Item 1. Business
History
We were incorporated in the State of Delaware on February 26, 2002. In June and July 2002, we acquired approximately 99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation (“VDL”), through an exchange of shares of the Company with shareholders of VDL. On June 13, 2006, we, as the acquirer, executed a Plan of Exchange with Yinfa (acquiree), the shareholders of Yinfa and the Company’s then majority shareholders, pursuant to which we issued 30,000,000 (pre-forward split) new shares of our Class A Common Stock to the Yinfa shareholders in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, in reliance upon Regulation S thereunder, in exchange for all of their shares of registered capital of Yinfa. As a result, Yinfa became our wholly-owned subsidiary. Yinfa was founded on April 24, 2001, with registered capital of US $125,500 (RMB 1,000,000) and total assets of US $1,475,795. Yinfa’s business incorporates a self-owned production base and a network of DAR (as defined below) associates, farmers and research and development affiliates. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree. We disposed of VDL on August 22, 2006 pursuant to the agreement between the Company, VDL and Arie Hinkis, our former president. On May 21, 2007, we changed our name to China Health Resource, Inc. to more accurately reflect our business operations.
Our Business
Since the completion of the Plan of Exchange with Yinfa, our core business has been in pharmaceuticals and the continued operations of Yinfa. Yinfa is a Chinese pharmaceutical company focused on producing, processing, and commercializing Dahurian Angelica Root (“DAR”), a popular traditional Chinese medicine (“TCM”) and developing DAR-related products to pharmaceutical manufacturers and wholesale markets. DAR is a popular herb employed extensively as an ingredient in food, medicine and cosmetics for the treatment of pain, swelling and pustule. Suining City in Sichuan Province of China is the major planting and production area in China for DAR as a result of the unique local climate and soil properties. As mandated by the central government, 100% of DAR for pharmaceutical use in China must be produced with GAP standards in Suining by Yinfa, bearing the “Sichuan Angelica” trademark.
In May 2005, we applied for and obtained Good Agricultural Practice (“GAP”) certification for DAR, in cooperation with Sichuan Yinfa Resource Development Group Co. Ltd., our affiliate (“Yinfa Resource”). The standards which must be met to obtain GAP certification include the study of our environment quality including water and soil samples, seed quality, use of pesticides, and use of fertilizers. These standards were approved by the Chinese State Food and Drug Administration (the “SFDA”). Our GAP farm production base includes approximately 133,334 square meters of experimental planting fields, and 1,333,340 square meters of contracted farm production bases, all of which have passed inspection by the SFDA, on February 26, 2006. The GAP standards are inspected annually. The GAP certificate has been issued in name of our partner, Yinfa Resource. The significance of our exclusive GAP certification for DAR demonstrates the high quality standards of our DAR and DAR-related products.
In 2007, Yinfa achieved a cooperation with the Sichuan Province Suining City DAR Association (“Association”) and received the exclusive rights to the “Sichuan Angelica” certified trademark from the Chinese State Administration of Industry and Commerce through December 13, 2016. As holder of the rights to the trademark, Yinfa is entitled to receive a management fee of 1RMB (or approximately US $0.14) per kilogram of DAR (including packaging fees) from any user of the trademark, of which 60% may be used by Yinfa for further development and investment of its DAR business and the remaining 40% must be paid to the Association for related expenses. In addition, Yinfa is entitled to receive 100% of the revenue stream from the use of the DAR trademark through December 13, 2016 and 95% of the revenue stream thereafter. There are approximately 235 regional certification trademarks in China, including 65 for natural resources, of which over 20 are for natural herb resources. In addition to the DAR Association, in 2010, Yinfa received the exclusive license to use and manage the “Sichuan Angelica” trademark by the General Administration of Quality Supervision, Inspection and Quarantine of People’s Republic of China.
Currently, raw-DAR in both its original root form and processed form (both sliced and powder) is one of Yinfa’s major products, which is sold to pharmaceutical manufacturers (80%) or wholesalers (20%). Our DAR-related product includes Yisheng Capsule, which has been certified by the SFDA, and sold to regional distributors throughout China.
In addition, this year the Company has added Rhizoma Gastrodia (“Gastrodia”) along with various other raw TCM products to the Company’s product offering. Gastrodia, along with various other raw TCM products are sold to pharmaceutical manufacturers (80%) or wholesalers (20%).
We believe our business model will help facilitate the process of growing and commercializing DAR, as well as further research and development of DAR and DAR-related products. We will continue to explore the development and addition of DAR in a range of foods, medicines and cosmetics. In addition, we continue to consider and explore opportunities to expand our current asset base and product offerings to increase our revenues and enhance shareholder value. These opportunities may include, but are not limited to, acquisitions or licensing of additional products through a combination or merger of Yinfa with other Chinese companies in synergistic or complementary industries.
Our Market Opportunity
We believe that TCM presents a highly attractive opportunity for the following reasons.
The trend towards organic materials. Since World War II, traditional agricultural and organic agriculture, has been subject to extensive application of synthetic chemicals, such as synthetic fertilizers, pesticides, herbicides, and mass-production techniques. The advocacy of organic agriculture and the trend for organic materials is recognized globally and is a strong part of the Chinese culture. In addition, TCM represents a vast market in China and a growing market internationally. Different from modern chemical-intensive medication, TCM relies on various natural herbs. Naturalism is the essence of traditional Chinese herbal theory and the functions of herbs have been studied and applied for thousands of years in China.
Substantial markets. As reported in Victoria of Australia State Government’s China Pharmaceutical Industry Report released in November 2010 by ChinaBio LLC, from 2001 to 2008, the Chinese pharmaceutical industry grew at a compounded annual growth rate (CAGR) of 20%. Both Morgan Stanley and WiCON predicted a sales increase of 16% in 2009. However, growth substantially exceeded expectations with sales increasing by 21.19%, along with output value and overall healthcare expenditures increasing by 21.02% and 11%, respectively. In 2010, WiCON predicts China’s drug sales to increase by RMB 20 billion. IMS expects that China will grow at a CAGR of 21.8% from 2008 - 2013, becoming the 3rd largest pharmaceutical market in the world by 2011 and the 2nd largest by 2020, growing to US$220 billion. As reported by China Medical News in 2008, the global trade volume of TCM increased from approximately $140 billion in 2006 to $154 billion in 2007, with the global export volume increasing from approximately $110 billion to $118 billion in the same period. (China Medical News, Vol. 23, p.2 Market Journal, 2008). Additionally, as governments and world bodies, such as the World Health Organization, continue to accept TCM, the number of potential customers continues to grow, as shown by the increasing trade volume and exports. We believe that we are in a position to take advantage of the growing acceptance of TCM through the development of our products.
Acceptance of GAP standards in China. Even though Chinese herbal theory has evolved over thousands of years, China did not play a key role historically in the global herbal medication market. This was due to a lack of standards for quality control of Chinese medicinal herbs. This situation has changed since GAP was adopted by China in 2003. GAP regulates controls at every stage of herb development from the ecological environment, germplasm and breeding, to cultivating, raising, collecting, transporting, packaging and quantitative administration. GAP is an essential step to implementing good manufacturing practice in the TCM industry because quality control begins with the planting of herbs. Our exclusive GAP certification and reputation for quality puts us in a unique position of market leadership.
The raw herb material is formed through different growing and production stages. Different germplasm, ecological environment, culture technology, and harvesting times and processing methods can all influence the output and quality of the herbs. Therefore, without adequate quality control, there can be significant risks when buying herbs from different sources in the market. For example, in the open market, herbs in the same genus but in different species are often confused and mixed together. Only a specific species will have the most active ingredients. Our extensive quality control programs and unique growing conditions yield herbs with the highest level of active ingredients consistently.
Increasing use in combination with Western medicine. Social and demographic factors contribute to the growth in the TCM market and the need for new, natural therapies. TCM is a supplement for chemical-intensive treatments, such as chemotherapy, due to its natural features and functions in strengthening the immune system. In addition to the increased side effects of chemical-intensive treatments, we believe that standard chemical-intensive treatment regimens have several other limitations, including multiple daily dosage requirements, lengthy treatment periods, limited effectiveness and severe side effects, all of which may decrease patient compliance and, ultimately, therapeutic efficacy.
Our Proprietary GAP-Certified DAR Products
A GAP certificate means that the planting, quality and manufacturing of DAR meets a high and certifiable standard. We are confident in the quality of, and therefore the market for, our DAR products. Our process in growing DAR is certified according to GAP. The table below highlights the standards which DAR products must meet to be GAP-certified.
Ingredients Constituting GAP DAR (State Food and Drug Administration, “Traditional Chinese Medicine Production Quality Administration Standard,” No. 32 Order.)
As mentioned above, the ecological environment is another important factor affecting the quality of DAR. The suitable environment for DAR is a warm and moist climate with medium-dry soil. Suining, where Yinfa is based, is located at the edge of the Sichuan basin, southwest China, covered by the subtropical climate belt. The annual mean temperature in this region is approximately 63.3°F, and annual rainfall is approximately 39.09 inches. In addition, the soil in this region contains abundant elements, such as potassium, phosphorus, and others, which is beneficial to the growth of herbs, such as DAR.
