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CHINA LIAONING DINGXU ECOLOGICAL AGRICULTURE DEVELOPMENT, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Overview We mainly engage in the business of growing and marketing fresh mushroom, dried mushroom and mushroom crops and mushroom seeds through our affiliated variable interest entity LiaoNing DingXu. We mainly produce and sell two types of products: (1) Fresh mushrooms. We grow fresh mushrooms in our greenhouse and sell them to markets. Our fresh mushrooms include oyster mushroom, king oyster mushroom, king trumpet mushroom, and button mushroom. The revenues from the sales of fresh mushrooms constitute approximately 62% and 53% of our total revenues in the first three months of 2013 and 2012, respectively. (2) Mushroom crops and mushroom seeds. The revenues from the sales of mushroom crops and mushroom seeds approximately 11% and 47% of our total revenues in the first three months of 2013 and 2012, respectively. (3) As the manufacture workshop completed in 2012, the Company began to produce the dried mushroom from fourth quarter in 2012. The revenues from the sales of dried mushroom approximately 27% of our total revenues in the first three months of 2013. History We were incorporated under the name "Hazlo! Technologies, Inc." on August 19, 2010 in the State of Nevada. Our initial business plan was to modify and translate software and web applications originally written in English into Spanish and to focus on the needs of the Arizona business community to better serve the Spanish-speaking population. We did not generate any revenue from the said. IT services and data translation services. On December 12, 2011, we entered a Share Exchange Agreement with DingXu BVI Shareholder (Chin Yung Kong) under which we issue 60,000,000 shares of common stock to Chin Yung Kong to acquire 100% of the issued and outstanding shares of DingXu BVI. Upon closing of the Share Exchange transaction, DingXu BVI became the wholly owned subsidiary of Hazlo! Technologies, Inc. China Liaoning DingXu Ecological Agriculture Development Co, Ltd., a BVI company (the "DingXu BVI") was incorporated under the laws of British Virgin Islands on April 15, 2011. Chin Yung Kong was the sole shareholder and director of DingXu BVI. On July 5, 2011, DingXu BVI formed Panjin Hengrun Biological Technology Development Co., Ltd. , a limited liability company organized under the laws of the People's Republic of China ("Panjin Hengrun"). DingXu BVI owns 99% of the total ownership of Panjing Hengrun. 20-------------------------------------------------------------------------------- Back to Table of Contents On November 28, 2011, Panjin Hengrun entered into a set of contractual arrangements with Liaoning Dingxu Ecological Agriculture Development Co., Ltd. , a limited liability company organized under the laws of the People's Republic of China and an affiliated entity of Panjin Hengrun through contractual arrangements ("Liaoning Dingxu"). The contractual arrangements are comprised of a series of agreements, including a Consulting Service Agreement and an Operating Agreement, through which Panjin Hengrun has the right to advise, consult, manage and operate Liaoning Dingxu to collect and own all of Liaoning Dingxu's net profits and net losses. Additionally, under a Proxy Agreement, the shareholders of Liaoning Dingxu have vested their voting control over Liaoning Dingxu to Panjin Hengrun. In order to further reinforce Panjin Hengrun's rights to control and operate Liaoning Dingxu. Liaoning Dingxu and its shareholders have granted Panjin Hengrun, under an Option Agreement, the exclusive right and option to acquire all of their equity interests in Liaoning Dingxu, or, alternatively, all of the assets of Liaoning Dingxu. Further, the shareholders of Liaoning Dingxu agreed to pledge all of their rights, titles and interests in Liaoning Dingxu under an Equity Pledge Agreement. Upon entry of these contractual arrangements, Liaoning Dingxu became the Variable Interest Entities ("VIE") of Panjin Hengrun pursuant to FIN 46(R) and Panjin Hengrun was able to carry out business operations through Liaoning Dingxu. Set forth below is our organizational chart upon completion of the share exchange transaction: [[Image Removed]] Liaoning Dingxu Ecological Agriculture Development Co., Ltd. ("Liaoning Dingxu") was formed as a limited liability company organized under the laws of the People's Republic of China on August 6, 2009. It mainly engages in the business of growing mushrooms and marketing mushroom and related agricultural products. Since the completion of the share exchange transaction, our business operations are carried out through Panjin Hengrun and its affiliated operating entity Liaoning Dingxu. On December 12, 2011, we ceased the business of development stage IT service and data translation services and started to engage in the business of growing mushrooms and marketing mushroom and related agricultural products through Liaoning Dingxu. 