United
States


Securities
and Exchange Commission


Washington,
D.C. 20549





FORM
10-Q







þ
            QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIEs EXCHANGE ACT OF
      1934For the quarterly
      period ended March 31, 2010o
            TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIEs EXCHANGE ACT OF
      1934For the transition
      period from:





Commission
file number000-30115




ASIA
      CORK INC.(Exact name of Small
      Business Issuer as specified in its
charter.)




DELAWARE
            
            13-3912047(State
      of other jurisdiction of incorporation or organization)
            
            (IRS Employer
      Identification No.)




3rd
      Floor, A Tower of Chuang Xin
              Information
      Building
              No. 72 Second Keji Road, Hi
      Tech Zone, Xi’An, Shaanxi 710075 P.R. CHINA(Address of principal
      executive offices, including zip code)




(011)
  86-13301996766(Issuer’s telephone number,
      including area code)


_________________________________________________


(Former
Address, if changed since last report)





Check
whether the Issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.YES þ   NO
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)  Yes oNo o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One)




Large
accelerated filero Accelerated
fileo Non-accelerated
filero Small
reporting  companyþ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes oNo þ





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: On May 10, 2010 there were 35,663,850 shares
of Common Stock, par value $.0001 per share, outstanding.

















ASIA CORK INC.


FORM
10-Q


QUARTERLY
PERIOD ENDED MARCH 31, 2010
 
 INDEX


















PagePART
      I - FINANCIAL INFORMATIONItem 1: –
            Financial
      Statements
            
            
            1Item 2: -
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            23Item 3: –
            Quantitative and
      Qualitative Disclosures About Market
Risk
            
            
            30Item
      4:
            Controls and
      Procedures
            
            
            31PART
      II - OTHER INFORMATIONItem 1: -
            Legal
      Proceedings
            
            
            32Item 1A:-
            Risk
      Factors
            
            
            32Item 2: -
            Unregistered Sales
      of Equity Securities and Use of Proceeds
            
            
            32Item 3: –
            Default upon Senior
      Securities
            
            
            32Item 4: –
            Removed and
      Reserved
            
            
            32Item 5: –
            Other
      Information
            
            
            32Item 6: –
            Exhibits
            
            
            32










PART
I


Financial
Information


ITEM
1.    FINANCIAL STATEMENTS




Asia
      Cork Inc. and SubsidiariesCondensed
      Consolidated Balance SheetsMarch
      31, 2010
            
            
            December
      31, 2009Assets:
            
            (Unaudited)
            
            
            (Audited)Current
      Assets:Cash
      and equivalents
            
            $
            1,285,351
            
            
            $
            49,949Accounts
      receivable, net of allowance for doubtful accounts of$265,789
      and $269,259, respectively
            
            
            5,098,145
            
            
            
            5,176,239Inventories
            
            
            3,958,893
            
            
            
            5,971,339Advance
      to suppliers
            
            
            3,717,048
            
            
            
            2,468,733Loan
      to unrelated party
            
            
            29,300
            
            
            
            29,295Deferred
      income taxes assets
            
            
            9,806
            
            
            
            3,064Prepayments
      and other current assets
            
            
            23,266
            
            
            
            130,065Total
      Current Assets
            
            
            14,121,809
            
            
            
            13,828,684Property
      and Equipment - Net
            
            
            2,283,522
            
            
            
            2,339,307Deposit
      for Purchase of Fixed Assets
            
            
            2,021,717
            
            
            
            2,021,380Deposit
      for Acquisition
            
            
            1,362,462
            
            
            
            1,362,234Non-Refundable
      Deposit for Purchase of Land Use Right
            
            
            1,465,013
            
            
            
            1,464,768Investment
      Properties - Net
            
            
            3,110,525
            
            
            
            3,139,686Investment
      - At Cost
            
            
            2,051,018
            
            
            
            2,050,675Intangible
      Assets- Net
            
            
            3,662
            
            
            
            3,742Deferred
      Income Tax Assets
            
            
            53,592
            
            
            
            54,591Total
      Assets
            
            
            26,473,320
            
            
            
            26,265,067Liabilities
      and Equity:Liabilities:Current
      LiabilitiesAccounts
      payable and accrued expenses
            
            
            1,446,737
            
            
            
            1,532,469Loan
      payable
            
            
            -
            
            
            
            215,321Convertible
      note, net
            
            
            700,000
            
            
            
            700,000Customer
      deposits
            
            
            23,422
            
            
            
            10,112Taxes
      payable
            
            
            819,007
            
            
            
            534,393Due
      to stockholder/officer
            
            
            177,611
            
            
            
            177,582Other
      current liabilities
            
            
            -
            
            
            
            22,528Total
      Current Liabilities
            
            
            3,166,777
            
            
            
            3,192,405Total
      Liabilities
            
            
            3,166,777
            
            
            
            3,192,405Equity:Asia
      Cork Inc. Stockholders' Equity:Common
      stock, $0.0001 par value, 200,000,000 shares authorized,35,663,850
      issued and outstanding
            
            
            3,566
            
            
            
            3,566Additional
      paid-in capital
            
            
            4,485,446
            
            
            
            4,485,446Additional
      paid-in capital-stock warrant
            
            
            279,386
            
            
            
            279,386Reserve
      funds
            
            
            2,842,426
            
            
            
            2,808,865Retained
      earnings
            
            
            10,916,533
            
            
            
            10,740,044Accumulated
      other comprehensive income
            
            
            2,661,765
            
            
            
            2,657,741Total
      Asia Cork Inc. Stockholders' Equity
            
            
            21,189,122
            
            
            
            20,975,048Noncontrolling
      Interest
            
            
            2,117,421
            
            
            
            2,097,614Total
      Equity
            
            
            23,306,543
            
            
            
            23,072,662Total
      Liabilities and Equity
            
            $
            26,473,320
            
            
            $
            26,265,067The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial statements.




1


Asia
      Cork Inc. and SubsidiariesCondensed
      Consolidated Statements of Operations (Unaudited)For
      Three Months Ended March 31,2010
              
              
              2009(Unaudited)
              
              
              (Unaudited)Revenues
              
              $
              3,634,641
              
              
              $
              902,504Cost
      of Goods Sold
              
              
              2,875,512
              
              
              
              689,587Gross
      Profit
              
              
              759,129
              
              
              
              212,917Operating
      ExpensesSelling
      expenses
              
              
              163,467
              
              
              
              125,973Bad
      debt (recoveries)
              
              
              (3,514
              )
              
              
              (808
              )Research
      & development costs
              
              
              109,851
              
              
              
              -General
      and administrative expense
              
              
              208,508
              
              
              
              114,282Total
      Operating Expenses
              
              
              478,312
              
              
              
              239,447Income
      (Loss) From Operations
              
              
              280,817
              
              
              
              (26,530
              )Other
      Income (Expense or Loss)Interest
      (expense), net
              
              
              (44,225
              )
              
              
              (114,384
              )Other
      income , net
              
              
              32,606
              
              
              
              24,725Loss
      on disposal of inventories
              
              
              (1,974
              )
              
              
              -Total
      Other Expense or Loss
              
              
              (13,593
              )
              
              
              (89,659
              )Income
      (Loss) from Continuing Operations Before Taxes
              
              
              267,224
              
              
              
              (116,189
              )Provision
      for Income Taxes
              
              
              37,367
              
              
              
              2,824Net
      Income (Loss) Before Noncontrolling Interest
              
              
              229,857
              
              
              
              (119,013
              )Less:
      Net income (loss) attributable to the noncontrolling
    interest
              
              
              19,807
              
              
              
              (5,472
              )Net
      Income (Loss) Attributable to Asia Cork Inc.
              
              $
              210,050
              
              
              $
              (113,541
              )Earnings
      Per Share - Basic and Diluted:-
      Basic
              
              $
              0.01
              
              
              $
              (0.00
              )-
      Diluted:
              
              $
              0.01
              
              
              $
              (0.00
              )Weighted
      Common Shares Outstanding - Basic and Diluted-
      Basic
              
              
              35,663,850
              
              
              
              35,663,850-
      Diluted:
              
              
              40,269,113
              
              
              
              38,734,025The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial statements.


