UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20-549





FORM 10-Q





(Mark One)





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





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





For the transition period from ______________ to _____________





Commission file number: 000-51060





CHINA HEALTH INDUSTRIES HOLDINGS, INC.


(Exact name of registrant as specified in its charter)





Delaware

(State or other jurisdiction of incorporation or

organization)

86-0827216

(I.R.S. Employer Identification No.)168 Binbei Street, Songbei District, Harbin City

Heilongjiang Province, People’s Republic of

China

(Address of principal executive offices)

150028

(Zip Code)





86-451-51719407


(Registrant’s telephone number, including area code)





Not Applicable


(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed 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 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 period 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.





Large accelerated filer  ̈
Accelerated filer  ̈Non-accelerated filer  ̈
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   ̈        No x





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS





Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes   ̈    No  ̈





APPLICABLE ONLY TO CORPORATE ISSUERS





Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:





As of May 23, 2011, there are 62,239,737 shares   of $0.0001 par value common stock issued and outstanding.








FORM 10-Q


CHINA HEALTH INDUSTRIES HOLDINGS, INC.


INDEX





PagePART I
FINANCIAL INFORMATION

3Item 1. Financial Statements (Unaudited).

3Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and June 30, 2010.

4Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited).

5Condensed Consolidated Statements of Cash Flows for the Nine Months ended March 31, 2011 and 2010 (Unaudited).

6Notes to Condensed Consolidated Financial Statements as of March 31, 2011 (Unaudited)

7Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

24Item 3. Quantitative and Qualitative Disclosures About Market Risk.

34Item 4. Controls and Procedures.

34PART II
OTHER INFORMATION

35Item 1. Legal Proceedings.

35Item 1A. Risk Factors.

35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

35Item 3. Defaults Upon Senior Securities.

35Item 4. (Removed and Reserved).

35Item 5. Other Information.

35Item 6. Exhibits.

35




2





PART I - FINANCIAL INFORMATION





Item 1. Financial Statements (Unaudited)





The unaudited condensed consolidated financial statements of registrant for the three and nine months ended March 31, 2011 and 2010 follow.  The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.  All such adjustments are of a normal and recurring nature.




3





CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS





March 31, 2011


June 30, 2010(Unaudited)


(Audited)ASSETSCurrent assetsCash and cash equivalents

$
22,439,486


$
13,344,531Accounts receivable


2,563,553



5,693Inventory


613,761



184,522Notes receivable


3,192,517



2,992,893Prepaid expenses


802,025



764,738Deposit


3,206,939



3,084,335Total current assets


32,818,281



20,376,712Property & equipment - net


982,346



987,310Intangible assets - net


851,919



835,183Construction-in-progress


169,815



163,323Total assets

$
34,822,361


$
22,362,528LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable and accrued expenses

$
3,991


$
228,992Related party debt


88,675



85,408Wages payable


633,168



291,885Self-insured reserve


372,947



216,343Tax payable


3,083,647



3,629,951Total current liabilities


4,182,428



4,452,579Stockholders' equityCommon stock, ($0.0001 par value, 300,000,000 shares authorized, 62,239,737 issued and outstanding, respectively)

$
6,224



6,224Additional paid in capital


1,434,910



1,434,910Accumulated other comprehensive income


2,518,621



589,618Retained earnings


26,680,178



15,879,197Total stockholders' equity


30,639,933



17,909,949Total liabilities and stockholders' equity

$
34,822,361


$
22,362,528





See accompanying notes to the unaudited condensed consolidated financial statements


4





CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


For the Three Months Ended


For the Nine Months EndedMarch 31, 2011


March 31, 2010


March 31, 2011


March 31, 2010REVENUE


16,681,724



9,889,459



41,662,210



29,511,002COST OF GOODS SOLD


8,918,379



4,540,126



21,611,710



13,061,854GROSS PROFIT


7,763,345



5,349,333



20,050,500



16,449,148OPERATING EXPENSESSelling, general & administrative expenses


1,069,847



946,960



3,558,266



3,462,505Depreciation and amortization expenses


20,958



20,716



60,754



77,012Research & development


602,860



-



1,374,403



-Total operating expenses


1,693,665



967,676



4,993,423



3,539,517INCOME FROM OPERATION


6,069,680



4,381,657



15,057,077



12,909,631OTHER INCOME (EXPENSES)Interest income


62,905



226,482



141,542



226,487Interest expenses


(1,195
)


(3,845
)


(3,531
)


(24,680
)Total other income (expenses)


61,710



222,637



138,011



201,807INCOME BEFORE INCOME TAXES


6,131,390



4,604,294



15,195,088



13,111,438Provision for income taxes


1,730,671



1,140,243



4,394,107



3,289,639NET INCOME


4,400,719



3,464,051



10,800,981



9,821,799OTHER COMPREHENSIVE INCOMEForeign currency translation gain(loss)


1,728,002



(1,870
)


1,929,003



183,227Total other comprehensive income

$
6,128,721


$
3,462,181


$
12,729,984


$
10,005,026Earning per share:Basic & diluted earning per share

$
0.07


$
0.06


$
0.17


$
0.16Weighted average shares outstanding:Basic & diluted weighted average shares outstanding


62,239,737



62,239,737



62,239,737



62,239,737





See accompanying notes to the unaudited condensed consolidated financial statements


5





CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





For the nine months ended March 312011


2010Cash Flows from Operating ActivitiesNet income

$
10,800,981


$
9,821,799Adjustments to reconcile net income to net cash provided byv(used in) operating activities:Depreciation and amortization


60,754



77,012Imputed interest


3,531



24,680Share-based compensation


-



4,750(Increase) / decrease in current assets:Accounts receivables and other receivables


(2,626,225
)


12,558Inventory


(414,274
)


(227,274
)Prepaid expenses


28,888



(19,444
)Increase/(decrease) in current liabilities:Accounts payable and other payables


(442,461
)


846,594Net cash provided by operating activities


7,411,194



10,540,675Cash Flows from Investing ActivitiesPurchases of fixed assets


(3,088
)


(29,079
)Prepayment on acquisition






(6,582,701
)Prepayment on land use right






(3,071,253
)Construction-in-progress






(152,147
)Net cash used in investing activities


(3,088
)


(9,835,180
)Cash Flows from financing ActivitiesRepayments of related party debt






(662,703
)Net cash used in financing activities


-



(662,703
)Effect of exchange rate changes on cash and cash equivalents


1,686,849



183,227Net Increase in cash and cash equivalents


9,094,955



226,019Cash and cash equivalents, beginning balance


13,344,531



7,394,270Cash and cash equivalents, ending balance

$
22,439,486


$
7,620,2890Supplemental cash flow informationCash paid for income taxes

$
7,497,393


$
1,272,724Cash paid for interest expenses

$
-


$
-





See accompanying notes to the unaudited condensed consolidated financial statements


6





CHINA HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Note 1 - ORGANIZATION AND BUSINESS BACKGROUND





We were incorporated in the state of Arizona on July 11, 1996 and were the successor of the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse merger) with Edmonds 6, Inc. (Edmonds 6) and our name was changed to Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Pursuant to this agreement, Universal Fog, Inc. (which has been in continuous operation since 1996) became a wholly-owned subsidiary of Edmonds 6.