21-------------------------------------------------------------------------------- Back to Table of Contents Financial condition as of March 31, 2013 and December 31, 2012 The following table presents an overview of assets, liabilities and shareholders' equity as of March 31, 2013 and December 31, 2012. March 31, December31, Increase 2013 2012 (decrease) Current assets Cash 518,229 21,245 496,984 Other Receivables - 8,662 (8,662 ) Advance to suppliers 150,446 148,895 1,551 Inventory 76,368 139,915 (63,547 ) Other current assets 86,700 85,914 786 Total current assets 831,743 404,631 427,112 Non-current assets Property, plant and equipment - net of accumulated depreciation 10,959,310 11,090,729 (131,419 ) Construction in progress 1,086,475 1,083,604 2,871 Land use rights 5,723,972 5,768,262 (44,290 ) Long term prepaid lease 868,337 879,470 (11,133 ) Total non-current assets 18,638,094 18,822,065 (183,971 ) Total assets 19,469,837 19,226,696 243,141 Current liabilities Account payable 3,738 3,729 9 Accrued expenses 17,495 18,519 (1,024 ) Other payables 1,516,021 2,879,287 (1,363,426 ) Due to Related Parties 5,292,608 5,301,552 (8,944 ) Total current assets 6,829,862 8,203,087 (1,373,385 ) Long term payable 1,548,644 1,548,644 160 Total liabilities 8,378,506 9,751,731 (1,373,225 ) Shareholders' liabilities Common stock 46,450 66,450 (20,000 )- Paid-in capital 8,340,410 8,215,126 125,284 Retained earnings 2,264,093 806,192 1,457,901 Accumulated comprehensive income - foreign currency 333,374 296,297 37,077 Non-controlling interests 107,004 90,900 16,104 Total shareholders' equity of the Company 11,091,331 9,474,965 1,616,366 Total liabilities and shareholders' equity 19,469,837 19,226,696 243,141 22-------------------------------------------------------------------------------- Back to Table of Contents Liquidity and Capital Resources: To date, our operations have been funded by contributions to "due to related parties" and the net cash provided by our fast developing operations. As a result, at March 31, 2013 we had $831,743 current assets, and $6,829,862 current liabilities mainly consisted of the $1,515,417 Factory seed cultivation workshop constructing payment, the $5,292,608 due to related party and others. We had working capital deficit of $5,998,119 as of March 31, 2013, which contains liquidity risk for the coming period. Although we believe management will continue to fund the Company on an as needed basis, we do not have a written agreement requiring such funding. For the due to related party, the shareholders promise that they would not demand repayment from the Company with in next fiscal year. We believe that our operation would have fast development in future which would provide sufficient net cash to fund our business. During the three months ended March 31, 2013, we got a net profit $1,473,033 and our operating activities provided $468,537 in net cash. Over the long term, our expectation is to see a trend of growing sales for our mushroom series products, including fresh mushrooms, dried mushroom and mushroom crops and seeds, resulting from the improving of general agriculture industry, improving of the planting skills and the quality of our products, and the continuing encouragement from local government. As we continue to invest to develop our mushroom planting greenhouse and structures, and factory workshop, the categories and total quantities of our products will be much higher than we produce now. Assets: 1. Inventory The balance at the end of this period consisted of raw materials, growing crops and finished goods. Inventories at March 31, 2013 and December 31, 2012 consisted of the following: March 31, December 31, 2013 2012 Raw materials and supplies $ 56,538 $ 16,781 Growing crops 1,316 123,071 Finished goods 18,514 63 76,368 139,915 2. Property, plant and equipment and Construction in progress Our property, plant and equipment are stated at cost less accumulated depreciation and impairment. Depreciation on property, plant and equipment is calculated on the straight-line method after taking into account their respective estimated residual values over the estimated useful lives of the assets as follows: Building 20 years Plant equipment 5-10 years Office equipment 3-5 years Vehicles 4 years 23-------------------------------------------------------------------------------- Back to Table of Contents As consistent with the policies, maintenance and repair costs are expensed as incurred, whereas significant renewals and betterments are capitalized. Construction in progress represents capital assets under construction or being installed and is stated at cost. Cost comprises original cost of plant and equipment, installation, construction and other direct costs prior to the date of reaching the expected usable condition. Construction in progress is transferred to the property, plant and equipment and depreciation commences when the asset has been substantially completed and reaches the expected usable condition. Property, Plant and Equipment consists of the following: March 31, December 31, 2013 2012 USD USD Building a $ 