Item 1. Business
Forward-looking Statements
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may,” "will,” "should,” "expects,” "plans,” "anticipates,” "believes,” "estimates,” "predicts,” "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements so as to conform these statements to actual results.
As used in this annual report, the terms "we,” "us,” "our,” “the Company,” and "China Forestry" mean China Forestry, Inc. and all of our subsidiaries, unless otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
Overview
We were originally incorporated in Nevada on January 13, 1986. Since inception, we have not had active business operations and were considered a development stage company. In 1993, we entered into an agreement with Bradley S. Shepherd in which Mr. Shepherd agreed to become an officer and director and use his best efforts to organize and update our books and records and to seek business opportunities for acquisition or participation. The acquisition of the share capital of Hong Kong Jin Yuan was such an opportunity.
As a result of a Share Exchange, Hong Kong Jin Yuan became our wholly-owned subsidiary, Harbin SenRun became our indirect wholly-owned subsidiary, and we succeeded to the business of Harbin SenRun Forestry Development Co., Ltd., a producer of forest products with approximately 1,561 hectares of State forest assets located mainly over the Small Xing An Mountains, Jin Yin County, and the Harbin Wu Chang District of Heilongjiang Province of Northern China.
Harbin SenRun was founded in 2004. Historically, it had a workforce of approximately 8 full time employees, mainly in sales, administration and in supporting services. It recruited temporary part-time workers to carry out felling, cutting and forestry plantation and protection. Its principal revenue was log sales.
Harbin SenRun lost its wood-cutting quota for log sales from the Bureau of Forestry for the year ended December 31, 2007, and, as a result, did not have any revenues for that period. While Harbin Senrun has applied for a wood cutting quota in subsequent years, it has not been successful in acquiring one.
On December 14, 2010, we simultaneously entered into and closed the transactions contemplated by a Sale and Purchase Agreement with Land Synergy Limited (as Purchaser), a company incorporated in the British Virgin Islands (“Land Synergy”) and sold to Land Synergy 100% of the share capital of Hong Kong Jin Yuan, including its wholly-owned subsidiary, Harbin SenRun, for US$2,000. As a result, we no longer engage in the timber business operations.
On July 15, 2010, we entered into a Share Exchange with Financial International (Hong Kong) Holdings Co. Limited (“FIHK”).
From April 1, 2010 to May 20, 2011, FIHK had a series of contractual arrangements with Hanzhong Hengtai Bio-Tech Limited (“Hengtai”), a company organized and existing under the laws of the People’s Reuplic of China that is engaged in the plantation and sale of garden plants used for landscaping, including Chinese Yew, Aesculus, Dove Tree and Dendrobium.
On May 20, 2011, FIHK exercised its rights under the Exclusive Option Agreement to direct Xi’An Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Xi’An Qi Ying”), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai. The Exclusive Option Agreement was exercised in a manner that the shareholders of Hengtai transferred all of their equity capital in Hengtai to Xi’An Qi Ying. At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China (“Spone”), acquired all of the capital stock of Xi’An Qi Ying, so that it became a direct wholly owned subsidiary of Spone. FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK and also accordingly became the indirect wholly owned subsidiary of us.
Hengtai was incorporated on October 22, 2003 with a registered capital of 15.0 million RMB. The registered address of Hengtai is in Economic Development Zone of Hanzhong City, Shaan’xi Province, China. Hengtai possesses several permits and licenses for its plantation business, including a Seedling Production Permit, a Forestry User Right, and a Seedling Operations Permit.
Chinese Yew is the major product of Hengtai and the company plants two types that carry the biological names Taxus chinensis var. mairei and Taxus media. Currently, they take up approximately 28% of the planting area of the company.
Hengtai currently has 29 full-time employees, including 3 members of management, 19 agricultural experts, 5 employees in sales and marketing, and 2 administrative employees.
A diagram depicting the organizational structure of the Registrant after the termination of the VIE Contracts and the exercise of the Exclusive Option Agreement follows:
There were no material early termination penalties incurred by the Registrant in connection with the termination of the VIE Contracts described herein.
Description of Business of Hengtai
Overview. Hengtai is engaged in the business of plantation and sale of garden plants including Chinese Yew, as well as Aesculus, Dove Tree and Dendrobium, among others. Hengtai was incorporated on October 22, 2003 with a
registered capital of RMB 15 million. The registered address of the Company is located in Economic Development Zone of Hanzhong City, Shaan’xi Province, China.
In the year 2007, Hengtai was acknowledged by Hanzhong Forestry Bureau as the “Leading Business of Forestry Commercialization.” The planting methods applied to the Chinese Yew and Dendrobium by Hengtai are endorsed by the Ministry of Science & Technology of China under the China Spark Program with the license number “Guo Ke Fa Ji Zi [2006]-377” in year 2006.
Products and Production. Hengtai currently has 13 forestry centers and occupies approximately 16.0 square kilometers (or 24,000 Mu). It is estimated that Hengtai has over 11,000,000 valuable plants, including 8,000,000 Chinese Yews, 1,000,000 Chinese Dove Trees, 300,000 Aesculus, 2,000,000 Dendrobium (and 30+ other species, including Crape Myrtle, Magnolia Denudate, Osmanthus Fragrans etc.).
Chinese Yew is the primary product of Hengtai and the Company is focusing its efforts on planting two types of Chinese Yews that carry the biological names Taxus chinensis var. mairei and Taxus media. Currently they take up approximately 28% (4.5 sq km or 6750 Mu) of the planting area of the Company.
According to a finding of the Chinese government, Chinese Yews species like Taxus media and Taxus chinensis have Paclitaxel content in their bark. Paclitaxel is an FDA approved chemical for use in the treatment of certain cancers and is marketed by Bristol Myers Squibb Corp., among other companies, in many countries as a chemotherapy agent for the treatment of cancer.
Hengtai’s open wood field planting area also carries a variety of other plants among Chinese Yew in order to optimize the use of the terrain. Mixed planting of taller plants not only will provide shade for Chinese Yews in the field; but also will diversify the income source of the Company. Currently, Chinese Yew is mixed planted with species including magnolia grandiflora, fragrans, crape myrtle, ginkgo, Davidia involucrate and horse chestnut.
Leveraging on the current land policy of China, which allow farmers to trade, purchase or sell their land rights, Hengtai works with local small farmers to commercialize their farm land by growing and selling Chinese Yew under the coordination of the Company. Training and technology transfer to the farmers is backed up by agricultural associations and academic institutes, namely Xi’an Agricultural University and Shaan’xi Agricultural Science & Technology Academy.
Sales and Marketing
Currently our Chinese Yew and other plants are all sold as garden plants in potted form used in landscaping across China. Hengtai develops the landscaping markets for Chinese Yew and other plantations in key Chinese cities including Beijing, Shanghai, Chongqing, among others by virtue of establishing garden plants landscape exhibitions in selected cities. The management believes that sales of Chinese Yew will also promote the sales of other seedlings and garden plants provided by the Company.