China Health Industries Holdings Limited ("China Health") was incorporated on July 20, 2007 in Hong Kong under the Companies Ordinance as a limited liability company. China Health was formed for the purpose of seeking and consummating a merger or acquisition with a business entity organized as a private corporation, partnership, or sole proprietorship as defined by FASB ACS topic 915 (“Development Stage Entities”).





Harbin Humankind Biology Technology Co., Limited ("Humankind") was incorporated in Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC") on December 14, 2003, as a limited liability company under the Company Law of PRC. Humankind is engaged in the business of production and distribution of health food.





On August 20, 2007, the sole shareholder of China Health entered into a Share Purchase Agreement with the owners of Humankind. Pursuant to the Agreement, China Health purchased 100% of the ownership in Humankind for a cash consideration of $60,408. Subsequent to completion of the Agreement, Humankind became a wholly-owned subsidiary of China Health. The share purchase transaction is being accounted for as a “reverse merger,” since the owner of Humankind owns a majority of the outstanding shares of China Health’s common stock immediately following the execution of the Agreement. Humankind is deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements for periods prior to the Agreement will be those of Humankind and will be recorded at the historical cost basis. After completion of the Agreement, China Health’s consolidated financial statements will include the assets and liabilities of both China Health and Humankind, the historical operations of Humankind and the operations of China Health and its subsidiaries from the closing date of the Agreement.





On October 14, 2008, Humankind set up a 99% owned subsidiary Harbin Huimeijia Medicine with its primary business being manufacturing and distributing medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of this subsidiary. The subsidiary is consolidated in the consolidated financial statements of the Company.





On December 31, 2008, China Health closed a reverse merger with Universal Fog, Inc; a U.S. public traded shell company. China Health is the accounting acquirer in the transaction and the transaction is treated as a recapitalization of the Company. After the transaction and a 1:20 reverse stock split, Xin Sun owned 61,203,088 shares of common stock, representing 98.3% of the 62,234,737 total outstanding shares of common stock of the Company. On April 7, 2009, Mr. Sun transferred 28,200,000 shares of common stock to 296 individuals, leaving him with 33,003,088 shares of common stock of the Company, or approximately 53.03%. We changed our name from "Universal Fog, Inc." to "China Health Industries Holdings, Inc." on February 19, 2009.


7





Our present corporate structure is as follows:











MANAGEMENT'S REPRESENTATION OF INTERIM FINANCIAL INFORMATION





The accompanying unaudited condensed consolidated financial statements have been prepared by China Health Industries Holdings, Inc. and subsidiaries without audit pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading.  These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations.  All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year.  These condensed consolidated financial statements should be read in conjunction with the audited financial statements at June 30, 2010 as filed in the Company Form 10-K/A filed with the Commission on 12/09/2010.


8





Note 2 - SIGNIFICANT ACCOUNTING POLICIES





This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements.  The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States and have been consistently applied in the preparation of the condensed consolidated financial statements and the June 30, 2010 financials included in the 10-K/A filed on December 9, 2010.





In June 2009 the FASB established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.  All accounting references have been updated and therefore, all FASB references have been replaced with ASC references.





Principles of Consolidation





The accompanying consolidated financial statements include China Health Industries Holdings, Inc., a Delaware corporation and a public company, and its three subsidiary companies, China Health Industries Holdings Limited., Harbin Humankind Biology Technology Co., Limited. and Harbin Huimeijia Medicine.   All significant intercompany balances and transactions have been eliminated in consolidation.





Effective January 1, 2009, the Consolidation Topic, ASC 810-10-45-16, revised the accounting treatment for non-controlling minority interests of partially-owned subsidiaries.  Non-controlling minority interests represent the portion of earnings that is not within the parent Company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet.  These amounts are immaterial as of March 31, 2011 and June 30, 2010, respectively.  Additionally, this statement requires net income from non-controlling minority interests to be shown separately on the consolidated statements of income.  These amounts are immaterial for the three and nine month periods ending March 31, 2011 and 2010, respectively. All significant intercompany balances and transactions have been eliminated in consolidation.





The Company also consolidates any variable interest entities (VIEs), of which it is the primary beneficiary, as defined.  The Company does not have any VIEs that need to be consolidated at this time. When the Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company would apply the equity method of accounting.





Segment Reporting





The Company operates in one segment in accordance with the accounting guidance FASB ASC topic 280, “Segment Reporting”. Our chief financial officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.





All revenue is from customers in People’s Republic of China. All of the company’s assets are located in People’s Republic of China.


9





Fair Value of Financial Instruments





The Company applies the provisions of accounting guidance, FASB ASC Topic 820 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  As of March 31, 2011, the fair value of cash and cash equivalents, accounts receivable, notes receivables, accounts payable, and other payables approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates except for related party debt or receivables for which it is not practicable to estimate fair value.





Fair Value Measurements





Effective January 1, 2009, the FASB ASC Topic 825,Financial Instruments, requiresdisclosures about fair value of financial instruments.





The FASB ASC Topic 820,Fair Value Measurements and Disclosures, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.





Various inputs are considered when determining the fair value of the Company’s investments, warrant derivative liability, and long-term debt.  The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below.





 ̈ ̈ ̈
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.





 ̈ ̈ ̈
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).





 ̈ ̈ ̈
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).





The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets or liabilities carried and measured on a recurring basis during the reporting periods.





The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.


10





Translation of Foreign Currencies





China Health maintains its books and accounting records in PRC currency “Renminbi” (“RMB”), which is determined as the functional currency. Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Foreign currency exchange gain and losses resulting from these transactions are included in operations.





China Health’s financial statements are translated into the reporting currency, the United States Dollar (“US$”). Assets and liabilities of China Health are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these financial statements are reflected as accumulated other comprehensive income (loss) in the shareholders’ equity.





Use of Estimates





The preparation of condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. China Health bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions about future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. The more significant estimates and assumptions by management include, among others; useful lives and residual value of long lived assets, valuation of Inventory, accounts receivable and notes receivable, impairment analysis of long-lived assets and intangible assets and deferred taxes. While China Health believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.





Statement of Cash Flows





In accordance with Statement FASB ASC Topic 230, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.





Accounts Receivable





Accounts receivable are recorded at the invoiced amount and do not bear interest. China Health extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness, and the economic environment.





Concentrations of Credit Risk





All of the Company’s manufacturing is located in the PRC.  There can be no assurance that the Company will be able to successfully continue to manufacture its products and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, price of raw material, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.


11





The Company operates in China, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between U.S. dollars and the Chinese currency RMB.  The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.





Self-Insured Reserve and Allowance





The Company is self-insured for all risks and carries no general liability or product insurance coverage of any kind. This account requires the use of estimates and judgment. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that such estimates are made with consistent and appropriate methods. Actual results may differ from these estimates under different assumptions or conditions.





