Item 1.
|
Financial Statements
|
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(UNAUDITED)
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
20,778,742
|
|
$
|
29,783,152
|
|
Short
term investment
|
|
8,997,526
|
|
|
-
|
|
Interest receivable
|
|
224,938
|
|
|
-
|
|
Accounts
receivable, net
|
|
962,055
|
|
|
1,145,131
|
|
Inventory
|
|
452,029
|
|
|
414,784
|
|
Other
receivables, net
|
|
35,472
|
|
|
35,484
|
|
Advance to suppliers
|
|
153,816
|
|
|
154,430
|
|
Current
assets held for discontinued operation
|
|
14,291
|
|
|
14,339
|
|
Total current assets
|
|
31,618,869
|
|
|
31,547,320
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
3,772,529
|
|
|
3,866,765
|
|
Intangible assets, net
|
|
4,065,541
|
|
|
4,191,059
|
|
Construction in progress
|
|
676,307
|
|
|
670,051
|
|
Other assets held for
discontinued operation
|
|
3,589
|
|
|
3,602
|
|
Total assets
|
$
|
40,136,835
|
|
$
|
40,278,797
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Short-term loans
|
$
|
1,499,588
|
|
$
|
1,504,687
|
|
Accounts payable and
accrued expenses
|
|
465,996
|
|
|
487,172
|
|
Other
payables
|
|
32,563
|
|
|
37,036
|
|
Advance from customers
|
|
190,025
|
|
|
164,122
|
|
Related
party debts
|
|
2,790,852
|
|
|
2,713,406
|
|
Wages payable
|
|
198,528
|
|
|
173,004
|
|
Taxes
payable
|
|
322,904
|
|
|
467,674
|
|
Current liabilities held
for discontinued operation
|
|
480,384
|
|
|
482,013
|
|
Total current
liabilities
|
|
5,980,840
|
|
|
6,029,114
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Common stock, ($0.0001 par
value, 300,000,000 shares
authorized,
65,839,737 and 65,839,737 issued
and outstanding as of September 30,
2016 and
June 30, 2016, respectively)
|
|
6,554
|
|
|
6,554
|
|
Additional paid-in capital
|
|
521,987
|
|
|
521,987
|
|
Accumulated other
comprehensive income
|
|
666,335
|
|
|
784,045
|
|
Statutory
reserve
|
|
38,679
|
|
|
38,679
|
|
Retained earnings
|
|
32,922,267
|
|
|
32,898,244
|
|
Total stockholders'
equity
|
|
34,155,822
|
|
|
34,249,509
|
|
Non-controlling interests
|
|
173
|
|
|
174
|
|
Total equity
|
|
34,155,995
|
|
|
34,249,683
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
$
|
40,136,835
|
|
$
|
40,278,797
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
|
(UNAUDITED)
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
1,180,168
|
|
$
|
1,956,068
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
755,285
|
|
|
1,418,964
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
424,883
|
|
|
537,104
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
430,264
|
|
|
348,879
|
|
Depreciation and amortization expenses
|
|
148,875
|
|
|
181,961
|
|
Total
operating expenses
|
|
579,139
|
|
|
530,840
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
(154,256
|
)
|
|
6,264
|
|
|
|
|
|
|
|
|
OTHER INCOME/(EXPENSES)
|
|
|
|
|
|
|
Interest
income
|
|
19,909
|
|
|
18,107
|
|
Interest expense
|
|
(21,686
|
)
|
|
(31,624
|
)
|
Investment income
|
|
225,093
|
|
|
-
|
|
Other income, net
|
|
8,993
|
|
|
9,519
|
|
Total
other income (expenses), net
|
|
232,309
|
|
|
(3,998
|
)
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME
TAXES
|
|
78,053
|
|
|
2,266
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
54,030
|
|
|
32,406
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FROM
CONTINUING
OPERATIONS
|
|
24,023
|
|
|
(30,140
|
)
|
|
|
|
|
|
|
|
NET LOSS FROM DISCONTINUED
OPERATIONS
|
|
-
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
24,023
|
|
|
(30,336
|
)
|
Less: net loss attributable to
non-controlling interests
|
|
-
|
|
|
(2
|
)
|
NET INCOME (LOSS)
ATTRIBUTABLE TO CHINA
HEALTH INDUSTRIES HOLDINGS
|
|
24,023
|
|
|
(30,334
|
)
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FROM
CONTINUING
OPERATIONS
|
|
24,023
|
|
|
(30,140
|
)
|
|
|
|
|
|
|
|
NET LOSS FROM DISCONTINUED
OPERATIONS
|
|
-
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE
LOSS
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
(117,711
|
)
|
|
(899,478
|
)
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
(93,688
|
)
|
|
(929,814
|
)
|
Less: comprehensive loss
attributable to non-controlling interests
|
|
(1
|
)
|
|
(7
|
)
|
COMPREHENSIVE LOSS ATTRIBUTABLE TO
CHINA
HEALTH INDUSTRIES HOLDINGS
|
$
|
(93,687
|
)
|
$
|
(929,807
|
)
|
Net income (loss)
attributable to China Health Industries Holdings' shareholders per share
are:
|
|
|
|
|
|
|
Basic
& diluted income (loss) per share
|
$
|
0.0004
|
|
$
|
(0.0005
|
)
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
Basic
& diluted weighted average shares outstanding
|
|
65,616,175
|
|
|
65,539,737
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND
SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
|
|
For the Three Months
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
Net income (loss)
available to China Health Industries Holdings
|
$
|
24,023
|
|
$
|
(30,334
|
)
|
Net loss
from discontinued operations
|
|
-
|
|
|
(196
|
)
|
Net income (loss) from
continuing operations
|
|
24,023
|
|
|
(30,138
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
|
192,577
|
|
|
233,185
|
|
Provision for doubtful accounts
|
|
(1,243
|
)
|
|
2,765
|
|
Non-controlling interests
|
|
-
|
|
|
(2
|
)
|
Short term investment income
|
|
(225,093
|
)
|
|
-
|
|
Changes in operating
assets and liabilities
|
|
|
|
|
|
|
Accounts receivable
|
|
178,748
|
|
|
48,951
|
|
Other receivables
|
|
(111
|
)
|
|
(856
|
)
|
Inventory
|
|
(38,678
|
)
|
|
(41,387
|
)
|
Advance to suppliers and prepaid expenses
|
|
90
|
|
|
(22,577
|
)
|
Accounts payables and accrued expenses
|
|
(19,544
|
)
|
|
61,205
|
|
Advance from customers and other payables
|
|
22,130
|
|
|
10,974
|
|
Wages payable
|
|
26,128
|
|
|
(85,462
|
)
|
Taxes payable
|
|
(143,283
|
)
|
|
33,632
|
|
Net cash
provided by operating activities from continuing operations
|
|
15,744
|
|
|
210,290
|
|
Net cash provided by
operating activities from discontinued operations
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
15,744
|
|
|
210,290
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities
|
|
|
|
|
|
|
Expenditure in short term investment
|
|
(9,003,737
|
)
|
|
-
|
|
Notes receivable
|
|
-
|
|
|
571
|
|
Purchases of property, plant and equipment
|
|
-
|
|
|
(454
|
)
|
Expenditure in construction in progress
|
|
(6,718
|
)
|
|
(28,299
|
)
|
Net cash used in
investing activities from continuing operations
|
|
(9,010,455
|
)
|
|
(28,182
|
)
|
Net cash
used in investing activities from discontinued operations
|
|
-
|
|
|
-
|
|
Net cash used in
investing activities
|
|
(9,010,455
|
)
|
|
(28,182
|
)
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
Proceeds from related party debts
|
|
85,085
|
|
|
49,181
|
|
Net cash provided by
financing activities from continuing operations
|
|
85,085
|
|
|
49,181
|
|
Net cash
provided by financing activities from discontinued operations
|
|
-
|
|
|
-
|
|
Net cash provided by
financing activities
|
|
85,085
|
|
|
49,181
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
and cash equivalents from continuing
operations
|
|
(94,784
|
)
|
|
(518,767
|
)
|
Effect of exchange rate
changes on cash and cash equivalents from discontinued
operations
|
|
(29
|
)
|
|
(226
|
)
|
|
|
|
|
|
|
|
Net decrease in cash and
cash equivalents from continuing operations
|
|
(9,004,410
|
)
|
|
(287,478
|
)
|
Net decrease in cash and cash equivalents
from discontinued operations
|
|
(29
|
)
|
|
(226
|
)
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning
balance from continuing operations
|
|
29,783,152
|
|
|
21,113,832
|
|
Cash and cash equivalents,
beginning balance from discontinued operations
|
|
8,578
|
|
|
9,195
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
ending balance from continuing operations
|
$
|
20,778,742
|
|
$
|
20,826,354
|
|
Cash and cash equivalents, ending balance
from discontinued operations
|
$
|
8,549
|
|
$
|
8,969
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
Cash paid
for income taxes
|
$
|
201,142
|
|
$
|
336,058
|
|
Cash paid for interest
expense
|
$
|
21,686
|
|
$
|
31,624
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
Loan from
related party for the construction of a facility
|
$
|
457,690
|
|
$
|
483,876
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - ORGANIZATION AND BUSINESS BACKGROUND
China Health Industries Holdings, Inc. (China Health US) was
incorporated in the State of Arizona on July 11, 1996 and was the successor of
the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, it
entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse
merger) with Edmonds 6, Inc. (Edmonds 6), a Delaware corporation, and changed
its name to Universal Fog, Inc. Pursuant to this agreement, Universal Fog, Inc.
(which has been in continuous operation since 1996) became a wholly-owned
subsidiary of Edmonds 6.
China Health Industries Holdings Limited (China Health HK)
was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as
a limited liability company. China Health HK was formed for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as
defined by Financial Accounting Standards Board (FASB) ACS Topic 915
(Development Stage Entities).
Harbin Humankind Biology Technology Co., Limited (Humankind)
was incorporated in Harbin City, Heilongjiang Province, the Peoples Republic of
China (the PRC) on December 14, 2003, as a limited liability company under the
Company Law of the PRC. Humankind is engaged in the manufacturing and sale of
health products.
