UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarter ended March 31, 2010
 
  ̈ TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
transition period from _____ to _____
 
 Commission
File Number: 0-52150
 
 FRANKLIN
TOWERS ENTERPRISES, INC.
 (Exact
name of small business issuer as specified in its charter)
 
 Nevada
                20-4069588(State
      of incorporation)
                (IRS
      Employer ID Number)
 
 88 Julong
Road
 Lidu
Economic Development Zone
 Fulin,
Chongqing, China
 (Address
of principal executive offices)
 
 011-86-2372183330
 (Issuer's
telephone number)
   (Former
name, former address and former fiscal year, if changed since last
report)
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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 xNo o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated filer
               ̈
              Accelerated filer
               ̈Non-accelerated filer
               ̈
              Smaller reporting company
              x(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈No x
 
 Indicate
the number of shares outstanding as of May 20,
2010:  123,484,043
  
  TABLE OF
CONTENTS
  PART
      I
              3Item
      1.  Financial Statements
              3Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
              4Forward-Looking
      Statements
              4Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
              15Item
      4.  Controls and Procedures.
              15PART
      II  OTHER INFORMATION
              16Item
      1.  Legal Proceedings.
              16Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds.
              16Item
      3.  Defaults Upon Senior Securities.
              17Item
      4.  Removed and Reserved
              17Item
      5.  Other Information.
              17Item
      6.  Exhibits
              17
 
 2
  PART
I
  Item
1.  Financial Statements


FRANKLIN
TOWERS ENTERPRISES, INC. AND SUBSIDIARY





INDEX TO
FINANCIAL STATEMENTS





PageCondensed
      Consolidated Balance Sheets
                    as
      of March 31, 2010 (Unaudited) and December 31, 2009
                  
                  F-1Condensed
      Consolidated Statements of Losses and Comprehensive Losses
                    for
      the three months ended March 31, 2010 and 2009 (Unaudited)
                  
                  F-2Condensed
      Consolidated Statement of Stockholders’ Deficit
                    for
      the three months March 31, 2010 (Unaudited) and the year ended December
      31, 2009
                  
                  F-3Condensed
      Consolidated Statements of Cash Flows
                    for
      the three months ended March 31, 2010 and 2009 (Unaudited)
                  
                  F-4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                  
                  F-5
      - F-21


3




FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
BALANCE SHEETS
 
 March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                  
                  $
                  1,334,060
                  
                  
                  $
                  2,788,581Accounts
      receivable - net of allowance for doubtful accounts of $23,772 and $20,631
      as of March 31, 2010 and December 31, 2009 respectively
                  
                  
                  331,606
                  
                  
                  
                  20,630Inventories
                  
                  
                  1,605,381
                  
                  
                  
                  1,441,685Prepaid
      costs and expenses
                  
                  
                  180,016
                  
                  
                  
                  135,314Other
      receivables
                  
                  
                  1,215,823
                  
                  
                  
                  21,232Total
      Current Assets
                  
                  
                  4,666,886
                  
                  
                  
                  4,407,442Property
      and Equipment, net
                  
                  
                  750,076
                  
                  
                  
                  796,144Other
      Assets:Deposits
                  
                  
                  996,200
                  
                  
                  
                  996,200Total
      Other Assets
                  
                  
                  996,200
                  
                  
                  
                  996,200TOTAL
      ASSETS
                  
                  $
                  6,413,162
                  
                  
                  $
                  6,199,786LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      Liabilities:Convertible
      notes payable
                  
                  $
                  2,792,175
                  
                  
                  $
                  2,792,175Loans
      payable
                  
                  
                  2,473,875
                  
                  
                  
                  2,217,500Accounts
      payable and accrued expenses
                  
                  
                  3,885,601
                  
                  
                  
                  3,679,424Customer
      prepaid
                  
                  
                  603,252
                  
                  
                  
                  536,344Loans
      payable - related parties
                  
                  
                  19,391
                  
                  
                  
                  19,391Total
      Current Liabilities
                  
                  
                  9,774,294
                  
                  
                  
                  9,244,834TOTAL
      LIABILITIES
                  
                  
                  9,774,294
                  
                  
                  
                  9,244,834Stockholders'
      Deficit:Preferred
      stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and
      outstanding as of March 31, 2010 and December 31, 2009
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $.0001 par value; 1,250,000,000 shares authorized, 123,484,043
      shares issued and outstanding as of March 31, 2010 and December 31, 2009,
      respectively
                  
                  
                  12,348
                  
                  
                  
                  12,348Additional
      paid-in capital
                  
                  
                  18,345,012
                  
                  
                  
                  18,345,012Accumulated
      deficit
                  
                  
                  (22,031,352
                  )
                  
                  
                  (21,715,270
                  )Accumulated
      other comprehensive income
                  
                  
                  312,860
                  
                  
                  
                  312,862Total
      Stockholders' Deficit
                  
                  
                  (3,361,132
                  )
                  
                  
                  (3,045,048
                  )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                  
                  $
                  6,413,162
                  
                  
                  $
                  6,199,786
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
1
 
 FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
STATEMENTS OF LOSSES AND COMPREHENSIVE LOSSES
 (UNAUDITED)
 
 Three Months Ended March 31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Restated)Net
      Sales
                  
                  $
                  712,511
                  
                  
                  $
                  398,371Cost
      of Sales
                  
                  
                  (600,928
                  )
                  
                  
                  (370,486
                  )Gross
      Profit
                  
                  
                  111,583
                  
                  
                  
                  27,885Operating
      Expenses:Professional
      fees
                  
                  
                  17,024
                  
                  
                  
                  16,629Depreciation
      and amortization
                  
                  
                  10,111
                  
                  
                  
                  9,625Selling,
      general and administrative expenses
                  
                  
                  141,305
                  
                  
                  
                  120,362Total
      Operating Expenses
                  
                  
                  168,440
                  
                  
                  
                  146,616(Loss)
      From Operations
                  
                  
                  (56,857
                  )
                  
                  
                  (118,731
                  )Other
      Income (Expenses):Subsidy
      income
                  
                  
                  173,611
                  
                  
                  
                  265,458Interest
      income
                  
                  
                  802
                  
                  
                  
                  6,457Interest
      expense
                  
                  
                  (433,638
                  )
                  
                  
                  (479,730
                  )Total
      Other (Expense)
                  
                  
                  (259,225
                  )
                  
                  
                  (207,815
                  )Loss
      Before Income Tax
                  
                  
                  (316,082
                  )
                  
                  
                  (326,546
                  )Provision
      for Income Tax
                  
                  
                  -
                  
                  
                  
                  -Net
      Loss
                  
                  $
                  (316,082
                  )
                  
                  $
                  (326,546
                  )Net
      Loss per Share - Basic and Diluted
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.00
                  )Weighted
      Average Shares Outstanding - Basic and Diluted
                  
                  
                  123,484,043
                  
                  
                  
                  123,484,043Comprehensive
      Loss:Net
      loss
                  
                  $
                  (316,082
                  )
                  
                  $
                  (326,546
                  )Foreign
      currency translation adjustment
                  
                  
                  (2
                  )
                  
                  
                  (2,976
                  )Comprehensive
      Loss
                  
                  $
                  (316,084
                  )
                  
                  $
                  (329,522
                  )
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
2
 
 FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
 FOR THE THREE MONTHS ENDED
MARCH 31, 2010 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31,
2009
 
 Preferred Stock
                                      
                                      
                                      Common Stock
                                      
                                      
                                      Additional
                                        Paid
      – in
                                      
                                      
                                      Accumulated
                                      
                                      
                                      Accumulated
                                        Other
                                        ComprehensiveShares
                                      
                                      
                                      Amount
                                      
                                      
                                      Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      Deficit
                                      
                                      
                                      Income
                                      
                                      
                                      TotalBalance
      - December 31, 2008 (Restated)
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      123,484,043
                                      
                                      
                                      $
                                      12,348
                                      
                                      
                                      $
                                      18,345,012
                                      
                                      
                                      $
                                      (20,161,779
                                      )
                                      
                                      $
                                      316,294
                                      
                                      
                                      $
                                      (1,488,125
                                      )Net
      loss for the year ended December 31, 2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,553,491
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,553,491
                                      )Foreign
      currency translation adjustment
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (3,432
                                      )
                                      
                                      
                                      (3,432
                                      )Balance
      - December 31, 2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      123,484,043
                                      
                                      
                                      
                                      12,348
                                      
                                      
                                      
                                      18,345,012
                                      
                                      
                                      
                                      (21,715,270
                                      )
                                      
                                      
                                      312,862
                                      
                                      
                                      
                                      (3,045,048
                                      )Net
      loss for the three months ended March 31, 2010 (Unaudited)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (316,082
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (316,082
                                      )Foreign
      currency translation adjustment
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (2
                                      )
                                      
                                      
                                      (2
                                      )Balance
      - March 31, 2010 (Unaudited)
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      123,484,043
                                      
                                      
                                      $
                                      12,348
                                      
                                      
                                      $
                                      18,345,012
                                      
                                      
                                      $
                                      (22,031,352
                                      )
                                      
                                      $
                                      312,860
                                      
                                      
                                      $
                                      (3,361,132
                                      )
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
3
 
 FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 Three Months Ended March, 312010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Restated)Cash
      Flows from Operating Activities:Net
      Loss
                        
                        $
                        (316,082
                        )
                        
                        $
                        (326,546
                        )Adjustments
      to Reconcile Net Loss to Net Cash Provided by (Used in) Operating
      Activities:Depreciation
      expense
                        
                        
                        26,364
                        
                        
                        
                        22,878Provision
      for doubtful accounts
                        
                        
                        3,141
                        
                        
                        
                        929Accrued
      convertible notes interest and penalties
                        
                        
                        342,042
                        
                        
                        
                        342,041Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                        
                        
                        (314,117
                        )
                        
                        
                        10,502(Increase)
      in inventories
                        
                        
                        (163,696
                        )
                        
                        
                        50,163(Increase)
      decrease in prepaid costs and expenses
                        
                        
                        (44,702
                        )
                        
                        
                        447,817(Decrease)
      increase in accounts payable and accrued liabilities
                        
                        
                        (135,865
                        )
                        
                        
                        59,193Increase
      in customer prepaid
                        
                        
                        66,908
                        
                        
                        
                        -Net
      Cash (Used in) Provided by Operating Activities
                        
                        
                        (536,007
                        )
                        
                        
                        606,977Cash
      Flows from Investing Activities:Capital
      expenditures
                        
                        
                        -
                        
                        
                        
                        (5,272
                        )Proceeds
      from return of property
                        
                        
                        19,704
                        
                        
                        
                        -Other
      receivables
                        
                        
                        (1,194,591
                        )
                        
                        
                        (545,388
                        )Acquisition
      deposits paid
                        
                        
                        -
                        
                        
                        
                        (219,600
                        )Net
      Cash (Used in) Investing Activities
                        
                        
                        (1,174,887
                        )
                        
                        
                        (770,260
                        )Cash
      Flows from Financing Activities:Proceeds
      from short term loans
                        
                        
                        256,375
                        
                        
                        
                        1,100,738Net
      Cash Provided by Financing Activities
                        
                        
                        256,375
                        
                        
                        
                        1,100,738Effect
      of Exchange Rate Changes on Cash and Cash Equivalents
                        
                        
                        (2
                        )
                        
                        
                        (1,370
                        )Net
      (Decrease) Increase in Cash and Cash Equivalents
                        
                        
                        (1,454,521
                        )
                        
                        
                        936,085Cash
      and Cash Equivalents - Beginning of Period
                        
                        
                        2,788,581
                        
                        
                        
                        61,867Cash
      and Cash Equivalents - End of Period
                        
                        $
                        1,334,060
                        
                        
                        $
                        997,952Supplemental Cash Flow
      Information:Interest
      paid
                        
                        $
                        90,945
                        
                        
                        $
                        146,522Income
      taxes paid
                        
                        $
                        -
                        
                        
                        $
                        -
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
4




FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY


NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE 1 –
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION





Organization





Franklin
Towers Enterprises, Inc. (“Franklin”) was
incorporated on March 23, 2006 under the laws of the State of
Nevada.





