UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2011
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-53146
 
MAN SHING AGRICULTURAL HOLDINGS, INC.
 
(Exact name of the registrant as specified in its charter)
 
Nevada
 
98-0660577
(State or other jurisdiction of incorporation or
 
(I.R.S. Employer Identification No.)
organization)
   
 
Linghe Town, Anqiu City
Weifang, Shandong Province
People’s Republic of China 262127
 
(Address of principal executive offices)
 
(86) 536-4644888
 
(Registrant’s telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨
 
Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “ accelerated filer” and “ small 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
 
Number of shares of common stock outstanding as of November 1, 2011: 48,026,958
 
 
 
 
Contents
   
Page(s)
       
PART I: FINANCIAL INFORMATION
   
       
Item 1
Financial Statements
  2
       
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  15
       
Item 3
Quantitative and Qualitative Disclosure about Market Risk
  22
       
Item 4
Controls and Procedures
  22
       
PART II: OTHER INFORMATION
   
       
Item 1
Legal Proceedings
  23
       
Item 1A
Risk Factors
  23
       
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
  23
       
Item 3
Defaults Upon Senior Securities
  23
       
Item 4
Removed and Reserved
  23
       
Item 5
Other Information
  23
       
Item 6
Exhibits
  23
       
SIGNATURES
  23
 
 
i
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
 
The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), contains “forward-looking statements” within the meaning of Section 21E of the Exchange Act that involve risks and uncertainties. The actual results of Man Shing Agricultural Holdings, Inc. (including our subsidiaries and predecessors unless the context indicates otherwise, “we,” “us,” “our,” “MSAH,” or the “Company”) could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “the Company believes,” “management believes” and similar language, including those set forth in the discussions under “Notes to Financial Statements” and “Management’s Discussion and Analysis or Plan of Operation” as well as those discussed elsewhere in this Form 10-Q. These forward-looking statements include statements of management’s plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to raise additional capital to finance our activities; the effectiveness, profitability, and the marketability of our products; the future trading of our common stock; our ability to operate as a public company; our ability to protect our proprietary information; general economic and business conditions; the volatility of our operating results and financial condition; our ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time to time in its filings with the SEC, or otherwise. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Readers are cautioned not to place undue reliance on these forward-looking statements. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the “safe harbor” created by the Private Securities Litigation Reform Act of 1995.
 
 
 
 
 
PART I
 
ITEM 1  FINANCIAL STATEMENTS
 
Man Shing Agricultural Holdings, Inc. and Subsidiaries
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
             
 
 
September 30, 2011
   
June 30, 2011
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 11,368,919     $ 7,081,297  
Accounts receivable, trade
    6,876,540       6,330,625  
Inventories
    2,439,803       5,443,117  
Deferred inventory costs
    9,660,017       9,064,571  
Prepayments
    427,104       371,881  
Other receivables
    673       787  
Tax recoverable
    -       15,144  
TOTAL CURRENT ASSETS
    30,773,056       28,307,422  
                 
FIXED ASSETS
               
Property, plant, and equipment
    1,716,628       1,619,838  
Accumulated depreciation
    (287,187 )     (257,250 )
Construction in progress
    215,640       211,752  
NET FIXED ASSETS
    1,645,081       1,574,340  
                 
TOTAL ASSETS
  $ 32,418,137     $ 29,881,762  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Short-term borrowing
  $ 1,951,250     $ 1,916,064  
Accounts payable
    824,895       691,628  
Other payables and accrued liabilities
    1,489,055       1,685,016  
Receipts in advance
    372,532       402,557  
Tax payable
    104,500       -  
TOTAL CURRENT LIABILITIES
    4,742,232       4,695,265  
                 
LONG-TERM LIABILITIES
               
Convertible note
    1,500,000       1,500,000  
                 
TOTAL LIABILITIES
  $ 6,242,232     $ 6,195,265  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $.001 par, 25,000,000 shares authorized, 176,750 shares issued and outstanding at September 30, 2011 and June 30, 2011, respectively
  $   177     $  177   
Common stock, $.001 par, 175,000,000 shares authorized, 48,026,958 shares issued and outstanding at September 30, 2011 and June 30, 2011, respectively
     48,027        48,027  
Additional paid-in capital
    4,225,545       4,210,545  
Accumulated other comprehensive income
    1,596,797       1,180,599  
Statutory reserves
    5,823,139       5,823,139  
Retained earnings
    14,482,220       12,424,010  
TOTAL STOCKHOLDERS' EQUITY
  $ 26,175,905     $ 23,686,497  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 32,418,137     $ 29,881,762  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
2
 

Man Shing Agricultural Holdings, Inc. and Subsidiaries
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
 
For the Three Months Ended September 30, 2011 and 2010
             
   
For the Three Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
Revenues
           
Sales
  $ 7,181,048     $ 7,333,954  
Cost of sales
    4,274,273       4,163,709  
Gross profit
    2,906,775       3,170,245  
                 
Operating expenses
               
Selling and marketing expenses
    645,373       782,208  
General and administrative expenses
    144,718       150,202  
Total operating expenses
    790,091       932,410  
                 
Operating income     2,116,684       2,237,835  
                 
Other income (expenses), net
               
Financial income (expenses), net
    (77,893 )     (28,867 )
Non-operating income (expense), net
    19,419       (236 ) 
Total other income (expenses), net
    (58,474 )     (29,103 )
                 
Income from operations before income taxes
    2,058,210       2,208,732  
                 
Income taxes
    -       -  
                 
Net Income
    2,058,210       2,208,732  
                 
Other comprehensive income
               
Foreign currency translation gain
    416,198       247,962  
                 
Total comprehensive income
  $ 2,474,408     $ 2,456,694  
                 
Weighted average number of shares outstanding
               
Basic
    48,026,958       36,345,522  
                 
Diluted
    49,794,458       72,389,015  
                 
Earnings per share
               
Basic
  $ 0.04     $ 0.06  
                 
Diluted
  $ 0.04     $ 0.03  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
3
 

Man Shing Agricultural Holdings, Inc. and Subsidiaries
 
Unaudited Condensed Consolidated Statements of Cash Flows
 
For the Three Months Ended September 30, 2011 and 2010
             
   
For the Three Months Ended
 
   
Septembet 30, 2011
   
Septembet 30, 2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 2,058,210     $ 2,208,732  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation
    24,965       19,381  
Reversal of provision for doubtful accounts
    (12,227 )     -  
Stock-based compensation to service providers
    15,000       -  
Increase (decrease) in cash from changes in:
               