Seven sales areas throughout China are identified by Hengtai, namely (a) Eastern China; (b) Southern China; (c) Central China; (d) Northern China; (e) Northwest China; (f) Southeast China; and (g) Northeast China. Sales agencies were appointed in each sales district in order to distribute its ornamental plant products.
Research and Development
None.
Competition and Market Position
Competition in the gardening plantation industry of China is mostly fragmented. We see no strong competitor to the Company in Shaan’xi Province of China. There are, however, two to three Chinese Yew producers in China in possession of total plantation area of over 33.3 sq km (or 50,000 Mu), compared to the 16 sq km (or 24,000 Mu) of
Hengtai. Each of these competitors has an annual production capacity of 50 million Chinese Yew, mainly of the species Taxus Chinensis.
Our competitive position will depend on our ability to attract and retain sufficient farm land for open wood field, develop effective gardening solutions, achieve economies of scale, develop and implement production and marketing plans, and secure adequate capital resources. We believe that we compete primarily on the basis of our product quality, reliability, economies of scale, experienced and stable management and plantation team, customer value and stability in supply and cost of Chinese Yew. Furthermore, Hengtai is situated in Hanzhong City, Shannxi province,. We believe that the geographical location of Hanzhong City, which is in a subtropical basin area with sufficient rainfall and moist climate, constitutes the optimal biological environment for the growth of the Yew across China and hence one of the key factors that allows us to compete favorably in the long term.
Regulatory Environment
Overview. China is transitioning from a planned economy to a market economy. While the Chinese government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the Chinese economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the Chinese government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the Chinese government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating revenue may be reduced by changes in China's economic and social conditions as well as by changes in the policies of the Chinese government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.
China’s legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
Permits. We are subject to many general regulations governing business entities and their activities in China including, among other things, the Permits for Seedling Operation, Permit for Seedling Production and Forest User Rights. We are required to renew, pass an examination with respect to, or make a filing in connection with these licenses and certifications on a regular basis. At provincial level we are also required to report our Chinese Yew sales and processing to the Shaan’xi Forestry Bureau of China. We are not aware of any material violations of permits, licenses or approvals that have been issued with respect to our operations. We expect to comply with all applicable laws, rules and regulations relating to our business, and at this time, we do not anticipate incurring any material capital expenditures to comply with any environmental regulations or other requirements.
Intellectual Properties
None.
Employees
As of April 10, 2015, there are currently 29 full-time employees, including 8 members of management and administrative staff, 12 agricultural experts and 9 marketing employees.
All employees of the company are located in China. We believe that we maintain good relationships with our employees, and have not experienced any strikes or shutdowns and have not been involved in any labor disputes.
Item 2.
Item 2. Properties
Hengtai. Hengtai has the following land user right:
Xiao He Forestry Center
This forest land is located near Lan Jia Wan, Cheng Gu County, Shaan’xi Province of China, with an area of approximately 0.49 sq km (or 737 Mu) recorded under the Forest Right Certificate. Hengtai held the forest land use right, woodland ownership right and woodland use right for a period of up to March 26, 2077. We have the right to grow Chinese Yew on this land.
The following table illustrates our 14 forestry centers in detail, which comprise land rented from local farmers:
Item 3.
Item 3. Legal Proceedings
We know of no material, active or pending legal proceedings against us, our subsidiaries or our property, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholders are an adverse party or have a material interest adverse to us.
Item 4.
Item 4. Removed and Reserved
None.
PART II
Item 5.
Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is currently quoted on a limited basis on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol “CHFY.” The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists. We cannot predict whether a more active market for our common stock will develop in the future. In the absence of an active trading market:
1)
Investors may have difficulty buying and selling or obtaining market quotations;
2)
Market visibility for our common stock may be limited; and
3)
A lack of visibility of our common stock may have a depressive effect on the market price for our common stock.
The following table sets forth the range of high and low prices of our common stock as quoted on the OTCBB during the periods indicated. The prices reported represent prices between dealers, do not include markups, markdowns or commissions and do not necessarily represent actual transactions.
The transfer agent for our common stock is Interwest Transfer Co., Inc., 1981 East 4800 South, Ste 100, Salt Lake City, UT 84111, Attn Melinda Orth; Tel: (801) 272-9294.
Holders
As of April 10, 2015, there were approximately 147 holders of record of 19,680,007 outstanding shares of common stock of the Company, which does not include shareholders who own our shares in so-called “street name.”
Dividends
Holders of our common stock are entitled to dividends if declared by the Board of Directors out of funds legally available therefore. As of December 31, 2014 no cash dividends have been declared.
Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operation, financial condition, contractual and legal restrictions and other factors the board of directors deem relevant.
Equity Compensation Plans
As of December 31, 2014, we did not have any equity compensation plans.
Recent Sales of Unregistered Securities
On August 20, 2014, we converted $600,000 of the outstanding convertible notes held by Wang Kejun, Xiao Xiuli and Xie Qing as well as accrued interest of $251,836 into 4,080,000 shares of commons stock. The issuance of these shares is pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933
Recent Purchases of Equity Securities by us and our Affiliated Purchasers
We have not repurchased any of our common stock and have no publicly announced repurchase plans or programs as of December 31, 2014.
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
This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including, "could" "may,” "will,” "should,” "expect,” "plan,” "anticipate,” "believe,” "estimate,” "predict,” "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Annual Report.
Overview of our Business
We were engaged through our Harbin SenRun subsidiary in the forestry business in Heilongjiang Province, People’s Republic of China. We managed four major forest centers having a total of 1,561 hectares of land, and cut timber in order to sell the logs in the commercial market. However, for the year ended December 31, 2007 and subsequent years, Harbin SenRun lost its wood cutting quota for log sales from the Heilongjiang Bureau of Forestry and has had no revenues. The Board of Directors of our company decided to sell the stock of Jin Yuan Global Ltd., the parent of Harbin SenRun, on December 14, 2010, to Land Synergy, Ltd., a British Virgin Islands company, for US$2,000.00.
As of July 15, 2010, we closed on the acquisition of Hanzhong Hengtai Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Hengtai”). Hengtai is a variable interest entity controlled by our subsidiary, Financial International (Hong Kong) Holdings, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China. Hengtai’s business is the plantation and sale of garden plants including Chinese Yew, as well as Aesculus, Dove Tree and Dendrobium, among others. Hengtai was incorporated on October 22, 2003 with a registered capital of RMB 15 million. The registered address of the Company is located in Economic Development Zone of Hanzhong City, Shaan’xi Province, People’s Republic of China.
Hengtai currently has 13 forestry centers and occupies approximately 16.0 square kilometers (or 24,000 Mu). It is estimated that Hengtai has over 11,000,000 valuable plants, including 8,000,000 Chinese Yews, 1,000,000 Chinese Dove Trees, 300,000 Aesculus, 2,000,000 Dendrobium (and 30+ other species, including Crape Myrtle, Magnolia Denudate, Osmanthus Fragrans etc.).
