Item 1. Business.
Our History and Corporate Structure
We were incorporated in the state of Arizona on July 11, 1996 and were the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.
We began manufacturing systems for outdoor cooling in Arizona and quickly expanded to distribute throughout the United States. Our primary product was a misting system which consisted of a high pressure pump assembled to specifications.
Pursuant to the Securities Purchase Agreement dated as of September 10, 2007 between the Company, Thomas Bontems (“Bontems”) and Xin Sun, we experienced a change in control whereby Xin Sun acquired a total of 22,000,545 shares of common stock of the Company from Bontems and the Company issued 2,061,200 shares of common stock of the Company to Xin Sun , such that upon consummation of the agreement, Xin Sun held an aggregate of 24,061,745 shares, or 51.53% of the total issued and outstanding shares of common stock of the Company on a fully-diluted basis.
Pursuant to the Asset Purchase and Sale Agreement dated September 10, 2007 between the Company and Universal Fog Systems, Inc., we then transferred all our liabilities to the latter on September 10, 2007 and similarly, all our assets on December 31, 2008.
On December 31, 2008, we acquired the business of Harbin Humankind Biology Technology Co. Limited through the acquisition of all the share capital of China Health Industries Holdings Limited under the Share Exchange Agreement dated October 15, 2007.
As a result of the above, China Health Industries Holdings Limited is now our wholly-owned subsidiary. Because Harbin Humankind Biology Technology Co., Limited (“Harbin Humankind”) is a wholly-owned subsidiary of China Health Industries Holdings Limited and Harbin Huimeijia Medicine Company (“Huimeijia”) is in turn a subsidiary 99% of whose shares are owned by Harbin Humankind, both Harbin Humankind and Huimeijia are our indirect owned subsidiaries.
Business Overview
Harbin Humankind was incorporated in the People’s Republic of China (“PRC”) on December 14, 2003 and completed its Good Manufacturing Practice (“GMP”) certification on April 24, 2007. It is in the business of manufacture and sales of health products, “green” (or organic) food and the detection of disease susceptibility or pre-disposition through genetic studies.
Huimeijia was incorporated in the PRC on October 14, 2008. Huimeijia completed its GMP certification on July 23, 2009 and will produce and sell our medical drugs.
Our business is conducted through our PRC subsidiaries, Harbin Humankind and Huimeijia. Our products are primarily sold through conference marketing where we offer free healthcare lectures and market our products to the conference attendees. We plan to develop chain-stores to sell our products and eventually sell our products over the internet.
Products
We presently have, through Huimeijia, the license to manufacture 19 medical drugs and have obtained a State Drug Approval Issue number for each of these drugs. Huimeijia completed its GMP certification on July 23, 2009 and is now authorized to commercially manufacture and sell medical drugs.
We have, through Harbin Humankind, the license to manufacture and sell two health supplement products which have a State Good Health Issue number assigned to each product (as provided below). In addition, Harbin Humankind distributes and sells 52 kinds of health food.
We are licensed to sell our products, including our medicine drugs only 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 for freckle removal and supplementing the water content of the skin. The certification number issued by the State Food and Drug Administration on August 29, 2007 is 2007B0837.
On May 12, 2010, we received a patent for this product (200610010394.4) under the name “Run Chao” (which has now been changed to “Qunle”) with the National Bureau of Intellectual Property and the application was approved in May 2010.
Pursuant to a Technology Transfer Agreement dated October 12, 2007, we purchased a health product known as “Kindlink” brand propolis and black ant capsule made from propolis, black ant, acanthopanax, astragalus root from Beijing Jindelikang Bio-Technology Co., Ltd (“Jindelikang”). The change of the ownership has been approved by the State Food and Drug Administration. This product is consumed to boost one’s immunity. The certification number issued by the State Food and Drug Administration on August 20, 2004 for the license to manufacture the product is GuoShiJianZi G20040906.We have no continuing obligations under the Technology Transfer Agreement.
(ii)
Health Food and Organic “Green” Food
Our health and organic “green” food products include (i) abalone, sea cucumber and frog oil soft capsules (Serial Number 016-2007), (ii) ganodermalucidum and aweto soft capsules (Serial Number 017-2007), (iii) propolis soft capsules, (iv) deep sea fish oil (Serial Number 012-2006), (v) liquid calcium (Serial Number 013-2006), (vi) multi-vitamins (Serial Number 010-2007), (vii) soybean isoflavone (Serial Number 012-2006) and (viii) royal jelly (Serial Number 011-2006), (ix) Sleeping Beauty Capsule, (x) Virility Max Capsule, (xi) Ruddy Granule, (xii) Blood Cleanser Soft Capsule, (xiii) Colon Cleanser Capsule, and (xiv)Energy Elemental Power.
The major suppliers of raw materials for these products in the fiscal year 2011 are:
For the fiscal year 2011, Mr. Wang Shukui was our biggest supplier of raw materials. The Company typically signs monthly purchase orders with its suppliers and a sample of such purchase order with Mr. Wang is found in exhibit 10.8 hereto. All purchase orders with Mr. Wang in fiscal year 2011 are on similar terms. Delivery of goods is against payment. The cost of delivery is borne by the supplier. Parties have an opportunity to inspect the goods on delivery and the Company may raise any objection to the goods within 30 days of delivery. In the event of any dispute of quality, the inspection results of the municipal drug administration shall be the final determining factor. Neither party may modify or terminate the contract of sale unilaterally.
(iii)
Medical Drugs
Huimeijia purchased the license of Harbin Dong Feng Medicine Company to manufacture 19 medical drugs on September 16, 2008. Huimeijia is now the registered owner of the license, approved by the Heilongjiang Food and Medicine Supervising Bureau.
A description of these 19 medical drugs is as follows:
Serial
No
Product
Efficacy*
Stomach-Tonic Tablets
Invigorating stomach and relieving pain. Used in the treatment of pain from stomach distention, eructation with fetid odor and fecal disorders caused by gasterasthenia and dyspeptic retention.
Pediatric Compound
Sulfamethoxazole Tablets (0.125g)
Used in the treatment of 1. Urinary tract infection caused by sensitive strains of Escherichia coli, Klebsiella, Enterobacter, Proteus mirabilis, Bacillus proteus and Proteus morganli. 2. Acute otitis media in children over 2 years old caused by Streptococcus pneumoniae or Hemophilus influenza. 3. Acute episode of adult chronic bronchitis caused by Streptococcus pneumoniae or Hemophilus influenza. 4. Intestinal infection and Shigella infection caused by sensitive strains of Shigellaflexneri and Shigellasonnei. 5. Pneumonia caused by Pneumocystis carinii. 6. Prevention of pneumonia caused by Pneumocystis carinii. This product can be used for patients with a history of pneumonia caused by Pneumocystis carinii or adult HIV-infected patients whose CD4 lymphocyte count is dult HIV-infected patients whose CD4 lymphocyte countTurista caused by enterotoxicEscherichia coli.
Pediatric Compound
Sulfamethoxazole Tablets (0.25g)
Same as above.
Pipemidic Acid Tablets
Used to treat urinary tract infection and bacterial infection of the intestines caused by sensitive gram negative bacilli.
Metamizole Sodium Tablets
Used to relieve fever caused hyperpyrexia and also for headache, migrainous headache, courbature, arthralgia, menalgia etc. The product also has strong anti-rheumatism effects and can be used for acute rheumatic arthritis, but because the product may induce severe adverse reaction, it is seldom applied in the treatment of rheumatic diseases.
Paracetamol Tablets
Used for fever caused by common cold or epidemic influenza and also for relieving light and moderate pain such as headache, arthralgia, migraines, tooth ache, courbature, neuralgia and menalgia.
Pediatric Paracetamol, Artificial Cow-
bezoar and Chlorphenamine Maleate Tablets
Used to relieve fever, headache, aching pain in extremities, sneezing, rhinorrhea, nasal obstruction, pharyngodynia and other symptoms in children caused by common cold or epidemic influenza.
Compound Theophylling
Hydrochloride Tablets
Used to treat bronchial asthma.
Powerful Loquat Syrup
Used for the treatment of coughing and reduction of sputum caused by bronchitis.
Purple Orange Cough Syrup
Relieving cough and eliminating sputum. Used to relieve coughing and excessive phlegm as well as expectoration.
Cough Syrup of Loquat Leaf
Used to clear lungs, relieve coughs and eliminate sputumand excessive phlegm.
Children’s Cough Syrup
Eliminating phlegm and relieving cough. Used to relieve coughs caused by the common cold in children.
Pentoxyverine Citrate and Ammonium
Chloride Syrup
Used for cough and expectoration.
Schisandra Syrup
Tonifying vital energy and invigorating the kidneys. Used in the treatment for neurastheria, dizziness and insomnia.
Ginseng Oral Liquid
Used to nourish renal “qi” and promote fluid production to quench thirst. Used to treat fatigue and acratia caused by deficiency of vital energy as well as poor appetite, cardiopalmus and shortness of breath, insomnia and forgetfulness.
Compound Fluououracil Oral Solution
Used in the therapeutic treatment of digestive tract cancer (colon carcinoma and gastric carcinoma), mammary adenocarcinoma, primary hepatic carcinoma.
Gossypol, Potassium Chloride and
Vitamins B Capsules
Used in the treatment of uterine bleeding brought on by menopause.
Compound Belladonna and Aluminum
Hydroxide Powder
Used for relieving stomach pain, brash (heartburn) and acid reflux caused by gastric hypersecretion.
Gentian and Sodium Bicarbonate
Powder
Used for anorexia, gastric hypersecretion and dyspepsia.
*Tested for efficacy by the National Food and Medicine Supervising Bureau.
Distribution
We signed a non-exclusive cooperation agreement with the Commercial Bureau of Qing’an County, Heilongjiang on September 17, 2008. Under the agreement, various affiliated companies of the Commercial Bureau will provide organic food and green food products to us for distribution and sale throughout the PRC.
We will order products from the Commercial Bureau and such products will be delivered within 20 days of placing the order. The price for these products fluctuates within a 3% range from its wholesale price, but we are not restricted in any way in dictating the retail price for such products. We typically have an average profit margin of approximately 20%.
Gene Studies
Genes are the basic elements of life. The makeup of certain genetic predisposes someone to certain types of diseases. Accordingly, the purpose of the genetic study services we provide to our customers is to educate them on their pre-dispositions or susceptibility to certain types of diseases.
We entered into a cooperation contract with Shanghai Hujing Bio Technology Co., Ltd (“Hujing”) on February 28, 2008. Pursuant to this agreement, we will collect genetic samples from our customers using simple oral smear techniques and then send it to Hujing for analysis. Hujing will then deliver a report to us for each sample which we will transmit to our customers.
E-business
We are in the process of building the infrastructure to conduct our business over the internet. A B2C e-business call and sales center has been established and will become an integral part of our distribution channel in the future. We have employed graduates from Tsinghua University, Harbin Industry University and Harbin Engineering University to develop the ERP, CRM and OA software for our e-business. OA software has been used in our daily operation. The Company plans to sell its products via internet in 2012.
Our Customers
For the fiscal year ended June 30, 2011, we had sales revenue of $62,779,978.
Our top ten customers (of which none contributed to more than 5% of our total sales) are:
Manufacture
We manufacture our products on a plot of land located in Jin Xing Industrial Park, Songbei District, Harbin. On June 7, 2004, the Company entered into a Land Use Purchase Contract with the local government, pursuant to which the Company agreed to purchase the right to use a piece of land, approximately 8 acres (32,000 square meters), located in Harbin County, Heilongjiang Province for commercial purposes for a fifty-year period from June 7, 2004 through June 6, 2054, for $637,261 (RMB5,248,000), which the Company has fully paid to the government on June 13, 2004. The Department of Housing and Urban Development of Harbin City approved this transaction. The Company is in the process of applying for the title certificate from the local government. The manufacturing facility on the land is 4,000 square meters and there are five production lines which is sufficient for our purposes. We package our products in bottles, plastic containers and aluminum foil bags there.