Accounts receivable, trade
    (491,588 )      (444,024 )
Prepayments
    (51,026 )     (3,135,878 )
Deferred inventory costs
    (424,776 )     -  
Inventories
    3,072,807       2,296,487  
Other receivables
    -       -  
Accounts payable
    121,094       (74,553 )
Tax payable
    118,745       76,207  
Other payables and accrued liabilities
    (214,629 )     (1,212 )
Receipts in advance
    (37,046 )     19,215  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    4,179,529       964,355  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant, and equipment
    (66,386 )     (20,734 )
Construction in progress
    -       (155,067 )
NET CASH USED IN INVESTING ACTIVITIES
    (66,386 )     (175,801 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issue of common stock
    -       2,600,000  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    -       2,600,000  
                 
Effect of exchange rate changes on cash and cash equivalents
    174,479       40,125  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    4,287,622       3,428,679  
                 
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    7,081,297       378,930  
End of period
  $ 11,368,919     $ 3,807,609  
                 
Supplemental disclosure of cash flow information
               
                 
Cash paid for:
               
Interest
  $ 63,923     $ 6,027  
Income taxes
  $ -     $ -  
Non-cash investing and financing activities:                
Stocke-based compensation to service providers
  $ 15,000     $ -  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
4
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(STATED IN US DOLLARS)
 
1.
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles in the United States of America for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary to make the financial statements not misleading. Interim results are not necessarily indicative of results for a full year.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended June 30, 2011.

2.
ORGANIZATION BACKGROUND

Man Shing Agricultural Holdings, Inc. (“Man Shing”), formerly known as Montgomery Real Estate Services, Inc. (“Montgomery”), was incorporated on February 8, 2000 under the laws of the State of Nevada.  From the beginning of 2003 until December 31, 2007, Montgomery had no operations and no assets and was considered a dormant company.  Subsequent to December 31, 2007, Montgomery began operating in the real estate industry and engaged in the business of buying, selling, renting, and improving real estate.

As of August 20, 2009, Man Shing entered into a Plan of Exchange (the “Agreement”) between and among Man Shing, Hero Capital Profits Limited (“Hero”), a company organized and existing under the laws of the British Virgin Islands, Weifang Xinsheng Food Co., Ltd. (“Xinsheng”), a company organized and existing under the laws of the People’s Republic of China, and the shareholders of Xinsheng. Pursuant to the terms of the Agreement, Man Shing acquired one hundred percent (100%) of the issued and outstanding share capital of Hero from the shareholders of Hero in exchange for a new issuance of 32,800,000 shares of common stock of Man Shing and the simultaneous transfer of 3,535,000 shares of Man Shing’s preferred stock to the shareholders of Hero, held in the name of the Northeast Nominee Trust, of which Duane Bennett, the former president of Man Shing, is trustee, which gave the shareholders of Hero an interest in Man Shing representing 99.38% of the issued and outstanding shares of common stock and 98.19% of the issued and outstanding shares of preferred stock (the “Transaction”). Upon completion of the exchange, Hero and Xinsheng became Man Shing’s wholly owned subsidiaries. The Transaction was consummated on August 20, 2009.

The Transaction has been accounted for as reverse acquisition and recapitalization of Man Shing and Hero / Xinsheng whereby Hero / Xinsheng is deemed to be the accounting acquirer (legal acquiree) and Man Shing to be the accounting acquiree (legal acquirer) under the Transaction. The consolidated financial statements are in substance those of Xinsheng, with the assets and liabilities, and revenues and expenses, of Man Shing and Hero being included effective from the consummation date of the Transaction.

On September 2, 2009, Montgomery changed its name to Man Shing Agricultural Holdings, Inc. to more accurately reflect the business after a stock exchange transaction with Hero and Xinsheng.
 
 
5
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)
 
Man Shing, Hero and Xinsheng are hereinafter referred to in these notes as “the Company”.

3.
DESCRIPTION OF BUSINESS

The Company is engaged in the production and processing of fresh and frozen vegetables, mainly ginger but also including other vegetables such as onion and garlic. The Company strives to provide high quality products to its customers. As of September 30, 2011, the Company leased 110,000 square meters of factory space from an individual and 7.7 million square meters of farmland from PRC Government in Anqiu, Shandong Province, which is one of the largest ginger farmlands in the region.

The Company has been certified by the British Retail Consortium Global Food Standard for Food Safety and has met the requirements of Operational HACCP Specification.

The Company’s products

Fresh Vegetables
Ginger                           

Frozen Vegetables
 
Peeled Ginger
Diced Garlic
Diced Ginger
Garlic Puree
Ginger Puree Cubes
Garlic Puree Cubes
Ginger Puree
Peeled Garlic
Strawberry
Diced Onion

4.
RECENTLY ISSUED ACCOUNTING STANDARDS
 
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The ASU amends the fair value measurement and disclosure guidance in ASC 820, “Fair Value Measurement,” to converge US GAAP and International Financial Reporting Standards requirements for measuring amounts at fair value as well as disclosures about these measurements. Many of the amendments clarify existing concepts and are generally not expected to result in significant changes to how many companies currently apply the fair value principles. In certain instances, however, the FASB changed a principle to achieve convergence, and while limited, these amendments have the potential to significantly change practice for some companies. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011 and, for the Company, the amendments are effective beginning in July 1, 2013.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (“ASU 2011-05”). The new US GAAP guidance gives companies two choices of how to present items of net income, items of other comprehensive income (“OCI”) and total comprehensive income: companies can create one continuous statement of comprehensive income or two separate consecutive statements. Companies will no longer be allowed to present OCI in the statement of stockholders’ equity. Earnings per share would continue to be based on net income. Although existing guidance related to items that must be presented in OCI has not changed, companies will be required to display reclassification adjustments for each component of OCI in both net income and OCI. Also, companies will need to present the components of OCI in their interim and annual financial statements. The amendments in the ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and, for the Company, the amendments are effective beginning July 1, 2013.
 
 
6
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)
 
The Company believes that adoption of ASU 2011-04 and ASU 2011-05 will not impact the results of operations, financial position or cash flows of the Company.

