UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended March 31, 2011





OR





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Transition Period from     to





(Commission File Number) 000-51263





NORTH CHINA HORTICULTURE, INC.


(Exact Name of Registrant As Specified in Its Charter)





Nevada

20-4650531(State or Other Jurisdiction of

Incorporation)

(IRS Employer

Identification No.)





LongSheng Village, Tangshan Town, Zhengan District


Dandong City, Liaoning, P.R.China


(Address of Principal Executive Offices)


Not Applicable


(Zip Code)





86-0415-8176321


(Registrant’s Telephone Number, Including Area Code)





(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange 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 at least the past 90 days. Yes x No  ̈





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 that the registrant was required to submit and post such files). Yes  ̈ No  ̈





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 filer o
Accelerated filer oNon-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x





As of March 31, 2011, the registrant had 50,000,139 shares of common stock outstanding.









NORTH CHINA HORTICULTURE, INC.


FORM 10-Q


Quarterly Period Ended March 31, 2011





INDEXPagePART I – FINANCIAL INFORMATIONITEM 1.
Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
3Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
4Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months ended March 31, 2011 and 2010 (Unaudited)Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
5Notes to Condensed Consolidated Financial Statements (Unaudited)
6ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
17ITEM 4.
Controls and Procedures
17PART II – OTHER INFORMATIONITEM 1.
Legal Proceedings
17ITEM 1A
Risk Factors
17ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17ITEM 3.
Defaults Upon Senior Securities
17ITEM 5.
Other Information
18ITEM 6.
Exhibits
18




2




NORTH CHINA HORTICULTURE, INC


CONDENSED CONSOLIDATED BALANCE SHEETS




March 31,


December 31,2011

(Unaudited)


2010ASSETSCurrent assetsCash and cash equivalents

$
37,019


$
240,719Accounts receivable, net of allowance for doubtful accounts of $906,534 and $888,844


2,642,216



1,392,020Inventories, net


1,771,774



1,199,099Prepaid rent and other current assets


144,790



116,170Deposits and advance to suppliers


330,835



93,658Receivable from unaffiliated entities


2,943,415



3,143,307Deposit to related party


-



727,722Due from officer


-



81,668Total current assets


7,870,049



6,994,363Property and equipment, net


383,401



139,997Deposit on greenhouse improvements


-



211,743TOTAL ASSETS

$
8,253,450


$
7,346,103LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilitiesAccounts payable

$
18,172


$
27,289Accrued expenses and other payables


73,478



103,460Due to officer


14,537



-Total current liabilities


106,187



130,749COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS’ EQUITYCommon stock, $0.00001 par value;50,000,139 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively


500



500Additional Paid-in capital


14,850



14,850Accumulated other comprehensive income


340,158



268,780Retained earnings


7,791,755



6,931,224TOTALSTOCKHOLDERS’ EQUITY


8,147,263



7,215,354TOTAL LIABILITIES ANDSTOCKHOLDERS’ EQUITY

$
8,253,450


$
7,346,103





The accompany notes are an integral part of these condensed consolidated financial statements




3




NORTH CHINA HORTICULTURE, INC


CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)




For the three months ended

March 31,2011


2010Revenues, net

$
1,585,134


$
827,249Cost of goods sold


329,398



116,890Gross profit


1,255,736



710,359Operating expenses


395,205



32,855Net income


860,531



677,504Other comprehensive income-foreign currency translation gains


71,378



56,029Comprehensive income

$
931,909


$
733,533Basic and diluted earnings per share

$
0.02


$
0.01Basic and diluted weighted average number of shares


50,000,139



49,870,814





The accompany notes are an integral part of these condensed consolidated financial statements




4




NORTH CHINA HORTICULTURE, INC


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)




For the three months ended

March 31,2011


2010Cash flows from operating activities:Net income

$
860,531


$
677,504Adjustments to reconcile net income to cash (used in) provided by operating activities:Depreciation


12,970



1,345Changes in operating assets and liabilities:Accounts receivable


(1,233,148
)


(345,101
)Inventories


(559,594
)


(274,255
)Deposit and advance to suppliers


(248,481
)


(285,895
)Prepaid rent and other current assets


(27,438
)


61,551Accounts payable


(9,340
)


(21,027
)Accrued expenses and other payables


(58,809
)


82,530Due to outside parties


-



198,687Net cash (used in) provided by operating activities


(1,263,309
)