We also plan to build a gene laboratory to conduct gene studies, drug screening and the development of new drugs and a new factory to manufacture our products. We have budgeted construction costs to be approximately $12,377,195 (RMB 80,000,000). We have already purchased a 50-year right to use a piece of land from the Harbin Songbei District Construction and Development Management Committee for this purpose. The plot of land is approximately 30,000 square meters and is located in the Duiqing Mountain Industrial Park, Harbin. The full price of the land is $4,873,520 (RMB 31,500,000) and we have already paid $3,249,014 (RMB21,000,000). The remaining $1,624,506 (RMB10,500,000) shall be paid prior to the registration of our land use right with local authorities.
Our Development Strategy
We will continue the production and sale of our “Qunle” brand Sailuozhi soft capsules in 2012.
We will focus on combining our products with traditional Chinese medicine, the creation of new products, and developing our B2C e-business and chain-stores. We plan to implement health management projects in our future chain-stores throughout China and establish a database of our clients’ health from data obtained from our B2C e-business and call center.
Our business model is to establish a one-stop shop for our customer’s health needs. From conducting a genetic profile of our customer to determine his/her susceptibility to certain types of diseases and then customizing health supplements and organic/green food to meet his/her needs, we plan to cater to our customer’s needs at all levels. With the distribution network we hope to establish through our chain stores and B2C e-businesses, we plan to eventually branch into the sale and distribution of beauty products and medical appliances.
The Future
Within the next ten years, our goal is to:
1. Increase product coverage in target markets; achieve 20%-30% coverage
Our target market is the health industry market. Presently, we believe that our product coverage is approximately 0.2%.We plan to open distribution stores in different provinces of China to expand our coverage. We also plan to sell our products through B2C websites to our customers.
2. Enter into the medicine, health product, health industry top 500 companies in the PRC
Currently, we are not ranked in the top 500 medicine, health product and health industry companies in the PRC. We believe that if our projected increase in revenue is achieved, we will achieve our goal of becoming one of the top 500 medicine, health product, health industry companies in China.
3. Form a diversified management group
Currently, our management group comprises people graduated from the most prestigious universities in the PRC, such as Tsinghua University and Remin University of China. We plan to further diversify management group by hiring talent both in the PRC and abroad.
4. Create an internationally famous brand
Currently, our products are sold under the brand names Qunle and Kindlink in the PRC. Our goal is eventually to expand our sales abroad to countries such as the United States of America, Russia, and Eastern Europe and South-east Asian countries.
5. Enter into the international market
Currently, we sell our products only in the PRC. We plan to sell our products to Russia, East Europe, and Southeast Asia in the future.
Our Business Plan
The plans designed to meet our sales and profit targets include:
¨
Manufacturing :
(a)
improving the manufacturing techniques and staff training;
(b)
guaranteeing high quality material supply;
(c)
strengthening the working procedure controls;
(d)
implementing GMP * to ensure a compliant standard in the food and medical industries;
(e)
ensuring that all employees have adequate training in health regulations
¨
Marketing: Adopt an effective marketing mode to:
(a)
utilize direct distribution of products to chain stores nationwide;
(b)
build business alliances with well-known enterprises to create private label brands;
(c)
expand the marketing of our products beyond the traditional methods;
¨
Product Distribution:
(a)
enlarge our sales and marketing force while developing new markets;
(b)
strengthen the distribution channel by developing promotion strategies and participating in trade shows;
(c)
develop 3-5 new products to market each year;
(d)
develop new markets through innovation and research
Our approach to manufacturing, marketing, cost control and products distribution, which is detailed above, is designed to minimize production costs and increase revenue at the same time. We feel that our procedures will enable us to reach our sales goals with an optimal manufacturing cost. The result should yield profits and a return to our investors.
*
Good Manufacturing Practice or “GMP” is a term that is recognized worldwide for the control and management of manufacturing and quality control testing of foods and pharmaceutical products. An important part of GMP is documentation of every aspect of the process, activities, and operations involved with drug and medical device manufacture. Additionally, GMP requires that all manufacturing and testing equipment has been qualified as suitable for use, and that all operational methodologies and procedures (such as manufacturing, cleaning, and analytical testing) utilized in the drug manufacturing process have been validated (according to predetermined specifications), to demonstrate that they can perform their purported function(s).
The Market for Healthcare and Beauty Products
The health product industry is one of the mainstay industries in the PRC, since it has a high level recognition and importance. Recently there have been new policies for health products, which control quality, manufacturing, manufacturing environments and techniques. With the PRC’s large and aging population there will be a steady demand for healthcare products. It is predicted that the healthcare and beauty industry will flourish over the next 50 years.
The Healthcare Product Market in the PRC
At present, the PRC healthcare market is growing rapidly and the demand for Chinese medicine and healthcare products has doubled every year. According to certain estimates, the PRC is the world’s fifth largest healthcare product market and by the year 2020, the size of the PRC healthcare product market may exceed the United States and become the number one largest healthcare market.
Production: According to certain estimates, approximately 5,500 healthcare manufacturers and companies have passed the PRC GMP standards. This includes over 500 Sino-Foreign Joint Ventures. At present, we estimate that the PRC can produce approximately 40 chemical pharmaceutical preparations, approximately 4,000 varieties, and over 1,500 varieties of chemical pharmaceutical raw materials.
Sales: According to “Forecasts for China’s Medical Economy in 2010” published by the South Economic Research Institute of the State Food and Drug Administration, at present, 80% of Chinese medicines are sold at hospitals and about 20% at retail drugstores.
The Healthcare Product Market in Heilongjiang Province, PRC
The healthcare product industry is the major industry in Heilongjiang Province. Harbin Pharmaceutical Group Health Technology has been the market leader in the PRC for many years. According to a study conducted by Harbin Pharmaceutical Group in 2008, over the last 10 years products of the Harbin Pharmaceutical Group Sixth Pharm Factory, and Flaming Sun Group have been among the most popular healthcare foods and products in the PRC.
Competition in the Healthcare Products Industry
We believe our competitors are:
Harbin DaZhong Pharmaceutical Co., Ltd.
Harbin ShenXinJianKang Co., Ltd.
Tsinghua Unisplendour Corporation Limited
Yeecare Company
Our Competitive Advantages and Strategy
We believe that we have the following competitive advantages over our competitors:
¨
We have more categories of products and a diversified production line.
¨
We have lower cost and operating expenses.
¨
We have a strong and effective research and development team.
¨
We are a self-owned enterprise, and have the support of the local government.
¨
We have a geographical advantage being located in Heilongjiang Province, the center of the healthcare industry in the PRC.
¨
As a new-styled industrial enterprise, we enjoy some financial support from the local government.
Sales and Marketing
We plan to open more such stores throughout the PRC. Customers who are members of our stores will enjoy discount off our products and services. Complementing these stores, we plan to develop a 24-hour delivery system for our B2C e-business.
We have budgeted approximately $1,000,000 for advertising and promotion for the current fiscal year.
Intellectual Property
We have received a patent (200610010394.4) for our “Qunle” brand Sailuozhi soft capsule from the National Bureau of Intellectual Property. We had initially applied for and used the trade name of “RunChao” soft capsules but the trade name was changed to “Qunle”, and the change has been approved by the National Bureau of Intellectual Property.
Pursuant to a Technology Transfer Agreement dated October 12, 2007 (“Kindlink Technology Transfer Agreement”), we purchased for a total of RMB350,000 the technology, manufacturing, and trademark rights to the health product known as “Kindlink” brand propolis and black ant capsule made from propolis, black ant, acanthopanax, astragalus root from Jindelikang. The change of the ownership has been approved by the State Food and Drug Administration. This product is consumed to boost one’s immunity. The certification number issued by the State Food and Drug Administration on August 20, 2004 to permit the manufacture of the product is GuoShiJianZi G20040906. We have no continuing obligations under the Kindlink Technology Transfer Agreement.
We have the following seven trademarks:
Trademark
Certificate
No.
Category
Registrant
Valid Term
“Qunle”
No.3895929
No.5 : Dietetic foods adapted for medical purposes; Food preparations adapted for medical purposes; Albuminous milk; Dietetic beverages adapted for medical purposes; Milk sugar; Diabetic bread; Albuminous foodstuffs for medical purposes; Food for babies; Dietetic substances adapted for medical use; Nutritional additives for medical purposes
Harbin
Humankind
7/7/2006 to 7/6/2016
“Qunle”
No.3896026
No.5 : Food preparations adapted for medical purposes; Albuminous milk; Dietetic beverages adapted for medical purposes; Milk sugar; Diabetic bread; Albuminous foodstuffs for medical purposes; Food for babies; Dietetic substances adapted for medical use; Nutritional additives for medical purposes
Harbin
Humankind
7/7/2006 to 7/6/2016
“Wangzu”
No.4857905
No.30: Molasses for food; Honey; pollen healthy grease; tortoise tuchahoe paste; breed columbine extract; helix alga; non-medicial nutrition liquid; non-medicial nutrition powder; non-medicial nutrition capsule; sugar candy bird’s nest
Harbin
Humankind
5/14/2008 to 5/13/2018
“Kindlink”
No.3236981
No.5: Food preparations adapted for medical purposes; Dietetic substances adapted for medical use
Harbin
Humankind
12/7/2003 to 12/06/2013
“Huimeijia”
No.5280303
No.5 : Medicine for human consumption; Medical nutrition capsule; Fibres (Edible plant) [non-nutritive]; Injection; Raw material drug; Troche; suppository; Food preparations adapted for medical purposes; Dietetic foods adapted for medical purposes; Dietetic substances adapted for medical use
Harbin
Humankind
7/21/2009 to 7/20/2019
“Huide”
No.5280304
No.5 : Medicines for human consumption; Medical nutrition capsule; Fibres (Edible plant) [non-nutritive]; Injection; Raw material drug; Troche; suppository; Food preparations adapted for medical purposes; Dietetic foods adapted for medical purposes; Dietetic substances adapted for medical use
Harbin
Humankind
7/21/2009 to 7/20/2019
“KDLK”
No.3230404
No.5 : Food preparations adapted for medical purposes; Dietetic foods adapted for medical purposes; Dietetic substances adapted for medical use
Harbin
Humankind
9/28/2003 to 9/27/2013
We have the right to use the following patent under the approval of National Bureau of Intellectual Property:
Regulation
The laws governing our business are as follows:
¨
Pharmaceutical administration law of the PRC enacted January 12, 2001
¨
Healthcare registration and administration law, enacted January 7, 2005
¨
Measures for the Administration of Pharmaceutical Trade License, enacted January 4, 2004
¨
Measures for the Supervision Over and Administration of Pharmaceutical Production, enacted May 8, 2004
¨
Food Safety Law of the PRC, enacted June 1, 2009
¨
Regulation on the Implementation of the Food Safety Law of the PRC, enacted July 20, 2009
¨
Regional regulation: Heilongjiang Regional Medicinal Materials Resource Protection Bylaw, enacted January 8, 2005
In the PRC, a Good Manufacturing Practice Certification (“GMP Certification”) is required for companies that produce medical drugs and health supplements. It is also required to market our medical drugs and health supplements. According to the Administrative Rules of Drug Manufacturing and Certification issued by the State Food and Drug Administration of the PRC on September 7, 2005, the State Food and Drug Administration is responsible for the review and issuance of GMP Certification. To obtain a GMP Certification, a company shall submit its application; the State Food and Drug Administration will then conduct a technical review of the application materials; if such company passes the technical review, the State Food and Drug Administration will inspect the manufacturing site. The State Food and Drug Administration also conducts follow-up inspections on the manufacturing site. After the issuance of the GMP Certification, the State Food and Drug Administration may inspect the manufacturing site from time to time. The GMP Certifications of our wholly owned subsidiaries, Harbin Humankind and Huimeijia, are valid through February 14, 2011 and July 22, 2014, respectively. Once GMP Certification is obtained, we would be able to manufacture and market our products without further governmental approval.