On June
19, 2007, Franklin entered into a Share Purchase Agreement with the shareholders
of Chongqing Qiluo Textile Co. Ltd. (“Qiluo”), a limited liability company
organized under the laws of the People’s Republic of China, whereby Franklin
agreed to acquire 100% of the issued and outstanding registered capital of Qiluo
for consideration of 5,000,000 shares of Franklin’s Series A Convertible
Preferred Stock (convertible into 52,880,000 shares of common stock) (see Note
11). Upon consummation of such purchase, Qiluo became a wholly-owned subsidiary
of Franklin.





The
acquisition was accounted for as a “reverse acquisition”, since the stockholders
of Qiluo owned a majority of Franklin’s common stock immediately following the
transaction. The combination of the two companies was recorded as a
recapitalization of Qiluo pursuant to which Qiluo was treated as the continuing
entity although Franklin was the legal acquirer. Accordingly, the Company’s
historical financial statements were those of Qiluo.





Qiluo was
incorporated on December 15, 2006, named “Chongqing Qiluo Industry Ltd.” under
the laws of the People’s Republic of China with the purpose of engaging in the
manufacture and sale of silk and silk products. Qiluo renamed to “Chongqing
Qiluo Textile Co., Ltd.” On May 30, 2008, Qiluo renamed to “Chongqing Fuling
Qiluo Wintus Silk Co., Ltd”. On November 4, 2009, the Company renamed to current
name “Chongqing Fuling Qiluo Cocoon Silk Company, Ltd.”.





After the
acquisition, Franklin focused on the production and sale of silk and silk
products. The Company started its test production at the end of June 2007 and
commenced operations from the third quarter of 2007.





All
references to common stock, share and per share amounts have been retroactively
restated to reflect the reverse acquisition as if the transaction had taken
place as of the beginning of the earliest period presented.





Principles of
Consolidation





The
accompanying condensed consolidated financial statements include the accounts of
Franklin (Parent) and its wholly owned subsidiary Qiluo. All significant
intercompany accounts and transactions have been eliminated in
consolidation.





Going
Concern





The
Company started its test production at the end of June 2007 and commenced its
manufacturing operations during the third quarter of 2007. The Company has
incurred a net loss of $316,082 and $326,546, for the three months ended March
31, 2010 and 2009, respectively.  The Company has an accumulated
deficit of $22,031,352 at March 31, 2010.  Substantial portions of the
losses are attributable to common stock issued for consulting services,
amortization of debt discount, deferred finance costs and beneficial conversion
feature, and accrued interest and penalties in connection with the default of
the Convertible Notes. The Company had a working capital deficiency of
$5,107,408 and $4,837,392 as of March 31, 2010 and December 31, 2009,
respectively.


F -
5





Furthermore,
as of July 12, 2008, the Company was in default on its Convertible Notes
payments due July 12, 2008. The Notes provide that, at the option of the holder,
an event of default shall make all sums of principal and interest then remaining
unpaid and all other amounts payable immediately due and payable upon demand. As
of March 31, 2010, the unpaid convertible notes payable balance is $2,792,175;
unpaid accrued interest is $554,153; and unpaid accrued liquidated damages
penalty and default penalty are $2,379,770. The Company is currently continuing
to negotiate with investors and is seeking ways to resolve the default issue
with all investors.





These
factors raise substantial doubt concerning the Company’s ability to continue as
a going concern.





There can
be no assurance that funds will be generated during the next twelve months or
thereafter from the Company’s current operations, or that funds will be
available from external sources such as debt or equity financings or other
potential sources.  The lack of additional capital could force the
Company to curtail or cease operations and would, therefore, have a material
adverse effect on its business.  Furthermore, there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significant dilutive effect on the
Company's existing stockholders.





During
2008, the Company received proceeds from a significant shareholder in the amount
of $1,722,656 as a repayment of nonreciprocal funds transferred to this
shareholder during 2007. The Company also received proceeds of short term loans
totaling $351,206 and $955,209 during 2009 and 2008, respectively.





During
the first quarter 2010, the Company received a $988,875 interest free loan from
Chongqing Fulin State-Owned-Assets Management Co.





The
Company has undertaken further steps as part of a plan to improve operations and
to address our lack of liquidity by raising additional funds, either in the form
of debt or equity or some combination thereof. The Company is planning to reduce
its cost of goods sold by purchasing more of its main raw material directly from
farmers in the local neighboring area and to reduce its overhead cost by fully
utilizing its current manufacture facilities. From the Spring of 2008, the
Company began purchasing its main raw material directly from farmers through the
planned acquisition of “Zhengzhong” (see Note 7), thereby helping the Company to
reduce its raw material - cocoon cost and increase its operating gross margin
rate to 15.66% in March 31, 2010 as compared to 7.00% for the three months ended
March 31, 2009. However, there can be no assurance that the Company will be able
to raise enough funds to complete the acquisition of “Zhengzhong” and to
accomplish these objectives, and it is uncertain whether the Company will
achieve a profitable level of operations or be able to obtain additional
financing.





There can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all.  In the event we are
unable to continue as a going concern, we may elect or be required to seek
protection from our creditors by filing a voluntary petition in bankruptcy or
may be subject to an involuntary petition in bankruptcy.





The accompanying condensed consolidated
financial statements do not include any adjustments related to the
recoverability or classification of asset-carrying amounts or the amounts and
classifications of liabilities that may result should the Company be unable to
continue as a going concern.





Reclassifications





Certain
reclassifications have been made to prior year’s consolidated financial
statements and notes thereto for comparative purposes to conform with current
year’s presentation. These reclassifications have no effect on previously
reported results of operations.


F -
6





NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
presentation





The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“US
GAAP”).





Use of
Estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.  Actual results could differ
from those estimates.





Fair Value of Financial
Instruments





The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, net, other receivable, accounts payable and accrued liabilities,
short term loans and convertible notes.  The fair value of these
financial instruments approximate their carrying amounts reported in the
consolidated balance sheets due to the short term maturity of these instruments
or by comparison to other instruments with similar terms.





Foreign Currency
Translation





The
functional currency of Franklin is the United States dollar.  The
functional currency of Qiluo is the Chinese Renminbi (“RMB”).  The
reporting currency of the Company is the United States dollar.





The
assets and liabilities of Qiluo were translated into United States dollars at
period-end exchange rates ($0.14650 and $0.14650 at March 31, 2010 and December
31, 2009, respectively).  The revenues and expenses were translated
into United States dollars at average exchange rates for the period ($0.14650
and $0.14630 for the three months ended March 31, 2010 and 2009,
respectively).  Resulting translation adjustments are recorded as a
component of accumulated other comprehensive income within stockholders’
equity.





Transaction
gains or losses arising from exchange rate fluctuation on transactions
denominated in a currency other than the functional currency are included in the
consolidated results of operations.  There are no material foreign
currency transaction gains or losses for the three months ended March 31, 2010
and 2009.





Cash and Cash
Equivalents





Cash and
cash equivalents consist of cash on hand, cash on deposit with banks, and highly
liquid debt investments with a maturity of three months or less when
purchased.





Inventory





Inventory
is stated at the lower of cost (first-in, first-out method) or
market.





Property, Plant and
Equipment, Net





Property,
plant and equipment is stated at cost less accumulated
depreciation.  Depreciation is calculated on a straight-line basis
over the estimated useful lives of the respective assets.


F -
7





Intangible and Other
Long-Lived Assets, Net





Intangible
and other long-lived assets are stated at cost, less accumulated amortization
and impairments.





The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Company measures impairment by
comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of the assets and
their eventual disposition. If the sum of the expected undiscounted cash flow is
less than the carrying amount of the assets, the Company would recognize an
impairment loss based on the fair value of the assets.





Revenue
Recognition





Sales of
products are recorded when title passes to the customer, which is generally at
time of shipment. The Company performs ongoing credit evaluations of its
customers’ financial condition, but generally does not require collateral to
support customer receivables. The credit risk is controlled through credit
approvals, limits and monitoring procedures. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other factors. Accounts receivable
are charged against the allowance for doubtful accounts once all collection
efforts have been exhausted. The Company does not routinely permit customers to
return product.





Stock-Based
Compensation





Stock-based
compensation is accounted for at fair value in accordance with Accounting
Standards Codification (“ASC”) 718, “ Compensation- Stock
Compensation”.





In
addition to requiring supplemental disclosures, FASB ASC 718, Compensation–Stock Compensation,
addresses the accounting for share-based payment transactions in which a company
receives goods or services in exchange for (a) equity instruments of the company
or (b) liabilities that are based on the fair value of the company’s equity
instruments or that may be settled by the issuance of such equity instruments.
FASB ASC 718 focuses primarily on accounting for transactions in which a company
obtains employee services in share-based payment transactions.





References
to the issuances of restricted stock refer to stock of a public company issued
in private placement transactions to individuals who are eligible to sell all or
some of their shares of restricted Common Stock pursuant to Rule 144,
promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain
limitations. In general, pursuant to Rule 144, a stockholder who is not an
affiliate and has satisfied a six-month holding period may sell all of his
restricted stock without restriction, provided that the Company has current
information publicly available. Rule 144 also permits, under certain
circumstances, the sale of restricted stock, without any limitations, by a
non-affiliate of the Company that has satisfied a one-year holding
period.





Advertising





Advertising
costs are expensed as incurred. The Company did not incur significant
advertising costs for the three months ended March 31, 2010 and
2009.





Shipping and Handling
Costs





Shipping
and handling costs, primarily related to outbound freight, are reported in the
consolidated statements of operations as a component of selling, general and
administrative expenses.


F -
8





Research and
Development





Research
and development costs related to both present and future products are expensed
as incurred. The Company did not incur significant research and development
costs for the three months ended March 31, 2010 and 2009.





Segment
Information





ASC
280-10 (formerly, SFAS No. 131, “Disclosure About Segments of and Enterprise and
Related Information”), requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company operates as a single
segment and will evaluate additional segment disclosure requirements as it
expands its operations.





Income
Taxes





The
Company accounts for income taxes using the asset and liability method described
in ASC 740-10 (formerly, SFAS No. 109, “Accounting For Income Taxes”), the
objective of which is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting and the tax bases of the
Company’s assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled.  A valuation allowance
related to deferred tax assets is recorded when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.





No
provision has been made for corporation income taxes due to losses incurred
during the periods presented. In addition, no future tax benefit has been
calculated. According to the tax regulations of China, the amount of loss that
will carry over to the next tax period should be assessed and approved by the
tax regulation agency. The maximum carry over period is five years.





Net Loss Per Common
Share





The
Company has adopted ASC 260-10 (formerly, SFAS No. 128, “Earnings per Share”
(“EPS”)), which requires presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation.





Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during the period.





Diluted
loss per share is computed similarly to basic loss per share except that it
includes the potential dilution that could occur if dilutive securities were
converted.  Diluted loss per common share is the same as basic loss
per share for the periods presented, as the effect of the inclusion of
potentially dilutive securities ($2,792,175 convertible debt convertible into
11,168,700 and 11,168,700 shares and warrants exercisable into 30,360,000 and
30,360,000 shares, for the three months ended March 31, 2010 and 2009,
respectively), was anti-dilutive.





Statement of Cash
Flows





In
accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.


F -
9




Recently Adopted Accounting
Standards




In
February 2010, the Company adopted an amendment to previously adopted accounting
guidance on subsequent events disclosure, which established standards of
accounting for and disclosure of events or transactions that occur after the
balance sheet date but before financial statements are issued or available to be
issued. Under the amended guidance, the Company is no longer required to
disclose the date through which subsequent events have been evaluated. The
adoption of this requirement did not have a material impact on the Company’s
financial condition or results of operations.




Recently Issued Accounting
Standards




In
January 2010, the Financial Accounting Standards Board issued guidance which
expands the required disclosures about fair value measurements. This guidance
requires disclosures about transfers of investments between levels in the fair
value hierarchy and disclosures relating to the reconciliation of fair value
measurements using significant unobservable inputs (level 3 investments). This
guidance is effective for the Company as of January 1, 2011. The adoption
of this guidance will not have a material impact on the Company’s financial
condition or results of operations.