Marketing Strategy
We expect to use our proprietary technology in DAR to develop and commercialize more efficient, effective and convenient DAR products. To achieve this objective, our business model incorporates our self-owned production base, DAR associates, farmers and research and development affiliates. We believe the business model will facilitate the growing process, research and development, commercializing DAR, sales and marketing. Currently, our DAR-related products include the Yisheng Capsule, Kimchee-Mate and Fragrant Bag, which have been certified by the SFDA and marketed through regional distributors throughout China. Yinfa continues to explore the application for DAR in a range of food, medicine and cosmetics.
In addition, we have adopted the following product development and commercialization strategies:
Commercialize GAP DAR products. We plan to develop high quality DAR products certified by GAP, which may include DAR seeds to pharmaceutical factories as raw material, or DAR-related products. Such DAR-related products may include medicines used for the treatment of tension and cluster headaches, including migraines, along with other DAR-related products. We believe that our DAR and DAR-related products will be competitive in the marketplace due to our GAP certification and their increased efficacy over competing products.
Develop sales and marketing functions across multiple DAR products. We have a long-range plan to build a pharmaceutical company to take advantage of the local resources of DAR and develop and commercialize DAR and its related products, diversifying our product lines to better compete in the growing TCM market. We believe that Yinfa’s commercialization strategy will allow us to fully enhance the value of its DAR product and retain significant control over its development and commercial activities. In order to facilitate the sales channel for DAR, we are considering several sales and marketing strategies, including strengthening our nation-wide network in China via regional distributors.
Commercialize Gastrodia products. We plan to develop high quality Gastrodia products, which may include Gastrodia to pharmaceutical factories as raw material. Gastrodia is used for the treatment of headaches, including migraines. We believe that our Gastrodia products will be competitive in the marketplace because the region where our Gastrodia production farms are located are well-known for producing high-quality Gastrodia.
We have also entered into agreements with other pharmaceutical companies which purchase DAR as raw material. For example, we have an exclusive agreement with Chengdu Derentang Pharmaceutical Ltd. (“Derentang”), the largest Chinese medicine distributor in the Sichuan province, which owns approximately 600 medical franchise stores throughout China, of which 120 stores are in Sichuan. We are the exclusive supplier of DAR to Derentang in the Sichuan area and our DAR products are sold in all of Derentang’s medical franchise stores. This agreement will expire in 2017.
Seek support from local resources. In order to commercialize TCM products and increase the income for TCM farmers, the local government of Suining City has successfully developed grower networks for TCM to facilitate the process from fields to end users, including planting, production, distribution and sales. Additionally, we intend to take advantage of the vast TCM resources available to aid in the development of our products in Sichuan province, which contains numerous research institutions and universities that focus on research and development of TCM.
Pursue strategic partners. For certain DAR products, we intend to enter into collaborative arrangements with third parties in order for us to:
· fund our research and development activities;
· fund manufacturing by third parties;
· seek and obtain regulatory approvals; and
· successfully commercialize our products.
Pursuant to an exclusive agreement with DongUi Cosmetics Co. (“DongUi”) in 2007, a Korean corporation, for the development of our DAR market in South Korea. DongUi acts as our sole marketing agent in South Korea for DAR. DongUi’s initial order was approximately 300 tons of DAR raw material and, under the terms of the agreement, DongUi is obligated to increase their annual DAR order at a rate of at least 10% per annum. The collaborative agreement will expire in 2017.
Competition
The TCM industry is highly competitive in many areas. Our DAR and DAR-related products will compete with other available products based primarily on:
· efficacy
· safety
· tolerability
· acceptance by doctors
· patient compliance and acceptance
· patent protection
· convenience
· price
· insurance and other reimbursement coverage
· distribution
· marketing
· adaptability to various models of dosing
Competitors include national and regional TCM providers, TCM manufacturers, wholesalers and chain drug stores.
Many of our competitors possess greater financial, managerial and technical resources and have established reputations for successfully developing and marketing TCM, all of which put us at a competitive disadvantage. Our competitors may be able to apply their resources and capabilities to develop and commercialize products that have distinct, enhanced, or perceived advantages over our products. In addition, our competitors may be in a position to devote greater resources to the sales, marketing, and distribution of these products and, therefore, considerably impact our ability to successfully sell, market and distribute our own products.
Manufacturing
We currently rely on several third-party contract manufacturers to produce sufficient quantities of DAR-related products. We believe that our initial focus on the application for GAP certification for DAR will reduce the risk and time involved in the development of manufacturing capabilities because production of DAR-related products involves well-established and well-accepted manufacturing techniques and processes. We intend to continue to rely upon third-party contract manufacturers for production of our DAR-related products. The use of third parties for these activities allows us to minimize our initial capital investment and reduce the risk that would be associated with the establishment of our own commercial manufacturing and distribution operations.
Chinese Government Regulation
We must follow various government regulations and, in particular, the SFDA regulations. Government regulations may have material impact on our operations, increase costs and could prevent or delay our licensing, manufacturing and selling our products. Our research, development, testing, manufacturing and marketing activities are subject to various governmental regulations in China, including health and drug regulations. Government regulations, among other things, cover the inspection of and controls over testing, manufacturing, safety and environmental considerations, efficacy, labeling, advertising, promotion, record keeping and sale and distribution of pharmaceutical products. We will not be able to license, manufacture, sell and distribute the vast majority of our products without proper approvals from government agencies and in particular the SFDA. Each new product must receive proper approvals before licensing, manufacturing, selling, and distributing, and there is no assurance that we will obtain such approvals each time.
In addition, delays or rejections may be encountered based upon additional government regulation from future legislation, administrative action or changes in governmental policy and interpretation during the period of product development and product assessment. Although we have, so far, obtained the marketing rights for selling some of our products in China, we may not continue to receive and maintain regulatory approvals for the sales of these products. Our marketing activities are also subject to government regulations with respect to the prices that we intend to charge or any other marketing and promotional related activities. Government regulations may substantially increase our costs for developing, licensing, manufacturing and selling products, negatively impacting our operation, revenue, income and cash flow.
The manufacture and sale of pharmaceutical products in the PRC is heavily regulated by many state, provincial and local authorities. These regulations significantly increase the difficulty and costs involved in obtaining and maintaining regulatory approvals for marketing new and existing products. Our future growth and profitability depend to a large extent on our ability to obtain regulatory approvals.
Under the SFDA guidelines for licensing of pharmaceutical products, all pharmaceutical manufacturers must obtain and maintain Good Manufacturing Practices (“GMP”) certifications. We are currently in compliance with the SFDA guidelines and maintain GMP certifications. However, should we fail to receive or maintain the GMP certifications under the guidelines in the future, our businesses would be materially and adversely affected.
Moreover, the laws and regulations regarding acquisitions of the pharmaceutical industry in the PRC may also change and may significantly impact our ability to grow through acquisitions.
Employees
As of December 31, 2011, we had 230 full-time employees. There are 30 in the administration department, and 45 in the sales department, of which 34 have college undergraduate degrees. There are 5 university professors with doctorate degrees in research and development. All employees are working in our subsidiary located in China.
Seasonality
Our business is subject to seasonal fluctuations. DAR is planted during the winter months and is suitable for harvest beginning in the summer. The prime season for harvest and resulting sales is typically from July through October, subject to climate conditions. As a result, we typically enter into contracts with farmers during the first quarter of the fiscal year for the purchase of raw DAR. We then process the harvested DAR and sell products to our customers during the second half of the fiscal year. Consequently, our revenues are received primarily in the second half of the fiscal year.
Customers
Our business is not dependent upon one customer. Due to our arrangement with the DAR Association, we are the exclusive distributor of Sichuan DAR. This exclusive arrangement provides significant diversification of our customer base and, as such, keeps us from being dependent on any major revenue-generating customers, the loss of whom would impact our business.
Research and Development
As of January 1, 2011, our research and development has been subsidized by the Chengdu city government, through the Chengdu University of Traditional Chinese Medicine. The medical discoveries and products resulting from this research and development belong to Yinfa Resource, of which Yinfa contractually has the rights to use and profit from.
Environment
As described above, we maintain certification with GAP standards. Consistent with these standards, we maintain an environmentally sound production site and utilize products such as organic fertilizer to ensure that our DAR and DAR-related products maintain a high quality. We generally expend 6% of our annual profits to maintain our production site to ensure compliance with best environmental practices.
Item 1A.
Item 1A. Risk Factors.
The information to be reported under this Item is not required of smaller reporting companies.
Item 1B.
Item 1B. Unresolved Staff Comments.
The information to be reported under this Item is not required of smaller reporting companies.
Item 2.
Item 2. Properties.
There is no private ownership of land in China; all land ownership is held by the government of China, its agencies and collectives. Land use rights are obtained from the government for periods ranging from 50 to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required transfer fee.
Owned Property
Our main office is located at 343 Sui Zhou Zhong Road, Suining, Sichuan Province, People’s Republic of China, which is owned by us and has a total area of 1,775 square feet. No other businesses operate from this office.
We also own a three-story building in Suining, Sichuan Province, China, with a total area of approximately 15,000 square feet, which contains our administration, sales, and research & development departments. We purchased this building from a related party.