Chinese Yew is the primary product of Hengtai and the Company is focusing its efforts on planting two types of Chinese Yews that carry the biological names Taxus chinensis var. mairei and Taxus madia. Currently they take up approximately 28% (4.5 sq km or 6750 Mu) of the planting area of the Company.
According to a finding of the Chinese government, Chinese Yews species like Taxus madia and Taxus chinensis have Paclitaxel content in their bark. Paclitaxel is an FDA approved chemical for use in the treatment of certain cancers and is marketed by Bristol Myers Squibb Corp., among other companies, in many countries as a
chemotherapy agent for the treatment of cancer.
Hengtai’s open wood field planting area also carries a variety of other plants among Chinese Yew in order to optimize the use of the terrain. Mixed planting of taller plants not only will provide shade for Chinese Yews in the field; but also will diversify the income source of the Company. Currently, Chinese Yew is mixed planted with species including magnolia grandiflora, fragrans, crape myrtle, ginkgo, Davidia involucrate horse chestnut.
Currently, our Chinese Yew and other plants are all sold as garden plants in potted form used in landscaping across China. Hengtai develops the landscaping markets for Chinese Yew and other plantations in key Chinese cities including Beijing, Shanghai, Chongqing, among others by virtue of establishing garden plants landscape exhibitions in selected cities. The management believes that sales of Chinese Yew will also promote the sales of other seedlings and garden plants provided by the Company.
The results of operations of Hengtai are consolidated in our financial statements since Hengtai is a controlled by our subsidiary, FIHK.
Results of Operations
For the year ended December 31, 2014 Compared to the year ended December 31, 2013
Net Sales
We had net sales of $518,114 for the year ended December 31, 2014 and $1,778,363 for the year ended December 31, 2013. Our sales decreased by $1,260,249 or approximately 71% the lower sales in 2014 is due to poor market condition in PRC
Cost of Goods Sold and Gross Profit
For the year ended December 31, 2014 and 2013, cost of goods sold amounted to $408,405 and $1,293,060. Gross profit for the year ended December 31, 2014 was $109,709 as compared to $485,303 for the year ended December 31, 2013. The gross margin percentage for the year ended December 31, 2014 and 2013 were approximately 21.2% and 27.3%.
Operating Expenses
For the year ended December 31, 2014, total operating expenses were $430,107 as compared to $499,850 for the year ended December 31, 2013, a decrease of $69,743, or approximately 14%. The changes resulted from decreased in selling expenses and general and administrative expenses from $106,219 of bad debt expenses for the year ended December 31, 2013 as compared to $9,276 for the year ended December 31, 2014.
The breakdown of the operating expenses as follows:
The breakdown of the general and administrative expenses as follows:
Other Income (Expenses)
Our other income (expenses) during the year ended December 31, 2014 amounted to $(98,951) as compared to $(577,303) for the same period in 2013. The result was mainly due to contingent loss accrued in 2013. The interest expenses were $(301,097) and $(296,260) for the year ended December 31, 2014 and 2013, respectively. The increase of interest expense resulted from higher interest rate on the short-term loans.
Net Income (Loss)
Net loss was $(419,349) for the year ended December 31, 2014, as compared to a net loss of $(591,850) for the same period in 2013. The decrease of net loss was due to significant decrease of other loss
Liquidity and Capital Resources
At December31, 2014, we had cash and cash equivalents of $4,688
Working Capital
At
December31,
At
December 31,
Current assets
$
2,616,257
$
2,654,753
Current liabilities
2,605,162
2,418,893
Working capital
$
11,095
$
235,860
Operating Activities
Net cash used in operating activities for the year ended December 31, 2014 was $104,943 as compared to net cash used in operating activities $295,918 for the year ended December 31, 2013.
For the year ended December 31, 2014, we had net loss of $(419,349). Our inventories increased by $111,450, accounts payable decreased by $50,237, accounts receivable decreased by $187,246, prepayments increased by $19,287, other receivables increased by $45,949, interest payable increased by $21,898, accrued liabilities and other current liabilities increased by $304,776, offset by non-cash items such as depreciation and amortization of $17,039 and provision for bad debts of $9,276.
For the year ended December 31, 2013, we had net loss of $(591,850). Our inventories increased by $114,803, accounts payable decreased by $293,678, accounts receivable increased by $285,373, prepayments increased by $114,714, other receivables increased by $15,123, interest payable increased by $190,271, accrued liabilities and other current liabilities increased by $27,775, contingent obligations increased by $551,079 , offset by non-cash items such as depreciation and amortization of $14,851 and bad debts provision of $106,219.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2014 was $19,219 as compared to net cash used in investing activities of $4,079 for the year ended December 31, 2013.
For the year ended December 31, 2014, we spent $19,446 in acquisitions of properties, plant and equipment. We received cash repayment of $227 from we disposed of properties, plant and equipment.
For the year ended December 31, 2013, we spent $4,079 in acquisitions of properties, plant and equipment.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2014 was $123,702. We have repaid $27,473 to our related parties and $28,325 of bank loans while we also borrowed $179,500 from our related parties.
Net cash provided by financing activities for the year ended December 31, 2013 was $198,160. We have repaid $40,702 to our related parties. We borrowed $110,362 in short and long term bank loans as well as $128,500 from our related parties.
We have not generated sufficient cash flows from operations. If we do not generate enough revenues from the sales of our products to meet the cash needs, we will need other financing to continue to operate. As we work to increase sales of our products, we expect to increase cash flows from operations. However, we may choose at any time to raise capital through private debt or equity financing to strengthen our financial position and facilitate growth.
Related Parties Transactions
We have historically funded our cash needs through a series of debt transactions, primarily with related parties. Amounts due to related parties as of December 31, 2014 and December 31, 2013 were $284,811 and $261,284, respectively.
Interest expense for related party loans was $14,903 and $11,373 for the years ended December 31, 2014 and 2013, respectively.
On August 20, 2014, $600,000 convertible promissory note as well as accrued interest of $251,836 was converted into 4,080,000 common shares.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting company.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements are attached immediately after the signature page of this Form 10-K Annual Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules, regulations and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.
Changes in Internal Controls
During the year ended December 31, 2014, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Control
Our Chief Executive Officer and Chief Financial Officer (the principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of December 31, 2014, that the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed in the reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to the management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
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.
The following table setforth the information of our current directors and officers:
Name
Age
Position
Shengli Liu
Chairman, President and Director
Yueping Li
Chief Executive Officer and Director
Shuncheng Ma
Chief Financial Officer and Director
Chunli Li
Secretary
Mr. Shengli Liu, Chairman, President and Director, age 44, has over 15 years working experience in corporate management. Since 2007, Mr. Liu served as the chairman of Xi’an Edward Co., Ltd. From 1999 to 2006, he served as the chairman of Shaanxi Henglida Business Co. Ltd. In 1998 Mr. Liu served as the manager of Xi’an Railway
Bureau Labor Service Co. Ltd. He acquired a Bachelors Degree in Economic Management from Shaanxi Provincial China’s Communist Party College in 1990.