Prepaid Expenses





Prepaid expenses principally include advances to raw material suppliers.





The Company periodically makes advances to certain vendors for purchases of raw materials, and records those advances as prepaid expense. Advances to vendors as of March 31, 2011 amounted to $802,025.  The majority balance in the amount of $746,480 (RMB 5,000,000) is converted from retaining fees paid to Tiefeng on July 23, 2009 to advances to Tiefeng for future purchasing of its inventory after cancelling the acquisition contract on May 5, 2010.





Inventory





Inventories consist of raw material, work in progress and finished goods of manufactured products.





Inventories are stated at lower of cost or market and consist of materials, labor and overhead.  The Company determines the cost of inventory by the first-in, first-out method.  The value of inventory is determined using the weighted average cost method and includes any related production overhead costs incurred in bringing the inventory to their present location and condition. Overhead costs included in finished goods include, direct labor cost and other costs directly applicable to the manufacturing process.  The Company evaluates inventories for excess, slow moving, and obsolete inventories as well as inventory whose volume is in excess of its net realizable value.  This evaluation includes analyses of sales levels by product and projections of future demand. In order to state the inventory at lower of cost or market, the Company maintains reserves against its inventory.  If future demand or market conditions are less favorable than the Company’s projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.  Inventory amounts are reported net of such allowances.  Management has recorded a $0 inventory allowance as of March 31, 2011.





Impairment of Long–Lived Assets





The Company’s long-lived assets and other assets are reviewed for impairment in accordance with the guidance of the FASB ASC Topic 360-10, “Property, Plant, and Equipment”, and FASB ASC Topic 205“Presentation of Financial Statements”.  The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.  Impairment evaluations involve management’s estimates on asset useful lives and future cash flows.  Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial position.  Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through March 31, 2011, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of Long-Lived assets in the future.


12





Property, Plant and Equipment





Property, plant and equipment are carried at cost. Maintenance, repairs and minor renewals are expensed as incurred; major renewals and improvements that extend the lives or increase the capacity of plant assets are capitalized.





When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the reporting period of disposition.





Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The percentages or depreciable life applied are:





Building, warehouse and Improvements

20 to 30 yearsLand use rights

50 yearsFurniture & Equipment

5 to 7 yearsTransportation Equipment

5 to 15 yearsMachinery and Equipment

7 to 15 years





Intangible assets





The Company evaluates goodwill and other intangible assets in accordance with FASB ASC Topic 350, “Intangibles — Goodwill and Other.”Goodwill is recorded at the time of an acquisition and is calculated as the difference between the total considerations paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development (“IPR&D”). Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology, including the valuation of our common stock, (iii) a significant slowdown in the worldwide economy or (iv) any failure to meet the performance projections included in our forecasts of future operating results. In accordance with FASB ASC Topic 350, the Company tests goodwill and intangible assets for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in the evaluations. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analysis, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period.





Intangible assets consist of land use right.





Land Use Right





All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner. On June 7, 2004, China Health enter into a Purchase Contract with the local government, pursuant to which China Health agreed to purchase the right to use a piece of land, approximately 8 acres, located in the Harbin County, Heilongjiang Province for commercial purpose over a fifty-year period from June 7, 2004 through June 6, 2054, for $967,882, which China Health has fully paid to the seller on June 13, 2004. The Department of Housing and Urban Development (“HUD”) of Harbin City approved this transaction. China Health recorded the land use right at its purchase price. The cost of the land use right is amortized over its prospective beneficial period, using the straight-line method with no residual value. China Health’s production facilities and office are located in this piece of land. As of March 31, 2011, the land use right and improvement have net balance of $851,919.


13





Revenue Recognition





China Health recognizes revenue when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations. The Company records revenue net of sales taxes. The Company allows its customers to return product for exchange or credit subject to certain limitations. A provision for such returns is recorded based upon historical experience. As of March 31, 2011, the Company did not have provision for such return as historically sales returns have been deminimus.





Sales Incentives— The Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense. Sales incentives are recorded when revenue are recognized. For the three and nine month period ended March 31, 2011 and 2010, the Company did not provide sales incentives to its customers or resellers.





Research and Development Costs





Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed when incurred.





For the three and nine months ended March 31, 2011, the Company incurred $602,860 and $1,374,403 in research and development costs. There was $0 research and development costs for the three and nine months ended March 31, 2010.





Advertising Costs





Advertising costs are expensed as incurred and included as part of selling and marketing expenses in the accompanying consolidated statement of income. Advertising costs were immaterial for the three and nine months ended March 31, 2011 and 2010, respectively.





Income Taxes





The Company adopts FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.




July 2006 the FASB issued FIN 48(ASC 740-10), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109(ASC 740), which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements.  Under FIN 48(ASC 740-10), tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met.  Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.


14





The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings.  Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.





As a result of the implementation of FIN 48 (ASC 740-10), the company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48 (ASC 740-10).  The Company recognized no material adjustments to liabilities or stockholders’ equity in lieu of the implementation.  The adoption of FIN 48 did not have a material impact on the Company’s financial statements.





Enterprise income tax





Under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income. Preferential tax treatment may, however, be granted pursuant to any law or regulations from time to time promulgated by the State Council.





Value added tax





The Provisional Regulations of PRC Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in, or imported into, the PRC and on processing, repair and replacement services provided within the PRC.





Value added tax payable in the PRC is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year.





According to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value Added Tax Waiver” published by the Ministry of Finance and the National Tax Affairs Bureau, the value added tax for agriculture related products is to be taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant are by definition agriculture related products.





Sales Taxes and Sales-related Taxes





Pursuant to the tax law and regulations of PRC, China Health is obligated to pay totally 6.66% of gross sales as sales tax and sales-related taxes. Sales taxes and sales-related taxes are recorded when sales revenue is recognized. The Company records sales revenue net of sales tax and sales-related taxes. For the three and nine month ended March 31, 2011, sales taxes and sales-related taxes were $250,105 and $695,163 respectively. For the three and nine month ended March 31, 2010, sales taxes and sales-related taxes were $185,061 and $747,461 respectively.





Comprehensive Income





The Company reports comprehensive income in accordance with FASB ASC Topic 220 “Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.


15





Total comprehensive income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation.  Total comprehensive income represents the activity for a period net of related tax and was an income of $12,729,984 and $10,005,026 for the nine month periods ended March 31, 2011 and 2010, respectively. Total comprehensive income was an income of $6,128,721 and $3,462,181 for the three month periods ended March 31, 2011 and 2010, respectively.





While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date.  For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased overall equity by $2,518,621 and $589,618 as of March 31, 2011 and June 30, 2010, respectively.





Pension and Employee Benefits





Full time employees of the PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require China Health to accrue for these benefits based on certain percentages of the employees’ salaries. The Management believes full time employees who have passed the probation period are entitled to such benefits.





The total provisions for such employee benefits were $7,202 and $2,804 for the three months ended March 31, 2011 and 2010, respectively.





The total provisions for such employee benefits were $12,609 and $9,478 for the nine months ended March 31, 2011 and 2010, respectively.