Leased Property
We lease our warehouse of approximately 2,600 square feet. Under the new lease for the year ending December 31, 2010, we pay approximately $2,079 per year. We renew our lease on a year-to-year basis, automatically, unless notice is given by one of the parties. This lease was renewed automatically for 2011 and 2012 with no change in terms or rental amount. Under the new lease for the year ending December 31, 2011, we pay approximately $2,079 per year.
In previous years, we leased farm land of approximately 861,543 square feet from a cooperative of farmers. This lease has been terminated as of October 26, 2011, as a result of a cooperative agreement between the Company and the DAR Association, in which the DAR farmers cooperative have agreed to transfer all land and facilities to the DAR Association management and all DAR products from the DAR Association are sold exclusively to the Company In October 2011 we negotiated a new agreement to lease farm land of approximately 90,000,000 square feet from village members of the DAR Association. Under the terms of the lease, we pay approximately $1,760,066 per year. The lease expires August 31, 2030, unless notice is given by one of the parties.
Item 3.
Item 3. Legal Proceedings.
As of the date of this report, we are not a party to any pending legal proceeding and are not aware of any threatened legal proceeding.
Item 4.
Item 4. Submission of Matters to a Vote of the Security Holders.
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A Common Stock has been quoted on the Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol “CHRI” since June 22, 2004. The range of closing high and low bid quotations for each quarter of the past two (2) fiscal years is as follows:
Holders
As of March 29, 2012, there were approximately 4,964 holders of record of our Common Stock and 177,435,953 shares issued and outstanding.
Dividends
We have not declared or paid any cash dividends on either our Common Stock since our formation, and do not presently anticipate paying any cash dividends on our Common Stock in the foreseeable future. We currently intend to retain any future earnings to finance the expansion and development of our business. The future payment of cash dividends on any class of our Common Stock will depend on our earnings, capital requirements and financial position, applicable requirements of the Delaware General Corporation Law, general economic conditions and other factors considered relevant by our board of directors.
There are no contractual restrictions on our ability to declare and pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plan
None.
Item 6.
Item 6. Selected Financial Data.
The information to be reported under this Item is not required of smaller reporting companies.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to Consolidated Financial Statements, are “forward-looking statements”, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are subject to certain events, risks and uncertainties that may be outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to achieve operating efficiencies, our ability to successfully develop, manufacture and deliver DAR and related products on a timely basis and in the prescribed condition, evolving standards in the TCM industry, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to raise sufficient capital in order to effectuate our business plan, our ability to find and retain skilled personnel and key executives, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the SEC.
General
All references in this Form 10-K to the “Company,” “CHRI,” the “Registrant,” “we,” “us” or “our” are to China Health Resource, Inc., a Delaware corporation. These terms also refer, where context requires, to our subsidiary corporation, Suining Shi Yinfa Bai Zhi Chan Ye You Xian Gong Si, a corporation organized and existing under the laws of the Peoples’ Republic of China (“Yinfa”), acquired in August 2006.
We were incorporated in the State of Delaware on February 26, 2002. In June and July 2002, we acquired approximately 99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation (“VDL”), through an exchange of shares of the Company with shareholders of VDL. On June 13, 2006, we, as the acquirer, executed a Plan of Exchange with Yinfa (acquiree), the shareholders of Yinfa and the Company’s then majority shareholders, pursuant to which we issued 30,000,000 (pre-forward split) new shares of our Common Stock to the Yinfa shareholders in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, in reliance upon Regulation S thereunder, in exchange for all of their shares of registered capital of Yinfa. As a result, Yinfa became our wholly-owned subsidiary. Yinfa was founded on April 24, 2001, with registered capital of US $125,500 (RMB 1,000,000) and total assets of US $1,475,795. Yinfa’s business incorporates a self-owned production base and a network of DAR (as defined below) associates, farmers and research and development affiliates. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree. We disposed of VDL on August 22, 2006 pursuant to the agreement between the Company, VDL and Arie Hinkis, our former president. On May 21, 2007, we changed our name to China Health Resource, Inc. to more accurately reflect our business operations.
Our Business
Since the completion of the Plan of Exchange with Yinfa, our core business has been in pharmaceuticals and the continued operations of Yinfa. Yinfa is a Chinese pharmaceutical company focused on developing and commercializing Dahurian Angelica Root (“DAR”), a popular traditional Chinese medicine (“TCM”). Our business plan includes distributing DAR and its related products for the treatment of pain, swelling and pustule. DAR is a popular herb employed extensively as an ingredient in food, medicine and cosmetics. The Suining district in China’s Sichuan Province is the major planting and production area in China for DAR as a result of the local climate and soil properties. Over 70% of DAR for general use and 100% of DAR for pharmaceutical use in China is produced in Suining.
In May 2005, we applied for and obtained Good Agricultural Practice of Medical Plants and Animals (“GAP”) certification for DAR, in cooperation with Sichuan Yinfa Resource Development Group Co. Ltd., our affiliate (“Yinfa Resource”). The standards which must be met to obtain certification include the study of our environment quality, seed quality, minimum pesticides, and fertilizer. These standards were adopted by the Chinese State Food and Drug Administration (the “SFDA”) . Our GAP project involves approximately 133,334 square meters of experimental planting fields, and 1,333,340 square meters of fields run by companies we have hired, all of which passed inspection by the SFDA, on February 26, 2006. The GAP certificate has been issued in name of our partner Yinfa Resource. GAP certification means that our planning, quality, and manufacturing of DAR have met the requisite high and certifiable standard.
In 2007, Yinfa contracted with the Sichuan Province Suining City DAR Association (“Association”) and received the exclusive rights to the “Suining Sichuan Angelic” certified trademark from the Chinese State Administration of Industry and Commerce through December 13, 2016. As holder of the rights to the trademark, Yinfa is entitled to receive a management fee of 1RMB (or approximately US $0.14) per kilogram of DAR (including packaging fees) from any user of the trademark, of which 60% may be used by Yinfa for further development and investment of its DAR business and the remaining 40% must be paid to the Association for related expenses. In addition, Yinfa is entitled to receive 100% of the revenue stream from the use of the DAR trademark through December 13, 2016 and 95% of the revenue stream thereafter. There are approximately 235 regional certification trademarks in China, including 65 for natural resources, of which over 20 are for natural herb resources.
In December 2008, we leased an additional 3,262 acres from Yinfa Resource for commercial uses, as described above under Item 2. “Property.”
We believe our business model will help facilitate the process of growing and commercializing DAR, research and development, sales and marketing. Our current DAR-related product includes the Yisheng Capsule, which has been certified by the SFDA and is being sold into the market via regional distributors throughout China. We will continue to explore the development and addition of DAR in a range of foods, medicines and cosmetics. Also, we will grow and commercialize Gastrodia and other TCM products. In addition, we continue to consider and explore opportunities to expand our current asset base and product offerings to increase our revenues and enhance shareholder value. These opportunities may include, but are not limited to, acquisitions or in-licensing of additional products and the combination or merger of Yinfa with other Chinese companies in synergistic or complementary industries.
Seasonality
Our business is subject to seasonal fluctuations. DAR is planted during the winter months and is suitable for harvest beginning in the summer. The prime season for harvest and resulting sales is typically from July through October, subject to climate conditions. As a result, we typically enter into contracts with farmers during the first quarter of the fiscal year for the purchase of raw DAR. We then process the harvested DAR and sell products to our customers during the second half of the fiscal year. Consequently, our revenues are received primarily in the second half of the fiscal year.
Critical Accounting Policies
Revenue recognition
Our revenue recognition policies are in accordance with Staff Accounting Bulletin No. 104. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.
We recognize revenue when the goods are delivered and title has passed. Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of our products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by us on raw materials and other materials included in the cost of producing their finished product.
Inventory
Inventory includes raw material, package material, low-value consumables and merchandise. We have adopted a perpetual inventory system and inventories are recorded at actual cost. Raw material, package material and merchandise are priced at cost upon acquisition, and with the weighted average method upon issuance and shipment. Low-value consumables are amortized at 50% of the amount upon application and amortized an additional 50% upon obsolescence.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost, less accumulated depreciation and impairment. Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property, plant, and equipment, are expensed as incurred. The cost and related accumulated depreciation, applicable to sold or no longer in service property, plant, and equipment, are eliminated from the accounts and any gain or loss is included in the statement of operations.
Depreciation is calculated to write-off the cost or basis of the property, plant, and equipment over their estimated useful lives for the date on which they become fully operational and after taking into account their estimated residual values (salvage value), using the straight-line method, at the following rates per year:
We recognize an impairment loss on property, plant, and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of the asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets.
Results of Operations for the Years Ended December 31, 2011 and 2010
Highlights
Our total assets at December 31, 2011 were US $14,368,305 compared to December 31, 2010 were US $5,728,151, principally due to an increase in the trade accounts receivable and prepayment for inventory and an increase in inventory level. Total liabilities increased to US $2,680,185 at December 31, 2011 from US $1,908,962 at December 31, 2010, principally due to an increase in the other payable and an increase in notes payable.