2







Asia
      Cork Inc. and SubsidiariesCondensed
      Consolidated Statements of Cash Flows (Unaudited)For
      Three Months Ended March 31,2010
            
            
            2009(Unaudited)
            
            
            (Unaudited)Cash
      Flows From Operating Activities:Net
      Income (Loss)
            
            $
            210,050
            
            
            $
            (113,541
            )Adjustments
      to Reconcile Net Income (Loss) to Net CashProvided
      by (Used in) Operating Activities:Depreciation
      and amortization
            
            
            85,921
            
            
            
            75,846Bad
      debt adjustment
            
            
            (3,514
            )
            
            
            (808
            )Loss
      on disposal of inventories
            
            
            1,974
            
            
            
            -Net
      income (loss) attributable to noncontrolling interest
            
            
            19,807
            
            
            
            (5,472
            )Deferred
      income tax benefits
            
            
            (5,732
            )
            
            
            1,866Consulting
      fees adjusted from deferred
            
            
            -
            
            
            
            9,840Interest
      expenses for discount on convertible note
            
            
            -
            
            
            
            69,756Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            82,460
            
            
            
            303,315Inventories
            
            
            2,011,133
            
            
            
            119,475Advance
      to suppliers
            
            
            (1,247,694
            )
            
            
            (268,441
            )Prepayments
      and other current assets
            
            
            106,803
            
            
            
            (66,908
            )Accounts
      payable and accrued expenses
            
            
            (85,988
            )
            
            
            (13,149
            )Customer
      Deposit
            
            
            13,306
            
            
            
            -Taxes
      payable
            
            
            284,477
            
            
            
            (86,944
            )Other
      current liabilities
            
            
            (22,528
            )
            
            
            (29,603
            )Net
      Cash Provided by (Used in) Operating Activities
            
            
            1,450,475
            
            
            
            (4,768
            )Cash
      Flows From Financing Activities:Repayment
      to the loan
            
            
            (215,321
            )
            
            
            -Net
      Cash Used in Financing Activities
            
            
            (215,321
            )
            
            
            -Net
      Increase (Decrease) in Cash and Equivalents
            
            
            1,235,154
            
            
            
            (4,768
            )Effect
      of Exchange Rate Changes on Cash
            
            
            248
            
            
            
            142Cash
      and Equivalents at Beginning of Period
            
            
            49,949
            
            
            
            23,605Cash
      and Equivalents at End of Period
            
            $
            1,285,351
            
            
            $
            18,979SUPPLEMENT
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      expenses paid
            
            $
            7,258
            
            
            $
            13,112Income
      taxes paid
            
            $
            -
            
            
            $
            108The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial statements.





3





Asia
Cork Inc. and Subsidiaries


Notes
to Condensed Consolidated Financial Statements (Unaudited)





1.
            BASIS
      OF PRESENTATION





a)
            Interim
      financial statements:





The
unaudited condensed consolidated financial statements of Asia Cork Inc.(f/k/a
Hankersen International Corp.) and subsidiaries (the "Company") have been
prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and pursuant to the requirements for reporting
on Form 10-Q. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for annual financial statements. However, the information included in
these interim financial statements reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair presentation of the consolidated financial position and
the consolidated results of operations. Results shown for interim periods are
not necessarily indicative of the results to be obtained for a full year. The
consolidated balance sheet information as of December 31, 2009 was derived from
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-K. These interim financial statements should be read in
conjunction with that report.





The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated.





b)
            Description
      of business and reverse merger:





Asia Cork
Inc. (f/k/a Hankersen International Corp.) (the "Company") was incorporated on
August 1, 1996, under the laws of the State of Delaware. Until August 2005, the
Company had no operations and the sole purpose of the Company was to locate and
consummate a merger or acquisition with a private entity.





On July
11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc., was merged into
its parent, the Company, in order to change the name of the Company, after
approval by the Board of Directors of the Company pursuant to the Delaware
General Corporation Law. The Company is the surviving company of the merger and,
except for the adoption of the new name its Certificate of Incorporation is
otherwise unchanged. The wholly-owned subsidiary was formed in July 2008 and had
no material assets.





As
permitted by Delaware General Corporation Law, the Company assumed the name of
its wholly owned subsidiary following the merger and now operates under the name
Asia Cork Inc. The Company’s common stock is quoted on the Over the Counter
Bulletin Board under the trading symbol “AKRK.OB





4





In August
2005, the Company, through Kushi Sub, Inc., a newly formed Delaware corporation
and wholly-owned subsidiary of the Company ("Acquisition Sub") acquired all the
ownership interest in Hanxin (Cork) International Holding Co., Ltd. ("Hanxin
International"), a British Virgin Islands limited liability corporation,
organized in September 2004. The Company acquired Hanxin International in
exchange for shares of common stock and shares of the Series A Preferred Stock
of the Company. The capitalizations are described in further detail in Note 18
to the accompanying consolidated financial statements.





Subsequent
to the merger and upon the conversion of the Series A Preferred Stock, the
former shareholders of Hanxin International will own 95% of the outstanding
shares of the Company's common stock. As a result of the ownership interests of
the former shareholders of Hanxin International, for financial statement
reporting purposes, the merger was treated as a reverse acquisition, with Hanxin
International deemed the accounting acquirer and Kushi deemed the accounting
acquiree. Historical information of the surviving company is that of Hanxin
International.





Hanxin
International has no other business activities but owns 100% of Xi'An Cork
Investments Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian
Hanxin Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An
and Hanxin are People's Republic of China (“PRC”) corporations. Most of the
Company’s activities are conducted through Hanxin.





During
the year ended December 31, 2005, Hanxin acquired a 75% equity interest of Cork
Import and Export Co. Ltd. (“CIE”), a PRC corporation engaged in the cork
trading business.





Hanxin is
engaged in developing, manufacturing and marketing of cork wood floor, wall and
decorating materials. Its products are sold to customers in China and oversea
customers in India, the United States of America, Germany and Japan through the
distributors or agents..





c)
            Use
      of estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reporting amounts of revenues and expenses during the reported period.
Significant estimates in 2010 and 2009 include the estimated useful lives and
fair values of the assets. Actual results could differ from those
estimates.





d)
            Revenue
      recognition





In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company's revenues from the sale of products are recognized when the goods are
shipped, title passes, the sales price to the customer is fixed and
collectability is reasonably assured. Persuasive evidence of an arrangement is
demonstrated via purchase order from distributor, our customers, product
delivery is evidenced by warehouse shipping log as well as signed bill of lading
from the trucking company and no product return is allowed except defective or
damaged products, the sales price to the customer is fixed upon acceptance of
purchase order, there is no separate sales rebate, discounts, and volume
incentives.





5





The
Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of its products at the rate of
17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition
to the invoiced value of purchases.





e)
            Reclassifications





Certain
amounts reflected in the consolidated financial statements for the year ended
December 31, 2009 have been reclassified to conform to the presentation for the
three months ended March 31, 2010.





f)
            Stock-Based
      Compensation





The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505-50, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”.  The fair value of the option
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received.  Fair value is measured as the
value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete.  The fair value of the equity instrument
is charged directly to compensation expense and additional paid-in
capital.





g)
            Basic
      and diluted net income per share





The
Company accounts for net income per common share in accordance with ASC 260,
“Earnings per Share”
(“EPS”). ASC 260 requires the disclosure of the potential dilution effect of
exercising or converting securities or other contracts involving the issuance of
common stock. Basic net income per share is determined based on the weighted
average number of common shares outstanding for the period.  Diluted
net income per share is determined based on the assumption that all dilutive
convertible shares and stock options were converted or exercised into common
stock.





h)
            Foreign
      currency translation





The
reporting currency of the Company is the U.S. dollar. The functional currencies
of the Company's subsidiaries are local currencies, primarily the Chinese
Renminbi. The financial statements are translated into U.S. dollars using
period-end rates of exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in other comprehensive income or
loss.





6




i)
            Recent
      Accounting Pronouncements





In
January 2010, FASB amended ASC 820, "Disclosures about Fair Value
Measurements." The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years.
The Company has determined the adoption of this ASU does not have a
material impact on its financial statements.





In
December, 2009, FASB amended "Financial Reporting by Enterprises
Involved with Variable Interest Entities." The amendments in this
Accounting Standards Update replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which reporting entity has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. An approach that is expected to be
primarily qualitative will be more effective for identifying which reporting
entity has a controlling financial interest in a variable interest entity. The
amendments in this Update also require additional disclosures about a reporting
entity’s involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The Company has
determined the adoption of this rule does not  have a material
impact on its financial statements.




2.
            ACCOUNTS
      RECEIVABLE AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS





The
Company generally provides its major customers with short term credit pursuant
to which the customers are required to make payment between three months and six
months after delivery, depending on the customer’s payment history. Management
of the Company actively sought to increase collections of accounts receivable
during the first quarter of 2010. As a result, the Company’s accounts receivable
balance decreased as of March 31, 2010. As of March 31, 2010 the accounts
receivable balance was $5,363,934 (equivalent to RMB36,613,569).





