China Health Industries Holdings, Inc. - Quarter Report: 2013 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended December 31, 2013

 

 

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)

 

 

168 Binbei Street, Songbei District

Harbin City, Heilongjiang Province

People’s Republic of China  150028

(Address of principal executive offices) (Zip Code)

 

86-451-88100688

(Issuer's telephone number, including area code)

 

Not Applicable

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

 

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

 

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

 

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

 

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of February 11, 2014, there are 62,239,737 shares of common stock, $0.0001 par value, issued and outstanding.

 

 

 

TABLE OF CONTENTS

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.    Financial Statements

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED AND COMBINED BALANCE SHEETS

(Unaudited)

 

 

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

 

 

	3

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

		For the Three Months Ended						For the Six Months Ended
		December 31, 2013			December 31, 2012			December 31, 2013			December 31, 2012
REVENUE		$	2,256,286		$	2,430,997		$	3,945,804		$	4,156,929
COST OF GOODS SOLD			1,717,795			1,914,931			3,249,235			3,237,927
GROSS PROFIT			538,491			516,066			696,569			919,002
OPERATING EXPENSES
Selling, general and administrative expenses			520,003			641,181			1,054,695			1,207,252
Depreciation and amortization expenses			319,395			161,817			544,599			206,152
Research and development expenses			445			120,086			157,505			238,167
Total operating expenses			839,843			923,084			1,756,799			1,651,571
LOSS FROM OPERATIONS			(301,352)			(407,018)			(1,060,230)			(732,569)
OTHER INCOME (EXPENSES)
Interest income			24,808			62,035			64,102			123,539
Interest expense			(21,223)			(32,517)			(44,003)			(77,050)
Other income (expense), net			9,737			(79)			34,128			(118)
Total other income, net			13,322			29,439			54,227			46,371
LOSS BEFORE INCOME TAXES			(288,030)			(377,579)			(1,006,003)			(686,198)
Provision for income taxes			-			15,980			-			23,723
NET LOSS			(288,030)			(393,559)			(1,006,003)			(709,921)
Net loss attributable to noncontrolling interests			(71)			(71)			(71)			(119)
Net loss attributable to China Health Industries Holdings			(287,959)			(393,488)			(1,005,932)			(709,802)
Foreign currency translation gain			357,213			131,808			509,545			731,133
Comprehensive income (loss)			69,183			(261,751)			(496,458)			21,212
Less: comprehensive loss attributable to noncontrolling interests			(67)			(68)			(66)			(111)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHINA HEALTH INDUSTRIES HOLDINGS		$	69,250		$	(261,683)		$	(496,392)		$	21,323
Net loss attributable to China Health Industries Holdings' shareholders per share are
Basic and diluted loss per share		$	(0.01)		$	(0.01)		$	(0.02)		$	(0.01)
Weighted average shares outstanding:
Basic and diluted weighted average shares outstanding			62,239,737			62,239,737			62,239,737			62,239,737

 

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

 

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended December 31,
		2013			2012
Cash Flows from Operating Activities
Net loss available to China Health Industries Holdings		$	(1,005,932)		$	(709,802)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expenses			600,040			271,359
Bad debt expenses			9,910			8,443
Noncontrolling interests			(71)			(119)
Changes in operating assets:
Accounts receivable			(885,867)			1,180,467
Other receivables			41,088			23,266
Inventory			66,402			(24,132)
Advance to suppliers			263,397			3,601,752
Changes in operating liabilities:
Accounts payables and accrued expenses			(48,464)			(9,527)
Advance from customers and other payables			(58,396)			31,157
Wages payable			(131,071)			83,975
Taxes payable			45,834			(161,436)
Net cash provided by (used in) operating activities			(1,103,130)			4,295,403
Cash Flows from Investing Activities
Dues from notes receivable			22,600			-
Purchases of property, plant and equipment			(102,560)			(53,349)
Purchases of intangible assets			(11,460)			-
Increase in construction in progress			-			(159,679)
Net cash used in investing activities			(91,420)			(213,028)
Cash Flows from Financing Activities
Payment of related party debts			-			(4,326)
Proceeds from related party debts			29,339			803,424
Payment of short-term loan			-			(635,113)
Proceeds from short-term loan			491,162			-
Net cash provided by financing activities			520,501			163,985
Effect of exchange rate changes on cash and cash equivalents			393,068			813,208
Net increase/(decrease) in cash and cash equivalents			(280,981)			5,059,568
Cash and cash equivalents at beginning of the period			28,868,533			28,770,157
Cash and cash equivalents at end of the period		$	28,587,552		$	33,829,725
Supplemental disclosure of cash flow information
Cash paid for income taxes		$	-		$	23,723
Cash paid for interest expense		$	13,863		$	-
Non-cash investing activities:
Transfer to property, plant and equipment from construction in progress		$	2,164,828		$	-