Revenues
Our revenues for the year ended December 31, 2011 were US $34,338,974, an increase of 234% over revenues of US $10,282,207 for the year ended December 31, 2010. The increase in sales revenues was due primarily to an increase in the volume sales of DAR and other TCM products received during 2011. Most of the revenue growth was attributable to increased sales in raw DAR and other TCM such as Gastrodia, etc. Our sales arrangements are not subject to any warranties.
Cost of Sales; Gross Profit
Cost of sales includes expenses directly related to manufacturing and selling our products, including costs of raw materials purchased from farmers, product delivery and direct labor costs. Our cost of sales for the year ended December 31, 2011 was US $24,056,723, or approximately 70% of revenues, compared to US $5,767,564, or approximately 56% of revenues, for the year ended December 31, 2010. The increase in costs of sales is principally due to increased costs for our product, increased purchasing cost of DAR and other TCM, and improvements to the DAR-related products’ packaging. The increased cost of raw DAR is attributable to increased fertilizer and labor costs in the farming process over last year.
Gross profit for the year ended December 31, 2011 increased by approximately 128% to US $10,282,251 from US $4,514,644 for the year ended December 31, 2010. Gross profit margin for the period ended December 31, 2011 was 30% compared to 44% for the year ended December 31, 2010.
Operating Expenses
Operating expenses for the year ended December 31, 2011 increased by 15% to US $883,778 from US $769,755 for the year ended December 31, 2010. The largest component of operating expenses is attributable to selling, general and administrative (“SG&A”) expense consisting primarily of administrative expenses. SG&A increased overall to US $808,148 for 2011 compared to US $751,532 for 2010. The increase is primarily due to an increase in wages, welfares and consulting fees in 2011.
Other Income/Expense
We recorded other expenses of US $497 attributable to the refund of rental of store. Interest expense for 2011 was US $75,630 compared to US $18,222 in 2010.
Impact of Inflation
We believe that inflation has had a negligible effect on operations during 2011. The inflation rate in the Sichuan Province has been lower than the average national inflation rate for China. However, the rate of inflation in China increased in 2010 and a drought in 2010 also affected all agricultural prices. We believe that we can offset any inflationary increases in the cost of sales by continuing to increase our sales of DAR and other TCM in response to continued demand and by improving operating efficiencies.
Taxes
According to the Corporate Income Tax Law of China, companies without any tax abatement programs are charged at a 25% income tax rate. As of December 31, 2011, we accrued income taxes of US $2,426,516. As of December 31, 2010, we accrued income taxes of US $1,038,578.
Net Income
We had net income for the year ended December 31, 2011 of US $6,971,460, or US $0.04 per share of Common Stock, compared to a net income for the year ended December 31, 2010 of US$2,707,286. Comprehensive income for the year ended December 31, 2011 was US $7,397,037, a 167% increase from a comprehensive income of US $2,785,880 for the year ended December 31, 2010. The deterioration in our operating results for 2011 is attributable principally to huge increased sales, relatively stable SG&A expenses, and a foreign currency translation gain between the RMB and U.S. dollar of US $425,576.
We are working to strengthen our internal management processes and to grow our sales revenues by expanding our product line, while maintaining an efficient cost structure. However, there can be no assurance that we will achieve or maintain continuing profitability, or that revenue growth will continue in the future.
Liquidity and Capital Resources
Cash flows used in operating activities were US $92,251 during the year ended December 31, 2011, compared to cash flows of US $125,636 used in operating activities during the year ended December 31, 2010. Increase in cash flows from operations in 2010 were due primarily to an reduction of notes payable for stock based compensation and increase of accounts receivable, prepaid expenses, decrease of accounts payable, and notes payable.
Cash flows used in investing activities was US $104,992 for the year ended December 31, 2011 from US $xxx for the year ended December 31, 2010. Cash flows used in investing activities during 2011 was due to the new equity investment and purchases of property, plant and equipment.
Cash flows provided by financing activities for the year ended December 31, 2011 was US $247,624 compare to US $206,756 for the year ended December 31, 2010. The increase in cash flows from financing activities was due to the increase in borrowing and loans.
In November, 2011, the Company subsidiary corporation, Suining Shi Yinfa Bai Zhi Chan Ye You Xian Gong Si (“Yinfa”), entered into a short-term loan agreement with Suining City Commercial Bank (“Bank Loan”). The Bank Loan provides the amount of for 1,600,000 RMB, ($253,932USD) for a term from November 3, 2011 to November 3, 2012 at a fixed annual interest rate of 6,875%, with interest is payable monthly. As part of that transaction, the Company entered into a bank loan security agreement (“Bank Collateral Agreement”) which provides for the collateralization of its office building located at ground floor, the 2 nd floor and the 3 rd floor of the Estate Management Building of Yinhejiayuan (address: No. 188 Xishan Road, Suining. A second short-term loan under the same collateral agreements was executed in December of 2011 3,000,000 RMB ($476,122USD) bearing 6.475% interest with a term of December 12, 2011 to December 12, 2012.
On December 27, 2010, the Company entered into an unsecured promissory note agreement (“Jiayin Wang Note”) with Mr. Jiayin Wang, the company’s Chairman, President, and Chief Executive Officer. The Jiayin Wang Note provides Yinfa with RMB 3,000,000 (approximately US $476,123) from Mr. Wang, payable after one year on December 26, 2011. And due to the arrangement between both parties, this promissory note was automatically extended for one year and is now payable on December 25, 2012.
Overall, we have funded our cash needs from inception through December 31, 2011 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.
We had cash of US $241,755 on hand as of December 31, 2011, an increase of US $151,450 from the beginning of the year and attributable in substantial to an increase in cash inflow. Currently, we have enough cash to fund our operations for about nine (3) months. This is based on current cash flows from financing activities and projected revenues. If the projected revenues fall short of needed capital we may not be able to sustain our capital needs. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately US $2,000,000 to sustain operations through year 2012 and each year thereafter.
On a long-term basis, our liquidity is dependent on continuation and expansion of our operations, receipt of revenues, and additional infusions of capital and debt financing. Our current capital and revenues are insufficient to fund such expansion. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.
Demand for our products and services will be dependent on, among other things, market acceptance of our products, the Chinese TCM in general, and general economic conditions, which are cyclical in nature. A major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recessionary periods.
Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We manage the processing and DAR distribution business to retail consumers and wholesale buyers. We plan to strengthen our position in these markets and to expand our operations through aggressively marketing our products and our concept.
Off-Balance Sheet Arrangements
As of December 31, 2011, we did not have any off-balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information to be reported under this Item is not required of smaller reporting companies.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and notes thereto are included at the end of Part IV of this annual report, beginning at page.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our fourth fiscal quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. The COSO framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.
Based on the assessment performed, management has concluded that the Company’s internal control over financial reporting, as of December 31, 2011, is effective and provides reasonable assurance regarding the reliability of its financial reporting and the preparation of its financial statements in accordance with generally accepted accounting principles.
There has been no change in our internal controls over financial reporting during our fourth fiscal quarter ended December 31, 2011, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Because of its inherent limitations, our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The continued effectiveness of our internal control over financial reporting is subject to risks, including that the control may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent 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.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Our directors and executive officers and their respective ages as of March 31, 2010, are as follows:
The following describes the business experience of each of our executive officers and directors, including other directorships held in reporting companies, if any:
Jiayin Wang. Mr. Jiayin Wang has served as our President and as director of the Corporation since October 20, 2008. He founded YinFa Resource, an affiliate of the Corporation, in 2001 and has continuously served as its president and chairman. Mr. Wang has been the People’s Senator of Suining City, Sichuan Province, the PRC since 1995 and the Chairman of Sichuan Province DAR Association since 2001. Mr. Wang was named Excellent Entrepreneur of Sichuan Province in 2004, National Entrepreneur Star Award in 2001 and 2004, Entrepreneur Star of Sichuan Province in 2001 and 2004 and Top Ten Entrepreneur Star of Suining City in 2005, among many other awards. On August 20, 2010, Mr. Wang was appointed Chief Executive Officer of the Corporation.
Weihai Liu. Mr. Weihai Liu has served as our Chief Financial Officer of the Corporation since September 29, 2010. From 2005 to most recently, Mr. Liu was Head of Finance in Guangdong Dongsong Sanxiong Electrical Appliance Co., Ltd where he was in charge of all aspects in budget management, accounting, financial management, taxation planning, assets and investment risk management. He also created systems of cost accounting, cost control, cost analysis, internal audit and also the financial management of all branch companies. From 1996 to 1998, he served as CFO in Guangzhou Longfa Group, which had four subsidiaries located in Beijing and Guangdong Province. Mr. Liu is a Certified Public Accountant in China.
Bing Wang. Mr. Bing Wang has served as our Independent Director of the Corporation since 2006. Mr. Wang has extensive experience in business and investment management. Mr. Wang has a strong professional relationship with the Sichuan provincial government and the Suining municipal government.
Ping Gao. Mr. Ping Gao has served as our Independent Director of the Corporation since 2010. In September 2004, he was President of the Suining City Leprosy Hospital. In August 2000, he was Vice President of Suining City Public Hospital. In August 1982, he was Lead Botanist at the Yajiang County Forestry Bureau for 15 years. Mr. Ping graduated from Xiamen University with an undergraduate engineering degree in 1964.
