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this guidance did not have a significant impact on the Group’s financial statements.

In February 2010, the FASB issued an accounting standard update related to the disclosure requirements for subsequent events. This update provides amendments to the subsequent event guidance within U.S. GAAP to clarify that an SEC filer is required to evaluate subsequent events through the date the financial statements are issued, but disclosure of this date is no longer required. We adopted this new guidance upon issuance of the accounting standard update.

Note 3 – CASH AND CASH EQUIVALENTS

The company maintains cash and cash equivalents balance at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of September 30, 2010 the Company’s uninsured bank balances totaled $14,128,126.

Note 4 - CONTROL BY PRINCIPAL OWNERS

The directors, executive officers, their affiliates and related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding capital of China Health. Accordingly, directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including approving significant expenses, increasing the authorized capital stock and the dissolution, merger or sale of China Health's assets.

Note 5 – NOTES RECEIVABLE

Notes receivable consist of the following:

	September 30, 2010		June 30, 2010
Advances to employees		46,159		55,432
Notes receivable -Tiefeng		3,026,231		2,937,461
Total notes receivable	$	3,072,390	$	2,992,893

The advances to employees are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.

On April 9, 2009 the Company’s wholly-owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Harbin Humankind”), entered into a letter of intent with the shareholders of Heilongjiang Tiefeng Rice Company Limited (“Tiefeng”) to purchase all the equity interest of Tiefeng (“the Share Transfer Agreement”). On July 23, 2009 the amount of $746,480 (RMB 5,000,000) were paid as retaining fees. The purchase agreement was signed on August 18, 2009; the amount of $7,312,507 (RMB 50,000,000) was prepaid to Tiefeng on August 19, 2009.

As of March 31, 2010, Tiefeng did not get the crucial certified documents from local government agencies. Based on the amended agreement, the deal is thus voided. Tiefeng paid back approximately $1.46 million (RMB 10,000,000) to the Company on March 31, 2010, the additional $1.46 million (RMB 10,000,000) was paid on April 30, 2010 as part of the deposit refund. Another $1.46 million (RMB 10,000,000) was paid on May 31, 2010. The balance of $2,985,921 (RMB 20,000,000) is converted as loans to Tiefeng with two years term starting from May 5, 2010. Interest is charged semi-yearly by using the current Chinese bank borrowing rate of 5.31%. For the three months ended September 30, 2010, accrued interest income on the Tiefeng loan totals $40,310.

Note 6 - INVENTORIES

Inventories consist of following:

	September 30, 2010		June 30, 2010
Finished goods	$	119,387	$	74,478
Work-in-process		135,343		75,498
Raw materials		51,094		17,836
Supplies and packing materials		21,571		14,972
Total inventory	$	327,395	$	184,522

Note 7 - PREPAID EXPENSES

Prepaid expenses consist of the following:

	September 30, 2010		June 30, 2010
Advances on raw materials		812,980		764,738
Prepaid services
Total prepaid expenses	$	812,980	$	764,738

The Company periodically makes advances to certain vendors for purchases of raw materials, and records those advances as prepaid expense. Advances to vendors as of September 30, 2010 amounted to $812,980. The majority balance in the amount of $746,480 (RMB 5,000,000) is converted from retaining fees paid to Tiefeng on July 23, 2009 to advances to Tiefeng for future purchasing of its inventory after cancelling the acquisition contract on May 5, 2010.

Note 8 - DEPOSIT

The Company paid $3,135,217 (RMB 21,000,000) to Harbin Songbei District Development and Construction Committee as the prepayment for the acquisition of the land use rights. The Company is in the process of going through a full range of procedures before the land use rights can be granted to the Company.

Note 9 - PROPERTY, PLANT AND EQUIPMENT

The following is a summary of property, plant and equipment:

	September 30, 2010			June 30, 2010
Building and warehouses	$	872,185		$	858,030
Machinery and equipment		177,241			174,365
Office equipment		31,737			29,963
Vehicles		90,905			89,428
Other		25,231			24,822
Less: Accumulated depreciation		(208,473	)		(189,298	)
Total	$	988,826		$	987,310

Depreciation expense charged to operations was $15,024 and $15,184 for the three months ended September 30, 2010 and 2009, respectively.

