China Health Industries Holdings, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

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)

86-451-88100688
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.

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 ☒     No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐    No ☒

As of May 8, 2020, there were 65,539,737 shares of common stock, $0.0001 par value per share, issued and outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(UNAUDITED)

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

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended March 31, 2020 and 2019
(UNAUDITED)

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

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the THREE Months Ended March 31, 2020 and 2019
(UNAUDITED)

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

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - ORGANIZATION AND BUSINESS BACKGROUND

China Health Industries Holdings, Inc. (“China Health US”) was incorporated in the State of Arizona on July 11, 1996, and is the successor to the business known as Arizona Mist, Inc., which was incorporated in 1989. On May 9, 2005, China Health US entered into a stock purchase agreement and share exchange (effecting a reverse merger) with Edmonds 6, Inc., a Delaware corporation (“Edmonds 6”), 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 Financial Accounting Standards Board (“FASB”) ACS Topic 915.

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 PRC Company Law. Humankind is engaged in the manufacturing and sale of health products.

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 equity interest in Humankind for 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. 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 and the Share Purchase was accounted for as a “reverse merger”. Consequently, the assets and liabilities and the historical operations that were reflected in the financial statements for periods prior to the Share Purchase are those of Humankind and have been recorded at historical cost basis. After the 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 onward.

On October 14, 2008, Humankind formed a 99% owned subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”) in the PRC. Huimeijia’s primary business is the manufacture and distribution of pharmaceuticals. Mr. Xin Sun, the majority owner of China Health US, 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. (the “Transaction”). China Health HK was the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US. Following the Transaction and a subsequent 20:1 reverse stock split, Mr. Xin Sun owned 61,203,088 shares of common stock of China Health US, representing 98.3% of the 62,234,737 total outstanding shares of common stock. 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 (RMB 100,000,000). HLJ Huimeijia was formed on October 30, 2003, in the PRC, and is engaged in the manufacturing and distribution of tinctures, ointments, rub-in therapeutic pastes, topical solutions, suppositories, liniments (including traditional Chinese medicine extractions), enemas and orally administered liquids. HLJ Huimeijia’s predecessor is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which established its brand by supplying high quality medical products. HLJ Huimeijia is categorized as a “high and new technology” enterprise by the Science Technology Department of Heilongjiang Province. HLJ Huimeijia has 21 products, which have been approved by, and have received approval numbers issued by, the China Food and Drug Administration (the “CFDA”). In addition, HLJ Huimeijia is the holder of one patent for a utility model, five patents for external design and three trademarks in the PRC, including the Chinese brand name “Xue Du”, which has an established reputation among customers in the northeastern PRC.

On December 24, 2014, Humankind entered into a stock transfer agreement (the “Original Agreement”) with Xiuzheng Pharmaceutical Group Co., Ltd. a company incorporated under the laws of the PRC and located in Jilin province (“Xiuzheng Pharmacy” or the “Buyer”), Mr. Xin Sun, the CEO of the Company, and Huimeijia, a subsidiary of Humankind 99% owned by Humankind and 1% owned by Mr. Xin Sun. Pursuant to the Original Agreement, Humankind and Mr. Xin Sun (the “Equity Holders”), would sell their respective equity interests in Huimeijia to Xiuzheng Pharmacy in more details as below.

According to a supplementary agreement, the four parties (i.e. Humankind, Xiuzheng Pharmacy, Mr. Xin Sun and Huimeijia) entered into on October 12, 2016 (the “2016 Supplementary Agreement”), pursuant to which the four parties agreed to execute the transfer of the equity interests based on the Original Agreement and the Equity Holders agreed to sell their respective equity interests in Huimeijia to Xiuzheng Pharmacy. The transfer of 100% of the equity interests of Huimeijia to the Buyer was for total cash consideration of RMB 8,000,000 (approximately $1,306,186) (the “Purchase Price”) to the Equity Holders. Pursuant to the 2016 Supplementary Agreement, 40% of the Purchase Price is due within 10 business days after the signing of the 2016 Supplementary Agreement; 40% of the Purchase Price is due within 10 business days after the completion of the changes in business registration described in the Original Agreement and Xiuzheng Pharmacy obtaining documents evidencing its ownership of Huimeijia; 15% of the Purchase Price is due within 10 business days after the transfer of all of the Assets is approved by the Heilongjiang FDA; and 5% of the Purchase Price is due within 10 business days after all of the Assets have been transferred to Xiuzheng Pharmacy, or its designee, and Humankind and Mr. Xin Sun have instructed Xiuzheng Pharmacy to complete the three-batches production of all forms of the drugs included in the Assets. As of the date of this report, 80% of the Purchase Price has been paid, because the Company has completed changes in its business registration, Xiuzheng Pharmacy has obtained a business license to Huimeijia that was issued by the local State Administration of Industry and Commerce in Harbin (“Harbin SAIC”) that reflects the recording of the ownership of Huimeijia as being held by Xiuzheng Pharmacy and with Harbin SAIC and the legal representative, a person that is authorized to take most of the corporate actions on behalf of a company under the corporate laws in China, of Huimeijia has been appointed by the Buyer.