Employees
We have 82 employees including 8 officers, 16 administrators, 44 salespersons and 14 workers in manufacturing. We believe that we are in compliance with local prevailing wage, contractor licensing and insurance regulations, and have good relations with our employees.
We also have 39 independent workers for packing.
Item 1A.
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and other information contained in this Annual Report on Form 10-K before to deciding to invest in our common stock.
Our future revenue will be derived from the sale and manufacture of healthcare products and medical drugs. Our business, financial condition and/or results of operations may be materially adversely affected by the nature and impact of these risks. In such case, the market value of our securities could be detrimentally affected, and investors may lose part or all of their investment. Please refer to the information contained under “Business” in this report for further details pertaining to our business and financial condition.
Risks Related To Our Company
If the Company does not obtain financing when needed, its business will fail.
As of June 30, 2011, we had cash and cash equivalents on hand in the amount of $ 23,744,820 (audited). We predict that we will need approximately $ 30 million to implement our business plan and meet our capital expenditure needs over the next three years. We currently do not have any arrangements for additional financing and we may not be able to obtain financing when required. Obtaining additional financing would be subject to a number of factors, including the market prices for our products, production costs, availability of credit, prevailing interest rates and the market prices for our common stock.
The success of our business depends upon the continuing contributions of our Chief Executive Officer and other key personnel and its ability to attract other employees to expand the business, whereas the loss of key individuals or our inability to attract new employees could have a negative impact on our business.
We rely heavily on the services of Mr. Xin Sun, our Chief Executive Officer, as well as several other senior management personnel. Loss of the services of any of such individuals would adversely impact our operations. In addition, we believe that our technical personnel represent a significant asset and provide us with a competitive advantage over many of our competitors. We believe that our future success will depend upon our ability to retain these key employees and our ability to attract and retain other skilled financial, engineering, technical and managerial personnel. For example, we presently do not have any directors or officers experienced with public company SEC reporting and financial reporting requirements and we will be required to engage such persons, and independent directors, in order to satisfy the quotation standards of the Over-the-Counter-Bulletin Board on which our common stock is traded (not currently required by OTCBB or SEC). In addition, as a result of failure to engage qualified personnel we may be unable to meet our responsibilities as a public reporting company under the rules and regulations of the SEC. In this regard, we currently engage consultants to prepare SEC reporting and financial reporting documents, and, in the future, may not be able to retain such consultants due to a shortage of financial resources. None of our key personnel is a party to any employment agreement. We do not currently maintain any “key man” life insurance with respect to any of such individuals.
Future sales of our equity securities will dilute existing stockholders.
To fully execute our long-term business plan, we may need to raise additional equity capital in the future. Such additional equity capital, when and if it is raised, would result in dilution to our existing stockholders.
Subject to the receipt of additional capital required, we plan to grow very rapidly, which will place strains on management and other resources.
We plan to grow rapidly and significantly expand our operations. This growth will place a significant strain on management systems and resources. We will not be able to implement our business strategy in a rapidly evolving market without an effective planning and management processes. We have a short operating history and have not implemented sophisticated managerial, operational and financial systems and controls. We are required to manage multiple relationships with various strategic partners, and other third parties. These requirements will be strained in the event of rapid growth or in the number of third party relationships, and our systems, procedures or controls may not be adequate to support our operations and management may be unable to manage growth effectively. To manage the expected growth of our operations and personnel, we will be required to significantly improve or replace existing managerial, financial and operational systems, procedures and controls, and to expand, train and manage our growing employee base. We will be required to expand our finance, administrative and operations staff. We may be unable to complete in a timely manner the improvements to our systems, procedures and controls necessary to support future operations, management may be unable to hire, train, retain, motivate and manage required personnel and management may be unable to successfully identify, manage and exploit existing and potential market opportunities.
The Company does not carry insurance to cover any losses due to fire, casualty or theft at our production facility located in Harbin, PRC.
We have not obtained fire, casualty or theft insurance and there is no insurance coverage for our raw materials, goods, merchandise, furniture or building located in the PRC. Any losses incurred by us will have to be borne by us without assistance. We may not have sufficient capital to cover material damage, or the loss of, our production facility due to fire, severe weather, flood or other cause. Such damage would have a material adverse effect on our financial condition and business operation.
The production of our health supplements and medicine depends on the supply of high quality Traditional Chinese Medicine raw materials
The production of our health supplements and medicines depends on the supply of Chinese raw materials of suitable quality. The quality and the market prices of these raw materials may be adversely affected by various factors such as the weather condition, the occurrence of nature disasters and sudden increases in demand that would impact cost of our production. Bad quality and increased market price of raw materials may adversely affect our business operation.
The products of our Company may have side effects. If side effects associated with our current or future products are not identified prior to their marketing and sale, we may suffer as a result of product liability. We may be required to withdraw such products from the market, change the labeling of our product, or suffer product liability claim against us.
All heath supplements and medicines have certain side effect. Although all of our heath supplements and medicines sold on market have passed proper testing and are approved by State Food and Drug Administration, or SFDA, the products may still inadvertently adverse effects on the health of the consumer. If such side effect is identified after marketing and sale of the product, the product may be required to be withdrawn from the market, or have a change in labeling. If a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with consumers, decreased demand for our products, costly litigation and loss of revenue.
Risks Related to the Healthcare Businesses
There are risks of increasing regulation of the healthcare industry in the PRC and internationally that could have a material adverse impact on our business.
In the next 20 years, our central government as well as international regulatory bodies will focus more attention on the healthcare and beauty industry. As a result, our enterprise will have to satisfy both PRC regulations and international regulations applicable to our industry. The cost of compliance may be high and may make the production of some healthcare and beauty products too expensive to successfully market. In such event, our business could be negatively impacted and revenues and earnings could decline.
GMP certification threatens our business with standards that will make all manufacturers produce similar products, which will take away any competitive edge.
After a company passes the GMP standards and is certified, its production methods may become homogeneous. As a result, many products will become identical and there will be little differentiation in the marketplace. This will cause profits for the manufacturer to decline and there will be few manufacturers with a competitive edge.
The Company must be successful in executing a complex business plan or it may fail to remain competitive in the industry.
Our business plan includes an emphasis on increasing research and development, strengthening our marketing and distribution capabilities and assuring a quality product. In the event that we fail to deliver on any of these strategies, we may fail to remain competitive in our industry.
Foreign companies with more capital, well developed business strategies and superior technology represent a threat to our business.
Foreign companies often have more capital, superior technology and well developed business strategies when they come to compete in the PRC market. They threaten our existence and we must develop systems and strategies to deal with them or we will go out of business. The protectionism of domestic industry that once existed is gone when it comes to international competitors.
Risks Related to Doing Business in the PRC
The Company faces the risk that changes in the policies of the PRC government could have a significant impact upon the business the Company may be able to conduct in the PRC and the profitability of such business.
The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social life.
The PRC laws and regulations governing the Company’s current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on the Company’s business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Company and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.
A slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our products and our business.
All of our operations are conducted in the PRC and all our revenue is generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure investors that such growth will continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC could materially reduce the demand for our products and materially and adversely affect our business.
Inflation in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.
Governmental control of currency conversion may affect the value of an investment in the Company.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive all our revenue in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of its expenses as they come due.
The fluctuation of the Renminbi may materially and adversely affect investments in the Company.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. As we rely principally on revenue earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flow, revenue and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi that we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 3.2% appreciation of the Renminbi against the U.S. dollar as of May 15, 2006. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
Recent PRC State Administration of Foreign Exchange (“SAFE”) Regulations regarding offshore financing activities by PRC residents have undergone a number of changes that may increase the administrative burden the Company faces. The failure by the Company’s stockholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent the Company from being able to distribute profits and could expose the Company and its PRC resident stockholders to liability under PRC law.
SAFE issued a public notice (the “October Notice”) effective November 1, 2005, which requires registration with SAFE by the PRC resident stockholders of any foreign holding company of a PRC entity. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise; however, it is uncertain how the October Notice will be interpreted or implemented regarding specific documentation requirements for a foreign holding company formed prior to the effective date of the October Notice, such as in the Company’s case. While the Company’s PRC counsel advised it that only the PRC resident stockholders who receive the ownership of the foreign holding company in exchange for ownership in the PRC operating company are subject to the October Notice, there can be no assurance that SAFE will not require the Company’s other PRC resident stockholders to make disclosure. In addition, the October Notice requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however, there is no indication of what the penalty will be for failure to comply or if stockholder non-compliance will be considered to be a violation of the October Notice by the Company or otherwise affect the Company.
In the event that the proper procedures are not followed under the SAFE October Notice, we could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions. Our PRC resident stockholders could be subject to fines, other sanctions and even criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.
Any recurrence of severe acute respiratory syndrome, or SARS, H1N1 Flu or another widespread public health problem, could adversely affect our operations.
A renewed outbreak of SARS, H1N1 Flu or another widespread public health problem in the PRC, such as bird flu where most of our revenue is derived, could have an adverse effect on our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
Because our principal assets are located outside of the United States and all of our sole director and officer resides outside of the United States, it may be difficult for investors to enforce their rights based on U.S. federal securities laws against the Company and our officer and director in the U.S. or to enforce U.S. court judgment against the Company or him in the PRC.
Our sole director and officer reside outside of the United States. In addition, China Health is located in the PRC and substantially all of its assets are located outside of the United States; it may therefore be difficult or impossible for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. federal securities laws against the Company in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against the Company or our officers and directors of criminal penalties, under the U.S. federal securities laws or otherwise.
We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has not adopted a western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet western standards.
Risks Relating to the Securities Purchase Agreement
Our Chief Executive Officer, Mr. Xin Sun, beneficially owns 53.03% of our outstanding common stock, which gives him working control over certain major decisions on which our stockholders may vote, which may discourage an acquisition of the Company.
As a result of the closing under the Securities Purchase Agreement, our sole executive officer, Mr. Xin Sun, will have the right and ability to control virtually all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:
¨
Electing or defeating the election of directors;
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Amending or preventing amendment of the Company’s Certificate of Incorporation or By-laws;
¨
Effecting or preventing a merger, sale of assets or other corporate transaction; and
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Controlling the outcome of any other matter submitted to the stockholders for vote.
Our stock ownership profile may discourage a potential acquirer from seeking to acquire shares of the Company’s common stock or otherwise attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over the Company’s stock price.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public entity, we expect these new rules and regulations to increase compliance costs in 2012 and beyond and to make certain activities more time consuming and costly. As a public entity, we also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve as directors or as executive officers.
If we fail to continue recruiting professional personnel with rich experience in U.S. GAAP and internal controls and procedures for financial reporting, our ability to provide accurate financial statements in a timely manner and comply with the requirements of the U.S. GAAP and internal controls and procedures for financial reporting could be impaired, which could cause our stock price to decrease substantially.