Note 10 - LAND USE RIGHT

The following is a summary of the land use right:

	September 30, 2010			June 30, 2010
Land use right	$	946,236		$	930,879
Less: Accumulated amortization		(102,532	)		(95,696	)
	$	843,704		$	835,183

Amortization expense charged to operations was $4,674 and $5,147 for the three months ended September 30, 2010 and 2009 respectively.

Note 11 - RELATED PARTY DEBT

“Related party debt" represents temporary short-term loans from majority owner, Mr. Xin Sun, a People Republic China citizen. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Cash flows classified as due to majority owner are classified as cash flows from financing activities. The total borrowings from Mr. Sun were $88,009 and $851,351 as of September 30, 2010 and 2009, respectively.

Interest was imputed on the loans using the Chinese bank borrowing rate of 5.31% for the three months ended September 30, 2010. The total imputed interest expense was $1,168 and $15,215 for the three months ended September 30, 2010 and 2009 respectively.

Note 12 – TAXES PAYABLE

The following is a summary of taxes payable:

	September 30, 2010		June 30, 2010
Income taxes payable	$	1,129,105	$	2,421,843
VAT taxes payable		318,005		781,962
City and Supplement taxes		22,263		371,430
Payroll taxes payable & other taxes		370,619		54,716
	$	1,839,992	$	3,629,951

Note 13 - INCOME TAX

On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law reduces the corporate income tax rate from 33% to 25% with effect from January 1, 2008. All Chinese enterprises are governed by the PRC Income Tax Law and various local income tax laws, pursuant to which a company generally is subject to an income tax at a statutory rate of 25% for the three months ended September 30, 2010 and 2009.

The provision for income taxes consisted of the following:

	September 30, 2010		June 30, 2010
Provision for PRC income tax - current taxes	$	1,115,414	$	4,447,467
Provision for PRC income tax - deferred taxes		-		-
Total provision for income taxes	$	1,115,414	$	4,447,467

The following table reconciles the PRC statutory rates to China Health’s effective tax rate:

	September 30, 2010			June 30, 2010

Pretax Income( loss)	$	3,651,767		$	17,701,638
Statutory tax rate		25	%		25	%
PRC enterprise income tax at statutory rate		912,942			4,425,410
Expenses not deductible for taxes – temporary difference		77,553			-109,343
Expenses not deductible for taxes – permanent difference		120,246			112,219
Increase in valuation allowance related to deferred tax assets		4,674			19,182
Total provision for income taxes	$	1,115,414		$	4,447,467

Deferred tax assets (liabilities) as of September 30, 2010 and June 30, 2010 are composed of the following:

	September 30, 2010			June 30, 2010
PRC
Noncurrent deferred tax assets :
Amortization of land use right and other intangible assets	$	4,674		$	19,182
Valuation allowance		(4,674	)		(19,182	)
	$	-		$	-

Note 14 - COMMITMENTS AND CONTINGENCIES

China Health’s assets are located in PRC and revenues are derived from operations in PRC.

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

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

The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which the Company might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Rental expense is approximately $44,245 and $43,850 for each of the three months ended September 30, 2010 and 2009 respectively. The rental commitment for the fiscal year 2011 is approximately $89,600.

STATUTORY RESERVE COMMITMENT

In compliance with PRC laws, the Company is required to appropriate a portion of its net income to its statutory reserve up to a maximum of 50% of an enterprise’s registered capital in the PRC. No appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Since China Health has been accumulating deficiency until June 30, 2009, no statutory surplus reserve fund or statutory public welfare reserve fund have been made since its inception.

The Company had future unfunded commitments, as provided below.