5.
ACCOUNTS RECEIVABLE, NET

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of trade receivables. The Company considers the historical level of credit losses and applies percentage to aged receivables categories. During the reporting periods, management establishes a general provision allowance equivalent to 0.5% of the gross amount of trade receivables due in less than 1 year, 5% of the gross amount of trade receivables due from 1 to 2 years, and 10% of the gross amount of trade receivables due from 2 to 3 years. Management completely writes off the gross amount of trade receivables due over 3 years.

Based upon the aforementioned criteria, management has determined that the allowances for doubtful accounts of $19,840 and $31,608 are appropriate as of September 30, 2011 and June 30, 2011, respectively.

   
September 30, 2011
   
June 30, 2011
 
             
Accounts receivable, gross
  $ 6,896,380     $ 6,362,233  
                 
Less: allowance for doubtful accounts
    (19,840 )     (31,608 )
                 
Accounts receivable, net
  $ 6,876,540     $ 6,330,625  

6.
INVENTORIES

   
September 30, 2011
   
June 30, 2011
 
             
Raw materials
  $ 1,833,092     $ 5,038,706  
Finished goods
    606,711       404,411  
 
  $ 2,439,803     $ 5,443,117  

For the three months ended September 30, 2011 and the year ended June 30, 2011, no provision for obsolete inventories was recorded by the Company.

7.
DEFERRED INVENTORY COSTS

The deferred inventory costs of $9,660,017 as of September 30, 2011 represented farmland rental of $1,408,700, cost of ginger seeds of $2,371,413, $4,476,641 of fertilizers and supplies, and other items of $1,403,263. The deferred inventory costs of $9,064,571 as of June 30, 2011 represented farmland rental of $1,406,615, cost of ginger seeds of $2,317,621, $3,955,192 of fertilizer and supplies, and other items of $1,385,143. These items were used in the planting of ginger which will be transferred to inventories at the time of harvests.
   
 
7
 
  
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)
 
8.
SHORT-TERM BORROWING (LINE OF CREDIT)

On March 17, 2011, Xinsheng entered a loan agreement with Bank of Weifang in the PRC for a facility of approximately $377,661 (RMB2,400,000). The loan has an annual interest rate of 9.696% and matures on March 16, 2012 (twelve months following the date the loan was entered into). The loan is guaranteed by an unrelated third party. As of September 30, 2011, the outstanding amount of this loan was $377,661 (RMB2,400,000).
 
On May 9, 2011, Xinsheng entered a loan agreement with Agricultural Development Bank of China in the PRC for a facility of approximately $1,573,589 (RMB10,000,000). The loan has an annual interest rate of 6.31 % and matures on May 8, 2012 (twelve months following the date the loan was entered into). The loan is guaranteed by an unrelated third party and a personal guaranty of Mr. Shili Liu, the Company’s CEO, President and Chairman. As of September 30, 2011, the outstanding amount of this loan was $1,573,589 (RMB10,000,000).

9.
NOTE PAYABLE AND CONVERTIBLE REDEEMABLE DEBENTURES

On September 9, 2009, the Company issued a secured note in the amount of $450,000 (the “Secured Note”) to a non-affiliate, which was secured by 2,250,000 shares of common stock of the Company. The Secured Note was interest-free and due on June 8, 2011. The Company fully repaid the Secured Note on June 8, 2011.
 
On January 4, 2010, the Company issued a secured convertible redeemable debenture (“Debenture I”) in the amount of $1,000,000, along with 800,000 shares of the Company’s common stock, to a non-affiliate investor, which was secured by 6,286,250 shares of the Company’s common stock and 839,562 shares of the Company’s preferred stock (equivalent to 14,681,870 shares of common stock), representing a pro rata portion of a majority position in the Company’s common stock owned by Mr. Shili Liu The 839,562 shares of the Company’s pledged preferred stock were released on November 30, 2010 and cancelled on December 16, 2010, respectively.
 
Debenture I bears an annual interest rate of 8% payable quarterly in cash, and a default interest rate of 16% per annum. All or any part of the principal amount of Debenture I, plus accrued interest, may be converted into shares of the Company’s common stock at a price per share equal to two dollars ($2.00), at the option of the holder. Debenture I matures three years after the date of issuance. The non-affiliate investor has the right to acquire an additional debenture of $100,000 and 80,000 shares within three years from the date of issuance, for an aggregate purchase price of up to $1,000,000.

On January 14, 2010, the Company issued a secured convertible redeemable debenture (“Debenture II”) in the amount of $500,000, along with 400,000 shares of the Company’s common stock, to a non-affiliate investor, which was secured by 3,143,125 shares of the Company’s common stock and 419,781 shares of the Company’s preferred stock (equivalent to 7,340,935 shares of common stock), representing a pro rata portion of a majority position in the Company’s common stock owned by Mr. Shili Liu. The 419,781 shares of the Company’s pledged preferred stock were released on November 30, 2010 and cancelled on December 16, 2010 , respectively.

Debenture II bears an annual interest rate of 8% payable quarterly in cash, and a default interest rate of 16% per annum. All or any part of the principal amount of Debenture II, plus accrued interest, may be converted into shares of the Company’s common stock at a price per share equal to two dollars ($2.00), at the option of the holder. Debenture II matures three years after the date of issuance. The non-affiliate investor has the right to acquire an additional debenture of $100,000 and 80,000 shares within three years from the date of issuance, for an aggregate purchase price of up to $1,000,000.
  
 
8
 
  
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)

The Company recognized the above debentures and accrued interest at carrying amounts and the shares of common stock were recognized as a prepaid expense using the bid price of the Company’s common stock at the issuance date, amortized to stock-based compensation expenses over the maturity period.
  
Pursuant to Registration Rights Agreements, (the “RRAs”) the Company had to file registration statements with the Securities and Exchange Commission (“SEC”) within thirty days of the issuance of Debentures I and II, respectively, and have those registration statements declared effective within 120 days of issuance. If these registrations and effective declarations did not occur, the Company was to pay damages to the holder of the debenture. The RRAs were rescinded pursuant to an agreement between the Company and the investors on September 13, 2010.
 
At any time prior to the maturity date after twelve months from the date of issue of the debentures, the Company will have the right to redeem all the debentures then outstanding, by payment in full, and not in part, of the outstanding principal amount due plus a premium equal to 50% of the principal amount being paid, plus all accrued and unpaid interest due through the date of payment without premium.