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

As of March 31, 2020, the Company’s corporate structure was as follows:

Note 2 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

This summary of the Company’s significant accounting policies is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management (“Management”), which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States (“US GAAP”) and have been consistently applied in the preparation of the unaudited condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as allowed by such rules and regulations, and Management believes that the disclosures are sufficient to ensure that the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. These unaudited condensed consolidated financial statements include all adjustments which in the opinion of Management are necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments are of a normal and recurring nature. The results of operations for the nine months ended March 31, 2020, may not be indicative of results that may be expected for the year ended June 30, 2020.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include China Health US and its three subsidiary companies, which includes China Health HK, Humankind, and HLJ Huimeijia. All significant intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting

FASB Accounting Standard Codification (“ASC”) Topic 280, “Segment Reporting”. established standards for reporting information about operating segments on a basis consistent with a 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.

Fair Value of Financial Instruments

The provisions of FASB ASC Topic 820 accounting guidance that apply to the Company require all entities to disclose the fair value of financial instruments, including both assets and liabilities recognized and those not recognized on the balance sheets, for which it is practicable to estimate fair value, and defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

Fair Value Measurements

FASB ASC Topic 820, “Fair Value Measurements and Disclosures”, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value, and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the fair value of the Company’s debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the following three broad levels:

Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets;

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.); and

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a nonrecurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets or liabilities carried and measured on a recurring basis during the reporting periods.

The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant discretion of Management. For other financial instruments, pricing inputs are less observable in the market and may require judgment of Management.

Translation of Foreign Currencies

Humankind and HLJ Huimeijia maintain their books and accounting records in the PRC currency “Renminbi” (“RMB”), which has been determined to be the Company’s functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the dates 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 and HLJ Huimeijia’s financial statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of the above entities 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 and non-controlling interests.

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 be the same as 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. Management 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 the Company’s 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 Management 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 March 31, 2020 and June 30, 2019, the Company’s uninsured bank balances were mainly maintained at financial institutions located in the PRC and Hong Kong. The uninsured bank balances were $36,593,609 and $35,507,535 as of March 31, 2020 and June 30, 2019, respectively. The Company had no insured bank balances as of March 31, 2020 and June 30, 2019, 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 (the “Allowance”). On November 1, 2013, the Company changed its credit policy by offering ninety (90) day payment terms for sales agents, whereas the payment terms for sales agents before November 1, 2013 were thirty (30) days. As of March 31, 2020 and June 30, 2019, the balances of accounts receivable were $3,601,683 and $1,987,505, respectively. The Company determines the Allowance based on aging data, historical collection experience, customer specific facts and economic conditions. Account balances are charged off against the Allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company evaluated the nature of all accounts receivable then provided allowance for doubtful accounts. The Company has determined that an Allowance of $33,953 and $71,713 was appropriate as of March 31, 2020 and June 30, 2019, respectively.

Advances to Suppliers

The Company periodically makes advances to certain vendors for purchases of raw materials, or to service providers for services relating to construction plans for its plants, equipment and production lines for GMP upgrading, and records these payments as advances to suppliers. As of March 31, 2020 and June 30, 2019, advances to suppliers amounted to $205,386 and $8,619, respectively.

