Item 1.
|
Financial
Statements
|
CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,748,905
|
|
|
$
|
32,614,910
|
|
Accounts receivable, net
|
|
|
2,676,783
|
|
|
|
1,455,433
|
|
Inventory
|
|
|
820,343
|
|
|
|
452,397
|
|
Other receivables, net
|
|
|
27,390
|
|
|
|
30,611
|
|
Advances to suppliers
|
|
|
18,791
|
|
|
|
94,749
|
|
Prepayments
|
|
|
47,530
|
|
|
|
20,462
|
|
Total current assets
|
|
|
36,339,742
|
|
|
|
34,668,562
|
|
|
|
|
|
|
|
|
|
|
Property, plants and equipment, net
|
|
|
3,542,840
|
|
|
|
3,724,490
|
|
Intangible assets, net
|
|
|
3,012,293
|
|
|
|
3,372,501
|
|
Construction in progress
|
|
|
1,174,800
|
|
|
|
1,134,834
|
|
Prepayments – Non-Current
|
|
|
19,387
|
|
|
|
30,212
|
|
Deferred tax assets
|
|
|
2,232
|
|
|
|
1,970
|
|
Total assets
|
|
$
|
44,091,294
|
|
|
$
|
42,932,569
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
|
499,971
|
|
|
|
400,109
|
|
Other payables
|
|
|
76,341
|
|
|
|
67,800
|
|
Advances from customers
|
|
|
377,560
|
|
|
|
163,459
|
|
Related party debts
|
|
|
6,419,954
|
|
|
|
6,393,730
|
|
Wages payable
|
|
|
290,112
|
|
|
|
234,668
|
|
Taxes payable
|
|
|
776,553
|
|
|
|
428,423
|
|
Total current liabilities
|
|
|
8,440,491
|
|
|
|
7,688,189
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Common stock, ($0.0001 par value per share, 300,000,000 shares authorized, 65,539,737 and 65,539,737 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively)
|
|
|
6,554
|
|
|
|
6,554
|
|
Additional paid-in capital
|
|
|
521,987
|
|
|
|
521,987
|
|
Accumulated other comprehensive income (loss)
|
|
|
(567,756
|
)
|
|
|
775,302
|
|
Statutory reserves
|
|
|
38,679
|
|
|
|
38,679
|
|
Retained earnings
|
|
|
35,651,339
|
|
|
|
33,901,858
|
|
Total stockholders’ equity
|
|
|
35,650,803
|
|
|
|
35,244,380
|
|
Total equity
|
|
|
35,650,803
|
|
|
|
35,244,380
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
44,091,294
|
|
|
$
|
42,932,569
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
For the three Months
|
|
|
For the Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
2,714,157
|
|
|
$
|
1,809,040
|
|
|
$
|
4,855,982
|
|
|
$
|
3,325,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
688,076
|
|
|
|
1,153,077
|
|
|
|
1,161,817
|
|
|
|
2,132,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,026,081
|
|
|
|
655,963
|
|
|
|
3,694,165
|
|
|
|
1,192,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
406,305
|
|
|
|
625,606
|
|
|
|
1,020,295
|
|
|
|
1,183,458
|
|
Depreciation and amortization expenses
|
|
|
142,758
|
|
|
|
66,750
|
|
|
|
284,280
|
|
|
|
208,604
|
|
Total operating expenses
|
|
|
549,063
|
|
|
|
692,356
|
|
|
|
1,304,575
|
|
|
|
1,392,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
1,477,018
|
|
|
|
(36,393
|
)
|
|
|
2,389,590
|
|
|
|
(199,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME/(EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
26,590
|
|
|
|
27,863
|
|
|
|
54,716
|
|
|
|
52,203
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
(25,062
|
)
|
|
|
(3
|
)
|
|
|
(48,402
|
)
|
Other income/(expenses), net
|
|
|
15,973
|
|
|
|
147
|
|
|
|
15,597
|
|
|
|
36,138
|
|
Bank charges
|
|
|
(274
|
)
|
|
|
(415
|
)
|
|
|
(709
|
)
|
|
|
(877)
|
|
Exchange Gain
|
|
|
-
|
|
|
|
12,675
|
|
|
|
-
|
|
|
|
-
|
|
Total other income, net
|
|
|
42,288
|
|
|
|
15,208
|
|
|
|
69,601
|
|
|
|
39,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAXES
|
|
|
1,519,306
|
|
|
|
(21,185
|
)
|
|
|
2,459,191
|
|
|
|
(160,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(402,041
|
)
|
|
|
(89,388
|
)
|
|
|
(709,710
|
)
|
|
|
(129,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
1,117,265
|
|
|
|
(110,573
|
)
|
|
|
1,749,481
|
|
|
|
(289,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
(44,937
|
)
|
|
|
789,814
|
|
|
|
(1,343,060
|
)
|
|
|
3,035,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
1,072,328
|
|
|
|
679,241
|
|
|
|
406,421
|
|
|
|
2,745,915
|
|
Basic & diluted income (loss) per share
|
|
$
|
0.0170
|
|
|
$
|
(0.0017
|
)
|
|
$
|
0.0267
|
|
|
$
|
(0.0044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted weighted average shares outstanding
|
|
|
65,539,737
|
|
|
|
65,539,737
|
|
|
|
65,539,737
|
|
|
|
65,539,737
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
Net income (loss) available to China Health Industries Holdings
|
|
$
|
1,749,481
|
|
|
$
|
(289,743
|
)
|
Net income (loss) from continuing operations
|
|
|
1,749,481
|
|
|
|
(289,743
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses
|
|
|
388,576
|
|
|
|
289,596
|
|
Provision for doubtful accounts
|
|
|
13
|
|
|
|
2,118
|
|
Provision for inventories
|
|
|
(154,767
|
)
|
|
|
(60,719
|
)
|
Deferred taxes loss/(gain)
|
|
|
(337
|
)
|
|
|
(348
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,279,100
|
)
|
|
|
157,408
|
|
Other receivables
|
|
|
2,079
|
|
|
|
(1,307
|
)
|
Inventory
|
|
|
(231,096
|
)
|
|
|
57,255
|
|
Advance to suppliers and prepaid expenses
|
|
|
54,401
|
|
|
|
(27,320
|
)
|
Accounts payables and accrued expenses
|
|
|
115,066
|
|
|
|
(4,332
|
)
|
Advance from customers and other payables
|
|
|
231,888
|
|
|
|
(3,694
|
)
|
Amounts due to related parties
|
|
|
248,961
|
|
|
|
1,882,464
|
|
Wages payable
|
|
|
64,401
|
|
|
|
(17,560
|
)
|
Taxes payable
|
|
|
360,982
|
|
|
|
(200,581
|
)
|
Net cash provided by operating activities
|
|
|
1,550,548
|
|
|
|
1,783,237
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Expenditure in short term investment
|
|
|
-
|
|
|
|
9,034,534
|
|
Purchases of property, plant and equipment
|
|
|
(112,055
|
)
|
|
|
15,354
|
|
Expenditure in construction in progress
|
|
|
(82,709
|
)
|
|
|
(18,338
|
)
|
Disposal of property, plant and equipment
|
|
|
-
|
|
|
|
361
|
|
Proceeds from disposal of subsidiaries
|
|
|
-
|
|
|
|
903,453
|
|
Net cash used in investing activities
|
|
|
(194,764
|
)
|
|
|
9,935,364
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from related party debts
|
|
|
-
|
|
|
|
85,085
|
|
Payment of short term loans
|
|
|
-
|
|
|
|
(1,505,756
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
(1,420,671
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,221,789
|
)
|
|
|
1,099,331
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
133,995
|
|
|
|
11,397,261
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning balance
|
|
|
32,614,910
|
|
|
|
21,197,448
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, ending balance
|
|
|
32,748,905
|
|
|
|
32,594,709
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
420,968
|
|
|
$
|
972,690
|
|
Cash paid for interest expense
|
|
$
|
-
|
|
|
$
|
48,400
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Loan from related party for the construction of a facility
|
|
$
|
584,147
|
|
|
$
|
479,985
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - ORGANIZATION AND BUSINESS BACKGROUND
China
Health Industries Holdings, Inc. (“China Health US”) was incorporated in the State of Arizona on July 11, 1996, and
is the successor to the business known as Arizona Mist, Inc., which was incorporated in 1989. On May 9, 2005, China Health US
entered into a stock purchase agreement and share exchange (effecting a reverse merger) with Edmonds 6, Inc., a Delaware corporation
(“Edmonds 6”), and changed its name to Universal Fog, Inc. Pursuant to this agreement, Universal Fog, Inc. (which
has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.
China
Health Industries Holdings Limited (“China Health HK”) was incorporated on July 20, 2007, in Hong Kong, under the
Companies Ordinance as a limited liability company. China Health HK was formed for the purpose of seeking and consummating a merger
or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship, as defined by Financial
Accounting Standards Board (“FASB”) ACS Topic 915.