10.
STOCKHOLDERS’ EQUITY

On August 20, 2009, Man Shing executed the Agreement among the Company, Hero, the shareholders of Hero and Xinsheng, pursuant to which Man Shing issued 32,800,000 new shares of common stock to shareholders of Hero and simultaneously transferred 3,535,000 shares of Man Shing’s preferred stock to the shareholders of Hero, held in the name of the Northeast Nominee Trust, in exchange for 100% of the capital stock of Hero and Xinsheng. On September 2, 2009, Man Shing effectuated a 1 for 100 reverse split of its common stock. All common stock and per share data for all periods presented in these financial statements reflect the reverse stock split.
 
On September 17, 2009, 100,000 shares of Preferred Stock were converted into 1,000,000 shares of common stock, based on a rate of 10 shares for one, per the request of the preferred stockholder.
 
Immediately following completion of the share transaction and the preferred stock conversion, the Company had a total of 34,001,963 shares of its common stock issued and outstanding.
 
Pursuant to a binding term sheet, dated November 26, 2009, the Company issued 1,500,000 shares of common stock on December 8, 2009 to an investment bank. The fair value of the 1,500,000 shares was determined using the bid price of the Company’s common stock on the measurement date, at a price of $0.25 per share. Accordingly, the Company calculated the stock-based compensation of $375,000 at its fair value.

Pursuant to the two Securities Purchase Agreements, dated January 4, 2010 and January 14, 2010, respectively, the Company issued a total of 1,200,000 shares of common stock to non-affiliated investors.

During the third quarter of 2010, the Company issued 549,995 shares of the Company’s common stock to a consultant for services rendered. The fair value of the 549,995 shares was determined using the bid price of the Company’s common stock on the measurement date, at a price of $0.25 per share. Accordingly, the Company calculated the stock-based compensation of $137,499 at its fair value.
 
 
9
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)

On May 27, 2010, the Company issued 125,000 shares of the Company’s common stock to a consultant for services rendered. The fair value of the 125,000 shares was determined using the bid price of the Company’s common stock on the measurement date, at a price of $0.25 per share. Accordingly, the Company calculated the stock-based compensation of $31,250 at its fair value.
 
On May 5, 2010, 65,000 shares of preferred stock were converted into 650,000 shares of common stock, based on a rate of 10 common shares for each preferred stock, at the request of the preferred stockholder pursuant to the terms of the preferred stock.
 
On September 13, 2010, the Company entered into securities purchase agreements with non-affiliate investors. Pursuant to the Agreements, the investors purchased an aggregate of 10,000,000 shares of common stock of the Company for consideration of $0.40 per share of Common Stock (an aggregate of $4,000,000). On January 18, 2011, the transactions contemplated by those certain securities purchase agreements dated as of September 13, 2010, as amended on November 14, 2010, were consummated.

Pursuant to certain cancellation agreement and amendments to certain securities purchase agreements dated November 14, 2010, Mr. Shili Liu agreed to cancel 3,358,250 preferred shares of the Company owned by him. On December 16, 2010, the 3,358,250 shares of preferred stock held by Mr. Shili Liu were cancelled.

11.
INCOME TAXES

The Company’s wholly owned subsidiary is subject to the PRC Enterprise Income Tax (“EIT”) at the statutory rate of 25% on the profits as reported in the Company’s PRC statutory financial statements as adjusted by profit and loss items that are not taxable or deductible.  During the quarter ended September 30, 2011 and year ended June 30, 2011 , the Company is exempted from the EIT as it engages in agricultural business as approved by PRC tax bureau. The Company must renew the exemption annually. The Company expects its exemption to continue since it operates in the rural agricultural business.
 
PRC’s legislative body, the National People’s Congress, adopted the unified EIT Law on March 16, 2007. This new tax law replaced the income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. However, there will be a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transit into the new tax rate over a five year period beginning on the effective date of the EIT Law. Enterprises that are currently entitled to exemptions for a fixed term may continue to enjoy such treatment until the exemption term expires. Preferential tax treatments may continue to be granted to industries and projects that qualify for such preferential treatments under the new law.

No income taxes have been included in the statements of operations and comprehensive income for the reporting periods for EIT for the Company’s continuing operations in the PRC.
 
The Company conducts all its operating business through its subsidiary in China. The subsidiary is governed by the income tax laws of the PRC and does not have any material deferred tax assets or deferred tax liabilities under the income tax laws of the PRC because there are no material temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities.

The Company by itself does not have any business operating activities in the United States and is therefore not subject to United States income tax.
 
 
10
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)

The following table reconciles the statutory rates to the Company’s effective tax rates for the quarter ended September 30, 2011 and June 30, 2011:
 
   
Quarter ended
   
Year ended
 
   
Sept 30, 2011
   
June 30, 2011
 
PRC statutory rates
    25 %     25 %
Effect of tax rates in different jurisdiction
    (1.08 )%     (0.46 )%
Effect of non-deductible expenses
    61.39 %     61.09 %
Change in valuation allowance
    1.91 %     3.69 %
Effect of tax exemption of PRC subsidiary
    (87.22 )%     (89.32 )%
                 
Effective income rate
    0 %     0 %

The Company has not provided deferred tax liabilities of $1,705,394 and $1,491,362 as of September 30, 2011 and June 30, 2011, respectively, on undistributed earnings attributable to its PRC subsidiary since January 1, 2008 as it intends to reinvest such earnings and the payment of dividends is indefinitely postponed.
 
As of September 30, 2011 and June 30, 2011, Man Shing had accumulated net operating loss carryforwards for United States federal income tax purposes of approximately $2,644,654 and $2,529,326, respectively, that are available to offset future taxable income. Realization of the net operating loss carryforwards is dependent upon future profitable operations. In addition, the carryforwards may be limited upon a change of control in accordance with Internal Revenue Code Section 382, as amended. Accordingly, management has recorded a full valuation allowance to reduce deferred tax assets associated with the net operating loss carryforwards to zero at September 30, 2011 and June 30, 2011. The net operating loss carryforwards expire in various years through 2030.