Mr. Yueping Li, Chief Executive Officer and Director, age 49, has more than 20 years business and management experience. From 2005 to present, he served as chairman of Shaanxi Yinlian Credit Guarantee Co. Ltd. In 2003 and 2004, Mr. Li was the vice-manager of Shaanxi International Trust and Investment Corporation Holding Company. From 1996 to 2002, he served as General Manager in Beijing Boming Castor-oil Plant Co., Ltd. Mr. Li served as project manager in China Machinery and Equipment Import & Export Company from 1992 to 1996. He worked as Northwest commissioner in Mechanical Engineering Company of Shougang Group from 1989 to 1991. Mr. Li acquired his Bachelors Degree of Engineering at Beijing Institute of Technology in 1986, and received his Masters of Engineering Degree in 1989.
Mr. Shuncheng Ma, Chief Financial Officer and Director, age 49, worked as general manager in Shaanxi Hongbao Green Engineering Co. Ltd. since 1999. He worked as general manager in Lvbao Industrial Co. Ltd. from 1995 to 1999. Mr. Ma graduated from Northwest University in 1986 with a Bachelors Degree in Mathematics and received an EMBA at Northwest University Economic Management College in 2005.
Chunli Li. Secretary. From 2010 to present, Mr. Li., age 52, has acted as manager of the Engineering Department of Shaanxi Libao Ecology Techonology Co. Ltd. From 2005 to 2006, he was the vice -manager of Xi’an Shili Electric Power Co., Ltd. From 2001 to 2004, he served as General Manager of Shaanxi Naide High-Tech Development Co., Ltd. Mr. Li received his Bachelors Degree from Shaanxi Province Agriculture College in 1984.
Meetings of Our Board of Directors
The Registrant’s Board of Directors took all actions by unanimous written consent without a meeting during the fiscal year ended December 31, 2014.
The Registrant’s Board of Directors took all actions by unanimous written consent without a meeting during the fiscal year ended December 31, 2011.
Board Committees
Audit Committee. The Company intends 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 the Company’s Board of Directors the engagement of independent auditors to audit the Company’s financial statements and to review the Company’s 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 the Company’s 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.
Compensation Committee. The Company intends to establish a compensation committee of the Board of Directors. The compensation committee would review and approve the Company’s salary and benefits policies, including compensation of executive officers.
Director Compensation
We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
Significant Employees
Other than the directors and officer described above, we do not expect any other individuals to make a significant contribution to our business.
Family Relationships
There are no familial relationships between or among our officers and directors.
No Legal Proceedings
None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the past five years:
-
any 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;
-
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
-
being 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; or
-
being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Section 16(a) Beneficial Ownership Compliance Reporting
Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission. Specific due dates for these reports have been established, and the Company is required to report, in this Form 10-K, any failure to comply therewith during the fiscal year ended December 31, 2014. During the fiscal years ended December 31, 2014, all our directors and officers have complied with the Section 16(a) of the Exchange Act to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission except that Xiuli Yao and Qing Xie did not file the Form 3 to report their change of ownership in the Company.
Code of Ethics
The Company adopted a Code of Ethics that applies to the Company’s principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as other employees (the "Code of Ethics"), a copy of which is attached as Exhibit 10.1 to our Form 8-K filed on December 19, 2008. The Code of Ethics is designed with the intent to deter wrongdoing, and to promote the following:
-
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships
-
Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by the small business issuer
-
Compliance with applicable governmental laws, rules and regulations
-
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code
-
Accountability for adherence to the code
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 the Company’s 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.
SUMMARY COMPENSATION TABLE
Option Grants in Last Fiscal Year
There were no options granted to any of the named executive officers during the year ended December 31, 2014.
During the year ended December 31, 2014, none of the named executive officers exercised any stock options.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Employment Agreements
The Company has no employment agreements with any of its employees.
Equity Compensation Plan
The Company currently does not have any equity compensation plans; however the Company is currently deliberating on implementing an equity compensation plan.
Directors’ and Officers’ Liability Insurance
The Company currently does not have insurance insuring directors and officers against liability; however, the Company is in the process of investigating the availability of such insurance.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Compensation of Directors
We did not pay our directors any compensation for services rendered as a director in the year ended December 31, 2014.
We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director. No director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
Change of Control Compensatory Plans
As of December 31, 2014, we had no pension plans or compensatory plans or other arrangements which provide compensation on the event of termination of employment or change in control of us.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth the information concerning the number of shares of our common stock beneficially owned as of April 10, 2015 by: (i) each of our directors, (ii) each of our named executive officers and (iii) owners of 5% or more of our common shares. There was no other person or group known by us to beneficially own more than 5% of our outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own.
Except as otherwise specified below, the address of each beneficial owner listed below is Economic Development Zone of Hanzhong City, Shaan’xi Province, The People’s Republic of China
Number of Shares of Common Stock Owned
Percent of Voting Power(1)
Directors and Executive Officers
Shengli Liu, President, Director (2)
1,912,048
9.72%
Shuncheng Ma, Director, CFO
1,100,000
5.59%
Yueping Li, Director, CEO
Chunli Li, Secretary
All Officers and Directors as a Group (5 persons)
3,012,048
15.31%
Principal Stockholders (5%)
Shuncheng Ma
1,100,000
5.59%
Shengli Liu
1,912,048
9.72%
Wealthstand Limited
Palm Grove House Po Box 438 Road Town Tortolla Bvi
1,328,610
6.75%
Zhengheng Shao
2,100,000
10.67%
Qing Xie
2,007,266
10.20%
Xiuli Yao
1,381,844
7.02%
All Principal Stockholders (5%)
9,829,768
49.95%
(1)
For purposes of the calculations in this table, there are 19,680,007 issued and outstanding shares of Common Stock as of April 10, 2015
(2)
Shengli Liu is the beneficial owner of 1,912,048 shares of Common Stock, and transferred and assigned all his interest in the convertible notes to others.
Item 13.
Item 13. Certain Relationships, Related Transactions, and Director Independence
All transactions associated with the following companies or individuals are considered to be related party transactions.
Name
Relationship
Hanzhong Bashan God Grass Biological Development Co., Ltd.
A company controlled by relative of Hengtai's CEO
Yongli Yang
*Previous owner of Hengtai
Zhengheng Shao
*Previous owner and CEO of Hengtai
Qinba Taxus Association
An organization controlled by the Company
Shengli Liu
Chairman, President and Director,
*In September 2010, Xian Qiying Bio-Tech Limited acquired 100% capital of Hengtai from previous owners.