95,339Cash flows from investing activities:Purchase of property and equipment


(41,228
)


(2,048
)Deposit to related party


725,400



-Repayments of receivable from unaffiliated entities


304,609



-Receivable from unaffiliated entities


(75,837
)


-Net cash provided by (used in) investing activities


912,944



(2,048
)Cash flows from financing activities:Repayment and advances by officer


95,907



-Additional paid-in capital


-



1,291Net cash provided by financing activities


95,907



1,291Effect of exchange rate changes on cash


50,758



233Net (decrease) increase  in cash and cash equivalents


(203,700
)


94,815Cash and cash equivalents, beginning of the period


240,719



11,300Cash and cash equivalents, ending of the period

$
37,019


$
106,115SUPPLEMENTARY DISCLOSURE:Interest paid

$
-


$
-Income tax paid

$
-


$
-




The accompany notes are an integral part of these condensed consolidated financial statements




5




NORTH CHINA HORTICULTURE, INC


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)





NOTE 1 – BASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements of North China Horticulture, Inc. (the “Company”, “We”, “Our”) and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-K for scaled disclosures for smaller reporting companies. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information 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 fiscal year.  The condensed consolidated balance sheet information as of December 31, 2010 was derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K filed with the SEC.  These interim financial statements should be read in conjunction with that report.




The accompanying consolidated financial statements include the financial statements of North China, its wholly owned subsidiaries, Honour Bond and Zhihao, and Zhihao’s VIE, Longsheng.   Inter-company balances and transactions have been eliminated in consolidation.





NOTE 2 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The Company, formerly known as iDcentrix, Inc., was incorporated in the State of Nevada on January 26, 2004.  The Company, along with its subsidiary and variable interest entity (“VIE”), is engaged in the cultivation and sales of blueberry seedlings.  The Company’s facilities are located in and around the city of Dandong in Liaoning Province, People’s Republic of China (“PRC”).  Our products consist of a number of blueberry seedling varietals.





On June 1, 2010 the Company effected a one for two hundred eighty-four (1:284) reverse stock split resulting in the Company having 240,269 (post-split) shares of common stock outstanding after the reverse stock split.  All share and per share amounts in the accompanying consolidated financial statements have been adjusted to reflect the reverse stock split as if it had occurred at the beginning of the earliest period presented.





On July 16, 2010, the Company completed a share exchange transaction with Honour Bond Limited ("Honour Bond") and its shareholders, whereby the Company acquired 100% of the issued and outstanding capital stock of Honour Bond in exchange for 49,870,814 shares of our common stock which constituted 99.74% of our issued and outstanding capital stock as of and immediately after the consummation of the share exchange transaction.  As a result of the share exchange transaction, Honour Bond became our wholly-owned subsidiary and the former shareholders of Honour Bond became our controlling stockholders.





For accounting purposes, the share exchange transaction is accounted for as a recapitalization (reverse merger), with Honour Bond treated as the accounting acquirer and iDcentrix treated as the legal acquirer.  The financial statements presented herein are those of the accounting acquirer given the effect of the issuance of 129,325 shares of common stock upon completion of the transaction.





Honour Bond is a corporation organized under the laws of Hong Kong Special Administrative Region in January 2010 with registered capital of HKD 10,000 (approximately $1,291).  Honour Bond’s wholly owned subsidiary, Shenzhen ZhihaoDongbo Technology Co., Ltd. (“Zhihao”), is a limited liability company organized under the laws of the People’s Republic of China (“PRC”) in March 2010.  Honour Bond does not conduct any substantive operations of its own, but conducts its primary business operations through Zhihao’s variable interest entity (“VIE”), Longsheng Horticulture Technology Co., Ltd.  (“Longsheng”).  Dandong Longsheng was incorporated under the laws of the PRC in March 2008.





6




Honour Bond, through Zhihao, has entered into certain exclusive agreements with Dandong Longsheng, which obligate the Company to absorb a majority of the risk of loss from Dandong Longsheng’s activities and entitle it to receive a majority of its residual returns. In addition, Dandong Longsheng’s shareholders have pledged their equity interest in Dandong Longsheng to Zhihao, irrevocably granted Zhihao an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Longsheng and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by Zhihao. Through these contractual arrangements, the Company is deemed to be the primary beneficiary of Longsheng.