 

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

 

 

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

On November 22, 2013, Humankind completed the acquisition of Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”) for a total purchase price of $16,339,869 (RMB100,000,000) (the “Purchase Price”). HLJ Huimeijia was founded on October 30, 2003. HLJ Huimeijia is engaged in the manufacturing and distribution of tincture, ointments, rubber paste (including hormones), solution (topical), suppositories, liniment (including traditional Chinese medicine extraction), enemas and oral liquid. HLJ Huimeijia’s predecessor is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which had established its brand name in the market by its medical products. HLJ Huimeijia is categorized as a “high and new technology” enterprise by the Science Technology Department in Heilongjiang Province. HLJ Huimeijia has 21 products which have been approved by, and have received approval numbers issued by, the China State Food and Drug Administration (“CFDA”). In addition, HLJ Huimeijia is a holder of one patent for utility models, five patents for external design and two trademarks in China, including the Chinese brand name of “Xue Du” that has an established reputation among customers in northeastern China.

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

 

 

 

As of December 31, 2013, the Company’s corporate structure is as follows:

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The accompanying consolidated and combined financial statements include China Health US and its four subsidiary companies, including China Health HK, Humankind Huimeijia, and HLJ Huimeijia. All significant intercompany balances and transactions have been eliminated in consolidation and combination.

 

On November 22, 2013, China Health US, through its wholly owned subsidiary Humankind, completed the acquisition of HLJ Huimeijia. HLJ Huimeijia and Humankind are under the common control of Mr. Xin Sun, the CEO of the Company before and after the date of transfer. Humankind’s accounting policy adopted the guidance in ASC 805-50-05-5 for the transfer of net assets between entities under common control to apply a method similar to the pooling-of-interests method. Under this method, the financial statements of Humankind shall report results of operations for the period in which the transfer occurs as though the transfer of net assets had occurred at the beginning of the period. Results of operations for that period will thus comprise those of the previously separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations from that date to the end of the period. Similarly, Humankind shall present the statements of financial position and other financial information as of the beginning of the period as though the assets and liabilities had been transferred at that date. Financial statements and financial information of Humankind presented for prior years also shall be retrospectively adjusted to furnish comparative information.

 

 

 

Segment Reporting

 

ASC 280, “Segment Reporting”, established standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments. The Company has three reportable operating segments: Humankind, HLJ Huimeijia and others. The segments are grouped based on the types of products provided.   

 

Statement of Cash Flows

 

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

 

Use of Estimates and Assumptions

 

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

 

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.

 

As of December 31, 2013 and June 30, 2013, the Company’s uninsured bank balance was mainly maintained at financial institutions located in the PRC and HK, totaled $28,587,552 and $28,868,533 respectively. The Company has no insured bank balance as of December 31, 2013 and June 30, 2013, respectively.

 

Accounts Receivable

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment and bad debt history, the customer’s current credit worthiness, changes in customer payment patterns and the economic environment. As of December 31, 2013 and June 30, 2013, the balance of allowance for doubtful accounts were $9,910 and $9,979, respectively.

 

 

 

Advance to Suppliers

 

Advance to suppliers principally include advances to suppliers. The Company periodically makes advances to certain vendors for purchases of raw materials. As of December 31, 2013 and June 30, 2013, advance to suppliers amounted to $68,488 and $328,348, respectively.

 

Inventory

 

Inventory consists of raw materials, work in process and finished goods of manufactured products.