On August 20, 2007, the sole shareholder of China Health HK
entered into a share purchase agreement (the Share Purchase Agreement) with
the owners of Humankind. Pursuant to the Share Purchase Agreement, China Health
HK purchased 100% of the ownership in Humankind for a cash consideration of
$60,408 (the Share Purchase). Subsequent to the completion of the Share
Purchase, Humankind became a wholly-owned subsidiary of China Health HK. The
Share Purchase was accounted for as a reverse merger since the owner of
Humankind owned a majority of the outstanding shares of China Health HKs common
stock immediately following the execution of the Share Purchase Agreement, it
was deemed to be the acquirer in the reverse merger. Consequently, the assets
and liabilities and the historical operations that have been reflected in the
financial statements for periods prior to the Share Purchase are those of
Humankind and have been recorded at the historical cost basis. After completion
of the Share Purchase, China Health HKs consolidated financial statements
include the assets and liabilities of both China Health HK and Humankind, the
historical operations of Humankind, and the operations of China Health HK and
its subsidiaries from the closing date of the Share Purchase.
7
On October 14, 2008, Humankind set up a 99% owned subsidiary,
Harbin Huimeijia Medicine Company (Huimeijia), with its primary business being
manufacturing and distributing medicine. Mr. Xin Sun, the Companys majority
owner, owns 1% of Huimeijia. Huimeijia is consolidated in the consolidated
financial statements of China Health HK.
On December 31, 2008, China Health HK entered into a reverse
merger with Universal Fog, Inc., a U.S. publicly traded shell company (the
Transaction). China Health HK is the acquirer in the Transaction, and the
Transaction has been treated as a recapitalization of China Health US. After the
Transaction and a 20:1 reverse stock split, Mr. Xin Sun owned 61,203,088 shares
of common stock, representing 98.3% of the 62,234,737 total outstanding shares
of common stock of China Health US. On April 7, 2009, Mr. Sun transferred
28,200,000 shares of common stock to 296 individuals, leaving him with
33,003,088 shares of common stock of China Health US, or approximately 53.03% of
the total outstanding shares of common stock. Universal Fog, Inc. changed its
name to China Health Industries Holdings, Inc. on February 19, 2009.
On November 22, 2013, Humankind completed the acquisition of
Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (HLJ Huimeijia) for a total
purchase price of $16,339,869 (RMB100,000,000). HLJ Huimeijia was founded on
October 30, 2003, and is engaged in the manufacturing and distribution of
tincture, ointments, rubber paste (including hormones), topical solution,
suppositories, liniment (including traditional Chinese medicine extractions),
enemas and oral liquids. HLJ Huimeijias predecessor is Heilongjiang Xue Du
Pharmaceutical Co., Ltd., which has established its brand name in the market
through its supply of high quality medical products. HLJ Huimeijia is
categorized as a high and new technology enterprise by the Science Technology
Department in Heilongjiang Province. HLJ Huimeijia has 21 products which have
been approved by, and have received approval numbers issued by, the China State
Food and Drug Administration (the CFDA). In addition, HLJ Huimeijia is the
holder of one patent for utility models, five patents for external design and
three trademarks in China, including the Chinese brand name of Xue Du which
has an established reputation among customers in northeastern China.
8
On December 24, 2014, Humankind entered into a Stock Transfer
Agreement (the Original Agreement) with Xiuzheng Pharmaceutical Group Co.,
Ltd. a company incorporated under the laws of the Peoples Republic of China and
located in Jilin province (Xiuzheng Pharmacy or the Buyer), Mr. Xin Sun, the
CEO of the Company, and Huimeijia, a 99% owned subsidiary of Humankind and 1%
owned by Mr. Xin Sun, pursuant to which, Humankind and Mr. Xin Sun (the Equity
Holders), shall sell their respective equity interests in Huimeijia, to
Xiuzheng Pharmacy. On February 9, 2015, the four parties entered into a
supplementary agreement (the Supplementary Agreement) to modify the terms of
the Original Agreement, pursuant to which, the Equity Holders and Huimeijia
(collectively the Assets Transferors) shall only sell the 19 drug approval
numbers (the Assets) to Xiuzheng Pharmacy. The Equity Holders will retain the
equity interests in Huimeijia, but will have the equity interests pledged to Xiuzheng Pharmacy until the Assets are transferred. On
October 12, 2016, the four parties agreed to rescind the Supplementary Agreement
and entered into a new supplementary agreement, pursuant to which, the four
parties agreed to execute the transfer of the equity interests based on the
Original Agreement, and according to which the Equity Holders shall sell their
respective equity interests in Huimeijia to Xiuzheng Pharmacy for a total cash
consideration of RMB 8,000,000 (approximately $1,306,186, the Purchase Price)
to the Equity Holders. As of the date of this report, 40% of the Purchase Price
was paid and the Company has completed the changes in business registration and
Xiuzheng Pharmacy obtained the newly issued document evidencing its ownership on
Huimeijia, which is the business license issued by the local State
Administration of Industry and Commerce in Harbin (Harbin SAIC) to Huimeijia
where the ownership of Huimeijia has now been recorded as held by Xiuzheng
Pharmacy with Harbin SAIC, and the legal representative (a person that is
authorized to take most of the corporate actions on behalf of a company under
the corporate laws in China) of Huimeijia has now become a person designated by
the Buyer. The transfer of all the drugs to the Buyer and the remainder of the
Purchase Price are pending to be processed (See Note 3). As of September 30,
2016, the results of operations of Huimeijia business are reflected in the
Companys unaudited condensed consolidated financial statements as discontinued
operations.
China Health US, China Health HK, Humankind, Huimeijia and HLJ
Huimeijia are collectively referred herein to as the Company.
As of September 30, 2016, the Companys corporate structure was
as follows:
9
10
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This summary of significant accounting policies of the Company
is presented to assist in understanding the Companys financial statements. The
financial statements and notes are representations of the Companys management,
which is responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles in the United
States ("US GAAP") and have been consistently applied in the preparation of the
unaudited condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial
statements have been prepared by Company without audit pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (SEC). Certain
information and disclosures normally included in financial statements prepared
in accordance with US GAAP have been condensed or omitted as allowed by such
rules and regulations, and management believes that the disclosures are adequate
to make the information presented not misleading. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended June 30, 2016. These unaudited condensed
consolidated financial statements include all adjustments, which in the opinion
of management are necessary to a fair presentation of financial position and
results of operations. All such adjustments are of a normal and recurring
nature. The results of operations for the three months ended September 30, 2016
may not be indicative of results that may be expected for the year ended June
30, 2017.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial
statements include China Health US and its four subsidiary companies, including
China Health HK, Humankind, Huimeijia, and HLJ Huimeijia. All significant
intercompany balances and transactions have been eliminated in consolidation and
combination.
On November 22, 2013, China Health US, through its wholly owned
subsidiary Humankind, completed the acquisition of HLJ Huimeijia. HLJ Huimeijia
and Humankind are under the common control of Mr. Xin Sun, the CEO of the
Company before and after the date of transfer. Humankinds accounting policy
adopted the guidance in ASC 805-50-05-5 for the transfer of net assets between
entities under common control to apply a method similar to the
pooling-of-interests method. Under this method, the financial statements of
Humankind shall report results of operations for the period in which the
transfer occurs as though the transfer of net assets had occurred at the
beginning of the period. Results of operations for that period will thus
comprise both those of the previously separate entities combined from the
beginning of the period to the date the transfer is completed and those of the
combined operations from that date to the end of the period.
Similarly, Humankind shall present the statements of financial position and
other financial information as of the beginning of the period as though the
assets and liabilities had been transferred at that date. Financial statements
and financial information of Humankind presented for prior years also shall be
retrospectively adjusted to furnish comparative information.
11
Reclassifications
Certain prior year balances were reclassified to conform to the
current period's presentation with consideration of reflecting Huimeijia
business as discontinued operations. None of these reclassifications had an
impact on reported financial position or cash flows for any of the periods
presented.
Segment Reporting
FASB ASC Topic 280, Segment Reporting, established standards
for reporting information about operating segments on a basis consistent with
the Company's internal organizational structure as well as information about
geographical areas, business segments and major customers in financial
statements for details on the Company's business segments. The Company has three
reportable operating segments: Humankind, HLJ Huimeijia and others. The segments
are grouped based on the types of products provided.
Fair Value of Financial Instruments
The provisions of accounting guidance, FASB ASC Topic 820 that
applies to the Company requires all entities to disclose the fair value of
financial instruments, both assets and liabilities recognized and not recognized
on the balance sheets, for which it is practicable to estimate fair value, and
defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures,
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements.
Various inputs are considered when determining the fair value
of the Companys debt. The inputs or methodologies used for valuing securities
are not necessarily an indication of the risk associated with investing in these
securities. These inputs are summarized in the three broad levels listed below.
12
Level 1 observable market inputs that
are unadjusted quoted prices for identical assets or liabilities in active
markets.
Level 2 other significant observable
inputs (including quoted prices for similar securities, interest rates, credit
risk, etc.).
Level 3 significant unobservable
inputs (including the Companys own assumptions in determining the fair value of
investments).
The carrying value of financial assets and liabilities recorded
at fair value is measured on a recurring or nonrecurring basis. Financial assets
and liabilities measured on a non-recurring basis are those that are adjusted to
fair value when a significant event occurs. The Company had no financial assets
or liabilities carried and measured on a nonrecurring basis during the reporting
periods. Financial assets and liabilities measured on a recurring basis are
those that are adjusted to fair value each time a financial statement is
prepared. The Company had no financial assets or liabilities carried and
measured on a recurring basis during the reporting periods.
The availability of inputs observable in the market varies from
instrument to instrument and depends on a variety of factors including the type
of instrument, whether the instrument is actively traded, and other
characteristics particular to the transaction. For many financial instruments,
pricing inputs are readily observable in the market, the valuation methodology
used is widely accepted by market participants, and the valuation does not
require significant management discretion. For other financial instruments,
pricing inputs are less observable in the market and may require management
judgment.
Translation of Foreign Currencies
Humankind, Huimeijia and HLJ Huimeijia maintain their books and
accounting records in PRC currency Renminbi (RMB), which has been determined
as the functional currency. Transactions denominated in currencies other than
RMB are translated into RMB at the exchange rates prevailing on the date of the
transactions, as quoted by the Federal Reserve Board. Foreign currency exchange
gains and losses resulting from these transactions are included in operations.
Humankind, Huimeijia and HLJ Huimeijias financial statements
are translated into the reporting currency, the United States Dollar (USD).
Assets and liabilities of the above entities are translated at the prevailing
exchange rate at each reporting period end date. Contributed capital accounts
are translated using the historical rate of exchange when capital is injected.