Based on these contractual arrangements, the Company believes that Longsheng is a VIE under authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on consolidations.  As the Company through Zhihao is deemed to be the primary beneficiary of Longsheng, the Company consolidates the assets, liabilities, and results of operations of Longsheng.





Use of estimates





The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods.  Items subject to such estimates and assumptions include the carrying value and estimated useful lives of long-lived assets and the valuation allowances for receivables and for unsecured advances to unaffiliated entities.  Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.





Impairment of long-lived assets





Authoritative guidance issued by the FASB establishes guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized, and how impairment losses should be measured.





Management regularly reviews property, equipment and other long-lived assets for possible impairment.  This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.  If there is indication of impairment, then management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition.  If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value.  Management’s assumptions about cash flows and discount rates require significant judgment.  Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, and significant negative industry or economic trends.  Based on managements’ assessment, there were no indicators of impairment at March 31, 2011 and December 31, 2010





Revenue recognition





The Company recognizes sales in accordance with the United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”. The Company recognizes revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured.  Revenue is not recognized until title and risk of loss is transferred to the customer, which generally occurs upon delivery of goods, and objective evidence exists that customer acceptance provisions have been met.  Deposits or advance payments from customers prior to delivery of goods and passage of title of goods are recorded as advances from customers.




7




Earnings per share





Earnings per share are calculated in accordance with the authoritative guidance issued by the FASB on earnings per share.  Basic net earnings per share are based upon the weighted average number of common shares outstanding.  Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised, and that all unvested shares have vested.  Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  At March 31, 2011 and 2010, basic and diluted earnings per share are the same as the Company did not have any dilutive convertible shares or stock options outstanding.





Foreign currency translation





The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the period.





March 31,

2011


December 31,

2010


March 31,

2010Period end RMB : US$ exchange rate


6.5483



6.6000



6.8263Average period end RMB : US$ exchange rate


6.5790



6.7690



6.8272





The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.





Concentrations





Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and unsecured trade accounts receivable.





Cash denominated in RMB with a US dollar equivalent of $37,019 and $240,719 at March 31, 2011 and December 31, 2010, respectively, was held in accounts at financial institutions located in the PRC.  The Company and its subsidiaries have not experienced any losses in such accounts and do not believe the cash is exposed to any significant risk.





For the three months ended March 31, 2011, five customers accounted for 94.11% of sales (33.6%, 19.44%, 15.87%, 13.65%, and 11.55% respectively) and at March 31, 2011, these customers accounted for 33.98%, of accounts receivable (9.13%, 9.94%, 8.76%, 0% and 6.16% respectively).  For the three months ended March 31, 2010, four customers accounted for 100% of sales (33.81%, 29.91%, 18.6%, and 17.68% respectively) and at December 31, 2010, six customers accounted for 49%, of accounts receivable (18%,6%, 14%,15% ,13% and 7% respectively).




For the three months ended March 31, 2011, two vendors accounted for 83.66% of total purchases (57.86%, and 25.8% respectively).  For the three months ended March 31, 2010, two vendors accounted for 90.86% of total purchases (74.46%, and 16.4%, respectively).  For the three months ended March 31, 2011 or 2010, there were no other vendors that accounted for over 10% of total purchases, respectively.




8




Economic and Political Risks





The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.





The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results of operations may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.





Recent Accounting Pronouncements





Recently issued accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") have either been implemented or are not significant to the Company.




NOTE 3 –DEPOSIT TO RELATED PARTY




At December 31, 2010, the Company had a deposit of approximately $727,722 (RMB 4,811,555) that had been paid to the father of the Company’s chairman and CEO for the purchase certain farming real estate.  During the quarter ended March 31 2011, the proposed acquisition was terminated and the deposit was returned to the Company.




NOTE 4 – RELATED PARTY TRANSACTIONS




At December 31, 2010, a balance of $81,668 of advances was due from the Company’s chairman and CEO.  The advances were made for Company business purposes and were repaid to the Company by March 10, 2011.  The amounts were unsecured, non-interest bearing, and due on demand.




During the quarter ended March 31, 2011, the Company’s chairman and CEO made advances of $14,537 to the Company which was outstanding at March 31, 2011.  The amounts are unsecured, non-interest bearing, and are payable on demand.