11,163,773 11,134,288 Plant equipment b 526,214 524,805 Vehicles c 33,460 33,372 Office equipment d 73,777 73,580 Less: Accumulated depreciation e 837,914 675,316 Property, plant and equipment, net 10,959,310 11,090,729 Construction in progress f 1,086,475 1,083,604 Total property, plant & equipment 12,045,785 12,174,333 a. The building mainly represented the greenhouses, manufacturing workshops, warehouse, office building and supporting facilities, most of which were transferred from the construction in progress (CIP). b. The plant equipment represented the production equipment purchased from third parties. c. The vehicles were the truck for transporting raw materials or finish goods. d. The office equipment represented for office computers, printers, desks and other office appliances. e. For the three months ended March 31, 2013 and 2012, the Company recorded depreciation expense of $162,598 and $192,221, respectively. f. The detailed information of the construction projects in progress which was not yet transfer to fixed assets is as below: March 31, December31, 2013 2012 USD USD Factory workshop 730,591 728,661 Greenhouse and Planting structures 355,884 354,943 Total amount of Construction In Progress 1,086,475 1,083,604 24-------------------------------------------------------------------------------- Back to Table of Contents 3. Land use right The Company states land use rights at cost less accumulated amortization. The land use right was used to build up greenhouse and planting structures, manufacturing workshop and other buildings. As of March 31, 2013 and December 31, 2012, the net values of land use rights are $5,723,972 and $5,768,262, respectively. The land use rights are amortized using the straight line method during the contract period. For the three months ended March 31, 2013 and 2012, amortization expense amounted to $55,870 and $55,699, respectively. 4. Long-term prepaid lease Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the consolidated statements of operations on a straight-line basis over the terms of the underlying lease. The Company records lease payments at cost less accumulated amortization and amount that to be amortized within one year. The amount to be amortized within one year is recorded as current portion of prepaid leases. The Company entered into long term agreements with local government to rent land. The rental payments of $1,030,900 for the entire contract period are prepaid in 2011. The rental payments are recorded as operating lease expenses using the straight line method during the contract period of 20 years. Lease expense of $13,643 and $13,588 were recorded for the three months ended March 31, 2013 and 2012. Liabilities: 5. Short-term loan The Company became indebted to Bank of China in December 2011 for $476,122, payable in December 2012, interest at 8.46% per annum. The loan was repaid in full as of December 31, 2012. For the three months ended March 31, 2013 and 2012, the Company recorded interest expense of nil and $10,001, respectively. 6. Other payables The balance at the end of this period mainly consisted of the $1,515,417 Factory seed cultivation workshop construction payment and others. The Company made payments to the seller of the land use right and to contractor for factory construction during the first quarter of 2013, which resulted in the decrease of other payables balance. 7. Due to related parties The total amount of due to related parties consisted of the borrowing of the shareholders. The balance was $5,292,608 and $5,301,552 as of March 31, 2013 and December 31, 2012, respectively. The stockholders lent money without interest to the Company, the interest was valued at $105,942 and $89,311 for the three months ended March 31, 2013 and 2012, respectively. The total of interest was reflected in the statement of operations as interest expenses in the three months ended March 31, 2013 and 2012 with a corresponding amount recorded as a contribution of paid-in capital. 25-------------------------------------------------------------------------------- Back to Table of Contents 8. Long term payable The Company had a long term payable for the acquisition of land use right. Based on the contract agreement, the future minimum rental payments required for the coming years are as follows: Years ending December 31: 2019 16,544 2020 153,210 2021 153,210 2022 153,210 2023 153,210 Remaining payments 919,260 Total future minimum payments $ 1,548,644 Shareholders' equity 9. Additional paid-in capital Additional paid-in capital increased from the imputed interest was necessary on outstanding balance due to related parties and the cancelled shares reclassified to additional paid-in capital. 