Harbin
Humankind Biology Technology Co., Limited (“Humankind”) was incorporated in Harbin City, Heilongjiang Province, the
People’s Republic of China (the “PRC”), on December 14, 2003, as a limited liability company under the PRC Company
Law. Humankind is engaged in the manufacturing and sale of health products.
On
August 20, 2007, the sole shareholder of China Health HK entered into a share purchase agreement (the “Share Purchase Agreement”)
with the owners of Humankind. Pursuant to the Share Purchase Agreement, China Health HK purchased 100% of the equity interest
in Humankind for cash consideration of $60,408 (the “Share Purchase”). Subsequent to the completion of the Share Purchase,
Humankind became a wholly-owned subsidiary of China Health HK. Since the owner of Humankind owned a majority of the outstanding
shares of China Health HK’s common stock immediately following the execution of the Share Purchase Agreement, it was deemed
to be the acquirer in the reverse merger and the Share Purchase was accounted for as a “reverse merger”. Consequently,
the assets, liabilities and historical operations that were reflected in the financial statements for the periods prior to the
Share Purchase are those of Humankind and have been recorded at historical cost basis. After the completion of the Share Purchase,
China Health HK’s consolidated financial statements include the assets and liabilities of both China Health HK and Humankind,
the historical operations of Humankind, and the operations of China Health HK and its subsidiaries from the closing date of the
Share Purchase onward.
On
October 14, 2008, Humankind formed a 99% owned subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”), in the
PRC. Huimeijia’s primary business is the manufacture and distribution of pharmaceuticals. Mr. Xin Sun, the majority owner
of China Health US, owns 1% of Huimeijia. Huimeijia is consolidated in the consolidated financial statements of China Health HK.
On
December 31, 2008, China Health HK entered into a reverse merger with Universal Fog, Inc. (the “Transaction”). China
Health HK was the acquirer in the Transaction, and the Transaction has been treated as a recapitalization of China Health US.
Following the Transaction and a subsequent 20:1 reverse stock split, Mr. Xin Sun owned 61,203,088 shares of common stock of China
Health US, representing 98.3% of the 62,234,737 total outstanding shares of common stock. On April 7, 2009, Mr. Sun transferred
28,200,000 shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of China Health US, or
approximately 53.03% of the total outstanding shares of common stock. Universal Fog, Inc. changed its name to China Health Industries
Holdings, Inc. on February 19, 2009.
On
November 22, 2013, Humankind completed the acquisition of Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”)
for a total purchase price of $16,339,869 (RMB100,000,000). HLJ Huimeijia was formed on October 30, 2003, in the PRC and is engaged
in the manufacturing and distribution of tinctures, ointments, rub-in therapeutic pastes, topical solutions, suppositories, enemas,
orally-administered liquids, and liniments, including traditional Chinese medicine extractions. HLJ Huimeijia’s predecessor
is Heilongjiang Xue Du Pharmaceutical Co., Ltd., which established its brand by supplying high quality medical products. HLJ Huimeijia
is categorized as a “high and new technology” enterprise by the Science Technology Department of Heilongjiang Province.
HLJ Huimeijia has 21 products that 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 a utility model, five
patents for external design, and three trademarks in the PRC, including the Chinese brand name “Xue Du”, which has
an established reputation among customers in the northeastern PRC.
On
December 24, 2014, Humankind entered into a stock transfer agreement (the “Original Agreement”) with Xiuzheng Pharmaceutical
Group Co., Ltd., a company incorporated under the laws of the PRC and located in Jilin province (“Xiuzheng Pharmacy”
or the “Buyer”), Mr. Xin Sun, the CEO of the Company, and Huimeijia, which was 99% owned by Humankind and 1% owned
by Mr. Xin Sun. Pursuant to the Original Agreement, Humankind and Mr. Xin Sun (the “Equity Holders”), sold their respective
equity interests in Huimeijia to Xiuzheng Pharmacy.
On
February 9, 2015, the four parties (i.e. Humankind, Xiuzheng Pharmacy, Mr. Xin Sun and Huimeijia) 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 “Asset Transferors”) would sell only 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 would have retained their equity interests in Huimeijia, but would have pledged such
equity interests to Xiuzheng Pharmacy until the Assets were transferred, at which time the cash consideration would have been
paid by the Buyer. Total cash consideration would have been the same as under the Original Agreement, i.e., RMB 8,000,000 (approximately
$1,306,186) to the Asset Transferors. In the event that the Assets had failed to be transferred to the Buyer due to the fault
of the Asset Transferors, the paid consideration would have been returned to the Buyer with interest accrued. If the failure of
the transfer of the Assets were a result of changes in government policy or force majeure, the paid cash consideration would have
been returned to the Buyer but without any interest.
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 the Equity Holders agreed to sell their respective equity interests in Huimeijia to Xiuzheng Pharmacy.
The transfer of 100% of the equity interests of Huimeijia to the Buyer was for total cash consideration of RMB 8,000,000 (approximately
$1,306,186) (the “Purchase Price”) to the Equity Holders. Pursuant to the Agreement, 40% of the Purchase Price is
due within 10 business days after the signing of the Agreement; 40% of the Purchase Price is due within 10 business days after
the completion of the changes in business registration described in the Original Agreement and Xiuzheng Pharmacy obtaining documents
evidencing its ownership of Huimeijia; 15% of the Purchase Price is due within 10 business days after the transfer of all of the
Assets is approved by the Heilongjiang FDA; and 5% of the Purchase Price is due within 10 business days after all of the Assets
have been transferred to Xiuzheng Pharmacy, or its designee, and Humankind and Mr. Xin Sun have instructed Xiuzheng Pharmacy to
complete the three-batches production of all forms of the drugs included in the Assets. As of the date of this report, 80% of
the Purchase Price has been paid, because the Company has completed changes in its business registration, Xiuzheng Pharmacy has
obtained a business license to Huimeijia that was issued by the local State Administration of Industry and Commerce in Harbin
(“Harbin SAIC”) that reflects the recording of the ownership of Huimeijia as being held by Xiuzheng Pharmacy and with
Harbin SAIC and the legal representative, a person that is authorized to take most of the corporate actions on behalf of a company
under the corporate laws in China, of Huimeijia has been appointed by the Buyer. The transfer of all of the drug licenses to the
Buyer and the payment of the remainder of the Purchase Price to the Equity Holders are still pending.
China
Health US, China Health HK, Humankind, and HLJ Huimeijia are collectively referred to herein as the “Company”.
As
of December 31, 2018, the Company’s corporate structure was as follows:
Note
2 - SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
This
summary of the Company’s significant accounting policies is presented to assist in understanding the Company’s financial
statements. The financial statements and notes are representations of the Company’s management (“Management”),
which is responsible for the integrity and objectivity of the financial statements and notes. These accounting policies conform
to generally accepted accounting principles in the United States (“US GAAP”) and have been consistently applied in the
preparation of the unaudited condensed consolidated financial statements.
The
accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and disclosures
normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted as allowed by such
rules and regulations, and Management believes that the disclosures are sufficient so that the information presented is not misleading.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018. These unaudited
condensed consolidated financial statements include all adjustments which, in the opinion of Management, are necessary for a fair
presentation of the financial position and the results of operations of the Company. All such adjustments are of a normal and
recurring nature. The results of operations of the Company for the six months ended December 31, 2018 may not be indicative of
results that may be expected for the year ended June 30, 2019.
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include China Health US and its three subsidiary companies,
namely China Health HK, Humankind, 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 were and are under the common control of Mr. Xin Sun, the CEO of China Health US, before and after
the date of transfer. Humankind’s accounting policy adopted the guidance in ASC 805-50-05-5 for the transfer of net assets
between entities under common control to apply an accounting 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 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 shall also
be retrospectively adjusted to furnish comparative information.
Segment
Reporting
FASB
Accounting Standard Codification (“ASC”) Topic 280, “Segment Reporting”, established standards for reporting
information about operating segments on a basis consistent with a company’s internal organizational structure, as well as information
about geographical areas, business segments, and major customers in financial statements for details on the Company’s business
segments. The Company has three reportable operating segments: Humankind, HLJ Huimeijia, and “Others”. The segments
are grouped based on the types of products provided.
Fair
Value of Financial Instruments
The
provisions of FASB ASC Topic 820 accounting guidance that apply to the Company require all entities to disclose the fair value
of financial instruments, including both assets and liabilities recognized and those not recognized on the balance sheets, for
which it is practicable to estimate fair value, and defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Fair
Value Measurements
FASB
ASC Topic 820, “Fair Value Measurements and Disclosures”, clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value, and requires additional disclosures about the use of fair value measurements.