NOTE 5 – INVENTORIES





Inventories consist of the following as of:




March 31, 2011

(Unaudited)


December 31, 2010Raw material

$
115,340


$
61,746Work in process


1,265,204



926,857Finished goods


391,230



210,496Total

$
1,771,774


$
1,199,099





NOTE 6 –RECEIVABLE FROM UNAFFLIATED ENTITIES





In May 2010, the Company made advances totaling approximately $4,129,115 (RMB 27,950,000) to four unaffiliated entities.  The advances were initially made in anticipation of being equity investments and were subsequently restructured into term loans.  One advance for approximately $435,810 (RMB 2,950,000) was repaid in full in December 2010.  An aggregate of approximately $623,000 (RMB 4,217,080) was repaid on the other three advances during 2010.  At December 31, 2010, the aggregate outstanding balance was approximately $3,143,307 (RMB 20,782,920), including an exchange gain of approximately $73,000.   During three months ended March 31, 2011, an aggregate of approximately $304,609 (RMB 2,000,000) was repaid on the outstanding three advances and at March 31, 2011, the aggregate outstanding balance was approximately $2,867,578 (RMB 18,782,920), including an exchange gain of approximately $28,880. The advances are unsecured, non-interest bearing, due in various installments, and any unpaid principal is due in full on September 30, 2011.  Repayment of the advances is guaranteed by an unrelated commercial finance company.




9




In March 2011, the Company made two more advances totaling approximately $75,837 (RMB 496,740) to two potential suppliers which were still outstanding at March 31, 2011.  The advances are unsecured, non-interest bearing, due in fifteen days. The advances were fully repaid on April 12, 2011.





Advances to unaffiliated entities are reviewed periodically as to whether their carrying value has become impaired.  The Company considers the assets to be impaired if the collectibility of the balances becomes doubtful.  Based upon management’s assessment at March 31, 2011 and December 31, 2010, there was no allowance necessary for potential uncollectible advances.





NOTE 7 – INCOME TAX





Companies in the PRC are generally subject to PRC Enterprise Income Tax at a uniform tax rate of 25% under the China's Unified Enterprise Income Tax Law ("New EIT Law"), which took effect from January 1, 2008.  Longsheng is exempt from both income tax and value-added tax because it operates in the agriculture industry, which the Chinese government encourages and offers special incentives. We benefited from the tax exemptions in both 2011 and 2010.





Honour is a Hong Kong company.  Honour’s operations are conducted through its wholly owned subsidiary Zhihao and its VIE Dandong Longsheng, and Honour has no operations or income in Hong Kong.  Accordingly no income tax provision is recorded for Hong Kong.





North China Horticulture, Inc. is incorporated in the state of Nevada and has no operations in the United States of America.  Accordingly, the Company has not recorded a provision for U.S. federal income tax for the three months ended March 31, 2011 and 2010.  The Company has a net operating loss carry forward in the United States of America which begins to expire in 2028. The deferred tax asset created by the net operating loss has been offset by a 100% valuation allowance.





The following table reconciles the U.S. Statutory rate to the Company’s effective tax rate for the three months ended March 31:





2011


2010US statutory rate


34
%


34
%Tax rate difference


(9
%)


(9
%)Effect of tax exempt


(25
%)


(25
%)Effective tax rate


0
%


0
%





Effective January 1, 2007, the Company adopted authoritative guidance issued by the FASB for uncertainty in income taxes. The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under the authoritative guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The authoritative guidance also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of March 31, 2011, the Company does not have a liability for unrecognized tax uncertainties except as described below. The Company’s Chinese subsidiaries have never been subject to a tax examination and all years are open to examination by the tax authorities.




10




Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation.





The following discussion and analysis should be read together with the factors discussed in Item 1A “Risk Factors” and with the consolidated financial statements, including the notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Company’s future performance. Words or phrases such as “believes,” “does not believe,” “will,” “may,” “plan,” “estimate,” “anticipate,” “expect,” “intend” and similar expressions may identify “forward-looking statements.”