Term of Office
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Committees of the Board of Directors
Our board of directors intends to establish an audit committee, a compensation committee and a nominating and corporate governance committee. Our board may establish other committees from time to time to facilitate the management of our company; however, we have not yet established any such committees.
Audit committee. Our audit committee will oversee a broad range of issues surrounding our accounting and financial reporting processes and audits of our financial statements, including by (1) assisting our board in monitoring the integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditor's qualifications and independence and the performance of our internal audit function and independent auditors, (2) appointing, compensating, retaining and overseeing the work of any independent registered public accounting firm engaged for the purpose of performing any audits, reviews or attest services, and (3) preparing the audit committee report that may be included in our annual proxy statement or annual report on Form 10-K. We will have at least three directors on our audit committee, each of whom will be independent under the requirements of the NASDAQ Capital Market, the Sarbanes-Oxley Act and the rules and regulations of the SEC. We have not yet formed our audit committee.
Compensation committee. Our compensation committee will review and recommend our policies relating to compensation and benefits for our executive officers and other significant employees, including reviewing and approving corporate goals and objectives relevant to compensation of our Chief Executive Officer and other executive officers, evaluating the performance of our executive officers relative to goals and objectives, determining compensation for these executive officers based on these evaluations and overseeing the administration of our incentive compensation plans. The compensation committee will also prepare the compensation committee report that may be included in a subsequent annual report on Form 10-K. We will have at least two directors on our compensation committee, each of whom will be independent under the requirements of the NASDAQ Capital Market. We do not yet have a compensation committee.
Nominating and corporate governance committee. Our nominating and corporate governance committee will (1) identify, review and recommend nominees for election as directors, (2) advise our board of directors with respect to board composition, procedures and committees, (3) recommend directors to serve on each committee, (4) oversee the evaluation of our board of directors and our management, and (5) develop, review and recommend corporate governance guidelines and policies. We will have at least two directors on our nominating and corporate governance committee, each of whom will be independent under the requirements of the NASDAQ Capital Market. We do not yet have a nominating and corporate governance committee.
Code of Ethics
The Company has adopted a Code of Ethics for its directors, executive officers and employees.
Shareholder Communications
The Corporation provides a process for stockholders to send communications to the Board. Information regarding stockholder communications with the Board can be found on the Corporation’s Web site at http://www.chinahealthresource.com.
Compliance with Section 16(a) of the Act
Section 16(a) of the Exchange Act requires the Corporation’s officers and Directors, and persons who beneficially own more than ten percent of a registered class of the Corporation’s equity securities (collectively, the “Reporting Persons”) to file reports of ownership and changes in ownership with the SEC. Such Reporting Persons are required by the SEC rules to furnish the Corporation with copies of all Section 16 forms they file. Based solely on its review of the copies of such filings, the Corporation believes that during the fiscal year ended December 31, 2011, the following filings were late: Mr. Jiayin Wang will file one late report covering a total of one late transaction.
Item 11.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
Philosophy and objectives
For the period December 31, 2010 through December 31, 2011, all compensation decisions were made by our board of directors. The primary objective of our compensation policies and programs with respect to executive compensation is to serve our shareholders by attracting, retaining and motivating talented and qualified individuals to manage and lead our business. We will focus on providing a competitive compensation package that provides significant short and long-term incentives for the achievement of measurable corporate and individual performance objectives. We intend to establish a compensation committee and future decisions regarding executive compensation will be the responsibility of that committee.
Elements of executive compensation
Base salary. We will provide our senior management with a level of base salary in the form of cash compensation appropriate to their roles and responsibilities. Base salaries for our executives are established based on the executive’s qualifications, experience, scope of responsibilities, future potential and past performance and cash available to pay executive compensation. Base salaries will be reviewed annually and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. We will consider four factors in determining the base salaries of our named executive officers. These four factors are, in order of significance, (1) creating an incentive to achieve corporate goals, (2) individual performance, (3) cash available to pay compensation and (4) the total compensation each executive officer previously received while employed with us, if any.
Incentive cash bonuses. Our practice will be to seek to award incentive cash bonuses to our executive officers based upon their individual performance, as well as our overall business and strategic objectives. In determining the amount of cash bonuses paid to our named executive officers, we will consider the same four factors as in determining their base salaries. See “Summary Compensation Table” below.
Compliance with Sections 162(m) and 409A of the Internal Revenue Code
Section 162(m) of the Internal Revenue Code limits the deductibility of compensation in excess of $1 million paid to certain executive officers, unless such compensation qualifies as performance-based compensation. Among other things, in order to be deemed performance-based compensation for Section 162(m) purposes, the compensation must be based on the achievement of pre-established, objective performance criteria and must be pursuant to a plan that has been approved by our shareholders. At least for the next several years, we expect the cash compensation paid to our sole executive officer and other executive officers, if any, to be below the threshold for non-deductibility provided in Section 162(m), and our equity incentive plans will afford our compensation committee with the flexibility to make a variety of types of equity awards to our executive officers, the deductibility of which will not be limited under Section 162(m). However, our compensation committee, which we expect to form, will fashion our future equity compensation awards. However, we do not now know whether any such awards will satisfy the requirements for deductibility under Section 162(m).
We also currently intend for our executive compensation program to satisfy the requirements of Internal Revenue Code Section 409A, which addresses the tax treatment of certain nonqualified deferred compensation benefits.
Executive Compensation
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our principal executive officer as of the end of fiscal 2011 and the two most highly compensated executive officers as of the end of fiscal 2011. We refer to these executive officers as our “Named Executive Officers.”
Summary Compensation Table
(1) Mr. Jiayin Wang’s employment with the Corporation as President commenced in October 20, 2008, and his employment as Principal Executive Officer commenced August 20, 2010
(2) Mr. Weihai Liu employment with the Corporation as Principal Financial Officer commenced in September 29, 2010.
(3) Mr. Jiang Chen’s employment with the Corporation terminated in August, 2010.
(4) Ms. Yi Zhou’s employment with the Corporation terminated in September, 2010.
Summary of Executive Compensation
Jiayin Wang. Mr. Jiayin Wang served as President and director of the Board under a 3 year term beginning in 2008. Mr. Wang was to receive a an annual salary of RMB 200,000, or approximately U.S.$29,851 for the fiscal year 2010, based upon the closing foreign exchange rate published by Bloomberg on March 25, 2010 of U.S.$1.00 = RMB 6.5615 (the “RMB Rate”). Mr. Wang elected to forego his salary for 2010 and 2011. On August 20, 2010, Mr. Wang accepted the Corporation’s offer regarding his employment with the Corporation as its Chief Executive Officer. His position as Chief Executive Officer offers no salary, although he was granted a signing bonus of U.S. $50,000 payable in shares of the Company's Common Stock based on a price per share of $0.00782, the average of the closing prices of the Common Stock as quoted on the OTC Bulletin Board for the five (5) trading days ending on such date. Mr. Wang received 6,393,862 shares of Common Stock as a signing bonus which shares are not registered under the U.S. Securities Act of 1933, as amended (the "1933 Act"). On August 20, 2010, Mr. Wang also received a past performance bonus in the amount of U.S. $88,000 payable in shares of Common Stock (shares not registered under the 1933 Act) based on a price per share of $0.00782, the average of the closing prices of the Common Stock as quoted on the OTC Bulletin Board for the five (5) trading days ending on such date. Mr. Wang received 11,253,197 shares of Common Stock that are not registered under the 1933 Act under this bonus. Mr. Wang was also offered stock options to purchase up to six million (6,000,000) shares of common stock at a price of $.02 per share vesting over 18 months in equal monthly installments pursuant to a Stock Option Agreement with the Company which is granted pursuant to the company’s 2009 Omnibus Incentive Plan and have a grant date of August 20, 2010.
Weihai Liu. On September 29, 2010, Mr. Liu accepted the Corporation’s offer regarding his employment with the Corporation as its Chief Financial Officer. Mr. Liu was to receive an annual salary of RMB 80,000, (approximately U.S. $11,941). Mr. Liu elected to forego this salary for 2010 and 2011.
Jiang Chen. On August 20, 2010, Mr. Chen resigned as Chief Executive Officer. There is no severance or termination agreement.
Yi Zhou. On September 29, 2010, Ms. Zhou resigned as Chief Financial Officer. There is no severance or termination agreement.
Other than the agreements mentioned herein, the Corporation has no employment agreements with any of our named executive officers, nor do we have any compensatory plans or arrangements with respect to any named executive officers that results or will result from the resignation, retirement or any other termination of such executive officer's employment with the Corporation or from a change-in-control of the Corporation or a change in the named executive officer's responsibilities following a change-in-control wherein the amount involved, including all periodic payments or installments, exceeds $100,000.
Outstanding Equity Awards at Fiscal Year-End
We had no outstanding options, warrants or rights to acquire shares of our common stock under plans either approved, or not approved, by our stockholders. Board members are eligible to participate in the 2009 Omnibus Incentive Plan after the Effective Date.