Our businesses are operated through our PRC subsidiaries, which are obligated to maintain financial books and records in accordance with the PRC Accounting Standards (“PRC GAAP”). We convert our financial statements according to the U.S. GAAP for SEC reporting and information disclosure. Because none of our employees have adequate training and experience in U.S. GAAP, we rely on a financial consultant for financial reporting including the conversion of books and records from PRC GAAP to U.S. GAAP. However, our financial consultant has not completed any formal training in the establishment, testing, and maintenance of internal controls and procedures for financial reporting.
As a result, the progress and result of our financial reporting may be affected by our limited experience and knowledge in U.S. GAAP and internal controls and procedures for financial reporting. We plan to take measures to improve our knowledge and experience in U.S. GAAP and internal controls and procedures for financial reporting, include hiring a chief financial officer with U.S. Certified Public Accountant qualification, U.S. GAAP and SEC reporting experience and taking other measures. However, if we fail to continue recruiting professional personnel with rich experience in U.S. GAAP and internal controls and procedures for financial reporting, we may not be able to provide accurate financial statements in a timely manner or comply with the U.S. GAAP as it applies to us. The investor confidence in our Company and the market price of our common stock may be adversely affected by such failure.
Risks Relating to the Share Exchange Agreement
As a result of the Share Exchange, China Health has become a wholly-owned subsidiary of a company that is subject to the reporting requirements of U.S. federal securities laws, which can be expensive.
As a result of the Share Exchange, China Health has become a wholly-owned subsidiary of a Company that is a public reporting company and, accordingly, is subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including compliance with the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC (including reporting of the share exchange) and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if China Health had remained privately-held and did not consummate the share exchange.
In addition, it may be time consuming, difficult and costly for China Health to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. China Health may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. If China Health is unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, China Health may not be able to obtain the independent accountant certifications required by the Sarbanes-Oxley Act.
Because China Health became public by means of a share exchange, the Company may not be able to attract the attention of major brokerage firms.
There may be risks associated with China Health’s becoming public through a share exchange. Specifically, securities analysts of major brokerage firms may not provide coverage of the Company since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on behalf of the Company.
Risks Relating to the Common Stock
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
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Additions or departures of key personnel;
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Limited “public float” following the Securities Purchase Agreement, in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for the common stock;
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Our ability to execute our business plan;
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Operating results that fall below expectations;
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Loss of any strategic relationship;
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Industry developments;
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Economic and other external factors; and
¨
Period-to-period fluctuations in the Company’s financial results.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
There is currently no liquid trading market for our common stock and we cannot ensure that one will ever develop or be sustained.
There is currently no liquid trading market for our common stock. We cannot predict how liquid the market for our common stock might become. Our common stock is currently approved for quotation on the OTC Bulletin Board trading under the symbol “CHHE”. Should we fail to satisfy the quotation standards for the OTC Bulletin Board, the trading price of our common stock could suffer, the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility.
Our common stock is deemed a “penny stock”, which will make it more difficult for investors to sell their shares.
The Company’s common stock is subject to the “penny stock” rules adopted under section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If the Company remains subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for the Company’s securities. Since the Company’s securities are subject to the penny stock rules, investors will find it more difficult to dispose of the Company’s securities.
Furthermore, for companies whose securities are quoted on the OTC Bulletin Board, it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital.
Availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of common stock in the public market, or upon the expiration of any statutory holding period, under Rule 144, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Provisions of our Articles of Incorporation and Delaware law could deter a change of control, which could discourage or delay offers to acquire the Company.
Provisions of our Articles of Incorporation and Delaware law may make it more difficult for someone to acquire control of the Company or for our stockholders to remove existing management, and might discourage a third party from offering to acquire the Company, even if a change in control or in management would be beneficial to stockholders. For example, our Articles of Incorporation allows us to issue 10,000,000 shares of preferred stock without any vote or further action by stockholders.
Volatility in our common stock price may subject the Company to securities litigation.
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
The elimination of monetary liability against the Company’s directors, officers and employees under the Company’s Articles of Incorporation, By-Laws and Delaware law, and the existence of indemnification rights to the Company’s directors, officers and employees may result in substantial expenditures by the Company and may discourage lawsuits against our directors, officers and employees.
Our Articles of Incorporation and By-Laws contain a provision that provides for indemnification of directors and officers against any and all expenses, including amounts paid upon judgments, counsel fees and amounts paid in settlement by any such person in any proceeding that they are made a party to by reason of being or having been directors or officers of the Company, except in relation to matters as to which any such director or officer shall be adjudged to be liable for his own negligence or misconduct in the performance of his duties. Such indemnification shall be in addition to any other rights to which those indemnified may be entitled under any law. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit the Company and our stockholders.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.
We manufacture our products on a plot of land located in Jin Xing Industrial Park, Songbei District, Harbin. On June 7, 2004, the Company entered into a Land Use Purchase Contract with the local government, pursuant to which the Company agreed to purchase the right to use a piece of land, approximately 8 acres (32,000 square meters), located in Harbin County, Heilongjiang Province for commercial purposes and a fifty-year period June 7, 2004 through June 6, 2054, for $637,261 (RMB5,248,000), which the Company has fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development of Harbin City approved this transaction. The Company is in the process of applying for the title certificate from the local government. The manufacturing facility on the land is 4,000 square meters and there are five production lines which is sufficient for our purposes. We package our products in bottles, plastic containers and aluminum foil bags there.
We also plan to build a gene laboratory to conduct gene studies, drug screening and the development of new drugs and a new factory to manufacture our products. We have budgeted construction costs to be approximately $12,377,195 (RMB 80,000,000). We have already purchased a 50-year right to use a piece of land from the Harbin Songbei District Construction and Development Management Association for this purpose. The plot of land is approximately 30,000 square meters and is located in the Duiqing Mountain Industrial Park, Harbin. The full price of the land is $4,873,520 (RMB 31,500,000) and we have already paid $3,249,014 (RMB21,000,000). The remaining $1,624,506 (RMB10,500,000) shall be paid prior to the registration of our land use right with local authorities.
Item 3.
Item 3.
Legal Proceedings.
We do not know of any material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.
Item 4.
Item 4.
(Removed and Reserved).
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded over-the-counter on the OTC Bulletin Board under the designation CHHE.OB (previously UFOG.OB) and the market for the stock has been relatively inactive. The range of high and low bid quotations for the quarters of the last two years ended June 30, 2011 and the subsequent interim period for which financial statements are included is listed below. The quotations are taken from the OTC Bulletin Board. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of September 26, 2011, we had approximately 371 shareholders of record of our common stock, including the shares held in street name by brokerage firms. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
Dividends
We have not paid dividends on our common stock and do not anticipate paying such dividends in the foreseeable future. We will rely on dividends from Harbin Humankind for our funds and PRC regulations may limit the amount of funds distributed to us from Harbin Humankind, which will affect our ability to declare any dividends.
Securities authorized for issuance under equity compensation plans
As of the date of this annual report, we do not have any securities authorized for issuance under any equity compensation plans and we do not have any equity compensation plans.
Registrar and Stock Transfer Agent
Our stock transfer agent is Interwest Transfer Company, Inc. at 1981 Murray Holladay Road, Suite 100 Salt Lake City, UT 84117 Tel: (801)272-9294 Fax: (801)277-3147.
Shares Eligible for Future Sale
There is no established trading market for our common stock. Future sales of substantial amounts of our common stock in the trading market could adversely affect market prices.
Penny Stock Regulations
Our shares of common stock are subject to the “penny stock” rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer’s net tangible assets or revenues. In the last case, the issuer’s net tangible assets must exceed $3,000,000 if in continuous operation for at least three years or $5,000,000 if in operation for less than three years or the issuer’s average revenues for each of the past three years must exceed $6,000,000.
Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.
Recent Sale of Unregistered Securities
None.
Repurchase of Equity Securities
None.
Item 6.
Item 6. Selected Financial Data
Not Applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD LOOKING STATEMENTS
The following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto appearing elsewhere herein and in the risk factors and “Forward Looking Statements” summary set forth in the forepart of this Annual Report as well as the “Risk Factors” section above and are afforded the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Readers should carefully review the risk factors disclosed in this Annual Report and other documents filed by us with the SEC.
DISCUSSION
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:
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the effect of political, economic, and market conditions and geopolitical events;
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legislative and regulatory changes that affect our business;
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the availability of funds and working capital;
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the actions and initiatives of current and potential competitors;
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investor sentiment; and
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our reputation.
We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.
Except as otherwise indicated by the context, references in this Form 10-K to “we,” “us,” “our,” “the Registrant”, “our Company,” or “the Company” are to China Health Industries Holdings, Inc., a Delaware corporation, China Health Industries Holdings Limited, and its wholly owned subsidiary, Harbin Humankind Biology Technology Co. Limited. Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are to 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.
Our History and Corporate Structure
The Company was incorporated in the state of Arizona on July 11, 1996 and was the successor of a business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, the Company entered into a stock purchase agreement and share exchange (effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.
The Company began manufacturing systems for outdoor cooling in Arizona and quickly expanded to distribute throughout the United States. Our primary product was a misting system which consisted of a high pressure pump assembled to specifications.
Pursuant to the Securities Purchase Agreement dated as of September 10, 2007 between the Company, Bontems and Sun Xin, we experienced a change in control whereby Sun Xin acquired a total of 22,000,545 shares of common stock of the Company from Bontems and the Company issued 2,061,200 shares of common stock of the Company to Sun Xin, such that upon consummation of the agreement, Sun Xin held an aggregate of 24,061,745 shares, or 51.53% of the total issued and outstanding shares of common stock of the Company on a fully-diluted basis.
Pursuant to the Asset Purchase and Sale Agreement dated September 10, 2007 between the Company and Universal Fog Systems, Inc., we then transferred all our liabilities to the latter on September 10, 2007 and similarly, all our assets on December 31, 2008.
On December 31, 2008, we acquired the business of Harbin Humankind Biology Technology Co. Limited through the acquisition of all the shares of China Health Industries Holdings Limited under the share exchange agreement dated October 15, 2007.
As a result of the above, China Health Industries Holdings Limited is now our wholly-owned subsidiary. Because Harbin Humankind Biology Technology Co., Limited (“Harbin Humankind”) is a wholly-owned subsidiary of China Health Industries Holdings Limited and Harbin Huimeijia Medicine Company (“Huimeijia”) is in turn a subsidiary whose 99% of shares are owned by Harbin Humankind, both Harbin Humankind and Huimeijia are our indirectly owned subsidiaries.
Business Overview
Our principal business operations are conducted through our wholly owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Humankind”) and Humankind’s subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”).
Humankind was incorporated in the People’s Republic of China (“PRC”) on December 14, 2003 and completed its Good Manufacturing Practice (“GMP”) certification on April 24, 2007. It is in the business of manufacture and sale of health products, “green” (or organic) food and detection of disease susceptibility or pre-disposition through genetic studies.
Huimeijia was incorporated in the PRC on October 14, 2008. Huimeijia completed its GMP certification on July 23, 2009 and produces and sells our drugs.
Our business is conducted through our sales agents and sales personnel. We sell our products to the sales agents and sales personnel, and our sales agents and sales people then sell our products to the customers. We have sales agents located in Jiang Su, Zhe Jiang, Gan Su, Shanghai and An Hui Provinces. Our sales through agents in Zhe Jiang, Jiang Su and Gan Su Provinces accounted for 6%, 6% and 3% of our total sales respectively. We expect to sell our products over the internet eventually.
We have, through Humankind, licenses to manufacture and sell two health supplement products, each of which has a State Good Health Issue Number assigned to it (as provided below). In addition, Humankind distributes and sells 52 kinds of health food.
We are licensed to sell our products only 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 for freckle removal and supplementing the water content of the skin. The certification number issued by the State Food and Drug Administration on August 29, 2007 is 2007B0837.