10. Retain earnings The retain earnings increased from net profit in the first quarter of 2013. Results of Operations for the three months ended March 31, 2013 and 2012 The following table presents an overview of our results of operation for the three months ended March 31, 2013 and 2012. Increase 2013 2012 (decrease) Total revenue 3,348,006 1,705,928 1,642,078 Total cost of revenue (1,535,050) (1,401,862) (133,188) Gross profit 1,812,956 304,066 1,508,890 General and administrative (59,842) (177,519) 117,677 Depreciation and amortization (174,038) (145,342) (28,696) Income from operations 1,579,076 (18,795) 1,597,871 Other income - 353,475 373,843 Interest expense (106,043) (99,312) (239,480) Income before income taxes 1,473,033 235,368 1,237,665 Income taxes - - - Net income 1,473,033 235,368 1,237,665 26-------------------------------------------------------------------------------- Back to Table of Contents 1. Revenue The following table sets forth the breakdown of our revenue for the three months ended March 31, 2013 and 2012, respectively: 2013 2012 USD % USD % Fresh mushrooms sales 2,080,603 62.14% 904,349 53.01%Mushroom crops and seeds sales 347,469 10.38% 801,579 46.99% Dried mushroom 919,934 27.48% - - Total revenue 3,348,006 100% 1,705,928 100% Sales revenue is recognized at the date of shipment from the Company's facilities to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, ownership has passed, no other significant obligations of the Company exist and collectability is reasonably assured. We derived our revenues predominantly from sales of our fresh mushrooms, mushroom crops and seeds and dried mushroom. For the three months ended March 31, 2013 and 2012, revenues from sales of our fresh mushrooms sales were $2,080,603 and $904,349 respectively representing an increase of $1,176,254. Revenues from sales of our mushroom crops and seeds were $347,469 and $801,579 for the three months ended March 31, 2013 and 2012 respectively, which indicated $454,110 decrease. Revenues from sales of our dried mushroom were 919,934 for the three months ended March 31, 2013, which also resulted in a sales increase. The increase of the fresh mushroom and dried mushroom was primarily due to the increase of the sales volume and price. To be specific, the increase in our revenue was attributable to the following reasons: a. As most of the greenhouse and planting structures under construction are completed in second half of 2012, productions in the first quarter of 2013 was higher than that in the same period of 2012. b. The company got the Organic products identification by the authorized government institution in the fourth quarter of 2012, the fresh mushroom price increased significantly, which resulted in a sales increase. c. As the manufacture workshop completed in 2012, the Company began to produce the dried mushroom in the fourth quarter of 2012. Dried mushroom production was further expanded during the first quarter of 2013. We expect to see a trend of growing sales for our mushroom series products, including fresh mushroom dried mushroom, resulting from the growing of the market, improving of general agriculture industry, improving of the planting skills and the quality of our products, and the continuing encouragement from local government. The decrease of the mushroom crops and seeds sales was primarily due to the business model changed. The business model was cooperation with local farmers and farming organizations. The company sold mushroom crops and seeds to local farmers and farming organization and purchased the fresh mushroom from them and sold out. As most of the greenhouse and planting structures under construction were completed, the company increased production of the fresh mushroom by themselves, the mushroom crops and seeds were used to product fresh mushroom instead of selling out, which result in decrease of the mushroom crops and seeds sales. 27-------------------------------------------------------------------------------- Back to Table of Contents 2. Cost of revenue The following table presents a breakdown of our cost of revenue of fresh mushrooms , mushroom crops and seeds and dried mushrooms for the three months ended March 31, 2013 and 2012. 2013 2012 USD USD Cost of fresh mushrooms sales 1,215,048 762,545 Cost of mushroom crops and seeds sales 150,066 639,317 Cost of dried mushrooms sales 169,936 - Total 1,535,050 1,401,862 Cost of fresh mushrooms sales: Our cost of fresh mushrooms sales consists primarily of costs associated with purchased materials, growing cost and purchased fresh mushroom from farmers or farming organizations. Cost of fresh mushrooms sales are allocated to each kind of mushroom using the specific identification method. Costs are allocated to specific units within a product based on the ratio of the sales quantities of the specific units to the total sellable quantities of the product. Cost of mushroom crops and seeds sales: Our cost of mushroom crops and seeds sales mainly represented the costs of purchased and cultivate seeds or crops. We used our workshop to cultivate well mushroom seeds or crops and sold them to local farmers or farming organizations. We also purchased some good quality mushroom seeds from third party and sold them to our customers as well after our selection. The costs are as well allocated to specific units within a product based on the ratio of the sales quantities of units to the total sellable quantities of the product. Cost of dried mushrooms sales: Our cost of dried mushrooms sales consists primarily of costs associated with fresh mushroom and manufacture expense. Cost of dried mushrooms sales are allocated to each kind of mushroom using the specific identification method. Costs are allocated to specific units within a product based on the ratio of the sales quantities of the specific units to the total sellable quantities of the product. 