Income and expense accounts are translated at the average rate of exchange
during the reporting period. Translation adjustments resulting from the
translation of these financial statements are reflected as accumulated other
comprehensive income in shareholders equity and non-controlling interests.
13
Statement of Cash Flows
In accordance with Statement FASB ASC Topic 230, Statement of
Cash Flows, cash flow from the Company's operations is calculated based upon
the local currencies and translated to the reporting currency using an average
foreign exchange rate for the reporting period. As a result, amounts related to
assets and liabilities reported in the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities on the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company bases its
estimates and judgments on historical experience and on various other
assumptions and information that are believed to be reasonable under the
circumstances. Estimates and assumptions of future events and their effects
cannot be perceived with certainty and, accordingly, these estimates may change
as new events occur, as more experience is acquired, as additional information
is obtained and as the Companys operating environment changes. Significant
estimates and assumptions by management include, among others; useful lives of
long-lived assets and intangible assets, valuation of inventory, accounts
receivable and notes receivable, impairment analysis of long-lived assets,
construction in progress, intangible assets and deferred taxes. While the
Company believes that the estimates and assumptions used in the preparation of
the financial statements are appropriate, actual results could differ from those
estimates. Estimates and assumptions are periodically reviewed and the effects
of revisions are reflected in the financial statements in the period they are
determined to be necessary.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits in
banks with maturities of three months or less, and all highly liquid investments
which are unrestricted as to withdrawal or use, and which have original
maturities of three months or less at the time of purchase.
As of September 30, 2016 and June 30, 2016, the Companys
uninsured bank balance was mainly maintained at financial institutions located
in the PRC and HK. The uninsured bank balances of continuing operations were
$20,778,742 and $29,783,152 as of September 30, 2016 and June 30, 2016,
respectively. The uninsured bank balances of discontinued operations were $8,549
and $8,578 as of September 30, 2016 and June 30, 2016, respectively. The Company
has no insured bank balance as of September 30, 2016 and June 30, 2016,
respectively.
14
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The Company extends unsecured credit to its customers in the
ordinary course of business but mitigates the associated risks by performing
credit checks and actively pursuing past due accounts. An allowance for doubtful
accounts is established and determined based on managements assessment of known
requirements, aging of receivables, payment and bad debt history, the customers
current credit worthiness, changes in customer payment patterns and the economic
environment. From November 1, 2013, the Company changed its credit policy by
offering ninety (90) day payment terms for sales agents, whereas the payment
terms for sales agents before November 1, 2013 were thirty (30) day. As of
September 30, 2016 and June 30, 2016, the balances of accounts receivable from
the continuing operations, were $962,055 and $1,145,131, respectively. As of
September 30, 2016 and June 30, 2016, the balances of accounts receivable from
discontinued operations, were both nil. The Company determines the allowance
based on aging data, historical collection experience, customer specific facts
and economic conditions. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote. The Company evaluated the nature of all accounts
receivable then provided allowance for doubtful accounts. The Company has
determined that an allowance of $50,710 and $52,129 from the continuing
operations was appropriate as of September 30, 2016 and June 30, 2016,
respectively. The Company has determined that an allowance of nil from
discontinued operations was appropriate as of September 30, 2016 and June 30,
2016.
Advance to Suppliers
The Company periodically makes advances to certain vendors for
purchases of raw materials, or service providers for services relating to
construction plans for its plant, equipment and production lines for the GMP
upgrading, and records these payments as advance to suppliers. As of September
30, 2016 and June 30, 2016, advance to suppliers, held for continuing
operations, amounted to $153,816 and $154,430, respectively. As of September 30,
2016 and June 30, 2016, advance to suppliers, held for discontinued operations,
amounted to $556 and $558, respectively.
Inventory
Inventory consists of raw materials, work in progress and
finished goods of manufactured products.
Inventory is stated at lower of cost or market and consists of
materials, labor and overhead. HLJ Huimeijia uses the weighted average method
for inventory valuation. The other entities of the Company use the first-in,
first-out (FIFO) method for inventory valuation. Overhead costs included in
finished goods include direct labor cost and other costs directly applicable to
the manufacturing process. The Company evaluates inventory for excess, slow
moving, and obsolete inventory as well as inventory the value of which is in
excess of its net realizable value. This evaluation includes analysis of sales levels by product and
projections of future demand. If future demand or market conditions are less
favorable than the Companys projections, a write-down of inventory may be
required, and would be reflected in cost of goods sold in the period the
revision is made. There was no inventory allowance, held for continuing
operations and discontinued operations, provided for the three months ended
September 30, 2016 and 2015, respectively.
15
Impairment of Long-Lived Assets
The Companys long-lived assets and other assets are reviewed
for impairment in accordance with the guidance of the FASB ASC Topic 360-10,
Property, Plant, and Equipment, and FASB ASC Topic 205, Presentation of
Financial Statements. The Company tests for impairment losses on long-lived
assets used in operations whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
an asset to be held and used is measured by a comparison of the carrying amount
of the asset to the future undiscounted cash flows expected to be generated by
the asset. If such asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. Impairment evaluations involve managements estimates on
asset useful lives and future cash flows. Actual useful lives and cash flows
could be different from those estimated by management which could have a
material effect on the Companys reporting results and financial position. Fair
value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals,
as considered necessary. As of September 30, 2016 and June 30, 2016, the Company
had not experienced impairment losses on its long-lived assets for both the
continuing and discontinued operations. However, there can be no assurances that
demand for the Companys products or services will continue, which could result
in an impairment of long-lived assets in the future.
Property, Plant and Equipment
Property, plant and equipment are carried at the lower of cost
or fair value. Maintenance, repairs and minor renewals are expensed as incurred,
major renewals and improvements that extend the lives or increase the capacity
of plant assets are capitalized.
When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains
or losses are included in the results of operations in the reporting period of
disposition.
Depreciation is calculated on a straight-line basis over the
estimated useful life of the assets. The depreciable lives applied are:
16
Building, Warehouse and Improvements
|
20 to 30 years
|
Office Equipment
|
3 to 7 years
|
Vehicles
|
5 to15 years
|
Machinery and Equipment
|
7 to 15 years
|
Intangible Assets
The Company evaluates intangible assets in accordance with FASB
ASC Topic 350, Intangibles Goodwill and Other. Intangible assets deemed to
have indefinite lives are not amortized, but are subject to annual impairment
tests. If the assumptions and estimates used to allocate the purchase price are
not correct, or if business conditions change, purchase price adjustments or
future asset impairment charges could be required. The value of the Companys
intangible assets could be impacted by future adverse changes such as: (i) any
future declines in the Companys operating results, (ii) a decline in the
valuation of technology, including the valuation of the Companys common stock,
(iii) a significant slowdown in the worldwide economy, or (iv) any failure to
meet the performance projections included in the Companys forecasts of future
operating results. In accordance with FASB ASC Topic 350, the Company tests
intangible assets for impairment on an annual basis or more frequently if the
Company believes indicators of impairment exist. Impairment evaluations involve
management estimates of asset useful lives and future cash flows. Significant
management judgment is required in the forecasts of future operating results
that are used in the evaluations. It is possible, however, that the plans and
estimates used may be incorrect. If the Companys actual results, or the plans
and estimates used in future impairment analysis, are lower than the original
estimates used to assess the recoverability of these assets, we could incur
additional impairment charges in a future period. Based on such evaluations,
there was no impairment recorded for intangible assets, held for both the
continuing and discontinued operations, for the three months ended September 30,
2016 and 2015, respectively.
Construction in Progress
Construction in progress represents the costs incurred in
connection with the construction of buildings or new additions to the Companys
plant facilities. Costs classified as construction in progress include all costs
of obtaining the asset and bringing it to the location and condition necessary
for its intended use. No depreciation is provided for construction in progress
until such time as the assets are completed and are placed into service.
The Company reviews the carrying value of construction in
progress for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future cash
flows expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value of the
assets, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of the assets. The factors considered by
management in performing this assessment include current operating results,
trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic
factors. Based on this assessment, there was no impairment recorded for
construction in progress, held for both the continuing and discontinued
operations, for the three months ended September 30, 2016 and 2015,
respectively.
17
Revenue Recognition
The Company recognizes revenue when it is both earned and
realized or realizable. The Companys policy is to recognize revenue when title
to the product, ownership and risk of loss have transferred to the customer,
persuasive evidence of an arrangement exits and collection of the sales proceeds
is reasonably assured, all of which generally occur upon shipment of goods to
customers. The majority of the Companys revenue relates to the sale of
inventory to customers, and revenue is recognized when title and the risks and
rewards of ownership pass to the customer. Given the nature of the Companys
business and the applicable rules guiding revenue recognition, the Companys
revenue recognition practices do not contain estimates that materially affect
the results of operations. The Company records revenue at the discounted selling
price and allows its customers to return products for exchange or credit subject
to certain limitations. A provision for such returns is recorded based upon
historical experience. There has been no provision recorded for returns based
upon historical experience, held for both the continuing and discontinued
operations, for the three months ended September 30, 2016 and 2015,
respectively.
18
Cost of Goods Sold
Cost of goods sold consists primarily of the costs of raw
materials, freight charges, direct labor, depreciation of plants and machinery,
warehousing and overhead costs associated with the manufacturing process and
commission expenses.
Income Taxes
The Company adopts FASB ASC Topic 740, Income Taxes, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
In July 2006, the FASB issued FIN 48(ASC 740-10), Accounting
for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109
(ASC 740), which requires income tax positions to meet a more-likely-than-not
recognition threshold to be recognized in the financial statements. Under FIN
48(ASC 740-10), tax positions that previously failed to meet the
more-likely-than-not threshold should be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not threshold should be
derecognized in the first subsequent financial reporting period in which that
threshold is no longer met.
As a result of the implementation of FIN 48 (ASC 740-10), the
Company undertook a comprehensive review of its portfolio of tax positions in
accordance with recognition standards established by FIN 48 (ASC 740-10). The
Company recognized no material adjustments to liabilities or stockholders
equity as a result of the implementation. The adoption of FIN 48 did not have a
material impact on the Companys financial statements.
The application of tax laws and regulations is subject to legal
and factual interpretation, judgment and uncertainty. Tax laws and regulations
themselves are subject to change as a result of changes in fiscal policy,
changes in legislation, the evolution of regulations and court rulings.
Therefore, the actual liability may be materially different from the Companys
estimates, which could result in the need to record additional tax liabilities
or potentially reverse previously recorded tax liabilities or deferred tax asset
valuation allowance.