Business Overview and Basis of Presentation





On July 16, 2010, we completed a reverse acquisition transaction through a share exchange with Honour Bond Limited, a Hong Kong limited company (“Honour Bond”) and its shareholders (“Honour Bond Shareholders”), whereby we acquired 100% of the issued and outstanding capital stock of Honour Bond in exchange for 49,870,814 shares of our common stock which constituted 99.74% of our issued and outstanding capital stock as of and immediately after the consummation of the reverse acquisition.  As a result of the reverse acquisition, Honour Bond became our wholly-owned subsidiary and the Honour Bond Shareholders became our controlling stockholders.  The share exchange transaction with Honour Bond and the Honour Bond Shareholders was treated as a reverse acquisition, with Honour Bond as the acquirer and iDcentrix, Inc. as the acquired party.  Unless the context suggests otherwise, when we refer in this report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Honour Bond and its consolidated subsidiaries and replace the historical financial results of iDcentrix, Inc. pre-acquisition.  iDcentrix, Inc. and its subsidiaries and controlled affiliates are referred to collectively as “we,” “us,” and the “Company.”





Upon the closing of the reverse acquisition, TsoiTik Man, our former President, Secretary and a director, submitted a resignation letter pursuant to which he resigned from all offices that he held effective immediately and from his position as our director that became effective on August 7, 2010.  In addition, our board of directors on July 16, 2010, appointed Guang Zhao to fill the vacancy created by such resignation, which appointment became effective on August 7, 2010.  In addition, our executive officer was replaced by Guang Zhao upon the closing of the reverse acquisition.





As a result of our acquisition of Honour Bond, we now own all of the issued and outstanding capital stock of Honour Bond, which in turn owns all of the issued and outstanding capital stock of ShengzhengZhihaoDongbo Technology Ltd., a Chinese limited company (“Dongbo Consulting”).  In addition, we effectively and substantially control Dandong LongSheng Horticulture Technology Co., Ltd., a Chinese limited company (“Dandong LongSheng”), through a series of captive agreements with Dongbo Consulting.  Dandong LongSheng is principally engaged in the production of blueberry seedlings in the PRC.





Honour Bond was established in Hong Kong on January 5, 2010 to serve as an intermediate holding company.  Dongbo Consulting was established in China on March 4, 2010.





Dandong LongSheng was founded in March of 2008 in the People’s Republic of China to meet the strict supply chain demands of the food and beverage industry for quality high-end agricultural products.  Our offices and growing facilities are located in and around the city of Dandong in Liaoning Province.  Our products consist of a number of blueberry seedling varietals.  Currently, we have the capacity to grow approximately nine million seedlings per year in our 42 greenhouses on six acres of growing facilities.  We sell our seedlings to a number of agricultural enterprises throughout northern China, who then replant them and cultivate them to maturity in blueberry farms.





Our unique cultivation techniques allow us to produce multiple semi-mature blueberry plants from seedlings at far higher efficiencies, survival rates and in shorter periods of time than many of our competitors, contributing to our strong gross margins.  We currently employ approximately 208 individuals.




11




Contractual Arrangements with our Controlled Affiliate and its Shareholder





On March 10, 2010, prior to the reverse acquisition transaction, Dongbo Consulting and Dandong LongSheng and its sole shareholder Guang Zhao entered into a series of agreements known as variable interest agreements (the “VIE Agreements”) pursuant to which Dandong LongSheng became Dongbo Consulting’s contractually controlled affiliate.  The use of VIE agreements is a common structure used to acquire PRC corporations, particularly in certain industries in which foreign investment is restricted or forbidden by the PRC government.  The VIE Agreements included:





(1)       an Exclusive Technical Consulting and Service Agreement between Dongbo Consulting and Dandong LongSheng pursuant to which Dongbo Consulting is to provide technical support and consulting services to Dandong LongSheng in exchange for all of the net income after taxes of Dandong LongSheng.





(2)       a Call Option and Cooperation Agreement among Guang Zhao, Dandong LongSheng and Dongbo Consulting under which the sole shareholder of Dandong LongSheng has granted to Dongbo Consulting the irrevocable right and option to acquire all of his equity interests in Dandong LongSheng to the extent permitted by PRC law.  If PRC law limits the percentage of Dandong LongSheng that Dongbo Consulting may purchase at any time, then Dongbo Consulting may repeatedly exercise its option in such increments as may be allowed by PRC law.  The exercise price of the option is the net asset value of Dandong LongSheng at the time of exercise, or the percentage of such net asset value which corresponds to any incremental exercise of the option, or any higher price required by PRC law.  Any such difference between such net asset value and such higher price required by PRC law is, subject to all applicable laws and regulations, to be paid over to Dandong LongSheng.  Dandong LongSheng and its owner agree to refrain from taking certain actions which might harm the value of Dandong LongSheng or Dongbo Consulting’s option, and Dongbo Consulting undertakes to offer necessary financial support to Dandong LongSheng with respect to any losses or capital requirements to the extent permitted by law;