Certain
other accounting pronouncements have been issued by the FASB and other standard
setting organizations which are not yet effective and have not yet been adopted
by the Company. The impact on the Company’s consolidated financial position and
results of operations from adoption of these standards is not expected to be
material.





NOTE 3 –
INTERIM FINANCIAL STATEMENTS





The
unaudited condensed consolidated financial statements as of March 31, 2010 and
for the three months ended March 31, 2010 and 2009 have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with instructions to Form 10 - Q. In the
opinion of management, the unaudited condensed consolidated financial statements
have been prepared on the same basis as the annual consolidated financial
statements and reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the financial position as of March 31,
2010 and the results of operations and cash flows for the three months ended
March 31, 2010 and 2009. The financial data and other information disclosed in
these notes to the interim financial statements related to these periods are
unaudited. The results for the three month period ended March 31, 2010 is not
necessarily indicative of the results to be expected for any subsequent quarter
of the entire year ending December 31, 2010. The balance sheet at December 31,
2009 has been derived from the audited consolidated financial statements at that
date.





Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the Securities and
Exchange Commission’s rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December
31, 2009 included in our Form 10 –K filed April 15, 2010.


F -
10





NOTE 4 -
INVENTORIES





Inventories
consist of the following:


March
      31,
                                    
                                    
                                    December
      31,2010
                                    
                                    
                                    2009(Unaudited)Finished
      Goods
                                    
                                    $
                                    304,475
                                    
                                    
                                    $
                                    486,334Processed
      cocoons
                                    
                                    
                                    950,269
                                    
                                    
                                    
                                    772,211Raw
      Materials
                                    
                                    
                                    147,345
                                    
                                    
                                    
                                    154,971Work
      in Process
                                    
                                    
                                    203,292
                                    
                                    
                                    
                                    28,169Total
                                    
                                    $
                                    1,605,381
                                    
                                    
                                    $
                                    1,441,685





Finished
goods consist of those silks and by products available for sale. There was no
valuation allowance for inventory loss at March 31, 2010 and December 31,
2009.





NOTE 5 –
PREPAID COSTS AND EXPENSES





Prepaid
costs and expenses consist of:


March
      31,
                      2010
                    
                    
                    December
      31,
                      2009(Unaudited)Advances
      to personnel for future overhead costs
                    
                    $
                    87,974
                    
                    
                    $
                    14,245Advances
      to vendors for future overhead costs
                    
                    
                    92,042
                    
                    
                    
                    118,339Other
                    
                    
                    -
                    
                    
                    
                    2,730Total
                    
                    $
                    180,016
                    
                    
                    $
                    135,314





NOTE 6 –
OTHER RECEIVABLES





Other
receivables consist of :


March
      31,
                        
                        
                        December
      31,2010
                        
                        
                        2009(Unaudited)Chongqing
      Guojing Silk Company, Ltd.
                        
                        $
                        1,177,211
                        
                        
                        $
                        -Chongqing
      Aikekaer Paint Co., Ltd.
                        
                        
                        21,232
                        
                        
                        
                        21,232Chongqing
      First Capital Investment Co., Ltd.
                        
                        
                        2,730
                        
                        
                        
                        -Mr.
      Songbai Zhong
                        
                        
                        14,650
                        
                        
                        
                        -Total
                        
                        $
                        1,215,823
                        
                        
                        $
                        21,232





In
February 2010, Qiluo loaned $1,177,211 (8,035,571 RMB) to Chongqing Guojing Silk
Company, Ltd. (“Guojing Silk”), an entity that has pledged its assets as
collateral for the Company’s bank borrowing (see Note 9). The receivable bears
interest at 10% per annum and is due by December 31, 2010. Guojing Silk is
controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and
chief executive officer of the Company.





The
receivables from Chonqing Aikekaer Paint Co., Ltd. and Chongqing First Capital
Investment Co., Ltd. are interest free and due on demand.





The
receivable from Mr. Songbai Zhong, one of the individuals whom furnished real
estate property as collateral to secure the Company’s bank borrowing (see Note
9) is interest free and due on demand.


F -
11





NOTE 7 -
PROPERTY AND EQUIPMENT





Property
and equipment is summarized as follows:


Fixed Assets
                                          
                                          Estimated
                                            Useful
      Life
                                          
                                          
                                          March
      31,
                                            2010
                                          
                                          
                                          December
      31,
                                            2009(Unaudited)Production
      Equipment
                                          
                                          
                                          10
                                          
                                          
                                          $
                                          726,161
                                          
                                          
                                          $
                                          726,161Auxiliary
      Equipment
                                          
                                          
                                          10
                                          
                                          
                                          
                                          6,944
                                          
                                          
                                          
                                          6,944Office
      Equipment
                                          
                                          
                                          3-5
                                          
                                          
                                          
                                          26,891
                                          
                                          
                                          
                                          26,891Automobile
                                          
                                          
                                          5
                                          
                                          
                                          
                                          124,525
                                          
                                          
                                          
                                          124,525Furniture
      and Fixtures
                                          
                                          
                                          5-7
                                          
                                          
                                          
                                          36,606
                                          
                                          
                                          
                                          36,606Construction
      in progress
                                          
                                          
                                          
                                          
                                          
                                          
                                          92,402
                                          
                                          
                                          
                                          112,1061,013,529
                                          
                                          
                                          
                                          1,033,233Less:
      Accumulated Depreciation
                                          
                                          
                                          
                                          
                                          
                                          
                                          263,453
                                          
                                          
                                          
                                          237,089$
                                          750,076
                                          
                                          
                                          $
                                          796,144





Depreciation
expense was $26,364 and $22,878 for the three months ended March 31, 2010 and
2009, respectively, of which $16,253 and $13,253 was included in cost of
sales.





In
January 2010, the Company returned unusable materials (included in construction
in progress at December 31, 2009) at their cost of $19,704.





NOTE 8 -
DEPOSITS





Deposits
consist of:


March
      31,
                            2010
                          
                          
                          December
      31,
                            2009(Unaudited)Down
      payment in connection with Letter Agreement dated November 26, 2007 to
      acquire cocoon purchase stations, warehouse, and certain other assets from
      Zhengzhong Silkworm Industrial Development Co. Ltd., a state owned entity
      ("Zhengzhong")
                          
                          $
                          411,270
                          
                          
                          $
                          411,270Deposit
      paid in connection with agreement dated March 19, 2008 to use cocoon
      purchase stations and warehouse at no cost from March 19, 2008 to March
      18, 2009
                          
                          
                          7,329
                          
                          
                          
                          7,329Additional
      payments relating to acquisition of Zhengzhong assets
                          
                          
                          549,393
                          
                          
                          
                          549,393Foreign
      currency translation adjustment
                          
                          
                          28,208
                          
                          
                          
                          28,208Total
                          
                          $
                          996,200
                          
                          
                          $
                          996,200





The
Letter Agreement dated November 26, 2007 and subsequent amendments provided that
the total purchase price of the Zhengzhong assets was 10,374,800 RMB
($1,519,908). If the Company is unable to pay the remaining 3,574,800 RMB
($523,708) due, the Company’s total payments of 6,800,000 RMB ($996,200) may be
forfeited and not recovered (partially or in full). In February 2009, the due
date of the remaining 3,574,800 RMB ($523,708) due was extended to September
2009.  As of May 17, 2010, the Company is still in negotiation with
the local government to further extend the due date.


F -
12





NOTE 9 -LOANS PAYABLE – SHORT
TERM





Loans
      payable consist of:
                                      
                                      March
      31,
                                        2010
                                      
                                      
                                      December
      31,
                                        2009((Unaudited)Qiluo
      loans payable to Chongqing Shan Xia Bank30,000,000
      RMB, interest at 10% per annum, due January 19, 2010
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      4,395,000Less:
      used by Mr. Chen, Wensheng, 3,000,000 RMB
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (439,500
                                      )Less:
      used by Mr. Zhong, Songbai, 2,000,000 RMB
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (293,000
                                      )Less:
      used by Guojing Silk, 10,000,000 RMB
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,465,000
                                      )25,000,000
      RMB, interest at 7.965% per annum, due January 29, 2011
                                      
                                      
                                      3,662,5005,000,000
      RMB, interest at 7.965% per annum, due February 9, 2011
                                      
                                      
                                      732,500Less:
      used by Mr. Chen, Wensheng, 3,000,000 RMB
                                      
                                      
                                      (439,500
                                      )Less:
      used by Mr. Zhong, Songbai, 2,000,000 RMB
                                      
                                      
                                      (293,000
                                      )Less:
      used by Guojing Silk, 10,000,000 RMB
                                      
                                      
                                      (1,465,000
                                      )Less:
      used by Mr. Jingshi Kuang, 5,000,000 RMB
                                      
                                      
                                      (732,500
                                      )Qiluo
      loans payable to Chongqing Shan Xia Bank, net
                                      
                                      
                                      1,465,000
                                      
                                      
                                      
                                      2,197,500Qiluo
      loans payable to Chongqing Fulin State-Owned-Assets Management
      Co.interest
      free, due by December 31, 2010988,875
                                      
                                      
                                      
                                      -Franklin
      loans payable to two individualsinterest
      at 8% per  annum, due April 24, 2008 (past due)
                                      
                                      
                                      20,000
                                      
                                      
                                      
                                      20,000Total
                                      
                                      $
                                      2,473,875
                                      
                                      
                                      $
                                      2,217,500





On
January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd.
(“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term
credit line in the amount of 30,000,000 RMB ($4,395,000 translated at the
December 31, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is
collateralized with the assets of Guojing Silk and real estate property of Mr.
Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line,
Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB
($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received
2,000,000 RMB ($293,000). Guojing Silk is controlled by the brother-in-law of
Mr. Kuang, indirect majority stockholder and chief executive officer of the
Company.





On
January 22, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen and Mr. Songbai Zhong, returned RMB 30,000,000 ($4,395,000) to
Shanxia Bank.





On
January 29, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short
term secured loan of RMB 25,000,000 ($3,662,500) from Shanxia Bank. The loan
bears interest at 7.965% per annum payable monthly. The loan provides for a 50%
penalty increase in the interest rate on a daily basis while the Company is in
default on payment of principal. It also provides for a 100% penalty increase in
interest rate if the loan proceeds are not used for the purpose stated in the
loan. The maturity date of this loan is January 29, 2011, and it is secured by
the assets of Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song
and Mr. Jingshi Kuang.





On
February 9, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term
loan of RMB 5,000,000 ($732,500) for working capital. The loan bears interest at
7.965% per annum payable monthly. The loan provides for a 50% penalty increase
in the interest rate on a daily basis while the Company is in default on payment
of principal. It also provides for a 100% penalty increase in interest rate if
the loan proceeds are not used for the purpose stated in the loan.The maturity
date of this loan is February 9, 2011, and it is secured by the assets of
Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song and Mr.
Jingshi Kuang.


F -
13




During
the first quarter 2010, the Company received a RMB 6,750,000 ($988,875) loan
from Chongqing Fulin State-Owned-Assets Management Co. The loan is interest free
and due by December 31, 2010.





As of
March 31, 2010 and December 31, 2009, the accrued interest payable for short
term loans totaled $36,520 and $51,092, respectively, which was included in
accounts payable and accrued expenses.





NOTE 10 –
LOANS PAYABLE – RELATED PARTIES





Loans payable – related parties consist of:
                  
                  March 31,
                    2010
                  
                  
                  December 31,
                    2009(Unaudited)Franklin
      loan payable to former chief executive officer, interest at 8% per annum,
      due on demand
                  
                  $
                  12,233
                  
                  
                  $
                  12,233Franklin
      loan payable to former chief executive officer, non-interest bearing, due
      on demand
                  
                  
                  7,158
                  
                  
                  
                  7,158Total
                  
                  $
                  19,391
                  
                  
                  $
                  19,391





The
accrued interest payable to related party was $3,517 and $3,272 as of March 31,
2010 and December 31, 2009, respectively.