19
Enterprise Income Tax
Under the Provisional Regulations of PRC Concerning Income Tax
on Enterprises promulgated by the PRC (the EIT Law), income tax is payable by
enterprises at a rate of 25% of their taxable income.
Value Added Tax
The Provisional Regulations of PRC Concerning Value Added Tax
promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the PRC Concerning Value Added Tax, value added tax (VAT) is imposed on goods
sold in, or imported into, the PRC and on processing, repair and replacement
services provided within the PRC.
VAT payable in the PRC is charged on an aggregated basis at a
rate of 13% or 17% (depending on the type of goods involved) on the full price
collected for the goods sold or, in the case of taxable services provided, at a
rate of 17% on the charges for the taxable services provided, but excluding, in
respect of both goods and services, any amount paid in respect of VAT included
in the price or charges, and less any deductible VAT already paid by the
taxpayer on purchases of goods and services in the same financial year. As of
September 30, 2016 and June 30, 2016 VAT payables from the continuing operations
were $197,378 and $183,813, respectively. As of September 30, 2016 and June 30,
2016, VAT payables were both nil for the discontinued operations.
Sales-Related Taxes
Pursuant to the tax law and regulations of the PRC, the Company
is obligated to pay 7% and 5% of the annual VAT paid as taxes on maintaining and
building cities and education additional fees, both of which belong to
sales-related taxes. Sales-related taxes are recorded when sales revenue is
recognized. Sales-related taxes from the continuing operations were $22,637 and
$33,901 for the three months ended September 30, 2016 and 2015, respectively.
Sales-related taxes from the discontinued operations were both nil for the three
months ended September 30, 2016 and 2015.
Concentrations of Business and Credit Risks
All of the Companys manufacturing is located in the PRC. There
can be no assurance that the Company will be able to successfully continue to
manufacture its products and failure to do so would have a material adverse
effect on the Companys financial position, results of operations and cash
flows. Also, the success of the Companys operations is subject to numerous
contingencies, some of which are beyond managements control. These
contingencies include general economic conditions, prices of raw materials,
competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade
in the PRC, the Company is subject to various additional political, economic and
other uncertainties. Among other risks, the Companys operations will be subject
to the risks of restrictions on transfer of funds, domestic customs, changing
taxation policies, foreign exchange restrictions, and political and governmental
regulations.
20
The Company operates in China, which may give rise to
significant foreign currency risks from fluctuations and the degree of
volatility of foreign exchange rates between U.S. dollars and the Chinese
currency RMB. The results of operations denominated in foreign currency are
translated at the average rate of exchange during the reporting periods.
Earnings Per Share
Basic earnings per common share is computed by dividing net
earnings applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. When applicable, diluted earnings
per common share is determined using the weighted-average number of common
shares outstanding during the period, adjusted for the dilutive effect of common
stock equivalents, consisting of shares that might be issued upon exercise of
common stock options and warrants. For the three months ended September 30, 2016
and 2015, the Company had no potential dilutive common stock equivalents
outstanding.
Potential common shares issued are calculated using the
treasury stock method, which recognizes the use of proceeds that could be
obtained upon the exercise of options and warrants in computing diluted earnings
per share. It assumes that any proceeds would be used to purchase common stock
at the average market price of the common stock during the period.
FASB ASC Topic 260, Earnings Per Share, requires a
reconciliation of the numerator and denominator of the basic and diluted
earnings per share (EPS) computations.
Recent Accounting Pronouncements
In August 2016, the FASB has issued Accounting Standards Update
(ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, to address diversity in how certain
cash receipts and cash payments are presented and classified in the statement of
cash flows. The amendments provide guidance on the following eight specific cash
flow issues: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of
Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest
Rates That Are Insignificant in Relation to the Effective Interest Rate of the
Borrowing; (3) Contingent Consideration Payments Made after a Business
Combination; (4)Proceeds from the Settlement of Insurance Claims; (5) Proceeds
from the Settlement of Corporate-Owned Life Insurance Policies,
including Bank-Owned; (6) Life Insurance Policies; (7) Distributions Received
from Equity Method Investees; (8) Beneficial Interests in Securitization
Transactions; and Separately Identifiable Cash Flows and Application of the
Predominance Principle. The amendments are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2018, and interim periods within
fiscal years beginning after December 15, 2019. Early adoption is permitted,
including adoption in an interim period. The amendments should be applied using
a retrospective transition method to each period presented. If it is
impracticable to apply the amendments retrospectively for some of the issues,
the amendments for those issues would be applied prospectively as of the
earliest date practicable. The Company is currently evaluating the impact of
this new standard on its consolidated financial statements and related
disclosures.
21
In October 2016, the FASB has issued ASU No. 2016-16, Income
Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The
amendments require an entity to recognize income tax consequences of an
intra-entity transfer of an asset other than inventory when the transfer occurs
and remove the exception to postpone recognition until the asset has been sold
to an outside party. The amendments are effective for public business entities
for annual reporting periods beginning after December 15, 2017, including
interim reporting periods within those annual reporting periods. For all other
entities, the amendments are effective for annual reporting periods beginning
after December 15, 2018, and interim reporting periods within annual reporting
periods beginning after December 15, 2019. Early adoption is permitted. The
Company is currently evaluating the impact of this new standard on its
consolidated financial statements and related disclosures.
In October 2016, the FASB has issued ASU No. 2016-17,
Consolidation (Topic 810): Interest Held through Related Parties That Are under
Common Control, to provide guidance on the evaluation of whether a reporting
entity is the primary beneficiary of a VIE by amending how a reporting entity,
that is a single decision maker of a VIE, treats indirect interests in that
entity held through related parties that are under common control. The
amendments are effective for public business entities for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years.
For all other entities, the amendments are effective for fiscal years beginning
after December 15, 2016, and interim periods within fiscal years beginning after
December 15, 2017. Early adoption is permitted, including adoption in an interim
period. The Company is currently evaluating the impact of this new standard on
its consolidated financial statements and related disclosures.
NOTE 3 - ASSETS SALE
On December 24, 2014, Humankind entered into a stock transfer
agreement (the Original Agreement) with Xiuzheng Pharmaceutical Group Co.,
Ltd. a company incorporated under the laws of the Peoples Republic of China and
located in Jilin province (Xiuzheng Pharmacyor the Buyer), Mr. Xin Sun, the
CEO of the Company, and Huimeijia, pursuant to which, Humankind and Mr. Xin Sun (the
Equity Holders), shall sell their respective equity interests in Huimeijia to
Xiuzheng Pharmacy. The transfer of the 100% equity interests of Huimeijia to the
Buyer was for a total cash consideration of RMB 8,000,000 (approximately
$1,306,186) to the Equity Holders.
22
On February 9, 2015, the four parties entered into a
supplementary agreement (the Supplementary Agreement) to modify the terms of
the Original Agreement, pursuant to which, the Equity Holders and Huimeijia
(collectively the Assets Transferors) shall only sell the 19 drug approval
numbers (including the tablet, capsule, powder, mixture, oral liquid, syrup and
oral solution under the 19 approval numbers; licenses including the original
copies of Business License, Organization Code Certificate, Tax Registration
Certificate, Drug Production Permit and GMP Certificate, and other documents and
original copies related to the production and operation of the 19 drugs) (the
Assets) to Xiuzheng Pharmacy. The Equity Holders will retain the equity
interests in Huimeijia, but will have the equity interests pledged to Xiuzheng
Pharmacy until the Assets are transferred, at which time all the cash
consideration shall be paid by the Buyer. The total cash consideration remains
to be the same as under the Original Agreement, i.e., RMB 8,000,000
(approximately $1,306,186) to the Assets Transferors. In the event that the
Assets are failed to be transferred to the Buyer due to the fault of the Assets
Transferors, the paid consideration shall be returned to the Buyer with
interests accrued. If the failure of the transfer of the Assets is a result of
the government policy changes or force majeure, the paid cash consideration
shall be returned to the Buyer but without any interests.
On October 12, 2016, the four parties agreed to rescind the
Supplementary Agreement and entered into a new supplementary agreement (the
Agreement), pursuant to which, the four parties agreed to execute the transfer
of the equity interests based on the Original Agreement, and according to which
the Equity Holders shall sell their respective equity interests in Huimeijia to
Xiuzheng Pharmacy. The transfer of the 100% equity interests of Huimeijia to the
Buyer was for a total cash consideration of RMB 8,000,000 (approximately
$1,306,186) (the Purchase Price) to the Equity Holders. 40% of the Purchase
Price is due within 10 business days after signing the Agreement; 40% of the
Purchase Price is due within 10 business days after the completion of the
changes in business registration and Xiuzheng Pharmacy obtains the newly issued
documents evidencing its ownership on Huimeijia; 15% of the Purchase Price is
due within 10 business days after the transfer of all the drugs is approved by
Heilongjiang FDA; and 5% of the Purchase Price is due within 10 business days
after all the drugs have been transferred to Xiuzheng Pharmacy or its designated
entity and Humankind and Mr. Xin Sun instructs Xiuzheng Pharmacy to complete
three-batches production of all forms of drugs. As of the date of this report,
40% of the Purchase Price was paid and the Company has completed the changes in
business registration and Xiuzheng Pharmacy obtained the newly issued documents
evidencing its ownership on Huimeijia, which are evidenced by the business
license issued by the local State Administration of Industry and Commerce in
Harbin (Harbin SAIC) to Huimeijia where the ownership of Huimeijia has now
been recorded as held by Xiuzheng Pharmacy with Harbin SAIC and the legal
representative (a person that is authorized to take most of the corporate
actions on behalf of a company under the corporate laws in China) of Huimeijia has now
become a person designated by the Buyer. The transfer of all the drugs to the
Buyer and the remainder of the Purchase Price are pending to be processed.
23
NOTE 4 - ACCOUNTS RECEIVABLE
The Companys accounts receivable, held for continuing
operations, were $962,055 and $1,145,131, respectively, net of allowance for
doubtful accounts amounting to $50,710 and $52,129 as of September 30, 2016 and
June 30, 2016, respectively. The Companys accounts receivable, held for
discontinued operations, were both nil, net of allowance for doubtful accounts
amounting to nil as of September 30, 2016 and June 30, 2016, respectively.