The
Company’s subsidiary, Hanxin, maintains a reserve for uncollectible accounts of
0.5% of accounts receivable. During the third quarter of 2009, the Company
increased the amount of its reserve from 0.5% to 5.0% of accounts receivable due
to an increase in accounts receivable from a major customer as well as new
customers. Consequently, in order to increase the reserve to the necessary 5%
and 0.5% levels at March 31, 2010 and 2009, the Company recognized a provision
for bad debts recoveries equal to $3,514 and $808, respectively





7





The
accounts receivable amounts included in the consolidated balance sheets as of
March 31, 2010 and December 31, 2009 were as follows:





March
      31, 2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Shaanxi
      Shuta Cork Products Co., Ltd
            
            $
            335,748
            
            
            $
            478,940Distributors
      who had owed the Company more thanUSD146,501
      (equivalent to RMB1 million)
            
            
            2,259,236
            
            
            
            1,951,810Distributors
      or Customers who had owed the Companyequal
      or less than USD146,501 (equivalent to RMB1 million)
            
            
            2,768,950
            
            
            
            3,014,748Sub-total
            
            
            5,363,934
            
            
            
            5,445,498Less:
      Allowance for doubtful accounts
            
            
            265,789
            
            
            
            269,259Total
      Accounts receivable, net
            
            $
            5,098,145
            
            
            $
            5,176,239





The total
amounts sold to the customers who had a balance of accounts receivable more than
$146,501 (equivalent to RMB1 million) were $1,887,610 and $121,188 for the three
months ended March 31, 2010 and 2009, respectively. They were represented 51.9%
and 13.4% of total sales in the three months ended March 31, 2010 and
2009.Except for Sichuan Hanxin, none of the customers accounted for more than
10% of total sales for the three months ended March 31, 2010 and 2009,
respectively.-





Accounts
receivable aging as of March 31, 2010 and December 31, 2009 consisted of the
following:





March
      31,2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Less
      than 90 days
            
            $
            1,372,986
            
            
            $
            3,778,74091days-180days
            
            
            3707,950
            
            
            
            1,606,436181days-365days
            
            
            282,998
            
            
            
            -More
      than 365days
            
            
            -
            
            
            
            60,322Total
            
            $
            5,363,934
            
            
            $
            5,445,498








The
Company’s accounts receivable with ages of less than 90 days represented
approximately 26% and 69% of the total receivables as of March 31, 2010 and
December 31, 2009, respectively





8





Accounts
receivable turnover for the three months ended March 31, 2010 and 2009 consisted
of the following:





For
      Three Months Ended March 31,2010
            
            
            2009Accounts
      receivable turnover
            
            
            0.17
            
            
            
            0.06





Since
there were significantly increased credit sales, and the increased credit sales
amounts were significantly greater than the average accounts receivable
increased amount in the first quarter of 2010 as compared to the same period of
2009, the accounts receivable turnover figure for the three months ended March
31, 2010 was greater than the turnover in the same period of 2009.




3.
            INVENTORIES





The barks
and wood particles are the primary raw materials utilized to manufacture cork
planks. The wood particles consist of grinded barks.  During the
course of manufacture, the Company makes use of reproducible oak barks. Since
the growth cycle of oak barks takes long periods of time, the Company generally
purchases barks and wood particles in advance in order to ensure production.
Moreover, the barks are usually picked in autumn.  In order to have
sufficient raw materials, the Company purchased a significant amount of barks
and wood particles as of March 31, 2010.




On
October 15, 2009, in order to expand output, the Company entered into an
agreement with Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan Hanxin”) to
build a production line for manufacturing cork floor planks in Sichuan
Province.  Pursuant to the agreement, the Company would provide a set
of production equipment, prepay raw materials, provide secondary raw materials
to Sichuan Hanxin and have the exclusive right to sell the cork floor products
produced from this production line. Sichuan Hanxin would provide the workshop
and supplementary equipment.  Sichuan Hanxin shall be responsible for
the production of cork floor products in accordance with the quality
specifications and standards set by the Company. Therefore, in order to fulfill
the agreement, the Company purchased a significant amount of secondary raw
materials as of December 31, 2009





In
January 2010, the Company entered into a sales agreement with Sichuan Hanxin to
sell secondary raw materials in amount of $1,387,206 (equivalent to RMB
9,468,901). Pursuant to the agreement, Sichuan Hanxin purchased the secondary
raw materials to manufacture cork floors products for the Company. As of March
31, 2010, Sichuan Hanxin paid    $1,167,847 to the Company
for the raw materials it purchased during the first quarter 2010. See more
information in Note 4.





9





Inventories
as of March 31, 2010 and December 31, 2009, consisted of the
following:





March
      31, 2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Raw
      materialsTree
      skins
            
            $
            1,884,989
            
            
            $
            2,026,925Wood
      Particles
            
            
            461,919
            
            
            
            1,097,599Secondary
      raw materials
            
            
            437,425
            
            
            
            1,639,893Other
      raw materials
            
            
            44,654
            
            
            
            29,188Subtotal
            
            
            2,828,987
            
            
            
            4,793,605Work
      in progress
            
            
            110,491
            
            
            
            202,495Finished
      goods
            
            
            1,017,034
            
            
            
            961,765Packaging
      and other
            
            
            2,381
            
            
            
            13,474Total
            
            $
            3,958,893
            
            
            $
            5,971,339





Inventories
turnover for the three months ended March 31, 2010 and 2009 consisted of the
following:





For
      Three Months Ended March 31,2010
            
            
            2009Inventories
      turnover
            
            
            0.58
            
            
            
            0.26





As of
March 31, 2010, there were almost equal amount of increased in raw materials
inventories and cost of sales as compared to the same period of 2009. Therefore,
the inventories turnover figure for the three months ended March 31, 2010 was
greater than the amount in the same period of 2009.





4.
            SPECIAL
      TRANSACTIONS TO SICHUAN HANXIN





During
the first quarter of 2010, the Company sold secondary raw materials to Schuan
Hanxin. The amount of sales listed below:





For
      Three Months Ended March 31,2010
            
            
            2009(Unaudited)
            
            
            (Unaudited)Total
      revenues
            
            $
            3,634,641
            
            
            $
            902,504Revenues
      from Sichuan Hanxin
            
            
            1,185,371
            
            
            
            -Total
      revenues excluded Sichuan Hanxin
            
            $
            2,449,270
            
            
            $
            902,504





March
      31,2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Total
      accounts receivable
            
            $
            5,363,934
            
            
            $
            5,445,498Accounts
      receivable from Sichuan Hanxin
            
            
            219,359
            
            
            
            -Total
      accounts receivable excluded Sichuan Hanxin
            
            
            5,144,575
            
            
            
            5,445,498





10





The
general VAT tax rate of 17% was applicable by the Company for three months ended
March 31, 2010 and 2009. The total revenues were represented in the amount
excluding VAT, whereas, the accounts receivable were represented in the amount
including VAT. In addition, the functional currencies of the Company’s PRC
subsidiaries are  Chinese Yuan, the accounts receivable were
translated into U.S dollars by using period-end rates whereas the total revenues
were translated into U.S dollars by using average rates.




5.
            ADVANCE
      TO SUPPLIERS





The
supply of cork raw material is our basis of production. In order to acquire
sufficient tree skins and ensure production, the Company generally signs
purchase agreements with unrelated parties at the beginning of every
year.  Pursuant to the agreements, the Company is required to pay its
suppliers in advance. As of March 31, 2010, most of these advances were
outstanding for less than six months.  The Company did not incur
losses in connection with advances to suppliers as of March 31,
2010.  As such, the Company has not recorded an allowance for advances
to suppliers for the three months ended March 31, 2010, and the net amount of
advances to suppliers was $ 3,717,048 as of March 31, 2010 and $2,468,733 as of
December 31, 2009.





6.
            LOAN
      TO UNRELATED PARTY





In
September 2009 the Company made an unsecured loan to Xian Tianlun Bath Co., Ltd
(“Xian Tianlun”) in the amount of RMB 0.2 million (equivalent to $29,300) for
the period from September 27, 2009 to September 26, 2010 with an interest rate
of 7% per year.




7.
            PROPERTY
      AND EQUIPMENT-NET





As of
March 31, 2010 and December 31, 2009, property and equipment consisted of the
following:





March
      31, 2010
            
            
            December
      31, 2009Estimated
      Life
            
            
            (Unaudited)
            
            
            (Audited)Buildings
      and improvements
            
            
            30-35
            
            
            $
            1,551,847
            
            
            $
            1,551,588Manufacturing
      equipments
            
            
            1-8
            
            
            
            1,598,995
            
            
            
            1,598,728Office
      furniture and equipments
            
            
            5
            
            
            
            31,126
            
            
            
            31,120Vehicle
            
            
            8
            
            
            
            12,520
            
            
            
            12,518Machinery
      improvements
            
            
            3
            
            
            
            80,576
            
            
            
            80,563Subtotal
            
            
            
            
            
            
            3,275,064
            
            
            
            3,274,517Less:
      Accumulated depreciation
            
            
            
            
            
            
            991,542
            
            
            
            935,210Total
            
            
            
            
            
            $
            2,283,522
            
            
            $
            2,339,307








11




8.
            DEPOSIT
      FOR PURCHASE OF FIXED ASSETS




Hanxin
intended to purchase a factory’s fixed assets through an unrelated agent who
handled the negotiations for the Company, and both parties signed the Entrust
Purchase Agreement on November 10, 2005. Hanxin had paid deposits
$2,021,717 (equivalent to RMB 13,800,000) to the agent as of March 31,
2010, and the same deposit was valued at $2,021,380 (equivalent to RMB
13,800,000) as of December 31, 2009. The agency agreement has no firm
commitment on the purchase but it stated a maximum price of RMB 50,000,000 that
the Company is willing to pay for the fixed assets. Due to the dissension within
the factory’s creditors, the agent could not close this purchase agreement on
time. As a result, Hanxin had a supplementary agreement with this agent on
September 27, 2009. Pursuant to the terms of such agreement, the agreement
was extended and as a result, Hanxin expects to fully collect the deposit which
it had paid to the agent if the purchase is not completed by June 30,
2010.  However, there is no assurance that the deposits will be
returned to Hanxin by then.