Compensation of Directors
The table below summarizes the compensation of all persons who served as a Director of the Corporation in fiscal 2009:
DIRECTOR COMPENSATION
For the year ended December 31, 2011, no cash compensation was paid, and no equity grants were made, to the Corporation’s directors. Mr. Jiayin Wang's compensation as an executive officer of the Corporation is disclosed under "Executive Compensation - Summary Compensation Table." Usually, the Board reviews the level of compensation it receives for its service every year. The Board may take action at any time to amend the amount or type of compensation it receives.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 31, 2011, for:
• each person or group known to us to beneficially own 5% or more of our common stock;
• each of our directors and director nominees;
• each of our named executive officers; and
• all of our executive officers and directors as a group.
Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Unless otherwise indicated below, each entity or person listed below maintains an address of 343 Sui Zhou Zhong Road, Suining City, Sichuan Province, P.R. China.
The number of shares beneficially owned by each shareholder is determined under rules promulgated by the SEC. There are no shares of common stock as to which any person has the right to acquire beneficial ownership within 60 days after March 31, 2012 through the exercise of any stock option, warrant or other right. The percentage ownership is based on 177,435,953 shares of common stock outstanding as of March 29, 2012.
(1) This percentage is a fraction with its denominator as 177,435,953 shares of the Corporation’s Common Stock.
(2) Lei Guo (the “Trustee”) is the trustee, on behalf of Sichuan Yinfa Resource Development Co., Ltd., a PRC company (“Yinfa Resource”). This amount includes the 43,000,000 shares of common stock issued and held by Mr. Lei Guo, as Trustee, on behalf of Sichuan Yinfa Resource Development Co., Ltd. Yinfa Resource, as Trustor, retains sole dispositive and voting control over the subject shares. Mr. Jiayin Wang is the controlling stockholder and founder of YinFa Resource and, consequently, is the indirect beneficial owner of the shares of common stock held by the Trustee
Equity Compensation Plan Information
(1) Pursuant to the Employment Agreement with Mr. Jiayin Wang, options to acquire stock at $.02 per share vested in 2010 for 3 months at 33,333.33 shares per month. Mr. Wang has not exercised these vested options as of March 29, 2012.
Policies and Procedures for Related Party Transactions
We intend to adopt a written policy that requires any transaction, arrangement or relationship in which we will be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of the company's total assets at year end for the last two completed fiscal years, and in which any of our directors, executive officers or shareholders beneficially owning at least 5% of any class of our voting securities, or any of their immediate family members or any entity in which any of the foregoing persons is employed or is a general partner or principal had or will have a direct or indirect material interest, to be submitted to our audit committee for review, consideration and approval. In the event that a proposed transaction with a related person involves an amount that is less than the threshold amount stated above, the transaction will be subject to the review and approval of our Chief Executive Officer (or our Chief Financial Officer in the event our Chief Executive Officer, an immediate family member of the Chief Executive Officer, or an entity in which our Chief Executive Officer or a member of his immediate family is employed or is a general partner or principal is a party to such transaction). If the transaction is approved by our Chief Executive Officer or Chief Financial Officer, such officer will report the material terms of the transaction to our audit committee at its next meeting. The policy will provide for periodic monitoring of pending and ongoing transactions. In approving or rejecting the proposed transaction, our audit committee will consider the relevant facts and circumstances available to it, including, (1) the impact on a director’s independence if the related person is a director or his or her family member or related entity, (2) the material terms of the proposed transaction, including the proposed aggregate value of the transaction, (3) the benefits to us, (4) the availability of other sources for comparable services or products (if applicable), and (5) an assessment of whether the proposed transaction is on terms that are comparable to the terms available to an unrelated third party or to our employees generally. Our audit committee will approve only those transactions that the committee determines to be, in light of known circumstances, in, or not inconsistent with, our best interests and the best interest of our shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
There have been no transactions or proposed transactions in which we or any of our subsidiaries was or is to be a party in which the amount involved exceeds the lesser of $120,000 or 1% of the average total assets of the Company at year-end for the last two completed fiscal years and in which any of our directors, executive officers or beneficial holders of more than 5% of the outstanding shares of Common Stock, or any member of the immediate family of any of the foregoing persons, had, has or will have any direct or indirect material interest, except as follows:
Mr. Jianyin Wang is the controlling shareholder of Sichuan Yinfa Resource and the President and Director of the Company. Mr. Wang loaned the Company RMB 3,000,000 (approximately $ US $451,467) on December 27, 2010 through an unsecured promissory note payable on December 26, 2011 which note has been extended to December 26, 2012 as set forth in Section 7 hereof.
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table sets forth fees billed to us for professional services rendered by Lake & Associates CPA’s LLC, our independent auditor, for the audit of our financial statements for the years ended December 31, 2009 and December 31, 2008.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a) The following financial statements of the Company are included following the signature page, commencing on page:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - as of December 31, 2011 and
Consolidated Statement of Operations - For years ended December 31, 2011 and 2010
Consolidated Statement of Cash Flows - For years ended December 31, 2011 and 2010
Consolidated Statement of Equity (Deficit) - For years ended December 31, 2011 and 2010
Notes to Audited Financial Statements
(b) Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHINA HEALTH RESOURCE, INC.
By: /s/ Wang, Jiayin Date: April 12, 2012
Wang, Jiayin
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated
Signature
Title Date
/s/ Wang, Jiayin
Chief Executive Officer, President, and Director April 12, 2012
Wang, Jiayin
(Principal Executive Officer)
/s/ Liu, Weihai
Chief Financial Officer and Director April 12, 2012
Liu, Weihai
(Principal Financial Officer)
/s/ Ping Gao
Director April 12, 2012
Ping, Gao
/s/ Wang, Bing
Director April 12, 2012
Wang, Bing
CHINA HEALTH RESOURCE, INC.
EXHIBIT INDEX
TO
2010 ANNUAL REPORT ON FORM 10-K
Exhibit
Number Description
3.1 Certificate of Incorporation, as adopted on February 26, 2002 and as amended on May 14, 2003, October 13, 2006, April 23, 2007 and May 8, 2007.(1)
3.2 Amended and Restated By-laws, as adopted on February 17, 2009.(1)
7.1 Bank Loan documents between Suining Shi Yinfa Bai Zhi Chan Ye You Xiam Gog Si and Suining City Commercial National Bank dated December 27, 2010 and related Bank Collateral Agreement. (2)
7.2 Unsecured promissory note agreement with Mr. Jiayin Wang, Company’s Chairman, President and Chief Executive Officer dated December 27, 2010.(2)
10.1 License Agreement Relating to the Exclusive Right to Use “Suining Sichuan Angelica” Certified Trademark, by and between Sichuan Province Suining City DAR Association and Yinfa, dated March 16, 2004.(3)
10.2 Import-Export Agent Executive Agreement, by and between Suining Yinfa DAR Industrial Co. and Korean DongUi Cosmetics Co., dated March 5, 2007. (4)
10.3 Sichuan DAR Purchase and Processing Contract, by and between Suining Yinfa DAR Industrial Co. and Chengdu Derentang Pharmacy Company Medicine Branch, dated April 18, 2007.(5)
10.4 Debt Transfer and Assumption Agreement by and among Yinfa, Suining Yinfa Building Construction and Development Co., Ltd., Chengdu Lianqiang Investment Co. and Yinfa Resource, dated September 20, 2008.(6)
14.1 Code of Ethics.(7)
21.1 Subsidiaries of Registrant. (8)
31.1 Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.(8)
31.2 Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.(8)
32.1 Section 1350 Certifications of Chief Executive Officer.(8)
32.2 Section 1350 Certifications of Chief Financial Officer.(8)
(1) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
(2) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 27, 2010.
(3) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
(4) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2007.
(5) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2007.
(6) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.
(7) Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.
(8) Filed herewith.
CHINA HEALTH RESOURCE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010
Consolidated Statement of Cash Flows for the years ended December 31, 2011 and 2010
Consolidated Statement of Equity (Deficit) for the years ended December 31, 2011 and 2010
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of China Health Resource Inc.
We have audited the accompanying consolidated balance sheets of China Health Resource Inc. and Subsidiaries (a Delaware corporation) as of December 31, 2011 and 2010, and the related statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2011. 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 audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Health Resource Inc. and Subsidiaries. (a Delaware corporation). as of December 31, 2011 and 2010 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
/s/ Lake & Associates, CPA’s LLC
Lake & Associates, CPA’s LLC
Schaumburg, Illinois
April 24, 2012
1905 Wright Boulevard
Schaumburg, IL 60193
Phone: 847-524-0800
Fax: 847-524-1655
China Health Resource, Inc. and Subsidiaries
Audited Consolidated Balance Sheets
As of December 31, 2011 and December 31,
The accompanying notes are an integral part of these financial statements.
China Health Resource, Inc. and Subsidiaries
Audited Consolidated Statement of Operations
For the Year Ended December 31, 2011 and
The accompanying notes are an integral part of these financial statements.
China Health Resource, Inc. and Subsidiaries
Audited Consolidated Statement of Cash Flows
For the Year Ended December 31, 2011 and
The accompanying notes are an integral part of these financial statements.