NOTE 11 -
CONVERTIBLE NOTES PAYABLE





March 31,
                  
                  
                  December 31,Convertible
      notes payable, net consist of:
                  
                  2010
                  
                  
                  2009(Unaudited)Convertible
      notes - initial face amount
                  
                  $
                  3,300,000
                  
                  
                  $
                  3,300,000Less
      unamortized debt discounts:Discount
      on relative fair value of warrants
                  
                  
                  (2,903,247
                  )
                  
                  
                  (2,903,247
                  )Discount
      on beneficial conversion feature
                  
                  
                  (396,753
                  )
                  
                  
                  (396,753
                  )Less
      accumulated amortization
                  
                  
                  3,300,000
                  
                  
                  
                  3,300,000Unamortized
      debt discounts
                  
                  
                  -
                  
                  
                  
                  -Repayment
      of convertible notes
                  
                  
                  (507,825
                  )
                  
                  
                  (507,825
                  )Convertible
      notes payable, net
                  
                  $
                  2,792,175
                  
                  
                  $
                  2,792,175





On
September 12 and September 20, 2007, the Company entered into Subscription
Agreements (the "Subscription Agreements") with 11 investors ("Purchasers"), for
the purchase and sale of $3,300,000 of Secured Convertible Promissory Notes of
the Company (the “Notes”) for the aggregate purchase price of $3,300,000 (the
“Note Financing”). The Company received net proceeds from the issuance of the
Notes of $2,622,425 after finance costs of $382,500 and other expenses of
$295,075. Pursuant to the terms of the Subscription Agreements, the Company also
issued to the Purchasers warrants to purchase up to 26,400,000 shares of common
stock of the Company, subject to adjustments for certain issuances and
transactions.





The Notes
bear interest at the rate of 10% per annum, payable in either (a) cash or (b)
absent an event of default, in shares of the Company’s common stock at the
lesser of (i) $0.25 per share or (ii) 75% of the average of the closing bid
prices of the Company’s common stock for the 5 trading days preceding the
payment date. Said payments commenced on March 12, 2008 and all accrued but
unpaid interest and any other amounts due thereon was due and payable on
September 12, 2009, or earlier upon acceleration following an event of default,
as defined in the Notes.





All
principal and accrued interest on the Notes is convertible into shares of the
Company’s common stock at the election of the Purchasers at any time at the
conversion price of $0.25 per share, subject to adjustment for certain
issuances, transactions or events that would result in “full ratchet” protection
to the holders.


F -
14





The Notes
contained default events which, if triggered and not timely cured (if curable),
would result in a default interest rate of 15% per annum. The Notes also contain
full ratchet antidilution provisions with respect to certain securities
issuances, including the issuances of stock for less than $.25 per share. In
addition, the Company has to pay the Purchasers an additional amount of
principal plus accrued interest if the Company is no longer listed on the
Bulletin Board or sells substantially all of its assets.




As part
of the financing, the Company also issued to the Purchasers an aggregate of
13,200,000 Class A Common Stock Purchase Warrants and 13,200,000 Class B Common
Stock Purchase Warrants. The Class A Warrants are exercisable at a price of
$0.50 per share at any time until the fifth anniversary from the date the
Registration Statement is declared effective by the Securities and Exchange
Commission (“the Expiration Date”) and the Class B Warrants are exercisable at a
price of $1.00 per share at any time until the Expiration Date. The warrants
include a cashless exercise provision which was triggered after March 12, 2008
as well as “full ratchet” antidilution provisions with respect to certain
securities issuances.





Absent a
waiver from a Purchaser, conversion of the Notes, or exercise of the Warrants,
is subject to the restriction that such conversion or exercise does not result
in the Purchaser beneficially owning at any one time more than 4.99% of the
Company’s outstanding shares of common stock.





Payment
of the Notes along with the Company’s other obligations to the Purchasers is
secured by all the assets of the Company and of its wholly-owned subsidiary,
Qiluo. Such obligations are also secured by a guaranty and pledge of the
17,100,000 shares of the Company’s common stock held by Xinshengxiang Industrial
Development Co., Ltd., a significant shareholder of the Company. In connection
with the transaction, the Company agreed to prepare and file with the Securities
and Exchange Commission within 60 days following the closing a registration
statement on Form SB-2 for the purpose of registering for resale all of the
shares of common stock underlying the Notes. If the Company failed to file such
registration statement within such time, or if the registration statement was
not declared effective within 120 days from September 12, 2007, the Company must
pay monthly liquidated damages in cash equal to 2% of the principal amount of
the Notes. The Purchasers were also granted standard piggyback registration
rights along with certain demand registration rights. The Company filed a
registration statement on December 26, 2007. The registration statement has not
yet been declared effective (see Note 17).





In
connection with the convertible debt, the Company recorded deferred finance
costs of $4,466,334, of which $382,500 was recorded as an asset and $4,083,834
was recorded as a component of stockholders’ equity. Such deferred finance costs
were being amortized over the life of the related debt. The Company also
recorded a deferred debt discount in the amount of $3,300,000 to reflect the
beneficial conversion feature of the convertible debt and the fair value of the
warrants. The beneficial conversion feature was recorded pursuant to ASC
470-20-30 (formerly, EITF 00-27), “Application of EITF No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, to Certain Convertible Instruments”. In accordance
with ASC 470-20-30, the Company evaluated the value of the beneficial conversion
feature and recorded the amount of $396,753 as a reduction to the carrying
amount of the convertible debt and as an addition to paid-in capital.
Additionally, the relative fair value of the warrants of $2,903,247 was
calculated and recorded as a further reduction to the carrying amount of the
convertible debt and as an addition to paid-in capital.





The
Company commenced the repayment of the convertible notes and interest on March
12, 2008 and paid $26,375 in cash to three of the Purchasers, which represented
accrued interest of $12,500 and repayment of principal of $13,875 due on the
convertible promissory notes. Also, the Company issued a total of 32,354,043
shares to seven of the Purchasers during the six months ended June 30, 2008,
which represented accrued interest of $174,912 and repayment of principal of
$493,950. The Company did not make any repayments during the six months ended
December 31, 2008 due to its financing difficulties. The Company has been in
default to all eleven investors (see Note 19) since then. Consequently, the
Company wrote off the remaining $56,797 unamortized deferred finance costs,
$1,078,882 unamortized debt discounts (warrants and beneficial conversion
feature) and $1,335,144 unamortized deferred finance costs included in the
equity section at December 31, 2008 and recognized additional interest expense
of $2,470,823 during the year ended December 31, 2008 (See Note
19).


F -
15





NOTE 12 -
STOCKHOLDERS’ EQUITY AND SHARE PURCHASE AGREEMENT





On June
19, 2007, Franklin entered into a Share Purchase Agreement (the “Share Purchase
Agreement”) with the following persons: Chongqing Qiluo Textile Co. Ltd., a
limited liability company organized under the laws of the People’s Republic of
China (“Qiluo”); Xinshengxiang Industrial Development Co., Ltd., a limited
liability company organized under the laws of the People’s Republic of China
(“Xinshengxiang”); Mr. Dingliang Kuang (“Dingliang”); and Ms. Yue Kuang (“Yue,”
and together with Xinshengxiang and Dingliang, the "Qiluo Shareholders").
Pursuant to the Share Purchase Agreement, Franklin agreed to acquire Qiluo at a
closing held simultaneously therewith by purchasing from the Qiluo Shareholders
all of their respective shares of Qiluo’s registered capital, which represent
100% of the issued and outstanding registered capital stock of Qiluo. Upon the
consummation of such purchase, Qiluo became a wholly-owned subsidiary of
Franklin. In consideration therefore, Franklin agreed to issue to the Qiluo
Shareholders an aggregate of 5,000,000 shares of Franklin’s Series A Convertible
Preferred Stock (convertible into 52,880,000 shares of common stock), which were
allocated between the Qiluo Shareholders as follows: 4,750,000 shares to
Xinshengxiang; 125,000 shares to Dingliang; and 125,000 shares to Yue. Each
share of Series A Convertible Preferred Stock was convertible, at the option of
the holder thereof, into 10.576 shares of Franklin's common stock.





In
connection with the foregoing transaction, on June 19, 2007, Kelly Fan, the
former President, Chief Executive Officer, Treasurer, and Director of Franklin,
transferred without consideration to the Qiluo Shareholders 18,000,000 shares of
the common stock of Franklin which were issued and outstanding and held by Ms.
Fan. Such shares were allocated between the Qiluo Shareholders as follows:
17,100,000 shares to Xinshengxiang Industrial Development Co., Ltd.; 450,000
shares to Dingliang Kuang; and 450,000 shares to Yue Kuang. Excluding
the  18,000,000 shares of common stock, there were 12,250,000 shares
of common stock outstanding in the preexisting public entity prior to the Share
Purchase Agreement that remained outstanding in the newly constituted
company.





As a
result of the foregoing transactions: (a) Xinshengxiang held approximately 81%
of the total combined voting power of all classes of Franklin’s capital stock
entitled to vote; (b) Diangliang Kuang is the principal owner and manager of
Xinshengxiang and thus has voting, investment, and dispositive control over the
shares of Franklin’s capital stock owned by Xinshengxiang. Accordingly, Mr.
Kuang is also deemed to be the indirect beneficial owner of the shares of
Franklin’s capital stock owned by Xinshengxiang. Mr. Kuang thus directly and
indirectly (by Xinshengxiang) held approximately 83% of the total combined
voting power of all classes of Franklin’s capital stock entitled to vote; and
(c) Yue Kuang, who is the sister of Diangliang Kuang, directly held
approximately 2% of the total combined voting power of all classes of Franklin’s
capital stock who is entitled to vote.





In
September 2007, the Company agreed to issue an aggregate of 8,000,000 shares of
its common stock valued at $9,200,000 to Bonsai Venture Partner, Ltd., a British
Virgin Islands Limited company, in consideration for consulting services
rendered. These issuances were offered and sold in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act and the Rule 506
promulgated thereunder. The shares issued in consideration for services rendered
were valued at $9,200,000, based on the price of our stock on the date of
issuance.





The
Company issued a total of 32,354,043 shares to seven of the Purchasers as
repayment of loan and loan interest during the six months ended June 30, 2008,
pursuant to the terms of the Notes (see Note 11).  The issuing price
was calculated at 75% of the average of the closing bid prices of the Company’s
common stock for the 5 days preceding the payment date.





NOTE 13 -
PREFERRED STOCK





On June
18, 2007, the Company designated a series of Preferred Stock known as the
“Series A Convertible Preferred Stock” (the “Series A Preferred Stock”) by
filing a Certificate of Designation with the Secretary of State of
Nevada.  The number of shares constituting such Series A Preferred
Stock was designated to be 5,000,000 shares, par value $0.001 per
share.  Pursuant to the Certificate of Designation, the principal
rights, preferences, powers, limitations and restrictions of the Series A
Preferred Stock are as follows:


F -
16


Each
share of Series A Preferred Stock is convertible, at the option of the holder
thereof, without payment of additional consideration, into 10.576 shares of the
Company’s common stock.  Holders of Series A Preferred Stock shall be
entitled to vote, together with holders of common stock as a single class, on
all matters upon which stockholders of the Company are entitled to vote, with
each share of Series A Preferred Stock having one vote.  The Series A
Preferred Stock shall rank senior to the common stock.  In the event
of any liquidation, dissolution or winding up of the Company, the holders of
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of the
common stock of the Company and any other issue of stock, should there be any,
by reason of their ownership thereof, an amount per share equal to $0.01 per
each share of Series A Preferred Stock owned by such shareholder plus any
declared and unpaid dividends on the Series A Preferred Stock.





On
December 10, 2007, the Company issued an aggregate of 52,880,000 shares of
common stock to complete the conversion of the 5,000,000 shares of Series A
Preferred Stock then outstanding.