9.
            DEPOSIT
      FOR ACQUISITION





Hanxin
intended to acquire Sichuan Hanxin Cork Merchandises Co, Ltd. (“Sichuan
Hanxin”), one of its cork raw material providers located in Sichuan Province
China, and signed a strategic cooperation agreement with Sichuan Hanxin on
March 26, 2007. The purchase price of Sichuan Hanxin was not to exceed
$2,930,025 (RMB20 million) based upon the agreement. As of March 31,
2010, Hanxin had paid a $1,362,462 (equivalent to RMB9.3 millions) deposit
to Sichuan Hanxin. Hanxin anticipates applying the deposited amount to payments
for raw materials if the acquisition does not occur.





On
September 20, 2009, Hanxin entered into an agreement with the two
shareholders of Sichuan Hanxin, Huadong Li and Xiaojun Wu. The agreement grants
Hanxin an option to acquire 100% of the shares of Sichuan Hanxin by September
20, 2010. The acquisition price shall be between 120% and 150% of the net asset
value as shown in the audited financial statements as of December 31, 2009 of
Sichuan Hanxin. The amount of the premium over the net asset value is subject to
agreement by the parties, but shall not exceed 150%. Exercise of the option is
subject to a satisfactory financing arrangement, due diligence and requisite
corporate approvals. In the event that any of the closing conditions are not
satisfied by September 20, 2010, the agreement will terminate and the breaching
party shall be liable to pay a penalty of RMB 10 million (equivalent to
$1,465,013). According to the agreement, Hanxin shall pay 30% of the acquisition
price within 10 days from the date of fulfillment of all closing conditions, 30%
within 60 days from the fulfillment date, and 40% within 10 days from completing
the transfer of all assets and shares of Sichuan Hanxin.  As of March
31, 2010, Hanxin had paid a deposit of $1,362,462 (equivalent to
RMB9.3 millions) to Sichuan Hanxin.





12




10.
            NON-REFUNDABLE
      DEPOSIT FOR PURCHASE OF LAND USE
RIGHT





In order
to ensure a sufficient raw material production base, the Company plans to
purchase the right to use a parcel of land of planting oak from Shaanxi Shuta
Cork Products Co., Ltd (“Shuta”)  in the Baoji district Shaanxi
Province of the PRC in 2007 (oak leather is used to produce the company's main
raw material).  The Company prepaid RMB10 million (equivalent to
$1,465,013) to Shuta. However, the Company terminated the agreement with Shuta
in August, 2008.  The deposit was refunded to the Company in August
and September 2008.   In the first quarter of 2009 the Company
terminated the land use right purchase deal with Shuta. In 2008, based upon
Hanxin’s sale and manufacturing strategies Shuta opened cork retail chain stores
exclusively selling Hanxin’s products. In 2008 Hanxin was not able to achieve
its 500,000 square meters floor and board production plan and delayed purchase
orders from Shuta. Accordingly, Shuta had to readjust its year 2008 sales
strategies and incurred heavy losses. In order to avoid losing an important
distribution channel, Hanxin loaned RMB10 million (equivalent to
$1,465,013) to   Shuta for a one year term commencing
October 27, 2008.  This loan is non-interest bearing and
unsecured.  On October 28, 2009, Hanxin signed a new loan agreement
with Shuta  extending the term of the loan from October 27, 2009 to
October 27, 2011.





Hanxin
would like to purchase the land use right in Baoji District Shaanxi Providence
from Shaanxi Shuta as soon as it obtains sufficient financing. Hanxin believes
that the price of the land is rising and needs the land use right for Portugal
type production of cork trees. Therefore, on October 20, 2009, Hanxin signed a
forgiveness memo with Shuta to express its desire to acquire 7,000 Mu (equal to
4,669,000 square meters) land use rights on or before October 20, 2011 for a
purchase price of RMB37.8 million, The purchase price is the same amount as
provided in the prior agreement. In the event that Hanxin does not purchase the
land by October 20, 2011, Hanxin will be liable to pay Shuta all upfront
operation costs approximately RMB10 million (equivalent to $1,465,013) that
Shuta had paid to acquire the land use right from the Baoji District government.
The parties anticipate that if Hanxin does not purchase the land by October 20,
2011, Shuta will not repay the RMB10 million loan and the parties will have
no further obligation to each other. Accordingly, the Company reclassified all
of these loan amounts as Non-Refundable deposits for the purchase of land use
right commencing as of October 20, 2009.





Even
though Shuta is one of major customers of Hanxin for the three months ended
March 31, 2010 and in year ended December 31, 2009, the total amounts sold to
Shuta during the first quarter of 2010 and in year 2009  only
represented 1.58% and 2.63% of total sales of Hanxin, for the three months ended
March 31, 2010 and in the year ended December 31, 2009, respectively. Shuta does
not have the ability, directly or indirectly, to control the Company or exercise
significant influence over the Company in making financial and operational
decisions. Shuta is not subject to common control or common significant
influence. Accordingly, Shuta is not deemed a related party of the Company for
the three months ended March 31, 2010 and the year ended December 31,
2009.





13




11.
            INVESTMENT
      PROPERTIES – NET





On
September 27, 2001, the Company purchased certain investment entertainment
facilities called YuLerYuan Resort which included certain buildings, machinery,
equipment, and the right to use a parcel of land of approximately 10,360.3
square meters for 40 years. The purchase price of the land use right is being
amortized over the term of the right while other facilities are being
depreciated over the estimated life of properties. The Company renovated the
space and built an additional student dormitory in 2007. The construction was
completed in June 2008. Although the construction had been completed, Hanxin did
not acquire the occupation certificates and ownership certificates with respect
to the dormitory. Hanxin expects to receive these certificates by the third
quarter of 2010. However, there is no assurance that the certificates will
beobtained. The YuLerYuan Resort including the new student dormitory was leased
for $21,970 (equivalent to RMB150,000) per month to the university nearby
YuLerYuan Resort and this agreement was renewed on March 1, 2010, and was
extended to February 28th, 2011.




As of
March 31, 2010 and December 31, 2009, Investment Properties consisted of the
following





March
      31, 2010
            
            
            December
      31, 2009Estimated
      Life
            
            
            (Unaudited)
            
            
            (Audited)Depreciation
      Properties:Buildings
      and improvements
            
            
            28
            
            
            $
            919,650
            
            
            $
            919,497Student
      dormitory
            
            
            30
            
            
            
            2,421,025
            
            
            
            2,420,619Machinery
      and equipments
            
            
            5
            
            
            
            26,263
            
            
            
            26,259Subtotal
            
            
            
            
            
            
            3,366,938
            
            
            
            3,366,375Less:
      Accumulated depreciation
            
            
            
            
            
            
            417,070
            
            
            
            388,594Total
      depreciation properties
            
            
            
            
            
            
            2,949,868
            
            
            
            2,977,781Amortization
      Property:Land
      use right
            
            
            40
            
            
            
            204,009
            
            
            
            203,975Less:
      Accumulated amortization
            
            
            
            
            
            
            43,352
            
            
            
            42,070Total
      amortization properties
            
            
            
            
            
            
            160,657
            
            
            
            161,905Total
      Investment Properties, Net
            
            
            
            
            
            $
            3,110,525
            
            
            $
            3,139,686





For the
three months ended March 31, 2010 and 2009, depreciation and amortization
expenses for these investment entertainment facilities amounted to $29,679 and
$29,640, respectively.




14





The
amortization expenses of land use right for the next five years are as
follows:




For
      the Quarter Ending March 31,
            
            Amount2011
            
            $
            5,0992012
            
            
            5,0992013
            
            
            5,0992014
            
            
            5,0992015
            
            
            5,099





12.
            INVESTMENT
      – AT COST





On June
28, 2005, the Company purchased a 12% equity interest of Shaanxi DeRong
Technology Information Development Co. Ltd. (“DeRong”), a PRC corporation, for
$2,051,018 (equivalent to RMB 14 million). DeRong owns a cork tree forest
plantation in China. The investment is long term and is stated at
cost.