Statutory Reserves





Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years ’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of China Health’s registered capital. Appropriation to the statutory public welfare fund is 5% to 10% of the after-tax net earnings. The statutory public welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. No appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Since China Health has been accumulating deficiency until June 30, 2009, no statutory surplus reserve fund or statutory public welfare reserve fund have been made since its inception. (Refer to Note 14)





Recent Accounting Pronouncements





In April 2010, the FASB issued the amendment to ASC Topic 718, “Compensation – Stock Compensation” which provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should not be considered to contain a condition that is not a market, performance, or service condition. As a result, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This topic will be effective on December 15, 2010. The Company management believes that this pronouncement will not have a material effect on its financial statements.




16




In August 2010, ASU 2010-23 was issued.  This amends ASC 954 to require the disclosure of charity care be disclosed at cost.  The Company management believes that this pronouncement will not have a material effect on its financial statements.




In August 2010, Accounting Standards Update (“ASU”) 2010-24 was issued.  This update amends ASC 954-450 to require that anticipated insurance settlements from malpractice claims not be offset against the accrual for the malpractice claim.  The Company management believes that this pronouncement will not have a material effect on its financial statements.





Note 3 – CASH AND CASH EQUIVALENTS





Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.





The company maintains cash and cash equivalents balance at several financial institutions. Only accounts at US financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of March 31, 2011, the Company’s uninsured bank balances totaled $22,435,170. The Company’s insured bank balances totaled $4,316, which was maintained at US financial institutions.





Note 4 - CONTROL BY PRINCIPAL OWNERS





The directors, executive officers, their affiliates and related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding capital of China Health. Accordingly, directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including approving significant expenses, increasing the authorized capital stock and the dissolution, merger or sale of China Health's assets.





Note 5 – ACCOUNTS RECEIVABLE





The Company’s accounts receivable amounted to $2,563,553 and $5,693 as of March 31, 2011 and June 30, 2010, respectively. The increase in accounts receivable was primarily due to the extended credit to the Company’s three sales agents. These three sales agents are the Company’s new customers and the Company offers these three sales agents 60 days to 90 days term in order to increase the Company’s sales. Most of the Company’s products were sold to the end customers directly and the end customers made the payment upon the receipt of our product.





Note 6 – NOTES RECEIVABLE





Notes receivable consist of the following:





March

31, 2011


June 30,

2010Advances to employees


97,057



55,432Accrued Interest


41,232Notes receivable -Tiefeng


3,054,228



2,937,461Total  notes  receivable

$
3,192,517


$
2,992,893





The advances to employees are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.


17





On April 9, 2009, the Company’s wholly-owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Humankind”), entered into a letter of intent with the shareholders of Heilongjiang Tiefeng Rice Company Limited (“Tiefeng”) to purchase all the equity interest of Tiefeng (“the Share Transfer Agreement”). On July 23, 2009, the amount of $746,480 (RMB 5,000,000) were paid as retaining fees. The purchase agreement was signed on August 18, 2009; the amount of $7,312,507 (RMB 50,000,000) was prepaid to Tiefeng on August 19, 2009.





As of March 31, 2010, Tiefeng did not get the crucial certified documents from local government agencies. Based on the amended agreement, the deal is thus voided. Tiefeng paid back approximately $1.46 million (RMB 10,000,000) to the Company on March 31, 2010, the additional $1.46 million (RMB 10,000,000) was paid on April 30, 2010 as part of the deposit refund. Another $1.46 million (RMB 10,000,000) was paid on May 31, 2010. The balance of $3,054,228 (RMB 20,000,000) was converted as loans to Tiefeng with two years term starting from May 5, 2010. Interest is charged semi-yearly by using the current Chinese bank borrowing rate of 5.31%.  For the three and nine months ended March 31, 2011, accrued interest income on the Tiefeng loan totals $40,545 and $121,635, respectively. Since the balance of $3,054,228 (RMB 20,000,000) was converted as loans to Tiefeng on May 5, 2010, there was no accrued interest income on the Tiefeng loan for the three and nine months ended March 31, 2010.





Note 7 - INVENTORIES





Inventories consist of following:





March

31, 2011


June 30, 2010Finished goods

$
146,406


$
74,478Work-in-process


141,489



75,498Raw materials


263,233



17,836Supplies and packing materials


62,633



16,710Total inventory

$
613,761


$
184,522





Note 8 - DEPOSIT





The Company paid $3,206,939 (RMB 21,000,000) as of March 31, 2011 and $3,084,335 (RMB 21,000,000) as of June 30, 2010 to Harbin Songbei District Development and Construction Committee as the prepayment for the acquisition of the land use rights. The Company is in the process of going through a full range of procedures before the land use rights can be granted to the Company.





Note 9 – CONSTRUCTION IN PROGRESS





Plant and production lines currently under development are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including development expenditures, professional fees and the interest expenses capitalized during the course of construction for the purpose of financing the project. Currently, construction is completed and the project is waiting for final inspection and examination and government approval. Upon readiness for use of the project, the cost of construction-in-progress will be transferred to property and equipment, at which time depreciation will commence. The Company had no capitalized interest and to date has funded this construction through operations without the use of outside debt financing.  As of March 31, 2011, the Company has incurred a total of $169,815 of construction in progress.


18





Note 10 - PROPERTY, PLANT AND EQUIPMENT





The following is a summary of property, plant and equipment:





March

31, 2011


June 30,

2010Building and warehouses

$
892,138


$
858,030Machinery and equipment


187,065



174,365Office equipment


29,186



29,963Vehicles


92,984



89,428Other


25,808



24,822Less: Accumulated depreciation


(244,835
)


(189,298
)Total

$
982,346


$
987,310





Depreciation expense charged to operations was $16,051 and $15,566 for the three months ended March 31, 2011 and 2010, respectively.





Depreciation expense charged to operations was $46,498 and $61,564 for the nine months ended March 31, 2011 and 2010, respectively.





Note 11 – INTANGIBLE ASSETS





The following is a summary of the intangible assets:





March

31, 2011


June 30,

2010Land use right

$
967,882


$
930,879Less: Accumulated amortization


(115,963
)


(95,696
)$
851,919


$
835,183





Amortization expense charged to operations was $4,907 and $5,150 for the three months ended March 31, 2011 and 2010 respectively.





Amortization expense charged to operations was $14,256 and $15,448 for the nine months ended March 31, 2011 and 2010 respectively.





Note 12 - RELATED PARTY DEBT





Related party debt represents temporary short-term loans from majority owner, Mr. Xin Sun, a People Republic China citizen. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Cash flows classified as due to majority owner are classified as cash flows from financing activities. The total borrowings from Mr. Sun were $88,675 and $85,408 as of March 31, 2011 and June 30, 2010, respectively.





Interest was imputed on the loans using the Chinese bank borrowing rate of 5.31% for the nine months ended March 31, 2011. The total imputed interest expense was $1,195 and $3,845 for the three months ended March 31, 2011 and 2010 respectively. The total imputed interest expense was $3,531 and $24,680 for the nine months ended March 31, 2011 and 2010 respectively.