	September 30, 2010		June 30, 2010
PRC Subsidiaries Registered Capital
Harbin Humankind Biology	$	1,640,465	$	1,584,467
H Harbin Huimeijia Medicine (Company has accumulating deficiency, no reserve commitment required)		149,296		146,873

Statutory Reserve Ceiling based on 50% of PRC Registered Capital of Harbin Humankind Biology or at least 10% of the after-tax net earnings until the reserve are equal to 50% of its registered capital.		820,233		792,234


Less: Retained Earnings appropriated to Statutory Reserve		-		-

Reserve Commitment Outstanding	$	820,233	$	792,234

Total commitments as of September 30, 2010 and June 30, 2010 are composed of the following:

	September 30, 2010		June 30, 2010
Rental Commitment	$	89,600	$	176,250
Statutory Reserve Commitment		820,233		792,234
Total commitments	$	909,833	$	968,484

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

FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in the risk factors and “Forward Looking Statements” summary set forth in the forepart of our Annual Report for the year ended September 30, 2010. This quarterly report on Form 10-Q contains forward-looking statements and is afforded the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Readers should carefully review the risk factors disclosed in our Annual Report for the year ended September 30, 2010 and other documents filed by us with the SEC.

DISCUSSION

We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

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

●

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

●

legislative and regulatory changes that affect our business;

●

the availability of funds and working capital;

●

the actions and initiatives of current and potential competitors;

●

investor sentiment; and

●

our reputation.

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

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

Except as otherwise indicated by the context, references in this Form 10-Q to “we,” “us,” “our,” “the Registrant”, “our Company,” or “the Company” are to China Health Industries Holdings, Inc., a Delaware corporation, China Health Industries Holdings Limited, and its wholly owned subsidiary, Harbin Humankind Biology Technology Co. Limited. Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are to Yuan Renminbi of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

Business Overview

Harbin Humankind Biology Technology Co., Limited was incorporated under the People’s Republic of China on December 14, 2003 and completed its GMP certification on April 24, 2007. It is in the business of the manufacture and sale of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies.

Harbin Huimeijia Medicine Company was incorporated on October 14, 2008. Huimeijia completed its GMP certification on July 23, 2009 and will be producing and selling our medical drugs.

Our business is conducted through chain-stores and, with regard to the sale of our products, eventually over the internet.

Results Of Operations

For the three months ended September 30, 2010 as compared to September 30, 2009

Our principal business operations are conducted through our wholly owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Humankind”) and Humankind’s subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”) which was incorporated on October 14, 2008. Huimeijia received GMP certification on July 23, 2009 and will be produces and sells our medical drugs.

	September 30
	2010		Variance			2009
REVENUES
Product Sales (net of sales allowance)	$	11,617,393		13.38	%	$	10,246,606
Total revenues	$	11,617,393					10,246,606

COST OF GOODS SOLD
Cost of goods sold		5,985,295		33.41	%		4,486,366
Gross Profit	$	5,632,098		-2.23	%	$	5,760,240

Total revenues increased by 13.38% to $11,617,393 for the three months ended September 30, 2010 compared to $10,246,606 for the same period in 2009. The $1,370,787 increase in revenue is attributable to strong performances from our sales distribution channels.

This growth in sales is in turn attributable to an increase in sales volume and our efforts to continue to develop our distribution channels by hiring additional sales agents to assure that our products and their associated benefits are seen by those making or influencing the purchasing decisions.

Our cost of sales increased $1,498,929, or 33.41% to $5,985,295 for the three months ended September 30, 2010 compared to $4,486,366 for the same period in 2009. The increase in cost of sales is a result of the increased sales and the increase in raw material costs.

Our gross margin decreased 7.74% from 56.22% for the three month period ended September 30, 2009 to 48.48% for the three month period ended September 30, 2010. This decrease was primarily attributable to an increase in the raw material and labor costs.