Inventory

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

Inventory is stated at the lower of either cost or market value, and consists of materials, labor and overhead. HLJ Huimeijia uses the weighted average method for inventory valuation. The other subsidiaries of the Company use the first-in, first-out (“FIFO”) method for inventory valuation. Overhead costs included in finished goods include direct labor costs and other costs directly applicable to the manufacturing process. The Company evaluates inventory for excess, slow moving, and obsolete inventory as well as inventory of which the value is in excess of 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 allowance was $nil and $nil for the nine months ended March 31, 2020 and June 30, 2019, 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 an asset’s useful life 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 the Company’s 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 March 31, 2020 and June 30, 2019, the Company had 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, Plants and Equipment

Property, plants and equipment are carried at the lower of either cost or fair value. Maintenance, repairs and minor renewals are expensed as incurred; major renewals and improvements that extend the life or increases 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 operations in the reporting period of disposition.

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

Intangible Assets

The Company evaluates intangible assets in accordance with FASB ASC Topic 350, “Intangibles — Goodwill and Other”. Intangible assets deemed to have indefinite life 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 the Company’s intangible assets could be impacted by future adverse changes such as the following: (i) any future declines in the Company’s operating results, (ii) a decline in the valuation of technology or the valuation of the Company’s common stock, (iii) a significant slowdown in the worldwide economy, or (iv) any failure to meet the performance projections included in the Company’s 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’s estimates of an asset’s useful life and future cash flows. Significant judgment by Management is required in the forecast of future operating results that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect. If the Company’s 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 nine months ended March 31, 2020 and 2019, 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 as construction in progress include all costs of obtaining the asset and bringing it to the location in the 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 of the assets, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the 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 were no impairments recorded for construction in progress, for the nine months ended March 31, 2020 and June 30, 2019, respectively. 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.

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 exists 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 the discounted selling price and allows its customers to return products 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 nine months ended March 31, 2020 and 2019, respectively.

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 costs associated with the manufacturing process and commission expenses.

Income Taxes

The Company has adopted 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 based on the 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.

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.

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 the Company’s 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.

Enterprise Income Tax

Under the Provisional Regulations of the PRC Concerning Income Tax on Enterprises promulgated by the PRC (the “EIT Law”), income tax is payable by enterprises at a rate of 25% of their taxable income.

Value Added Tax

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

VAT payable in the PRC is charged on an aggregated basis at a rate of 13% or 16% (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 VAT included in the price or charges, and less any deductible VAT already paid by the taxpayer on purchases of goods and services in the same financial year. As of March 31, 2020 and June 30, 2019, VAT payables were $130,117 and $120,114, 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 aggregate VAT paid by the Company as taxes for the purposes of maintaining and building cities and educational facilities, which fees are included as sales-related taxes. Sales-related taxes are recorded when sales revenue is recognized.

Concentrations of Business and Credit Risks

All of the Company’s manufacturing takes place 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 the PRC, 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 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 are 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 nine months ended March 31, 2020 and 2019, 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The main objective of the standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In issuing this standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. The standard is applicable to loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, loan commitments and certain other off-balance sheet credit exposures, debt securities (including those held-to-maturity) and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The CECL model does not apply to available-for-sale debt securities. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities. Accordingly, the new methodology will be utilized when assessing the Company’s financial instruments for impairment. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU 2016-13 is effective for years beginning after December 15, 2019, including interim periods within those fiscal years under a modified retrospective approach. Early adoption is permitted for the periods beginning after December 15, 2018. The Company plans to adopt the guidance from July 1, 2020. The Company finalized its analysis and believes the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and its internal controls over financial reporting.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which modifies the disclosure requirements on fair value measurements, including removing the requirement to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. ASU 2018-13 also added new disclosures including the requirement to disclose (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2019 and early adoption is permitted. This standard will only impact the disclosures pertaining to fair value measurements. The Company plans to adopt the guidance from July 1, 2020. The Company finalized its analysis and believes the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and its internal controls over financial reporting.

NOTE 3 - ACCOUNTS RECEIVABLE

The Company’s accounts receivables were $3,601,683 and $1,987,505, net of allowances for doubtful accounts amounting to $33,953 and $71,713, as of March 31, 2020 and June 30, 2019, respectively.

NOTE 4 - INVENTORY

Inventory of the Company consisted of following:

The inventory allowance in the amounts of $nil and $nil for the nine months ended March 31, 2020 and June 30, 2019, respectively.

NOTE 5 - CONSTRUCTION IN PROGRESS

Construction in progress of the Company consisted of the following:

On April 6, 2012, HLJ Huimeijia entered into an agreement with a contractor for construction of the HLJ Huimeijia plant. The estimated total cost of construction was approximately $1.86 million (RMB 12,800,000). As of March 31, 2020, 77% of construction has been completed, $510,522 (RMB 3,614,907) has been recorded as costs of construction in progress and construction in progress at an amount of $877,219 (RMB6,211,409) has been completed and converted into property, plant and equipment.