(3)       a Power of Attorney by Guang Zhao pursuant to which Mr. Zhao authorizes Dongbo Consulting to designate someone to exercise all of his shareholder decision rights with respect to Dandong LongSheng, provided that Dandong LongSheng consents to such authorization; and





(4)      an Equity Pledge Agreement between Guang Zhao and Dongbo Consulting under which the sole shareholder of Dandong LongSheng has pledged all of his equity in Dandong LongSheng to Dongbo Consulting to guarantee Dandong LongSheng’s and Guang Zhao’s performance of their obligations under the Exclusive Technical Consulting and Service Agreement, the Call Option and Cooperation Agreement and the Equity Pledge Agreement.





The VIE Agreements with our Chinese affiliate and its shareholder, which relate to critical aspects of our operations, may not be as effective in providing operational control as direct ownership.  In addition, these arrangements may be difficult and costly to enforce under PRC law.  Furthermore, our failure to perform our obligations under the VIE Agreements could give Dandong LongSheng the right to cease performance under or terminate the VIE Agreements and thereby deprive us of the economic benefit of the VIE Agreements from which we derive all of our revenues.  See “Item 1. Risk Factors - Risks Relating to the VIE Agreements” of this report.





Because of the common control between Honour Bond, Dongbo Consulting and Dandong LongSheng, for accounting purposes, the acquisition of these entities has been treated as a recapitalization with no adjustment to the historical basis of their assets and liabilities.  The restructuring has been accounted for using the “as if” pooling method of accounting and the operations were consolidated as if the restructuring had occurred as of the beginning of the earliest period presented in our consolidated financial statements and the current corporate structure had been in existence throughout the periods covered by our consolidated financial statements.





Principal Factors Affecting Our Financial Performance





Our operating results are primarily affected by the following factors:





·
Growth in the Chinese Economy - We operate our agricultural facilities in China and derive the majority of our revenues from sales to customers in China. Economic conditions in China, therefore, affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. China has experienced significant economic growth, achieving a compound annual growth rate of over 10% in gross domestic product from 1996 through 2008. Concurrent with this growth, domestic demand for our products has also increased. China is expected to experience continued growth in all areas of investment and consumption, even in the face of a global economic recession.




12




·
Growth of Demand in the Agricultural Products Market –We believe that China’s recent rise in consumption of fruit has been due to China’s economic growth and increased health and wellness consciousness. Management believes that along with increases in disposable income, Chinese consumers will elect to purchase more health foods and fresh fruits, which will benefit our sales.





·
Fluctuations in Raw Material Supply, Prices and Demand for our Products - Our Company’s production costs depend largely on readily available supply price of necessary raw materials which include seedlings, fertilizer, and other growing equipment. Increases in the price of oil directly impact fertilizer prices. Blueberry demand impacts both our raw material costs as well as our sales price. We set our prices according to local market prices for seedlings, which are determined by supply and demand factors in Northern China.





·
PRC Government Policy Promoting the Development of the Agricultural Industry - As part of the PRC’s eleventh five-year plan, local and federal authorities have offered assistance in the form of a variety of subsidies and tax incentives to farmers and agricultural producers with the goal of modernizing China’s agriculture industry and promoting rural affluence.




Management's Discussion and Analysis of Financial Condition and Results of Operations





Comparison of Three Months Ended March 31, 2011 and 2010





The following tables set forth key components of our results of operations during the three months ended March 31, 2011 and 2010, both in dollars and as a percentage of our net sales.





Three Months Ended


Three Months EndedMarch 31, 2011


March 31, 2010% of Net





% of NetAmount


Sales


Amount


SalesNet Sales

$
1,585,134



100
%

$
827,249



100
%Cost of sales


(329,398
)


(21
%)


(116,890
)


(14
%)Gross profit


1,255,736



79
%


710,359



86
%Selling, General and Administrative Expenses


(395,205
)


(25
%)


(32,855
)


(4
%)Operating Income


860,531



54
%


677,504



82
%Income before income taxes


860,531



54
%


677,504



82
%Income taxes


-



-



-



-Net income

$
860,531



54
%

$
677,504



82
%




Net Sales and Cost of Sales





Our net sales increased 92% to $1,585,134 in the three months ended March 31, 2011 from $827,249 in the three months ended March 31, 2010. The cost of goods sold per sales ratio changed from 14% to 21% in the three months ended March 31, 2011.