Note 13 – INCOME TAX AND TAXES PAYABLE





The following is a summary of taxes payable:





March

31, 2011


June 30,

2010Income taxes payable

$
1,717,605


$
2,421,843VAT taxes payable


919,044



781,962City and Supplement taxes


64,331



371,430Payroll taxes payable & other taxes


382,667



54,716$
3,083,647


$
3,629,951




19





On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law reduces the corporate income tax rate from 33% to 25% with effect from January 1, 2008. All Chinese enterprises are governed by the PRC Income Tax Law and various local income tax laws, pursuant to which a company generally is subject to an income tax at a statutory rate of 25% for the nine months ended March 31, 2011 and 2010.





The provision for income taxes consisted of the following for the nine months ended March 31, 2011 and 2010:





March 31,


March 31,2011


2010Provision for PRC income tax - current taxes

$
4,394,107


$
3,289,639Provision for PRC income tax - deferred taxes


-



-Total provision for income taxes

$
4,394,107


$
3,289,639





The following table reconciles the PRC statutory rates to China Health’s effective tax rate for the nine months ended March 31, 2011 and 2010:





March 31


March 312011


2010Pretax Income

$
15,195,088


$
13,111,438Statutory tax rate


25
%


25
%PRC enterprise income tax at statutory rate


3,798,772



3,277,860Expenses not deductible for taxes – temporary difference






-Expenses not deductible for taxes – permanent difference


595,335



11,779Increase in valuation allowance related to deferred tax assets


-Total provision for income taxes

$
4,394,107


$
3,289,639





The provision for income taxes consisted of the following for the three months ended March 31, 2011 and 2010:





March 31,


March 31,2011


2010Provision for PRC income tax - current taxes

$
1,730,671


$
1,140,243Provision for PRC income tax - deferred taxes


-



-Total provision for income taxes

$
1,730,671


$
1,140,243





The following table reconciles the PRC statutory rates to China Health’s effective tax rate for the three months ended March 31, 2011 and 2010:





March 31


March 312011


2010Pretax Income

$
6,131,390


$
4,604,294Statutory tax rate


25
%


25
%PRC enterprise income tax at statutory rate


1,532,848



1,151,074Expenses not deductible for taxes – temporary difference






-Expenses not deductible for taxes – permanent difference


192,916



(15,978
)Increase in valuation allowance related to deferred tax assets


4,907



5,147Total provision for income taxes

$
1,730,671


$
1,140,243




20





Deferred tax assets (liabilities) as of March 31, 2011 and 2010 are composed of the following:





March 312011


2010PRCNoncurrent deferred tax assets :Amortization of land use right and other intangible assets

$
4,907


$
5,147Valuation allowance


(4,907
)


(5,147
)$
-


$
-





Note 14 – EARNINGS PER SHARE





Basic earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. When applicable, diluted earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants.





Potential common shares issued are calculated using the treasury stock method, which recognizes the use of proceeds that could be obtained upon the exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price of the common stock during the period.





FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations.





For the three and nine month periods ended March 31, 2011 and 2010, the company does not have potential dilutive shares.





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





For the Nine Month Periods EndedMarch 31,2011


2010Net income  attributable to the common stockholders

$
10,800,981


$
9,821,799Basic weighted average outstanding shares of common stock


62,239,737



62,239,737Dilutive effect of options and warrants


-



-Diluted weighted average common stock and common stock equivalents


-



-Earnings per share:


0.17



0.16Basic

$
0.17


$
0.16Diluted

$
0.17


$
0.16




21




For the Three Month Periods EndedMarch 31,2011


2010Net income attributable to the common stockholders

$
4,400,719


$
3,464,051Basic weighted average outstanding shares of common stock


62,239,737



62,239,737Dilutive effect of options and warrants


-



-Diluted weighted average common stock and common stock equivalents


-



-Earnings  per share:


0.07



0.06Basic

$
0.07


$
0.06Diluted

$
0.07


$
0.06





Note 15 - COMMITMENTS AND CONTINGENCIES





China Health’s assets are located in PRC and revenues are derived from operations in PRC.





In terms of industry regulations and policies, the economy of PRC has been transitioning from a planned economy to market oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reforms, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in PRC are still owned by the Chinese government. For example, all lands are state owned and are leased to business entities or individuals through governmental granting of Land Use Rights. The granting process is typically based on government policies at the time of granting and it could be lengthy and complex. This process may adversely affect our company’s future manufacturing expansions. The Chinese government also exercises significant control over PRC’s economic growth through the allocation of resources and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures.





China Health faces a number of risks and challenges not typically associated with companies in North America and Western Europe, since its assets exist solely in the PRC, and its revenues are derived from its operations therein. The PRC is a developing country with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect China Health’s performance.





The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which the Company might be involved in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.





Rental expense is approximately $1,500 and $144,468 for each of the three months ended March 31, 2011 and 2010 respectively.




22
  Rental expense is approximately $90,000 and $232,206 for each of the nine months ended March 31, 2011 and 2010 respectively. The remaining rental commitment for the fiscal year 2011 is $0.




STATUTORY RESERVE COMMITMENT





In compliance with PRC laws, the Company is required to appropriate a portion of its net income to its statutory reserve up to a maximum of 50% of an enterprise’s registered capital in the PRC. No appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. Since Harbin Huimeijia Medicine has been accumulating deficiency, no statutory reserve fund has been made since its inception.





The Company had future unfunded commitments, as provided below.





March

31, 2011


June 30,

2010PRC Subsidiaries Registered CapitalHarbin Humankind Biology

$
1,677,993


$
1,584,467Harbin Huimeijia Medicine (Company has accumulating deficiency, no reserve commitment required)


152,711



146,873Statutory Reserve Ceiling based on 50% of PRC Registered Capital of Harbin Humankind Biology or at least 10% of the after-tax net earnings until the reserve are equal to 50% of its registered capital.


838,996



792,234Less:  Retained Earnings appropriated to Statutory  Reserve


-



-Reserve Commitment Outstanding

$
838,996


$
792,234





Total commitments as of March 31, 2011 and June 30, 2010 are composed of the following:





March

31, 2011


June 30,

2010Rental Commitment

$
-


$
176,250Statutory Reserve Commitment


838,996



792,234Total commitments

$
838,996


$
968,484





Note 16 – MAJOR SUPPLIERS AND CUSTOMERS





The Company had two suppliers that accounted for 82% of purchase for the three-month period ended March 31, 2011 with each accounted for 49% and 33% respectively.





The Company had two suppliers that accounted for 82% of purchase for the nine-month period ended March 31, 2011 with each accounted for 62% and 20% respectively.




The Company had no customer that accounted for more than 10% of the company’s total sales for the three and nine-month periods ended March 31, 2011.





The Company had two suppliers that accounted for 93% of purchase for the three-month period ended March 31, 2010 with each accounted for 77% and 16% respectively.





The Company had two suppliers that accounted for 93% of purchase for the nine-month period ended March 31, 2010 with each accounted for 70% and 23% respectively.