NOTE 6 - PROPERTY, PLANTS AND EQUIPMENT

Property, plants and equipment consisted of the following:

Depreciation expenses were $254,553 and $265,406 for the nine months ended March 31, 2020 and 2019, respectively. Depreciation expenses charged to operations were $94,770 and $110,064 for the nine months ended March 31, 2020 and 2019, respectively. Depreciation expenses charged to cost of goods sold were $159,783 and $155,342 for the nine months ended March 31, 2020 and 2019, respectively.

NOTE 7 - INTANGIBLE ASSETS

The following is a summary of intangible assets of the Company:

All land in the PRC belongs to the government of the PRC. Enterprises and individuals can pay the PRC government 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. These land use rights can be sold, purchased, and exchanged in the market. The successive owner of the land use right will have the right to use the land for the time remaining on the initial period.

Amortization expenses was $340,963 and $354,382 for the nine months ended March 31, 2020 and 2019, respectively.

NOTE 8 - RELATED PARTY DEBTS

Related party debts, which represent temporary short-term loans from Mr. Xin Sun and Mr. Kai Sun, consisted of the following:

These loans are unsecured, non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand. Mr. Kai Sun is a PRC citizen and a family member of Mr. Xin Sun, the CEO of the Company.

NOTE 9 - INCOME TAXES

(a) Corporate income taxes

United States

China Health US was organized in the United States. China Health US had no taxable income for US income tax purposes for the nine months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, China Health US had a net operating loss carry forward for United States income taxes. Net operating loss carry forwards are available to reduce future years’ taxable income. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history and the continued losses of its US entity. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to reduce the asset to zero. There were no changes in the valuation allowance for the nine months ended March 31, 2020 and 2019. Management reviews this valuation allowance periodically and makes adjustments accordingly.

Hong Kong

China Health HK was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for income taxes has been made because China Health HK had no taxable income in Hong Kong.

People’s Republic of China

Under the EIT Law, the standard EIT rate is 25%. The PRC subsidiaries of the Company are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.

The provision for income taxes consisted of the following for the three and nine months ended March 31, 2020 and 2019:

Significant components of deferred tax assets of the Company were as follows:

(b) Uncertain tax positions

There were no unrecognized tax benefits as of March 31, 2020 and June 30, 2019. Management does not anticipate any potential future adjustments in the next twelve months which would result in a material change to its tax positions. For the nine months ended March 31, 2020 and 2019, the Company did not incur any interest or penalties arising from its tax payments.

NOTE 10 - 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 dilutive earnings per share. It assumes that any proceeds would be used to purchase common stock at the average of the 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.

For the nine months ended March 31, 2020 and 2019, the Company did not have potential dilutive shares. The following table sets forth the computation of basic and diluted net income per share:

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 PRC 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 PRC government. For example, all land is state owned and leased to business entities or individuals through the PRC 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 PRC 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 or Western Europe, because 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, which is overshadowed by the state. Its political and economic systems are vastly 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.

The main items of the Company’s assets are cash, accounts receivable, inventory and PPE. On March 31, 2020, December 31, 2019, and June 30, 2019, the proportion of cash in total assets remained approximately 76 %. Accounts receivable as of March 31, 2020 slightly increased from the previous period as a proportion of total assets. Inventory and fixed assets as a percentage of total assets were stable.

Affected by the coronavirus disease 2019 (COVID-19) pandemic, the proportion of Company’s accounts receivable in total assets slightly increased during the reporting period and the end-of-period value estimate will have an impact on the balance sheet. However, the Company does not expect COVID-19 to have a significant impact on the end-of-period valuation of accounts receivable based on the following reasons: (1) the Company and its customers have a long-term cooperating relationship and as a result the Company could reliably assess the recoverability of accounts receivable; and (2) as the outbreak of COVID-19 is gradually under control in China, more and more business have restarted their operations, and consequently, we believe the consumption power is recovering as well. We believe these positive business recovery activities will similarly affect the recovery of receivables in a positive manner. However, due to the unprecedented and uncertain conditions surrounding the outbreak of COVID-19, there can be of no assurance that the Company can recover its account receivables in a way as it expected.