On May 12, 2010, we received a patent for this product (200610010394.4) under the name “Run Chao” (which has now been changed to “Qunle”) with the National Bureau of Intellectual Property.
Pursuant to a technology transfer agreement dated October 12 (“Technology Transfer Agreement”), 2007, we purchased one other health product known as “Kindlink” brand propolis and black ant capsule made from propolis, black ant, acanthopanax, astragalus root from Beijing Jindelikang Bio-Technology Co., Ltd. (“Jindelikang”). The change of the ownership has been approved by the State Food and Drug Administration. This product is consumed to boost one’s immunity. The certification number issued by the State Food and Drug Administration on August 20, 2004 for the license to manufacture the product is GuoShiJianZi G20040906.We have no continuing obligations under the Technology Transfer Agreement.
(ii)
Health Food and Organic “Green” Food
Our health and organic “green” food products include (i) Abalone, Sea Cucumber and Frog Oil Soft Capsules (Serial Number 016-2007), (ii) Ganodermalucidum and Aweto Soft Capsules (Serial Number 017-2007), (iii) Propolis Soft Capsules, (iv) Deep Sea Fish Oil (Serial Number 012-2006), (v) Liquid Calcium (Serial Number 013-2006), (vi) Multi-Vitamins (Serial Number 010-2007), (vii) Soybean Isoflavone (Serial Number 012-2006) and (viii) Royal Jelly (Serial Number 011-2006), (ix) Sleeping Beauty Capsule, (x) Virility Max Capsule, (xi) Ruddy Granule, (xii) Blood Cleanser Soft Capsule and (xiii) Colon Cleanser Capsule.
Results of Operations
For the years ended June 30, 2011 as compared to June 30, 2010
Total revenues increased by 45.64% in the year ended June 30, 2011 compared to the same period in 2010. The $19,674,006 increase in revenues is attributable to growth in product sales. This growth in product sales was attributable to increased sales volume and our efforts to continue to develop our distribution channels by hiring additional sales agents to ensure that our products and their benefits are introduced to those making or influencing the purchasing decisions.
Our cost of sales increased $13,174,914, or 65.35% in the year ended June 30, 2011 compared to the same period in 2010. The costs increased as a result of the increased sales and the increase of raw material costs.
Our gross margin decreased 6.33% from 53.23% for the year ended June 30, 2010 to 46.90% for the year ended June 30, 2011. This decrease was primarily attributable to an increase in the raw material costs. Due to high inflation in the PRC, the prices of many of our raw materials have increased. We seek to establish relationships with more suppliers to lower our raw material costs.
Sales by Product Line
A break-down of our sales by major product line for the year ended June 30, 2011 and 2010 is as follows:
*All of the products are manufactured by the Company.
The Company has discontinued 3 product lines around January 2010, even though the Company has a high gross profit on these 3 products. However, due to the fact that the raw materials for these 3 products are rare and hard to obtain with an ideal price, the Company decided to discontinue these 3 products.
Operating Expenses
The following table summarizes our operating expenses for the years ended June 30, 2011 and 2010, respectively:
Total operating expenses for the year ended June 30, 2011 increased $600,354 or 11.12% over the same period in 2010. The higher operating expenses were primarily attributable to the increased costs of marketing and distribution of our products due to our increased product sales.
Interest Income and interest expense
Interest income is $227,837 for the year ended June 30, 2011 and $226,536 for the year ended June 30, 2010.
We incurred imputed interest expenses in the amount of $27,317 on the loans payable to Mr. Sun Xin, the executive officer and major shareholder of our Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment.
Income Taxes
Income taxes increased $1,477,034 for the year ended June 30, 2011 compare to the same period in 2010. The increase was primarily attributable to increased income before income taxes in the amount of $5,896,858.
2012 Outlook
We anticipate our total revenues in 2012 versus 2011 to increase by 20% or approximately $12.5 million with growth in all categories of our product sales. Our gross profit margin in 2012 is expected to be approximately 47% due to increased raw material costs resulting from inflation. We estimate our overall 2012 net profit margin to be approximately 26%. However, there is no assurance that these predictions will be reached.
Liquidity and Capital Resources
We believe our current working capital position; together with our expected future cash flows from operations 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 position, our working capital, and our cash flow activity as of June 30, 2011 and 2010 and for each year then ended:
As of June 30, 2011, cash and cash equivalents were $23,744,820 as compared to $13,344,531 at June 30, 2010. The increased cash and cash equivalents position was $10,400,289 or 77.94% at June 30, 2011. The increase in cash and cash equivalents was attributable to cash flows provided by operating activities and fewer investing activities.
Cash flow provided by operating activities was $9,344,473 for the year ended June 30, 2011 compared to cash flow provided by operation activities of $9,515,621 for the same period in 2010. The decrease in cash provided by operating activities of $171,148 was primarily attributable to the increase in accounts receivable in the amount of $8,501,240.
Our working capital position at June 30, 2011 was $31,774,310 compared to working capital of $12,839,798 at June 30, 2010. Our increased working capital position in 2011 was principally funded by the increased cash flow generated by sales. Management considers current working capital and borrowing capabilities adequate to cover our current operating and capital requirements.
We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or 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. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. 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.
Plan of Operation
We will continue to focus on the expansion of our operation, development of new products and increase new customers. Additionally, we are putting more effort to develop our distribution channels by hiring more sales agents and sales people. We presently have enough liquidity to meet our expansion plans. However, depending on growth, the Company may need additional funding in the future.
Currency Exchange Fluctuations
Aggregate net foreign currency transactions included in the income statement were gains of $1,421,363 and $327,761, for the years ended June 30, 2011 and 2010, respectively, primarily due to the decline of the value of USD to RMB. The average rates of exchange from USD to RMB were 6.6255 to 1 and 6.8271 to 1 for the years ended June 30, 2011 and 2010 or a 2.95% change.
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
This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimated and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an on-going basis, we evaluate our estimates, including those related to property, plant and equipment, inventories, revenue recognition, accounts receivable, derivative warrant liability, warranty reserve, goodwill and intangibles, stock based compensation, and foreign currency transactions and translation. We base our estimates on historical experience and on various other market-specific assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ significantly from these estimates.
We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Method of Accounting
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.
Accounts Receivable
The accounts receivable incurred in the current reporting period was primarily due to the receivables from our sales agents. These sales agents are our new customers and we offer these agents 60 days to 90 days term in order to increase our sales. Most of the products were sold to the end customers directly and the end customers made payments upon receipt of our product. The credit sale system has not been well established in the PRC. Our sale agreements with our customers provide that risk of loss passes to the customers upon delivery and that we accept product exchanges but we do not have a policy for product returns. Accordingly, accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to our customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness, and the economic environment.
Inventories
We value our inventory at the lower of cost or market. Our inventories include various raw materials, semi-finished products, finished products, packages and low-value consumption goods, labors and overhead. Inventories are stated at the cost using the weighted average cost method and include any related production overhead costs incurred in bringing the inventory to their present location and condition. Inventory cost includes purchase cost, processing cost and other cost. Purchase cost include purchase price, related tax, transportation fee, handling cost, insurance fee and other related fees. We evaluate inventories for excess, slow moving, and obsolete inventories as well as inventory whose volume is in excess of its net realizable value. Our management uses estimates of future demand and sales prices for each product to determine appropriate inventory reserves.
Amortization of low-value consumption goods and packages is based on the direct write-off method. The Company conducts physical inventory count at the end of each quarter.
Recognition of Revenue
We recognize revenue when it is both earned and realized or realizable. Our revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, discounts, and after eliminating sales within the Group.
Our principal sources of revenue are from sales of our products through our direct sales professionals. These sales occur either through a purchase order submitted by the customer or through our direct marketing sales agents. We 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.
Most of our products are sold to end customers directly and customers made payments promptly. The Company may offer sales incentives and cash discounts to customers or resellers as a reduction of revenue rather than an operating expense. For the years ended June 30, 2011 and 2010, the Company did not provide sales incentives to its customers or resellers.
We allow our customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. We have reserve against revenue recognized for product exchange. The consumer credit system has not been well established and recognized by sellers in the PRC. Except for our sales agents, our end customers pay us instantaneously when they receive orders.
Cost
Matching Principle-Costs have to be matched with revenues and our costs always match with revenue. Cost of production is calculated based on actual number of products manufactured and matched with revenues as long as it is reasonable to do so. There has been no change in our calculation of cost of production. There are no circumstances that cause variations in our calculation of cost of production. Expenses are recognized not when the product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance.
Cost of production is calculated based on actual number of products manufactured. We calculate the cost of production at the end of each month. If there is any work in progress, the cost of production is allocated between finished products and work in progress. Below is a detailed step-by-step description of our cost of production calculation:
a.
Determine end-of-period quantity and amount of finished goods, semi-finished products, raw materials, and packing materials.
b.
Based on sales plan, the Company purchases raw materials and packing materials by batches and calculate stock-in and stock-out quantity and amount respectively. Summary calculation will be made based on actual quantity of consumption at the end of each month.
c.
Collect manufacturing overhead of each month, including depreciation, labor, water charge, electric charge, the consumptions of low value consumables. Distribute manufacturing overhead based on volume of production and make expense distribution sheet.
d.
Apportion raw materials, packing materials and manufacturing overhead of each products in each month to finished-goods and semi-finished products. Carry over Cost of Goods Sold according to sales quantity.
Foreign Currency Translation
The Company’s two operating subsidiaries maintain their financial statements in the functional currency, which is PRC currency “Renminbi” (“RMB”). Another subsidiary maintains its financial statements in a different functional currency, which is Hong Kong Dollar (“HKD”). Monetary assets and liabilities denominated in currencies other than the functional currencies are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, the financial statements of subsidiaries, which are prepared using the functional currency, have been translated into reporting currency, the United States Dollars (“USD”). Assets and liabilities are translated at at the prevailing exchange rate at each reporting period end date, revenue and expenses are translated at the average exchange rates, and stockholders’ equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.
Recently Issued Accounting Pronouncements
In April 2010, the FASB issued the amendment to ASC Topic 718, “Compensation - Stock Compensation” which provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should not be considered to contain a condition that is not a market, performance, or service condition. As a result, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In August 2010, Accounting Standards Update (“ASU”) 2010-23 was issued. This amends ASC 954 to require the disclosure of charity care be disclosed at cost. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In August 2010, Accounting Standards Update (“ASU”) 2010-24 was issued. This update amends ASC 954-450 to require that anticipated insurance settlements from malpractice claims not be offset against the accrual for the malpractice claim. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In May 2011, Accounting Standards Update (“ASU”) 2011-04 was issued. This update amends Topic 820 to achieve common fair value measurement and disclosure requirement in US GAAP and IFRSs. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In June 2011, FASB issued the ASU 2011-05 “Presentation of Comprehensive Income” to amend ASC Topic 220. This update allows an entity to have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In September 2011, Accounting Standards Update (“ASU”) 2011-08 was issued. This update allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this item are set forth beginning on page.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
China Health Industries Holdings, Inc.
We have audited the accompanying consolidated balance sheet of China Health Industries Holdings, Inc. and subsidiaries (the Company) as of June 30, 2011 and the related statements of operations and comprehensive income, stockholders’ equity and cash flows for the year ended June 30, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Health Industries Holdings, Inc. and subsidiaries as of June 30, 2011 and the results of their operations and cash flows for the year ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America.
/s/ De Joya Griffith & Company, LLC
Henderson, Nevada
September 28, 2011
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
China Health Industries Holdings, Inc.