NOTE 14 -
WARRANTS





A summary
of the status of the Company’s warrants is presented below:





Date of
                      Issuance
                    
                    Number of
                      Warrants
                    
                    
                    Weighted Average
                      Exercise PriceOutstanding
      - January 1, 2007
                    
                    
                    
                    
                    -
                    
                    
                    $
                    -Issued,
      Class A Warrants
                    
                    9/12/2007
                    
                    
                    13,200,000
                    
                    
                    
                    0.50Issued,
      Class B Warrants
                    
                    9/12/2007
                    
                    
                    13,200,000
                    
                    
                    
                    1.00Issued,
      Finder's Fees Warrants
                    
                    9/12/2007
                    
                    
                    3,960,000
                    
                    
                    
                    0.25Outstanding
      - March 31, 2010 (Unaudited), December 31, 2009 and
    2008
                    
                    
                    
                    
                    30,360,000
                    
                    
                    $
                    0.68





Warrants
outstanding and exercisable by price range as of March 31, 2010
are:





Warrants Outstanding
                            
                            
                            Warrants ExercisableExercise
                              Price
                            
                            
                            Number
                              Outstanding
                            
                            
                            WeightedAverage
                              Remaining
                              Contractual
                              Life in Years*
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price
                            
                            
                            Number
                              Exercisable
                            
                            
                            Weighted
                              Average
                              Exercise
                              Price$
                            0.25
                            
                            
                            
                            3,960,000
                            
                            
                            
                            5.00
                            
                            
                            $
                            0.25
                            
                            
                            
                            3,960,000
                            
                            
                            $
                            0.25$
                            0.50
                            
                            
                            
                            13,200,000
                            
                            
                            
                            5.00
                            
                            
                            
                            0.50
                            
                            
                            
                            13,200,000
                            
                            
                            
                            0.50$
                            1.00
                            
                            
                            
                            13,200,000
                            
                            
                            
                            5.00
                            
                            
                            
                            1.00
                            
                            
                            
                            13,200,000
                            
                            
                            
                            1.0030,360,000
                            
                            
                            
                            
                            
                            
                            $
                            0.68
                            
                            
                            
                            30,360,000
                            
                            
                            $
                            0.68





*
Warrants expire 5 years after effective date of registration statement. The
registration statement filed on December 26, 2007 is not effective as of March
31, 2010.





The
significant assumptions used to determine the fair values of the warrants, using
a Black-Scholes option pricing model, were as follows:




Significant
      assumptions:Risk-free
      interest rate at grant date
                  
                  
                  4.11
                  %Expected
      stock price volatility
                  
                  
                  93.95
                  %Expected
      dividend payout
                  
                  
                  -Expected
      option life-years
                  
                  
                  5




F -
17





NOTE 15 -
RELATED PARTY TRANSACTION





Chongqing
Guojing Silk Company, Ltd. (“Guojing Silk”), is controlled by the brother-in-law
of Mr. Kuang, indirect majority stockholder and chief executive officer of the
Company. On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company,
Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short
term credit line in the amount of 30,000,000 RMB ($4,395,000) from Chongqing
Shan Xia Bank. The loan was collateralized with the assets of Guojing Silk and
real estate property of Mr. Wensheng Chen and Mr. Songbai Zhong. From this
jointly acquired credit line, Qiluo received 15,000,000 RMB ($2,197,500),
Guojing Silk received 10,000,000 RMB ($1,465,000), Mr. Chen received 3,000,000
RMB ($439,500), and Mr. Zhong received 2,000,000 RMB ($293,000).




In March
2009, Qiluo borrowed 31,500,000 RMB ($4,611,600) from Chongqing Guojing Silk
Company, Ltd.(“Guojing Silk”) and simultaneously delivered a bank acceptance
(from Shan Xia Bank) for the same amount to Guojing Silk. Under the related
agreement with Shan Xia Bank, use of the 31,500,000 RMB was not permitted while
the bank acceptance was outstanding. Qiluo returned the 31,500,000 RMB in
September 2009.





During
the nine months ended September 30, 2008, the Company received funds from and
advanced funds to Guojing Silk for working capital purposes. As of September 30,
2009, the excess advanced payments to Guojing Silk amounted to $498,312
(3,401,450 RMB), which was reported under the caption of “Other receivable”.
During the fourth quarter of 2009, Guojing Silk repaid this receivable. As of
December 31, 2009, receivable from Guojing was $0.





On March
25, 2009, Xin Shengxiang Industrial Development Co., Ltd, (“Xinshengxiang”), a
major shareholder of the Company borrowed 4,000,000 RMB from Jin Cheng Small
Loans Company, Ltd. (Jincheng”) and advanced the funds to the Company. The short
term loan was due by November 24, 2009 and bore interest at 21.24% per annum.
This loan was paid in full as of December 31, 2009.





On
September 29, 2009, Mr. Dingliang Kuang (“Mr. Kuang”), the Chief Executive
Officer and a major shareholder of the Company, borrowed 6,000,000 RMB from
Jincheng and advanced the funds to the Company. The short term loan was due by
October 28, 2009 and bore interest at 19.44% per annum. This loan was paid in
full as of December 31, 2009.





On
January 22, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen and Mr. Songbai Zhong, returned RMB 30,000,000 ($4,395,000) to
Shanxia Bank.


On
January 29, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short
term loan of RMB 25,000,000 ($3,662,500) from Shanxia Bank. The loan bears
interest at 7.965% per annum payable monthly. The maturity date of this loan is
January 29, 2011.





On
February 9, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short
term loan of RMB 5,000,000 ($732,500) for working capital. The loan bears
interest at 7.965% per annum payable monthly. The maturity date of this loan is
February 9, 2011.





NOTE 16 -
CONCENTRATION OF CREDIT RISK





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and accounts
receivable.




Qiluo
maintains cash balances in various banks in the People’s Republic of China.
Currently, no deposit insurance system has been set up in the People’s Republic
of China. Therefore, the Company will bear a risk if any of these banks become
insolvent. Qiluo’s uninsured cash balance was $1,329,372 and $2,788,581 as of
March 31, 2010 and December 31, 2009.


F -
18





NOTE 17 -
COMMITMENTS AND CONTINGENCIES





Lease
agreement





On
January 28, 2007, Qiluo signed a twenty (20) years lease with Xinshengxiang, a
related party (see Note 12), for the use of a factory building located in Fulin,
Chongqing. The lease commenced on March 1, 2007 and provides for annual rental
payments of 200,000 Renminbi ($29,300 translated at the March 31, 2010 exchange
rate) plus other occupancy costs.




Future
minimum rentals under this lease are as follows:





Year Ending
                    March 31,
                  
                  Future Minimum
                    Rent Payments2011
                  
                  $
                  29,3002012
                  
                  
                  29,3002013
                  
                  
                  29,3002014
                  
                  
                  29,3002015
                  
                  
                  29,300Thereafter
                  
                  
                  341,833Total
                  
                  $
                  488,333





Rent
expense incurred under the lease during the three months ended March 31, 2010
and 2009 charged to Selling, General and Administrative Expenses was $$7,325 and
$7,325, respectively.





Registration Rights
Arrangement





In
connection with the convertible notes payable (see Note 11), the Company agreed
to prepare and file with the Securities and Exchange Commission within 60 days
following the closing a registration statement for the purpose of registering
for resale all of the shares of common stock underlying the Notes. If the
Company fails to file such registration statement within such time, or if the
registration statement is not declared effective within 120 days from September
12, 2007, the Company is to pay monthly liquidated damages in cash equal to 2%
of the principal amount of the Notes. The Company filed a registration statement
on December 26, 2007; the registration statement has not yet been declared
effective. Accordingly, the Company has accrued liquidated damages of $1,646,822
and $1,479,241 at March 31, 2010 and December 31, 2009,
respectively.





Lack of
Insurance





The
Company currently has no insurance in force for its office facilities and
operations and it cannot be certain that it can cover the risks associated with
such lack of insurance or that it will be able to obtain and/or maintain
insurance to cover these risks at economically feasible premiums.





Country
Risk




As the
Company's principal operations are conducted in the People’s Republic of China
(the “PRC”), the Company is subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These risks include, among others, risks associated with the political,
economic and legal environments and foreign currency exchange limitations
encountered in the PRC. The Company's results of operations may be adversely
affected by changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations, among
other things.





In
addition, all of the Company's transactions undertaken in the PRC are
denominated in Renminbi, which must be converted into other currencies before
remittance out of the PRC may be considered. Both the conversion of Renminbi
into foreign currencies and the remittance of foreign currencies abroad require
the approval of the PRC government.


F -
19





NOTE 18 –
LEGAL PROCEEDING





On July
28, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) obtained
a default judgment against the Company. On April 21, 2008, the Plaintiff
initiated the action in the United States District Court Southern District of
New York, on a claim of breach of contract and non payment on a secured
convertible promissory note dated September 12, 2007, made by the Company in
favor of the Plaintiff, in the principal amount of $500,000. The Plaintiff
claimed approximately $671,000 in total relief, which amount includes a 15%
principal charge of $75,000, accrued interest of $48,125, and liquidated damages
of $37,000.





NOTE 19 –
DEFAULT ON CONVERTIBLE NOTES PAYABLE




As of
June 12, 2008, the Company was in default to six (6) Purchasers on convertible
notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company
was in default to all eleven (11) Purchasers on convertible notes payments due
July 12, 2008. The Notes provide that, at the option of the holder, an event of
default shall make all sums of principal and interest then remaining unpaid and
all other amounts payable immediately due and payable upon demand. As of March
31, 2010, the unpaid convertible notes payable balance is $2,792,175; unpaid
accrued interest is $554,153; and unpaid accrued liquidated damages penalty and
default penalty are $2,379,770. The Company is currently continuing to negotiate
with investors and is seeking ways to resolve the default issue with all
investors.





NOTE
20 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS





The
condensed consolidated statements of losses and comprehensive losses and
condensed consolidated statements of cash flows for the three months ended March
31, 2009 (which were previously included in the Company’s Form 10-Q filed with
SEC on May 20, 2009) have been restated herein in order to correct an error
relating to the accounting for the defaulted notes payable (see Notes 11 and
19).




In the
Form 10-Q filed May 20, 2009, the condensed consolidated statements of losses
and comprehensive losses and condensed consolidated statements of cash flows for
the three months ended March 31, 2009 included amortization of deferred finance
costs of $31,628, amortization of fair value of warrants and beneficial
conversion feature of $392,275 and amortization of deferred finance cost –
consulting of $485,451 relating to the defaulted notes payable. Since the
Company had defaulted on the notes, thus making the obligations immediately due
and payable on demand, the Company should have accelerated the amortization of
the remaining unamortized deferred finance costs and debt discounts at such
time. Accordingly, the consolidated financial statements at December 31, 2008
and for the year then ended included in the Form 10-K filed on April 15, 2010
were restated to reflect such amortization.