Due to related parties
"Due to related parties" represents loans payable that are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. Due to related parties is subject to interest rate from 8%~15%.
Interest expense for related party loans was $14,903 and $11,373 for the years ended December 31, 2014 and 2013, respectively.
Director Independence
Our securities are quoted on the OTCQB tier of OTC Markets Group inter-dealer quotation and trading system, which does not have any director independence requirements. Once we engage further directors and officers, we will develop a definition of independence and examine the composition of our Board of Directors with regard to this definition.
Item 14.
Item 14. Principal Accounting Fees and Services.
Audit and Non-Audit Fees
The following table represents fees for the professional audit services and fees billed for other services rendered by our auditors for the audit of our annual financial statements for the years ended December 31, 2014 and December 31, 2013 and any other fees billed for other services rendered by our auditors during these periods.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The financial statements are attached immediately after the signature page of this Form 10-K Annual Report.
(a) (2) Financial Statement Schedules
None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto.
Exhibits
Exhibit
Number
Exhibit
Description
3.1
Articles of Incorporation of the Company (1)
3.2
Bylaws of the Company (1)
10.1
Share Exchange Agreement by and among Patriot Investment Corporation, Bradley Shepherd, Everwin Development, Ltd., Harbin SenRun Forestry Development Co., Ltd., Jin Yuan Global Limited and Jin Yuan Global Limited Trust (2)
10.2
Share Exchange Agreement by and between China Forestry, Inc., Financial International (Hong Kong) Holdings Co. Ltd., LIU, Shengli, LI, Bin, and Hanzhong Hengtai Bio-Tech Limited (3)
10.3
Operating Agreement by and among China Forestry, Inc., Financial International (Hong Kong) Holdings Co. Ltd., LIU, Shengli, LI, Bin, and Hanzhong Hengtai Bio-Tech Limited (4)
10.4
Sale and Purchase Agreement between China Forestry, Inc. and Land Synergy Limited (5)
21.1
List of Subsidiaries
Financial International (Hong Kong) Holdings Co. Limited
31.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
31.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6)
(1)
Incorporated by reference from Exhibit 3 to Patriot Investment Corporation’s Form 10-SB12G filed with the Commission on April 13, 1999.
(2)
Included as an exhibit to our Form 8-K filed with the Commission on July 2, 2007.
(3)
Included as an exhibit to our Form 8-K filed with the Commission on June 16, 2010.
(4)
Included as an exhibit to our Form 8-K filed with the Commission on July 16, 2010.
(5)
Included as an exhibit to our Form 8-K filed with the Commission on December 17, 2010.
(6)
Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Company has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
CHINA FORESTRY, INC. AND SUBSIDIARIES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of China Forestry, Inc.
We have audited the accompanying consolidated balance sheets of China Forestry, Inc. as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Forestry, Inc. as of December 31, 2014 and 2013 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred accumulated deficits of $3,379,588 and $2,960,239 as of December 31, 2014 and 2013, respectively. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Yichien Yeh, CPA
Oakland Gardens, New York
April 15, 2015
CHINA FORESTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS BACKGROUND
The Company was incorporated under the name of Patriot Investment Corp. on February 13, 1986 under the laws of the State of Nevada. In January 2008, the Company filed an amendment to its articles of incorporation to change the name to China Forestry Inc. (“the Company”). The Company is principally engaged in the growing and harvesting of timber and manufacture and marketing of lumber in the People’s Republic of China (“PRC”) through its holdings and subsidiaries.
On June 26, 2007, the Company closed the share exchange transaction and acquired 100% Jin Yuan Global Limited, HK Holding Company, who directly owns 51% of Harbin Senrun Forestry Development Co., Ltd. (“Harbin Senrun”) and indirectly owns 49% of Harbin SenRun through a wholly 100% owned subsidiary Jin Yuan Global Limited Trust. Harbin Senrun was a PRC operating company that principally engaged in the growing and harvesting of timber and manufacture and marketing of lumber in the People’s Republic of China (“PRC”).
On July 15, 2010, the Company closed the transactions contemplated by the Share Exchange Agreement and acquired Financial International (Hong Kong) Holdings Co. (“FIHK”), a holding company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China on January 8, 2009, as its wholly owned subsidiary. FIHK has no other material operations except it has entered into a series of contractual obligations with Hanzhong Hengtai Bio-Tech Limited (“Hengtai”), a company organized and existing under the laws of the People’s Republic of China on October 22, 2003.
Hanzhong Hengtai Bio-Tech Limited (“Hengtai”) is a company incorporated under the laws of the People’s Republic of China (“China”) that engaged in the plantation and sale of garden plants used in landscaping, such as Chinese Yews of the types Taxus chinensis var. mairei and Taxus media, as well as the holders of 100% of the voting shares of Hengtai.
The Company’s relationship with Hengtai and its shareholders is governed by a series of contractual arrangements among FIHK, Hengtai and the 100% holders of the share capital of Hengtai (the “Hengtai Shareholders”) entered on April 1, 2010. The contractual arrangements include a Consulting Services Agreement, a Business Operating Agreement, an Equity Pledge Agreement, an Exclusive Option Agreement, and a Voting Rights Proxy Agreement (collectively the “VIE Agreements”). Under the laws of China, the VIE Agreements constitute valid and binding obligations of the parties of such agreements. Each of the VIE Agreements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of China.
On December 14, 2010, following the resolution of the Board of Directors to terminate the timber business, the Company closed a sale and purchase transaction contemplated by a Sale and Purchase Agreement and sold 100% of Jin Yuan Global Limited along with all its directly or indirectly owned subsidiaries Harbin Senrun for $2,000. A loss of $640,786 was recognized from the disposal.
On May 20, 2011, the Board of Directors of the Company authorized the termination of the VIE Agreements. In connection with the termination of the VIE Agreements, FIHK exercised its rights under the Exclusive Option Agreement to direct Xi’An Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Xi’An Qi Ying”), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK.
The Exclusive Option Agreement was exercised in a manner that the Hengtai Shareholders transferred all of their equity capital in Hengtai to Xi’An Qi Ying. At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China (“Spone”), acquired all of the
capital stock of Xi’An Qi Ying, so that it became a direct wholly owned subsidiary of Spone. FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK.
As a result of the termination of the VIE Agreements, Hengtai became an indirect wholly owned subsidiary of the Company, and a direct wholly owned subsidiary of Xi’An Qi Ying. Previously, the status of Hengtai under the VIE Agreements was a company that was controlled by FIHK pursuant to contractual provisions of the VIE Agreements whose equity capital was owned by the original Hentai Shareholders.