We have audited the accompanying consolidated balance sheets of China Health Industries Holdings, Inc. and subsidiaries (the Company) as of June 30, 2010 and 2009 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Health Industries Holdings, Inc. and subsidiary as of June 30, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ e-FANG Accountancy Corp & CPA
City of Industry, California
September 22, 2010
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - ORGANIZATION AND BUSINESS BACKGROUND
The Company 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, the Company entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (“Edmonds 6”) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.
China Health Industries Holdings Limited ("China Health") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability company. China Health was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship as defined by 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 PRC. Humankind is engaged in the business of production and distribution of health food.
On August 20, 2007, the sole shareholder of China Health entered into a share purchase agreement (“Share Purchase Agreement”) with the owners of Humankind. Pursuant to the Share Purchase Agreement, China Health purchased 100% of the ownership in Humankind for a cash consideration of $60,408 (“Share Purchase”). Subsequent to the completion of the Share Purchase, Humankind became a wholly-owned subsidiary of China Health. The share purchase transaction was accounted for as a “reverse merger,” since the owner of Humankind owns a majority of the outstanding shares of China Health’s common stock immediately following the execution of the Share Purchase Agreement. Humankind is 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’s consolidated financial statements include the assets and liabilities of both China Health and Humankind, the historical operations of Humankind and the operations of China Health and its subsidiaries from the closing date of the Share Purchase.
On October 14, 2008, Humankind set up a 99% owned subsidiary Harbin Huimeijia Medicine with its primary business being manufacturing and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of this subsidiary. The subsidiary is consolidated in the consolidated financial statements of the Company.
On December 31, 2008, China Health closed a reverse merger with Universal Fog, Inc., a U.S. public traded shell company (“Transaction”). China Health is the accounting acquirer in the Transaction and the Transaction has been treated as a recapitalization of the Company. 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 the Company. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of the Company, or approximately 53.03%. We changed our name from Universal Fog, Inc. to China Health Industries Holdings, Inc. on February 19, 2009.
Our present corporate structure is as follows:
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States ("GAAP") and have been consistently applied in the preparation of the consolidated financial statements and the June 30, 2010 financials included in the 10-K/A filed on July 18, 2011.
Principles of Consolidation
The accompanying consolidated financial statements include China Health Industries Holdings, Inc., a Delaware corporation and a public company, and its three subsidiaries, China Health Industries Holdings Limited, Harbin Humankind Biology Technology Co., Limited and Harbin Huimeijia Medicine. All significant intercompany balances and transactions have been eliminated in consolidation.
Effective January 1, 2009, the Consolidation Topic, ASC 810-10-45-16, revised the accounting treatment for non-controlling minority interests of partially-owned subsidiaries. Non-controlling minority interests represent the portion of earnings that is not within the parent Company’s control. These amounts are now required to be reported as equity instead of as a liability in the balance sheet. These amounts are immaterial as of June 30, 2011 and June 30, 2010, respectively. Additionally, this statement requires net income from non-controlling minority interests to be shown separately in the consolidated statements of income. These amounts are immaterial for the years ending June 30, 2011 and 2010, respectively. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company also consolidates any variable interest entities (VIEs), of which it is the primary beneficiary, as defined in ASC 810-10-15 The Company does not have any VIEs that need to be consolidated at this time. When the Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company would apply the equity method of accounting.
Segment Reporting
The Company operates in one segment in accordance with the accounting guidance FASB ASC topic 280, “Segment Reporting”. Our chief financial officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
All revenue is from customers in People’s Republic of China (“PRC”). All of the company’s assets are located in PRC.
Fair Value of Financial Instruments
The Company applies the provisions of accounting guidance, FASB ASC Topic 820 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines 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 three broad levels listed below.

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.).

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 non-recurring 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 management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
Translation of Foreign Currencies
China Health maintains its books and accounting records in PRC currency “Renminbi” (“RMB”), which is determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing on the date of the transactions. Foreign currency exchange gains and losses resulting from these transactions are included in operations.
China Health’s financial statements are translated into the reporting currency, the United States Dollar (“USD”). Assets and liabilities of China Health 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 translation of these financial statements are reflected as accumulated other comprehensive income (loss) in shareholders’ equity.
Use of Estimates
The preparation of financial statements in conformity with 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. China Health bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions 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. The more significant estimates and assumptions by management include, among others; useful lives and residual value of long-lived assets, valuation of Inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets, intangible assets and deferred taxes. While China Health believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.
Statement of Cash Flows
In accordance with Statement FASB ASC Topic 230, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. 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.
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.
The company maintains cash and cash equivalents at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of June 30, 2011, the Company’s uninsured bank balances totaled $23,740,502.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. China Health extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness, and the economic environment.
Concentrations of Credit Risk
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. Because 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 risk of restrictions on transfer of funds, domestic and international 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 period.
Earnings per Share
Basic earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants.
Potential common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price of the common stock during the period.
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.
Self-Insured Reserve and Allowance
The Company reclassified its self-insured reserve of $216,343 as of June 30, 2010, which was previously included in current liabilities, to accrued expenses, in order to conform to the current presentation. The reclassification had no effect on the Company’s financial condition, results of operations or cash flows.
Prepaid Expenses
Prepaid expenses principally include prepaid R&D expenses and advances to raw material suppliers.
The Company periodically makes advances to certain vendors for purchases of raw materials, and records those advances as prepaid expense. Advances to vendors as of June 30, 2011 amounted to $106,702.
The Company has entered into five Technology Development Agreements, two with Shenyang Pharmaceutical University and three with Pharmaceutical School of Jiamusi University during the period from April 9, 2010 through July 7, 2010. The Agreements are to entrust the Universities to develop different tablet and medicine related products, and obtain the approval for the correlated registration or certification within a certain period (3 years) on behalf of the Company. As of June 30, 2011, total payments the Company has made to the Contractor were $1,392,434 (RMB 9 million). The Company recognized the amount paid to the Universities as deferred expense, and recognizes R&D expense ratably over the terms of the Agreements. As of June 30, 2011, the deferred expenses amounted to $900,928.
Inventory
Inventories consist of raw materials, work in progress and finished goods of manufactured products.
Inventories are stated at lower of cost or market and consist of materials, labor and overhead. The Company determines the cost of inventory using the first-in, first-out method. The value of inventory is determined using the weighted average cost method and includes any related production overhead costs incurred in bringing the inventory to their present location and condition. Overhead costs included in finished goods include, direct labor cost and other costs directly applicable to the manufacturing process. The Company evaluates inventories for excess, slow moving, and obsolete inventories as well as inventory whose volume is in excess of its net realizable value. This evaluation includes analyses of sales levels by product and projections of future demand. In order to state the inventory at lower of cost or market, the Company maintains reserves against its inventory. 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. Management has recorded a $0 inventory allowance as of June 30, 2011.
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 an 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. Through June 30, 2011, 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 income in the reporting period of disposition.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The depreciable life 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 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.
Intangible assets consist of patents and land use right. Patent costs are amortized over an estimated life of ten years.
Pharmaceutical Patents
On June 9, 2007, China Health entered into a Purchase Agreement, pursuant to which China Health agreed to purchase pharmaceutical patents from a third party for $485,622 (RMB 3,180,000).
Since the names of the pharmaceutical patents have never been transferred to China Health and they were useless to China Health, China Health expensed the purchase price of the pharmaceutical patents.
Land Use Right
All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner. On June 7, 2004, China Health entered into a Purchase Contract with the local government, pursuant to which China Health agreed to purchase the right to use a piece of land, approximately 8 acres, located in Harbin County, Heilongjiang Province for commercial purpose over a fifty-year period from June 7, 2004 through June 6, 2054, for $967,882, which China Health fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development (“HUD”) of Harbin City approved this transaction. China Health recorded the land use right at its purchase price. The cost of the land use right is amortized over its prospective beneficial period, using the straight-line method with no residual value. China Health’s production facilities and office are located in this piece of land. As of June 30, 2011, the land use right and improvement have a net balance of $860,164.
Revenue Recognition
China Health recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect results of operations. The Company records revenue net of sales taxes. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. As of June 30, 2011, the Company did not have provision for such return as historically sales returns have been immaterial.
Sales Incentives - The Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense. Sales incentives are recorded when revenue are recognized. For the years ended June 30, 2011 and 2010, the Company did not provide sales incentives to its customers or resellers.
Research and Development Costs
The Company has entered into five Technology Development Agreements, two with Shenyang Pharmaceutical University and three with Pharmaceutical School of Jiamusi University during the period from April 9, 2010 through July 7, 2010. The Agreements are to entrust the Universities to develop different tablet and medicine related products, and obtain the approval for the correlated registration or certification within a certain period (3 years) on behalf of the Company. As of June 30, 2011, total payment the Company has paid to the Contractor was $1,392,434 (RMB 9 million). The Company recognized the amount paid to the Universities as deferred expense, and recognizes R&D expense ratably over the terms of the Agreements.
The Company reclassified its research and development costs as of June 30, 2010, which was previously included in operating expenses, to general and administrative expenses, in order to conform to the current presentation. The reclassification had no effect on the Company’s financial condition, results of operations or cash flows.
Advertising Costs
Advertising costs are expensed as incurred and included as part of selling and marketing expenses in the accompanying consolidated statement of operations. Advertising costs were immaterial for the years ended June 30, 2011 and 2010, respectively.
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.
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 made 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.
According to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value Added Tax Waiver” published by the Ministry of Finance and the National Tax Affairs Bureau, the value added tax for agriculture related products is to be taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant are by definition agriculture related products.
Sales Taxes and Sales-related Taxes
Pursuant to the tax law and regulations of PRC, China Health is obligated to pay 7% and 4% (5% effective in May, 2011) 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..For the year ended June 30, 2011, sales taxes and sales-related taxes were $1,062,267. For the year ended June 30, 2010, sales taxes and sales-related taxes were $1,002,039.
Comprehensive Income
The Company reports comprehensive income in accordance with FASB ASC Topic 220 “Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Total comprehensive income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation. Total comprehensive income represents the activity for a period net of related tax and was a gain of $19,095,358 and $13,581,932 for the years ended June 30, 2011 and 2010, respectively.
While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased overall equity by $2,010,981 and $589,618 as of June 30, 2011 and 2010, respectively.
Pension and Employee Benefits
Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which, certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require China Health to accrue for these benefits based on certain percentages of the employees’ salaries. Management believes full-time employees who have passed the probation period are entitled to such benefits.
The total provisions for such employee benefits were $24,272 and $31,276 for the years ended June 30, 2011 and 2010, respectively.
Statutory Reserves
Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the generally accepted accounting principles in PRC, after offsetting any prior years ’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of China Health’s registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. The Company had appropriated $38,679 (RMB 250,000) statutory reserve, which is 50% of Harbin Humankind Biology Technology Co., Limited’s registered capital as of June 30, 2011. Since Harbin Huimeijia Medicine had accumulated deficits from its inception, no statutory reserve is required.
Recent Accounting Pronouncements
In April 2010, the FASB issued the amendment to ASC Topic 718, “Compensation - Stock Compensation” which provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should not be considered to contain a condition that is not a market, performance, or service condition. As a result, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In August 2010, Accounting Standards Update (“ASU”) 2010-23 was issued. This amends ASC 954 to require the disclosure of charity care be disclosed at cost. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In August 2010, Accounting Standards Update (“ASU”) 2010-24 was issued. This update amends ASC 954-450 to require that anticipated insurance settlements from malpractice claims not be offset against the accrual for the malpractice claim. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In May 2011, Accounting Standards Update (“ASU”) 2011-04 was issued. This update amends Topic 820 to achieve common fair value measurement and disclosure requirement in US GAAP and IFRSs. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In June 2011, FASB issued the ASU 2011-05 “Presentation of Comprehensive Income” to amend ASC Topic 220. This update allows an entity to have the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
In September 2011, Accounting Standards Update (“ASU”) 2011-08 was issued. This update allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company’s management believes that this pronouncement will not have a material effect on its financial position, results of operations or cash flows.