The Company had no rental commitments as of March 31, 2020.

NOTE 12 - MAJOR SUPPLIERS AND CUSTOMERS

For the nine months ended March 31, 2020, the Company had three suppliers that in the aggregate accounted for 75% of the Company’s purchases for operations, with each supplier accounting for 29%, 24% and 22%, respectively.

For the nine months ended March 31, 2019, the Company had three suppliers that in the aggregate accounted for 73% of the Company’s purchases for operations, with each supplier accounting for 47%, 15% and 11%, respectively.

For the nine months ended March 31, 2020, the Company had six customers that in the aggregate accounted for 83% of the Company’s total sales for operations, with each customer accounting for 21%, 17%, 15%, 12%, 11% and 8%, respectively.

For the nine months ended March 31, 2019, the Company had six customers that in the aggregate accounted for 81% of the Company’s total sales for operations, with each customer accounting for 20%, 16%, 15%, 11%, 11% and 8%, respectively.

NOTE 13 - SEGMENT REPORTING

The Company is organized into the following three main business segments based on the types of products being 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 information regarding revenue, gross margin, operating income, and net income 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 loss by segment.

The following tables present summary information by segment for the three and nine months ended March 31, 2020 and 2019, respectively:

NOTE 14 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and determined that there are no additional items to disclose except the above-mentioned matters.

FORWARD LOOKING STATEMENTS

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 this caption as well as under 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. 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. 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, which reflect our view only as of the date of this report.

Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:

Except as required by applicable laws, regulations, or rules, 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 unaudited condensed consolidated financial statements and the related notes thereto 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 limited liability company incorporated under the laws of Hong Kong, its wholly owned subsidiary in China, Harbin Humankind Biology Technology Co. Limited (“Humankind”), and indirect wholly owned subsidiary, Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”). Unless the context otherwise requires, all references to (i) the “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 subsidiaries, Humankind and HLJ Huimeijia.

The Company owns a GMP-certified plant and production facilities and has the capacity to produce 21 different CFDA-approved medicines, 14 CFDA-approved health supplement products and 8 hemp derivative products in soft capsule, hard capsule, tablet, granule, oral liquid forms. These products address the needs of some key sectors in China, including the feminine, geriatric, and children’s markets.

HLJ Huimeijia was founded on October 30, 2003 and its latest GMP certificate is effective until April 24, 2023. HLJ Huimeijia engages in the manufacture and distribution of tincture, ointments, rubber paste, including hormones, topical solution, suppositories, enemas, oral liquids, and liniment, including traditional Chinese medicine extractions. HLJ Huimeijia’s predecessor was Heilongjiang Xue Du Pharmaceutical Co., Ltd., which established brand recognition 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.

We have developed the following products that are derived from hemp and obtained business license to manufacture and sell these products. We have begun to sell these products since May 2018. Hemp Oil, Hemp Protein Powder, Hemp Polypeptide and Collagen Peptide are sold through Humankind. Other products are sold through HLJ Huimeijia. The revenue of the Hemp Oil, Hemp Protein Powder and Hemp Polypeptide accounted for 79.69% and 67.56% of the total revenues for the nine months periods ended March 31, 2020 and 2019, respectively.

Affected by COVID-19, the company ceased production in February 2020, and the company has obtained government approval for reinstatement in early March. Because early February is China’s traditional Spring Festival during which period the company’s estimated sales are not large, so the epidemic had little effect on February’s sales revenue.

From April 2020, most provinces in China have begun to resume production and production. In the short term, our business could be adversely affected by the effects of COVID-19, and the company’s sales revenue growth would be affected, but in the medium to long term it has no impact on sales revenue. Because the company sells products such as Hemp Protein Powder and Hemp Polypeptide, as the understanding of COVID-19 continues to deepen, consumers will realize that strengthening their own immunity and resistance is the effective way to fight COVID-19, and the consumers will pay attention to strengthen of physical fitness, the consumption of protein powder, protein peptides and other health foods. To maintain market share and maintain customer loyalty, there will be promotions and discounts in the short term. And these actions are within the company’s normal operating capacity control.

We sell our products directly to end customers through our own sales personnel as well as our sales agents, operating primarily in Anhui, Zhejiang, Shanghai, Jiangsu, Beijing and Gansu, where most of our revenues are generated. Sales by agents in Anhui, Zhejiang, Shanghai, Jiangsu, Beijing, and Gansu provinces accounted for 21%, 17%, 15%, 12%, 11%, and 8%, of our total sales, respectively, for the nine months ended March 31, 2020. Although we do not currently sell our products online, we expect to do so in the future.