Various
inputs are considered when determining the fair value of the Company’s debt. The inputs or methodologies used for valuing
securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized
in the three broad levels listed below:
Level
1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
Level
2 – other significant observable inputs, including quoted prices for similar securities, interest rates, credit risk, etc..
Level
3 – significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.
The
carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or a 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 discretion of Management. For other financial instruments,
pricing inputs are less observable in the market and may require judgment of Management.
Translation
of Foreign Currencies
Humankind
and HLJ Huimeijia maintain their books and accounting records in the PRC currency “Renminbi” (“RMB”),
which has been determined to be the Company’s functional currency.
Transactions
denominated in currencies other than RMB are translated into RMB at the exchange rates prevailing on the dates of the respective
transactions, as quoted by the Federal Reserve Board. Foreign currency exchange gains and losses resulting from these transactions
are included in operations.
Humankind
and HLJ Huimeijia’s financial statements are translated into the reporting currency, the United States Dollar (“USD”).
Assets and liabilities of the aforementioned entities are translated at the prevailing exchange rate at the end date of each reporting
period. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and
expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting
from the translation of these financial statements are reflected as accumulated other comprehensive income in shareholders’
equity and non-controlling interests.
Statement
of Cash Flows
In
accordance with Statement FASB ASC Topic 230, “Statement of Cash Flows”, cash flow from the Company’s operations is
calculated based upon the local currencies and translated to the reporting currency using an average foreign exchange rate for
the reporting period. As a result, amounts related to assets and liabilities reported in the statement of cash flows will not
necessarily be the same as the corresponding balances on the balance sheet.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with US GAAP requires Management to make estimates and judgments that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on
historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances.
Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates
may change as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s
operating environment changes. Significant estimates and assumptions by Management include, among others, useful life of long-lived
assets and intangible assets, valuation of inventory, accounts receivable and notes receivable, impairment analysis of long-lived
assets, construction in progress, intangible assets, and deferred taxes. While Management believes that the estimates and assumptions
used in the preparation of the financial statements are appropriate, actual results could differ from those estimates. Estimates
and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period
they are determined to be necessary.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments
which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.
As
of December 31, 2018 and June 30, 2018, the Company’s uninsured bank balances were mainly maintained at financial institutions
located in the PRC and Hong Kong. The uninsured bank balances were $32,748,905 and $32,614,910 as of December 31, 2018 and June
30, 2018, respectively. The Company had no insured bank balances as of December 31, 2018 and June 30, 2018, respectively.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers
in the ordinary course of business, but mitigates the associated risks by performing credit checks and actively pursuing past
due accounts. An allowance for doubtful accounts is established and determined based on Management’s assessment of known
requirements, aging of receivables, payment and bad debt history, the customer’s current credit worthiness, changes in customer
payment patterns and the economic environment. 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) days.
As of December 31, 2018 and June 30, 2018, the balances of accounts receivable were $2,731,895 and $1,512,678, respectively. The
Company determines the allowance based on aging data, historical collection experience, customer specific facts, and economic
conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. The Company evaluated the nature of all accounts receivable then provided allowance for doubtful
accounts. The Company has determined that an allowance of $55,112 and $57,245 from the continuing operations of the Company was
appropriate as of December 31, 2018 and June 30, 2018, respectively.
Advances
to Suppliers
The
Company periodically makes advances to certain vendors for purchases of raw materials or to service providers for services relating
to construction plans for its plants, equipment and production lines for GMP upgrading, and records these payments as advances
to suppliers. As of December 31, 2018 and June 30, 2018, advances to suppliers amounted to $18,791 and $94,749, respectively.
Inventory
Inventory
consists of raw materials, work in progress, and finished goods or manufactured products.
Inventory
is stated at the lower of either cost or market value and consists of materials, labor and overhead. HLJ Huimeijia uses the weighted
average method for inventory valuation. The other subsidiaries of the Company use the first-in, first-out (“FIFO”)
method for inventory valuation. Overhead costs included in finished goods include direct labor costs and other costs directly
applicable to the manufacturing process. The Company evaluates inventory for excess, slow moving, and obsolete inventory, as well
as inventory, for which the value is in excess of net realizable value. This evaluation includes analysis of sales levels by product
and projections of future demand. If future demand or market conditions are less favorable than the Company’s projections,
a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made. Inventory
allowance was nil and $160,394 for the six months ended December 31, 2018 and June 30, 2018, respectively.
Impairment
of Long-Lived Assets
The
Company’s long-lived assets and other assets are reviewed for impairment in accordance with the guidance of the FASB ASC
Topic 360-10, “Property, Plant, and Equipment”, and FASB ASC Topic 205, “Presentation of Financial Statements”.
The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to the future undiscounted cash flows expected to be generated by the asset. If
such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount
of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on the useful life and future
cash flows of assets. Actual useful life and cash flows could be different from those estimated by management, which could have
a material effect on the Company’s reporting results and financial position. Fair value is determined through various valuation
techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
As of December 31, 2018 and June 30, 2018 the Company had not experienced impairment losses on its long-lived assets. However,
there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment
of long-lived assets in the future.
Property,
Plants and Equipment
Property,
plants and equipment are carried at the lower of either cost or fair value. Maintenance, repairs and minor renewals are expensed
as incurred; major renewals and improvements that extend the life or increases the capacity of plant assets are capitalized.
When
assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains
or losses are included in the results of operations in the reporting period of disposition.
Depreciation
is calculated on a straight-line basis over the estimated useful life of the assets. The depreciable life applied are:
Buildings, Warehouses
and Improvements
|
20 to
30 years
|
Office Equipment
|
3 to 7 years
|
Vehicles
|
5
to 15 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 life are not amortized, but are subject to annual impairment tests. If the assumptions
and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments
or future asset impairment charges could be required. The value of the Company’s intangible assets could be impacted by
future adverse changes such as: (i) any future declines in the Company’s operating results, (ii) a decline in the valuation
of technology, including the valuation of the Company’s common stock, (iii) a significant slowdown in the worldwide economy,
or (iv) any failure to meet the performance projections included in the Company’s forecasts of future operating results.
In accordance with FASB ASC Topic 350, the Company tests intangible assets for impairment on an annual basis or more frequently
if the Company believes indicators of impairment exist. Impairment evaluations involve management’s estimates of the useful
life and future cash flows of assets. Significant judgment of management is required in the forecast of future operating results
that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect. If the Company’s
actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used to assess
the recoverability of these assets, the Company could incur additional impairment charges in a future period. Based on such evaluations,
there was no impairment recorded for intangible assets, for the six months ended December 31, 2018 and 2017, respectively.
Construction
in Progress
Construction
in progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s
plant facilities. Costs classified as construction in progress include all costs of obtaining the asset and bringing it to the
location and in the condition necessary for its intended use. No depreciation is provided for construction in progress until such
time as the assets are completed and are placed into service.
The
Company reviews the carrying value of construction in progress for impairment whenever events and circumstances indicate that
the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value of the assets, an
impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets. The factors
considered by management in performing this assessment include current operating results, trends and prospects, the manner in
which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment,
there were no impairments recorded for construction in progress, for the six months ended December 31, 2018 and 2017, respectively.
Revenue
Recognition
The
Company recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue
when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement
exists and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers.
The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title
and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable
rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially
affect the results of operations. The Company records revenue at the discounted selling price and allows its customers to return
products for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical
experience. There has been no provision recorded for returns based upon historical experience, for both continuing and discontinued
operations, in the six months ended December 31, 2018 and 2017, respectively.
Cost
of Goods Sold
Cost
of goods sold consists primarily of the costs of raw materials, freight charges, direct labor, depreciation of plants and machinery,
warehousing and overhead costs associated with the manufacturing process and commission expenses.
Income
Taxes
The
Company has adopted FASB ASC Topic 740, “Income Taxes”, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years based on the differences between
the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount expected to be realized.
In
July 2006, the FASB issued FIN 48(ASC 740-10), “Accounting for Uncertainty in Income Taxes — An Interpretation of
FASB Statement No. 109 (ASC 740),” which requires income tax positions to meet a more-likely-than-not recognition threshold
to be recognized in the financial statements. Under FIN 48(ASC 740-10), tax positions that previously failed to meet the more-likely-than-not
threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met.
As
a result of the implementation of FIN 48 (ASC 740-10), the Company undertook a comprehensive review of its portfolio of tax positions
in accordance with recognition standards established by FIN 48 (ASC 740-10). The Company recognized no material adjustments to
liabilities or stockholders’ equity as a result of the implementation. The adoption of FIN 48 did not have a material impact
on the Company’s financial statements.
The
application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and
regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of
regulations and court rulings. Therefore, the actual liability may be materially different from the Company’s estimates,
which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities
or deferred tax asset valuation allowance.
Enterprise
Income Tax
Under
the Provisional Regulations of the PRC Concerning Income Tax on Enterprises promulgated by the PRC (the “EIT Law”),
income tax is payable by enterprises at a rate of 25% of their taxable income.