Net deferred tax assets relate solely to Man Shing, and consist of the following components as of September 30, 2011 and June 30, 2011:
 
   
Sept 30, 2011
   
June 30, 2011
 
Deferred tax assets
    926,000       885,000  
Less: valuation allowance
    (926,000 )     (885,000 )
                 
Net deferred tax assets
    -       -  
 
Value added tax (“VAT”)

Enterprises or individuals who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with the PRC laws. The VAT standard rate is 13% of the gross sales price. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s products can be used to offset the VAT due on the sales of the products.

12.
EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of the common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares and common share equivalents outstanding during the period.
 
 
11
 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 (STATED IN US DOLLARS)
 
The following tables illustrate the computation of basic and diluted earnings per share:

   
 
Three months ended
 
   
 
September 30,
 
   
 
2011
   
2010
 
Net income for the period  
  $ 2,058,210     $ 2,208,732  
   
               
Determination of shares:  
               
Weighted-average common shares outstanding (Basic)  
    48,026,958       36,345,522  
Assumed conversion of preferred stock  
    1,767,500       36,043,493  
Weighted-average common shares outstanding (Diluted)  
    49,794,458       72,389,015  
   
               
Basic earnings per share  
  $ 0.04     $ 0.06  
Diluted earnings per share  
  $ 0.04     $ 0.03  

Conversion of the convertible notes (see note 9) is not assumed and the related 750,000 shares (Convertible notes of $1,500,000 at conversion price of $2) were not included in weighted average share calculation as the conversion would be anti-dilutive because the conversion price was higher than the market value per share of the common stock as of September 30, 2011 and 2010.
 
13.
COMMITMENT AND CONTINGENCIES

The Company has entered into the following material lease agreements.

On December 30, 2008, and December 31, 2009 the Company entered into lease agreements with local government. Pursuant to these agreements, total area of 3.335 million square meters (5,000 mu) and 2 million square meters (3,000 mu) of land are leased from January 1, 2009 to December 31, 2023 and January 1, 2010 to December 31, 2025, with total annual lease payment of $472,077 (RMB3,000,000) and $283,246 (RMB 1,800,000), respectively.

On July 1, 2009, the Company entered into a lease agreement with a third party. Pursuant to the agreement, the company leased the office building and plant from July 1, 2009 to June 30, 2014. The first year rent is waived and the annual lease payment starting in the second year is $141,623 (RMB900,000). The Company recognized the aggregate benefit of rent incentives as a reduction of rental expense over the lease term, on a straight-line basis.
 
On October 6, 2010, the Company entered into several lease agreements with a local village for inventory (ginger) storage. Pursuant to these agreements, annual lease payment will be calculated upon on the weight of inventory storage (RMB280 per ton).
 
On March 31, 2011, the Company entered into a land lease agreement with the local government pursuant to which the Company agreed to lease 3,620 mu of farmland (approximately 2.4 million square meters). The term of the lease is six years, from January 1, 2011 through December 31, 2016 with an annual lease fee of approximately $546,853 (RMB3,475,200).
 
 
12
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(STATED IN US DOLLARS)
 
Future aggregated annual lease payments are as follows:
     
       
Year Ending June 30,
     
2012
 
$
1,448,193
 
2013
   
1,443,799
 
2014
   
1,443,799
 
2015
   
1,302,176
 
2016
   
1,302,176
 
Thereafter
   
6,032,762
 
TOTAL
 
$
12,972,905
 
 
As of September 30, 2011 and June 30, 2011, the Company had a capital commitment of $118,379 (RMB752,288) and $208,957 (RMB 1,352,288) respectively, in respect of an environmental equipment installation for construction in progress and two machineries.
 
14.
SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION

 
(a)
Segment information

The Company’s chief operating decision maker has been identified as the CEO, president and chairman, Mr. Shili Liu, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Based on this assessment, the Company has determined that it has one operating and reportable segment. The majority of the Company’s sales are derived from ginger, with no other product constituting more than 10% of the consolidated total sales.
 
 
(b)
Geographical segment
 
The following table sets forth the geographic information of the Company’s customers for the three months ended September 30, 2011:
   
Market 
 
% of 
revenue
contribution
 
PRC (note a)  
    64 %
UK  
    7 %
Japan  
    18 %
Netherlands  
    4 %
Others  
    7 %
Total  
    100 %
 
The Company’s operations are located in the PRC. For the three months ended September 30, 2011 and 2010, 100% of the Company’s assets were located in the PRC.
 
 
13
 
 
MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(STATED IN US DOLLARS)
 
Note (a): The following table sets forth the Company’s PRC customers by designation of delivery:
 
For the three months ended September 30, 2011
 
Market 
 
% of 
revenue
contribution
 
Japan
    37 %
UK  
    47 %
Netherlands  
    16 %
Total  
    100 %
   
15.
CONCENTRATION AND RISK

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company's results may be affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 
(a)
Major customers

The Company had 5 and 5 customers that individually comprised 57% and 48% of net revenue for the three months ended September 30, 2011 and the year ended June 30, 2011, respectively.
 
     
Three months ended
September 30, 2011
         
As of
September 30, 2011
 
CUSTOMERS
   
REVENUES
         
ACCOUNTS
RECEIVABLE
 
                     
Customer A
    $ 1,018,611       14 %   $ 1,162,798  
Customer B
      859,460       12 %     931,994  
Customer C
      837,260       12 %     956,787  
Customer D
      745,072       10 %     626,883  
Customer E
      628,441       9 %     715,714  
                           
 
Total:
  $ 4,088,844    
57
%    $ 4,394,176  
 
 
     
Three months ended
September, 2010
         
As of
June 30, 2011
 
CUSTOMERS
   
REVENUES
         
ACCOUNTS
RECEIVABLE
 
                     
Customer A
    $ 1,044,178       17 %   $ 1,896,141  
Customer B
      641,123       9 %     583,517  
Customer C
      615,936       8 %     318,076  
Customer D
      558,944       8 %     374,821  
Customer E
      545,561       6 %     470,408  
                           
 
Total:
  $ 3,405,742    
48
%    $ 3,642,963  
 
 
14
 
 
ITEM 2 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Business Overview
 
Our operations are conducted through our wholly owned subsidiary, Xinsheng, a company incorporated under the laws of the PRC. Xinsheng is principally engaged in the production and processing of high quality fresh and frozen ginger, as well as other vegetables, such as onion and garlic. Xinsheng leases 7.7 million square meters of farmland in Anqiu within the Shandong Province in China for the planting and growing of high quality fresh ginger. Our customers are primarily based in Japan and several countries within Europe. We produce high quality fresh and frozen ginger according to the strict food safety standards of those countries. We have been certified by the British Retail Consortium Global Food Standard for Food Safety. Regarding food safety management system, we have met the requirements under Hazard Analysis and Critical Control Point Principles (“HACCP”). We maintain a monitoring and supervision program that we believe results in our products being in compliance with food safety standards from the countries into which we sell them.
 