3. Gross profit The following table presents the gross profit of our businesses for the three months ended March 31, 2013 and 2012: 2013 2012 Gross Gross Gross Gross Production Category Profit Margin Profit Margin USD % USD % Fresh mushrooms sales 865,555 41.60 % 141,804 15.68 % Mushroom crops and seeds sales 197,403 56.81 % 162,262 20.24 % Dried Mushroom sales 758,033 81.53 % - - Total gross profit 1,812,956 304,066 28-------------------------------------------------------------------------------- Back to Table of Contents Gross profit from our mushroom growing business increased by $ 1,508,890 for the three months ended March 31, 2013 compared to the same period of 2012. The increase was a primary result from cumulative effect of our business development and sales volume increase. The gross margin of our fresh mushrooms and mushroom crops and seeds increased because that we began to produce the fresh mushroom and mushroom seeds instead of purchasing from third parties as the most of the green house and the mushroom seed cultivation workshop completed in the fourth quarter of 2012, which reduced our cost a lot and improved our gross margin. In addition, the dried mushroom, the purpose of which is usually used as gift, have large added value and high gross margin. 4. Depreciation and amortization For the three months ended March 31, 2013, our Depreciation and amortization were $174,038, representing an increase of $28,696, as compared to that for the period of 2012. The increase was primarily a result of increased in fixed assets during second half of the year 2012. 5. Other income Other income is used to record the company's non operating income, such as government grant. For the three months ended March 31, 2012, the other income included the USD $353,475 from the government grant for encourage developing local agriculture. The Company did not receive any government grant for the three months ended March 31, 2013. 6. Income taxes Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC where the Company operates after taking into effect the benefits from any special tax credits or "tax holidays" allowed in the county of operations. The Company does not accrue United States income tax since it has no operating income in the United States. The Operating subsidiary is organized and located in the PRC and do not conduct any business in the United States. In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the Operating subsidiary is exempted from corporate income tax from 2010 to 2012 and sequentially exempted from enterprise income tax from 2013 to 2015. Accordingly, the Company statutory rate was 0% and 0% for the three months ended March 31, 2013 and 2012, respectively. 29-------------------------------------------------------------------------------- Back to Table of Contents Cash flow for the three months ended March 31, 2013 and 2012 The following table presents selected cash flow data from our cash flow statements for the three months ended March 31, 2013 and 2012, respectively. 2013 2012 (Restated) Net cash provided by operating activities $ 468,537 $ 341,652 Net cash used in investing activities - (1,266,067) Net cash provided by (used in) financing activities (8,944) 2,106,512 Effect of exchange rate changes on cash and cash equivalents 37,391 (22,127) Net increase(decrease) in cash and cash equivalents 496,984 1,159,970 Cash and cash equivalents, beginning of period 21,245 31,863 Cash and cash equivalents, end of period $ 518,229 $ 1,191,833 Operating Activities Net cash provided by operating activities for the three months ended March 31, 2013 was $468,537 which was primarily due to (i) an increase of the net income $1,473,033 and (ii) a total increase of $218,792 of the depreciation and amortization of fixed assets, land use right and (iii)an increase of the imputed interest $105,942 and (iv) a total decrease of $1,329,230 of the changes in assets and liabilities. Net cash provided by operating activities for the three months ended March 31, 2012 was $341,652, which was primarily due to (i) a increase of the net income $235,368 and (ii) a total increase of $248,064 of the depreciation and amortization of fixed assets, land use right and (iii)an increase of the imputed interest $89,310 a (iv) a total decrease of $231,090 of the changes in assets and liabilities. Investing Activities No investing activity took place for the three months ended March 31, 2013. Net cash used in investing activities was $1,266,067 for the three months ended March 31, 2012, which was primarily attributable to (i) an investment of $18,907 for the fixed assets and (ii) an investment of $39,718 for the construction in progress to build greenhouse and (iii)an investment of $1,207,442 for the acquisition of land use right. 