Sales by Product Line

A break-down of our sales by major product line for each of the three months ended September 30, 2010 and 2009 is as follows:

	For the Three Months Ended September 30
	2010							2009
Product Category	Quantity (Unit)		Sales USD		% of Sales			Quantity (Unit)		Sales USD		% of Sales
Sleeping Beauty Capsule	28,594		582,274		5.01		%
Ruddy Granule	28,426		782,325		6.73		%
Virility Max Capsule	65,051		1,513,833		13.03		%
Blood Cleanser Soft Capsule	39,140		1,022,658		8.80		%
Abalone, Sea cucumber and Frog oil soft capsule									5,496		1,181,036.60		11.53	%
Ganoderma lucidum and Aweto Soft Capsules									4,424		911,994.06		8.90	%
Energy Elemental Powder		14,195		234,149		2.02	%

Propolis and Black Ant Capsule									28,982		2,672,224.26		26.08	%
Waterlilies Soft Capsule(Sailuozhi)		52,867		4,710,276		40.55	%		13,885		3,226,614.02		31.49	%
Colon Cleanser Capsule		72,528		2,771,878		23.86	%		31,589		2,241,673.72		21.88	%
OEM Sales											13,063.34		0.13	%
Total				11,617,393		100	%				10,246,606		100	%

Operating Expenses

The following table summarizes the changes in our operating expenses from $2,018,517 to $536,656 for each of the three months ended September 30, 2010 and 2009, respectively:

	For the Three Months Ended September 30
	2010		Variance			2009
Operating Expenses
Selling , General and Administrative expenses	$	1,261,392		144.30	%	$	516,325
Depreciation and amortization		19,697		-3.12	%		20,331
Research & development		737,428					-
Total operating expenses	$	2,018,517		276.13	%	$	536,656

Total operating expenses for the three months ended September 30, 2010 increased $1,481,861 or 276.13% over the same period in 2009. The higher operating expenses were primarily attributable to the increased cost of sales, increased number of representatives and the commissions paid to them, professional fees and distribution costs of our products to generate our increased product sales from $10,246,606 in 2009 to $11,617,393 in 2010.

We incurred imputed interest expenses in the amount of $1.168 on the loans due to Mr. Sun Xin, the executive officer and major shareholder of Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment.

Other Income (Expenses)

Other income (expenses) increased approximately $54,100 for the three month period ended September 30, 2010. The increase was primarily attributable to increased interest income in the approximate amount of $39,400 from Tiefeng Rice Group and the decrease in interest expenses of approximately $14,700, which was due to repayment of debts in 2009.

2011 Outlook

We anticipate our total revenues in 2011 versus 2010 to increase by 40% or approximately $17.2 million with growth in all categories of our product sales. Our gross profit margin in 2011 is expected to be approximately 53% due to raw material cost inflation. We estimate our overall 2011 net profit margins to be approximately 28%. However, there is no assurance that these predictions will be reached.

Liquidity and Capital Resources

The following table summarizes our cash and cash equivalents position, our working capital, and our cash flow activity as of September 30, 2010 and 2009 and for each of the three months then ended:

	September 30, 2010			September 30, 2009

As of September 30:
Cash and cash equivalents	$	14,132,435		$	1,164,590
Working capital	$	18,673,477		$	6,354,077
Inventories	$	327,395		$	150,652
For the Three Months Ended September 30:
Cash provided by (used in):
Operating activities	$	672,675		$	4,884,607
Investing activities	$	(79,497	)	$	(11,281,540	)
Financing activities	$	2,601		$	(17,201	)

As of September 30, 2010, cash and cash equivalents were $14,132,435 as compared to $1,164,590 at September 30, 2009. This represents an increased cash and cash equivalents position of $12,967,845 or an increase of 1113.51% at September 30, 2010 compared to September 30, 2009.

Our current ratio was 7.64 versus 2.04 and the quick ratio was 7.52 versus 2.01 at September 30, 2010 and 2009, respectively. Management endeavors to ensure that funds are available to take advantage of new investment opportunities and that funds are sufficient to meet future liquidity and capital needs.

Cash flow provided by operating activities was $672,675 for the three months ended September 30, 2010 compared to cash flow used by operation activities of $4,884,607 for the same period in 2009. The decrease in cash provided by operating activities of $4,211,932 is primarily attributable to the decrease in account payables in the amount of $1,642,453.