NOTE 5 - INVENTORY
Inventory from the continuing operations consisted of
following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Raw Materials
|
$
|
132,272
|
|
$
|
122,569
|
|
Supplies and Packing Materials
|
|
135,742
|
|
|
130,472
|
|
Work-in-Progress
|
|
131,323
|
|
|
118,233
|
|
Finished Goods
|
|
57,878
|
|
|
48,713
|
|
Total
|
|
457,215
|
|
|
419,987
|
|
Less: Inventory, Held for Discontinued
Operations
|
|
5,186
|
|
|
5,203
|
|
Inventory, Held for
Continuing Operations
|
$
|
452,029
|
|
$
|
414,784
|
|
For the three months ended September 30, 2016 and 2015, the
Company has not made provision for inventory from the continued and discontinued
operations in regards to excessive, slow moving or obsolete items.
NOTE 6 - CONSTRUCTION IN PROGRESS
Construction in progress from the continuing operations
consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Plant - HLJ Huimeijia
|
$
|
676,307
|
|
$
|
670,051
|
|
Plant and Production Lines - Huimeijia
|
|
1,800
|
|
|
1,806
|
|
Total
|
|
678,107
|
|
|
671,857
|
|
Less: Construction in Progress, Held for
Discontinued Operations
|
|
1,800
|
|
|
1,806
|
|
Construction in Progress,
Held for Continuing Operations
|
$
|
676,307
|
|
$
|
670,051
|
|
24
On April 6, 2012, HLJ Huimeijia entered into an agreement with
a contractor for the plant, the estimated total cost of construction was
approximately $2.09 million (RMB 12,800,000), anticipated to be completed by
December 2016. As of September 30, 2016, 35% of construction had been completed
and $676,307 (RMB 4,509,953) had been recorded as a cost of construction in
progress.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment from the continuing operations
consisted of the following:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Building, Warehouses and
Improvements
|
$
|
4,345,412
|
|
$
|
4,360,191
|
|
Machinery and Equipment
|
|
1,228,683
|
|
|
1,232,861
|
|
Office Equipment
|
|
69,095
|
|
|
69,330
|
|
Vehicles
|
|
203,764
|
|
|
204,457
|
|
Less: Accumulated
Depreciation
|
|
(2,072,636
|
)
|
|
(1,998,278
|
)
|
Total
|
|
3,774,318
|
|
|
3,868,561
|
|
Less: Property and Equipment,
net, Held for Discontinued Operations
|
|
1,789
|
|
|
1,796
|
|
Property and Equipment, net, held for
continuing operations
|
$
|
3,772,529
|
|
$
|
3,866,765
|
|
Depreciation expense from the continuing operations was $81,187
and $85,735 for the three months ended September 30, 2016 and 2015,
respectively. Depreciation expense from the discontinued operations was nil and
$196 for the three months ended September 30, 2016 and 2015, respectively.
Depreciation expense charged to operations from the continuing operations was
$37,485 and $34,511 for the three months ended September 30, 2016 and 2015,
respectively. Depreciation expense charged to cost of goods sold from the
continuing operations was $43,702 and $51,224 for the three months ended
September 30, 2016 and 2015, respectively. Depreciation expense charged to
operations from the discontinued operations was nil and $196 for the three
months ended September 30, 2016 and 2015, respectively. Depreciation expense
charged to cost of goods sold from the discontinued operations was both nil for
the three months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016, the building of HLJ Huimeijia with
the book value of $1,670,945 has been mortgaged for the working capital loan in
the principal amount of $1,499,588 (RMB 10,000,000). As of June 30, 2016, the
building of HLJ Huimeijia with the book value of $1,676,627 has been mortgaged
for the working capital loan in the principal amount of $1,504,687 (RMB
10,000,000).
25
NOTE 8 - INTANGIBLE ASSETS
The following is a summary of intangible assets from the
continuing operations:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
Land Use Rights Humankind
|
$
|
950,436
|
|
$
|
953,670
|
|
Health Supplement Product Patents Humankind
|
|
4,498,763
|
|
|
4,514,061
|
|
Pharmaceutical Patents - HLJ
Huimeijia
|
|
134,361
|
|
|
134,817
|
|
Land Use Rights - HLJ Huimeijia
|
|
650,084
|
|
|
652,295
|
|
Less: Accumulated
Amortization
|
|
(2,168,103
|
)
|
|
(2,063,784
|
)
|
Total
|
|
4,065,541
|
|
|
4,191,059
|
|
Less: Intangible Assets, net,
Held for Discontinued Operations
|
|
-
|
|
|
-
|
|
Intangible Assets, net, Held for Continuing
Operations
|
$
|
4,065,541
|
|
$
|
4,191,059
|
|
All land in the PRC belongs to the State. Enterprises and
individuals can pay the State a fee to obtain the right to use a piece of land
for commercial purposes or residential purposes for an initial period of 50
years or 70 years, respectively. The land use right can be sold, purchased, and
exchanged in the market. The successor owner of the land use right will have the
right to use the land for the time remaining on the initial period.
Amortization expense from the continuing operations was
$111,390 and $147,450 for the three months ended September 30, 2016 and 2015,
respectively. Amortization expense from the discontinued operations was both nil
for the three months ended September 30, 2016 and 2015.
As of September 30, 2016, land use rights of HLJ Huimeijia with
the book value of $650,084 have been mortgaged for a working capital loan in the
principal amount of $1,499,588 (RMB 10,000,000). As of June 30, 2016, land use
rights of HLJ Huimeijia with the book value of $652,295 have been mortgaged for
a working capital loan in the principal amount of $1,504,687 (RMB 10,000,000).
NOTE 9 - SHORT-TERM LOAN
On November 12, 2015, HLJ Huimeijia entered into a short-term
loan agreement with a bank for a working capital loan in the principal amount of
RMB 10,000,000, at an interest rate of 5.66% from November 12, 2015 to November
10, 2016. The loan was secured by the land use right and the building of HLJ
Huimeijia, with a maturity date of November 10, 2016. As of September 30, 2016
and June 30, 2016, the Companys short-term loan from the continuing operations
was $1,499,588 and $1,504,687, respectively. As of September 30, 2016 and June
30, 2016, the Companys short-term loan from the discontinued operations was
both nil.
26
Interest expenses from the continuing operations were $21,686
and $31,624 for the three months ended September 30, 2016 and 2015,
respectively. Interest expenses from the discontinued operations were both nil
for the three months ended September 30, 2016 and 2015, respectively.
NOTE 10 - RELATED PARTY DEBTS
Related party debts, which represent temporary short-term loans
from Mr. Xin Sun and Mr. Kai Sun, consisted of the following:
|
|
S
eptember 30, 201
6
|
|
|
June 30, 2016
|
|
Mr. Xin Sun
|
$
|
2,755,786
|
|
$
|
2,678,220
|
|
Mr. Kai Sun
|
|
35,066
|
|
|
35,186
|
|
Total
|
|
2,790,852
|
|
|
2,713,406
|
|
Less: Related Party Debts, Held for
Discontinued Operations
|
|
-
|
|
|
-
|
|
Related Party Debts, Held for
Continuing Operations
|
$
|
2,790,852
|
|
$
|
2,713,406
|
|
These loans are unsecured and non-interest bearing and have no
fixed terms of repayment; therefore, they are deemed payable on demand. Mr. Kai
Sun is a PRC citizen and a family member of Mr. Xin Sun, the CEO of the
Company.
NOTE 11 - INCOME TAXES
(a) Corporate income taxes
United States
China Health US was organized in the United States. China
Health US had no taxable income for US income tax purposes for the three months
ended September 30, 2016 and 2015, respectively. As of September 30, 2016, China
Health US has a net operating loss carry forward for United States income taxes.
Net operating loss carry forwards are available to reduce future years taxable
income. Management believes that the realization of the benefits from these
losses appears uncertain due to the Companys operating history and the
continued losses of the US entity. Accordingly, the Company has provided a 100%
valuation allowance on the deferred tax asset to reduce the asset to zero. There
were no changes in the valuation allowance for the three months ended September
30, 2016 and 2015. Management reviews this valuation allowance periodically and
makes adjustments accordingly.
27
Hong Kong
China Health HK was incorporated in Hong Kong and is subject to
Hong Kong taxation on its activities conducted in Hong Kong and income arising
in or derived from Hong Kong. No provision for income taxes have been made as
China Health HK has no taxable income in Hong Kong.
Peoples Republic of China
Under the EIT Law, the standard EIT rate is 25%. The PRC
subsidiaries of the Company are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they
operate.
The provision for income taxes from the continuing operations
consisted of the following for the three months ended September 30, 2016 and
2015:
|
|
For the
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current provision:
|
|
|
|
|
|
|
USA
|
$
|
-
|
|
$
|
-
|
|
China
|
|
54,030
|
|
|
32,406
|
|
Total current provision
|
|
54,030
|
|
|
32,406
|
|
Deferred provision:
|
|
|
|
|
|
|
USA
|
|
-
|
|
|
-
|
|
China
|
|
-
|
|
|
-
|
|
Total deferred provision
|
|
-
|
|
|
-
|
|
Total provision for income
taxes
|
|
54,030
|
|
|
32,406
|
|
Less: Provision for income taxes, held for
discontinued operations
|
|
-
|
|
|
-
|
|
Provision for income taxes,
held for continuing operations
|
$
|
54,030
|
|
$
|
32,406
|
|
Significant components of deferred tax assets from the
continuing operations were as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
Net operating loss carry forward
|
$
|
112,236
|
|
$
|
118,259
|
|
Allowance for doubtful
accounts
|
|
-
|
|
|
-
|
|
Valuation allowance
|
|
(112,236
|
)
|
|
(118,259
|
)
|
Deferred tax assets, net
|
|
-
|
|
|
-
|
|
Less: Deferred tax assets, net, held for
discontinued operations
|
|
-
|
|
|
-
|
|
Deferred tax assets, net,
held for continuing operations
|
$
|
-
|
|
$
|
-
|
|
As of September 30, 2016 and June 30, 2016, the Company accrued
a 100% valuation allowance on its deferred tax assets based on the assessment on
the probability of future reversion.
28
(b) Uncertain tax positions
There were no unrecognized tax benefits as of September 30,
2016 and June 30, 2016, respectively. Management does not anticipate any
potential future adjustments in the next twelve months which would result in a
material change to its tax positions. For the three months ended September 30,
2016 and 2015, the Company did not incur any interest and penalties arising from
its tax payments.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Companys assets are located in the PRC and revenues are
derived from operations in the PRC.