The Company had no customer that accounted for more than 10% of the company’s total sales for the three and nine-month periods ended March 31, 2010.




23




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





FORWARD LOOKING STATEMENTS





The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in the risk factors and “Forward Looking Statements” summary set forth in the forepart of our Quarterly Report for the quarter ended March 31, 2011. This Quarterly Report on Form 10-Q contains forward-looking statements and is afforded the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. Readers should carefully review the risk factors disclosed in our Annual Report for the year ended June 30, 2010 and other documents filed by us with the SEC.





DISCUSSION





We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.




24




The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:





·
the effect of political, economic, and market conditions and geopolitical events;





·
legislative and regulatory changes that affect our business;





·
the availability of funds and working capital;





·
the actions and initiatives of current and potential competitors;





·
investor sentiment; and





·
our reputation.





We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.





The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.





Except as otherwise indicated by the context, references in this Form 10-Q to “we,” “us,” “our,” “the Registrant”, “our Company,” or “the Company” are to China Health Industries Holdings, Inc., a Delaware corporation, China Health Industries Holdings Limited, and its wholly owned subsidiary, Harbin Humankind Biology Technology Co. Limited. Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; (iii) “RMB” are to Renminbi Yuan of China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and (v) “Exchange Act” are to the Securities Exchange Act of 1934, as amended.





Business Overview





Our principal business operations are conducted through our wholly owned subsidiary, Harbin Humankind Biology Technology Co., Limited (“Humankind”) and Humankind’s subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”).





Humankind was incorporated in the People’s Republic of China (“PRC”) on December 14, 2003 and completed its Good Manufacturing Practice (“GMP”) certification on April 24, 2007. It is in the business of manufacture and sale of health products, “green” (or organic) food and detection of disease susceptibility or pre-disposition through genetic studies.





Huimeijia was incorporated in the PRC on October 14, 2008.  Huimeijia completed its GMP certification on July 23, 2009 and produces and sells our medical drugs.





Our business is conducted through our sales agents and sales people, our sales agents and sales people then sale our products to the customers. We have sales agents located in Jiang Su, Zhe Jiang and Gan Su Provinces. Our sales through these agents accounted for 3.08%, 3% and 0.92% respectively. We expect to sale our products over the internet eventually.




25




We have, through Humankind, the license to manufacture and sell two health supplement products which have a State Good Health Issue number assigned to each product (as provided below). In addition, Humankind distributes and sells 52 kinds of health food.





We are licensed to sell our products only in the PRC.





(i)
Health Supplements





Our “QunLe” brand Sailuozhi soft capsule, which is made from frog oil, soybean isoflavone, procyanidine (made from grape seeds) and vitamin C, is for freckle removal and supplementing the water content of the skin. The certification number issued by the State Food and Drug Administration on August 29, 2007 is 2007B0837.





On May 12, 2010, we received a patent for this product (200610010394.4) under the name “Run Chao” (which has now been changed to “Qunle”) with the National Bureau of Intellectual Property.





Pursuant to a Technology Transfer Agreement dated October 12, 2007, we purchased one other health product known as “Kindlink” brand propolis and black ant capsule made from propolis, black ant, acanthopanax, astragalus root from Beijing Jindelikang Bio-Technology Co., Ltd. (“Jindelikang”). The change of the ownership has been approved by the State Food and Drug Administration. This product is consumed to boost one’s immunity. The certification number issued by the State Food and Drug Administration on August 20, 2004 for the license to manufacture the product is GuoShiJianZi G20040906.We have no continuing obligations under the Technology Transfer Agreement.




(ii)
Health Food and Organic “Green” Food





Our health and organic “green” food products include (i) Abalone, Sea Cucumber and Frog Oil Soft Capsules (Serial Number 016-2007), (ii) Ganodermalucidum and Aweto Soft Capsules (Serial Number 017-2007), (iii) Propolis Soft Capsules, (iv) Deep Sea Fish Oil (Serial Number 012-2006),  (v) Liquid Calcium (Serial Number 013-2006),  (vi) Multi-Vitamins (Serial Number  010-2007), (vii) Soybean Isoflavone (Serial Number 012-2006)  and (viii) Royal Jelly (Serial Number 011-2006), (ix) Sleeping Beauty Capsule, (x) Virility Max Capsule, (xi) Ruddy Granule, (xii) Blood Cleanser Soft Capsule and (xiii) Colon Cleanser Capsule.





Results of Operations





Three months ended March 31, 2011 as compared to three months ended March 31, 2010





March 31,

2011


Variance


March 31,

2010REVENUESProduct Sales

$
16,681,724



68.68
%

$
9,889,459Total revenues

$
16,681,724







9,889,459COST OF GOODS SOLDCost of goods sold

$
8,918,379



96.43
%

$
4,540,126Gross Profit

$
7,763,345



45.13
%

$
5,349,333





Total revenues increased by 68.68%% in the three months ended March 31, 2011 compared to the same period in 2010. The $6,792,265 increase in revenues is attributable to growth in product sales. This growth in product sales was attributable to increased sales volume and our efforts to continue to develop our distribution channels by hiring additional sales agents to ensure that our products and their associated benefits are seen by those making or influencing the purchasing decisions.




26





Our cost of sales increased $4,378,253, or 96.43% in the three months ended March 31, 2011 compared to the same period in 2010. The costs increased as a result of the increased sales and the increase of raw material costs.





Our gross margin decreased 7.55% from 54.09% for the three month period ended March 31, 2011 to 46.54%   for the three month period ended March 31, 2010. This decrease was primarily attributable to an increase in the raw material costs. Due to high inflation in the PRC, the prices of many of our raw materials have increased. We seek to establish relationships with more suppliers to lower our raw material costs.





Sales by Product Line





A break-down of our sales by major product line for each of the three months ended March 31, 2011 and 2010 is as follows:





For the Three Months Ended March 31,2011








2010Product Category*

Quantity

(Unit)


Sales US$


% of Sales


Quantity

(Unit)


Sales US$


% of

SalesSleeping Beauty Capsule


25,655



377,952



2.27
%

31,988


479,811


4.85
%Ruddy Granule


35,587



1,027,299



6.16
%

23,803


714,077


7.22
%Virility Max Capsule


100,680



2,457,272



14.73
%

15,523


194,035


1.96
%Blood Cleanser Soft Capsule


51,901



1,515,001



9.08
%

25,626


768,766


7.77
%Abalone, Sea cucumber and Frog oil soft capsule














755



166,622



1.68
%Ganoderma lucidum and Aweto Soft CapsulesEnergy Elemental Powder


20,355



246,392



1.48
%Propolis and Black Ant Capsule














4,766



439,656



4.45
%Waterlilies Soft Capsule(Sailuozhi)


87,354



8,011,492



48.03
%


45,640



5,121,980



51.79
%Colon Cleanser Capsule


95,191



3,046,316



18.25
%


52,763



2,004,512



20.28
%Total






16,681,724



100
%






9,889,459



100
%





*All of the products are manufactured by the Company and none of them have been provided by the Commercial Bureau or other suppliers so far.