China Health Resource, Inc. and Subsidiaries
Audited Consolidated Statement of Equity (Deficit)
For the Year Ended December 31, 2011 and
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
1.ORGANIZATION AND BUSINESS BACKGROUND
China Health Resource Inc., f/k/a Voice Diary Inc. (the “Company” or “CHRI”) was incorporated in the State of Delaware on February 26, 2002. In June and July 2002, the Company acquired approximately 99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation (“VDL”), through the exchange of shares of the Company with former shareholders of the Subsidiary. VDL was disposed of on August 22, 2006 pursuant to the agreement between the Company, VDL and Arie Hinkis, the former president of the Company. On May 21, 2007, the Company changed its name to “China Health Resource Inc.”.
On June 13, 2006, CHRI (“acquiree”) executed a Plan of Exchange with Sui Ning Shi Yin Fa Bai Zhi Chan Ye You Xian Gong Si, a corporation organized and existing under the laws of the Peoples’ Republic of China (“Yin Fa” or ‘acquirer”), the shareholders of Yin Fa (the “Yin Fa Shareholders”) and the Majority Shareholder of the CHRI, pursuant to which six simultaneous transactions were consummated at closing, as follows: (1) settlement of the liabilities of CHRI, (2) a deposit of 7,977,023 (pre-split) new shares of Class A Common Stock and 2,000 new shares of Class B Common Stock via hand delivery by Mr. Hinkis in exchange for a payment of $264,000 in cash , (3) a deposit of 1,305,000 (pre-split) shares of Class A Common Stock via hand delivery by Mr. Hinkis in exchange for a payment of $136,000 in cash, (4) the issuance of 30,000,000 (post-split) investment shares of Class A Common Stock of the Registrant to the Yin Fa shareholders pursuant to Regulation S under the Securities Act of 1933, as amended, in exchange for all of the shares of registered capital of Yin Fa, (5) vending out the CHRI subsidiary after closing, and (6) retirement of 744 shares of Class B Common Stock owned Mr. Hinkis at closing against payment of $74,000 and settlement of all unpaid salaries and severance pay to Mr. Hinkis in the amount of $100,000, of which both amounts was taken from the payment made to CHRI for the issued shares.
The Plan of Exchange was consummated on August 22, 2006; as a result, Yin Fa became a wholly-owned subsidiary of CHRI. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree.
Accordingly, the consolidated financial statements include the following:
(1) The balance sheet consists of the net assets of the acquirer at historical cost and the net assets of the acquiree at historical cost.
(2) The statement of operations includes the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the merger.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
Yin Fa was founded on April 24, 2001 in China. The main business plan includes the manufacturing, processing, and sales of Dahurian Angelica Root (DAR) and its related products. DAR is one of the major herbs used in Chinese traditional medicines. In 2004 and 2005, the company and Sichuan Yingfa Resource Development Co., Ltd., (Sichuan) began the process of applying for Good Agricultural Practice of Medical Plants and Animals (GAP) for DAR. The project passed the inspection of the State Food and Drug Administration (SFDA), and the SFDA made the final, official announcement on February 26, 2006.
A GAP certificate means that the planning, quality, and manufacturing of DAR meet a high and certifiable standard. The GAP certificate is in the name of Sichuan and the company manages the processing and sales of DAR. CHRI and its wholly owned subsidiary Yin Fa are hereafter referred to as (the “Company”).
In 2011, Suining Yinfa DAR Industrial Co, Ltd. had invested 95,223 USD (600,000 RMB) to establish an agricultural planting business entity called Suining Yinfa DAR Planting Co, Ltd. This Yinfa DAR Planting Company is in process of obtaining business approval and certificate from different government departments, and no business activity has occurred.
CHRI and its wholly owned subsidiaries, Suining Yinfa DAR Industrial Co, Ltd. and Suining Yinfa DAR Planting Co, Ltd, are hereafter referred to as (the “Company”).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries.
All significant inter-company balances and transactions within the Company and subsidiary have been eliminated upon consolidation.
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents.
Management’s Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time the product is delivered and title has passed to the customer. Cash discounts are recognized as an expense in the period in which it actually occurs. Sales allowances are recorded as a reduction of revenue in the period in which they occur. Revenue is presented net of returns.
Comprehensive Income (Loss)
The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 130 (FASB ASC 220), “Reporting Comprehensive Income,” which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements.
Foreign Currencies
Assets and liabilities denominated in respective functional currencies are translated into United States Dollars at the exchange rate as of the balance sheet date. The share capital and retained earnings are translated at exchange rates prevailing at the time of the transactions. Revenues, costs, and expenses denominated in respective functional currencies are translated into United States Dollars at the weighted average exchange rate for the period. The effects of foreign currencies translation adjustments are included as a separate component of accumulated other comprehensive income.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
Company’s Future Operations Are Dependent on Foreign Operations
The Company’s future operations and earnings will depend on the results of the Company’s operations in China. There can be no assurance that the Company will be able to successfully conduct such operations, and a failure to do so would have a material adverse effect on the Company’s financial position, results of operations, and cash flows.
Also, the success of the Company’s operations will be subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general and regional economic conditions, prices for the Company’s products, competition, and changes in regulation. Since the Company is dependent on international operations, specifically those in China, the Company will be subject to various additional political, economic, and other uncertainties. Among other risks, the Company’s operations will be subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining the collectability of the account, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowance which is 90 days. Bad debt provision is made if fail to collect the balance after the allowance period. And the uncollectable amount last more than one year, it will automatically account for bad debt.
Inventory
Inventory includes raw material, package material, low-value consumables and merchandise. The Company adopts perpetual inventory system and inventories are recorded at actual cost. Raw material, package material and merchandise are priced at cost upon acquisition, and with the weighted average method upon issuance and shipment. Low-value consumables are amortized at 50% of the amount upon application and amortized an additional 50% upon obsolescence.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost, less accumulated depreciation and impairment. Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property, plant, and equipment, are expensed as incurred. The cost and related accumulated depreciation, applicable to sold or no longer in service property, plant, and equipment, are eliminated from the accounts and any gain or loss is included in the statement of operations.
Depreciation is calculated to write-off the cost or basis of the property, plant, and equipment over their estimated useful lives for the date on which they become fully operational and after taking into account their estimated residual values (salvage value), using the straight-line method, at the following rates per year:
Equipment Straight-line for 5 to 20 years with a 3% salvage value
Building Straight-line for 20 years with a 5% salvage value
The Company recognizes an impairment loss on property, plant, and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of the asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
Income Taxes
Income taxes are provided in accordance with Statement of Financial Accounting Standards (SFAS) No. 109 (FASB ASC 740), “Accounting for Income Taxes.” A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that, and some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Common Share
Basic earnings (loss) per share are computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable, accounts payable, and loans payable approximate fair value based on the short-term maturity of these instruments. The carrying value of the Company’s long-term debt approximated its fair value based on the current market conditions for similar debt instruments.
Impairment of Long-Lived Assets
The Company evaluated the recoverability of its property and equipment, and other assets in accordance with Statements of Financial Accounting Standards (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed of,” which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate.
Stock-Based Compensation
Employee stock-based compensation is accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and the FASB interpretations thereof. Pursuant to those accounting pronouncements, compensation is recorded for share options granted to employees at the date of grant based on the difference between the exercise price of the options and the market value of the underlying shares at that date. Due to the terms of the grants, the fair value of the compensation in accordance with SFAS No. 123R, "Accounting for Stock-Based Compensation" approximates the values computed in accordance with APB No. 25. Stock-based compensation to non-employees is accounted for in accordance with SFAS No. 123R. Under both accounting pronouncements, as part of the necessary computations, management is required to estimate the fair value of the underlying shares. Fair value has generally been determined by management, as the price at which the Company's shares were issued at the most recent prior placement of the Company's Common Stock. Since the Company was approved for listing on the Over the Counter Bulletin Board - fair value is determined according to stock market price. The timing of the grant and measurement of stock-based awards will not have a material effect on the Company's results of operations and financial position. Since no stock-based awards exist.
Subsequent Events
SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Company’s financial statements. The Company evaluated for subsequent events through the issuance date of the Company’s financial statements.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
Recently Issued Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.
In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially expand its financial statement note disclosures.
In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company is reviewing ASU 2011-05 to ascertain its impact on the Company’s financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.
In September 2011, the FASB issued ASU 2011-08 which provides an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test for goodwill impairment. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.
In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, we do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the year ended December 31, 2011 and 2010 are summarized as follows:
Cash paid during the year ended December 31, 2011 and 2010 for interest and income taxes:
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
4. ACCOUNTS RECEIVABLE
The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. Accounts receivable as of December 31, 2011 and December 31, 2010 consist of the following:
All accounts receivables are aging within 30 days. No provision of bad debt was accrued as of year end.
5. INVENTORIES
Inventories as of December 31, 2011 and December 31, 2010 consist of the following:
As of December 31, 2011 and December 31, 2010, 95% of the total inventory is accounted by DAR and 5% for other TCM herbs. And no provision for obsolete inventories was recorded by the Company. The large amount of raw material are due to more TCM business started, larger volume demand of DAR, and higher purchasing than previous year. The company has largely increased its inventory in current year to take advantage of the increasing market demand. Low value consumables are the materials for the process of finished goods. Due to the different outsourcing process adopted for the same period in 2011, the processing party is having all the materials and processing cost in its total fees. The finished goods, Bailing Capsules, had been changed to process by order due to the upgrade of the sales strategy.