Note 3 - 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.
The company maintains cash and cash equivalents balance at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of June 30, 2011, the Company’s uninsured bank balances totaled $23,740,502, which was mainly maintained at PRC. The Company’s insured bank balances totaled $4,318, which was maintained at US financial institutions.
Note 4 - CONTROL BY PRINCIPAL OWNERS
The directors, executive officers, their affiliates and related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding capital of China Health. Accordingly, directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including approving significant expenses, increasing the authorized capital stock and the dissolution, merger or sale of China Health's assets.
Note 5 - ACCOUNTS RECEIVABLE
The Company’s accounts receivable amounted to $8,506,933 and $5,693 as of June 30, 2011 and June 30, 2010, respectively. The increase in accounts receivable was primarily due to extending credit to the Company’s sales agents. These sales agents are the Company’s new customers and the Company offers these agents 60 days to 90 days term in order to increase the Company’s sales. Most of the Company’s products were sold to the end customers directly and the end customers made payments upon receipt of our product.
Note 6 - NOTES RECEIVABLE
Notes receivable consist of the following:
The advances to employees are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.
On April 9, 2009, the Company’s wholly-owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Humankind”), entered into a letter of intent with the shareholders of Heilongjiang Tiefeng Rice Company Limited (“Tiefeng”) to purchase all the equity interest of Tiefeng (“the Share Transfer Agreement”). On July 23, 2009, the amount of $746,480 (RMB 5,000,000) was paid as retaining fees. The Share Purchase Agreement was signed on August 18, 2009; the amount of $7,312,507 (RMB 50,000,000) was prepaid to Tiefeng on August 19, 2009.
As of March 31, 2010, Tiefeng did not get the crucial certified documents from local government agencies. Based on the amended share purchase agreement, the deal is thus voided. Tiefeng paid back approximately $1.46 million (RMB 10,000,000) to the Company on March 31, 2010, an additional $1.46 million (RMB 10,000,000) was paid on April 30, 2010 as part of the deposit refund. Another $1.46 million (RMB 10,000,000) was paid on May 31, 2010. The balance of $3,094,299 (RMB 20,000,000) was converted to loans to Tiefeng a two year term starting from May 5, 2010. Interest is charged semi-annually by using the current Chinese bank borrowing rate of 5.31%. For the years ended June 30, 2011 and 2010, accrued interest income on the Tiefeng loan totals $25,992 and $0, respectively.
Note 7 - INVENTORIES
Inventories consist of following:
Note 8 - DEPOSIT
The Company paid $3,249,014 (RMB 21,000,000) as of June 30, 2011 and $3,084,335 (RMB 21,000,000) as of June 30, 2010 to Harbin Songbei District Development and Construction Committee as the prepayment for the acquisition of the land use rights. The Company is in the process of going through a full range of procedures before the land use rights can be granted to the Company.
The Company reclassified its deposit as of June 30, 2010, which was previously included in current assets, to other assets, in order to conform to the current presentation. The reclassification had no effect on the Company’s financial condition, results of operations or cash flows.
Note 9 - CONSTRUCTION IN PROGRESS
Plant and production lines currently under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including development expenditures, professional fees and interest expenses capitalized during the course of construction for the purpose of financing the project. Currently, construction is completed and the project is waiting for final inspection and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred to property and equipment, at which time depreciation will commence. The Company had no capitalized interest and to date has funded this construction through operations without the use of outside debt financing. As of June 30, 2011, the Company has incurred a total of $1,857 of construction in progress.
Note 10 - PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
Depreciation expense charged to operations was $64,448 and $61,898 for the years ended June 30, 2011 and 2010, respectively.
Note 11 - INTANGIBLE ASSETS
The following is a summary of the intangible assets:
Amortization expense charged to operations was $19,132 and $19,025 for the years ended June 30, 2011 and 2010, respectively.
Note 12 - RELATED PARTY DEBT
Related party debt represents temporary short-term loans from the majority owner, Mr. Xin Sun, a PRC citizen. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Cash flows classified as due to the majority owner are classified as cash flows from financing activities. The total borrowings from Mr. Sun were $432,924 and $85,408 as of June 30, 2011 and 2010, respectively.
Interest was imputed on the loans using the Chinese bank borrowing rate of 6.31% for the year ended June 30, 2011. The total imputed interest expense was $27,317 and $20,315 for the years ended June 30, 2011 and 2010, respectively.
Note 13 - INCOME TAX AND TAXES PAYABLE
The following is a summary of taxes payable:
On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law reduces the corporate income tax rate from 33% to 25% effective on January 1, 2008. All Chinese enterprises are governed by the PRC Income Tax Law and various local income tax laws, pursuant to which a company generally is subject to an income tax at a statutory rate of 25% for the years ended June 30, 2011 and 2010.
The provision for income taxes consisted of the following for the years ended June 30, 2011 and 2010:
The following table reconciles the PRC statutory rates to China Health’s effective tax rate for the years ended June 30, 2011 and 2010:
Deferred tax assets (liabilities) as of June 30, 2011 and 2010 are composed of the following:
Note 14 - EARNINGS PER SHARE
For the years ended June 30, 2011 and 2010, the Company had no potential dilutive shares.
The following table sets forth the computation of basic and diluted net income per share:
Note 15 - COMMITMENTS AND CONTINGENCIES
China Health’s assets are located in PRC and revenues are derived from operations in PRC.
In terms of industry regulations and policies, the economy of PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in PRC are still owned by the Chinese government. For example, all lands are state owned and are leased to business entities or individuals through governmental granting of land use rights. The granting process is typically based on government policies at the time of grant and it could be lengthy and complex. This process may adversely affect our future manufacturing expansions. The Chinese government also exercises significant control over PRC’s economic growth through allocation of resources and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures.
China Health faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks, instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect China Health’s performance.
The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the regulatory and legal matters in which the Company might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Rental expense was approximately $25,763 and $176,250 for the years ended June 30, 2011 and 2010, respectively. Since the Company orally terminated the rental agreement, there is no rental commitment for the year ended June 30, 2011. The rental commitment for the year ended June 30, 2010 was approximately $176,250.
STATUTORY RESERVE COMMITMENT
In compliance with PRC laws, the Company is required to appropriate a portion of its net income to its statutory reserve up to a maximum of 50% of an its registered capital in the PRC. The Company had appropriated $38,679 (RMB 250,000) to statutory reserve, which is 50% of Harbin Humankind Biology Technology Co., Limited’s registered capital as of June 30, 2011. Since Harbin Huimeijia Medicine has been accumulating deficiency, no statutory reserve fund has been made since its inception.
The Company had future unfunded commitments, as provided below.
Total commitments as of June 30, 2011 and 2010, are composed of the following:
Note 16 - MAJOR SUPPLIERS AND CUSTOMERS
The Company had two suppliers that accounted for 82% of purchases for the year ended June 30, 2011 with each accounting for 61% and 21%, respectively.
The Company had no customer that accounted for more than 10% of the company’s total sales for the year ended June 30, 2011.
The Company had two suppliers that accounted for 95% of purchases for the year ended June 30, 2010 with each accounting for 75% and 20%, respectively.
The Company had no customer that accounted for more than 10% of the company’s total sales for the year ended June 30, 2010.
Note 17 - SUBSEQUENT EVENT
On August 15, 2011, the Company entered into an agreement with a contractor to construct an office building for the Company. Estimated total cost of construction is approximately $622,372 (RMB 4,022,700). The Company anticipates the construction to be completed within 45 days from August 15, 2011 to October 15, 2011. Today, 40% of construction has been completed and $248,949 (RMB 1,609,080) has been paid for construction.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities 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 our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based upon their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, our management believes that, as of June 30, 2011, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our registered accounting firm regarding internal control over financial reporting. The management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting have come to management’s attention during our last fiscal year that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our 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 China Health Industries Holdings, Inc. have been detected.
Item 9B.
Item 9B. Other Information.
None.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth information regarding the members of our board of directors and our executive officers and other significant employees. All directors hold office for one-year terms until the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board.
Name
Age
Position
Xin Sun
Chairman, Chief Executive Officer, Chief Financial Officer and Treasurer
Biography
Mr. Sun attended Jia Mu Si Medical College with a major in pharmacy from 1984 to 1988. From 1988 to 1991, he was the production manager at the Ha Yao Group Sanchine Medicine Joint-Stock Company Ltd. From 1991 to 1994, he was the district director for the Northeast District of China for Pfizer Pharmaceuticals Limited. Thereafter, he spent one year as the director of the marketing department for Ha Yao Group Sanchine Medicine Joint-Stock Company Ltd. From 1996 to 2002, he was the chief executive officer of a company he founded, Heilongjiang Bijie Chemical Industry Co., Ltd. He next obtained his Masters of Business Administration from Renmin University of China. From 2003 to the present, he was the president and chief executive officer of Harbin Humankind Biology Technology Co., Ltd.
Mr. Sun is well known in the pharmaceutical field in Harbin, PRC as a result of all of his professional experience. While he was studying at Renmin University, Mr. Sun developed many contacts in the pharmaceutical field, which later became district agents and other employees in Humankind’s distribution system.
Our sole director, Mr. Xin Sun, does not hold any directorships in other reporting companies and does not qualify as an “independent director” under the Rules of NASDAQ, Marketplace Rule 4200(a)(15).
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
¨
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
¨
Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
¨
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
¨
Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Director Qualifications
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The board believes that there are general requirements for service on the Company’s board of directors that are applicable to all directors and that there are other skills and experience that should be represented on the board as a whole but not necessarily by each director. The board considers the qualifications of director and director candidates individually and in the broader context of the board’s overall composition and the Company’s current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by stockholders, the board will consider the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors it determines are pertinent in light of the current needs of the board. The board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board conducts interviews of potential director candidates to assess intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially. The board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The board has identified particular qualifications, attributes, skills and experience that are important to be represented on the board as a whole, in light of the Company’s current needs and its business priorities. The board believes that it should include some directors with a high level of financial literacy and some directors who possess relevant business experience as a Chief Executive Officer or a President or like position. Marketing is the core focus of our business and the Company seeks to develop and deploy innovative and effective marketing and technology. Therefore, the board believes that marketing and technology experience should be represented on the board.
Presently, only Mr. Xin Sun is the only director of the Company. Mr. Sun possesses many of the skills and experience needed for our business. He is experienced in the pharmaceutical industry having been the district director for the Northeast District of China for Pfizer Pharmaceuticals Limited from 1991 to 1994. He has also been the director of the marketing department for Ha Yao Group Sanchine Medicine Joint-Stock Company Ltd. Mr. Sun has relevant business experience as a Chief Executive Officer or a President or like position in that from 1996 to 2002, he was the chief executive officer of a company he founded, Heilongjiang Bijie Chemical Industry Co., Ltd. From 2003 to the present, he was the president and chief executive officer of Harbin Humankind Biology Technology Co., Ltd.
The board plans to eventually increase its membership to include directors with skills and experience complementary to Mr. Sun’s.
Board Leadership Structure and Role in Risk Oversight
Mr. Xin Sun is our chairman and chief executive officer. The board’s role in the risk oversight of the Company includes, among other things:
·
appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;
·
approving all auditing and non-auditing services permitted to be performed by the independent auditors;
·
reviewing annually the independence and quality control procedures of the independent auditors;
·
reviewing and approving all proposed related party transactions;
·
discussing the annual audited financial statements with the management;
·
meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management.