F -
20





The
effect of the restatement adjustments on the condensed consolidated statement of
losses for the three months ended March 31, 2009 follows:





As PreviouslyReported
                                  
                                  
                                  Adjustments
                                  
                                  
                                  As Restated(Loss)
      From Operations
                                  
                                  $
                                  (118,731
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (118,731
                                  )Other
      Income (Expense):Subsidy
      income
                                  
                                  
                                  265,458
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  265,458Interest
      income
                                  
                                  
                                  6,457
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,457Interest
      expense
                                  
                                  
                                  (1,389,085
                                  )
                                  
                                  
                                  909,355
                                  
                                  
                                  
                                  (479,730
                                  )Total
      Other (Expense)
                                  
                                  
                                  (1,117,170
                                  )
                                  
                                  
                                  909,355
                                  
                                  
                                  
                                  (207,815
                                  )Net
      Loss
                                  
                                  $
                                  (1,235,901
                                  )
                                  
                                  $
                                  909,355
                                  
                                  
                                  $
                                  (326,546
                                  )Net
      Loss per Share - Basic and Diluted
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  0.01
                                  
                                  
                                  $
                                  (0.00
                                  )Comprehensive
      Loss:Net
      loss
                                  
                                  $
                                  (1,235,901
                                  )
                                  
                                  $
                                  909,355
                                  
                                  
                                  $
                                  (326,546
                                  )Foreign
      currency translation adjustment
                                  
                                  
                                  (2,976
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,976
                                  )Comprehensive
      Loss
                                  
                                  $
                                  (1,238,877
                                  )
                                  
                                  $
                                  909,355
                                  
                                  
                                  $
                                  (329,522
                                  )





The
effect of the restatement adjustments on the condensed consolidated statement of
cash flows for the three months ended March 31, 2009 follows:





As
      PreviouslyReported
                        
                        
                        Adjustments
                        
                        
                        As
      RestatedCash
      Flows from Operating Activities:Net
      Loss
                        
                        $
                        (1,235,901
                        )
                        
                        $
                        909,355
                        
                        
                        $
                        (326,546
                        )Adjustments
      to Reconcile Net Loss to NetCash
      Provided by (Used in) Operating Activities:Depreciation
      expense
                        
                        
                        22,878
                        
                        
                        
                        
                        
                        
                        
                        22,878Provision
      for doubtful accounts
                        
                        
                        929
                        
                        
                        
                        
                        
                        
                        
                        929Amortization
      of deferred finance costs
                        
                        
                        31,628
                        
                        
                        
                        (31,628
                        )
                        
                        
                        -Amortization
      of debt discount - fair value of warrants and beneficial conversion
      feature
                        
                        
                        392,275
                        
                        
                        
                        (392,275
                        )
                        
                        
                        -Amortization
      of deferred finance costs - consulting
                        
                        
                        485,451
                        
                        
                        
                        (485,451
                        )
                        
                        
                        -Accrued
      convertible notes interest and penalties
                        
                        
                        342,042
                        
                        
                        
                        (1
                        )
                        
                        
                        342,041Changes
      in operating assets and liabilities:
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Decrease
      (increase) in accounts receivable
                        
                        
                        10,502
                        
                        
                        
                        
                        
                        
                        
                        10,502Decrease
      in inventories
                        
                        
                        50,163
                        
                        
                        
                        
                        
                        
                        
                        50,163Decrease
      (increase) in prepaid costs and expenses
                        
                        
                        447,817
                        
                        
                        
                        
                        
                        
                        
                        447,817Increase
      in accounts payable and accrued liabilities
                        
                        
                        59,193
                        
                        
                        
                        
                        
                        
                        
                        59,193Net
      Cash (Used in) Provided by Operating Activities
                        
                        $
                        606,977
                        
                        
                        $
                        -
                        
                        
                        $
                        606,977




F -
21




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 our financial
statements, which are included elsewhere in this Form 10-Q and the Form 10-K
filed on April 15, 2010. Although Qiluo is a subsidiary of Franklin, the
acquisition of Qiluo by Franklin that was consummated on June 19, 2007 has been
treated as a reverse merger of Qiluo. This means that Qiluo is the continuing
entity for financial reporting purposes.
  We
and our representatives may, from time to time, make written or verbal
forward-looking statements, including statements contained in our filings with
the United States Securities and Exchange Commission and in our reports to
shareholders. Generally, the inclusion of the words “believe”, “expect”,
“intend”, “estimate”, “anticipate”, “will”, and similar expressions or the
converse thereof, identify statements that constitute “forward-looking
statements”.
  These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements as a result
of a number of risks and uncertainties including: (a) those risks and
uncertainties related to general economic conditions, (b) whether we are able to
manage our planned growth efficiently and operate profitable operations, (c)
whether we are able to generate sufficient revenues or obtain financing to
sustain and grow our operations, and (d) whether we are able to successfully
fulfill our primary requirements for cash.
  Plan
of Operation
 
 In an
effort to obtain a stable raw material supply and to maximize both output and
quality of our silk production through Qiluo, we are contemplating the
acquisition of various other silk worm farms. On November 26, 2007, we entered
into a letter of intent with Chongqing Fulin Municipal Government to acquire
certain assets from Zhengzhong Silkworm Industrial Development Co., Ltd., a
state owned entity, pursuant to which we intend to acquire the assets of cocoon
purchase stations from Zhengzhong and exclusive right of those purchase stations
to purchase cocoons produced from approximately 15,000 acres of mulberry farms
in the local area.
 
 The
Letter Agreement dated November 26, 2007 and subsequent amendments provided that
the total purchase price of the Zhengzhong assets was 10,374,800 RMB
($1,519,908).  If the Company is unable to pay the remaining 3,574,800
RMB ($523,708 translated at the September 30, 2009 exchange rate) due, the
Company’s total payments of 6,800,000 RMB ($996,200) may be forfeited and not
recovered (partially or in full). In February 2009, the due date of the
remaining 3,574,800 RMB ($523,708) due was extended to September 2009. As of the
date of this filing, the Company was unable to pay this balance due. The Company
is in negotiation with the local government to further extend the due
date.
 
 The
acquisition of certain assets of Zhengzhong Silkworm Industrial Development Co.,
Ltd. from Fuling Municipal Government will not be consummated until the Company
has made the full payment. Nevertheless, the Company started to use those cocoon
stations and to purchase cocoon directly from local farmers commencing in the
second quarter of 2008. However, there is no assurance that the Company will
raise sufficient funds to complete this acquisition.
  4
  Furthermore,
in an effort to expand silk production and subsequent processing ability, on
November 28, 2007, we entered into a binding letter agreement with Chongqing
Wintus, pursuant to which we intend to acquire certain assets of Wintus,
including the stock of their seven wholly owned Chinese subsidiaries. The
business of Wintus is focused on the production of raw silk and the subsequent
processing and sales of various silk products. As consideration for the assets,
we agreed to pay a combination of cash and stock, in amounts to be mutually
agreed upon after we have completed our due diligence investigation of Wintus’
and its assets.  As of the date of this filing, the Company has not
taken any further steps for this planned acquisition. We will not be able to
complete this acquisition until we secure additional funds.
 
 Should
our initiatives to maximize both output and quality of silk production move
forward, additional funds may be required. However, there can be no assurance
that additional capital will be available to us. Although we may seek to raise
additional funds, we have no specific plans, understandings or agreements with
respect to such an offering, and we have given no contemplation with respect to
the securities to be offered or any other issue with respect to any offering. We
may have to issue debt or equity or enter into a strategic arrangement with a
third party.
 
 Results
of Operations
 
 Comparison of Sales for the
Three Months Ended March 31, 2010 and 2009
 
 Three Months Ended March 31,Sales
      in US dollars
                      
                      2010
                      
                      
                      2009Silk
                      
                      $
                      631,835
                      
                      
                      $
                      257,961Cocoons
                      
                      
                      -
                      
                      
                      
                      33,565By
      products and others
                      
                      
                      80,676
                      
                      
                      
                      106,845Total
      sales
                      
                      $
                      712,511
                      
                      
                      $
                      398,371
 
 Net
Sales
 
 Our net
sales increased $314,140, or 79% to $712,511 in the first quarter 2010 from
$398,371 in the first quarter 2009.  The Company sold 21.60 tons of
silk during the three months ended March 31, 2010, an increase of 8.84 tons,
compared to 12.76 tons during the same period of 2009. The revenue from sale of
silk was $631,835 in the first quarter 2010, an increase of $373,874, or 145% as
compared to $257,961 for the three months ended March 31, 2009.
 
 The
cocoon is a raw material for production of silk. There were no cocoon sales in
the first quarter of 2010 due to seasonality.
 
 Gross
Profit
 
 Comparison of Gross Profit
for the Three Months Ended March 31, 2010 and 2009
 
 Three Months Ended March 31,2010
                    
                    
                    2009Net
      sales
                    
                    $
                    712,511
                    
                    
                    $
                    398,371Cost
      of sales
                    
                    
                    (600,928
                    )
                    
                    
                    (370,486
                    )Gross
      profit
                    
                    $
                    111,583
                    
                    
                    $
                    27,885Gross
      profit margin rate
                    
                    
                    15.66
                    %
                    
                    
                    7.00
                    %
  5
  Gross
profit for the three months ended March 31, 2010 and 2009 was $111,583 and
$27,885, respectively. The gross profit margin rate increased 8.66 percentage
points to 15.66% in the first quarter 2010 from 7% in the first quarter 2009.
This improvement reflects the improvement of silk market conditions and is also
the result of our contemplated acquisition of Zhengzhong (see Plan of
Operation). The Company started to use its exclusive right through acquired
assets of Zhengzhong to purchase cocoons directly from local farmers commencing
in the spring cocoon season of 2008. As a result, the Company had better quality
and lower cost cocoons.
 
 (Loss)
from Operations
 
 Comparison of (Loss) from
Operations for the Three Months Ended March 31, 2010 and
2009
 
 Three Months Ended March 31,2010
                    
                    
                    2009Gross
      profit
                    
                    $
                    111,583
                    
                    
                    $
                    27,885Professional
      fees
                    
                    
                    17,024
                    
                    
                    
                    16,629Depreciation
      and amortization
                    
                    
                    10,111
                    
                    
                    
                    9,625Selling
      expenses
                    
                    
                    16,815
                    
                    
                    
                    10,127Cocoon
      station costs
                    
                    
                    -
                    
                    
                    
                    18,088Other
      general and administrative expenses
                    
                    
                    124,490
                    
                    
                    
                    92,147Total
      operating expenses
                    
                    
                    168,440
                    
                    
                    
                    146,616(Loss)
      from operations
                    
                    $
                    (56,857
                    )
                    
                    $
                    (118,731
                    )
 
 Loss from
operations for the three months ended March 31, 2010 was $56,857, an improvement
of $61,874, as compared to loss from operations of $118,731 for the three months
ended March 31, 2009.
 
 Total
operating expenses were $168,440, an increase of $21,824, or 15%, as compared to
$146,616 for the three months ended March 31, 2009. The increase was primarily
due to the increase in other general and administrative expenses.
 
 Other
general and administrative expenses consist of expenses relating to our back
office and general and administrative expenses relating to our cocoon stations.
Other general and administrative expenses increased $32,343 to $124,490 in the
first quarter 2010 from $92,147 in the same quarter 2009. The increase was
primarily attributable to the cost in connection with the application of
government subsidy.
 
 6
  Other
Expenses, Net
 Comparison of Other
Expenses, net for the Three Months Ended March 31, 2010 and
2009
 
 Three Months Ended March 31,2010
                    
                    
                    2009Subsidy
      income
                    
                    $
                    173,611
                    
                    
                    $
                    265,458Interest
      income
                    
                    
                    802
                    
                    
                    
                    6,457Interest
      expense
                    
                    
                    (433,638
                    )
                    
                    
                    (479,730
                    )Other
      Expenses, net
                    
                    $
                    (259,225
                    )
                    
                    $
                    (207,815
                    )
 
 Total
other expenses, net were $259,225 for the three months ended March 31, 2010, an
increase of $51,410 as compared to $207,815 for the three months ended March 31,
2009. The Company received $173,611 and $265,458 net subsidy from local Chinese
government during the three months ended March 31, 2010 and 2009, respectively.
These government subsidies were in connection with the purchase of cocoons and
as an incentive for technology innovation. Part of these subsidies will pass
through to the farmers who produced the cocoons when we purchase the cocoons
from farmers.
 
 Interest
expenses consist of interest paid for short term loans and accrued loan interest
expense and default penalties in connection with the defaulted convertible
notes. Accrued loan interest and default penalties totaled $342,042 and $342,042
for the three months ended March 31, 2010 and 2009,
respectively.
 
 Liquidity
and Capital Resources
 
 As of
March 31, 2010 and December 31, 2009, we had $1,334,060 and $2,788,581 in
cash, respectively. The cash balance at December 31, 2009 was prepared for
repayment of the Shangxia bank loan which was due by January 19, 2010. We
believe that such funds will not be sufficient to effectuate our plans with
respect to the business over the next twelve months. We will need to seek
additional capital for our operations.
 
 The major
sources of the Company’s liquidity for its operations were cash generated from
operations and short term loans from banks and other entities.
 