The increasing of the net sales was mainly attributed to the enhancement of the market recognition of the products of the Company and the expansion of the market. Through years of cultivating the products of the Company, our clients recognized the quality characteristics such as high survival ratio, and this enhanced the cooperation with the Company.




13




Increasing cost of goods sold per sales ratio in three months ended March 31, 2011 was mainly due to the higher unit selling price for each seed in the first quarter of 2010, which was twice as the unit price in 2011.  The reason for the higher unit price was because of the age of seed.  The unit price is higher with the two-year-old seed than the one-year-old seed.  In other words, the unit price is increasing accordingly during the growing of seeds.  Moreover, the costs of raw materials were also higher in 2011 which according to the trends of the market causing our overall cost to rise and our gross profit to decline to 79% from 86%.





Gross Profit and Gross Margin





Our gross profit increased 77% to $1,255,736 in the three months ended March 31, 2011 from $710,359 in the same period 2010. Gross profit as a percentage of net revenue was 79% and 86% for the three months ended March 31, 2011 and 2010, respectively.





The increasing of gross profit was driven by the increase of the net sales, and decreasing gross margin was due to the rising of the raw material purchasing cost which was discussed above.





Also, most of the maturity seeding plants we sold in first quarter of 2010 were aged over 1 or 2 years, with a price twice as typical, so the gross margin of the first quarter in 2010 is higher than that of 2011 causing our overall cost to rise and our gross profit to decline to 79% from 86%.





Selling, General and Administrative Expenses





Our selling, general and administration expenses significantly increased to $395,205 in the three months ended March 31, 2011 from $32,742 in 2010.  The increase is mainly due to the increase of audit fee and consulting fee in 2011. In 2011, we spend significantly more on consulting to improve our cultivative skill and business procedure.




Income before Income Taxes





Our income before income taxes increased 27%, to $860,531 in the three months ended March 31, 2011 from $677,504 in 2010. This change was mainly due to the increase of sales in 2011 offset by higher cost of plants and an increase in selling, general and administration expenses.




Income Taxes





As our operations are conducted in China, according to the PRC’s new Enterprise Income Tax, we are exempt from paying income taxes because we operate our business in the agriculture industry, which the government encourages and offers special incentives. We benefited from the tax exemption in both 2011 and 2010.





Liquidity and Capital Resources





As of March 31, 2011, we had cash and cash equivalents of $37,019, primarily consisting of cash on hand and demand deposits. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily through cash flows from operations and equity contributions by our shareholders.





The following table sets forth a summary of our cash flows for the periods indicated:




Three Months EndedMarch 31,2011


2010Net cash (used in) provided by operating activities

$
(1,263,309
)

$
95,339Net cash provided by (used in) investing activities


912,944



(2,048
)Net cash provided by financing activities


95,907



1,291Effects of Exchange Rate Change in Cash


50,758



233Net (Decrease) Increase in Cash and Cash Equivalents


(203,700
)


94,815Cash and Cash Equivalent at Beginning of the Period


240,719



11,300Cash and Cash Equivalent at End of the Period


37,019



106,115




14




Operating activities





Net cash used in operating activities was $1,263,309 for the three months ended March 31, 2011, as compared to net cash provided $95,339 for the three months ended March 31, 2010. The change is attributable to the increase of the accounts receivable and inventories.  The accounts receivable contributed $1,233,148 to the net cash outflow, and inventories purchasing led to $559,594 net cash outflow.




Investing activities





Net cash provided by investing activities for the three months ended March 31, 2011 was $912,944, as compared to net cash used in investing activities $2,048 during the first quarter of 2010. The change is attributable to unsecured advances to third parties and more assets purchase.





Financing activities





Net cash provided by financing activities for the three months ended March 31, 2011 was $95,907 due to the repayment of amounts due from a director, compared to $1,291 additional paid in capital received in 2010.