As a result of a series of reverse acquisition transactions above, the Company now owns all of the issued and outstanding capital stock of its subsidiaries. Since there is common control between the Company and all the subsidiaries, for accounting purposes, the acquisition of Xi’An Qi Ying and Henngtai has been treated as a recapitalization with no adjustment to the historical basis of the assets and liabilities of the consolidated company based on Financial Accounting Standards Board (FASB) rules on business combinations and transactions among entities under common control. The restructuring has been accounted for using the “as if” pooling method of accounting and the operations were consolidated as if the restructuring had occurred as of the beginning of the earliest period presented in our consolidated financial statements and the current corporate structure had been in existence throughout the periods covered by our consolidated financial statements.
On June 15, 2012, the Company effected a 1-for-10 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value and number of authorized shares of the common stock remained unchanged. All references to number of shares and per share amounts included in these consolidated financial statements and the accompanying notes have been adjusted to reflect the reverse stock split retroactively.
2. GOING CONCERN
As reflected in the accompanying financial statements, the Company has accumulated deficits of $3,379,588 and $2,960,239 at December 31, 2014 and 2013, respectively. The Company’s owners have funded the losses and cash shortfalls allowing management to develop sales and contingency plans. The Company is also arranging for additional funding. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Preparation
The accompanying financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). All significant intercompany accounts and transactions have been eliminated in consolidation.
b. Variable Interest Entities
Prior to May 11, 2011, Hengtai is considered a variable interest entity (“VIE”), and FIHK, the Company’s wholly owned subsidiary, is the primary beneficiary. The Company’s relationships with Hengtai and its shareholders are governed by a series of contractual arrangements between the Company and Hengtai, which is an operating company in the PRC. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On April 1, 2010, FIHK entered into the following contractual arrangements with Hengtai:
(1) Consulting Services Agreement. Pursuant to the consulting services agreement between FIHK and Hengtai, dated April 1, 2010, FIHK has the exclusive right to provide Hengtai with consulting services and daily operations, including general business operations in relation to business development, human resources, research and development, and business growth, and support the daily operation costs and daily expenses. Hengtai pays an annual consulting service fee to FIHK that is equal to 100% of Hengtai’s net revenue for such year, based on the annual financial statements. This agreement shall remain in force unless otherwise terminated. FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement. All intercompany transactions, including this service fee, have been eliminated in the consolidated financial statements presented.
(2) Business Operating Agreement. Pursuant to the business operating agreement among FIHK and Hengtai, dated April 1, 2010, FIHK provides Hengtai guidance and instruction on Hengtai’s daily operations, financial management and employment issues. FIHK has the right to appoint or remove Hengtai’s directors and executive officers. In addition, FIHK agrees to guarantee Hengtai’s performance under any agreements or arrangements relating to its business arrangement with any third party. Upon the request of Hengtai, FIHK agrees to provide loans to support its operation’s capital requirements and to provide a guarantee if the Company needs to apply for loans from a third party. In return, Hengtai agrees to pledge its accounts receivable and all of its assets to FIHK. The term of this agreement is ten years; and may be extended or terminated only by 30-day prior written notice served by FIHK (or its designated party). FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement.
(3) Equity Pledge Agreement. Under the equity pledge agreement between FIHK and Hengtai, dated April 1, 2010, Hengtai’s 100% shareholders pledged all of their equity interests in Hengtai to FIHK to guarantee its performance of its obligations under the Business Operating Agreement. If Hengtai or its shareholders breaches their respective contractual obligations, FIHK, as Pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The 100% shareholders of Hengtai also agreed that upon occurrence of any event of default, FIHK shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the 100%
shareholders of Hengtai to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that FIHK may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The 100% shareholders of Hengtai agreed not to dispose of the pledged equity interests or take any actions that would prejudice FIHK’s interest. This equity pledge agreement shall expire two years after Hengtai’s obligations under the Consulting Services Agreement have been fulfilled. FIHK is entitled to assign to a wholly-owned subsidiary, if one were set up in the future, all the rights to the Company as stipulated in this agreement.
(4) Exclusive Option Agreement. Under the exclusive option agreement between FIHK and Hengtai, dated on April 1, 2010, all the shareholders of Hengtai irrevocably granted to FIHK (or its designated person) an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Hengtai for the minimum amount of consideration permitted by applicable PRC law. FIHK (or its designated person) has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is ten (10) years from April 15, 2009 and may be extended prior to its expiration by written agreement of the parties.
(5) Voting Right Proxy Agreement. Under the voting right proxy agreement between FIHK and Hengtai, dated on April 1, 2010, all shareholders of Hengtai agreed to irrevocably grant FIHK with the right to exercise the 100% shareholders of Hengtai’s voting rights and their other rights, including the attendance at and the voting of the all the shares held by 100% shareholders of Hengtai at shareholders’ meetings (or by written consent in lieu of such meetings) in accordance with applicable laws and its Articles of Association, including but not limited to the rights to sell or transfer all or any of his equity interests of the Hengtai, and appoint and vote for the directors and Chairman as the authorized representative of the shareholders of the Hengtai. The proxy agreement may be terminated by joint consent of the parties or upon 30-day written notice from FIHK.
Under Article 1.06(c) of the Share Exchange Agreement, if FIHK does not execute and deliver the Exclusive Option Agreement described above to acquire Hengtai on or before September 30, 2010, the Company has the option to rescind the Share Exchange Agreement by delivering notice of rescission to FIHK and the shareholders of FIHK. The parties are to be returned to such position that they were in prior to entering into the Share Exchange Agreement, including, but not limited to, the return to the Company of the share certificates for 100,000,000 shares of common stock of the Company and the $1.0 million convertible promissory note issued by the Company, and the return to the shareholders of FIHK of the share certificates representing the FIHK Share Capital. The $50,000 cash payment by Hengtai as part of the Share Exchange Agreement will not be returned by the Company. The option agreement has not been exercised to date. However, FIHK is going through the approval process with the Chinese government to exercise the option to acquire Hengtai and it intends to do so. Nonetheless, the Company still has a right of rescission under the Share Exchange Agreement until the exercise of that option. There can be no assurances that the Chinese government will approve the exercise by FIHK of the option agreement to acquire Hengtai.
On May 20, 2011, the Board of Directors of the Company authorized the termination of variable interest entities (“VIE”) contracts. In connection with the termination of the VIE Contracts, FIHK exercised its rights under the Exclusive Option Agreement to direct Xi’An Qi Ying Bio-Tech Limited, a company organized and existing under the laws of the People’s Republic of China (“Xi’An Qi Ying”), the indirect wholly owned subsidiary of FIHK, to acquire all of the equity capital of Hengtai. As a result, Hengtai became an indirect wholly owned subsidiary of FIHK.
The Exclusive Option Agreement was exercised in a manner that the Selling Shareholders transferred all of their equity capital in Hengtai to Xi’An Qi Ying. At or about the same time, Spone Limited, a company organized and existing under the laws of the Hong Kong SAR of the People’s Republic of China (“Spone”), acquired all of the capital stock of Xi’An Qi Ying, so that it became a direct wholly owned subsidiary of Spone. FIHK then acquired all of the capital stock of Spone, so that it became a direct wholly owned subsidiary of FIHK.