Operating Expenses





The following table summarizes our operating expenses for each of the three months ended March 31, 2011 and 2010, respectively:





For the Three Months Ended

March 31,2011


Variance


2010Operating ExpensesSelling , General and Administrative expenses

$
1,069,847



12.98
%

$
946,960Depreciation and amortization


20,958



1.17
%


20,716Research & Development


602,860







-Total operating expenses

$
1,693,665



75.02
%

$
967,676




27




Total operating expenses for the three months ended March 31, 2011 increased $725,989 or 75.02% over the same period in 2010. The higher operating expenses were primarily attributable to higher selling and administrative expenses and research and development costs.





We incurred imputed interest expenses in the amount of $3,531 on the loans due to Mr. Sun Xin, the executive officer and major shareholder of our Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment.





Other Income (Expenses)





Other income (expenses) decreased $160,927 for the three month period ended March 31, 2011. The decrease was primarily attributable to decreased interest income in the amount of $163,577 from Heilongjiang Tiefeng Rice Company Limited.





Income Taxes





Income taxes increased $590,428 for the three month period ended March 31, 2011 compare to the same period in 2010. The increase was primarily attributable to increased income before income taxes in the amount of $1,527,096





Results of Operations





Nine months ended March 31, 2011 as compared to nine months ended March 31, 2010





March 31,2011


Variance


2010REVENUESProduct Sales

$
41,662,210



41.18
%

$
29,511,002Total revenues

$
41,662,210







29,511,002COST OF GOODS SOLDCost of goods sold


21,611,710



65.46
%


13,061,854Gross Profit

$
20,050,500



21.89
%

$
16,449,148





Total revenues increased by 41.18% in the nine months ended March 31, 2011 compared to the same period in 2010. The $12,151,208 increase in revenues was attributable to growth in product sales. This growth in product sales was attributable to increased sales volume and our efforts to continue to develop our distribution channels by hiring additional sales agents to assure that our products and their associated benefits are seen by those making or influencing the purchasing decisions.




Our cost of sales increased $8,549,856, or 65.46% in the nine months ended March 31, 2011 compared to the same period in 2010. The costs increased as a result of the increased sales and the increase of direct labor and overhead costs.





Our gross margin decreased 7.61% from 55.74% for the nine month period ended March 31, 2010 to 48.13%   for the nine month period ended March 31, 2011. This decrease was primarily attributable to increase in the raw material costs. Due to high inflation in the PRC, the prices of many of our raw materials have increased. We seek to establish relationships with more suppliers to lower our raw material costs.




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Sales by Product Line




A break-down of our sales by major product line for each of the nine months ended March 31, 2011 and 2010 is as follows:





For the Nine Months Ended March 31,2011








2010Product Category*

Quantity

(Unit)


Sales US$


% of

Sales


Quantity

(Unit)


Sales US$


% of

SalesSleeping Beauty Capsule


86,906



1,310,574



3.15
%

31,988


479,811


1.63
%Ruddy Granule


95,402



2,841,635



6.82
%

23,803


714,077


2.42
%Virility Max Capsule


234,023



5,801,091



13.92
%

15,523


194,035


0.66
%Blood Cleanser Soft Capsule


126,811



3,781,534



9.08
%

25,626


768,766


2.61
%Abalone, Sea cucumber and Frog oil soft capsule














15,979



2,522,507



8.55
%Ganoderma lucidum and Aweto Soft Capsules














12,008



1,857,551



6.29
%Energy Elemental Powder


49,309



611,355



1.47
%Propolis and Black Ant Capsule














78,689



4,857,928



16.46
%Waterlilies Soft Capsule(Sailuozhi)


204,583



19,080,810



45.80
%


89,240



12,140,250



41.14
%Colon Cleanser Capsule


253,180



8,235,211



19.76
%


134,593



5,963,013



20.21
%OEM Sales


















13,064



0.03
%Total






41,662,210



100
%






29,511,002



100
%





*All of the products are manufactured by the Company and none of them have been provided by the Commercial Bureau or other suppliers so far.





Operating Expenses





The following table summarizes our operating expenses for each of the nine months ended March 31, 2011 and 2010, respectively:





For the Nine Months Ended March

31,2011


Variance


2010Operating ExpensesSelling , General and Administrative expenses

$
3,558,266



2.77
%

$
3,462,505Depreciation and amortization


60,754



-21.11
%


77,012Research & Development


1,374,403







-Total operating expenses

$
4,993,423



41.08
%

$
3,539,517





Total operating expenses for the nine months ended March 31, 2011 increased $1,453,906 or 41.08% over the same period in 2010. The higher operating expenses were primarily attributable to increased research and development costs. The research and development cost were primarily used to develop new products.





We incurred imputed interest expenses in the amount of $3,531 on the loans due to Mr. Sun Xin, the executive officer and major shareholder of Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment.





Other Income (Expenses)





Other income (expenses) decreased $63,796 for the nine month period ended March 31, 2011. The decrease was primarily attributable to decreased interest income in the amount of approximately $84,945 from Heilongjiang Tiefeng Rice Company Limited.




29




Income Taxes





Income taxes increased $1,104,468 for the nine month period ended March 31, 2011 compare to the same period in 2010. The increase was primarily attributable to increased income before income taxes in the amount of $2,083,650.





2011 Outlook





We anticipate our total revenues in 2011 versus 2010 to increase by 40% or approximately $17.2 million with growth in all categories of our product sales. Our gross profit margin in 2011 is expected to be approximately 53% due to increased raw material costs resulting from inflation. We estimate our overall 2011 net profit margin to be approximately 28%. However, there is no assurance that these predictions will be reached.





Liquidity and Capital Resources





We believe our current working capital position; together with our expected future cash flows from operations will be adequate to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding in the future.




The following table summarizes our cash and cash equivalents position, our working capital, and our cash flow activity as of March 31, 2011 and 2010 and for each of the nine months then ended:





March 31,

2011


March 31,

2010As of  March 31:Cash and cash equivalents

$
22,439,486


$
7,620,289Working capital

$
28,635,853


$
12,340,505Inventories

$
613,761


$
377,926For the Nine Months Ended March 31:Cash provided by (used in):Operating activities

$
7,411,194


$
10,540,675Investing activities

$
(3,088
)

$
(9,835,180
)Financing activities

$
0


$
(662,703
)





As of March 31, 2011, cash and cash equivalents were $22,439,486 as compared to $7,620,289 at March 31, 2010. The increased cash and cash equivalents position was $14,819,197 or 194.47% at March 31, 2011. The increase in cash and cash equivalents was attributable to cash flows provided by operating activities, the return of purchase price for Heilongjiang Tiefeng Rice Company Limited and fewer investing activities.





Cash flow provided by operating activities was $7,411,194 for the nine months ended March 31, 2011 compared to cash flow provided by operation activities of $10,540,675 for the same period in 2010. The decrease in cash provided by operating activities of $3,129,481 was primarily attributable to the increase in accounts receivable in the amount of $2,626,225.