Receivable from unaffiliated entities





In May 2010, the Company made advances totaling approximately $4,129,115 (RMB 27,950,000) to four unaffiliated entities.  The advances were initially made in anticipation of being equity investments and were subsequently restructured into term loans.  One advance for approximately $435,810 (RMB 2,950,000) was repaid in full in December 2010.  An aggregate of approximately $623,000 (RMB 4,217,080) was repaid on the other three advances during 2010.  At December 31, 2010, the aggregate outstanding balance was approximately $3,143,307 (RMB 20,782,920), including an exchange gain of approximately $73,000.   During three months ended March 31, 2011, an aggregate of approximately $304,609 (RMB 2,000,000) was repaid on the outstanding three advances.  At March 31, 2011, the aggregate outstanding balance was approximately $2,867,578 (RMB 18,782,920), including an exchange gain of approximately $28,880. The advances are unsecured, non-interest bearing, due in various installments, and any unpaid principal is due in full on September 30, 2011.  Repayment of the advances is guaranteed by an unrelated commercial finance company.





In March 2011, the Company made two more advances totaling approximately $75,837 (RMB 496,740) to two potential suppliers which were still outstanding at March 31, 2011.  The advances are unsecured, non-interest bearing, due in fifteen days. The advances were fully repaid on April 12, 2011.





Advances to unaffiliated entities are reviewed periodically as to whether their carrying value has become impaired.  The Company considers the assets to be impaired if the collectibility of the balances becomes doubtful.  Based upon management’s assessment at March 31, 2011 and December 31, 2010, there was no allowance necessary for potential uncollectible advances.





At December 31, 2010, the Company had a deposit of approximately $727,722 (RMB 4,811,555) that had been paid to the father of the Company’s chairman and CEO for the purchase certain farming real estate.  During the quarter ended March 31 2011, the proposed acquisition was terminated and the deposit was returned to the Company.




At December 31, 2010, a balance of $81,668 of advances was due from the Company’s chairman and CEO.  The advances were made for Company business purposes and were repaid to the Company by March 10, 2011.  The amounts were unsecured, non-interest bearing, and due on demand.




During the quarter ended March 31, 2011, the Company’s chairman and CEO made advances to the Company and at March 31, 2011, $14,537 was due to the Company’s chairman and CEO.  The amounts are unsecured, non-interest




15





We believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, to meet our expected capital expenditure and working capital for the next 12 months. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.





Inflation





Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change in travel industry and continually maintain effective cost control in operations.





Off Balance Sheet Arrangements





We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.





Seasonality





Our products’ growth is subject to seasonal weather conditions.  During the winter our products are mostly dormant.





Critical Accounting Policies





Use of estimates





The preparation of consolidated financial statements in conformity with US GAAP 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 dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made.  However, actual results could differ materially from those results.





Revenue recognition





The Company recognizes sales in accordance with the United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”. The Company recognizes revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Revenue is not recognized until title and risk of loss is transferred to the customer, which occurs upon delivery of goods, and objective evidence exists that customer acceptance provisions have been met. Deposits or advance payments from customers prior to delivery of goods and passage of title of goods are recorded as advance from customers.





Accounts receivable





Accounts receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible amounts, as needed.





The Company uses the aging method to estimate the valuation allowance for anticipated uncollectible receivable balances. Under the aging method, bad debt percentages determined by management based on historical experience as well as current economic climate are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. The valuation allowance balance is adjusted to the amount computed as a result of the aging method. When facts subsequently become available to indicate that the allowance provided requires an adjustment, then the adjustment will be classified as a change in estimate.




16





Recent Accounting Pronouncements





Recently issued accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") have either been implemented or are not significant to the Company.




Item 3.  Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.





Item 4.  Controls and Procedures.




Evaluation of Disclosure Controls and Procedures




Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Guang Zhao, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2011, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.




Changes in internal control over financial reporting




During the fiscal quarter ended March 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.




PART II. OTHER INFORMATION.





Item 1. Legal Proceedings





Not applicable.





Item 1A. Risk Factors





Not applicable.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





Not applicable.





Item 3. Defaults Upon Senior Securities





Not applicable.




17





Item 5. Other Information





Not applicable.




Item 6. Exhibits





Exhibit

Number

Description of Exhibit31.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*





*           Filed herewith




18




SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





North China Horticulture, Inc.,Date: May 23, 2011

/s/ Guang ZhaoGuang ZhaoChief Executive OfficerDate: May 23, 2011

/s/ Guang ZhaoGuang ZhaoChief Financial Officer




19