In terms of industry regulations and policies, the economy of
the PRC has been transitioning from a planned economy to market oriented
economy. Although in recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reforms, the
reduction of state ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial portion of
productive assets in the PRC is still owned by the Chinese government. For
example, all land is state owned and leased to business entities or individuals
through the governments granting of Land Use Rights. The granting process is
typically based on government policies at the time of granting and can be
lengthy and complex. This process may adversely affect the Companys future
manufacturing expansions. The Chinese government also exercises significant
control over the PRCs economic growth through the allocation of resources and
providing preferential treatment to particular industries or companies.
Uncertainties may arise with changing of governmental policies and measures.
The Company faces a number of risks and challenges not
typically associated with companies in North America or Western Europe, since
its assets exist solely in the PRC, and its revenues are derived from its
operations therein. The PRC is a developing country with an early stage market
economic system, overshadowed by the state. Its political and economic systems
are very different from the more developed countries and are in a state of
change. The PRC also faces many social, economic and political challenges that
may produce major shocks, instabilities and even crises, in both its domestic
arena and in its relationships with other countries, including the United
States. Such shocks, instabilities and crises may in turn significantly and
negatively affect the Companys performance.
Since the Company terminated its rental agreement on January 9,
2013, it had no rental commitment as of September 30, 2016.
29
NOTE 13 - MAJOR SUPPLIERS AND CUSTOMERS
For the three months ended September 30, 2016, the Company had
two suppliers that in the aggregate accounted for 88% of the Companys purchases
for the continuing operations, with each supplier accounting for 78% and 10%,
respectively.
For the three months ended September 30, 2015, the Company had
one supplier that in the aggregate accounted for 75% of the Companys purchases
for the continuing operations.
For the three months ended September 30, 2016, the Company had
six customers that in the aggregate accounted for 81% of the Companys total
sales for the continuing operations, with each customer accounting for 16%, 15%,
13%, 13%, 12% and 12%, respectively.
For the three months ended September 30, 2015, the Company had
four customers that in the aggregate accounted for 42% of the Companys total
sales for the continuing operations, with each customer accounting for 11%, 11%,
10% and 10%, respectively.
NOTE 14 - SEGMENT REPORTING
The Company was organized into three main business segments
based on the types of products being provided to customers: HLJ Huimeijia,
Humankind and others. Each of the three operating segments referenced above has
separate and distinct general ledgers. The chief operating decision maker
(CODM) receives financial information, including revenue, gross margin,
operating income, and net income produced from the various general ledger
systems to make decisions about allocating resources and assessing performance;
however, the principal measure of segment profitability or loss used by the CODM
is net loss by segment. The discontinued Huimeijia business was included in
others segment.
The following tables present summary information by segment for
the three months ended September 30, 2016 and 2015, respectively:
|
|
For the Three Months Ended
September 30, 2016
|
|
|
For the Three Months Ended
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
HLJ
|
|
|
|
|
|
|
|
|
continuing
|
|
|
HLJ
|
|
|
|
|
|
|
|
|
continuing
|
|
|
|
Huimeijia
|
|
|
Humankind
|
|
|
Others
|
|
|
operations
|
|
|
Huimeijia
|
|
|
Humankind
|
|
|
Others
|
|
|
operations
|
|
Revenues
|
$
|
100
|
|
$
|
1,180,068
|
|
$
|
-
|
|
$
|
1,180,168
|
|
$
|
293,756
|
|
$
|
1,662,312
|
|
$
|
-
|
|
$
|
1,956,068
|
|
Cost of revenues
|
|
58
|
|
|
755,227
|
|
|
-
|
|
|
755,285
|
|
|
250,346
|
|
|
1,168,618
|
|
|
-
|
|
|
1,418,964
|
|
Gross profit
|
|
42
|
|
|
424,841
|
|
|
-
|
|
|
424,883
|
|
|
43,410
|
|
|
493,694
|
|
|
-
|
|
|
537,104
|
|
Interest expense
|
|
21,686
|
|
|
-
|
|
|
-
|
|
|
21,686
|
|
|
31,624
|
|
|
-
|
|
|
-
|
|
|
31,624
|
|
Depreciation and amortization
|
|
14,230
|
|
|
134,645
|
|
|
-
|
|
|
148,875
|
|
|
18,792
|
|
|
163,169
|
|
|
-
|
|
|
181,961
|
|
Income tax
|
|
-
|
|
|
54,030
|
|
|
-
|
|
|
54,030
|
|
|
-
|
|
|
32,406
|
|
|
-
|
|
|
32,406
|
|
Net income (loss)
|
|
(137,873
|
)
|
|
162,091
|
|
|
(195
|
)
|
|
24,023
|
|
|
(127,282
|
)
|
|
97,216
|
|
|
(74
|
)
|
|
(30,140
|
)
|
Total capital expenditures
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
454
|
|
|
-
|
|
|
454
|
|
Total assets
|
$
|
2,922,517
|
|
$
|
37,194,994
|
|
$
|
1,444
|
|
$
|
40,118,955
|
|
$
|
3,282,095
|
|
$
|
37,246,334
|
|
$
|
2,024
|
|
$
|
40,530,453
|
|
33
|
|
For the
Three Months Ended
|
|
|
For the
Three Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated from
|
|
|
|
|
|
Consolidated from
|
|
|
|
|
|
|
discontinued
|
|
|
|
|
|
discontinued
|
|
|
|
Huimeijia
|
|
|
operations
|
|
|
Huimeijia
|
|
|
operations
|
|
Revenues
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Cost of revenues
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gross profit
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest expense
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Depreciation and amortization
|
|
-
|
|
|
-
|
|
|
196
|
|
|
196
|
|
Income tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
(196
|
)
|
|
(196
|
)
|
Total capital expenditures
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total assets
|
$
|
17,880
|
|
$
|
17,880
|
|
$
|
19,341
|
|
$
|
19,341
|
|
NOTE 15 -
DISCONTINUED OPERATIONS
In accordance with ASU No. 2014-08, Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity, a disposal
of a component of an entity or a group of components of an entity is required to
be reported as discontinued operations if the disposal represents a strategic
shift that has (or will have) a major effect on an entitys operations and
financial results when the components of an entity meets the criteria in
paragraph 205-20-45-1E to be classified as held for sale. When all of the
criteria to be classified as held for sale are met, including management, having
the authority to approve the action, commits to a plan to sell the entity, the
major current assets, other assets, current liabilities, and noncurrent
liabilities shall be reported as components of total assets and liabilities
separate from those balances of the continuing operations. At the same time, the
results of all discontinued operations, less applicable income taxes (benefit),
shall be reported as a component of net income (loss) separate from the net
income (loss) of continued operations in accordance with ASC 205-20-45.
Reconciliation of the carrying amounts of major classes of
assets and liabilities of discontinued operations classified as discontinued
operations in the unaudited condensed consolidated balance sheets.
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
8,549
|
|
$
|
8,578
|
|
Inventory
|
|
5,186
|
|
|
5,203
|
|
Advance to
suppliers
|
|
556
|
|
|
558
|
|
Total Current Assets
|
|
14,291
|
|
|
14,339
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net
|
|
1,789
|
|
|
1,796
|
|
Construction in
progress
|
|
1,800
|
|
|
1,806
|
|
Total Assets
|
$
|
17,880
|
|
$
|
17,941
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current Liabilities:
|
$
|
|
|
$
|
|
|
Accounts payable and accrued
expenses
|
|
556
|
|
|
558
|
|
Other payables
|
|
20
|
|
|
16
|
|
Advance from customers
|
|
479,868
|
|
|
481,500
|
|
Taxes payable
|
|
(60
|
)
|
|
(61
|
)
|
Total Current Liabilities
|
|
480,384
|
|
|
482,013
|
|
|
|
|
|
|
|
|
Total Liabilities
|
$
|
480,384
|
|
$
|
482,013
|
|
34
Reconciliation of the carrying amounts of major classes of net
income (loss) from operations to be disposed classified as discontinued
operations in the unaudited condensed consolidated statements of operations and
comprehensive income (loss).
|
|
For the
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Operating Expenses
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
$
|
-
|
|
$
|
(196
|
)
|
Total Operating
Expenses
|
|
-
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
Loss from Operations
|
|
-
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
Loss before Income
Taxes
|
|
-
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
Net Loss from Discontinued
Operations
|
$
|
-
|
|
$
|
(196
|
)
|
NOTE 16 - SUBSEQUENT EVENTS
On October 12, 2016, Humankind, Xiuzheng Pharmacy, Mr. Xin Sun
and Huimeijia agreed to rescind the Supplementary Agreement which was entered
into on February 9, 2015. Meanwhile, the four parties entered into a new
supplementary agreement, pursuant to which, Humankind and Mr. Xin Sun shall sell
their respective equity interests in Huimeijia to Xiuzheng Pharmacy. Please
refer to NOTE 3 ASSETS SALE.
35
Item 2.
|
Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
FORWARD LOOKING STATEMENTS
We make certain forward-looking statements in this report.
Statements concerning our future operations, prospects, strategies, financial
condition, future economic performance (including growth and earnings), demand
for our services, and other statements of our plans, beliefs, or expectations,
including the statements contained under this caption as well as captions
elsewhere in this document, are forward-looking statements. In some cases, these
statements are identifiable through the use of words such as anticipate,
believe, estimate, expect, intend, plan, project, target, can,
could, may, should, will, would, and similar expressions. The
forward-looking statements we make are not guarantees of future performance and
are subject to various assumptions, risks, and other factors that could cause
actual results to differ materially from those suggested by these
forward-looking statements. These risks and uncertainties, together with the
other risks described from time to time in reports and documents that we file
with the SEC should be considered in evaluating forward-looking statements.
Because such statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied by the forward-looking
statements. Indeed, it is likely that some of our assumptions will prove to be
incorrect. Our actual results and financial position will vary from those
projected or implied in the forward-looking statements and the variances may be
material. You are cautioned not to place undue reliance on such forward-looking
statements, which reflect our view only as of the date of this report.
Important factors that could cause actual results to differ
from those in the forward-looking statements include, without limitation, the
following:
|
|
the effect of political, economic, and market
conditions and geopolitical events;
|
|
|
|
|
|
legislative and regulatory changes that affect
our business;
|
|
|
|
|
|
the availability of funds and working capital;
and
|
|
|
|
|
|
the actions and initiatives of current and
potential competitors.
|
Except as required by applicable laws, regulations or rules, we
do not undertake any responsibility to publicly release any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this report. Additionally, we do not undertake any
responsibility to update you on the occurrence of any unanticipated events which
may cause actual results to differ from those expressed or implied by any
forward-looking statements.