Production Process and Quality Control Procedures

Currently, we lease 7.7 million square meters of land in Anqui, Shandong Province where we plant and harvest high quality ginger in addition to other vegetables, including onion and garlic. The planting of ginger takes place in April, the fourth quarter of our fiscal year, and harvesting takes place in October, the second quarter of our fiscal year.
  
Our quality control procedures include the following:
 
 
1.
Soil is tested for chemical residue that may have harmful effect on our products.
 
 
2.
Our fertilizing and debugging methods are environmentally friendly, and we do not use chemical pesticides.
 
 
3.
Raw ginger is randomly selected to test for any chemical residue.
 
 
4.
Raw ginger is randomly selected to check for inappropriately sized or rotten ginger.
 
 
5.
Half-finished ginger products are randomly selected to ensure that their size and weight will meet customer requirements.
 
 
6.
Finished product is randomly selected to test for quality and quantity.
 
 
7.
Electronic weights are utilized to weigh the finished products. In order to ensure the weights are working properly and accurately, the weights are tested frequently.
 
 
8.
Finished product is randomly tested to ensure that its weight will meet customer requirements.
 
Our Products
 
Fresh Vegetables
 
Ginger
 
 
15
 
   
Frozen Vegetables

Peeled Ginger
Diced Garlic
   
Diced Ginger
Garlic Puree
   
Ginger Puree Cubes
Garlic Puree Cubes
   
Ginger Puree
Diced Onion
   
Strawberry
Peeled Garlic
 
We produced 11 products in the quarter ended September 30, 2011. Ginger accounted for approximately 84% of our sales in the quarter ended September 30, 2011.
 
Our customers
 
After years of building our reputation, we believe that we have earned the trust of our customers. Our customers include suppliers to one of the world’s largest supermarket chains in Europe and a major ingredient producer in Japan. Our major customers are located in Japan and within Europe, including the United Kingdom and the Netherlands.
 
The following table lists our top five customers and their percentage of current sales for the quarter ended September 30, 2011.
 
Top 5 Customers for the Three Months ended September 30, 2011
 
(Total sales revenue for the three months ended September 30, 2011: US$7,181,048)

Customer
 
Revenues
   
%
 
1. Customer A
 
US$
    1,018,611       14 %
2. Customer B
 
US$
    859,460       12 %
3. Customer C
 
US$
    837,260       12 %
4. Customer D
 
US$
    745,072       10 %
5. Customer E
 
US$
    628,441       9 %
Total:
 
US$
    4,088,844       57 %
 
The following table sets forth our sales by geographic segmentation:
 
Market
 
% of revenue contribution
 
PRC (see note a)
    64 %
UK
    7 %
Japan
    18 %
Netherlands
    4 %
Others
    7 %
Total
    100 %
 
Note a: The following table sets forth our PRC customers by designation of delivery:
    
 
16
 
  
Market
 
% of revenue contribution
 
Japan
    37 %
UK
    47 %
Netherlands
    16 %
Total
    100 %
 
Growth Strategy
 
We aim to be one of the largest exporters of fresh and frozen vegetables in China and our goal is to capture more of China’s export market share in high quality fresh and frozen vegetables over the next few years. Our short-term strategy is to increase production capacity to satisfy our customers’ demand. Our long-term strategy is to make efficient use of China’s resources of low-cost labor and operating costs to increase our market share.
 
We intend to grow by:
 
 
·
Increasing market share by leasing additional farmland. Prior to March 31, 2011, Man Shing leased 5.3 million square meters of farmland. On March 31, 2011, Man Shing leased an additional 2.4 million square meters of farmland increasing total farmland by approximately 45% to 7.7 million square meters.
 
 
·
Maintaining our reputation and increasing customer satisfaction by meeting applicable food safety standards.
 
 
·
Increasing production capacity to satisfy increasing customer demand.
 
 
·
Working with our customers to meet end user demand for new products and forms of our ginger and frozen vegetables. For the quarter ended September 30, 2011, Man Shing produced 11 products.
 
 
·
Continuing to maximize operating efficiencies through the utilization of our existing infrastructure and low labor and operating costs.
 
Competition
 
We are located in Anqiu City, Shandong Province. Anqiu is a large ginger producing region in China, and is an ideal location to grow sandy soil plants such as ginger. Within the Shandong Province region, competitors consist of smaller local processing enterprises as compared to Man Shing.
 
We operate in a highly fragmented industry and our primary competitive advantage is that we lease over 7.7 million square meters of farmland in Anqiu Weifang. The long term leases provide stable farmland for planting.
 
We believe our ability to maintain a competitive advantage depends on many factors including the following:
 
 
·
There is growing demand for ginger in the agricultural industry. Ginger is used in cooking as both an ingredient and main course;
 
 
·
We are able to meet strict export requirements that smaller local producers are unable to meet;
 
 
·
We have leased 7.7 million square meters of farmland. We believe that we have significantly more farmland than most of our competitors in the region. Our size supports our ability to maintain our high quality safety standards;
 
 
·
We have spent a significant amount of capital on safety and operational infrastructure. This investment is highly leveragable as we continue to lease more land and increase the amount of tonnage harvested;
  
 
17
 
 
 
·
We have relationships not only with the local government but also with our customers. Through these relationships, we have been able to increase the amount of farmland leased year over year and maintain our customer base. Our customers are willing to pay a premium for our high quality products since we comply with the most stringent international safety and quality standards that many of our smaller competitors are currently unable to meet; and
 
 
·
Local governments have tightened the export license renewal procedures and have toughened inspection, as a result of which certain exporters have terminated operations.
 