 

Inventory is stated at lower of cost or market and consists of materials, labor and overhead. The weighted average method is used for inventory valuation by HLJ Huimeijia. The first-in, first-out (“FIFO”) method is used for inventory valuation by other entities of the Company. Overhead costs included in finished goods include direct labor cost and other costs directly applicable to the manufacturing process. The Company evaluates inventory for excess, slow moving, and obsolete inventory as well as inventory the volume of which is in excess of its net realizable value. This evaluation includes analysis of sales levels by product and projections of future demand. If future demand or market conditions are less favorable than the Company’s projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made. Inventory amounts are reported net of such allowances. There was no inventory allowance as of December 31, 2013 and June 30, 2013, respectively.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets and other assets are reviewed for impairment in accordance with the guidance of the FASB ASC Topic 360-10, “Property, Plant, and Equipment,” and FASB ASC Topic 205“Presentation of Financial Statements.” The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial position. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. As of December 31, 2013 and June 30, 2013, the Company has not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of long-lived assets in the future.

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at the lower of cost or fair value. 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 the results of operating 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
	Office Equipment	3 to 7 years
	Transportation Equipment	5 to 15 years
	Machinery and Equipment	7 to 15 years

 

Intangible Assets

 

The Company evaluates intangible assets in accordance with FASB ASC Topic 350, “Intangibles — Goodwill and Other.” Intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required. The value of our intangible assets could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology, including the valuation of our common stock, (iii) a significant slowdown in the worldwide economy or (iv) any failure to meet the performance projections included in our forecasts of future operating results. In accordance with FASB ASC Topic 350, the Company tests intangible assets for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period. Based on such evaluations, there was no impairment recorded for intangible assets for the six months ended December 31, 2013 and 2012, respectively.

 

 

  

Construction in Progress

 

Construction in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. Costs classified to construction in progress include all costs of obtaining the asset and bringing it to the location and condition necessary for its intended use. No depreciation is provided for construction in progress until such time as the assets are completed and are placed into service.

 

The Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment recorded for construction in progress for the six months ended December 31, 2013 and 2012, respectively.  

 

Translation of Foreign Currencies

 

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

 

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

 

Revenue Recognition

 

The Company recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations. The Company records revenue at discounted selling price and 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. There has been no provision recorded for returns based upon historical experience. For the six months ended December 31, 2013 and 2012, there was no such provision recorded.

 

Cost of goods sold

 

Cost of goods sold consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery, warehousing and overhead associated with the manufacturing process and commission expenses.

 

Income Taxes

 

The Company adopts FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

 

 

In July 2006 the FASB issued FIN 48(ASC 740-10), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (ASC 740)”, which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under FIN 48(ASC 740-10), tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.

 

As a result of the implementation of FIN 48 (ASC 740-10), the Company undertook a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48 (ASC 740-10). The Company recognized no material adjustments to liabilities or stockholders’ equity as a result of the implementation.  The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

 

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.

 

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. Value added tax for the six months ended December 31, 2013 and 2012 were $564,404 and $559,624, respectively.

 

Sales-Related Taxes

 

Pursuant to the tax law and regulations of the PRC, the Company is obligated to pay 7% and 5% of the annual VAT paid as tax on maintaining and building cities and education additional fee, both of which belong to sales-related taxes. Sales-related taxes are recorded when sales revenue is recognized. Sales taxes and sales-related taxes for the six months ended December 31, 2013 and 2012 were $65,121 and $67,537, respectively.

 

Concentrations of Business and Credit Risks

 

All of the Company’s manufacturing is located in the PRC. There can be no assurance that the Company will be able to successfully continue to manufacture its products and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, prices of raw materials, competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to the risks of restrictions on transfer of funds, domestic customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.

  

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

 

 

 

Earnings Per Share

 

Basic earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants. For the six months ended December 31, 2013 and 2012, the Company had no potential dilutive common stock equivalents outstanding.

 

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

 

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

 

Recent Accounting Pronouncements

 

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.