Due to the outbreak of COVID-19 and the lock-down policy in China in the first quarter of 2020, the Company temporarily ceased production in February 2020. However, the Company obtained the government approval for reinstatement in early March. From April 2020, most provinces in China have begun to resume production. Thus we believe the impact of COVID-19 will gradually weaken. We believe our temporary closure in February had a relatively small impact on our results of operations because we usually experienced a lowers sale volumes during the Chinese New Year season. Moreover, in order to maintain our market share and customer’s loyalty, we plan to offer promotions and discounts for a short term, which could result in a temporary slight fluctuation of the gross profit margin but we do not expect this will have a long-term substantial impact on our gross profit rate. However, due to the unprecedented and uncertain conditions surrounding the outbreak of COVID-19, there can be of no assurance that our promotion activities will receive the results as we expected. If these promotions and discounts fail to achieve our goal to maintain the market share and customer’s loyalty and the COVID-19 pandemic lasts longer than we expected, our results of operations could be adversely impacted in a material manner. The management has been closely monitoring the impact caused by COVID-19 and we will continue to operate our business as steadily and safely as we can.

Results of Operations

Three months ended March 31, 2020 compared to the three months ended March 31, 2019

The following table summarizes the top lines of the results of our operations for the three months ended March 31, 2020 and 2019, respectively:

Revenue

Total revenues increased by $220,981 or 10.03% for the three months ended March 31, 2020, as compared to the same period in 2019. The increase in revenues was primarily due to an increase of $229,255 or 10.55% in Humankind’s revenues for the three months ended March 31, 2020, as compared to the same period in 2019. The increase in Humankind’s sales revenues was primarily due to the increased demand of Hemp Polypeptide and Hemp Protein Powder.

Our total cost of sales increased by $60,069 or 11.86% for the three months ended March 31, 2020 as compared to the same period in 2019. The increase in the overall cost of sales was attributed to the decrease of $72,840 or 14.79% Humankind’s cost of sales for the three months ended March 31, 2020 as compared to the same period in 2019. This increase aligned with the increase in sales volume of products sold by Humankind. The growth ratio of cost of goods sold was consistent with the figure of sales for the three months ended March 31, 2020 as compared to the same period in 2019.

Our gross margin increased by $160,912 or 9.49% for the three months ended March 31, 2020 as compared to the same period in 2019. This change was consistent with the change of sales and costs in Humankind. The gross margin of HLJ Huimeijia increased by $4,497 or 112.57% for the three months ended March 31, 2020 as compared to the same period in 2019. The increase was primarily due to that HLJ Huimeijia completed a processing transaction for drying raw materials of traditional Chinese medicine of which the gross margin was higher during the three months ended March 31, 2020.

Sales by Product Line

The following table summarizes a breakdown of our sales by major product line for the three months ended March 31, 2020 and 2019, respectively:

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2020 and 2019, respectively:

Total operating expenses for the three months ended March 31, 2020 were $60,168 or 13.40% lower than in the corresponding period in 2019. The decrease in operating expenses was primarily due to the decrease in selling, general and administrative expenses, which was mainly due to the decrease of staff cost of HLJ Huimeijia and the higher exchange rate for the three months ended March 31, 2020 as compared to the same period in 2019. 

Interest Income and Interest Expense

Interest income was $31,801 for the three months ended March 31, 2020, as compared to $28,815 for the three months ended March 31, 2019. This increase of $2,986 or 10.36%, was mainly due to the increased average balance of bank deposits for the three months ended March 31, 2020 compared with the same period of 2019.

Interest expense was $nil for the three months ended March 31, 2020, a decrease of $2 or 100.00%, as compared to $2 for the three months ended March 31, 2019.

Income Taxes

Income taxes increased by $33,558 or 10.25%, from $327,536 for the three months ended March 31, 2019 to $361,094 for the three months ended March 31, 2020. The increase in income taxes was due to the increase of the Company’s income.

Net Income and Net Income Per Share

Net income was $992,722 for the three months ended March 31, 2020, as compared to $767,929 for the three months ended March 31, 2019. This increase of $224,793 in net income was primarily attributable to an increase of gross margin.