Value
Added Tax
The
Provisional Regulations of the PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1,
1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax,
value added tax (“VAT”) is imposed on goods sold in, or imported into, the PRC and on processing, repair and replacement
services provided within the PRC.
VAT
payable in the PRC is charged on an aggregated basis at a rate of 13% or 16% (depending on the type of goods involved) on the
full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the
taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of VAT included in
the price or charges, and less any deductible VAT already paid by the taxpayer on purchases of goods and services in the same
financial year.
Sales-Related
Taxes
Pursuant
to the tax law and regulations of the PRC, the Company is obligated to pay 7% and 5% of the annual aggregate VAT paid by the Company
as taxes for the purposes of maintaining and building cities and educational facilities, which fees are included as sales-related
taxes. Sales-related taxes are recorded when sales revenue is recognized.
Concentrations
of Business and Credit Risks
All
of the Company’s manufacturing takes place in the PRC. There can be no assurance that the Company will be able to successfully
continue to manufacture its products and failure to do so would have a material adverse effect on the Company’s financial
position, results of operations, and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies,
some of which are beyond Management’s control. These contingencies include general economic conditions, prices of raw materials,
competition, governmental and political conditions, and changes in regulations. Since the Company is dependent on trade in the
PRC, the Company is subject to various additional political, economic, and other uncertainties. Among other risks, the Company’s
operations will be subject to the risks of restrictions on transfer of funds, domestic customs, changing taxation policies, foreign
exchange restrictions, and political and governmental regulations.
The
Company operates in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility
of foreign exchange rates between U.S. dollars and RMB. The results of operations denominated in foreign currency are translated
at the average rate of exchange during the reporting periods.
Earnings
Per Share
Basic
earnings per common share are computed by dividing net earnings applicable to common shareholders by the weighted-average number
of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options and warrants. For the six months ended December 31, 2018
and 2017, 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
Revenue
Recognition:
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers:
Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of
ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve
this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition
process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate
performance obligation. ASU 2014-09 is effective for the Company in its first quarter of fiscal 2018 using either of two methods:
(i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within
ASU 2014-09 (full retrospective method); or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized
at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09 (modified retrospective
method).
In April 2016, the FASB issued ASU 2016-10,
Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The objective is to clarify
the two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the
related principles for these areas. The ASU affects the guidance in ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606),
which is not yet effective. The effective date and transition requirements for this ASU are the same as
the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date,
defers the effective date of ASU 2014-09 by one
year. The Company adopted the new standard beginning on July 1, 2018, using the modified retrospective transition method. The
Company does not believe the adoption of this guidance has a material impact on the Company’s consolidated financial statements
and its internal controls over financial reporting.
Except
for the ASU above, in the period from January 1, 2018 to December 31, 2018, the FASB has issued ASU No. 2018-01 through ASU 2018-015,
which are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
NOTE
3 - ACCOUNTS RECEIVABLE
The
Company’s accounts receivable were $2,676,783 and $1,455,433, net of allowances for doubtful accounts amounting to $55,112
and $57,245, as of December 31, 2018 and June 30, 2018, respectively.
NOTE
4 - INVENTORY
Inventory
from the continuing operations of the Company consisted of following:
|
December 31,
|
|
June 30,
|
|
2018
|
|
2018
|
Raw Materials
|
$
|
350,830
|
|
$
|
219,735
|
Supplies and Packing Materials
|
|
68,108
|
|
|
132,329
|
Work-in-Progress
|
|
92,003
|
|
|
22,083
|
Finished Goods
|
|
309,402
|
|
|
78,250
|
Total
|
$
|
820,343
|
|
$
|
452,397
|
The
inventory allowance in the amounts of nil and $160,394 were provided for as of December 31, 2018 and June 30, 2018, respectively.
NOTE
5 - CONSTRUCTION IN PROGRESS
Construction
in progress of the Company consisted of the following:
|
December 31,
|
|
June 30,
|
|
2018
|
|
2018
|
Plant - HLJ Huimeijia
|
$
|
1,146,968
|
|
$
|
1,116,652
|
Factory Maintenance - Humankind
|
|
27,832
|
|
|
18,182
|
Total
|
$
|
1,174,800
|
|
$
|
1,134,834
|
On
April 6, 2012, HLJ Huimeijia entered into an agreement with a contractor for construction of the HLJ Huimeijia plant. The estimated
total cost of construction was approximately $1.86 million (RMB 12,800,000), and construction is anticipated to be completed in
2019. As of December 31, 2018, approximately 63% of construction had been completed and $1,174,800 (RMB 8,079,799) has been recorded
as costs of construction in progress.
NOTE
6 - PROPERTY, PLANTS AND EQUIPMENT
Property,
plants and equipment consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Building, Warehouses and Improvements
|
|
$
|
3,357,164
|
|
|
$
|
3,487,904
|
|
Machinery and Equipment
|
|
|
1,635,668
|
|
|
|
1,589,195
|
|
Office Equipment
|
|
|
74,966
|
|
|
|
71,927
|
|
Vehicles
|
|
|
201,897
|
|
|
|
209,760
|
|
Others
|
|
|
908,747
|
|
|
|
944,138
|
|
Less: Accumulated Depreciation
|
|
|
(2,635,602
|
)
|
|
|
(2,578,434
|
)
|
Total
|
|
$
|
3,542,840
|
|
|
$
|
3,724,490
|
|
Depreciation
expenses were $154,199 and $175,057 for the six months ended December 31, 2018 and 2017, respectively. Depreciation expenses charged
to operations were $49,903 and $94,064 for the six months ended December 31, 2018 and 2017, respectively. Depreciation expenses
charged to cost of goods sold were $104,296 and $80,993 for the six months ended December 31, 2018 and 2017, respectively.
NOTE
7 - INTANGIBLE ASSETS
The
following is a summary of intangible assets of the Company:
|
|
December 31,
2018
|
|
|
June 30,
2018
|
|
Land Use Rights – Humankind
|
|
$
|
921,540
|
|
|
$
|
957,428
|
|
Health Supplement Product Patents – Humankind
|
|
|
4,361,987
|
|
|
|
4,531,858
|
|
Pharmaceutical Patents - HLJ Huimeijia
|
|
|
380,099
|
|
|
|
394,902
|
|
Land Use Rights - HLJ Huimeijia
|
|
|
630,320
|
|
|
|
654,867
|
|
Less: Accumulated Amortization
|
|
|
(3,281,653
|
)
|
|
|
(3,166,554
|
)
|
Total
|
|
$
|
3,012,293
|
|
|
$
|
3,372,501
|
|
All
land in the PRC belongs to the government of the PRC. Enterprises and individuals can pay the PRC government a fee to obtain the
right to use a piece of land for commercial purposes or residential purposes for an initial period of 50 years or 70 years as
applicable. These land use rights can be sold, purchased, and exchanged in the market. Any successive owner of the land use right
would have the right to use the land for the time remaining on the initial period.
Amortization
expenses were $234,377 and $114,539 for the six months ended December 31, 2018 and 2017, respectively.
NOTE
8 - RELATED PARTY DEBTS
Related
party debts, which represent temporary short-term loans from Mr. Xin Sun and Mr. Kai Sun, consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
2018
|
|
|
2018
|
Mr. Xin Sun
|
|
$
|
6,385,954
|
|
|
$
|
6,358,406
|
Mr. Kai Sun
|
|
|
34,000
|
|
|
|
35,324
|
Total
|
|
$
|
6,419,954
|
|
|
$
|
6,393,730
|
These
loans are unsecured, non-interest bearing and have no fixed terms of repayment; therefore, they are deemed payable on demand.
Mr. Kai Sun is a PRC citizen and a family member of Mr. Xin Sun, the CEO of the Company.
NOTE
9 - INCOME TAXES
(a)
Corporate income taxes
United
States
China
Health US was organized in the United States. China Health US had no taxable income for US income tax purposes for the six months
ended December 31, 2018 and 2017. As of December 31, 2018, China Health US had a net operating loss carry forward for United States
income tax purposes. Net operating loss carry forwards are available to reduce future years’ taxable income. Management
believes that the realization of the benefits from these losses appears uncertain due to the Company’s operating history
and the continued losses of its US entity. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax
asset to reduce the asset to zero. There were no changes in the valuation allowance for the six months ended December 31, 2018
and 2017. Management reviews this valuation allowance periodically and makes adjustments accordingly.
Hong
Kong
China
Health HK was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income
arising in or derived from Hong Kong. No provision for income taxes has been made because China Health HK had no taxable income
in Hong Kong.