NOTE 3 - ACQUISITION

  

On November 22, 2013, Humankind completed the acquisition of HLJ Huimeijia for a total purchase price of $16,339,869 (RMB100,000,000) (the “Purchase Price”). HLJ Huimeijia was founded on October 30, 2003. HLJ Huimeijia is engaged in the manufacturing and distribution of tincture, ointments, rubber paste (including hormones), solution (topical), suppositories, liniment (including traditional Chinese medicine extraction), enemas and oral liquid. HLJ Huimeijia’s predecessor is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which had established its brand name in the market by its medical products. HLJ Huimeijia is categorized as a “high and new technology” enterprise by the Science Technology Department in Heilongjiang Province. HLJ Huimeijia has 21 products which have been approved by, and have received approval numbers issued by, the China State Food and Drug Administration (“CFDA”). In addition, HLJ Huimeijia is a holder of one patent for utility models, five patents for external design and two trademarks in China, including the Chinese brand name of “Xue Du” that has an established reputation among customers in northeastern China.

 

HLJ Huimeijia and Humankind are under the common control of Mr. Xin Sun, the CEO of the Company before and after the date of transfer. Humankind’s accounting policy adopted the guidance in ASC 805-50-05-5 for the transfer of net assets between entities under common control to apply a method similar to the pooling-of-interests method. Under this method, the financial statements of Humankind shall report results of operations for the period in which the transfer occurs as though the transfer of net assets had occurred at the beginning of the period. Results of operations for that period will thus comprise those of the previously separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations from that date to the end of the period. Similarly, Humankind shall present the statements of financial position and other financial information as of the beginning of the period as though the assets and liabilities had been transferred at that date. Financial statements and financial information of Humankind presented for prior years also shall be retrospectively adjusted to furnish comparative information.

NOTE 4 - ACCOUNTS RECEIVABLE

 

The Company’s accounts receivable amounted to $1,022,110 and $136,414, net of allowance for doubtful accounts $9,190 and $9,979 as of December 31, 2013 and June 30, 2013, respectively. The Company offered thirty (30) day payment terms for sales before November 2013, and ninety (90) day payment terms for sales after November 2013.

NOTE 5 - INVENTORIES

 

Inventories consisted of following:

 

 

 

NOTE 6 - CONSTRUCTION IN PROGRESS

 

Construction in progress consisted of the following:

 

 

As of December 31, 2013, a plant was completed and $154,358 (RMB 942,662) was recorded as a cost of construction in progress at HLJ Huimeijia. The project is now waiting for final inspection, examination and government approval. The balance will be transferred to property, plant and equipment upon the government approval and be placed in service.

 

On August 1, 2010, HLJ Huimeijia entered into an agreement with a contractor to construct a warehouse for the Company. As of December 31, 2013, the warehouse has been completed and $35,515 (RMB 215,000) had been recorded as a cost of construction in progress. The project is now waiting for final inspection, examination and government approval. The balance will be transferred to property, plant and equipment upon the government approval and be placed in service.

 

On August 1, 2010, Huimeijia entered into an agreement with a contractor to construct plant and production lines for the Company. As of December 31, 2013, the construction had been completed and the project was waiting for final inspection and examination and government approval. The balance will be transferred to property, plant and equipment upon the government approval and be placed in service. The estimated total cost of construction was $1,982 (RMB 12,000) and $1,955 (RMB 12,000) as of December 31, 2013, and June 30, 2013, respectively.

 

On December 8, 2012, Humankind entered into an agreement with a contractor for the interior decoration of the office building and the warehouse. As of December 31, 2013, the project was completed and the cost of construction in progress had been transferred to the property, plant and equipment account. The estimated total cost of construction was $0 and $814,677 (RMB 5,000,000) as of December 31, 2013 and June 30, 2013, respectively.

 

On March 10, 2011, Humankind entered into an agreement with a contractor to construct a warehouse for the Company. As of December 31, 2013, the project was completed, the warehouse was ready for use, and the cost of construction in progress had been transferred to the property, plant and equipment account. The estimated total cost of construction was $0 and $684,330 (RMB 4,200,000) as of December 31, 2013 and June 30, 2013, respectively.

 

On August 15, 2011, Humankind entered into an agreement with a contractor to construct an office building for the Company. As of December 31, 2013, the project was completed, the office building was ready for use, and the cost of construction in progress had been transferred to the property, plant and equipment account. The estimated total cost of construction was $0 and $655,440 (RMB 4,022,700) as of December 31, 2013 and June 30, 2013, respectively.