 Net cash
used in operating activities was $536,007 for the three months ended March 31,
2010, compared to net cash provided by operating activities of $606,977 during
the three months ended March 31, 2010. This was mainly due to increases in
accounts receivable, inventory and prepaid expenses and a decrease in accounts
payable and accrued expenses.
 
 Net cash
used in investing activities was $1,174,887 and $770,260 during the three months
ended March 31, 2010 and 2009, respectively. The Company loaned $1,194,591 to
various entities and individuals, in particular, $1,177,211 to Guojing Silk Ltd,
an entity controlled by the brother-in-law of Mr. Kuang, indirect majority
stockholder and Chief Executive of the Company. The Company received $19,704
from the return of property during the three months ended March 31, 2010. As
comparison, during the three months ended March 31, 2009, the Company loaned
$545,388 to various entities and individuals, spent $5,272 on equipment and paid
$$219,600 in connection with the purchase of Zhengzhong.
 
 The
Company received $256,375 and $1,100,738 from short term loans for the three
months ended March 31, 2010 and 2009, respectively.
  7
  Short Term Loans
Payable
 
 March 31,
                          
                          
                          December 31,Loans
      payable consist of:
                          
                          2010
                          
                          
                          2009((Unaudited)Qiluo
      loans payable to Chongqing Shan Xia Bank30,000,000
      RMB, interest at 10% per annum, due January 19, 2010
                          
                          $
                          -
                          
                          
                          $
                          4,395,000Less:
      used by Mr. Chen, Wensheng, 3,000,000 RMB
                          
                          
                          -
                          
                          
                          
                          (439,500
                          )Less:
      used by Mr. Zhong, Songbai, 2,000,000 RMB
                          
                          
                          -
                          
                          
                          
                          (293,000
                          )Less:
      used by Guojing Silk, 10,000,000 RMB
                          
                          
                          -
                          
                          
                          
                          (1,465,000
                          )25,000,000
      RMB, interest at 7.965% per annum, due January 29, 2011
                          
                          
                          3,662,5005,000,000
      RMB, interest at 7.965% per annum, due February 9, 2011
                          
                          
                          732,500Less:
      used by Mr. Chen, Wensheng, 3,000,000 RMB
                          
                          
                          (439,500
                          )Less:
      used by Mr. Zhong, Songbai, 2,000,000 RMB
                          
                          
                          (293,000
                          )Less:
      used by Guojing Silk, 10,000,000 RMB
                          
                          
                          (1,465,000
                          )Less:
      used by Mr. Jingshi Kuang, 5,000,000 RMB
                          
                          
                          (732,500
                          )Qiluo
      loans payable to Chongqing Shan Xia Bank, net
                          
                          
                          1,465,000
                          
                          
                          
                          2,197,500Qiluo
      loans payable to Chongqing Fulin State-Owned-Assets Management
      Co.interest
      free, due by December 31, 2010988,875
                          
                          
                          
                          -Franklin
      loans payable to two individualsinterest
      at 8% per annum, due April 24, 2008 (past due)
                          
                          
                          20,000
                          
                          
                          
                          20,000Total
                          
                          $
                          2,473,875
                          
                          
                          $
                          2,217,500
 
 On
January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd.
(“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term
credit line in the amount of 30,000,000 RMB ($4,395,000 translated at the
December 31, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is
collateralized with the assets of Guojing Silk and real estate property of Mr.
Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line,
Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB
($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received
2,000,000 RMB ($293,000). Guojing Silk is controlled by the brother-in-law of
Mr. Kuang, indirect majority stockholder and chief executive officer of the
Company.
 
 On
January 22, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen and Mr. Songbai Zhong, returned RMB 30,000,000 ($4,395,000) to
Shanxia Bank.
 
 On
January 29, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen, Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short
term secured loan of RMB 25,000,000 ($3,662,500) from Shanxia Bank. The loan
bears interest at 7.965% per annum payable monthly. The loan provides for a 50%
penalty increase in the interest rate on a daily basis while the Company is in
default on payment of principal. It also provides for a 100% penalty increase in
interest rate if the loan proceeds are not used for the purpose stated in the
loan. The maturity date of this loan is January 29, 2011, and it is secured by
the assets of Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song
and Mr. Jingshi Kuang.
  8
  On
February 9, 2010, the Company jointly with Chongqing Guojing Silk Company, Ltd.,
Mr. Wensheng Chen Mr. Songbai Zhong and Mr. Jingshi Kuang, obtained a short term
loan of RMB 5,000,000 ($732,500) for working capital. The loan bears interest at
7.965% per annum payable monthly. The loan provides for a 50% penalty increase
in the interest rate on a daily basis while the Company is in default on payment
of principal. It also provides for a 100% penalty increase in interest rate if
the loan proceeds are not used for the purpose stated in the loan.The maturity
date of this loan is February 9, 2011, and it is secured by the assets of
Guojing Silk and real estate of Mr. Wenshen Chen, Mr. Songbai Song and Mr.
Jingshi Kuang.
 
 During
the first quarter 2010, the Company received a RMB 6,750,000 ($988,875) loan
from Chongqing Fulin State-Owned-Assets Management Co. The loan is interest free
and due by December 31, 2010.
 
 As of
March 31, 2010 and December 31, 2009, the accrued interest payable for short
term loans totaled $36,520 and $51,092, respectively, which was included in
accounts payable and accrued expenses.
 
 Loans Payable to Related
Parties
 
 March31,
                          
                          
                          December31,Loans payable – related parties consist of:
                          
                          2010
                          
                          
                          2009(Unadited)Franklin
      loan payable to former chief executive officer, interest at 8% per annum,
      due on demand
                          
                          $
                          12,233
                          
                          
                          $
                          12,233Franklin
      loan payable to former chief executive officer, non-interest bearing, due
      on demand
                          
                          
                          7,158
                          
                          
                          
                          7,158Total
                          
                          $
                          19,391
                          
                          
                          $
                          19,391
 
 The
accrued interest payable to related party was $3,517 and $3,272 as of March 31,
2010 and December 31, 2009, respectively.
 
 Convertible Notes
Payable
 
 March 31,
                                        
                                        
                                        December 31,Convertible notes payable, net consist of:
                                        
                                        2010
                                        
                                        
                                        2009(Unaudited)Convertible
      notes - initial face amount
                                        
                                        $
                                        3,300,000
                                        
                                        
                                        $
                                        3,300,000Less
      unamortized debt discounts:Discount
      on relative fair value of warrants
                                        
                                        
                                        (2,903,247
                                        )
                                        
                                        
                                        (2,903,247
                                        )Discount
      on beneficial conversion feature
                                        
                                        
                                        (396,753
                                        )
                                        
                                        
                                        (396,753
                                        )Less
      accumulated amortization
                                        
                                        
                                        3,300,000
                                        
                                        
                                        
                                        3,300,000Unamortized
      debt discounts
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Repayment
      of convertible notes
                                        
                                        
                                        (507,825
                                        )
                                        
                                        
                                        (507,825
                                        )Convertible
      notes payable, net
                                        
                                        $
                                        2,792,175
                                        
                                        
                                        $
                                        2,792,175
  9
  On
September 12 and September 20, 2007, the Company entered into Subscription
Agreements (the "Subscription Agreements") with 11 investors ("Purchasers"), for
the purchase and sale of $3,300,000 of Secured Convertible Promissory Notes of
the Company (the “Notes”) for the aggregate purchase price of $3,300,000 (the
“Note Financing”). The Company received net proceeds from the issuance of the
Notes of $2,622,425 after finance costs of $382,500 and other expenses of
$295,075. Pursuant to the terms of the Subscription Agreements, the Company also
issued to the Purchasers warrants to purchase up to 26,400,000 shares of common
stock of the Company, subject to adjustments for certain issuances and
transactions.
 
 The Notes
bear interest at the rate of 10% per annum, payable in either (a) cash or (b)
absent an event of default, in shares of the Company’s common stock at the
lesser of (i) $0.25 per share or (ii) 75% of the average of the closing bid
prices of the Company’s common stock for the 5 trading days preceding the
payment date. Said payments commenced on March 12, 2008 and all accrued but
unpaid interest and any other amounts due thereon was due and payable on
September 12, 2009, or earlier upon acceleration following an event of default,
as defined in the Notes.
 
 All
principal and accrued interest on the Notes is convertible into shares of the
Company’s common stock at the election of the Purchasers at any time at the
conversion price of $0.25 per share, subject to adjustment for certain
issuances, transactions or events that would result in “full ratchet” protection
to the holders.
 
 The Notes
contained default events which, if triggered and not timely cured (if curable),
would result in a default interest rate of 15% per annum. The Notes also contain
full ratchet antidilution provisions with respect to certain securities
issuances, including the issuances of stock for less than $.25 per share. In
addition, the Company has to pay the Purchasers an additional amount of
principal plus accrued interest if the Company is no longer listed on the
Bulletin Board or sells substantially all of its assets.
 
 As part
of the financing, the Company also issued to the Purchasers an aggregate of
13,200,000 Class A Common Stock Purchase Warrants and 13,200,000 Class B Common
Stock Purchase Warrants. The Class A Warrants are exercisable at a price of
$0.50 per share at any time until the fifth anniversary from the date the
Registration Statement is declared effective by the Securities and Exchange
Commission (“the Expiration Date”) and the Class B Warrants are exercisable at a
price of $1.00 per share at any time until the Expiration Date. The warrants
include a cashless exercise provision which was triggered after March 12, 2008
as well as “full ratchet” antidilution provisions with respect to certain
securities issuances.
 
 Absent a
waiver from a Purchaser, conversion of the Notes, or exercise of the Warrants,
is subject to the restriction that such conversion or exercise does not result
in the Purchaser beneficially owning at any one time more than 4.99% of the
Company’s outstanding shares of common stock.
 
 Payment
of the Notes along with the Company’s other obligations to the Purchasers is
secured by all the assets of the Company and of its wholly-owned subsidiary,
Qiluo. Such obligations are also secured by a guaranty and pledge of the
17,100,000 shares of the Company’s common stock held by Xinshengxiang Industrial
Development Co., Ltd., a significant shareholder of the Company. In connection
with the transaction, the Company agreed to prepare and file with the Securities
and Exchange Commission within 60 days following the closing a registration
statement on Form SB-2 for the purpose of registering for resale all of the
shares of common stock underlying the Notes. If the Company failed to file such
registration statement within such time, or if the registration statement was
not declared effective within 120 days from September 12, 2007, the Company must
pay monthly liquidated damages in cash equal to 2% of the principal amount of
the Notes. The Purchasers were also granted standard piggyback registration
rights along with certain demand registration rights. The Company filed a
registration statement on December 26, 2007. The registration statement has not
yet been declared effective (see Note 17).
  10
  In
connection with the convertible debt, the Company recorded deferred finance
costs of $4,466,334, of which $382,500 was recorded as an asset and $4,083,834
was recorded as a component of stockholders’ equity. Such deferred finance costs
were being amortized over the life of the related debt. The Company also
recorded a deferred debt discount in the amount of $3,300,000 to reflect the
beneficial conversion feature of the convertible debt and the fair value of the
warrants. The beneficial conversion feature was recorded pursuant to ASC
470-20-30 (formerly, EITF 00-27), “Application of EITF No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, to Certain Convertible Instruments”. In accordance
with ASC 470-20-30, the Company evaluated the value of the beneficial conversion
feature and recorded the amount of $396,753 as a reduction to the carrying
amount of the convertible debt and as an addition to paid-in capital.
Additionally, the relative fair value of the warrants of $2,903,247 was
calculated and recorded as a further reduction to the carrying amount of the
convertible debt and as an addition to paid-in capital.
 
 The
Company commenced the repayment of the convertible notes and interest on March
12, 2008 and paid $26,375 in cash to three of the Purchasers, which represented
accrued interest of $12,500 and repayment of principal of $13,875 due on the
convertible promissory notes. Also, the Company issued a total of 32,354,043
shares to seven of the Purchasers during the six months ended June 30, 2008,
which represented accrued interest of $174,912 and repayment of principal of
$493,950. The Company did not make any repayments during the six months ended
December 31, 2008 due to its financing difficulties. The Company has been in
default to all eleven investors (see Note 19) since then. Consequently, the
Company wrote off the remaining $56,797 unamortized deferred finance costs,
$1,078,882 unamortized debt discounts (warrants and beneficial conversion
feature) and $1,335,144 unamortized deferred finance costs included in the
equity section at December 31, 2008 and recognized additional interest expense
of $2,470,823 during the year ended December 31, 2008 (See Note
19).
 