People’s
Republic of China
Under
the EIT Law, the standard EIT rate is 25%. The PRC subsidiaries of the Company are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
|
|
For the Three Months
Ended
|
|
|
For the Six Months
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
China
|
|
|
402,041
|
|
|
|
89,388
|
|
|
|
709,710
|
|
|
|
129,040
|
|
Total current provision
|
|
|
402,041
|
|
|
|
89,388
|
|
|
|
709,710
|
|
|
|
129,040
|
|
Deferred provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
402,041
|
|
|
$
|
89,388
|
|
|
$
|
709,710
|
|
|
$
|
129,040
|
|
Significant
components of deferred tax assets from the continuing operations of the Company were as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
676,947
|
|
|
$
|
653,936
|
|
Allowances for doubtful accounts
|
|
|
13,778
|
|
|
|
13,962
|
|
Valuation allowance
|
|
|
(688,493
|
)
|
|
|
(665,928
|
)
|
Total
|
|
$
|
2,232
|
|
|
$
|
1,970
|
|
(b)
Uncertain tax positions
There
were no unrecognized tax benefits as of December 31, 2018 and June 30, 2018, 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 six
months ended December 31, 2018 and 2017, the Company did not incur any interest or penalties arising from its tax payments.
NOTE
10 - EARNINGS/(LOSS) PER SHARE
Basic
earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number
of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options and warrants.
Potential
common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained
upon the exercise of options and warrants in computing dilutive earnings per share. It assumes that any proceeds would be used
to purchase common stock at the average of the market price of the common stock during the period.
FASB
ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings
per share (EPS) computations.
For
the six months ended December 31, 2018 and 2017, the Company did not have potential dilutive shares. The following table sets
forth the computation of basic and diluted net income per share:
|
|
For the Three Months
Ended
|
|
|
For the Six Months
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to China Health Industries Holdings
|
|
$
|
1,117,265
|
|
|
$
|
(110,573
|
)
|
|
$
|
1,749,481
|
|
|
$
|
(289,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted
|
|
$
|
0.0170
|
|
|
$
|
(0.0017
|
)
|
|
$
|
0.0267
|
|
|
$
|
(0.0044
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted
|
|
|
65,539,737
|
|
|
|
65,539,737
|
|
|
|
65,539,737
|
|
|
|
65,539,737
|
|
NOTE
11 - COMMITMENTS AND CONTINGENCIES
The
Company’s assets are located in the PRC and revenues are derived from operations in the PRC.
In
terms of industry regulations and policies, the economy of the PRC has been transitioning from a planned economy to market oriented
economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for
economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in
business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC government. For example,
all land is state owned and leased to business entities or individuals through the PRC government’s granting of land use
rights. The granting process is typically based on government policies at the time of granting and can be lengthy and complex.
This process may adversely affect the Company’s future manufacturing expansions. The PRC government also exercises significant
control over the PRC’s economic growth through the allocation of resources and providing preferential treatment to particular
industries or companies. Uncertainties may arise with changing of governmental policies and measures.
The
Company faces a number of risks and challenges not typically associated with companies in North America or Western Europe, because
its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country
with an early stage market economic system, which is overshadowed by the state. Its political and economic systems are 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 Company’s
performance.
The
Company had no rental commitments as of December 31, 2018.
NOTE
12 - MAJOR SUPPLIERS AND CUSTOMERS
For
the six months ended December 31, 2018, the Company had three suppliers that in the aggregate accounted for 76% of the Company’s
purchases for operations, with each supplier accounting for 46%, 16%, and 14%, respectively.
For
the six months ended December 31, 2017, the Company had two suppliers that in the aggregate accounted for 88% of the Company’s
purchases for operations, with each supplier accounting for 78% and 10%, respectively.
For
the six months ended December 31, 2018, the Company had six customers that in the aggregate accounted for 84% of the Company’s
total sales for operations, with each customer accounting for 21%, 17%, 15%, 12%, 11% and 8%, respectively.
For
the six months ended December 31, 2017, the Company had six customers that in the aggregate accounted for 69% of the Company’s
total sales for operations, with each customer accounting for 17%, 14%, 12%, 10%, 9% and 7%, respectively.
NOTE
13 - SEGMENT REPORTING
The
Company is organized into the following three main business segments based on the types of products being provided to customers:
HLJ Huimeijia, Humankind and “Others”. Each of the three operating segments referenced above has separate and distinct
general ledgers. The chief operating decision maker (“CODM”) receives financial information, including information
regarding revenue, gross margin, operating income, and net income from the various general ledger systems to make decisions about
allocating resources and assessing performance; however, the principal measure of segment profitability or loss used by the CODM
is net loss by segment. The discontinued Huimeijia business was included in the “Others” segment.
The
following tables present summary information by segment for the three months ended December 31, 2018 and 2017, respectively:
|
|
For the Three Months Ended
December 31, 2018
|
|
|
For the Three Months Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
HLJ
|
|
|
|
|
|
|
|
|
continuing
|
|
|
HLJ
|
|
|
|
|
|
|
|
|
continuing
|
|
|
|
Huimeijia
|
|
|
Humankind
|
|
|
Others
|
|
|
operations
|
|
|
Huimeijia
|
|
|
Humankind
|
|
|
Others
|
|
|
operations
|
|
Revenues
|
|
$
|
29,272
|
|
|
$
|
2,684,885
|
|
|
$
|
-
|
|
|
$
|
2,714,157
|
|
|
$
|
-
|
|
|
$
|
1,809,040
|
|
|
$
|
-
|
|
|
$
|
1,809,040
|
|
Cost of revenues
|
|
|
34,919
|
|
|
|
653,157
|
|
|
|
-
|
|
|
|
688,076
|
|
|
|
-
|
|
|
|
1,153,077
|
|
|
|
-
|
|
|
|
1,153,077
|
|
Gross profit
|
|
|
(5,647
|
)
|
|
|
2,031,728
|
|
|
|
-
|
|
|
|
2,026,081
|
|
|
|
-
|
|
|
|
655,963
|
|
|
|
-
|
|
|
|
655,963
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
25,061
|
|
|
|
-
|
|
|
|
1
|
|
|
|
25,062
|
|
Depreciation and amortization
|
|
|
11,823
|
|
|
|
130,935
|
|
|
|
-
|
|
|
|
142,758
|
|
|
|
1,941
|
|
|
|
64,809
|
|
|
|
-
|
|
|
|
66,750
|
|
Income tax
|
|
|
|
|
|
|
402,041
|
|
|
|
|
|
|
|
402,041
|
|
|
|
-
|
|
|
|
89,388
|
|
|
|
-
|
|
|
|
89,388
|
|
Net income (loss)
|
|
|
(77,027
|
)
|
|
|
1,206,114
|
|
|
|
(11,822
|
)
|
|
|
1,117,265
|
|
|
|
(346,474
|
)
|
|
|
266,971
|
|
|
|
(310,70
|
)
|
|
|
(110,573
|
)
|
Total capital expenditures
|
|
|
72,974
|
|
|
|
20,719
|
|
|
|
-
|
|
|
|
93,963
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
3,610,890
|
|
|
$
|
40,480,428
|
|
|
$
|
(24
|
)
|
|
$
|
44,091,294
|
|
|
$
|
3,455,816
|
|
|
$
|
40,363,229
|
|
|
$
|
(433,842
|
)
|
|
$
|
43,385,203
|
|
|
|
For the Six Months Ended
December 31, 2018
|
|
|
For the Six Months Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
HLJ
|
|
|
|
|
|
|
|
|
continuing
|
|
|
HLJ
|
|
|
|
|
|
|
|
|
continuing
|
|
|
|
Huimeijia
|
|
|
Humankind
|
|
|
Others
|
|
|
operations
|
|
|
Huimeijia
|
|
|
Humankind
|
|
|
Others
|
|
|
operations
|
|
Revenues
|
|
$
|
45,589
|
|
|
$
|
4,810,393
|
|
|
$
|
-
|
|
|
$
|
4,855,982
|
|
|
$
|
-
|
|
|
$
|
3,325,007
|
|
|
$
|
-
|
|
|
$
|
3,325,007
|
|
Cost of revenues
|
|
|
55,384
|
|
|
|
1,106,433
|
|
|
|
-
|
|
|
|
1,161,817
|
|
|
|
-
|
|
|
|
2,132,710
|
|
|
|
-
|
|
|
|
2,132,710
|
|
Gross profit
|
|
|
(9,795
|
)
|
|
|
3,703,960
|
|
|
|
-
|
|
|
|
3,694,165
|
|
|
|
-
|
|
|
|
1,192,297
|
|
|
|
-
|
|
|
|
1,192,297
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
48,400
|
|
|
|
|
|
|
|
2
|
|
|
|
48,402
|
|
Depreciation and amortization
|
|
|
18,828
|
|
|
|
265,452
|
|
|
|
-
|
|
|
|
284,280
|
|
|
|
33,142
|
|
|
|
175,462
|
|
|
|
-
|
|
|
|
208,604
|
|
Income tax
|
|
|
|
|
|
|
709,710
|
|
|
|
-
|
|
|
|
709,710
|
|
|
|
-
|
|
|
|
129,040
|
|
|
|
-
|
|
|
|
129,040
|
|
Net income (loss)
|
|
|
(230,972
|
)
|
|
|
2,130,480
|
|
|
|
(150,027
|
)
|
|
|
1,749,481
|
|
|
|
(525,618
|
)
|
|
|
385,928
|
|
|
|
(150,053
|
)
|
|
|
(289,743
|
)
|
Total capital expenditures
|
|
|
93,186
|
|
|
|
101,579
|
|
|
|
-
|
|
|
|
194,765
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
3,610,890
|
|
|
$
|
40,480,428
|
|
|
$
|
(24
|
)
|
|
$
|
44,091,294
|
|
|
$
|
3,455,816
|
|
|
$
|
40,363,229
|
|
|
$
|
(433,842
|
)
|
|
$
|
43,385,203
|
|
NOTE
14 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events
from the balance sheet date through the date the financial statements were issued and determined that there are no items to disclose
under this section.