NOTE 7 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

 

Depreciation expense was $142,170 and $121,266 for the six months ended December 31, 2013 and 2012, respectively. Depreciation expense charged to operations was $58,450 and $56,059 for the six months ended December 31, 2013 and 2012, respectively. Depreciation expense charged to cost of goods sold was $83,720 and $65,207 for the six months ended December 31, 2013 and 2012, respectively.

 

 

 

As of June 30, 2013, the building of HLJ Huimeijia in the book value of $1,471,024 has been mortgaged for the working capital loan in the principal amount of $1,140,548 (RMB 7,000,000). As of December 31, 2013, the building of HLJ Huimeijia in the book value of $1,491,362 has been mortgaged for the working capital loan in the principal amount of $1,651,882 (RMB 10,000,000).

NOTE 8 - INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

 

All land belongs to the State in the PRC. Enterprises and individuals can pay the State a fee to obtain the right to use a piece of land for commercial purposes or residential purposes 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 have the right to use the land for the time remaining after reducing the time which has been consumed by the predecessor owner from the initial period.

 

Amortization expense charged to operations was $457,870 and $150,093 for the six months ended December 31, 2013 and 2012, respectively.

 

As of December 31,2013, land use rights of HLJ Huimeijia in the book value of $716,105 have been mortgaged for the working capital loan in the principal amount of $1,651,882 (RMB 10,000,000). As of June 30, 2013, the land use rights of HLJ Huimeijia in the book value of $706,339 have been mortgaged for the working capital loan in the principal amount of $1,140,548 (RMB 7,000,000).

NOTE 9 - SHORT-TERM LOAN

 

On November 30, 2012, HLJ Huimeijia entered into a loan agreement with Longjiang Bank, Mudanjiang Hailin Branch (the “Bank") for a working capital loan in the principal amount of $1,140,548 (RMB 7,000,000) at an interest rate of 7.8% per annum. The loan has a one-year term with maturity date on November 29, 2013 and was secured by the land use right and the building of HLJ Huimeijia. As of June 30, 2013, the Company’s short-term loan was $1,140,548 (RMB 7,000,000). The loan was paid off on November 22, 2013.

 

On November 20, 2013, HLJ Huimeijia entered into a short-term loan agreement with the Bank for a working capital loan in the principal amount of $1,651,882 (RMB 10,000,000), at an interest rate that is 10% higher than the bench mark. The loan was secured by the land use right and the building of HLJ Huimeijia, with a maturity date of November 19, 2014. The Company’s short-term loan was $1,651,882 (RMB 10,000,000) as of December 31, 2013.

 

Interest expenses were $77,050 and $32,517 for the six months ended December 31, 2013 and 2012, respectively.

NOTE 10 - RELATED PARTY DEBTS

 

Related party debts consisted of the following:

 

 

These loans are unsecured and non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand. Mr. Kai Sun and Ms. Haiping Man are the family members of Xin Sun, the CEO of the Company.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

 

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

 

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

 

 

 

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

 

Rental expense was nil and $11,114 for the six months ended December 31, 2013 and 2012, respectively. Since the Company terminated its rental agreement on January 9, 2013, it had no rental commitment as of December 31, 2013.

NOTE 12 - MAJOR SUPPLIERS AND CUSTOMERS

 

The Company had six suppliers in the six months ended December 31, 2013, of which one accounted for 85% of the Company’s purchases for the six months ended December 31, 2013.

 

The Company had four customers that in the aggregate accounted for 47% of the Company’s total sales for the six months ended December 31, 2013, with each customer accounting for 13%, 12%, 11% and 11%, respectively.

 

The Company had seven suppliers in the six months ended December 31, 2012, of which one accounted for 85% of the Company’s total purchases for the six months ended December 31, 2012

 

The Company had five customers that in the aggregate accounted for 60% of the Company’s total sales for the six months ended December 31, 2012 with each customer accounting for 13%, 12%, 12%, 12% and 11%, respectively.

NOTE 13 - SEGMENT REPORTING

 

The Company was organized into three main business segments based on the types of products provided to customers: HLJ Huimeijia, Humankind and others. Each of the three operating segments referenced above has separate and distinct general ledgers. The chief operating decision maker (“CODM”) receives financial information, including revenue, gross margin, operating income and net income produced from the various general ledger systems to make decisions about allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM is net income by segment.