13.
            INTANGIBLE
      ASSETS-NET





During
the quarter ended June 30, 2008, the Company acquired ownership of three
patent rights from its major stockholder and Chairman, Mr. Fang She Zhang
for no consideration,. These three patent rights are used as part of a vital
technique for the production of the Company’s products. The application and
filing costs of these three patent rights were $4,219 (equivalent to RMB28,800).
As of March 31, 2010 and December 31, 2009, intangible assets, less accumulated
amortization consisted of the following:





March
      31,2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Intangible
      assets
            
            $
            4,219
            
            
            $
            4,219Less:
      Accumulated amortization
            
            
            557
            
            
            
            477Total
            
            $
            3,662
            
            
            $
            3,742




For the
three months ended March 31, 2010 and 2009, amortization expense amounted to $80
and $79 respectively.





The
amortization expenses for the next five years are as follows:





For
      the Quarter Ending March 31,
            
            Amount2011
            
            $
            3182012
            
            
            3182013
            
            
            3182014
            
            
            3182015
            
            
            318





15





14.
            LOAN
      PAYABLE





Loan
payable as of March 31, 2010 and December 31, 2009 consisted of the
following:




December
      31, 20010
            
            
            December
      31, 2009(Unudited)
            
            
            (Audited)Commencing
      September 24, 2009, the Company borrowed certain short-term loans from Mr.
      Yang Liu, an unrelated party. These short-term loans were in amounts of
      RMB1.47 million (equivalent to $215,321) as of December 31, 2009. The
      interest rate of these loans is 7.4% per year, and are due during the
      first quarter of 2010
            
            $
            -
            
            
            $
            215,321Total Loan
      Payable
            
            $
            -
            
            
            $
            215,321




15.
            CONVERTIBLE
      NOTES





In June
2008, the Company consummated an offering of convertible promissory notes and
common stock purchase warrants for aggregate gross proceeds of $700,000. The
notes matured in June 2009 and bore interest at an annual rate of 18%, payable
at maturity in USD. Upon the successful closing of an equity or convertible debt
financing for a minimum of $2,000,000 ("Financing"), the promissory notes will
be convertible into shares of common stock at a 50% discount to the price per
share of Common Stock sold in the Financing. Since the Financing was not
achieved within the one year term of the promissory notes, each investor has the
option to be paid the principal and interest due under the promissory note or
convert the note into shares of common stock at a conversion price of $0.228 per
share.





The
warrants are exercisable at any time after the consummation of the Financing
through the fourth anniversary of the consummation of the Financing (the
"Financing Expiration Date"). Each holder is entitled to purchase the number of
shares of common stock equal to the initial principal amount of such investor's
promissory note divided by the lowest cash purchase price paid for the Company's
common stock (or the conversion price or exercise price if the Financing
consists of convertible securities or warrants, respectively) in the Financing
(the "Financing Based Conversion Price") at an exercise price equal to the
Financing Based Conversion Price. Since the Financing did not occur within 12
months of the issuance of the warrant, the warrant is exercisable from and after
such date and through the fourth anniversary of the issuance date of the
warrant. In such event, the holder is entitled to purchase the number of shares
of common stock equal to 50% of the initial principal amount of the promissory
note divided by  $0.228 at an exercise price equal to $0.228, subject
to certain adjustments as set forth in the warrant.





16





Since the
notes were not paid at maturity in June 2009, the annual interest rate payable
since the maturity date increased to 24%. The interest payable s has been
accrued and recorded as of March 31, 2010 and December 31, 2009. However, the
extension of the due date for the notes is still under negotiation as of May 10,
2010. There can be no assurance that the holders of the convertible notes will
agree to extend the due date or the terms of such extension.





Since the
warrants issued with convertible notes are basically long-term options to buy
common stock at a fixed price, the Company allocated the proceeds from the
offering of convertible promissory notes and common stock purchase warrants
between the two securities utilizing the  incremental method, The
difference between the market price of the common stock on the issuance date of
the warrants and the warrant  exercise price of $0.228  has
been carried on the balance sheet as a “discount on convertible note, and the
sum also been carried on the balance sheet as an “additional paid-in
capital-stock warrant” in the amount of $279,386 as of March 31, 2010 and
December 31, 2009, respectively.





If the
investors exercise the warrants, the Company will reflect the proceeds received
and increase “Additional Paid-in Capital – Stock Warrant”, and “Common Stock”
and “Additional Paid-in Capital in Excess of Par”. However, if the investors do
not exercise the warrants, the Company will reduce “Additional Paid-in Capital
–Stock Warrant” for $279,386, and increase “Additional Paid-In Capital from
Expired Warrants” for a like amount.




The
Company’s obligations under the promissory notes are secured by an aggregate of
7,630,814 shares of common stock pledged by Mr. Pengcheng Chen, the Company’s
Chief Executive Officer, Mr. Fangshe Zhang, the Company’s Chairman (the “Escrow
Shares”). In the event that subsequent to the issuance of the Convertible Notes,
the value of the Escrow Shares is less than 150% of the outstanding principal
amount of the promissory notes for 10 consecutive trading days, then the holder
of the promissory notes shall have the right to give the Company notice (the
“Investor Notice”) to deposit or cause to be deposited additional Escrow Shares
such that the value of the Escrow Shares based upon the volume weighted average
price per share for the 20 trading days preceding the date of the Investor
Notice, is equal to 150% of the outstanding principal amount of the promissory
notes. The Company agreed to deposit or cause to be deposited such additional
Escrow Shares within 30 days of the date of the Investor Notice. To the extent
the Escrow Shares are not sufficient to meet the threshold of 150% of the
outstanding principal amount of the promissory notes within 30 days after the
Investor Notice, the Company shall grant to investors a security interest on the
Company’s tangible assets to the extent permitted under applicable
law.




16.
            TAX
      PAYABLE




The
Company and its U. S. subsidiary will file consolidated Federal income tax and
state franchise tax annual report individually. Its PRC subsidiaries file income
tax returns under the Income Tax Law of the PRC concerning Foreign Investment
Enterprises and Foreign Enterprises and local income tax laws. The Company’s BVI
subsidiary is exempt from income taxes.




17




Per PRC
Income Tax Law, any new foreign owned corporation is exempt from income tax for
the first two years of existence, and then receives a 50% exemption of income
tax for the next three years if it is a non high-tech corporation or 15% tax
rate for corporation qualified by State Science and Technology Commission as
"High Tech Manufacturing Enterprise" located in State "High Tech Zone" approved
by China State Council. Hanxin is qualified as a High Tech Manufacturing
Enterprise. Based on this regulation, Hanxin was exempt from income tax in 2003
and 2004 and its income has been subject to a 15% tax starting from January 1,
2005. CIE is not “High Tech Manufacturing Enterprise”, thus its income is
subject to 33% tax rate. Commencing January 2008,  CIE’s income is
subject to a 25% tax rate.




On March
31, 2010 and December 31, 2009, taxes payable consisted the
following:




March
      31, 2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Value-added
      tax
            
            $
            367,499
            
            
            $
            144,664Corporate
      income tax provision
            
            
            416,704
            
            
            
            373,542Local
      taxes and surcharges
            
            
            31,590
            
            
            
            12,973Franchise
      tax
            
            
            3,214
            
            
            
            3,214Total
            
            $
            819,007
            
            
            $
            534,393





The
deferred income taxes assets results from a loss on disposition of fixed assets
that are not deductible and bad debt allowance which is deductible when the bad
debt is incurred




The
components of the provisions for income taxes were as follows:





For
      Three Months Ended March 31,2010
            
            
            2009(Unaudited)
            
            
            (Unaudited)Current
      taxes:Current
      income taxes in P.R. China
            
            $
            43,099
            
            
            $
            958Deferred
      taxes benefits
            
            
            (5,732
            )
            
            
            1,866Total
      provision for income taxes
            
            $
            37,367
            
            
            $
            2,824





18





The
following is a reconciliation of the statutory taxes rate to the effective taxes
rate for the three months ended March 31, 2010 and 2009:





For
      Three Months Ended March 31,2010
            
            
            2009U.S.
      statutory corporate income taxes rate
            
            
            34
            %
            
            
            34
            %PRC
      taxes rate difference
            
            
            (9
            %)
            
            
            (9
            %)Net
      effect of taxes
      exemption/non-taxable         income/non-deductible
      expenses
            
            
            (12
            %)
            
            
            (27
            %)Valuation
      allowance
            
            
            1
            %
            
            
            -Effective
      taxes rate
            
            
            14
            %
            
            
            (2
            %)





The taxes
effect of temporary differences that give rise to the Company’s deferred taxes
assets as of March 31, 2010 and December 31, 2009 were as follows:





March
      31, 2010
            
            
            December
      31, 2009(Unaudited)
            
            
            (Audited)Deferred
      income taxes assets:Bad
      debt allowance
            
            $
            39,868
            
            
            $
            40,389Loss
      on disposition of fixed assets
            
            
            15,502
            
            
            
            17,266Loss
      carry forward
            
            
            8,028
            
            
            
            -Total
      deferred income taxes assets
            
            $
            63,398
            
            
            $
            57,655Reported
      as:Current
      deferred income taxes assets
            
            $
            9,806
            
            
            $
            3,064Long-term
      deferred income taxes assets
            
            
            53,592
            
            
            
            54,591Net
      deferred income taxes assets
            
            $
            63,398
            
            
            $
            57,655




17.
            DUE TO
      STOCKHOLDERS/OFFICERS





Amounts
due to stockholders/officers are unsecured, non-interest bearing, and do not
have a set repayment date.  As of March 31, 2010 and December 31,
2009, the total net amounts due to the stockholders/officers were $177,611 and
$177,582, respectivelywhich represented the net
amounts lent by Mr. Pengcheng Chen, the Chief Executive Officer of the Company,
to the Company.