Our working capital position at March 31, 2011 was $28,635,853 compared to working capital of $12,340,505 at March 31, 2010. Our increased working capital position in 2011 was principally funded by the increased cash flow generated by sales and the return of purchase price for Heilongjiang Tiefeng Rice Company Limited. Management considers current working capital and borrowing capabilities adequate to cover our current operating and capital requirements for the full year 2011.




30




We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.





Plan of Operation





We will continue to focus on the expansion of our operation, development of new products and increase new customers. Additionally, we are putting more effort to develop our distribution channels by hiring more sales agents and sales people. We presently have enough liquidity to meet our expansion plans. However, depending on growth, the Company may need additional funding in the future.





Currency Exchange Fluctuations





Aggregate net foreign currency transactions included in the income statement were gains of $1,728,002 and loss of $1,870, for the three months ended March 31, 2011 and 2010, respectively, and gains of $1,929,003 and a gain of $183,227 for the nine months ended March 31, 2011 and 2010, respectively primarily due to the decline of the value of the USD to the RMB.  The average rates of exchange from USD to RMB were 6.5783 to 1 and 6.8271 to 1 for the three months ended March 31, 2011 and 2010 or a 3.64% change, respectively, and 6.6689 to 1 and 6.8283 to 1 for the nine months ended March 31, 2011 and 2010 or a 2.33% change, respectively.





As of March 31, 2011, should the exchange rate of USD to RMB fluctuate by 1%, the Company would expect the impact on its financial statements to be approximately a $130,000 exchange gain or loss for each 1% in the exchange rate.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our financial position or results of operations.





Critical Accounting Policies and Estimates





This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimated and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an on-going basis, we evaluate our estimates, including those related to property, plant and equipment, inventories, revenue recognition, accounts receivable, derivative warrant liability, warranty reserve, goodwill and intangibles, stock based compensation, and foreign currency transactions and translation. We base our estimates on historical experience and on various other market-specific 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, however, may differ significantly from these estimates.





We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements:




31




Method of Accounting





The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.





Accounts Receivable





The accounts receivable incurred in the current reporting period was primarily due to the receivables from our local sales agents. The majority of our sales are to end customers who directly pay us instantaneously when they receive orders. The credit sale system has not been well established in the PRC. Our sale agreements with our customers provide that risk of loss passes to the customer upon delivery and that we accept product exchanges but we do not have a policy for product returns. Accordingly, we will recognize accounts receivable on a product sale if management determines that the product has been delivered or the sale is collectible, and an Allowance for Doubtful Accounts measures receivable recorded but not expected to be collected and estimates the value of those receivables believed to be uncollectible as matching principle.





Accounts receivable will be recorded at the invoiced amount. We use aging analysis method quarterly on accounts receivable.





Inventories





We value our inventory based on our cost. Our inventories include various raw materials, semi-finished products, finished products, package, low-value consumption goods etc. Inventories are stated at the cost using the weighted average method. Inventory cost includes purchase cost, processing cost and other cost. Purchase cost include purchase price, related tax, transportation fee, handling cost, insurance fee and other related fees. We adjust the value of our inventory to the extent our management determines that our cost cannot be recovered due to obsolescence or other factors. Our management uses estimates of future demand and sales prices for each product to determine appropriate inventory reserves.





Amortization of low-value consumption goods and package is based on the direct write-off method. The Company conducts physical inventory count at the end of each quarter.





Recognition of Revenue





Our revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, discounts, and after eliminating sales within the Group.





Our principal sources of revenue are from sales of our products through our direct sales professionals. These sales occur either through a purchase order submitted by the customer or through our direct marketing sales. We recognize revenue when products are delivered to end customers directly or services are performed in accordance with terms of the agreement, title and risk of loss have been transferred and pricing is fixed or determinable. The majority of our revenues have been derived from sales of our products directly to end consumers historically. We sell our products to OEMs as well, which is only very small portion of our overall sales.





Most of our products are sold to end customers directly and customers made the payment promptly. The Company may offer sales incentives and cash discounts. For the three and nine month period ended March 31, 2011 and 2010, the Company did not provide sales incentives to its customers or resellers.





Our end customers generally have the right to exchange products purchased from us, although we have no policy for return of products. At each period end, we determine the extent to which our revenues need to be reduced to account for exchange of products. Based on our historical experience with our customers, product exchange rarely happens. We have reserve against revenue recognized for product exchange. The consumer credit system has not been well established and recognized by sellers in the PRC. Except for our OEM sales, our end customers pay us instantaneously when they receive orders.





32





Cost




Matching Principle-Costs have to be matched with revenues and our costs always match with revenue. Cost of production is calculated based on actual number of products manufactured and matched with revenues as long as it is reasonable to do so. There has been no change in our calculation of cost of production. There are no circumstances that cause variations in our calculation of cost of production. Expenses are recognized not when the product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance.





Cost of production is calculated based on actual number of products manufactured. We calculate the cost of production at the end of each month. If there is any work in progress, the cost of production is allocated between finished products and work in progress. Below is a detailed step-by-step description of our cost of production calculation:





a.
Determine end-of-period quantity and amount of finished-goods,semi-finished products, raw materials, packing materials etc.


b.
Based on sales plan, the Company purchases raw materials and packing materials by batches and calculate stock-in and stock-out quantity and amount respectively. Summary calculation will be made based on actual quantity of consumption at the end of each month.


c.
Collect manufacturing overhead of each month, including depreciation, labor, water charge, electric charge, the consumptions of low value consumables. Distribute manufacturing overhead based on volume of production and make expense distribution sheet.


d.
Apportion raw materials, packing materials and manufacturing overhead of each products in each month to finished-goods andsemi-finished products. Carry over Cost of Goods Sold according to sales quantity.





Foreign Currency Translation





The Company’s two operating subsidiaries maintain their financial statements in the functional currency, which is the Renminbi. Another subsidiary maintains its financial statements in the functional currency, which is Hong Kong Dollar. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.





For financial reporting purposes, the financial statements of subsidiaries, which are prepared using the functional currency, have been translated into United States dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates, and stockholders’ equity is translated at historical exchange rates. Translation adjustments are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.





Recently Issued Accounting Pronouncements





The Company does not believe the recently issued accounting pronouncements would have material impacts on its financial statements.





33





Item 3.Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.





Item 4.  Controls and Procedures.




Evaluation of our Disclosure Controls





As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.





Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.




Changes in internal control over financial reporting





There have been no changes in our internal controls over financial reporting during our third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





34




PART II - OTHER INFORMATION





Item 1. Legal Proceedings.





There is no material legal proceeding pending against us.





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





Not applicable.





Item 6.  Exhibits





Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.




Exhibit No.

SEC Ref. No.

Title of Document1

31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *2

31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *3

32.1

Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002*4

32.2

Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002*





*The Exhibits attached to this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.





35




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.




CHINA HEALTH INDUSTRIES HOLDINGS, INC.Date: May 23, 2011/s/ Xin SunXin SunChief Executive Officer and Chief Financial Officer





36