 

The following tables present summary information by segment as of and for the six and three months ended December 31, 2013 and 2012, respectively:

 

		As of and For the Six Months Ended December 31, 2013												As of and For the Six Months Ended December 31, 2012
		HLJ Huimeijia			Humankind			Others			Consolidated			HLJ Huimeijia			Humankind			Others			Combined
Revenues		$	750,982		$	3,194,822		$	-		$	3,945,804		$	697,727		$	3,459,202		$	-		$	4,156,929
Cost of revenues			524,559			2,724,676			-			3,249,235			483,765			2,754,162			-			3,237,927
Gross profit			226,423			470,146			-			696,569			213,962			705,040			-			919,002
Interest expense			44,003			-			-			44,003			77,050			-			-			77,050
Depreciation and amortization expenses			219,894			317,655			7,050			544,599			174,112			32,040			-			206,152
Income tax			-			-			-			-			-			23,723			-			23,723
Total capital expenditures			37,726			64,834						102,560			50,483			2,866			-			53,349
Total assets			24,762			41,401,059			170,468			41,596,289			3,445,191			38,193,459			40,743			41,679,393
Noncontrolling interests			-			-			250			250			-			-			380			380

 

		As of and For the Three Months Ended December 31, 2013												As of and For Three Months Ended December 31, 2012
		HLJ Huimeijia			Humankind			Others			Consolidated			HLJ Huimeijia			Humankind			Others			Combined
Revenues		$	447,248		$	1,809,038		$	-		$	2,256,286		$	425,103		$	2,005,894		$	-		$	2,430,997
Cost of revenues			319,807			1,397,988			-			1,717,795			277,417			1,637,514			-			1,914,931
Gross profit			127,441			411,050			-			538,491			147,686			368,380			-			516,066
Interest expense			21,223			-			-			21,223			32,517			-			-			32,517
Depreciation and amortization expenses			194,267			118,078			7,050			319,395			158,112			3,705			-			161,817
Income tax			-			-			-			-			-			15,980			-			15,980
Total capital expenditures			36,111			64,834			-			100,945			39,390			2,866			-			42,256
Total assets			24,762			41,401,059			170,468			41,596,289			3,445,191			38,193,459			40,743			41,679,393
Noncontrolling interests			-			-			250			250			-			-			380			380

NOTE 14 - SUBSEQUENT EVENTS

  

Management has considered all events occurring through February 18, 2014, the date which the financial statements were available to be issued. All subsequent events requiring recognition as of December 31, 2013 have been incorporated into the accompanying consolidated and combined financial statements, and those requiring disclosure have been fully disclosed in accordance with FASB ASC Topic 855, “Subsequent Events”.

 

 

	16

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

 

FORWARD LOOKING STATEMENTS

 

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

 

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

 

 

 

 

 

 

 

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

 

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

 

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

 

Business Overview

 

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

 

 

 

Our business is conducted through our sales agents and sales personnel. We sell our products to our own sales personnel and our sales agents, who in turn sell our products to our end customers. We have sales agents located in Jiangsu, Zhejiang, Gansu, Shanghai, Anhui and Beijing, where most of our revenues are generated. Our sales through agents in Beijing, Zhejiang, Jiangsu, Shanghai, Gansu and Anhui provinces accounted for 13%, 12%, 11%, 11%, 10% and 10% of our total sales, respectively, for the six months ended December 31, 2013. Although we do not currently sell our products online, we expect to do so in the future.

 

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

 

Through Humankind, we are licensed to manufacture and sell two health supplement products, which have a State Good Health Issue Number as provided below. Humankind distributes and sells six kinds of health food and one kind of cosmetics product. In addition, the Company purchased 12 health supplement products on January 18, 2013 from a third-party company based in Guangdong province for a total $4,955,647 (RMB30,000,000).