30-------------------------------------------------------------------------------- Back to Table of Contents Financing activities Net cash used in financing activities was $8,944 for the three months ended March 31, 2013, which was mainly attributable to $8,944 repaid to a related party. Net cash provided by financing activities was $2,106,512 for the three months ended March 31, 2012, which was mainly attributable to (i) a total $2,107,838 of the current account from a related party and (ii) a total payment of $1,326 to short-term bank loan. Significant Accounting Policies 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been included. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market value. Cost is determined using moving weighted average method. Inventories consist of raw materials, finished goods and growing crops. Cost of finished goods comprises direct material, direct production cost based on normal operating capacity. REVENUE RECOGNITION Sales revenue is recognized at the date of shipment from the Company's facilities to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, ownership has passed, no other significant obligations of the Company exist and collectability is reasonably assured. The Company's revenue consists of the invoiced value of goods, net of value-added tax ("VAT"). 31-------------------------------------------------------------------------------- Back to Table of Contents FOREIGN CURRENCY TRANSLATION The functional currency of the Company is the RMB and the RMB is not freely convertible into foreign currencies. The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods. For financial reporting purposes, the financial statements of the Company, which are prepared using the functional currency, have been translated into United States dollars. Assets and liabilities translated at exchange rates at the balance sheet date, revenue and expenses are translated at the average exchange rates for the period, and members' equity is translated at historical exchange rates. Translation adjustments are included in accumulated other comprehensive income, a component of members' equity. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments. TAXATION Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC where the Company operates after taking into effect the benefits from any special tax credits or "tax holidays" allowed in the county of operations. The Company does not accrue United States income tax since it has no operating income in the United States. The Company is organized and located in the PRC and do not conduct any business in the United States. Enterprise income tax In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the operating subsidiary is exempted from enterprise income tax from 2010 to 2012 and sequentially exempted from enterprise income tax from 2013 to 2015. Accordingly, the Company statutory rate was 0% and 0% for the three months ended March 31, 2013 and 2012, respectively. Value added tax The Provisional Regulations of The People's Republic of China Concerning Value Added Tax promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC. In accordance with the relevant tax laws in the PRC, as an agriculture growing enterprise, the Company is exempted from VAT from 2010 to 2012 and sequentially exempted from VAT from 2013 to 2015. 32-------------------------------------------------------------------------------- Back to Table of Contents PROPERTY, PLANT and EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Depreciation on property, plant and equipment is calculated on the straight-line method after taking into account their respective estimated residual values over the estimated useful lives of the assets as follows: Building 20 years Plant equipment 5-10 years Office equipment 3-5 years Vehicles 4 years Maintenance and repair costs are expensed as incurred, whereas significant renewals and betterments are capitalized. Construction in progress represents capital assets under construction or being installed and is stated at cost. Cost comprises original cost of plant and equipment, installation, construction and other direct costs prior to the date of reaching the expected usable condition. Construction in progress is transferred to the property, plant and equipment and depreciation commences when the asset has been substantially completed and reaches the expected usable condition. LAND USE RIGHTS The Company states land use rights at cost less accumulated amortization. The land use rights are amortized on straight line method during the contract period. LONG TERM PREPAID LEASE Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the consolidated statements of operations on a straight-line basis over the terms of the underlying lease. 33-------------------------------------------------------------------------------- Back to Table of Contents |