Net income per share was $0.0151 for the three months ended March 31, 2020, and net income per share was $0.0117 for the three months ended March 31, 2019, respectively. This increase was primarily a result of the aforementioned increase in net profit.

Nine months ended March 31, 2020 compared to the nine months ended March 31, 2019

The following table summarizes the top lines of the results of our operations for the nine months ended March 31, 2020 and 2019, respectively:

Revenue

Total revenues increased by $849,811 or 11.91% for the nine months ended March 31, 2020, as compared to the same period in 2019. The increase in revenues was primarily due to an increase of $858,945 or 12.27% in Humankind’s revenues, which was primarily due to the increased demand of Hemp Polypeptide and Hemp Protein Powder.

Our total cost of sales increased by $93,658 or 5.61% for the nine months ended March 31, 2020, as compared to the same period in 2019. The increase in the overall cost of sales was mainly due to the cost of sales of Humankind increased by$122,277 or 7.65%, which was consistent with the growth of sales for the nine months ended March 31, 2020 as compared to the same period in 2019.

Our gross margin increased by $747,253, from $5,390,281 for the nine months ended March 31, 2019 to $6,137,534 for the nine months ended March 31, 2020. This growth was consistent with the increase of sales and costs in Humankind. The gross margin of HLJ Huimeijia increased by $10,585 or 76.76% for the nine months ended March 31, 2020 as compared to the same period in 2019. The increase was primarily due to that HLJ Huimeijia completed a processing transaction for drying raw materials of traditional Chinese medicine of which the gross margin was higher during the nine months ended March 31, 2020.

Sales by Product Line

The following table summarizes a breakdown of our sales by major product line for the nine months ended March 31, 2020 and 2019, respectively:

Operating Expenses

The following table summarizes our operating expenses for the nine months ended March 31, 2020 and 2019, respectively:

Total operating expenses for the nine months ended March 31, 2020 were $108,885 or 5.63% lower than in the corresponding period in 2019. The decrease in operating expenses was primarily due to company’s management’s efforts in human cost control.

Interest Income

Interest income was $93,842 for the nine months ended March 31, 2020, as compared to $83,531 for the nine months ended March 31, 2019. This increase of $10,311 or 12.34%, was mainly due to the increased average balance of bank deposits for the nine months ended March 31, 2020 compared with the same period of 2019.

Income Taxes

Income taxes increased by $192,251 or 18.53%, from $1,037,246 for the nine months ended March 31, 2019 to $1,229,497 for the nine months ended March 31, 2020. The increase was primarily due to the growth of the Company’s revenue and gross profits

Net Income and Net Income Per Share

Net income was $3,175,880 for the nine months ended March 31, 2020, as compared to $2,517,410 for the nine months ended March 31, 2019. This increase of $685,470 was primarily attributable to an increase of gross margin.

Net income per share was $0.0485 for the nine months ended March 31, 2020 and $0.0384 for the nine months ended March 31, 2019. This increase was primarily a result of the above-mentioned increase in net income.

Liquidity and Capital Resources

We believe our current working capital position, together with our expected future cash flows from operations and loans from our major shareholder will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding in the future.

The following table summarizes our cash and cash equivalents positions, our working capital, and our cash flow activities as of March 31, 2020 and June 30, 2019 and for the nine months ended March 31, 2020 and 2019:

For the nine months ended March 31, 2020, our net increase in cash and cash equivalents totaled $1,374,122, which total was comprised of net cash provided by operating activities in the amount of $2,044,984, net cash used in financing activities in the amount of $152,362 and the effect of the prevailing exchange rates on our cash position of $806,548.

For the nine months ended March 31, 2019, our net increase in cash and cash equivalents totaled $2,604,577, which total was comprised of net cash provided by operating activities in the amount of $3,206,439 and the effect of prevailing exchange rates on our cash position of $393,281, offset by net cash used in financing activities in the amount of $208,581.

Our working capital as of March 31, 2020 was $32,539,427, compared to working capital of $29,595,941 as of June 30, 2019. This increase of $2,943,486 or 9.95% was primarily attributable to the increase of cash and cash equivalents and accounts receivable in the amount of $1,374,122 and $1,614,178, respectively in the nine months ended March 31, 2020.