36
The following discussion and analysis should be read in
conjunction with our unaudited condensed consolidated financial statements and
the related notes thereto as filed with the SEC and other financial information
contained elsewhere in this report.
Except as otherwise indicated by the context, references in
this report to we, us, our, the Registrant, our Company, or the
Company are to China Health Industries Holdings, Inc., a Delaware corporation,
China Health Industries Holdings Limited, a corporation incorporated under the
laws of Hong Kong, its wholly owned subsidiary in China, Harbin Humankind
Biology Technology Co. Limited (Humankind) and indirect 99% owned subsidiary,
Harbin Huimeijia Medicine Company (Huimeijia) and indirect wholly owned
subsidiary, Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (HLJ Huimeijia).
Unless the context otherwise requires, all references to (i) PRC and China
are to the Peoples Republic of China; (ii) U.S. dollar, $ and US$ are to
United States dollars; (iii) RMB are to Renminbi Yuan of China; (iv)
Securities Act are to the Securities Act of 1933, as amended; and (v)
Exchange Act are to the Securities Exchange Act of 1934, as amended.
Business Overview
Our principal business operations are conducted through our
wholly-owned subsidiaries, Humankind and HLJ Huimeijia.
The Company owns a GMP-certified plant and facilities and has
the capacity to produce 21 CFDA-approved medicines and 14 CFDA-approved health
supplement products in soft capsule, hard capsule, tablet, granule and oral
liquid forms. These products address the needs of some key sectors in China,
including the feminine, geriatric and childrens markets.
HLJ Huimeijia's current certificate of GMP expired by the end
of December 2015. HLJ Huimeijia has applied a new certificate of GMP, which is
expected to be obtained in April 2017. However, there is no assurance that we
will obtain the new GMP certificate by such time. According to the law of PRC,
HLJ Huimeijia must cease all production activities before getting the new GMP
certificate. The equipment and production line is being reconstructed from the
third quarter of the fiscal year 2016 to the third quarter of the fiscal year
2017 for the purpose of applying for the new GMP certificate. Although HLJ
Huimeijia could sell inventory produced before obtaining the new GMP
certificate, management anticipates there will be no or very little revenue
generated by HLJ Huimeijia after the expiration of the old GMP certificate.
On December 24, 2014, Humankind, Xiuzheng Pharmacy (the
Buyer), Mr. Xin Sun and Huimeijia entered into a Stock Transfer Agreement (the
Original Agreement), pursuant to which, Humankind and Mr. Xin Sun (the Equity Holders) shall sell their respective equity interests
in Huimeijia to Xiuzheng Pharmacy. On February 9, 2015, the four parties entered
into a Supplementary Agreement (the Supplementary Agreement) to modify the
terms of the Original Agreement, pursuant to which, the Equity Holders and
Huimeijia shall only sell the 19 drug approval numbers (the Assets) to
Xiuzheng Pharmacy. The Equity Holders will retain the equity interests in
Huimeijia, but will have the equity interests pledged to Xiuzheng Pharmacy until
the Assets are transferred. On October 12, 2016, the four parties agreed to
rescind the Supplementary Agreement and entered into a new supplementary
agreement, pursuant to which, the four parties agreed to execute the transfer of
the equity interests based on the Original Agreement, and according to which the
Equity Holders shall sell their respective equity interests in Huimeijia to
Xiuzheng Pharmacy for a total cash consideration of RMB 8,000,000 (approximately
$1,306,186) (the Purchase Price) to the Equity Holders. As of the date of this
report, 40% of the Purchase Price was paid and the Company has completed the
changes in business registration and Xiuzheng Pharmacy obtained the newly issued
document evidencing its ownership on Huimeijia, which is the business license
issued by the local State Administration of Industry and Commerce in Harbin
(Harbin SAIC) to Huimeijia where the ownership of Huimeijia has now been
recorded as held by Xiuzheng Pharmacy with Harbin SAIC and the legal
representative (a person that is authorized to take most of the corporate
actions on behalf of a company under the corporate laws in China) of Huimeijia
has now become a person designated by the Buyer. The transfer of all the drugs
to the Buyer and the remainder of the Purchase Price are pending to be
processed. As of September 30, 2016, the results of operations of Huimeijia
business are reflected in the Companys unaudited condensed consolidated
financial statements as discontinued operations.
37
Our business is conducted through our sales agents and sales
personnel. We sell our products directly to end customers by our own sales
personnel as well as our sales agents, operating primarily in Jiangsu, Zhejiang,
Shanghai, Beijing, Anhui and Gansu, where most of our revenues are generated.
Our sales through agents in Beijing, Zhejiang, Jiangsu, Shanghai, Anhui and
Gansu provinces accounted for 16%, 15%, 13%, 13%, 12% and 12% of our total sales
from the continuing operations, respectively, for the three months ended
September 30, 2016. Although we do not currently sell our products online, we
expect to do so in the future.
Results of Operations
The following table summarizes the top lines of the results of
our operations from the continuing operations for the three months ended
September 30, 2016 and 2015, respectively:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Variance
|
|
|
%
|
|
Revenues
|
$
|
1,180,168
|
|
$
|
1,956,068
|
|
$
|
(775,900
|
)
|
|
(39.67%
|
)
|
Humankind
|
|
1,180,068
|
|
|
1,662,312
|
|
|
(482,244
|
)
|
|
(29.01%
|
)
|
HLJ Huimeijia
|
|
100
|
|
|
293,756
|
|
|
(293,656
|
)
|
|
(99.97%
|
)
|
Cost of Goods Sold
|
$
|
755,285
|
|
$
|
1,418,964
|
|
$
|
(663,679
|
)
|
|
(46.77%
|
)
|
Humankind
|
|
755,227
|
|
|
1,168,618
|
|
|
(413,391
|
)
|
|
(35.37%
|
)
|
HLJ Huimeijia
|
|
58
|
|
|
250,346
|
|
|
(250,288
|
)
|
|
(99.98%
|
)
|
Gross Profit
|
$
|
424,883
|
|
$
|
537,104
|
|
$
|
(112,221
|
)
|
|
(20.89%
|
)
|
Humankind
|
|
424,841
|
|
|
493,694
|
|
|
(68,853
|
)
|
|
(13.95%
|
)
|
HLJ Huimeijia
|
|
42
|
|
|
43,410
|
|
|
(43,368
|
)
|
|
(99.90%
|
)
|
38
Revenue
Total revenues from the continuing operations decreased by
$775,900 or 39.67% for the three months ended September 30, 2016 as compared to
the same period in 2015. The decrease in revenues was primarily due to a
decrease of $482,244 or 29.01% in Humankinds revenues and a decrease of
$293,656 or 99.97% in HLJ Huimeijias revenues for the three months ended
September 30, 2016 as compared to the same period in 2015. The decrease of the
sales revenue in Humankind was primarily due to the decrease in sales volume of
Waterlilies Soft Capsule, which was caused by our shift of marketing focus from
such product to Propolis and Black Ant Capsule. The decrease of the sales
revenue in HLJ Huimeijia was primary due to the expiration of its GMP
certificate on December 31, 2015. During the last three months prior to such an
expiration date, HLJ Huimeijia reduced its production and marketing operation as
more attention was paid to the preparation of manufacturing and technical
improvement in order to meet the requirements for obtaining a new GMP
certificate. Since the third quarter of fiscal year 2016, HLJ Huimeijia has
ceased all production activities, reconstructed its equipment and production
line for the purpose of applying for the new GMP certificate while selling
inventory produced before the expiration of the GMP certificate.
Our total cost of sales from the continuing operations
decreased by $663,679 or 46.77% for the three months ended September 30, 2016 as
compared to the same period in 2015. The decrease in cost of sales was primarily
due to a decrease of $413,391 or 35.37% in Humankinds cost of sales and a
decrease of $250,288 or 99.98% in HLJ Huimeijias cost of sales for the three
months ended September 30, 2016 as compared to the same period in 2015, which
were primarily due to the decrease in sales volume of Humankind and HLJ
Huimeijia.
Our gross margin from the continuing operations decreased by
$112,221 from $537,104 for the three months ended September 30, 2015 to $424,883
for the three months ended September 30, 2016. This decrease was mainly due to
the decrease in sales volume of Humankind and HLJ Huimeijia as discussed
above.
Sales by Product Line
The following table summarizes a breakdown of our sales by
major product line from the continuing operations for the three months ended
September 30, 2016 and 2015, respectively:
39
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Quantity
|
|
|
|
|
|
% of
|
|
|
Quantity
|
|
|
|
|
|
% of
|
|
|
|
(Unit)
|
|
|
Sales US$
|
|
|
Sales
|
|
|
(Unit)
|
|
|
Sales US$
|
|
|
Sales
|
|
Humankind
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waterlilies Soft Capsule (Sailuozhi)
|
|
4,389
|
|
$
|
269,847
|
|
|
22.87%
|
|
|
16,188
|
|
$
|
1,050,585
|
|
|
53.71%
|
|
Propolis and Black Ant
Capsule
|
|
32,925
|
|
|
910,215
|
|
|
77.13%
|
|
|
20,828
|
|
|
611,727
|
|
|
31.27%
|
|
HLJ Huimeijia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Muskiness Bone Strengthener
Paste
|
|
59
|
|
|
24
|
|
|
-
|
|
|
492,048
|
|
|
129,182
|
|
|
6.60%
|
|
Muskiness Pain Relieving Paste
|
|
21
|
|
|
9
|
|
|
-
|
|
|
197,265
|
|
|
46,522
|
|
|
2.38%
|
|
Injury and Rheumatism
relieving Paste
|
|
68
|
|
|
28
|
|
|
-
|
|
|
93,163
|
|
|
25,434
|
|
|
1.30%
|
|
Refining GouPi Cream
|
|
15
|
|
|
6
|
|
|
-
|
|
|
144,665
|
|
|
48,645
|
|
|
2.49%
|
|
Enema Glycerini
|
|
-
|
|
|
-
|
|
|
-
|
|
|
408,278
|
|
|
41,428
|
|
|
2.12%
|
|
Umguentum Acidi Borici Camphoratum
|
|
10
|
|
|
3
|
|
|
-
|
|
|
2,160
|
|
|
732
|
|
|
0.04%
|
|
Indometacin and Furazolidone
Suppositories
|
|
-
|
|
|
7
|
|
|
-
|
|
|
1,100
|
|
|
450
|
|
|
0.02%
|
|
Ge Hong Beriberi Water
|
|
92
|
|
|
29
|
|
|
-
|
|
|
4,625
|
|
|
1,363
|
|
|
0.07%
|
|
Total
|
|
|
|
$
|
1,180,168
|
|
|
100.00%
|
|
|
|
|
$
|
1,956,068
|
|
|
100.00%
|
|
Operating Expenses
The following table summarizes our operating expenses from the
continuing operations for the three months ended September 30, 2016 and 2015,
respectively:
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
Variance
|
|
|
%
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
$
|
430,264
|
|
$
|
348,879
|
|
$
|
81,385
|
|
|
23.33%
|
|
Depreciation and amortization
|
|
148,875
|
|
|
181,961
|
|
|
(33,086
|
)
|
|
(18.18%
|
)
|
Total Operating Expenses
|
$
|
579,139
|
|
$
|
530,840
|
|
$
|
48,299
|
|
|
9.10%
|
|
Total operating expenses from the continuing operations for the
three months ended September 30, 2016 increased by $48,299 or 9.10%, as compared
to the corresponding period in 2015. The increase in operating expenses was
primarily attributable to an increase of $81,385 or 23.33% in selling, general
and administrative expenses, partly offset by a decrease of $33,086 or 18.18% in
depreciation and amortization expenses. The increase in selling, general and
administrative expenses was mainly due to the increased professional fees and
increased salaries for management for the three months ended September 30, 2016
as compared to the same period in 2015. The decreased in depreciation and
amortization expenses was primarily due to the disposal of property, plant and
equipment of HLJ Huimeijia incurred during the second quarter of fiscal year
2016.