We believe that we are uniquely positioned as a leading exporter and one of the largest producers of ginger in the Shandong Province. We depend on our ability to continue to increase our land capacity which we have successfully done over the past several years. We must also maintain long term relationships with customers and attract new customers in order to continue increasing revenue and profitability.
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

   
For the three months ended
September 30,
 
   
2011
   
2010
 
Sales:
  $ 7,181,048     $ 7,333,954  
Cost of Goods Sold:
  $ 4,274,273     $ 4,163,709  
Operating Expenses:
  $ 790,091     $ 932,410  
Other (Expenses):
  $ (58,474 )   $ (29,103 )
Income from Operations:
  $ 2,116,684     $ 2,237,835  
Income Taxes:
  $ 0     $ 0  
Net Income:
  $ 2,058,210     $ 2,208,732  
Other Comprehensive Income:
  $ 416,198     $ 247,962  
Total Comprehensive Income:
  $ 2,474,408     $ 2,456,694  
 
Revenues
 
Net revenues were $7,181,048 and $7,333,954 for the quarters ended September 30, 2011 and 2010, respectively. The slight decrease in revenue (2%) is attributable to the slight decrease in production volume and sales order of ginger in this quarter as compared to the same period in the last year. We did not record any product returns for the quarter ended September 30, 2011 and 2010.
 
Cost of Sales
 
Cost of sales primarily includes costs to plant, harvest and store ginger and other agricultural products such as ginger seeds and fertilizers. During the quarter ended September 30, 2011, we had cost of revenues of $4,274,273, or approximately 60% of revenues, versus cost of revenues of $4,163,709, or approximately 57%, of revenues for the quarter ended September 30, 2010. The cost of sales as a percentage of revenue slightly increased due primarily to the slight increase in costs of planting and production.
 
Gross profit
 
We had gross profit of $2,906,775 for the quarter ended September 30, 2011, which decreased by $263,470, or 8%, when compared to the gross profit of $3,170,245 for the quarter ended September 30, 2010.
 
Gross profit margin decreased by 3% from 43% for quarter ended September 30, 2010 to 40% for the quarter ended September 30, 2011.
  
 
18
 
 
The decrease in gross profit margin for our ginger and agricultural products during the period under review was due primarily to the slight increase in material costs and the decrease in revenue.
 
Expenses
 
Operating expenses for the quarter ended September 30, 2011 were $790,091 compared to operating expenses of $932,410 for the quarter ended September 30, 2010. The decrease in operating expenses was due to the decrease in the selling and marketing expenses by $136,835 and the decrease in general and administrative expenses by $5,484.
 
Selling and marketing expenses were 9% of revenues for the quarter ended September 30, 2011 and 11% of revenues for the quarter ended September 30, 2010. The decrease in the selling and marketing expenses was due primarily to the decrease in distribution costs
 
General and administrative expenses were 2% of revenues for the quarter ended September 30, 2011 and 2% of revenues for the quarter ended September 30, 2010. General and administrative expenses were maintained at a relatively low level as a percentage of revenue. General and administrative expenses consisted of mainly professional fees and office rental expenses.
 
Income Taxes
 
We had no income tax expense for the quarters ended September 30, 2011 and 2010, respectively, since the Company is exempted from the Enterprise Income Tax as approved by PRC tax bureau.
 
Income
 
We had a net income of $2,058,210 and $2,208,732 for the quarters ended September 30, 2011 and 2010, respectively. Net income margin was stable at 29% for the quarter ended September 30, 2011, as compare to 30% for the quarter ended September 30, 2010. Our net income is a function of revenues, cost of sales and other expenses as described above. The decrease in net income is attributable to the slight decrease in sales and increase in material costs. However, we were able to maintain expenses at a low level as a percentage of revenue to maintain a stable net income margin.
 
Impact of Inflation
 
We believe that inflation has had a negligible effect on operations. We believe that we can offset inflationary increases in our cost of operations by increasing sales and improving operating efficiencies.
 
Liquidity and Capital Resources
 
As of September 30, 2011 and June 30, 2011, cash and cash equivalents totaled $11,368,919 and $7,081,297, respectively.
 
Working capital as of September 30, 2011 and June 30, 2011 amounted to $26,030,824 and $23,612,157, respectively. Net cash provided by  operating activities for the quarters ended September 30, 2011 and 2010 amounted to $4,179,529 and $964,356, respectively. Cash flows from operations for the quarter ended September 30, 2011 were contributed primarily by net income generated from operating activities of $2,058,210, a decrease in inventory of $3,072,807, partially offset by an increase in prepayment and deferred inventory costs of $475,802 which was in connection with prepaid rent, supplies and other items used in the growing and packaging of ginger, and an increase in accounts receivable of $491,588.
 
Cash flows used in investing activities were $66,386 and $175,801 for the quarters ended September 30, 2011 and 2010, respectively.  Net cash used in investing activities for the quarter ended September 30, 2011 was due primarily to the increase in fixed assets and purchase of equipment.
 
Net cash provided by financing activities for the quarters ended September 30, 2011 and 2010 amounted to $0 and $2,600,000, respectively. No cash was provided by financing activities for the quarter ended September 30, 2011 because there were no proceeds from fund raising activities for the quarter ended September 30, 2011 as we have sufficient cash flows for the operations.
 
 
19
 
 
On January 4, 2010, pursuant to the terms of a Securities Purchase Agreement by and among the Company and China Angel Assets Management Limited (“China Angel”), the Company issued a secured convertible redeemable debenture in the amount of $1,000,000, along with 800,000 shares of the Company’s common stock, to China Angel.
 
On January 14, 2010, pursuant to the terms of a Securities Purchase Agreement by and among the Company and Guang Dong ZhiBo Investment Co., Ltd. (“ZhiBo”), the Company issued a secured convertible redeemable debenture in the amount of $500,000, along with 400,000 shares of the Company’s common stock, to ZhiBo.
 
On September 13, 2010, the Company entered into securities purchase agreements with certain investors pursuant to which the investors were obligated to purchase an aggregate of 10,000,000 shares of the Company’s common stock for consideration of $0.40 per share of Common Stock (an aggregate of $4,000,000).
 
As of September 30, 2011, we had a capital commitment of $118,379 (RMB752,288) in respect of an environmental equipment installation for construction in progress and two machineries, which will be funded by our cash and cash equivalents.
 