Item 2.
|
Management’s
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 under captions elsewhere in this document,
are forward-looking statements. In some cases, these statements are identifiable through the use of words such as “anticipate”,
“believe”, “estimate”, “expect”, “intend”, “plan”, “project”,
“target”, “can”, “could”, “may”, “should”, “will”, “would”,
and similar expressions. The forward-looking statements we make are not guarantees of future performance and are subject to various
assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking
statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents
that we file with the SEC should be considered in evaluating forward-looking statements. Because such statements are subject to
risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.
Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary
from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to
place undue reliance on such forward-looking statements, which reflect our view only as of the date of this report.
Important
factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the
following:
|
●
|
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.
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 limited liability company incorporated under the laws of Hong Kong, its
wholly owned subsidiary in China, Harbin Humankind Biology Technology Co. Limited (“Humankind”) and indirect wholly
owned subsidiary, Heilongjiang Huimeijia Pharmaceutical Co., Ltd. (“HLJ Huimeijia”). Unless the context otherwise
requires, all references to (i) the “PRC” and “China” are to the People’s Republic of China; (ii)
“U.S. dollar”, “$” and “US$” are to United States dollars; (iii) “RMB” are to
Renminbi Yuan of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange
Act” are to the Securities Exchange Act of 1934, as amended.
Business
Overview
Our
principal business operations are conducted through our wholly-owned subsidiaries, Humankind and HLJ Huimeijia.
The
Company owns a GMP-certified plant and production facilities and has the capacity to produce 21 different CFDA-approved medicines,
14 CFDA-approved health supplement products and 8 hemp derivative products in soft capsule, hard capsule, tablet, granule and
oral liquid forms. These products address the needs of some key sectors in China, including the feminine, geriatric, and children’s
markets.
HLJ
Huimeijia was founded on October 30, 2003 and its latest GMP certificate is effective until April 24, 2023. HLJ Huimeijia engages
in the manufacture and distribution of tincture, ointments, rubber paste, including hormones, topical solution, suppositories,
enemas, oral liquids, and liniment, including traditional Chinese medicine extractions. HLJ Huimeijia’s predecessor was
Heilongjiang Xue Du Pharmaceutical Co., Ltd., which established brand recognition in the market through its supply of high-quality
drug products. HLJ Huimeijia is a “high and new technology” enterprise that provides the most comprehensive types
of topical medical products in Heilongjiang Province, a northeastern province of China.
On
December 24, 2014, Humankind entered into a stock transfer agreement (the “Original Agreement”) with Xiuzheng Pharmaceutical
Group Co., Ltd. a company incorporated under the laws of the PRC and located in Jilin province (“Xiuzheng Pharmacy”
or the “Buyer”), Mr. Xin Sun, the CEO of the Company, and Huimeijia, 99% owned by Humankind and 1% owned by Mr. Xin
Sun. Pursuant to the Original Agreement, Humankind and Mr. Xin Sun (the “Equity Holders”), would sell their respective
equity interests in Huimeijia to Xiuzheng Pharmacy. On February 9, 2015, the four parties (i.e. Humankind, Xiuzheng Pharmacy,
Mr. Xin Sun and Huimeijia) 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 “Asset Transferors”)
would only sell 19 drug approval numbers (the “Assets”) to Xiuzheng Pharmacy. The Equity Holders would have retained
their equity interests in Huimeijia, but would have pledged such equity interests to Xiuzheng Pharmacy until the Assets were 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 parties agreed to execute the transfer of the equity interests based on the Original Agreement and the Equity
Holders sold their respective equity interests in Huimeijia to Xiuzheng Pharmacy for total cash consideration of RMB 8,000,000
(approximately $1,306,186, the “Purchase Price”) to the Equity Holders. On October 12, 2016, Huimeijia has completed
changes in its business registration, and Xiuzheng Pharmacy has obtained a new business license issued by the local State Administration
of Industry and Commerce in Harbin (“Harbin SAIC”) for Huimeijia, in which Huimeijia’s ownership is recorded
as held by Xiuzheng Pharmacy with Harbin SAIC, and the legal representative (a person that is authorized to take most of corporate
actions on behalf of a company under PRC corporate laws) of Huimeijia has been appointed by the Buyer.
Our
business is conducted through our sales agents and sales personnel. We sell our products directly to end customers through our
own sales personnel as well as our sales agents, operating primarily in Anhui, Zhejiang, Shanghai, Jiangsu, Beijing and Gansu,
where most of our revenues are generated. Sales by agents in Anhui, Zhejiang, Shanghai, Jiangsu, Beijing and Gansu provinces accounted
for 21%, 17%, 15%, 12%, 11% and 8% of our total sales, respectively, for the six months ended December 31, 2018. Although we do
not currently sell our products online, we expect to do so in the future.
Results
of Operations
Three
months ended December 31, 2018 compared to the three months ended December 31, 2017
The
following table summarizes the top lines of the results of our operations for the three months ended December 31, 2018 and 2017,
respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
%
|
|
Revenues
|
|
$
|
2,714,157
|
|
|
$
|
1,809,040
|
|
|
$
|
905,117
|
|
|
|
50.03
|
%
|
Humankind
|
|
|
2,684,885
|
|
|
$
|
1,809,040
|
|
|
$
|
875,845
|
|
|
|
48.41
|
%
|
HLJ Huimeijia
|
|
|
29,272
|
|
|
|
-
|
|
|
|
29,272
|
|
|
|
-
|
|
Cost of Goods Sold
|
|
$
|
688,076
|
|
|
$
|
1,153,077
|
|
|
$
|
(465,001
|
)
|
|
|
(40.33
|
%)
|
Humankind
|
|
|
653,157
|
|
|
$
|
1,153,077
|
|
|
$
|
(499,920
|
)
|
|
|
(43.36
|
%)
|
HLJ Huimeijia
|
|
|
34,919
|
|
|
|
-
|
|
|
|
34,919
|
|
|
|
-
|
|
Gross Profit
|
|
$
|
2,026,081
|
|
|
$
|
655,963
|
|
|
$
|
1,370,118
|
|
|
|
208.87
|
%
|
Humankind
|
|
|
2,031,728
|
|
|
|
655,963
|
|
|
|
1,375,765
|
|
|
|
209.7
|
%
|
HLJ Huimeijia
|
|
|
(5,647
|
)
|
|
|
-
|
|
|
|
(5,647
|
)
|
|
|
-
|
|
Revenue
Total revenues increased by $905,117, or 50.03%,
for the three months ended December 31, 2018, as compared to the same period in 2017. The increase in revenues was primarily due
to an increase of $875,845 or 48.41% in Humankind’s revenues for the three months ended December 31, 2018, as compared to
the same period in 2017. The increase in Humankind’s sales revenues was primarily due to the increased demand of new products.
The increase in HLJ Huimeijia’s sales revenue was primarily due to small-scale production after obtaining a new GMP certificate.
Our total cost of sales decreased by $465,001,
or 40.33% for the three months ended December 31, 2018, as compared to the same period in 2017. The decrease in the overall cost
of sales was attributed to the decrease of $499,920 or 43.36% in Humankind’s cost of sales for the three months ended December
31, 2018 as compared to the same period in 2017. This decrease aligned with the decrease in sales volume of products sold by Humankind.
The significant decline in the cost of the main business was mainly due to the lower unit cost of new products and the fact that
the old products were no longer sold for the three months ended December 31, 2018, as compared with the same period in 2017. The
increase in HLJ Huimeijia cost of sales was primarily due to the small-scale production.
Gross Profit
Our gross margin increased by $1,370,118,
or 208.87%, for the three months ended December 31, 2018 as compared to the same period in 2017. This change was consistent with
the change in the main products in Humankind. As HLJ Huimeijia resumed production for a short period of time, the output of the
products is small, but the fixed cost of the apportionment has not decreased, resulting in high cost of the product. After the
Company operates normally, the cost is expected to return to a reasonable level.