Our working capital position at September 30, 2010 was $18,673,477 compared to working capital of $6,354,076 at September 30, 2009. Our increased working capital position in 2010 was principally funded by the increased cash flow generated by sales. Management considers current working capital and borrowing capabilities adequate to cover our current operating and capital requirements for the full fiscal year 2011.

Currency Exchange Fluctuations

All of our revenues and majority of the expenses during the three months ended September 30, 2010 were denominated primarily in Renminbi (“RMB”), the currency of China, and was converted into US dollars at the exchange rate of 6.78032 RMB to 1 U.S. Dollar. In the third quarter of 2005, the Renminbi began to rise against the US dollar. There can be no assurance that RMB-to-U.S. dollar exchange rates will remain stable. A devaluation of RMB relative to the U.S. dollar would adversely affect our business, financial condition and results of operations. We do not engage in currency hedging.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition presented in this section are based upon the audited consolidated financial statements of the Company, including Harbin Humankind, which have been prepared in accordance with the generally accepted accounting principles in the United States. For purposes of this section entitled “Critical Accounting Policies and Estimates,” During the preparation of the financial statements of the Company we were required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to sales, returns, pricing concessions, bad debts, inventories, investments, fixed assets, intangible assets, income taxes and other contingencies. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under current conditions. Actual results may differ from these estimates under different assumptions or conditions.

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure about Critical Accounting Policy,” The Company identified the most critical accounting principles upon which its financial status depends. The Company determined that those critical accounting principles are related to the use of estimates, inventory valuation, revenue recognition, income tax and impairment of intangibles and other long-lived assets. The Company presents these accounting policies in the relevant sections in this management’s discussion and analysis, including the Recently Issued Accounting Pronouncements discussed below.

Revenue Recognition. The Company recognizes revenue when the earnings process is complete. This generally occurs when products are shipped to unaffiliated customer or services are performed in accordance with terms of the agreement, title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable. Accruals are made for sales returns and other allowances based on the Company’s experience.

Accounts Receivable, Trade and Allowance for Doubtful Accounts. The Company’s business operations are conducted in the PRC. During the normal course of business, the Company extends unsecured credit to its customers. Management reviews accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable. At December 31, 2008, and 2007, no allowances for doubtful accounts were accrued.

Inventories. Inventories are stated at the lower of cost or market using the weighted average method. The Company reviews its inventory on a regular basis for possible obsolete goods or to determine if any reserves are necessary for potential obsolescence. As of September 30, 2009 and 2008, the Company has determined that no reserves are necessary.

Impairment of Long-Lived Assets. The Company reviews all of its long-lived assets, including tangible and intangible long-lived assets, for impairment indicators at least annually and performs detailed impairment testing for all long-lived assets whenever impairment indicators are present. When necessary, the Company records charges for impairments of long-lived assets for the amount by which the present value of future cash flows, or some other fair value measure, is less than the carrying value of these assets.

Off-Balance Sheet Arrangements. The Company has not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. The Company has not entered into any derivative contracts that are indexed to China the Company’s shares and classified as shareholder’s equity or that are not reflected in the Company’s financial statements. Furthermore, The Company does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. The Company does not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to the Company or engages in leasing, hedging or research and development services with the Company.

Income Taxes. The Company has adopted Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes. Since the Company had no operations within the United States there is no provision for US income taxes and there are no deferred tax amounts as of September 30, 2009 and 2008. The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and the Company intends to settle current tax assets and liabilities on a net basis.

Recently Issued Accounting Pronouncements

The Company does not believe the recently issued accounting pronouncements would have a material impacts on its financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of our Disclosure Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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 the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.

Changes in internal control over financial reporting

There have been no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There is no material legal proceeding pending against us.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

Exhibit No.	SEC Ref. No.	Title of Document

1	31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

2.	31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

3	32.1	Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

4	32.2	Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

* The Exhibits attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA HEALTH INDUSTRIES HOLDINGS, INC.

Date: November 12, 2010
	/s/ Xin Sun
	Xin Sun
	Chief Executive Officer and Chief Financial Officer