Net cash provided by operating activities was $2,044,984 for the nine months ended March 31, 2020, primarily attributable from net income of $3,175,880. Net cash used in investing activities was $152,362 for the nine months ended March 31, 2020, primarily due to expenditures in property, plant and equipment of $133,436. The negative effect of exchange rate changes on cash and cash equivalents in the amount of $806,548 for the nine months ended March 31, 2020 was mainly a result of the effect of the depreciation of the value of RMB for USD. The exchange rates from USD to RMB were 6.8668 to 1 and 7.0808 to 1 as of June 30, 2019 and March 31, 2020, respectively, and the average exchange rate from USD to RMB was 7.0128 for the nine months ended March 31, 2020.

Net cash provided by operating activities was $3,206,439 for the nine months ended March 31, 2019, primarily attributable to a decrease in inventory in the amount of $343,902, an increase of amounts due to related parties in the amount of $445,204 and a decrease in accounts receivable in the amount of $562,752. Net cash used in investing activities was $208,581 for the nine months ended March 31, 2019, primarily due to decrease in property, plant and equipment of $189,106. The negative effect of exchange rate changes on cash and cash equivalents in the amount of $393,281 for the nine months ended March 31, 2019 was mainly a result of the effect of the valuation of the RMB against the USD on the significant amount of cash and cash equivalents held by the Company in RMB. The exchange rates from USD to RMB were 6.2000 to 1 and 6.7119 to 1 as of June 30, 2018 and March 31, 2019, respectively, and the average exchange rate from USD to RMB was 6.8237 for the nine months ended March 31, 2019.

Other than as described in this report, we have no present agreements or commitments with respect to any material acquisitions of businesses, products, product rights, technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of, and/or investments in, products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

Related Party Debts

We had related party debts in the amount of $7,241,166 as of March 31, 2020, as compared to $6,764,976 as of June 30, 2019, an increase of $476,190 or 7.04%. Our related party debts mainly consist of a loan from Mr. Xin Sun, the CEO of the Company. The loan is unsecured, non-interest bearing and has no fixed terms of repayment. There was no written agreement for the loan. See Note 8.

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

We prepare the unaudited condensed consolidated financial statements in accordance with US GAAP. These accounting principles require us to make judgments, estimates and assumptions on the reported amounts of assets and liabilities at the end of each fiscal period, and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information, and assumptions that we believe to be reasonable.

There have been no material changes during the nine months ended March 31, 2020 in the Company’s significant accounting policies to those previously disclosed in the annual report on Form 10-K for the fiscal year ended June 30, 2019.

Not applicable.

Evaluation of Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to Management, including the Company’s chief executive and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

At the conclusion of the period ended March 31, 2020, the Company carried out an evaluation, under the supervision and with the participation of Management, including the Company’s principal executive and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Company’s principal executive and principal financial officer concluded that, due to the material weakness in the Company’s internal controls over financial reporting as discussed in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2019, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.

Despite the material weakness referenced above, Management believes that the Company’s unaudited condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented because the Company has retained a consultant who has U.S. GAAP experience to assist the Company in the preparation of its unaudited condensed consolidated financial statements.

Changes in Internal Controls over Financial Reporting

No changes in our internal controls over financial reporting have come to Management’s attention during the quarter ended March 31, 2020, that have materially affected, or are likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Management does not expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions, and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II - OTHER INFORMATION

We face risks related to health epidemics that could impact our sales and operating results.

Due to the outbreak of COVID-19 and the lock-down policy in China in the first quarter, the Company temporarily ceased production in February 2020. However, the Company obtained the government approval for reinstatement in early March. From April 2020, most provinces in China have begun to resume production and as we believe the impact of COVID-19 will gradually weaken. We believe our temporary closure in February had a relatively small impact on our results of operations because we usually experienced a lower sales volumes during the Chinese New Year season. Moreover, in order to maintain our market share and customer’s loyalty, we plan to offer promotions and discounts for a short term, which we believe could result in a temporary slight fluctuation of the gross profit margin but we do not expect this will have a long-term substantial impact on our gross profit rate. However, due to the unprecedented and uncertain conditions surrounding the outbreak of COVID-19, there can be of no assurance that our promotion activities will receive the results as we expected. If these promotions and discounts fail to achieve our goal to maintain the market share and customer’s loyalty and the COVID-19 pandemic lasts longer than we expected, our results of operations could be adversely impacted in a material manner. The management has been closely monitoring the impact caused by COVID-19 and we will continue to operate our business as steadily and safely as we can.

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

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