 

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

 

(i)	Health Supplements

 

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

 

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

 

Pursuant to a technology transfer agreement dated January 18, 2013 (the “Technology Transfer Agreement”), we purchased twelve health products from Guangzhou Aoda Biology Beauty Healthy Technology Co., Ltd, a non-affiliated party. These twelve products are the following:

 

 

(ii)	Health Food and Organic “Green” Food

 

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

 

HLJ Huimeijia was founded on October 30, 2003, and is engaged in the manufacture and distribution of tincture, ointments, rubber paste (including hormones), topical solution, suppositories, liniment (including traditional Chinese medicine extractions), enemas and oral liquids. Its predecessor is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which had established brand name in the market through its supply of high-quality drug products. HLJ Huimeijia is a “high and new technology” enterprise that provides the most comprehensive types of topical medical products in Heilongjiang Province, a northeastern province of China. HLJ Huimeijia has twenty one products with approval numbers issued by the CFDA. In addition, HLJ Huimeijia is the holder of one patent for utility models, five patents for external design, and two trademarks in China, including the Chinese characters of “Xue Du,” that have a good reputation amongst customers in northeastern in China.

 

 

 

Through HLJ Huimeijia, we are licensed to manufacture and sell twenty one products with approval numbers issued by the CFDA as following:

 

 

Results of Operations

 

The following table summarizes the results of our operations for the three months ended December 31, 2013 and 2012, respectively:

 

 

 

 

Revenue

 

Total revenues decreased by $174,711 or 7.19% for the three months ended December 31, 2013 as compared to the same period in 2012. The decrease in revenues was primarily due to a decrease of $196,856, or 9.81% in Humankind for the three months ended December 31, 2013 as compared to the same period in 2012, partially offset by an increase of $22,415 or 5.21% in HLJ Huimeijia. The decrease in Humankind was mainly attributable to the decrease in sales volume as compared to the same period in 2012.

 

Our total cost of sales decreased $197,136 or 10.29% for the three months ended December 31, 2013 as compared to the same period in 2012. The decrease in cost of sales was primarily due to the Humankind’s cost of sales decreased by $239,526, or 14.63%, for the three months ended December 31, 2013 as compared to the same period in 2012, partially offset by an increase of $42,390 or 15.28% in HLJ Huimeijia. The decrease in Humankind was mainly a result of the decrease in sales volume. 

 

Our gross margin increased 2.64% from 21.23% for the three months ended December 31, 2012 to 23.87% for the three months ended December 31, 2013. This increase was attributable to the sale prices increasing in Humankind since November 2013. For the Waterlilies Soft Capsule (Sailuozhi), the sales price increased 4% and for the Propolis and Black Ant Capsule, the sales price increased 21% compared to the same period in 2012.

Sales by Product Line

 

The following table summarizes a breakdown of our sales by major product line for the three months ended December 31, 2013 and 2012, respectively:

 

 

 

 

*All of the products are manufactured by the Company except for the New Looks-28 Set.

 

Operating Expenses

 

The following table summarizes our operating expenses for the three months ended December 31, 2013 and 2012, respectively:

 

 

Total operating expenses for the three months ended December 31, 2013 decreased $83,241 or 9.02% as compared to the corresponding period in 2012. The decrease in operating expenses was primarily attributable to all research and development expenses have been amortized out during July, 2013..

 

Interest Income and Interest Expense

 

Interest income was $24,808 for the three months ended December 31, 2013 as compared to $62,035 for the three months ended December 31, 2012. This decrease of $37,227 or 60.01% was primarily due to the decrease in deposits in the bank. The balance of deposits in bank was $28,587,552 as of December 31, 2013 and $33,829,725 as of December 31, 2012.

 

Interest expense was $21,223 for the three months ended December 31, 2013 as compared to $32,517 for the three months ended December 31, 2012. This decrease of $11,294 or 34.73% was primarily due to the decrease in short-term loan. The average daily short-term loan was $1,268,219 and $1,427,340 for the three months ended December 31, 2013 and 2012, respectively.

Income Taxes

 

Income taxes decreased $15,980, or 100.00%, from $15,980 for the three months ended December 31, 2012 to $0 for the three months ended December 31, 2013. The Company had no income taxes because of a net loss in the amount of $288,030 for the three months ended December 31, 2013.

 

Net Loss and Loss Per Share

 

Net loss was $288,030 for the three months ended December 31, 2013, as compared to $393,559 for the three months ended December 31, 2012. This decrease of $105,529 or 26.81% in net loss was primarily attributable to the decrease in operating expenses in the amount of $83,241.

 

Loss per share was $0.01 and $0.01 for the three months ended December 31, 2013 and 2012 respectively, which remained stable.

 

The following table summarizes the results of our operations for the six months ended December 31, 2013 and 2012, respectively: