**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

**Form 10-Q**

**[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended March 31, 2010**

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

**Commission file number 333-147084**

**CHINA GREEN CREATIVE, INC.**

(Exact name of registrant as specified in its charter)

| **Nevada**

  

**83-0506099**

(State or other jurisdiction of incorporation or organization)

  

(I.R.S. Employer Identification No.)

 

**24/F., Unit 3 Great China International Square, No. 1 Fuhua Rd., Futian District, Shenzhen**

  

  

**Guandong Province, China**

  

**n/a**

(Address of principal executive offices)

  

(Zip Code)

**86-755-23998799**

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                Yes T     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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruble 12b-2 of the Exchange Act.

Large accelerated filer   £

Accelerated filer  £

Non-accelerated filer  £ (Do not check if a smaller reporting company)

Smaller reporting company  T

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of May 21 2010, are as follows: 

Class of Securities

Shares Outstanding

**Common Stock, $0.001 par value**

**300,000,000 shares**

1

**TABLE OF CONTENTS**

**PART I – FINANCIAL INFORMATION**

Item 1.

Unaudited Condensed Financial Statements

4

Item 2

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4T.

Controls and Procedures

25

 

**PART II – OTHER INFORMATION**

Item 1.

Legal Proceedings.

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

26

Item 3.

Defaults Upon Senior Securities.

26

Item 4.

[REMOVED AND RESERVED]

26

Item 5.

Other Information

26

Item 6.

Exhibits

26

 

 

 

SIGNATURES

 

27

2

**PART I – FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**Contents**

 

 

**Condensed Financial Statements:**

**Page**

**Number**

  

  

Condensed Consolidated Balance Sheets 

4

Condensed Consolidated Statements of Operation  (unaudited)

5

Condensed Consolidated Statements of Cash Flow (unaudited)

6

Notes to Condensed Financial Statements (unaudited)

8

3

**PART I – FINANCIAL INFORMATION**

**CHINA GREEN CREATIVE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**ITEM 1. FINANCIAL STATEMENTS**

 

 

 

 

March 31,2010

 

December 31,

2009

 

 

 

 

(Unaudited)

 

(Audited)

**Assets**

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

        Cash and cash equivalents

 

 

$

 91,695 

$

 116,989 

        Accounts receivable

 

 

 

 2,977,735 

 

 3,282,501 

        Inventories

 

 

 

 156,294 

 

 66,289 

        Amount due from a director

 

 

 

 110,412 

 

 99,957 

Prepaid expenses and other receivables

 

 

 

 635,111 

 

 231,883 

Total current assets

 

 

 

 3,971,247 

 

 3,797,619 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 3,049,543 

 

 3,348,553 

Land use rights, net

 

 

 

 95,295 

 

 95,478 

Other intangible assets, net

 

 

 

 70,262 

 

 39,198 

Deferred tax assets

 

 

 

 431,680 

 

 430,798 

 

 

 

 

 

 

 

**Total assets**

 

 

**$**

** 7,618,027 **

**$**

** 7,711,646 **

 

 

 

 

 

 

 

**Liabilities and stockholders’ equity**

 

 

 

 

 

 

**Liabilities**

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

       Accounts payable

 

 

$

 392,490 

$

 436,505 

       Accrued expenses and other payables

 

 

 

 3,242,335 

 

 2,523,943 

       Other liabilities

 

 

 

 293,600 

 

 1,494,300 

       Amount due to a related company 

 

 

 

 368,945 

 

 - 

       Amount due to a shareholder 

 

 

 

 880,800 

 

 - 

       Short term debts

 

 

 

 230,476 

 

 230,005 

       Taxes payable

 

 

 

 1,528,429 

 

 1,550,172 

       Amount due to a director

 

 

 

 70,545 

 

 201,033 

 

 

 

 

 

 

 

**Total liabilities**

 

 

 

** 7,007,620 **

 

** 6,435,958 **

 

 

 

 

 

 

 

**Stockholders’ equity**

 

 

 

 

 

 

     Common stock: Par value $0.001 per share; 400,000,000 shares authorized, 300,000,000 shares issued and outstanding

 

 

 

 300,000 

 

 300,000 

     Additional paid in capital

 

 

 

 1,632,689 

 

 1,632,689 

     Accumulated deficits

 

 

 

 (1,587,344)

 

 (919,402)

     Accumulated other comprehensive income

 

 

 

 265,062 

 

 262,401 

**Total stockholders’ equity**

 

 

 

** 610,407 **

 

** 1,275,688 **

 

 

 

 

 

 

 

**Total liabilities and stockholders’ equity**

 

 

**$**

** 7,618,027 **

**$**

** 7,711,646 **

 

 

 

 

 

 

** **

**See accompanying notes to condensed consolidated financial statements.**

4

**CHINA GREEN CREATIVE, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE INCOME (UNAUDITED)**

 

**Three months ended March 31,**

 

 

**2010**

 

**2009**

 

 

 

 

 

Revenues

**$**

**301,398 **

**$**

**1,286,753 **

 

 

 

 

 

Cost of sales

 

95,245 

 

331,640 

 

 

 

 

 

Gross profit

 

206,153 

 

955,113 

 

 

 

 

 

Expenses

 

 

 

 

     Selling and distribution 

 

72,956 

 

369,030 

     General and administrative (inclusive of depreciation and 

         allowance of doubtful accounts)

 

556,271 

 

112,757 

     Impairment loss on property, plant and equipment

 

231,597 

 

- 

Total operating expenses

 

860,824 

 

481,787 

 

 

 

 

 

Operating (loss)/profit from continuing operations

 

(654,671)

 

473,326 

 

 

 

 

 

Other expenses

 

 

 

 

     Other expenses

 

2,261 

 

- 

     Interest expense

 

11,010 

 

45,698 

Total other expenses

 

13,271 

 

45,698 

 

 

 

 

 

(Loss)/income from continuing operations before provision for 

     income taxes

 

(667,942)

 

427,628 

 

 

 

 

 

Provision for income taxes

 

- 

 

124,647 

 

 

 

 

 

**Net (loss)/income from continuing operations**

**$**

**(667,942)**

**$**

**302,981 **

 

 

 

 

 

Discontinued operations

 

 

 

 

     Net loss

 

- 

 

(1,600)

     Gain on disposal of discontinued operations

 

- 

 

1,600 

 

 

 

 

 

**Net income from discontinued operations**

**$**

- 

**$**

- 

 

 

 

 

 

**Net (loss)/income for the period**

**$**

**(667,942)**

**$**

**302,981 **

 

 

 

 

 

Other comprehensive income

 

 

 

 

     Gain/(loss) on foreign currency translation

 

2,661 

 

(2,094)

 

 

 

 

 

**Total comprehensive (loss)/income for the period**

**$**

**(665,281)**

**$**

**300,887 **

 

 

 

 

 

 

 

 

 

 

(Loss)/earnings per share, basic and diluted – continuing operations

$

(0.00)

$

0.00 

 

 

 

 

 

Weighted average number of shares outstanding, basic and diluted

 

300,000,000 

 

300,000,000 

**See accompanying notes to condensed consolidated financial statements.**

5

**CHINA GREEN CREATIVE, INC. AND SUBSDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)**

 

 

 

 

Three months ended March 31,

 

 

 

 

2010

 

2009

**Cash flows from operating activities**

 

 

 

 

 

 

Net (loss)/income from continuing operations

 

 

$

(667,942)

$

302,981 

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:

 

 

 

 

 

 

     Depreciation expense

 

 

 

109,311 

 

42,543 

     Impairment charges for property, plant and equipment

 

 

 

231,597 

 

- 

     Deferred tax income

 

 

 

- 

 

(83,107)

     Amortization expense of land use rights

 

 

 

379 

 

377 

     Amortization expense of other intangible assets

 

 

 

2,085 

 

- 

Changes in operating assets and liabilities:

 

 

 

 

 

 

     Decrease in accounts receivable

 

 

 

304,766 

 

48,733 

     (Increase)/decrease in inventories

 

 

 

(90,005)

 

242,156 

     (Increase)/decrease in prepaid expenses and other receivables

 

 

 

(403,228)

 

35,463 

     Increase in amount due from a director

 

 

 

(10,455)

 

(82,297)

     Decrease in accounts payable

 

 

 

(44,015)

 

(18,810)

     Increase in accrued expenses and other payables

 

 

 

718,392 

 

213,735 

     (Decrease)/increase in taxes payable

 

 

 

(21,743)

 

404,517 

Net cash provided by operating activities – continuing operations

 

 

 

129,142 

 

1,106,291 

Net cash used in operating activities – discontinued operations

 

 

 

- 

 

(247)

**Net cash provided by operating activities**

 

 

 

129,142 

 

1,106,044 

 

 

 

 

 

 

 

**Cash flows from investing activities**

 

 

 

 

 

 

     Additions to property, plant and equipment

 

 

 

(35,041)

 

- 

     Additions to other intangible assets

 

 

 

(33,069)

 

- 

Net cash used in investing activities – continuing operations

 

 

 

(68,110)

 

- 

Net cash used in investing activities – discontinued operations

 

 

 

- 

 

- 

**Net cash used in investing activities**

 

 

 

(68,110)

 

- 

 

 

 

 

 

 

 

**Cash flows from financing activities**

 

 

 

 

 

 

     Decrease in other liabilities

 

 

 

(1,200,700)

 

- 

     Increase in amount due to related parties

 

 

 

368,945 

 

- 

     Decrease in amount due to a director

 

 

 

(130,488)

 

- 

     Repayment of a loan from related parties

 

 

 

- 

 

(996,880)

     Increase/(decrease) in amount due to a shareholder

 

 

 

880,800 

 

(12,741)

Net cash used in financing activities – continuing operations

 

 

 

(81,443)

 

(1,009,621)

Net cash provided by financing activities – discontinued operations

 

 

 

- 

 

- 

**Net cash used in financing activities**

 

 

 

(81,443)

 

(1,009,621)

 

 

 

 

 

 

 

**[Continued]**

6

**CHINA GREEN CREATIVE, INC. AND SUBSDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)**

**[Continued]**

**Net increase/(decrease) in cash and cash equivalents**

 

 

 

 

 

 

     Attributable to continuing operations

 

 

$

 (20,411)

$

 96,670 

     Attributable to discontinued operations

 

 

 

 - 

 

 (247)

 

 

 

$

 (20,411)

$

 96,423 

**Effect of foreign exchange rate changes**

 

 

 

 

 

 

     Attributable to continuing operations

 

 

$

 (4,883)

$

 178 

     Attributable to discontinued operations

 

 

 

 - 

 

 - 

 

 

 

 

 

 

 

**Cash and cash equivalents at January 1**

 

 

 

 

 

 

     Attributable to continuing operations

 

 

$

 116,989 

$

 6,768 

     Attributable to discontinued operations

 

 

 

 - 

 

 247 

 

 

 

$

 116,989 

$

 7,015 

 

 

 

 

 

 

 

**Cash and cash equivalents at March 31**

 

 

 

 

 

 

     Attributable to continuing operations

 

 

$

 91,695 

$

 103,616 

     Attributable to discontinued operations

 

 

 

 - 

 

 - 

 

 

 

$

 91,695 

$

 103,616 

 

 

 

 

 

 

 

Supplement disclosure of cash flows information:

 

 

 

 

 

 

     Cash paid for interest

 

 

$

 - 

$

 23,738 

     Cash paid for income taxes

 

 

$

 - 

$

 - 

**See accompanying notes to condensed consolidated financial statements.**

7

**CHINA GREEN CREATIVE, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES**

China Green Creative, Inc. (“CGC”), a Nevada Corporation, was incorporated on August 17, 2006 under the name of Glance, Inc. On January 21, 2009, we changed our name to China Green Creative, Inc. CGC and its subsidiaries (collectively known as the “Company”) are principally engaged in the distribution of consumer goods in the People’s Republic of China (“China” or the “PRC”).

As of March 31, 2010, the details of the Company’s subsidiaries are summarized as follows:

Name

 

Domicile and date

of incorporation

 

Paid-in capital

 

Effective

ownership

 

Principal activities

 

 

 

 

 

 

 

 

 

Plenty Fame Holding, Limited (“Plenty Fame”)

 

British Virgin Islands (the “BVI”)

January 18, 2008

 

$50,000

 

100%

 

Investment holding

 

 

 

 

 

 

 

 

 

Prospect Hong Kong Development Limited (“Prospect”)

 

Hong Kong Special Administrative Region (“HKSAR”)

October 17, 2008

 

HK$10,000

 

100%

 

Investment holding

 

 

 

 

 

 

 

 

 

Jiangxi Jien Industries Limited

 (“Jiangxi Jien”)

 

The PRC

April 8, 1997

 

RMB16,000,000

 

100%

 

Distribution of consumer goods in the PRC

 

 

 

 

 

 

 

 

 

Shenzhen Jien Electronic Commerce Company Limited (“Shenzhen Jien”)

 

The PRC

April 13, 2009

 

RMB3,000,000

 

100%

 

Distribution of consumer goods in the PRC, and provision of online customer services

 

 

 

 

 

 

 

 

 

On April 13, 2009, Jiangxi Jien formed Shenzhen Jien as a wholly-owned subsidiary. Shenzhen Jien is principally engaged in the distribution of consumer goods in the PRC, and provision of online customer services for the company’s customers. Its registered capital of RMB3,000,000 was fully paid up in April, 2009.  

No segment information is reported as the Company has operated in only one segment for the three months ended March 31, 2010 and 2009.

8

**NOTE 2 – RECAPITALIZATION AND REORGANIZATION**

On May 31, 2009, Plenty Fame entered into a share exchange agreement (the “Agreement for Share Exchange”) with CGC. Pursuant to which CGC acquired all of the equity ownership of Plenty Fame in exchange for 277,785,000 newly-issued shares of CGC. On September 18, 2009, the Company issued the shares and closed the Agreement for Share Exchange. 

Immediately after completion of the share exchange transaction, the Company had a total of approximately 300,000,000 shares of its common stock issued and outstanding. 

The above stock exchange transaction resulted in the shareholders of Plenty Fame obtaining a majority voting interest in the Company. Generally accepted accounting principles in the United States of America require that the Company whose shareholders retain the majority interest in a combined business be treated as the acquirer for accounting purposes. Consequently, the stock exchange transaction has been accounted for as a recapitalization of Plenty Fame as Plenty Fame acquired a controlling equity interest in the Company. The reverse acquisition process utilizes the capital structure of CGC and the assets and liabilities of Plenty Fame recorded at historical cost.

Plenty Fame is the continuing operating entity for financial reporting purposes and the financial statements prior to September 18, 2009 represent Plenty Fame’s financial position and results of operations. Although Plenty Fame is deemed to be the acquiring corporation for financial accounting and reporting purposes, the legal status of the Company as the surviving corporation did not change.  

**NOTE 3 – PRINCIPLES OF CONSOLIDATION**

The unaudited interim financial statements of the Company and the Company’s subsidiaries (see Note 1) for the three months ended March 31, 2010 and 2009 have been prepared pursuant to the rules & regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading.  All significant intercompany balances and transactions have been eliminated. The functional currency for the majority of the Company’s operations is the Renminbi (“RMB”), while the reporting currency is the US Dollar.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position as of March 31, 2010, the results of its operations and cash flows for the three months ended March 31, 2010 and 2009.

The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results for a full year period. 

**NOTE 4 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

(a)

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  The Company maintains bank accounts in Hong Kong and China.

(b)

Inventories

Inventories consisting of trading goods, packing and other materials are stated at the lower of cost or net realizable value. Inventory costs are calculated using a weighted average method of accounting.

9

(c)

Fair Value of Financial Instruments

The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, prepaid expenses and other receivables, amount due from/(to) directors, other liabilities, loans from related parties, debts, accounts payable, accrued expenses and other payables, and taxes payable. 

The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. 

  

As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented, due to the short maturities of these instruments and the fact that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profiles at respective period ends. 

(d)

Revenue Recognition

Revenue represents the invoiced value of goods sold recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:

a)

Persuasive evidence of an arrangement exists,

b)

Delivery has occurred,

c)

The seller’s price to the buyer is fixed or determinable, and

d)

Collectability is reasonably assured.

(e)

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of March 31, 2010 and 2009, there were no dilutive securities outstanding.

(f)

Foreign Currency Translation

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

 

 

March 31,

2010

 

 

December 31,

2009

 

March 31,

2009

                  

 

 

 

 

 

 

 

Period/year end RMB : US$ exchange rate

 

0.1468

 

 

0.1465

 

0.1463

Average yearly RMB : US$ exchange rate     

 

0.1468

 

 

0.1464

 

0.1463

 

 

 

 

 

 

 

 

On July 21, 2005, the PRC changed its foreign currency exchange policy from a fixed RMB/US$ exchange rate into a flexible rate under the control of the PRC’s government.

10

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

(g)

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) ASU No. 2010-06, *Improving Disclosures about Fair value Measurements*, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. We do not expect that this ASU will have a significant impact on the consolidated financial statements or related disclosures.

**NOTE 5 – ACCOUNTS RECEIVABLE**

As of the balance sheet dates, the Company’s accounts receivable are summarized as follows:

 

 

March 31,

2010

 

December 31,

 2009

 

 

 

 

 

Beijing Shanghan International Trading Limited (“Beijing Shanghan”)

$

 5,474,060 

$

 5,867,670 

Others

 

101,549 

 

5,626 

 

 

5,575,609 

 

5,873,296 

Less: Allowance for doubtful accounts

 

(2,597,874)

 

(2,590,795)

 

 

 

 

 

Total

$

2,977,735 

$

3,282,501 

Beijing Shanghan is a related party as a director of which is also a shareholder of the Company. It contributed 63% and 100% of the Company’s revenues for the three months ended March 31, 2010 and 2009, respectively. As of the balance sheet dates, the balances are unsecured, interest free and repayable according to terms of trade.

**NOTE 6 – INVENTORIES**

As of the balance sheet dates, the Company’s inventories are summarized as follows:

 

 

 

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

 

 

Trading inventories

 

 

$

 115,217

$

 40,041

Packing and other materials

 

 

 

 41,077

 

 26,248

 

 

 

 

 

 

 

Total 

 

 

$

 156,294

$

 66,289

11

**NOTE 7 – PREPAID EXPENSES AND OTHER RECEIVABLES**

As of the balance sheet dates, the Company’s prepaid expenses and other receivables are summarized as follows:

 

 

 

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

 

 

Prepaid expenses

 

 

$

 213,013

$

 199,454

Other receivables

 

 

 

 422,098

 

 32,429

 

 

 

 

 

 

 

Total 

 

 

$

 635,111

$

 231,883

The Company evaluates prepaid expenses and other receivables on a periodic basis and records a charge to the current operations of the Company when the related expense has been incurred or when the amounts reported as other receivables is no longer deemed to be collectible by the Company.

**NOTE 8 – PROPERTY, PLANT AND EQUIPMENT, NET**

Property, plant and equipment of the Company consist primarily of manufacturing facilities and equipment in the PRC. As of the balance sheet dates, property, plant and equipment are summarized as follows:

 

Depreciable

lives

 

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

 

 

At cost:

 

 

 

 

 

 

     Plant

40 years

 

$

 1,376,732 

$

 1,543,298 

     Machinery

15 years

 

 

 176,985 

 

 158,701 

     Motor vehicle

10 years

 

 

 - 

 

 106,945 

     Office equipment

5 years

 

 

 165,442 

 

 154,016 

     Leasehold Improvement

2 years

 

 

 440,400 

 

 439,500 

     Construction in progress

N/A

 

 

 1,607,533 

 

 1,604,247 

 

 

 

 

 3,767,092 

 

 4,006,707 

 

 

 

 

 

 

 

Less: Accumulated depreciation

 

 

 

 (717,549)

 

 (658,154)

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

$

 3,049,543 

$

 3,348,553 

Depreciation expense for the three months ended March 31, 2010 and 2009 was $109,311 and $42,543, respectively. 

Impairment charges for property, plant and equipment for the three months ended March 31, 2010 and 2009 were $231,597 and nil, respectively.

Since the second half of 2009, the Company has commenced a technical advancement program. In the first quarter of 2010, certain machineries, equipment and motor vehicle with net book value of $231,597 in aggregate were removed or abandoned. These assets were fully impaired on March 31, 2010.

12

The Company’s plant and construction in progress are restricted to sale as of March 31, 2010 and up to the date of this report.  Details of which have been disclosed in note 13 to the condensed consolidated financial statements.

**NOTE 9 – LAND USE RIGHTS, NET**

The Company’s land use rights represent the cost for purchasing the rights to use the leasehold land in the PRC for the production facilities of Jiangxi Jien. According to the law of the PRC, the government owns all the land in the PRC. Companies or individuals are only authorized to possess and use the land through land use rights granted by the PRC government.

As of the balance sheet dates, the Company’s land use rights are summarized as follows:

 

Useful lives

 

 

 

March 31,

2010

 

December 31,

2009

At cost:

 

 

 

 

 

 

 

       Land use rights

59 – 60 years

 

 

$

 111,612 

$

 111,384 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

 

 

 (16,317)

 

 (15,906)

 

 

 

 

 

 

 

 

Land use rights, net

 

 

 

$

 95,295 

$

 95,478 

Amortization expense of land use rights for the three months ended March 31, 2010 and 2009 was $379 and $377, respectively.

The Company’s land use rights are restricted to sale as of March 31, 2010 and up to the date of this report.  Details of which have been disclosed in note 13 to the consolidated financial statements.

**NOTE 10 – OTHER INTANGIBLE ASSETS, NET**

The Company’s other intangible assets represent cost of setting up information systems for the provision of e-commerce services. As of the balance sheet dates, the Company’s other intangible assets are summarized as follows:

 

Useful lives

 

 

 

March 31,

2010

 

December 31,

2009

At cost:

 

 

 

 

 

 

 

      Information systems

5 years

 

 

$

 74,555 

$

 41,605 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

 

 

 (4,293)

 

 (2,407)

 

 

 

 

 

 

 

 

Other intangible assets, net

 

 

 

$

 70,262 

$

 39,198 

Amortization expense of other intangible assets for the three months ended March 31, 2010 and 2009 was $2,085 and nil, respectively.

13

**NOTE 11 – DEFERRED TAX ASSETS**

As of the balance sheet dates, the components of the Company’s deferred tax assets are summarized as follows:

 

 

 

March 31,

2010

 

December 31,

2009

Arising from:

 

 

 

 

 

     Difference in depreciation and amortization

 

$

 290,898

$

 290,304

     Difference in recognition of expenses between accounting and PRC tax practice (timing differences)

 

 

 140,782

 

 140,494

 

 

 

 

 

 

Total 

 

$

 431,680

$

 430,798

**NOTE 12 – AMOUNT DUE FROM/(TO) DIRECTORS**

As of the balance sheet dates, the Company’s current accounts with the directors are summarized as follows:

 

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

Ye Xin Zhang

$

 110,412 

$

 99,957 

 

 

 

 

 

Chen Xing Hua

$

 (70,545)

$

 (201,033)

The amount due from Mr. Ye Xin Zhang represents temporary advances to the director for the Company’s daily operating expenses.  The balances are unsecured, interest free, and have no fixed terms of repayments.

The amount due to Mr. Chen Xing Hua represents temporary advance from the director for the Company’s working capital use. The balance is unsecured, interest free, and has no fixed terms of repayment.

**NOTE 13 – OTHER LIABILITIES**

 

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

Other liabilities

$

 293,600

$

 1,494,300

 

 

 

 

 

In 2003, the Company was involved in litigation matters with two local banks in PRC as Jiangxi Jien was unable to settle bank borrowings of RMB16,200,000 (equivalent to $2,378,160 as of March 31, 2010) in aggregate. 

Pursuant to legal opinion, the Court of Anyi Municipal, Jiangxi Province, China (the “Court of Anyi”) ruled in 2003 that the final settlement payable by Jiangxi Jien is RMB12,800,000 (equivalent to $1,879,040 as of March 31, 2010). Meanwhile, Jiangxi Jien’s properties, properties under construction, and land use rights have been restricted to sale until the above debt is fully settled.

Shenzhen Hanhong Investments Limited (“Shenzhen Hanhong”), a related company with common directorship, has provided a guarantee in favor of the Court of Anyi for repayment of the outstanding debt.  Mr. Chen Xing Hua is a common director of the Company and Shenzhen Hanhong. As such, the guarantee granted by Shenzhen Hanhong is a related party transaction.

14

Repayment of outstanding borrowings in the first quarter of 2010 amounted to RMB8,200,000 (equivalent to $1,200,700) to the Court of Anyi.  In view of management, the remaining balance of RMB2,000,000 (equivalent to $293,600 as of March 31, 2010) will be settled upon the official acknowledgement from the Court of Anyi for the release of restrictions relating to the property and equipment of the Company.

**NOTE 14 – DEBTS**

The Company’s debts are summarized as follows:

 

 

 

 

 

 

Effective 

interest rate

Outstanding balance

Name of 

parties

 

Due date

 

Nature

 

March 31,

2010

 

December 31,

2009

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Qin Jianguo

 

September,

2010

 

Unsecured

 

19.1%

 

19.1%

$

230,476

$

230,005

Short term debt

 

 

 

 

 

 

 

 

$

230,476

$

230,005

Pursuant to the loan agreement entered into between Jiangxi Jien and Qin Jianguo on September 30, 2005, the total lending amount was RMB3,000,000, repayable in September, 2010. Total interest expense accrued on the borrowing amount is fixed at RMB1,500,000 (equivalent to $220,200 as of March 31, 2010), repayable on the due date and is being accrued over the loan period (please also see footnote 15). Accrued interest expense associated with this debt for the three months ended March 31, 2010 and 2009 was $11,010 and $10,980, respectively.

**NOTE 15 – ACCRUED EXPENSES AND OTHER PAYABLES**

As of the balance sheet dates, the Company’s accrued expenses and other payables are summarized as follows:

 

 

 

 

March 31,

2010

 

December 31,

2009

Accrued operating expenses

 

 

$

40,569

$

70,052

Accrued interest expenses – (i)

 

 

 

198,180

 

186,788

Deposits received in advance from customers

 

 

 

873,522

 

380,683

Amount due to Shenzhen Hanhong – (ii)

 

 

 

800,060

 

826,600

Other payables – (iii)

 

 

 

1,330,004

 

1,059,820

 

 

 

$

3,242,335

$

2,523,943

(i)

Amount represents accrued interest expense for loan from Qin Jianguo repayable in September, 2010 (please also see footnote 14). 

(ii)

The amount mainly represents consultancy fee payable to Shenzhen Hanhong. Shenzhen Hanhong is a related party as Mr. Chen Xing Hua is a common director of the Company and Shenzhen Hanhong.

(iii)

Included in other payable as of March 31, 2010, there is an amount payable for office decoration in the amount of $440,400 and an amount payable for marketing and promotional expenses of $376,859.The remaining balance consists of amounts owed by the Company to various entities that are incurred by the Company outside of the normal course of business operations.  These liabilities and accrued operating expenses are non interest bearing and are payable within one year.

15

**NOTE 16 – TAXES PAYABLE**

As of the balance sheet dates, the Company’s taxes payable are summarized as follows:

 

 

 

 

March 31,

2010

 

December 31,

2009

 

 

 

 

 

 

 

Income tax payables

 

 

$

 209,427

$

 208,998

Value added tax payables

 

 

 

 1,262,629

 

 1,252,119

Other tax payables

 

 

 

 56,373

 

 89,055

 

 

 

 

 

 

 

Total

 

 

$

 1,528,429

$

 1,550,172

**NOTE 17 – COMMON STOCK**

As of the balance sheet dates, the Company has authorized 400,000,000 shares $0.001 par value of common stock, of which 300,000,000 shares have been issued and outstanding. The Company has also authorized 10,000,000 shares of preferred class of stock, but no shares have been issued as of March 31, 2010.

**NOTE 18 – REVENUES**

The components of the Company’s revenues are summarized as follows:

 

 

 

 

For the three months ended March 31,

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Health products

 

 

$

 -

$

 118,052

Feminine hygiene and beauty products

 

 

 

 -

 

 227,876

Lingerie products

 

 

 

 -

 

 736,929

Chinese herbal tea products

 

 

 

 -

 

 203,896

Condiments and beverages

 

 

 

 301,398

 

 -

 

 

 

 

 

 

 

Total revenues

 

 

$

 301,398

$

 1,286,753

Beijing Shanghan, a related party through a common director since March 1, 2009, contributed 63% and 100% of the Company’s revenues for the three months ended March 31, 2010 and 2009, respectively.

No segment information is reported as the Company operated in only one segment for the three months ended March 31, 2010 and 2009.

**NOTE 19 – PROVISION FOR INCOME TAXES**

Income tax expense for the three months ended March 31, 2010 and 2009 is summarized as follows:

 

 

 

 

For the three months ended March 31,

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Current – PRC income tax provision

 

 

$

-

$

207,754

Deferred income tax provision

 

 

 

-

 

(83,107)

 

 

 

 

 

 

 

Total

 

 

$

-

$

124,647

16

A reconciliation of the expected tax with the actual tax expense is as follows:

 

 

 

For the three months ended March 31,

 

 

 

2010

 

2009

 

 

 

Amount

%

 

Amount

%

 

 

 

 

 

 

 

 

(Loss)/income from continuing operations before provision for income taxes

 

$

(667,942)

 

 

427,628

 

 

 

 

 

 

 

 

 

Expected PRC income tax expense at statutory

 tax rate of 25%

 

 

(166,986)

25.0

 

106,907

25.0

Tax effect of expenses that are not deductible for 

tax purposes

 

 

- 

-

 

17,740

4.1

Tax effect of tax losses not provided for deferred tax

 

 

166,986 

(25.0)

 

-

-

 

 

 

 

 

 

 

 

Provision for Income Taxes

 

$

- 

-

$

124,647

29.1

(i)

Both Jiangxi Jien and Shenzhen Jien are subject to PRC tax. The provision for PRC income tax is based on a statutory rate of 25% of the assessable income of the PRC subsidiaries as determined in accordance with the relevant income tax rules and regulations of the PRC. 

(ii)

Plenty Fame is not subject to tax in accordance with the relevant tax laws and regulations of the BVI. 

(iii)

Prospect did not generate any assessable profits since its incorporation and therefore is not subject to HKSAR tax.

**NOTE 20 – RELATED PARTY TRANSACTIONS**

In addition to the transactions detailed elsewhere in these financial statements, the Company entered into the following significant transactions with related parties:

 

 

 

 

For the three months ended March 31,

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Chen Xing Hua

 

 

 

 

 

 

Rental expenses payable for the Company’s office premises in Shenzhen, the PRC

 

 

 

13,886

 

-

 

 

 

 

 

 

 

Mr. Chen Xing Hua, the director of Shenzhen Hanhong, is also a director of the Company.  Details of which please refer to note 12 to the consolidated financial statements.

In the opinion of the directors, the above transactions were entered into by the Company in the normal course of business.

17

**NOTE 21 – CONCENTRATION OF RISK**

The Company is exposed to the following concentrations of risk:

 

(a)

Major Customers

Beijing Shanghan International Trading Limited (“Beijing Shanghan”), is a related party as a director of which is also a shareholder of the Company. It contributed 63% and 100% of the Company’s revenues for the three months ended March 31, 2010 and 2009, respectively.

(b)

Major Suppliers

For the three months ended March 31, 2010 and 2009, the vendors who account for 10% or more of purchases of the Company are presented as follows:

 

 

 

For the three months ended March 31,

 

 

 

2010

 

2009

 

 

 

Purchases

%

 

Purchases

%

Total purchases

 

$

152,648

 

$

92,961

 

 

 

 

 

 

 

 

 

Vendor A

 

$

73,824 

48.4

$

-

-

Vendor B

 

 

20,420 

13.4

 

-

-

Vendor C

 

 

18,608 

12.2

 

-

-

Vendor D

 

 

15,502 

10.1

 

-

-

Vendor E

 

 

-

-

 

86,519

93.1

 

 

 

 

 

 

 

 

 

 

$

128,354

84.1

$

86,519

93.1

**NOTE 22 – CONTINGENCIES AND COMMITMENTS**

(a)

Capital Commitment:

As of March 31, 2010, the Company’s capital commitment is summarized as follows:

 

 

 

 

2010

 

 

 

 

 

Construction-in-progress:

 

 

 

 

Contracted but not provided for

 

 

$

1,849,680

 

 

 

 

 

(b)

Lease Commitment

As of March 31, 2010, Shenzhen Jien had arranged a non-cancelable operating lease with the Company’s director, Mr. Chen Xing Hua, for the Company’s office in Shenzhen, the PRC.  The expected annual lease payment under the operating leases is as follows:

 

 

2010

 

 

 

For the year ending December 31, 2010

 

94,590

 

 

 

TOTAL

$

94,590

 

 

 

18

**NOTE 23 – GOING CONCERN**

Generally accepted accounting principles in the United States of America contemplate the continuation of the Company as a going concern. Since the fourth quarter of 2009, the Company has modified its sales and marketing strategies in order to diversify its concentration of credit risk, leading to a decrease in working capital and incurred significant losses. As of March 31, 2010, the Company has accumulated deficits of $1,587,344, a negative working capital of $ 3,036,373, and also recorded a net loss of $667,942 for the period then ended. 

As of March 31, 2010 the Company may need additional cash resources to operate during the upcoming 12 months, and the continuation of the Company may dependent upon the continuing financial support of investors, directors and/or stockholders of the Company. The Company intends to attempt to acquire additional operating capital through private equity offerings to the public and existing investors to fund its business plan. However, there is no assurance that equity or debt offerings will be successful in raising sufficient funds to assure the eventual profitability of the Company. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

**NOTE 24 – SUBSEQUENT EVENTS**

The Company has evaluated for disclosure all subsequent events occurring through May 22, 2010, the date the financial statements were issued and filed with the United States Securities and Exchange Commission.

19

**ITEM 2.**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report.

**Forward Looking Statements**

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "our company believes," "management believes" and similar language.  These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under “Description of Business" and "Management's Discussion and Analysis", including under the heading “– Risk Factors”.  Our actual results may differ materially from results anticipated in these forward-looking statements.  We base our forward-looking statements on information currently available to us, and we assume no obligation to update them.  In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the future and we believe that such comparisons cannot be relied upon as indicators of future performance.

**Results of Operations**

Results of Operations – Three Months Ended March 31, 2010 as Compared to Three Months Ended March 31, 2009

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

December 31,

 

Increase/

 

%

 

 

2010

 

2009

 

(decrease)

 

change

 

 

 

 

 

 

 

 

 

Revenue

$

301,398

$

1,286,753

$

(985,355)

 

(76.6)

Cost of sales

 

95,245

 

331,640

 

(236,395)

 

(71.3)

Gross profit

 

206,153

 

955,113

 

(748,960)

 

(78.4)

Selling and distribution expenses

 

72,956

 

369,030

 

(296,074)

 

(80.2)

General and administrative expenses

 

556,271

 

112,757

 

443,514

 

393.3

Impairment loss on property, plant, and equipment

 

231,597

 

-

 

231,597

 

100.0

(Loss)/income before income taxes

 

(667,942)

 

427,628

 

(1,095,570)

 

N/A

Provision for income taxes

 

-

 

124,647

 

(124,647)

 

(100.0)

Discontinued operations

 

-

 

-

 

-

 

N/A

Net (loss)/income

$

(667,942)

$

302,981

$

(970,923)

 

N/A

*Revenues*

The Company modified its product mix in the first quarter of 2010 in order to keep pace with market trends.  Innovative Chinese-style condiment and beverages were introduced to the Company. 

20

Sales revenue for the first quarter of 2010 and 2009 was $301,398 and $1,286,753, respectively. Beijing Shanghan, a related party as a director of which is also a shareholder of the Company, contributed approximately 63% and 100% of the Company’s revenues for the first quarter of 2010 and 2009, respectively. 

For credit risk management, the Company tightened its credit control on sales to Beijing Shanghan, leading to a significant decrease in sales revenue by $985,355 or 76.6% when compared to the same period last year.  On the other hand, the Company has modified its sales strategies and has developed some new distribution channels in order to diversify the concentration of credit risks.

As of March 31, 2010, the Company has a gross account receivable from Beijing Shanghan of $5,474,060, and an accumulated allowance of $2,597,874, giving a net receivable of $2,876,186.  Our management is now assessing the recoverability of this account and may further increase the allowance.

*Cost of sales and gross profit*

Cost of sales decreased from $336,237 for the first quarter of 2009 to $95,245 for the same period in 2010. The decrease in cost of sales was a result of decrease in sales revenue.

Gross profit decreased by $748,960, or 78.4%, from $955,113 for the first quarter of 2009 to $206,153 for the first quarter of 2010.  Gross profit as a percentage of revenue was 68.4% for the first quarter of 2010, representing a decrease of 7.6% from 76.0% for the same period last year. The decrease in gross profit margin was mainly due to the modification of product mix and sales strategies.

*Selling and distribution expenses*

The decrease in selling and distribution expenses of $296,074 was mainly due to the modification of sales strategies in the first quarter of 2010.

*General and administrative expenses*

General and administrative expenses increased by $443,514 or 393.3% from $112,757 for the three months ended March 31, 2009 to $556,271 for the three months ended March 31, 2010. The increase in general and administrative expenses was primarily due to the setting up of our PRC headquarters in Shenzhen which led to an increase in professional expenses, payroll and rental charges.

*(Loss)/income before income taxes and provision for income taxes*

The Company recorded a loss before income tax of $667,942 for the three months ended March 31, 2010, compared to a profit of $427,628 for the comparative period last year. The change was mainly due to the decrease in sales revenue and the increase in administrative expenses. 

There was no PRC income tax provision for the first quarter of 2010 as the Company did not generate any assessable profits in this period. Tax provision for the comparative period last year was $124,647.

*Net (loss)/income*

We recorded a net loss of $667,942 for the first quarter of 2010, as compared to a net profit of $302,981 for the same period in 2009. The change was mainly due to the decrease in sales revenue and the increase in administrative expenses.

21

**Liquidity and Capital Resources**

*Cash and cash equivalents*

As of March 31, 2009, the Company had a total cash and cash equivalents of $91,695 compared to $116,989 as of December 31, 2009.  The cash was mainly used to fund our operations.  The Company’s cash flows for the three months ended March 31, 2010 are analyzed as follows:

*Cash Flow From Continuing Operations*

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

 129,142 

$

 1,106,291 

Net cash used in investing activities

 

 

 

 (68,110)

 

 - 

Net cash used in financing activities

 

 

 

 (81,443)

 

 (1,009,621)

Net (decrease)/increase in cash and cash equivalents

 

 

$

 (20,411)

$

 96,670 

In the first quarter of 2010, we had net cash provided by operating activities of $129,142, as compared to $1,106,291 for the same period last year. The decrease in cash inflow was primarily due to the decrease in our sales revenue.