 Going
Concern Consideration
 
 The
Company started its test production at the end of June 2007 and commenced its
manufacturing operations during the third quarter of 2007. The Company has
incurred a net loss of $316,082 and $326,546, for the three months ended March
31, 2010 and 2009, respectively.  The Company has an accumulated
deficit of $22,031,352 at March 31, 2010.  Substantial portions of the
losses are attributable to common stock issued for consulting services,
amortization of debt discount, deferred finance costs and beneficial conversion
feature, and accrued interest and penalties in connection with the default of
the Convertible Notes. The Company had a working capital deficiency of
$5,107,408 and $4,837,392 as of March 31, 2010 and December 31, 2009,
respectively.
 
 Furthermore,
as of July 12, 2008, the Company was in default on its Convertible Notes
payments due July 12, 2008. The Notes provide that, at the option of the holder,
an event of default shall make all sums of principal and interest then remaining
unpaid and all other amounts payable immediately due and payable upon demand. As
of March 31, 2010, the unpaid convertible notes payable balance is $2,792,175;
unpaid accrued interest is $554,153; and unpaid accrued liquidated damages
penalty and default penalty are $2,379,770. The Company is currently continuing
to negotiate with investors and is seeking ways to resolve the default issue
with all investors.
 
 These
factors raise substantial doubt concerning the Company’s ability to continue as
a going concern.
  11
  There can
be no assurance that funds will be generated during the next twelve months or
thereafter from the Company’s current operations, or that funds will be
available from external sources such as debt or equity financings or other
potential sources.  The lack of additional capital could force the
Company to curtail or cease operations and would, therefore, have a material
adverse effect on its business.  Furthermore, there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significant dilutive effect on the
Company's existing stockholders.
 During
2008, the Company received proceeds from a significant shareholder in the amount
of $1,722,656 as a repayment of nonreciprocal funds transferred to this
shareholder during 2007. The Company also received proceeds of short term loans
totaling $351,206 and $955,209 during 2009 and 2008, respectively.
 
 During
the first quarter 2010, the Company received a $988,875 interest free loan from
Chongqing Fulin State-Owned-Assets Management Co.
 
 The
Company has undertaken further steps as part of a plan to improve operations and
to address our lack of liquidity by raising additional funds, either in the form
of debt or equity or some combination thereof. The Company is planning to reduce
its cost of goods sold by purchasing more main raw material directly from
farmers in the local neighboring area and to reduce its overhead cost by fully
utilizing its current manufacture facilities. From the Spring of 2008, the
Company began purchasing its main raw material directly from farmers through the
planned acquisition of “Zhengzhong” (see Note 7), thereby helping the Company to
reduce its raw material - cocoon cost and increase its operating gross margin
rate to 15.66% in March 31, 2010 as compared to 7.00% for the three months ended
March 31, 2009. However, there can be no assurance that the Company will be able
to raise enough funds to complete the acquisition of “Zhengzhong” and to
accomplish these objectives, and it is uncertain whether the Company will
achieve a profitable level of operations or be able to obtain additional
financing.
 
 There can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all.  In the event we are
unable to continue as a going concern, we may elect or be required to seek
protection from our creditors by filing a voluntary petition in bankruptcy or
may be subject to an involuntary petition in bankruptcy.
 
 Critical
Accounting Policies and Estimates
 
 General
 
 The
Company’s Condensed Consolidated Financial Statements are prepared in accordance
with U.S. generally accepted accounting principles, which require management to
make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, net revenue and expenses, and the disclosure of contingent
assets and liabilities. Management bases its estimates on historical experience
and on various other assumptions that it believes 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. Senior management has discussed the development, selection and
disclosure of these estimates with the Board of Directors. Management believes
that the accounting estimates employed and the resulting balances are
reasonable; however, actual results may differ from these estimates under
different assumptions or conditions.
  12
  Basis of
Presentation
 
 The
condensed consolidated financial statements have been prepared on the going
concern basis, which assumes the realization of assets and liquidation of
liabilities in the normal course of operations. If we were not to continue as a
going concern, we would likely not be able to realize on our assets at values
comparable to the carrying value or the fair value estimates reflected in the
balances set out in the preparation of the consolidated financial statements.
There can be no assurances that we will be successful in generating additional
cash from equity or other sources to be used for operations. The consolidated
financial statements do not include any adjustments relating to the
recoverability of assets and classification of assets and liabilities that might
be necessary should the Company be unable to continue as a going
concern.
 
 Foreign Currency
Translation
 
 The
functional currency of Franklin is the United States dollar.  The
functional currency of Qiluo is the Chinese Renminbi (“RMB”).  The
reporting currency of the Company is the United States dollar.
 
 The
assets and liabilities of Qiluo were translated into United States dollars at
period-end exchange rates The revenues and expenses were translated into United
States dollars at average exchange rates for the period.  Resulting
translation adjustments are recorded as a component of accumulated other
comprehensive income within stockholders’ equity.
 
 Transaction
gains or losses arising from exchange rate fluctuation on transactions
denominated in a currency other than the functional currency are included in the
consolidated results of operations.
 
 Intangible and Other
Long-Lived Assets
 
 Intangible
and other long-lived assets are stated at cost, less accumulated amortization
and impairments.
 
 The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may no longer be
recoverable.  When these events occur, the Company measures impairment
by comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of the assets and
their eventual disposition.  If the sum of the expected undiscounted
cash flow is less than the carrying amount of the assets, the Company would
recognize an impairment loss based on the fair value of the assets.
 
 Revenue
Recognition
 
 Sales of
products are recorded when title passes to the customer, which is generally at
time of shipment.  The Company performs ongoing credit evaluations of
its customers’ financial condition, but generally does not require collateral to
support customer receivables.  The credit risk is controlled through
credit approvals, limits and monitoring procedures.  The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other
factors.  Accounts receivable are charged against the allowance for
doubtful accounts once all collection efforts have been
exhausted.  The Company does not routinely permit customers to return
product.
 
 Stock-Based
Compensation
 
 Stock-based
compensation is accounted for at fair value in accordance with Accounting
Standards Codification (“ASC”) topic 718-10, Stock Compensation (formerly, SFAS
123(R), “Accounting for Stock-Based Compensation”). No stock options have been
granted and none are outstanding.
  13
  Income
Taxes
 
 The
Company accounts for income taxes using the asset and liability method described
in ASC 740-10, (formerly, SFAS No. 109, “Accounting For Income Taxes”), the
objective of which is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting and the tax bases of the
Company’s assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled.  A valuation allowance
related to deferred tax assets is recorded when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
 
 No
provision has been made for corporation income taxes due to the current loss. In
addition, no future tax benefit has been calculated. According to the tax
regulations of China, the amount of loss that will carry over to the next tax
period should be assessed and approved by the tax regulation agency. The maximum
carry over period is five years.
 
 Segment
Information
 
 ASC
280-10 (formerly, SFAS No. 131), “Disclosure About Segments of and Enterprise
and Related Information”, requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds assets
and reports revenues and its major customers. The Company operates as a single
segment and will evaluate additional segment disclosure requirements as it
expands its operations.
  Recently Adopted Accounting
Standards
  In
February 2010, the Company adopted an amendment to previously adopted accounting
guidance on subsequent events disclosure, which established standards of
accounting for and disclosure of events or transactions that occur after the
balance sheet date but before financial statements are issued or available to be
issued. Under the amended guidance, the Company is no longer required to
disclose the date through which subsequent events have been evaluated. The
adoption of this requirement did not have a material impact on the Company’s
financial condition or results of operations.
  Recently Issued Accounting
Standards
  In
January 2010, the Financial Accounting Standards Board issued guidance which
expands the required disclosures about fair value measurements. This guidance
requires disclosures about transfers of investments between levels in the fair
value hierarchy and disclosures relating to the reconciliation of fair value
measurements using significant unobservable inputs (level 3 investments). This
guidance is effective for the Company as of January 1, 2011. The adoption
of this guidance will not have a material impact on the Company’s financial
condition or results of operations.
 
 Certain
other accounting pronouncements have been issued by the FASB and other standard
setting organizations which are not yet effective and have not yet been adopted
by the Company. The impact on the Company’s consolidated financial position and
results of operations from adoption of these standards is not expected to be
material.
  14




Item
3. Quantitative and Qualitative Disclosures About Market Risk.
 
 Smaller
reporting companies are not required to provide the information required by Item
305.
 
 Item
4.  Controls and Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 We
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act
(defined below)). Based upon that evaluation, our principal executive officer
and principal financial officer concluded that, as of the end of the period
covered in this report, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized and reported within the required time periods and is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
  Our
management, including our principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error or 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.  Due to 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.
Accordingly, management believes that the financial statements included in this
report fairly present in all material respects our financial condition, results
of operations and cash flows for the periods presented.
 
 Changes
in Internal Control Over Financial Reporting
 
 There
were no changes in our internal controls over financial reporting that occurred
during the last fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
  15
  PART
II  OTHER INFORMATION
  Item
1.  Legal Proceedings.
 
 There are
no pending legal proceedings to which the Company is a party or in which any
director, officer or affiliate of the Company, any owner of record or
beneficially of more than 5% of any class of voting securities of the Company,
or security holder is a party adverse to the Company or has a material interest
adverse to the Company, and the Company's property is not the subject of any
pending legal proceedings, except as follows:
 
 On July
28, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) obtained
a default judgment against the Company. On April 21, 2008, the Plaintiff
initiated the action in the United States District Court Southern District of
New York, on a claim of breach of contract and non payment on a promissory note
dated September 12, 2007, made by the Company in favor of the Plaintiff, in the
principal amount of $500,000. The Plaintiff claimed approximately $671,000 in
total relief, which amount includes a 15% principal charge of $75,000, accrued
interest of $48,125, and liquidated damages of $37,000.
 
 As of
June 12, 2008, the Company was in default to six (6) Purchasers on convertible
notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company
was in default to all eleven (11) Purchasers on convertible notes payments due
July 12, 2008. The Notes provide that, at the option of the holder, an event of
default shall make all sums of principal and interest then remaining unpaid and
all other amounts payable immediately due and payable upon demand. As of March
31, 2010, the unpaid convertible notes payable balance is $2,792,175; unpaid
accrued interest is $554,153; and unpaid accrued liquidated damages penalty and
default penalty are $2,379,770. The Company is currently continuing to negotiate
with investors and is seeking ways to resolve the default issue with all
investors.
 
 Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds.
 
 Unregistered Sales of Equity
Securities
 
 None
  Purchases of equity
securities by the issuer and affiliated purchasers
 
 None.
  16
  Use of
Proceeds
 
 None
  Item
3.  Defaults Upon Senior Securities.
 
 See Part
II – Item 1. above.
  Item
4.  Removed and Reserved.
 
 Item
5.  Other Information.
 
 None
  Item
6.  Exhibits
 
 Exhibit
                No.
              
              Description31.1
              
              Rule
      13a-14(a)/15d14(a) Certifications of Dingliang Kuang, the President, Chief
      Executive Officer, Treasurer and Director (Attached
  Hereto)32.1
              
              Section
      1350 Certifications of Dingliang Kuang, the President, Chief Executive
      Officer, Treasurer and Director (Attached
  Hereto)
 
 SIGNATURES
 
 In
accordance with to requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 FRANKLIN
      TOWERS ENTERPRISES, INC.Dated:
      May 21, 2010
                  By:
                  /s/  Dingliang
      KuangName:
                  Dingliang
      KuangTitle:
                  President,
      Chief Executive Officer,Treasurer
      and Director(Principal
      Executive, Financial andAccounting
      Officer)
 
 17