19




18.
            STOCKHOLDERS
      EQUITY





On August
9, 2005, the Company acquired Hanxin International in exchange for (i)
24,000,000 shares of the Company’s common stock and (ii) 1,000 shares of the
Company’s Series A Preferred Stock, which were converted into 177,185,642 shares
of the Company’s common stock, without taking into effect a reverse stock split
as described below.




In
November 2005, the Company filed and circulated to its shareholders the
Information Statement which permitted the Company, among other things, to (i)
amend its Articles of Incorporation to increase its authorized shares of common
stock to 200,000,000 shares; (ii) approve a one for six reverse split, (iii)
approve a stock option, SAR and stock bonus plan for the directors, officers,
employees and consultants of the Company. A certificate of amendment officially
increasing the authorized shares of common stock and approving the reverse stock
split was filed with the State of Delaware on December 13, 2005.





On
September 1, 2006, the 1,000 shares Series A preferred stock were converted into
29,530,937 shares of the Company’s common stock. Subsequently, the Company
issued an additional 118,123 shares in October 2006 to reflect an under-issuance
to a stockholder of the shares of common stock issuable upon conversion of the
preferred stock As a result the total amount of issued and outstanding shares of
the Company’s common stock was 35,413,850 as of June 30, 2008.





In May
2008, the board of directors of the Company authorized, and on July 31, 2008 the
Company issued, 150,000 shares of the Company’s common stock to its attorney for
services rendered. In June 2008, the board of directors of the Company
authorized, and on August 14 2008 the Company issued, 100,000 shares of the
Company’s common stock to HAWK Associates, Inc (“Hawk”), its investor relations
firm for services rendered pursuant to the agreement. Accordingly the Company
has 35,663,850 shares of issued and outstanding common stock as of March 31,
2010.





In June
2008, the Company was assigned ownership of three patent rights from its major
shareholder, Mr. Fangshe Zhang.  These patents were assigned without
any payment due to Mr. Zhang. The application and filing costs of these three
patents were RMB28,800 (equivalent to $4,199). In connection therewith, the
Company recorded $4,199 of intangible assets, and same amount of additional paid
in capital as of March 31, 2009.





20




19.
            BASIC
      AND DILUTED EARNING PER SHARE





The
following table sets forth the computation of basic and diluted net income per
share:




For
      Three Months Ended March 31,2010
            
            
            2009Basic:
            
            (Unaudited)
            
            
            (Unaudited)Numerator:Net
      income (loss) for basic calculation
            
            $
            210,050
            
            
            $
            (113,541
            )Denominator:Weighted
      average common shares
            
            
            35,663,850
            
            
            
            35,663,850Denominator
      for basic calculation
            
            
            35,663,850
            
            
            
            35,663,850Net
      income (loss) per share — basic
            
            $
            0.01
            
            
            $
            (0.00
            )Diluted:Numerator:Net
      income (loss) for basic calculation
            
            $
            210,050
            
            
            $
            (113,541
            )Effect
      of dilutive securities issued
            
            
            40,606
            
            
            
            98,015Net
      income (loss) for diluted calculation
            
            $
            250,656
            
            
            $
            (15,526
            )Denominator:Denominator
      for basic calculation
            
            
            35,663,850
            
            
            
            35,663,850Weighted
      average effect of dilutive securities:Convertible
      debt
            
            
            3,070,175
            
            
            
            3,070,175Warrants
            
            
            1,535,088
            
            
            
            -Denominator
      for diluted calculation
            
            
            40,269,113
            
            
            
            38,734,025Net
      income (loss) per share — diluted
            
            $
            0.01
            
            
            $
            (0.00
            )





20.
            COMMITMENTS




The
Company leases its office space, and production facilities and lands under
operating lease agreements that are expiring on December 31, 2010 and
October, 2047 respectively. The following is a schedule of future minimum rental
land payments required under these operating leases as of March 31,
2010.




For
      the Quarter Ending March 31,
            
            Amount2010
            
            $
            165,3392011
            
            
            52,7282012
            
            
            17,5762013
            
            
            17,5762014
            
            
            17,576Thereafter
            
            
            572,687Total
      minimum rental payments required
            
            $
            843,482





21





Rent and
properties maintenance expenses amounted to $47,790 and $29,118 for the three
months ended March 31, 2010 and 2009, respectively.




The
Company also leases three patent rights from its Chairman, Mr. Fangshe Zhang,
under operating lease agreements that expire on April 16, 2011. The following is
a schedule of future minimum rental payments required under these operating
leases as of March 31, 2010.




For
      the Quarter Ending March 31,
            
            Amount2011
            
            $
            351,5222012
            
            
            15,623Total
      minimum rental payments required
            
            $
            367,145








Patent
lease expenses amounted to $87,880 and $87,767 for the three months ended March
31, 2010 and 2009, respectively.




21.
            CONCENTRATIONS
      OF BUSINESS AND CREDIT RISK





Financial
Risks:





The
Company provides credit in the normal course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.





Concentrations
Risks:





For the
three months ended March 31, 2010 and 2009, except for special sales to Sichuan
Hanxin, none of the Company’s customers accounted for more than 10% of its
sales.





Major
Suppliers:





The
following summarizes purchases of raw materials from major suppliers (each 10%
or more of purchases):





Purchases
      from
            
            
            Number
      of
            
            
            PercentageThree
      Months Ended March 31,
            
            Major
      Suppliers
            
            
            Suppliers
            
            
            of
      Total2010
            
            $
            435,272
            
            
            
            3
            
            
            
            87.50
            %2009
            
            $
            119,480
            
            
            
            2
            
            
            
            76.60
            %




Geographical
Risks:





Substantially
all of the Company’s operations are carried out through its subsidiaries located
in the PRC. Accordingly, the Company’s business, financial condition and results
of operations may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the economy of the PRC. The Company’s
operations in the PRC are subject to special considerations and significant
risks not typically associated with companies in the United States. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company's results may be
adversely affected by, among other things, changes in the political, economic
and social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, changes in the PRC's cork manufacture industry
and regulatory rules and policies, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of
taxation.





22





ITEM
2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION





The
following analysis of our consolidated financial condition and results of
operations for the three months ended March 31, 2010 and 2009, should be read in
conjunction with the consolidated financial statements, including footnotes, and
other information presented in our annual report on Form 10-K as filed with the
Securities and Exchange Commission on April 15, 2010.





Overview





The
Company was incorporated under the laws of the State of Delaware on August 1,
1996. The Company was formed in connection with the merger acquisition of Kushi
Macrobiotics Corp. (“KMC”) with American Phoenix Group, Inc. (“APGI”) in 1996.
Prior to such acquisition, KMC had operated a business of marketing a line of
natural foods (the “Kushi Cuisine”). This business was not successful and
management determined that it would be in the shareholder’s interest for KMC to
operate a different business. In August 2005, the Company, through Kushi Sub,
Inc., a newly formed Delaware corporation and wholly-owned subsidiary of the
Company ("Acquisition Sub") acquired all the ownership interest in Hanxin (Cork)
International Holding Co., Ltd. ("Hanxin International"), a British Virgin
Islands limited liability corporation, organized in September 2004. The Company
acquired Hanxin International in exchange for 24,000,000 shares of common stock
and 1,000 shares of the Series A Preferred Stock, which such shares converted
into 29,530,937 shares of common stock. Subsequent to the merger and upon the
conversion of the Series A Preferred Stock, the former shareholders of Hanxin
International currently own 95% of the outstanding shares of the Company's
common stock.





Kushi
Sub, the surviving entity of the merger with Hanxin International, has no other
business activities other than owning 100% of Xi'An Cork Investments
Consultative Management Co., Ltd. ("Xi'An"), which owns 92% of Xian Hanxin
Technology Co., Ltd. ("Hanxin"), incorporated in July 2002, both Xi'An and
Hanxin are People's Republic of China (PRC) corporations. Most of the Company’s
operating and business activities are conducted through Hanxin.





On July
11, 2008, the Company's wholly owned subsidiary, Asia Cork Inc. was merged into
the Company as approved by the Board of Directors. The Company was the survivor
of the merger and assumed the name of its wholly owned subsidiary following the
merger and now operates under the name Asia Cork Inc. The Company’s common stock
is quoted on the Over the Counter Bulletin Board under the trading symbol
“AKRK.OB.”