As a result of the termination of the VIE Agreements, Hengtai became an indirect wholly owned subsidiary of the Company, and a direct wholly owned subsidiary of Xi’An Qi Ying. Previously, the status of Hengtai under the VIE Agreements was a company that was controlled by FIHK pursuant to contractual provisions of the VIE Agreements whose equity capital was owned by the original Hentai Shareholders.
c. Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
d. Use of Estimates
In preparing these financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the year reported. Actual results may differ from these estimates. The Company regularly evaluates estimates and assumptions related to obsolete inventory, useful life and recoverability of long lived assets. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
e. Financial Instruments
The carrying amount reported in the balance sheet for cash, accounts receivable, inventory, other receivables, short-term loans, accounts payable, other payables, accrued expenses, interest payable and long-term loans approximate fair value because of the immediate or short-term maturity of these financial instruments.
f. Fair Value Accounting
The Company adopted the standard “Fair Value Measurements,” codified with ASC 820 and effective January 1, 2008. The provisions of ASC 820 are to be applied prospectively.
ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e. the exit price at the measurement date). Under ASC 820, fair value measurements are not adjusted for transaction cost. ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
Level 1:
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2:
Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Level 3:
Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.
g. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits with banks. Cash deposits with banks are held in financial institutions in China, which have no federally insured deposit protection. Accordingly, the Company has a concentration of credit risk related to these uninsured deposits.
h. Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollected amounts through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for bad debts and a credit to accounts receivable.
i. Inventories
Inventories are stated at the lower of cost, as determined on a standard cost basis, or net present value. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Management also regularly evaluates the composition of the Company’s inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.
j. Property, Plant, and Equipment
Property, plant and equipment are initially recognized recorded at cost. Gains or losses on disposals are reflected as gain or loss in the period of disposal. The cost of improvements that extend the life of plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repairs and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets:
Buildings
10 years
Machinery and equipment
5 years
Transportation equipment
5 years
Office equipment
5 years
k. Intangible Assets
Intangible assets are stated in the balance sheet at cost less accumulated amortization. The costs of the intangible assets are amortized on a straight-line basis over their estimated useful lives. The respective amortization periods for the intangible assets are as follows:
Land use right 30-70 years
l. Impairment of Long-Lived Assets
The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with the standard, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,” codified with ASC 360, which requires the Group to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value.
m. Comprehensive Income
The standard, “Reporting Comprehensive Income,” codified with ASC 220, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income arose from the effect of foreign currency translation adjustments.
n. Revenue Recognition
The Company generates revenues from the sales of plants, such as Taxus mairei and etc. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales are presented net of value added tax (VAT). No return allowance is made as product returns are insignificant based on historical experience.
o. Advertising expense
The advertising costs are expensed as incurred and included in selling expenses.
p. Income Taxes
The Company accounts for income taxes in accordance with the standard, "Accounting for Income Taxes," codified with ASC 740. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future deductibility is uncertain.
The Company is exempt from paying income tax in China as it produces the products which fall into the tax exemption list issued by the Chinese government.
q. Loss Per Share
Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. At December 31, 2014 and 2013, the Company has an outstanding convertible debenture that is convertible into 2,720,000 and 6,800,000 shares of common stock. The potential dilution associated with convertible debt was excluded from the calculation for the years ended December 31, 2014 and 2013 as it will create an anti-dilutive effect. The basic and diluted loss per share for the years ended December 31, 2014 and 2013 as follows:
r. Segment Information
The standard, “Disclosures about Segments of an Enterprise and Related Information,” codified with ASC 280, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. The Company believes that it operates in one business segment (research, development, production, marketing and sales) and in one geographical segment (China), as all of the Company’s current operations are carried out in China.
s. Foreign Currency Translation
The Company’s functional currency is Chinese Renminbi (“RMB”) and its reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.
The consolidated financial statements of the Company are translated into U.S. dollars in accordance with the standard, “Foreign Currency Translation,” codified with ASC 830, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency consolidated financial statements into U.S. dollars are included in determining comprehensive income. At December 31, 2014 and December 31, 2013, the cumulative translation adjustments of $220,392 and $225,423, respectively, were classified as items of accumulated other comprehensive income in the stockholders’ equity section of the balance sheet. For the years ended December 31, 2014 and 2013, other comprehensive income (loss) was ($5,031) and $13,517, respectively.
The exchange rates used to translate amounts in RMB into U.S. dollars for the purposes of preparing the consolidated financial statements were as follows: As of December 31, 2014 and December 31, 2013, the Company used the period-end rates of exchange for assets and liabilities of $1 to RMB6.2067 and $1 to RMB6.054, respectively. For the years ended December 31, 2014 and 2013, the Company used the period’s average rate of exchange to convert revenues, costs, and expenses of $1 to RMB6.1618 and $1 to RMB6.1492, respectively. The Company used historical rates for equity.
t. Related Parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
u. Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
v. Recently Issued Accounting Pronouncements
In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This standard provides additional guidance with respect to the reclassification into income of the cumulative translation adjustment (CTA) recorded in accumulated other comprehensive income associated with a foreign entity of a parent company. The ASU differentiates between transactions occurring within a foreign entity and transactions/events affecting an investment in a foreign entity. For transactions within a foreign
entity, the full CTA associated with the foreign entity would be reclassified into income only when the sale of a subsidiary or group of net assets within the foreign entity represents the substantially complete liquidation of that foreign entity. For transactions/events affecting an investment in a foreign entity (for example, control or ownership of shares in a foreign entity), the full CTA associated with the foreign entity would be reclassified into income only if the parent no longer has a controlling interest in that foreign entity as a result of the transaction/event. In addition, acquisitions of a foreign entity completed in stages will trigger release of the CTA associated with an equity method investment in that entity at the point a controlling interest in the foreign entity is obtained. For the Company, this ASU is effective prospectively beginning January 1, 2014, with early adoption permitted. This ASU would impact the Company’s consolidated results of operations and financial condition only in the instance of an event/transaction as described above.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This standard will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. However, existing provisions that prohibit an entity from reporting a discontinued operation if it has certain continuing cash flows or involvement with the component after disposal are eliminated by this standard. The ASU also expands the disclosures for discontinued operations and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. This ASU is effective prospectively beginning January 1, 2015. Early adoption is, however, permitted. This ASU would impact the Company’s consolidated results of operations and financial condition only in the instance of a disposal as described above.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle the ASU includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) an entity satisfies a performance obligation. The standard also specifies the accounting for some costs to obtain or fulfill a contract with a customer and requires expanded disclosures about revenue recognition. The standard provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. This ASU is effective January 1, 2017. The Company is currently assessing this ASU’s impact on the Company’s consolidated results of operations and financial condition.
The Company believes that there were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.
4. SIGNIFICANT CONCENTRATIONS
Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist of cash and accounts receivable as of December 31, 2014 and 2013. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.