6. DEFERRED INVENTORY COSTS
The deferred inventory costs represented prepayment to suppliers for future inventory delivery. As of December 31, 2011 and 2010, the balances of deferred inventory costs are $3,079,930 and 2,453,892 respectively. These costs will be transferred to inventories at the time of inventory delivery.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
7. PREPAYMENT FOR LAND USAGE
In November 2011, the company entered land usage agreement with 12 local village unions for future raw material DAR production. Prepayment for land usage as of December 31, 2011 and December 31, 2010 consist of the following:
8. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net as of December 31, 2011 and December 31, 2010 consists of the following:
9.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 2011 and December 31, 2010 consist of the following:
Accrued liabilities include accrued wage payable, accrued welfare payable, other taxes payable, and receipt in advance.
10.NOTES PAYABLE - CURRENT
As of December 31, 2011 and December 31, 2010, notes payable consist of the following:
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
11.OTHER PAYABLE
As of December 31, 2011 and December 31, 2010, notes payable consist of the following:
12.CONVERTIBLE DEBT
On July 1, 2010, the company issued a convertible note in amount of $80,000 for the consulting services rendered by a consultant. Pursuant to the agreement, the note bears 1% annual interest and convertible at $0.008 per share after September 1, 2010 per all outstanding principal amount and accrued interest and fees. In January, 2011, partial amount ($56,000) of convertible note was converted into7, 000,000 shares. The remaining balance of convertible debt was $24,000, which was converted into 3,000,000 shares on May 4, 2011. There was no balance of convertible debt as of December 31, 2011.
13.INCOME TAXES
The Company conducts all its operating business through its subsidiaries in China. The subsidiaries are governed by the income tax laws of the PRC and do not have any deferred tax assets or deferred tax liabilities under the income tax laws of the PRC because there are no temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. The Company by itself does not have any business operating activities in the United States and is therefore not subject to United States income tax.
The Company’s subsidiaries are governed by the Income Tax Law of the People’s Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the previous laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate previously applicable to both DEs and FIEs.
Prior to 2008, under the Chinese Income Tax Laws, FIEs generally were subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income as reported in their statutory financial statements after appropriate tax adjustments unless the enterprise was located in specially designated regions for which more favorable effective tax rates apply. Beginning January 1, 2008, China has unified the corporate income tax rate on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%.
The Company generated substantially its net income from its PRC operation and has recorded income tax provision for the year ended December 31, 2011 and 2010.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
The components of (loss) income before income taxes separating U.S. and PRC operations are as follows:
United States of America
The Company is registered in the State of Delaware and is subject to United States of America tax law.
For the year ended December 31, 2011, the U.S. operation had $289,753 of net operating losses available for federal tax purposes, which are available to offset future taxable income. The net operating loss carry forwards begin to expire in 2030. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carry forwards as the management believes it is more likely than not that these assets will not be realized in the future.
The PRC
The reconciliation of income tax rate to the effective income tax rate based on income before income taxes stated in the consolidated statement of operations for the year ended December 31, 2011 and September 30, 2010 is as follows:
The following table reconciles the U.S. statutory rate to the Company’s effective tax rate:
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
The Company applies FASB ASC 740-10, “Accounting for Income Taxes”, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes. Because the Company has no operations within the United States, there is no provision for US income taxes and there are no deferred tax amounts as of the year ended December 31, 2011 and December 31, 2010.
The charge for taxation is based on the results for the year as adjusted for items that are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred taxes are accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred taxes are charged or credited in the income statement, except when they relate to items credited or charged directly to equity, in which case the deferred taxes are also recorded in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption of FIN 48 had no affect on the Company’s financial
14.MAJOR CUSTOMER/VENDOR AND CONCENTRATION
(a) Sale breakdown
For the year ended December 31, 2011, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from customers located in the PRC.
For the year ended December 31, 2011, major customers and vendors with their revenues are presented as follows:
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
For the year ended December 31, 2010, major customers with their revenues are presented as follows:
All customers are all non-related parties, mostly located in Sichuan province or southern China. The sole business relationship with Yinfa is to purchase raw DAR, other TCM, or Yishen Capsule. For the year ended December 31, 2011, 45% of the total revenue is contributed by DAR, 40% of the total revenue is contributed by other TCM, and 15% of total revenue is contributed byYishen Capsule.
(b) Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.
15. Stockholders’ equity
Effective August 20, 2010, the Company’s Board of Directors appointed Mr. Jiayin Wang Chief Executive Officer of the Company. The Board of Directors has approved the following compensation for Mr. Wang in his capacity as the Company’s Chief Executive Officer:
(a) no annual base salary will be paid until such time as the Company achieves $1,000,000 in annual net income, whereupon Mr. Wang will receive an annual base salary of based upon the Company’s market capitalization and fair market rate of a public company chief executive officer;
(b) A signing bonus totaling $50,000, payable on August 20, 2010 in shares of the Company's Class A common stock (the "Common Stock") based on a price per share of $0.00782, the average of the closing prices of the Common Stock as quoted on the OTC Bulletin Board for the five (5) trading days ending on such date. Mr. Wang received 6,393,862 shares of Common Stock as a signing bonus which shares are not registered under the U.S. Securities Act of 1933, as amended (the "1933 Act");
(c) A grant of stock options to purchase 6,000,000 shares of Common Stock at an exercise price of $0.02 per share, vesting over 18 months in equal monthly installments. The stock options were granted pursuant to the Company’s 2009 Omnibus Incentive Plan and have a grant date of August 20, 2010; and
(d) Performance bonuses payable in shares of the Common Stock (which shares will not registered under the 1933 Act) based upon milestones and terms as follows:
i. If the Company achieves $500,000 in net income for the three-month period ended September 30, 2010 as shown in the Company's financial statements contained in the Quarterly Report on Form 10-Q for such period, Mr. Wang will receive a bonus of $40,000 payable in shares of Common Stock valued at $0.02 per share.
ii. If the Company achieves $1,000,000 in net income for the six-month period ended December 31, 2010, Mr. Wang will receive a bonus of $100,000 payable in shares of Common Stock valued at $0.05 per share.
China Health Resource, Inc. and Subsidiaries
Notes to Audited Consolidated Financial Statements
For the Twelve Months Ended December 31, 2011 and 2010
(Expressed in USD)
iii. If the Company achieves $1,500,000 in net income for the nine-month period ended March 31, 2011, Mr. Wang will receive a bonus of $160,000 payable in shares of Common Stock valued at $0.08 per share.
Mr. Wang will also be eligible to receive periodic stock grants and participate in the Company's incentive plans and benefit plans for which he is eligible.
In recognition of Mr. Wang's contributions to the Company's achievement of various corporate and financial milestones, effective August 20, 2010, the Board of Directors approved a bonus for Mr. Wang in the amount of $88,000 payable in shares of Common Stock based on a price per share of $0.00782, the average of the closing prices of the Common Stock as quoted on the OTC Bulletin Board for the five (5) trading days ending on such date. Mr. Wang received 11,253,197 shares of Common Stock that are not registered under the 1933 Act under this bonus.
For the year ended December 31, 2010, total 17,647,059 shares of Common Stock in amount of $138,000 was issued and recognized as share-based compensation. $7,958 was recognized as option expenses for vested option as of December 31, 2010. The company has also accrued $140,000 expenses relating to CEO’s performance bonus as of December 31, 2010.
On July 15, 2011, the Company issued 6,000,000 shares of common stock to Jiayin Wang to settle his performance bonuses payable accrued pursuant to his employment offer letter signed August 20, 2010 (see above (d) i, ii, and iii). Jiayin Wang has achieved the milestones pursuant to the employment offer letter and therefore was awarded accordingly.
On October 30, 2011, the Company entered an investment banking service agreement with a third party and issued 1,500,000 shares of comment stock for the service rendered. These common stocks were valued and recorded at market price ($0.02 per share) at the issuance.
For the year ended December 31, 2011, the company recognized $31,831 as option expenses for vested option (see above (c) ) .
For the year ended December 31, 2011, the company recognized $30,063 imputed interest expense from non-interest bearing shareholder’s loan (see note 10) as additional paid-in capital from shareholder.
16. COMMITMENT AND CONTINGENCIES
On November 3, 2011, the Company’s wholly owned subsidiary Suining Yinfa DAR Industrial Co, Ltd. received 7 separated purchasing letters of intent totaling of over 7.5 million USD with the time period from November 4, 2011 to November 3, 2012
The Company rented land (note 7) and warehouse space under a non-cancelable operating lease agreement. Based on the current rental lease agreement, the future five years minimum rental payments required as of December 31 are as follows:
Year ended December 31 Lease payment
1,760,066
1,765,346
1,770,642
1,775,954
1,781,282
Total 8,853,290
For the years ended December 31, 2011 and 2010, rental expense was $5,443 and $2,422.
17. RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications were limited to the Consolidated Balance Sheet presentation and did not impact the Consolidated Statement of Operations and Comprehensive Income, Consolidated Statement of Equity, and Consolidated Statement of Cash Flows.
For the year ended December 31, 2010, $2,453,892 was reclassified to “Deferred inventory cost” out of “Prepayment” to conform to current year’s presentation.