Our cash flow used in investing activities for the first quarter amounted to $68,110, mainly represents purchase of equipment and machinery of $35,041, and development of information systems of $33,096.

Our cash flows used in financing activities for the first quarter of 2010 amounted to $81,443, as compared to $1,009,621 for the same period last year. The difference mainly represents repayment of loans of $996,880 in the first quarter of last year.

*Working Capital*

As of March 31, 2010, the Company recorded a working capital deficit of $3,036,373, as compared to a deficit of $2,638,339 as of December 31, 2009.  The decrease in working capital was mainly due to the modification of sales and marketing strategies since the fourth quarter of 2009.

*Going Concern*

As of March 31, 2010, the Company may need additional cash resources to operate during the upcoming 12 months, and the continuation of the Company may dependent upon the continuing financial support of investors, directors and/or stockholders of the Company.  The Company intends to attempt to acquire additional operating capital through private equity offerings to the public and existing investors to fund its business plan. However, there is no assurance that equity or debt offerings will be successful in raising sufficient funds to assure the eventual profitability of the Company. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

22

**Off-Balance Sheet Transactions**

We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, cash flows, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

**Critical Accounting Policies**

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

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements.

We believe that the following critical accounting policy reflect the significant estimates and assumptions which are used in the preparation of the consolidated financial statements and affect our financial condition and results of operations.

*Revenue Recognition*

Revenue represents the invoiced value of goods sold recognized upon the shipment of goods to customers. Revenue is recognized when all of the following criteria are met:

e)

Persuasive evidence of an arrangement exists,

f)

Delivery has occurred,

g)

The seller’s price to the buyer is fixed or determinable, and

h)

Collectibility is reasonably assured.

**Recent Accounting Pronouncements**

The Company does not expect that the adoption of any recent accounting pronouncements will have any material impact on its financial statements.

**ITEM 3.**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

We are exposed to various market risks arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and interest rates, which could impact our results of operations and financial position. We do not currently engage in any hedging or other market risk management tools, and we do not enter into derivatives or other financial instruments for trading or speculative purposes.

23

 

**Foreign Currency Exchange Rate Risk**

 

Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Chinese Renminbi, could adversely affect our financial results. During the three months ended March 31, 2010, approximately all of our sales are denominated in foreign currencies. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same respective currency, thereby mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not substantial. However, for sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in U.S. dollars than we did before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our price not being competitive in a market where business is transacted in the local currency.

 

All of our sales denominated in foreign currencies are denominated in the Chinese Renminbi. Our principal exchange rate risk therefore exists between the U.S. dollar and this currency. Fluctuations from the beginning to the end of any given reporting period result in the re-measurement of our foreign currency-denominated receivables and payables, generating currency transaction gains or losses that impact our non-operating income/expense levels in the respective period and are reported in other income (expense), net in our combined consolidated financial statements. We do not currently hedge our exposure to foreign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

 

**Interest Rate Risk**

 

Changes in interest rates may affect the interest paid (or earned) and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant. 

 

**Inflation**

 

Inflation has not had a material impact on the Company's business in recent years.

 

**Currency Exchange Fluctuations**

 

All of the Company's revenues are denominated in Chinese Renminbi, while its expenses are denominated primarily in Chinese Renminbi ("RMB"). The value of the RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China, which are set daily based on the previous day's inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of RMB to U.S. dollars had generally been stable and RMB had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of RMB to the U.S. dollar. Under the new policy, RMB may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the RMB from the United States dollar. At the recent quarterly regular meeting of People's Bank of China, its Currency Policy Committee affirmed the effects of the reform on RMB exchange rate. Since February 

24

2006, the new currency rate system has been operated; the currency rate of RMB has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. The Company has never engaged in currency hedging operations and has no present intention to do so. 

 

**Concentration of Credit Risk**

 

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions as described below:

 

1.

Approximately 63% of the Company’s revenue and accounts receivable is contributed by a related party in the People’s Republic of China (the “PRC”). 

2.

Approximately 100% of the Company's revenue is derived from the PRC. Changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition.

3.

If the Company is unable to derive any revenues from China, it would have a significant, financially disruptive effect on normal operations of the Company.

**ITEM 4T.**

**CONTROLS AND PROCEDURES**

Our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures are appropriate and effective. They have evaluated these controls and procedures as of the date of this report on Form 10-Q. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Our management believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors 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, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. 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; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

25

**PART II.**

**OTHER INFORMATION**

**ITEM 1.**

**LEGAL PROCEEDINGS**

None.

**ITEM 2.**

**UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3.**

**DEFAULT UPON SENIOR SECURITIES**

None.

**ITEM 4.**

**[REMOVED AND RESERVED]**

**ITEM 5.**

**OTHER INFORMATION**

None.

**ITEM 6.  EXHIBITS**

***Exhibits***

**Exhibit**

**Number**

**Description**

**31.1**

 

Certification of Chief Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

**31.2**

 

Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

**32.1**

 

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

**32.2**

 

Certification of Chief Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

26

**SIGNATURES**

 

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

 

 

 

 

 

 

 

**CHINA GREEN CREATIVE, INC.**

 

 

 

Dated:  May 24, 2010

/*s/ Ye Xing Zhang*

 

Ye Xing Zhang

 

Chief Executive Officer

 

 

 

Dated:  May 24, 2010

/s/ *Deng Lin*

 

Deng Lin

 

Chief Financial Officer

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