Overall, we have funded all of our cash needs and no significant amount of our trade payables has been unpaid within the stated trade term. As of September 30, 2011, we are not subject to any unsatisfied judgments, liens, or settlement obligations. We believe that the current operating activities would be able to generate adequate cash flows supporting the daily operations for the next twelve months.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 
CRITICAL ACCOUNTING POLICIES
 
Use of estimates
 
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods.  These accounts and estimates include, but are not limited to, the valuation of trade receivables, other receivables, inventories, warranty reserve, deferred income taxes and the estimation on useful lives of property, plant and equipment.  Actual results could differ from these estimates.
 
Principles of Consolidation
 
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.
 
Accounts Receivable
 
Accounts receivable are stated at estimated net realizable value.  Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts.  In determining the collectability of the account, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.
  
 
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Allowance for doubtful accounts
 
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages to aged receivables categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future.  If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
 
Based on the above assessment, during the reporting periods, the management establishes the general provision allowance equivalent to 0.5% of the gross amount of trade receivables due less than 1 year, 5% of the gross amount of trade receivables due from 1 to 2 years, and 10% of the gross amount of trade receivables due from 2 to 3 years. The management completely writes off the gross amount of trade receivables due over 3 years.  An additional specific provision is made against trade receivables to the extent to which they are considered to be doubtful.
 
Bad debts are written off when identified. The Company does not accrue interest on trade receivables.
 
Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss. This general provisioning policy has not changed since establishment and the management considers that the aforementioned general provisioning policy is adequate and not too excessive and does not expect to change this established policy in the near future.
 
Deferred inventory cost
 
In accordance with Accounting Standards Codification (“ASC’’) 905 “Agriculture’’ costs of growing crops shall be accumulated until the time of harvest. Growing crops shall be reported at the lower of cost or market.
 
Inventories
 
Inventories are stated at the lower of cost or market value.  Cost is determined on a first in first out basis, which approximates weighted average and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.  In case of manufacturing inventories, cost includes an appropriate share of production overheads based on normal operating capacity.  In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.
 
In addition, the Company estimates net realizable value based on intended use, current market value and inventory aging analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventories equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.
 
Revenue recognition
 
Revenue from sales of the Company’s products, including fresh frozen produce and processed produce, is recognized upon customer acceptance, which occurs at the time of delivery to customer, provided persuasive evidence of an arrangement exists, such as signed sales contract, the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to its customers with no significant post-delivery obligation on our part, the sales price is fixed or determinable and collection is reasonably assured. We do not provide our customers with contractual rights of return and post-delivery discount for any of our products, including fresh produce and processed produce. When any significant post-delivery performance obligation exists, revenue is recognized only after such obligation is fulfilled. We evaluate the terms of sales agreement with our customer for fresh frozen produce and processed produce in order to determine whether any significant post-delivery performance obligations exist. Currently, the sales under fresh produce and processed produce segments do not include any terms which may impose any significant post-delivery performance obligations.
  
 
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Sales revenue represents the invoiced value of goods, net of a value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 13% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.
 
Convertible notes
 
According to ASC 470-20, “Debt with conversion and other options”, the Company records the convertible debt and accrued interest as conventional convertible debt at the carrying amounts without bifurcation.
 
Stock-based compensation
 
The Company measures compensation expenses for its non-employee stock-based compensation under FASB ASC 718. The fair value of the stock issued was used to measure the compensation, as this is more reliable than the fair value of the services received. Fair value is measured using the bid price as the value of the Company’s common stock on the measurement date.
 
ITEM 3 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable to smaller reporting companies.
 
ITEM 4 
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer (who is also our Chief Executive Officer) and principal financial officer (who is also our Chief Financial Officer), we conducted an evaluation of the effectiveness, as of September 30, 2011, of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are not effective due to the material weakness and significant deficiency in internal controls over financial reporting described below .
 
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information 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.
 
The material weakness and significant deficiency identified by our management as of September 30, 2011 relates to the ability of the Company to record transactions and provide disclosures in accordance with U.S. GAAP. We did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of U.S. GAAP commensurate with our financial reporting requirements. For example, our staff members do not hold licenses such as Certified Public Accountant in the U.S., have not attended U.S. institutions for training as accountants, and have not attended extended educational programs that would provide sufficient relevant education relating to U.S. GAAP. Our staff needs substantial training to meet the demands of a U.S. public company and our staff’s understanding of the requirements of U.S. GAAP-based reporting are inadequate.
 
Remediation Initiative
 
We previously began to provide U.S. GAAP training sessions to our accounting team and intend to increase the amount of training that each member of our accounting team receives. The training sessions will be organized to help our corporate accounting team gain experience in U.S. GAAP reporting and to enhance their awareness of new and emerging pronouncements with potential impact over our financial reporting. Since March 2011, we engaged a certified public accounting firm in the United States to act as a consultant to provide advice regarding U.S. GAAP and internal controls over financial reporting.
 
Inherent Limitations Over Internal Controls
 
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:
 
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
  
 
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Management, including our principal executive officer and principal financial officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Changes in Internal Controls over Financial Reporting
 
There were no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II OTHER INFORMATION
 
ITEM 1  LEGAL PROCEEDINGS
 
None.
 
ITEM 1A. 
RISK FACTORS
 
Not applicable to smaller reporting companies
 
ITEM 2. 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
During the three months ended September 30, 2011, we did not issue any unregistered securities that were not otherwise reported in a Current Report on Form 8-K.
 
ITEM 3. 
DEFAULT UPON SENIOR SECURITIES
 
None.
 
ITEM 4. 
REMOVED AND RESERVED
 
ITEM 5. 
OTHER INFORMATION
 
None.
 
ITEM 6. 
EXHIBITS

Exhibit
No.
 
Description
31.1
 
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101
 
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (Unaudited); (ii) the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income; (iii) the Unaudited Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Unaudited Consolidated Financial Statements.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 
MAN SHING AGRICULTURAL HOLDINGS, INC.
   
Date: November 4, 2011
By:
/s/ Shili Liu
 
Name: Shili Liu
 
Title: Chief Executive Officer
 
(Principal Executive Officer)
   
Date: November 4, 2011
By:
/s/ Kenny Chow
 
Name: Kenny Chow
 
Title: Chief Financial Officer
 
(Principal Financial and Accounting Officer)
  
 
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EXHIBIT INDEX
 
Exhibit
No.
 
Description
31.1
 
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
101
 
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets (Unaudited); (ii) the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income; (iii) the Unaudited Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Unaudited Consolidated Financial Statements.
 
 
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