Total operating expenses from the discontinued operations
decreased from $196 for the three months ended September 30, 2015 to nil for the
corresponding period in 2016.
40
Interest Income and Interest Expense
Interest income from the continuing operations was $19,909 for
the three months ended September 30, 2016, as compared to $18,107 for the three
months ended September 30, 2015. This increase of $1,802, or 9.95%, was mainly
due to the increased average balance of bank deposits compared with the same
period of 2015.
Interest expense from the continuing operations was $21,686 for
the three months ended September 30, 2016, a decrease of $9,938 or 31.43%, as
compared to $31,624 for the three months ended September 30, 2015. The decrease
of interest expense was mainly due to the decrease of short-term loan interest
rate.
Investment Income
During the three months ended September 30, 2016, investment
income from the continuing operations was $225,093, as compared to nil for the
same period in 2015. On July 5, 2016, our Company entered into a one-year
financial management agreement with the principal in the amount of $8,997,526
(RMB 60,000,000) at the expected annual rate of return of 10%.
Income Taxes
Income taxes from the continuing operations increased by
$21,624, or 66.73%, from $32,406 for the three months ended September 30, 2015
to $54,030 for the three months ended September 30, 2016. This increase was due
to the increase in income before income taxes of one of the Companys
subsidiaries, Humankind, with an increase from $129,622 for the three months
ended September 30, 2015 to $216,121 for the same period of 2016.
Net Income (Loss) from Continuing Operations and Income
(Loss) Per Share
Net income from the continuing operations was $24,023 for the
three months ended September 30, 2016, as compared to net loss of $30,140 for
the three months ended September 30, 2015. This increase of $54,163, or 179.70%
in net income was primarily attributable to an increase in investment income in
the amount of $225,093 and a decrease in depreciation and amortization expense
in the amount of $33,086, partially offset by a decrease in gross profit of
$112,221 and an increase in selling, general and administrative expenses of
$81,385 for the three months ended September 30, 2016 as compared to the same
period of 2015.
Income per share was $0.0004 for the three months ended
September 30, 2016 and loss per share was $0.0005 for the three months ended
September 30, 2015, respectively. This increase was primarily a result of the
above increase in net income.
41
Net Loss from Discontinued Operations
Net loss from the discontinued operations was nil for the three
months ended September 30, 2016, as compared to $196 for the three months ended
September 30, 2015.
Net Income (Loss)
As a result of the foregoing, we had net income of $24,023 for
the three months ended September 30, 2016, compared to net loss of $30,336 for
the same period in 2015. After deduction of non-controlling interest in loss,
net income attributable to the China Health Industries Holdings was $24,023 for
the three months September 30, 2016, and net loss attributable to the China
Health Industries Holdings was $30,334 for the same period in 2015.
Liquidity and Capital Resources
We believe our current working capital position, together with
our expected future cash flows from operations, loans from our major
shareholder, will be adequate to fund our operations in the ordinary course of
business, anticipated capital expenditures, debt payment requirements and other
contractual obligations for at least the next twelve months. However, this
belief is based upon many assumptions and is subject to numerous risks, and
there can be no assurance that we will not require additional funding in the
future.
The following table summarizes our cash and cash equivalents
position, our working capital, and our cash flow activities from the continuing
operations as of September 30, 2016 and June 30, 2016 and for the three months
ended September 30, 2016 and 2015:
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
Cash and cash equivalents
|
$
|
20,778,742
|
|
$
|
29,783,152
|
|
Working capital
|
$
|
25,638,029
|
|
$
|
25,518,206
|
|
Inventories
|
$
|
452,029
|
|
$
|
414,784
|
|
|
|
2016
|
|
|
2015
|
|
For the three months ended
September 30:
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
$
|
15,744
|
|
$
|
210,290
|
|
Investing activities
|
$
|
(9,010,455
|
)
|
$
|
(28,182
|
)
|
Financing activities
|
$
|
85,085
|
|
$
|
49,181
|
|
For the three months ended September 30, 2016, our net decrease
in cash and cash equivalents from the continuing operations totaled $9,004,410,
which comprised of net cash used in investing activities in the amount of
$9,010,455 and the negative effect of prevailing exchange rates on our cash
position of $94,784, offset by net cash provided by operating activities in the
amount of $15,744 and net cash provided by financing activities in the amount of
$85,085.
42
For the three months ended September 30, 2015, our net decrease
in cash and cash equivalents from the continuing operations totaled $287,478,
which comprised of net cash used in investing activities in the amount of
$28,182 and the negative effect of prevailing exchange rates on our cash
position of $518,767, offset by net cash provided by operating activities in the
amount of $210,290 and net cash provided by financing activities in the amount
of $49,181.
Our working capital from continuing operations at September 30,
2016 was $25,638,029, compared to working capital of $25,518,206 at June 30,
2016. This increase of $119,823 or 0.47% was primarily attributable to the
increase in interest receivable in the amount of $224,938 and the decrease in
taxes payable in the amount of $144,770, offset by the decrease in accounts
receivable in the amount of $183,076 and the increase in related party debts in
the amount of $77,446.
Net cash provided by operating activities from the continuing
operations was $15,744 for the three months ended September 30, 2016, primarily
attributable to a decrease in accounts receivable of $178,748, partially offset
by an increase in taxes payable of $143,283. Net cash used in investing
activities from the continuing operations was $9,010,455 for the three months
ended September 30, 2016, primarily due to the expenditure in short-term
investment of $9,003,737. Net cash provided by financing activities from
continuing operations was $85,085 for the three months ended September 30, 2016,
attributable to proceeds from related party debts in the amount of $85,085. The
negative effect of exchange rate changes on cash and cash equivalents in the
amount of $94,784 for the three months ended September 30, 2016 was mainly a
result of the effect of the devaluation of the RMB to the USD on the significant
amount of cash and cash equivalents held by the Company in RMB. The exchange
rates from USD to RMB were 6.6685 to 1 and 6.6459 to 1 as of September 30, 2016
and June 30, 2016, respectively, and the average exchange rate from USD to RMB
was 6.6639 for the three months ended September 30, 2016.
Net cash provided by operating activities from continuing
operations was $210,290 for the three months ended September 30, 2015, primarily
attributable to net loss attribute to the Company from continuing operations in
the amount of $30,138, depreciation and amortization expenses of $233,185 as
reconciled, as well as an increase in accounts payables and accrued expenses of
$61,205, offset by a decrease in wages payable with an amount of $85,462. Net
cash provided by financing activities from continuing operations was $49,181 for
the three months ended September 30, 2015, attributable to collections of
related party debts in the amount of $49,181. The negative effect of exchange
rate changes on cash and cash equivalents in the amount of $518,767 for the
three months ended September 30, 2015 was mainly a result of the effect of the
devaluation of the RMB to the USD on the significant amount of cash and cash
equivalents held by the Company in RMB. The exchange rates from USD to RMB were
6.3556 to 1 and 6.2000 to 1 as of September 30, 2015 and June 30, 2015,
respectively, and the average exchange rate from USD to RMB was 6.3033 for the
three months ended September 30, 2015.
43
Other than as described in this report, we have no present
agreements or commitments with respect to any material acquisitions of
businesses, products, product rights or technologies or any other material
capital expenditures. However, we will continue to evaluate acquisitions of,
and/or investments in, products, technologies, capital equipment or improvements
or companies that complement our business and may make such acquisitions and/or
investments in the future. Accordingly, we may need to obtain additional sources
of capital in the future to finance any such acquisitions and/or investments. We
may not be able to obtain such financing on commercially reasonable terms, if at
all. Even if we are able to obtain additional financing, it may contain undue
restrictions on our operations, in the case of debt financing, or cause
substantial dilution for our stockholders, in the case of equity financing.
Related Party Debts
We had related party debts from the continuing operations in
the amount of $2,790,852 as of September 30, 2016, as compared to $2,713,406 as
of June 30, 2016, an increase of $77,446 or 2.85% . The amount of related party
debts mainly consists of a loan from Mr. Xin Sun, the CEO of the Company. The
loan is unsecured and non-interest bearing and has no fixed terms of repayment.
There was no written agreement for the loan. See Note 10.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are
currently material or reasonably likely to be material to our financial position
or results of operations.
Critical Accounting Policies and Estimates
We prepare the unaudited condensed consolidated financial
statements in accordance with US GAAP. These accounting principles require us to
make judgments, estimates and assumptions on the reported amounts of assets and
liabilities at the end of each fiscal period, and the reported amounts of
revenues and expenses during each fiscal period. We continually evaluate these
judgments and estimates based on our own historical experience, knowledge and
assessment of current business and other conditions, our expectations regarding
the future based on available information and assumptions that we believe to be
reasonable.
There have been no material changes during the three months
ended September 30, 2016 in the Companys significant accounting policies to
those previously disclosed in the annual report on Form 10-K for the fiscal year
ended June 30, 2016.