23





Business
Overview





We,
through our subsidiaries, engage in developing, manufacturing and marketing of
cork wood floor, wall and decorating materials.




Hanxin is
a manufacturing company based in China, which produces cork-building material
sold under the Hanxin brand name. Approximately 75% of Hanxin's products sold in
year 2009 were to customers in China by our own sales persons, and domestic
distributors and agents, with the remaining sales being made to customers in
India, the United States, Germany and Japan through unrelated national
distributors and agents. The sales to the distributors, the sales agent and
directly to clients have no difference as reflected in accounting policies, as
the price and the means of delivery has no material differences. All sales
revenues are recognized when reception and inspection of goods are finished by
clients.  We have the right to use 17 patents developed by Fangshe
Zhang, our Chairman regarding cork processing technologies. We own 3 patents,
lease 3 patents, and have exclusive right to use another 11 patents for free. We
believe that these 17 patents give us a competitive advantage in our
product quality.




Foreign
Exchange Considerations





Even
though we are a U.S. company, because all of our operations are located in the
PRC, we face certain risks associated with doing business in that country. These
risks include risks associated with the ongoing transition from state business
ownership to privatization, operating in a cash-based economy, dealing with
inconsistent government policies, unexpected changes in regulatory requirements,
export restrictions, tariffs and other trade barriers, challenges in staffing
and managing operations in a communist country, differences in technology
standards, employment laws and business practices, longer payment cycles and
problems in collecting accounts receivable, changes in currency exchange rates
and currency exchange controls. We are unable to control the vast majority of
these risks associated both with our operations and the country in which they
are located and these risks could result in significant declines in our
revenues.





Because
revenues from our operations in the PRC accounted for 100% of our consolidated
net revenues, how we report net revenues from our PRC-based operations is of
particular importance to understanding our financial statements. Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation," and are included in determining
comprehensive net income or loss. For foreign operations with the local currency
as the functional currency, assets and liabilities are translated from the local
currencies into U.S. dollars. Translation adjustments resulting from the process
of translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income or loss.





24





The
functional currency of our Chinese subsidiaries is the Chinese RMB, the local
currency. The financial statements of the subsidiaries are translated to U.S.
dollars using year-end rates of exchange for assets and liabilities, and average
rates of exchange for the period for revenues, costs, and expenses. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented. Until 1994, the RMB experienced a gradual but significant devaluation
against most major currencies, including U.S. dollars, and there was a
significant devaluation of the RMB on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the RMB relative to the
U.S. Dollar has remained stable and has appreciated slightly against the U.S.
dollar. Countries, including the United States, have argued that the RMB is
artificially undervalued due to China's current monetary policies and have
pressured China to allow the RMB to float freely in world markets.





On July
21, 2005, the PRC reported that it would have its currency pegged to a basket of
currencies rather than just tied to a fixed exchange rate to the dollar. It also
increased the value of its currency 2% higher against the dollar, effective
immediately. If any devaluation of the RMB were to occur in the future, returns
on our operations in China, which are expected to be in the form of RMB, will be
negatively affected upon conversion to U.S. dollars. Although we attempt to have
most future payments, mainly repayments of loans and capital contributions,
denominated in U.S. dollars, if any increase in the value of the RMB were to
occur in the future, our product sales in China and in other countries may be
negatively affected.





Critical
Accounting Policies





The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.




A summary
of significant accounting policies is included in Note 2 to the consolidated
financial statements. Management believes that the application of these policies
on a consistent basis enables us to provide useful and reliable financial
information about our operating results and financial condition.




We record
property and equipment at cost. Depreciation is provided using the straight-line
method over the estimated economic lives of the assets, which are from 1 to 35
years. Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred. We review the carrying value of
long-lived assets for impairment at least annually or whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to the undiscounted cash flows that the asset or asset group
is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market value.




25





Our
revenues from the sale of products are recognized when the goods are shipped,
title passes, the sales price to the customer is fixed and collectibility is
reasonably assured. Persuasive evidence of an arrangement is demonstrated via
purchase order from customer, product delivery is evidenced by warehouse
shipping log as well as bill of lading from the trucking company and no product
return is allowed except defective or damaged products, the sales price to the
customer is fixed upon acceptance of purchase order, there is no separate sales
rebate, discounts, and volume incentives.





RESULTS OF
OPERATIONS





THREE
MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31,
2009





For
      Three Months Ended March 31,2010
            
            
            2009(Unaudited)
            
            
            (Unaudited)
            
            
            (Decrease)/Increase
            
            
            %Revenues
            
            $
            3,634,641
            
            
            $
            902,504
            
            
            $
            2,732,137
            
            
            
            302.73
            %Cost
      of Goods Sold
            
            
            2,875,512
            
            
            
            689,587
            
            
            
            2,185,925
            
            
            
            316.99
            %Gross
      Profit
            
            
            759,129
            
            
            
            212,917
            
            
            
            546,212
            
            
            
            256.54
            %Gross
      Profit Percentage
            
            
            20.89
            %
            
            
            23.59
            %Operating
      ExpensesSelling
      expenses
            
            
            163,467
            
            
            
            125,973
            
            
            
            37,494
            
            
            
            29.76
            %Bad
      debt (recoveries)
            
            
            (3,514
            )
            
            
            (808
            )
            
            
            (2,706
            )
            
            
            334.99
            %Research
      & development costs
            
            
            109,851
            
            
            
            -
            
            
            
            109,851
            
            
            
            0
            %General
      and administrative expense
            
            
            208,508
            
            
            
            114,282
            
            
            
            94,226
            
            
            
            82.45
            %Total
      Operating Expenses
            
            
            478,312
            
            
            
            239,447
            
            
            
            238,865
            
            
            
            99.76
            %Income
      (Loss) From Operations
            
            
            280,817
            
            
            
            (26,530
            )
            
            
            307,347
            
            
            
            -1158.49
            %Other
      Income (Expense or Loss)Interest
      (expense), net
            
            
            (44,225
            )
            
            
            (114,384
            )
            
            
            70,159
            
            
            
            -61.34
            %Other
      income, net
            
            
            32,606
            
            
            
            24,725
            
            
            
            7,881
            
            
            
            31.87
            %Loss
      on disposal of inventories
            
            
            (1,974
            )
            
            
            -
            
            
            
            (1,974
            )
            
            
            0
            %Total
      Other Expense or Loss
            
            
            (13,593
            )
            
            
            (89,659
            )
            
            
            78,040
            
            
            
            -87.04
            %Income
      (Loss) from Continuing Operations Before Taxes
            
            
            267,224
            
            
            
            (116,189
            )
            
            
            383,413
            
            
            
            -329.99
            %Income
      Tax Provision
            
            
            37,367
            
            
            
            2,824
            
            
            
            34,543
            
            
            
            1223.19
            %Net
      Income (Loss) Before Noncontrolling Interest
            
            
            229,857
            
            
            
            (119,013
            )
            
            
            348,870
            
            
            
            -293.14
            %Less:
      Net income (loss) attributable to the noncontrolling
    interest
            
            
            19,807
            
            
            
            (5,472
            )
            
            
            25,279
            
            
            
            -461.97
            %Net
      Income (Loss) Attributable to Asia Cork Inc.
            
            $
            210,050
            
            
            $
            (113,541
            )
            
            
            323,591
            
            
            
            -285.00
            %





26





Revenues





For the
three months ended March 31, 2010, our revenues were $3,634,641 as compared to
$902,504 for the three months ended March 31, 2009, an increase of $2,732,137 or
302.73%. The primary reason for the increase was adverse market conditions for
home and commercial renovations in the first quarter of 2009 as compared to the
first quarter of 2010.  In the first quarter of 2009 we increased
sales of major finished goods (wood materials, floors and boards) as compared to
the first quarter of 2009. In addition, we sold  secondary raw
materials in  the amount of $1,185,371 to Sichuan Hanxin during the
first quarter of 2010. No such sales were made in the first quarter of
2009.





Cost
of Sales and Gross Profit





For the
three months ended March 31, 2010, cost of sales amounted to $2,875,512 or 79.1%
of net revenues as compared to cost of sales of $689,587 or 76.41% of net
revenues for the three months ended March 31, 2009. Gross profit for the three
months ended March 31, 2010 was $759,129 or 20.89% of revenues, as compared to
$212,917 or 23.59% of revenues for the three months ended March 31, 2009. The
gross margin decreased primarily as a result of a low margin sale of secondary
raw materials to Sichuan Hanxin. In addition we raised employee salaries
commencing in October 2009. As a result, our unit costs increased for the three
months ended March 31, 2010 as compared to the same period of 2009.





Operating
Expenses





For the three months ended March 31,
2010, total operating expenses were $478,312 as compared to $239,447 for the
three months ended March 31, 2009, an increase of $238,865 or 99.76%. This
increase was attributable to an increase in selling expenses and freight costs
associated with our increased revenue. The amount of the potential increase was
reduced by a change in the commission rate from 10% to 2% in the fourth quarter
of 2009. The increase in general and administrative expenses was primarily
attributable to increases inemployees salaries, professional fees and legal fees that
increased in the first quarter of 2010 as compared to the first quarter of
2009.