Sales
by Product Line
The
following table summarizes a breakdown of our sales by major product line for the three months ended December 31, 2018 and 2017
respectively:
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Quantity
|
|
|
|
|
|
% of
|
|
Quantity
|
|
|
|
|
% of
|
|
|
(Unit)
|
|
|
Sales US$
|
|
|
Sales
|
|
(Unit)
|
|
Sales US$
|
|
|
Sales
|
|
Humankind
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waterlilies Soft Capsules (Sailuozhi)
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
6,153
|
|
$
|
373,432
|
|
|
|
20.64
|
%
|
Propolis and Black Ant Capsules
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
55,113
|
|
|
1,435,608
|
|
|
|
79.36
|
%
|
Hemp Oil
|
|
31,278
|
|
|
$
|
1,227,389
|
|
|
|
45.22
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Collagen Peptide
|
|
34,716
|
|
|
|
942,515
|
|
|
|
34.73
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Hemp Polypeptide
|
|
8,023
|
|
|
$
|
316,297
|
|
|
|
11.65
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Hemp Protein Powder
|
|
7,309
|
|
|
|
198,674
|
|
|
|
7.32
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
HLJ Huimeijia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Musk Bone Strengthener Paste
|
|
738
|
|
|
|
297
|
|
|
|
0.01
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Injury and Rheumatism relieving Paste
|
|
3,679
|
|
|
|
1,477
|
|
|
|
0.05
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Refining GouPi Cream
|
|
78,595
|
|
|
|
19,629
|
|
|
|
0.72
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Indometacin and Furazolidone Suppositories
|
|
2,426
|
|
|
|
2,000
|
|
|
|
0.07
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
ShangBiTongDing
|
|
810
|
|
|
|
1,137
|
|
|
|
0.04
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Enema Glycerini
|
|
4,430
|
|
|
|
265
|
|
|
|
0.01
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Socks
|
|
2,650
|
|
|
|
2,528
|
|
|
|
0.09
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Towel
|
|
500
|
|
|
|
1,235
|
|
|
|
0.05
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Bath towel
|
|
40
|
|
|
|
434
|
|
|
|
0.02
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Soap
|
|
230
|
|
|
|
278
|
|
|
|
0.01
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Bubble net
|
|
50
|
|
|
|
2
|
|
|
|
0.00
|
%
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
$
|
2,714,157
|
|
|
|
100
|
%
|
|
|
|
$
|
1,809,040
|
|
|
|
100.00
|
%
|
Operating
Expenses
The
following table summarizes our operating expenses for the three months ended December 31, 2018 and 2017, respectively:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
%
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
406,305
|
|
|
$
|
625,606
|
|
|
$
|
(219,301
|
)
|
|
|
(35.05%
|
)
|
Depreciation
and amortization
|
|
|
142,758
|
|
|
|
66,750
|
|
|
|
76,008
|
|
|
|
113.87
|
%
|
Total Operating
Expenses
|
|
$
|
549,063
|
|
|
$
|
692,356
|
|
|
$
|
(143,293
|
)
|
|
|
(20.7
|
%)
|
Total operating expenses for the three months
ended December 31, 2018 was $143,293 or 20.7% lower than in the corresponding period in 2017. The decrease in selling, general
and administrative expenses for the three months ended December 31, 2018, as compared to the same period in 2017, was mainly due
to the non-production expense, the non-existence of the write-off expense on the expired drugs for HLJ Huimeijia for the three
months ended December 31, 2018, offset by the increase of salary and benefit due to HLJ Huimeijia’s resuming production
for the three months ended December 31, 2018.
Interest
Income and Interest Expense
Interest
income was $26,590 for the three months ended December 31, 2018, as compared to $27,863 for the three months ended December 31,
2017. This increase of $1,273 or 4.57%, was mainly due to the increased average balance of bank deposits compared with the same
period of 2017.
Interest
expense was $1 for the three months ended December 31, 2018, as compared to $25,062 for the three months ended December 31, 2017.
The decrease in interest expense was mainly due to the maturity of short-term loans.
Income
Taxes
Income
taxes significantly increased by $312,653 or 349.77%, from $89,388 for the three months ended December 31, 2017 to $402,041 for
the three months ended December 31, 2018. The increase in income taxes was due to the significant increase of the Company’s
income.
Net
Income (Loss) and Net Income (Loss) Per Share
Net
Income was $1,117,265 for the three months ended December 31, 2018, as compared to a net loss of $110,573 for the three months
ended December 31, 2017. This increase of $1,227,838 in net profit was primarily attributable to an increase of $939,049 in the
net income from Humankind.
Net
Income per share was $0.0170 for the three months ended December 31, 2018 and net loss per share was $0.0017 for the three months
ended December 31, 2017. This increase was primarily a result of the aforementioned increase in net profit.
Six
months ended December 31, 2018 compared to the six months ended December 31, 2017
The
following table summarizes the top lines of the results of our operations for the three months ended December 31, 2018 and 2017,
respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
%
|
|
Revenues
|
|
$
|
4,855,982
|
|
|
$
|
3,325,007
|
|
|
$
|
1,530,975
|
|
|
|
46.04
|
%
|
Humankind
|
|
|
4,810,393
|
|
|
$
|
3,325,007
|
|
|
$
|
1,485,386
|
|
|
|
44.67
|
%
|
HLJ Huimeijia
|
|
|
45,589
|
|
|
|
-
|
|
|
|
45,589
|
|
|
|
-
|
|
|
|
Cost of Goods Sold
|
|
$
|
1,161,817
|
|
|
$
|
2,132,710
|
|
|
$
|
(970,893
|
)
|
|
|
(45.52
|
%)
|
Humankind
|
|
|
1,106,433
|
|
|
$
|
2,132,710
|
|
|
$
|
(1,026,277
|
)
|
|
|
(48.12
|
%)
|
HLJ Huimeijia
|
|
|
55,384
|
|
|
|
-
|
|
|
|
55,384
|
|
|
|
-
|
|
Gross Profit
|
|
$
|
3,694,165
|
|
|
$
|
1,192,297
|
|
|
$
|
2,501,868
|
|
|
|
209.84
|
%
|
Humankind
|
|
|
3,703,960
|
|
|
|
1,192,297
|
|
|
|
2,511,663
|
|
|
|
210.66
|
%
|
HLJ Huimeijia
|
|
|
(9,795
|
)
|
|
|
-
|
|
|
|
(9,795
|
)
|
|
|
-
|
|
Revenue
Total revenues increased by $1,530,975, or
46.04% for the six months ended December 31, 2018, as compared to the same period in 2017. The increase in revenues was primarily
due to an increase of $1,485,386 or 44.67% in Humankind’s revenues for the six months ended December 31, 2018, as compared
to the same period in 2017. The increase in Humankind’s sales revenues was primarily due to the increased demand of the
new products. The increase in HLJ Huimeijia’s sales revenue was primarily due to small-scale production after obtaining
a new GMP certificate.
Our total cost of sales decreased by $970,893,
or 45.52%, for the six months ended December 31, 2018, as compared to the same period in 2017. The decrease in the overall cost
of sales was attributed to the decrease of $1,026,277 or 48.12% in Humankind’s cost of sales for the six months ended December
31, 2018, as compared to the same period in 2017. The significant decline in the cost of the main business was mainly due to the
lower unit cost of new products and the fact that the old products were no longer sold for the six months ended December 31, 2018,
as compared to the same period in 2017.
Gross Profit
Our gross margin increased by $2,501,868,
or 209.84%, for the six months ended December 31, 2018, as compared to the same period in 2017. This change was consistent with
the change in the main products in Humankind. As HLJ Huimeijia resumed production for a short period of time, the output of the
product is small, but the fixed cost of the apportionment has not decreased, resulting in high cost of the products. After the
Company operates normally, the cost is expected to return to a reasonable level.