Compliance with Section 16(a) of Exchange Act
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish our Company with copies of all Section 16(a) reports they file.
Based solely on our review of the copies of such reports received by us and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended June 30, 2011, our officers and directors, and all of the persons known to us to own more than 10% of our common stock, filed all required reports on a timely basis.
Meetings of Our Board of Directors
Our Board of Directors held no meetings during the fiscal year ended June 30, 2011.
Board Committees
Audit Committee. We intend to establish an audit committee of the board of directors, which will consist of soon-to-be-nominated independent directors. The audit committee’s duties would be to recommend to our board of directors the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of our board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Audit Committee Financial Expert. Our board of directors currently acts as our audit committee. Because we are still a developing company, our board of directors is still in the process of finding an “audit committee financial expert” as defined in Regulation S-K and directors that are “independent” as that term is used in Section 10A of the Exchange Act.
Compensation Committee. We intend to establish a compensation committee of the board of directors. The compensation committee would review and approve our salary and benefits policies, including compensation of executive officers.
Code of Ethics
We currently do not have a Code of Ethics because we presently only have one director and officer. We plan to adopt a Code of Ethics when our board members and management increases.
Director Compensation
We did not compensate our directors for fiscal years 2010 and 2011. However, in the future, we intend to implement a market-based director compensation program.
Limitations on Liability
Under Delaware law, a corporation may indemnify its officers, directors, employees and agents under certain circumstances, including indemnification of such persons against liability under the Securities Act of 1933, as amended. Those circumstances include that an officer, director, employee or agent may be indemnified if the person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Article Seventh of our Articles of Incorporation provide that no director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.
We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the Delaware General Corporation Law would permit indemnification.
Indemnification against Public Policy
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling an issuer pursuant to the foregoing provisions, the opinion of the Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The effect of indemnification may be to limit the rights of the Company and its stockholders (through stockholders’ derivative suits on behalf of the Company) to recover monetary damages and expenses against a director for breach of fiduciary duty.
Directors and Officers of Harbin Humankind
The following table sets forth certain information as of June 30, 2011 concerning the directors and executive officers of Harbin Humankind:
Directors and Executive Officers
Position/Title
Age
Xin Sun
Chairman, Chief Financial Officer, Treasurer
Baosen Ma
President, Secretary, Director
Kai Sun
Director
Zhigang Ma
Chief Information Officer
The following is a summary of the biographical information of those directors and officers of Harbin Humankind whose biographical information does not appear above:
Baosen Ma, President, Secretary and Director
Mr. Ma graduated from China University of Political Science and Law with a major in financial accounting. From 1987 to 1992, he was an accountant with Harbin Keluola Solar Power Co., Ltd. Thereafter from 1992 to 1996, he was vice general manger and sales manager for ShangHaiDahua Solar Battery Co., Ltd. From 1996 to 2004, he was the East China manager for the Ha Yao Group Sanchine Medicine Joint-Stock Ltd. In January 2004, Mr. Ma was appointed President, Secretary and Director of Harbin Humankind.
Kai Sun, Director
Mr. Sun graduated from Mu Dan Jiang University with a major in economics. From 1993 to 1995, he was vice director of Mu Dan Jiang Engine Factory. Thereafter, from 1995 to 1998, he was a director of Mu Dan Jiang Engine Factory. From 1998 to 2004, he was an administration director for Mu Dan Jiang Lysine Co., Ltd. Since 2004, he has been the administration director at Harbin Humankind. Mr. Sun, Kai is the younger brother of Chairman, Chief Financial Officer, Treasurer and Director, Xin Sun. In January 2004, Mr. Sun was appointed Director of Harbin Humankind.
Zhigang Ma, Chief Information Officer
Mr. Ma graduated from Tsinghua University with a major in Economics. Prior to joining Harbin Humankind as Chief Information Officer in August 2008, from 2001 to 2005, Mr. Ma worked in Telecommunication Software Project Bureau of Heilongjiang. Thereafter, from 2005 to August 2008, he worked at the Real Estate Trading Center of Harbin.
Item 11.
Item 11. Executive Compensation
The following Summary Compensation Table sets forth, for the years indicated, all cash compensation paid, distributed or accrued for services, including salary and bonus amounts, rendered in all capacities by our chief executive officer and all other executive officers who received or are entitled to receive remuneration in excess of $100,000 during the stated periods. Mr. Xin Sun, our chief executive officer and sole director, receives no additional compensation for his services in his capacity as director.
SUMMARY COMPENSATION TABLE
(all figures in US Dollars)
(1) Mr. Sun was appointed the Chief Executive on December 31, 2008.
Option Grants in Last Fiscal Year
There were no options granted to any of the named executive officers during the year ended June 30, 2011.
During the year ended June 30, 2011, none of the named executive officers exercised any stock options.
Employment Agreements
We have no employment agreements with all of our employees.
Equity Compensation Plan Information
We currently do not have any equity compensation plans; however we are currently deliberating on implementing an equity compensation plan.
Directors’ and Officers’ Liability Insurance
We currently do not have insurance insuring directors and officers against liability; however, we are in the process of investigating the availability of such insurance.
Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations, including Harbin DaZhong Pharmaceutical Co., Ltd., Harbin ShenXinJianKang Co., Ltd., Tsinghua Unisplendour Corporation Limited and YeeCare Company. We use this information to calculate the average salary of executive officers with similar roles and responsibilities. We then adjust the average salary by comparing the profitability of our peer companies.
It is not uncommon for PRC private companies in China to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.
We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.
We will also consider forming a compensation committee to oversee the compensation of our named executive officers. The majority of the members of the compensation committee would be independent directors.
Director Compensation
Mr. Xin Sun, our chief executive officer and sole director, receives no additional compensation for his services in his capacity as director.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and president and (iv) all executive officers and directors as a group as of September 26, 2011.
Except as otherwise specified below, the address of each beneficial owner listed below is Harbin Humankind Biology Technology Co. Limited, 168 Binbei Street, Songbei District, Harbin, Heilongjiang Province, PRC.
(1)
The number of shares reflects the 1:20 reverse split of the Company’s common stock that became effective on November 13, 2008.
(2)
Based on a 62,239,737 total issued and outstanding shares of the Company as of September 26, 2011, which reflects the 1:20 post reverse split of the Company’s common stock that became effective on November 13, 2008.
Except as otherwise indicated each person has the sole power to vote and dispose of all shares of common stock listed opposite his name. Each person is deemed to own beneficially shares of common stock which are issuable upon exercise of warrants, options or upon conversion of convertible securities if they are exercisable or convertible within 60 days of September 26, 2011. None of the persons named in the table above own any options or convertible securities.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Our company received temporary short-term loans from majority owner and our sole director and officer, Mr. Xin Sun, a PRC citizen. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Cash flows classified as due to majority owner are classified as cash flows from financing activities. The total borrowings from Mr. Sun were $ 432,924 as of June 30, 2011.
Interest was imputed on the loans using the Chinese bank borrowing rate of 6.31%. The total imputed interest expense was $ 27,317 for the year ended June 30, 2011.
Item 14.
Item 14. Principal Accounting Fees and Services.
We were billed by De Joya Griffith & Company LLC and our previous independent public accounting firms, Windes & McClaughry Accountancy Corporation and e-Fang Accountancy Corp & CPA for the following professional services they performed for us during the fiscal years ended June 30, 2010 and 2011 as set forth in the table below.
All of the services rendered to us by our independent registered public accountants were pre-approved by our Board of Directors.
PART V
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Exhibit No.
Description
3.1
Articles of Incorporation. (1)
3.2
By-laws. (1)
3.3
Certificate of Amendment dated May 11, 2005(5)
3.4
Certificate of Amendment dated November 12, 2008(5)
3.5
Certificate of Amendment dated February 11, 2009(5)
4.1
Securities Purchase Agreement dated September 10, 2007 between the Company, Thomas Bontems and Xin Sun. (2)
10.1
Asset Purchase and Sale Agreement dated September 10, 2007 between the Company and Universal Fog Systems, Inc. (2)
10.2
Share Exchange Agreement dated October 15, 2007 between the Company, Thomas Bontem, Xin Sun, China Health Industries Holdings Limited and Harbin Humankind Biology Technology Co. Limited. (3)
10.3
English Translation of Land Use Agreement dated June 7, 2004, between Harbin Humankind Biology Technology Co. Limited and Harbin City, Daochu District, Songbei Township, Jinxin Village. (5)
10.4
English Translation of Cooperative Agreement dated September 17, 2008 between Harbin Humankind Biology Technology Co. Limited and the Commercial Bureau of Qing’an County. (5)
10.5
English Translation of Land Purchase Agreement dated July 7, 2009 between Harbin Humankind Biology Technology Co. Limited and Harbin Songbei District Construction and Development Management Committee. (5)
10.6
Technology Transfer Agreement dated October 12, 2007 between the Company and Beijing Jindelikang Bio-Technology Co., Ltd. (5)
10.7
Purchase Agreement dated March 13, 2009 between the Company and Mr. Wang Shukui (5)
10.8
Loan Agreements between the Company and Xin Sun dated June 27, 2008 (5)
10.9
Loan Agreements between the Company and Xin Sun dated August 21, 2008 (5)
10.10
Loan Agreements between the Company and Xin Sun dated October 9, 2008 (5)
10.11
Loan Agreements between the Company and Xin Sun dated October 27, 2008 (5)
10.12
Loan Agreements between the Company and Xin Sun dated November 1,2008 (5)
10.13
Loan Agreements between the Company and Xin Sun dated December 30, 2008 (5)
10.14
Loan Agreements between the Company and Xin Sun dated January 22, 2009 (5)
10.15
Loan Agreements between the Company and Xin Sun dated February 2, 2009 (5)
10.16
Loan Agreements between the Company and Xin Sun dated February 22, 2009 (5)
10.17
Loan Agreements between the Company and Xin Sun dated May 24, 2009 (5)
10.18
Loan Agreements between the Company and Xin Sun dated June 17, 2009 (5)
10.19
Share Transfer Agreement dated August 18, 2009 by and among Harbin Humankind Biology Technology Co. Limited and all shareholders of Heilongjiang Tiefeng Rice Company Limited.(6)
10.20
Technology Development Agreement, dated April 9, 2010, between Harbin Humankind Biology Technology Co. Limited and Shenyang Pharmaceutical University (7)
10.21
Technology Development Agreement, dated May 20, 2010, between Harbin Humankind Biology Technology Co. Limited and Shenyang Pharmaceutical University (7)
21.1
List of Subsidiaries. (4)
23.1
Consent of Independent Registered Public Accounting Firm
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1)
Incorporated by reference to the Company’s Registration Statement on Form 10-SB filed with the SEC on December 1, 2004.
(2)
Incorporated by reference to the Company’s Current Report on Form 8-K/A filed with the SEC on February 20, 2008.
(3)
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2007.
(4)
Incorporated by reference to the Company’s Current Report on Form 8-K and Form 8-K/A filed with the SEC on January 7, 2009.
(5)
Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed with the SEC on November 16, 2010.
(6)
Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed with the SEC on December 9, 2010.
(7)
Incorporated by reference to the Company’s Annual Report on Form 10-K/A filed with the SEC on July 18, 2011.
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.
CHINA HEALTH INDUSTRIES HOLDINGS, INC.
/s/ Xin Sun
By: Xin Sun
Title: Chief Executive Officer
Date: September 28,2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Xin Sun
By: Xin Sun
Title: Chief Executive Officer, Chief Financial
Officer and sole director
Date: September 28, 2011