For three
months ended March 31, 2010, bad debt reserve amounted to $3,514 as compared to
$808 for three months ended March 31, 2009, an increase of $2,706 or 334.99%.
The reason for the increase is primarily attributable to an increase in bad debt
allowance from 0.5% to 5% of the outstanding accounts receivable commencing from
July 2009.




For three
months ended March 31, 2010, research and development costs amounted to
$109,851. The reason is primarily due to the Company engaging an unrelated party
in August 2009 to develop a project focused on cork material carbonizing in
order to acquire advanced technical procedures for future
manufacturing.




27





Other
Income (expense)





For the
three months ended March 31, 2010, other expense, net, amounted to $13,593 as
compared to other expense net of $89,659 for the three months ended March 31,
2009, a decrease of $78,040 or 87.04%. Other income for the three months ended
March 31, 2010 and 2009 is related to the income received from the leasing of
our Yu Ler Yuan Resort.





For the
three months ended March 31, 2010, net interest expense was $44,225 as compared
to net interest expenses of $114,384 for three months ended March 31, 2009, a
decrease of $70159, or 61.34%. This decrease was primarily attributable to the
full amortization of the discount through June 2009 on $700,000 of convertible
debt and common stock purchase warrants issued in June 2008.  The
decreased interest expenses were partially offset by an increased interest rate
of 24% applied to the convertible notes commencing in the third quarter of 2009.
The rate was increased as a result of the Company’s inability to pay the
convertible notes when due on their original maturity dates in
June 2009.





Income
Tax





Net
income taxes expense increased by$34,543 to $37,367 for the three months ended
March 31, 2010 as compared to $2,824 for the three months ended March 31, 2009.
This increase was primarily due to an increase in net income before income taxes
in the first quarter of 2010 as compared to the first quarter of
2009.





LIQUIDITY
AND CAPITAL RESOURCES





Operating
working capital (cash and equivalents plus accounts receivable plus inventory
less accounts payable and accrued expenses) decreased by $769,406
from  $9,665,058 as of December 31, 2009 to $8,895,652 as of March 31,
2010. The decrease was primarily due to a decrease in inventories and accounts
receivable in the amount of $2,012,446 and $78,094 during the current year,
respectively.





Cash
provided by operating activities was $1,450,475 for the three months ended March
31, 2010 as compared to ($4,768) used for the three months ended March 31, 2009.
The increase in cash provided by operating activities for the three months ended
March 31, 2010 was a result of an increase of net income and reduced
inventories.





Financing
activities for the three months ended March 31, 2010 was ($215,321) of net cash
used.  There was no such use of cash during the three months ended
March 31, 2009. The use of cash for the three months ended March 31, 2010 was
primarily attributable to repayment of a loan from an unrelated
party.





28





In June 2008, the Company issued
convertible notes and common stock purchase warrants resulting in aggregate
gross proceeds of $700,000. The notes matured one year from the date of issuance
and bore interest at an annual rate of 18%, payable at maturity in USD. Since
the notes were not paid at maturity, the annual interest rate increased to 24%.
Upon the closing of a financing of at least $2,000,000, the promissory notes
will be convertible into shares of common stock at a 50% discount to the price
per share of common stock sold in such financing.  Each holder also
has the option to either be paid the principal and interest due under the
promissory note or, convert the note into shares of common stock at a
conversion price of $0.228 per share. The warrants are exercisable at any time
after the consummation of such financing through the fourth anniversary of the
consummation of such financing (the "Financing Expiration Date").Since
the financing  did not occur within 12 months of the issuance of
the warrants, each warrant is exercisable for the number of shares of common
stock equal to 50% of the initial principal amount of the promissory note
divided by $0.228, at an exercise price equal to $0.228, subject to certain
adjustments as set forth in the warrant. The interest payable regarding the
convertible notes has been accrued and recorded as of March 31, 2010. The
promissory notes are secured by common stock pledged by Pengcheng Chen, our
Chief Executive Officer and Fangshe Zhang, our Chairman. The holders have not
sought to take possession of such collateral to date.  The Company and
the holders of the promissory notes and warrants are negotiating the
satisfaction of the Company’s obligations under the promissory notes and
warrants  In the event that such negotiations fail, the Company
believes it would have sufficient cash or cash equivalents to repay the
promissory notes should the holders demand payment.





With
approximately $10.9 million of net working capital (total current assets
less total current liabilities), improvements in our collections of accounts
receivable and positive cash flow from operations as of March
31,  2010. As a result, we believe we have sufficient resources to
finance our operations for the coming year.





Since the
Company’s PRC operation subsidiaries, Xian Hanxin Technology Co., Ltd.
("Hanxin") and Cork Import and Export Co. Ltd (“CIE”) have not paid or declared
any dividends on their common stock within the past three years and do not
foresee doing so in the foreseeable future.  Hanxin and CIE intend to
retain any future earnings for the operation and expansion of their business in
the PRC.  Any decision as to future payment of dividends will depend on the
future available earnings, the capital requirements of Hanxin and CIE, their
general financial condition and other factors deemed pertinent by the Board of
Directors.  In addition, as discussed below, there are restrictions on
the ability of our Chinese operating subsidiaries to pay dividends due to
foreign exchange control and other regulations of China.




Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulated amount of such reserves reaches 50% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of a
liquidation.




29





Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China, all of our revenue and currency received are
denominated in Renminbi (RMB). RMB is subject to the exchange control
regulations in China, and, as a result, we may unable to distribute any
dividends outside of China due to PRC exchange control regulations that restrict
our ability to convert RMB into U.S. Dollars.




Our
inability to receive dividends or other payments from our Chinese operating
subsidiaries could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. The funds of Hanxin and CIE may not be
readily available to us to satisfy obligations which have been incurred outside
the PRC, which could adversely affect our business and prospects or our ability
to meet our cash obligations. Accordingly, if we do not receive dividends from
our Chinese operating subsidiaries, we may not have sufficient cash flow to fund
our corporate overhead and regulatory obligations in the United States and may
be unable to pay dividends on our shares of capital stock.





INFLATION





During
the period under review, inflation did not have a material impact on our
financial performance.





Web Site
Access to Our Periodic SEC Reports


You may
read and copy any public reports we filed with the SEC at the SEC’s Public Reference
Room at 100 F Street, N.E. Room 1580, Washington D.C. 20549.  You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site
http://www.sec.gov that contains reports and information statements, and other
information we filed electronically










30




ITEM 3.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




Not
applicable.





ITEM
4.  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures. Under the supervision and with the
participation  of  our  management,  including  our
Chief Executive Officer, Pengcheng Chen, and Chief Financial Officer, Yi Tong,
we  evaluated  the  effectiveness  of
the design and operation  of
our  disclosure  controls  and  procedures  (as  defined  in  Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act")) as of the end of the  period  covered  by
this  report.  Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report were
effective such that the  information  required to be
disclosed by us in reports  filed under
the  Securities  Exchange  Act of 1934 is
(i)  recorded, processed,  summarized  and
reported  within the time  periods  specified in
the SEC's rules and forms and (ii) accumulated and  communicated to
our management to allow timely
decisions  regarding  disclosure.  A controls
system cannot provide absolute assurance, however, that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance  that all control issues
and  instances  of  fraud, if any, within a
company have been  detected.





Changes in Internal Control
Over  Financial  Reporting.  During the
most recent year ended December 31, 2009, there has been no change in our
internal control over financial  reporting  (as defined in
Rule  13a-15(f) and 15d-15(f) under the Exchange Act) ) that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





31





PART II
- OTHER INFORMATION





ITEM
1.     LEGAL PROCEEDINGS
 
 None
 
 ITEM
1A.    RISK FACTORS
 
 Not
applicable.
 
 
 ITEM
2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
 
 None
 
 ITEM
3.    DEFAULTS UPON SENIOR SECURITIES
 
 None
 
 ITEM
4.    (REMOVED AND RESERVED)
  ITEM
5.    OTHER INFORMATION
 
 None
 
 ITEM
6.    EXHIBITS
  ExhibitNumber
              
              Description31.1
              
              Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certification of the
      Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.32.1
              
              Certification of
      Chief Executive Officer Certification pursuant to Section 906 of the
      Sarbanes- Oxley Act of 2002.32.2
              
              Certification of
      Chief Financial Officer Certification pursuant to Section 906 of the
      Sarbanes-Oxley
      Act of 2002.




32




SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant has caused
his report to be signed on its behalf by the undersigned, thereunto duly
authorized.




ASIA
      CORK INC.Date:
      May
      13, 2010
              By:
              /s/Pengcheng
      ChenPengcheng
      Chen,Chief
      Executive Officer(Principal
      Accouting Officer)By:
              /s/ Yi TongYi
      Tong,Chief
      Financial Officer(Principal
      Executive Officer)


33