Sales
by Product Line
The
following table summarizes a breakdown of our sales by major product line for the six months ended December 31, 2018 and 2017,
respectively:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Quantity
|
|
|
|
|
|
% of
|
|
|
Quantity
|
|
|
|
|
|
% of
|
|
|
|
(Unit)
|
|
|
Sales US$
|
|
|
Sales
|
|
|
(Unit)
|
|
|
Sales US$
|
|
|
Sales
|
|
Humankind
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waterlilies Soft Capsules (Sailuozhi)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
11,655
|
|
|
$
|
707,258
|
|
|
|
21.27
|
%
|
Propolis and Black Ant Capsules
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,782
|
|
|
|
2,617,749
|
|
|
|
78.73
|
%
|
Hemp Oil
|
|
|
66,603
|
|
|
$
|
2,653,999
|
|
|
|
54.65
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Collagen Peptide
|
|
|
53,092
|
|
|
|
1,448,442
|
|
|
|
29.83
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hemp Polypeptide
|
|
|
11,424
|
|
|
$
|
449,655
|
|
|
|
9.26
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hemp Protein Powder
|
|
|
9,469
|
|
|
|
258,298
|
|
|
|
5.32
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
HLJ Huimeijia
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Musk Bone Strengthener Paste
|
|
|
31,011
|
|
|
|
11,712
|
|
|
|
0.24
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Injury and Rheumatism relieving Paste
|
|
|
3,679
|
|
|
|
1,477
|
|
|
|
0.03
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Refining GouPi Cream
|
|
|
78,595
|
|
|
|
19,629
|
|
|
|
0.40
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indometacin and Furazolidone Suppositories
|
|
|
4,156
|
|
|
|
3,513
|
|
|
|
0.07
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
ShangBiTongDing
|
|
|
2,410
|
|
|
|
3,146
|
|
|
|
0.06
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Enema Glycerini
|
|
|
5,050
|
|
|
|
311
|
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Essence repair liquid
|
|
|
30
|
|
|
|
422
|
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revitalizing Essence
|
|
|
30
|
|
|
|
320
|
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Anti aging eye cream
|
|
|
30
|
|
|
|
219
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Moisturizing cream
|
|
|
30
|
|
|
|
358
|
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ge Hong Beriberi Water
|
|
|
10
|
|
|
|
4
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Socks
|
|
|
2,650
|
|
|
|
2,528
|
|
|
|
0.05
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Towel
|
|
|
500
|
|
|
|
1,235
|
|
|
|
0.03
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bath towel
|
|
|
40
|
|
|
|
434
|
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Soap
|
|
|
230
|
|
|
|
278
|
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Bubble net
|
|
|
50
|
|
|
|
2
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
$
|
4,855,982
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
3,325,007
|
|
|
|
100.00
|
%
|
Operating
Expenses
The
following table summarizes our operating expenses for the six months ended December 31, 2018 and 2017, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Variance
|
|
|
%
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
1,020,295
|
|
|
$
|
1,183,458
|
|
$
|
(163,163
|
)
|
|
|
(13.79
|
%)
|
Depreciation and amortization
|
|
|
284,280
|
|
|
|
208,604
|
|
|
75,676
|
|
|
|
36.28
|
%
|
Total Operating Expenses
|
|
$
|
1,304,575
|
|
|
$
|
1,392,062
|
|
$
|
(87,487
|
)
|
|
|
(6.28
|
%)
|
Total operating expenses for the six months
ended December 31, 2018 was $1,304,575 or 6.28% lower than in the corresponding period in 2017. The decrease in selling, general
and administrative expenses for the six months ended December 31, 2018, as compared to the same period in 2017, was mainly due
to the non-production expense and the non-existence of the write-off expense from the expired drugs in HLJ Huimeijia for the six
months ended December 31, 2018, offset by the increase of salary and benefit due to HLJ Huimeijia’s resuming production
for the six months ended December 31, 2018.
Interest
Income and Interest Expense
Interest
income was $54,716 for the six months ended December 31, 2018, as compared to $52,203 for the six months ended December 31, 2017.
This increase of $2,513 or 4.81%, was mainly due to the increased average balance of bank deposits compared with the same period
of 2017.
Interest
expense was $3 for the six months ended December 31, 2018, as compared to $48,402 for the six months ended December 31, 2017.
The decrease in interest expense was mainly due to the maturity of short-term loan.
Income
Taxes
Income
taxes significantly increased by $580,670 or 449.99%, from $129,040 for the six months ended December 31, 2017 to $709,710 for
the six months ended December 31, 2018. The increase in income taxes was due to the significant increase of the Company’s
income from operations in the amount of $2,619,894.
Net
Income (Loss) and Net Income (Loss) Per Share
Net
Income was $1,749,481 for the six months ended December 31, 2018, as compared to the net loss $289,743 for the six months ended
December 31, 2017. This increase of $2,039,224 in net profit was primarily attributable to an increase of $1,744,458 in Humankind.
Net
Income per share was $0.0267 for the six months ended December 31, 2018 and net loss per share was $0.0044 for the six months
ended December 31, 2017. This increase was primarily a result of the aforementioned increase in net profit.
Liquidity
and Capital Resources
We
believe our current working capital position, together with our expected future cash flows from operations and loans from our
major shareholder will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures,
debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based
upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding
in the future.
The
following table summarizes our cash and cash equivalents positions, our working capital, and our cash flow activities as of December
31, 2018 and June 30, 2018 and for the six months ended December 31, 2018 and 2017:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
32,748,905
|
|
|
$
|
32,614,910
|
|
Working capital
|
|
$
|
27,899,251
|
|
|
$
|
26,980,373
|
|
Inventories
|
|
$
|
820,343
|
|
|
$
|
452,397
|
|
|
2018
|
|
|
2017
|
|
For the six months ended December 31:
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
Operating activities
|
$
|
1,550,548
|
|
|
$
|
1,783,237
|
|
Investing activities
|
$
|
(194,764
|
)
|
|
$
|
9,935,364
|
|
Financing activities
|
$
|
-
|
|
|
$
|
(1,420,671
|
)
|
For
the six months ended December 31, 2018, our net increase in cash and cash equivalents totaled $133,995, which total was comprised
of net cash provided by operating activities in the amount of $1,550,548, net cash used in investing activities in the amount
of $194,764 and the effect of prevailing exchange rates on our cash position of $1,221,789.
For
the six months ended December 31, 2017, our net increase in cash and cash equivalents totaled $11,397,261, which total was comprised
of net cash provided by operating activities in the amount of $1,783,237, net cash provided by investing activities in the amount
of $9,935,364 and the effect of prevailing exchange rates on our cash position of $1,099,331, offset by net cash provided by financing
activities in the amount of $1,420,671.
Our
working capital as of December 31, 2018 was $27,899,251 compared to working capital of $26,980,373 as of June 30, 2018. This increase
of $918,878 or 3.41% was primarily attributable to the increase of taxes payable in the amount of $348,130 and the increase of
accounts receivable in the amount of $1,219,217.
Net
cash provided by operating activities was $1,550,548 for the six months ended December 31, 2018, primarily attributable to an
increase of taxes payable in the amount of $360,982 and an increase of amounts due to related parties in the amount of $248,961.
Net cash used in investing activities was $194,764 for the six months ended December 31, 2018, primarily due to decrease in property,
plant and equipment of $112,055. The negative effect of exchange rate changes on cash and cash equivalents in the amount of $1,221,789
for the six months ended December 31, 2018 was mainly a result of the effect of the valuation of the RMB against the USD on the
significant amount of cash and cash equivalents held by the Company in RMB. The exchange rates from USD to RMB were 6.2000 to
1 and 6.8776 to 1 as of June 30, 2018 and December 31, 2018, respectively, and the average exchange rate from USD to RMB was 6.8605
for the six months ended December 31, 2018.
Net
cash provided by operating activities was $1,783,237 for the six months ended December 31, 2017, primarily attributable to a decrease
in accounts receivables in the amount of $157,408, an increase of amounts due to related parties in the amount of $1,882,464 and
a decrease in taxes payable in the amount of $200,581. Net cash used in investing activities was $9,935,364 for the six months
ended December 31, 2017, primarily due to the withdrawal of a short term investment of $9,034,534 and the proceeds from short
term investment in the amount of $903,453. Net cash used in financing activities was $1,420,671 for six months ended December
31, 2017, attributable to payment of short term loans in the amount of $1,505,756. The effect of exchange rate changes on cash
and cash equivalents in the amount of $1,420,671 for the six months ended December 31, 2017 was mainly a result of the effect
of the valuation of the RMB against the USD on the significant amount of cash and cash equivalents held by the Company in RMB.
The exchange rates from USD to RMB were 6.7793 to 1 and 6.5063 to 1 as of June 30, 2017 and December 31, 2017, respectively, and
the average exchange rate from USD to RMB was 6.6412 for the six months ended December 31, 2017.
Other
than as described in this report, we have no present agreements or commitments with respect to any material acquisitions of businesses,
products, product rights, technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions
of, and/or investments in, products, technologies, capital equipment or improvements or companies that complement our business
and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital
in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially
reasonable terms, if at all. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations,
in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
Related
Party Debts
We
had related party debts in the amount of $6,419,954 as of December 31, 2018, as compared to $6,393,730 as of June 30, 2018, an
increase of $26,224 or 0.41%. Our related party debts mainly consist of a loan from Mr. Xin Sun, the CEO of the Company. The loan
is unsecured, non-interest bearing and has no fixed terms of repayment. There was no written agreement for the loan. See Note
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 six months ended December 31, 2018 in the Company’s significant accounting policies
to those previously disclosed in the annual report on Form 10-K for the fiscal year ended June 30, 2018.