The major part of the Company’s cash at December 31, 2014 and 2013 is maintained at one financial institution in the PRC which does not provide insurance for amounts on deposit. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
Geographic Concentration
For the years ended December 31, 2014 and 2013 the Company’s sales were mainly made to customers located in the PRC. In addition, total accounts receivables as of December 31, 2014 and 2013 also arose from customers located in the PRC.
All net assets of the Company are also located in the PRC.
Customer Concentration
In 2009, the Company changed its sales strategy by switching the focused product in the market. This change resulted in concentration on certain customers for the Company’s sales. The following table sets forth information as to the revenue derived from those customers that accounted for more than 10% of our revenue for the years ended December 31, 2014 and 2013:
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Bad debt expense was $9,276 and $106,219 for the years ended December 31, 2014 and 2013, respectively.
6. INVENTORIES
Inventories consist of the following:
7. PREPAYMENT
As of December 31, 2014 and 2013, the Company made prepayment for rental of land, purchase of vehicle, and advance to suppliers for $86,043 and $66,756, respectively.
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consist of the following:
The depreciation was $16,799 and $14,610 for the years ended December 31, 2014 and 2013, respectively. They are broken down as follows:
9. INTANGIBLE ASSETS
Intangible assets consist of the following:
The amortization for land use right was $240 and $241 for the years ended December 31, 2014 and 2013, respectively. They are broken down as follows:
As of December 31, 2013, land use right of the Company, was pledged as collateral under certain loan agreements (see Note 10)
10. SHORT-TERM LOANS
Short-term loans consist of the following:
December 31, 2014
December 31, 2013
Interest expense for short-term loans was $206,273 and $182,934 for the years ended December 31, 2014 and 2013, respectively.
On November 5, 2014, the Company paid off principle of loan from Agricultural Development Bank of China. The Bank agreed to waive the unpaid interest. $51,594 of interest incurred before 2014 was waived and booked as other income for the year ended December 31, 2014.
Forest land use right secured for short-term loans is use right of 737 MU (491,357.9 square meters) forest land granted from government with carrying value as the followings:
Loans from nonfinancial institutions and individuals are made for the Company’s operational need. The loans are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. The interest rates for loans to nonfinancial institutions and individuals are from 10%~60%.
11. LONG-TERM LOANS
Long-term loans consist of the following:
December 31, 2014
December 31, 2013
Total Interest expense for long-term loans was $1,948 and $1,952 for the years ended December 31, 2014 and 2013, respectively.
The loan is currently past due and the related interest expense has been accrued. The Company is subject to related penalty from the Bureau of Finance of Chenggu County due to default.
12. CONVERTIBLE PROMISSORY NOTE-SHAREHOLDERS
The $1,000,000 convertible promissory note was issued to FIHK’s prior shareholders to execute Shares Exchange Agreement between the Company and FIHK on July 15 2010. The outstanding principal amount of this Note, together with all accrued and unpaid interest due thereunder is convertible into Six Million and Eight Hundred Thousand (6,800,000) shares of the Company’s common stock. The note bears a 10% annual interest rate and its principal and accrued interest are due on June 3, 2015 or on such earlier date that the note is converted.
On September 15, 2012, $400,000 convertible promissory note as well as associated accrued interest was transferred to 8 individuals who were not the Company’s shareholders as of September 30, 2014.
On August 20, 2014, $600,000 convertible promissory note as well as accrued interest of $251,836 was converted into 4,080,000 common shares.
For the years ended December 31, 2014 and 2013, the interest expense for this note was $77,973 and $100,000, respectively.
13. GERNERAL AND ADMINISTRATIVE
For the years ended December 31, 2014 and 2013, the amount of general and administrative expenses mainly composed of the following events:
14. CHINA CONTRIBUTION PLAN
Full time employees of the Company participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations. The Company has no further commitments beyond its monthly contribution. For the years ended December 31, 2014 and 2013, the total provisions for such employee benefits were $32,332 and $30,223, respectively.
Though provisions were made, the Company did not make full monthly contribution to these funds. In the event that any current or former employee files a complaint with the PRC government, the Company may be subject to administrative fines. As the Company believes that these fines would not be material, no accrual for such fines has been made in this regard.
15. STATUTORY RESERVES
Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC ("PRC GAAP") at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss. Therefore, the Company did not make any appropriations to the reserve funds mentioned above.
16. INCOME TAX
The Company accounts for income taxes pursuant to the standard, “Accounting for Income Taxes,” codified with ASC 740 which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
Prior to January 1, 2008, the Company was governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises and local income tax laws (the previous income tax laws and rules). Pursuant to the previous income tax laws and rules, wholly-owned foreign enterprises were subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax).
In March 2007, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which were effective January 1, 2008. The Corporate Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. The previous income tax laws and rules, which stipulated income tax rates for domestic and foreign invested enterprises at different rates, expired upon the effectiveness of the Corporate Income Tax Law.
The Company was exempt from paying income tax in China as it produces the products which fall into the tax exemption list issued by the Chinese government.
The Company has no United States corporate income tax liability as of December 31, 2014 and 2013.
17. RELATED PARTY TRANSACTION
All transactions associated with the following companies or individuals are considered to be related party transactions.
Name
Relationship
Hanzhong Bashan God Grass Biological Development Co., Ltd.
A company controlled by relative of Hengtai's CEO
Yang, Yung Li
*Previous owner of Hengtai
Shau, Jen Heng
*Previous owner and CEO of Hengtai
Qinba Taxus Association
An organization controlled by the Company
Liu, Sheng Li
Chairman, President and Director,
*In September 2010, Xian Qiying Bio-Tech Limited acquired 100% capital of Hengtai from previous owners.
Due to related parties
"Due to related parties" represents loans payable that are unsecured, and have no fixed terms of repayment, and are therefore deem payable on demand. Due to related parties is subject to interest rate from 8%~15%.
Interest expense for related party loans was $14,903 and $11,373 for the years ended December 31, 2014 and 2013, respectively.
18. CONTINGENCIES, RISKS AND UNCERTAINTIES
Country Risk
The Company has significant investments in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in or have a material adverse effect upon the Company’s business and financial condition.
Loss Contingencies
The Company guarantees a loan of Hanhuang group, related party of Shau, Jen Heng. On December 31, 2014 and 2013, balance of the loan, including interest payable is $537,521 and $551,079, respectively. The loan was due on July 1, 2013 and Hanhuang Group has not made any payment. The contingent loss was accrued in 2013 since it is probable the liability has been incurred.
19. OPERATING LEASE COMMITMENT
The Company leases land under operating leases which are for 3~30 years and, expire beginning on April 30, 2011. The rents were $25,059 and $28,714 for the years ended December 31, 2014 and 2013, respectively.
They are broken down as follows:
Future minimum lease payments for operating leases with initial or remaining noncancelable terms in excess of one year are as follows: