MSAH Man Shing Agricultural Holdings Inc (CE)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

 

(Mark One)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: December 31, 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 organization)		(I.R.S. Employer Identification No.)

   

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 S    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 S    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 S

(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 S

 

Number of shares of common stock outstanding as of January 31, 2012: 48,026,958

 

TABLE OF CONTENTS  

 

		Page(s)
PART I		2
ITEM 1	Financial Statements	2
ITEM 2.	Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.	16
ITEM 3.	Quantitative And Qualitative Disclosures About Market Risk	24
ITEM 4.	Controls And Procedures	24
PART II	Other Information	25
ITEM 1.	Legal Proceedings	25
ITEM 1A.	RISK FACTORS	26
ITEM 2.	Unregistered Sales Of Equity Securities And Use Of Proceeds	26
ITEM 3.	Default Upon Senior Securities	26
ITEM 4.	Removed And Reserved	26
ITEM 5.	Other Information	26
ITEM 6.	Exhibits	26
SIGNATURES		27

 

 

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)

 

ASSETS		December 31, 2011				June 30, 2011
CURRENT ASSETS
Cash and cash equivalents		$	11,841,067			$	7,081,297
Accounts receivable, trade, net			8,450,524				6,330,625
Inventories			12,040,134				4,880,266
Deferred inventory costs			—				9,064,571
Prepayments			225,444				371,881
Other receivables			821				787
Tax recoverable			1,295,050				577,995
TOTAL CURRENT ASSETS			33,853,040				28,307,422
FIXED ASSETS
Property, plant, and equipment			1,947,361				1,619,838
Accumulated depreciation			(347,950	)			(257,250	)
Construction in progress			244,454				211,752
NET FIXED ASSETS			1,843,865				1,574,340
TOTAL ASSETS		$	35,696,905			$	29,881,762
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing		$	1,967,973			$	1,916,064
Accounts payable			1,148,678				691,628
Other payables and accrued liabilities			1,614,918				1,685,016
Receipts in advance			375,329				402,557
TOTAL CURRENT LIABILITIES			5,106,898				4,695,265
LONG-TERM LIABILITIES
Convertible Note			1,500,000				1,500,000
TOTAL LIABILITIES			6,606,898				6,195,265
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par, 25,000,000 shares authorized, 176,750 shares issued and outstanding at December 31, 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 December 31, 2011 and June 30, 2011, respectively			48,027				48,027
Additional paid-in capital			4,240,545				4,210,545
Accumulated other comprehensive income			1,820,851				1,180,599
Statutory reserves			10,198,223				5,823,139
Retained earnings			12,782,184				12,424,010
TOTAL STOCKHOLDERS' EQUITY			29,090,007				23,686,497
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	35,696,905			$	29,881,762

 

The accompanying notes are on integral part of these unaudited condensed consolidated financial statements.

 

 

Man Shing Agricultural Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

For the Three and Six Months Ended December 31, 2011 and 2010

 

		For the Three Months Ended								For the Six Months Ended
		December 31, 2011				December 31, 2010				December 31, 2011				December 31, 2010
Revenues
Sales		$	8,798,455			$	8,147,275			$	15,969,860			$	15,474,501
Cost of sales			4,960,953				4,816,635				9,231,131				8,974,943
Gross Profit			3,837,502				3,330,640				6,738,729				6,499,558
Operating expenses
Selling and marketing expenses			629,540				715,642				1,275,008				1,498,401
General and administrative expenses			489,885				306,183				638,147				455,581
Total Operating Expenses			1,119,425				1,021,825				1,913,155				1,953,982
Operating Income			2,718,077				2,308,815				4,825,574				4,545,576
Other income (expenses), net
Financial income (expenses), net			(66,587	)			(59,295	)			(135,268	)			(87,910	)
Non-operating income (expense), net			23,559				1,403				42,953				1,153
Total Other Income (Loss), net			(43,028	)			(57,892	)			(92,315	)			(86,757	)
Income from Operations Before Income Tax			2,675,049				2,250,923				4,733,259				4,458,819
Income taxes			—				—				—				—
Net Income			2,675,049				2,250,923				4,733,259				4,458,819
Other comprehensive income , net
Foreign currency translation gain			227,970				195,326				640,252				445,164
Total Comprehensive Income		$	2,903,019			$	2,446,249			$	5,373,511			$	4,903,983
Weighted average number of shares outstanding
Basic			48,026,958				38,026,958				48,026,958				38,026,958
Diluted			49,794,458				67,901,550				49,794,458				70,624,294
Earnings per share
Basic		$	0.06			$	0.06			$	0.10			$	0.12
Diluted		$	0.05			$	0.03			$	0.10			$	0.06

  

The accompanying notes are on integral part of these unaudited condensed consolidated financial statements.

 

 

Man Shing Agricultural Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended December 31, 2011 and 2010

 

		For the Six Months Ended
		December 31, 2011				December 31, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	4,733,259			$	4,458,819
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			82,694				39,657
Provision for doubtful accounts			10,683				-
Stock-based compensation to service providers			30,000				-
Increase (decrease) in cash from changes in:
Accounts receivable, trade, net			(2,053,573	)			(1,097,716	)
Inventories			(6,940,634	)			(7,405,451	)
Deferred inventory costs			9,194,858				5,195,372
Prepayments			150,261				(71,050	)
Accounts payable			446,338				1,899,295
Other payables and accrued liabilities			(98,081	)			36,181
Receipts in advance			(37,659	)			150,812
Tax recoverable			(692,712	)			(978,513	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			4,825,434				2,227,406
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment			(255,335	)			(472,957	)
Construction in progress			(51,426	)			-
NET CASH USED IN INVESTING ACTIVITIES			(306,761	)			(472,957	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from investor			-				1,500,129
NET CASH PROVIDED BY FINANCING ACTIVITIES			-				1,500,129
Effect of exchange rate change on cash and cash equivalents			241,096				(10,262	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			4,759,769				3,244,316
CASH AND CASH EQUIVALENTS:
Beginning of period			7,081,298				378,930
End of period		$	11,841,067			$	3,623,246
Supplemental disclosure of cash flow information
Cash paid for:
Interest		$	129,003			$	6,027
Income taxes		$	-			$	-
Non-cash investing and financing activities:
Stock-based compensation to service providers		$	30,000			$	-

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 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 was 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 the stock exchange Transaction with Hero and Xinsheng.

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 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 December 31, 2011, the Company leased 110,000 square meters of factory space from an individual and 7.7 million square meters of farmland from the People’s Republic of China (“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.

 

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income’’ (“ASU 2011-05’’). The company may display reclassification adjustments out of accumulated other comprehensive income on the face of the financial statement in which the components of other comprehensive income are presented, comprehensive income is reported, or it may disclose those reclassification adjustments in the notes to the financial statements. Therefore, for all classifications of other comprehensive income, an entity may use either a gross display on the face of the financial statement or a net display on the face of the financial statement and disclose the gross change in the notes to the financial statements. The amendments in the ASU should be applied retrospectively.  The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011.

 

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

The Company believes that adoption of ASU 2011-04, ASU 2011-05 and ASU 2011-12 will not materially 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 a 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 $43,281 and $31,608 are appropriate as of December 31, 2011 and June 30, 2011, respectively.

 

		December 31, 2011				June 30, 2011
Accounts receivable, gross		$	8,493,805			$	6,362,233
Less: allowance for doubtful accounts			(43,281	)			(31,608	)
Accounts receivable, net		$	8,450,524			$	6,330,625

 

6.	INVENTORIES

 

		December 31, 2011				June 30, 2011
Raw materials		$	11,277,181			$	4,475,855
Finished goods			762,953				404,411
		$	12,040,134			$	4,880,266

 

For the six months ended December 31, 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 were $0 as of December 31, 2011. 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, fertilizer and supplies of $3,955,192, and other items of $1,385,143. These items were used in the planting of ginger which and were transferred to inventories at the time of harvests.

 

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 $365,748 (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 December 31, 2011, the outstanding amount of this loan was $380,898 (RMB2,400,000).

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

On May 9, 2011, Xinsheng entered a loan agreement with Agricultural Development Bank of China in the PRC for a facility of approximately $1,542,615 (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 Mr. Shili Liu, the Company’s CEO, President and Chairman. As of December 31, 2011, the outstanding amount of this loan was $1,587,075 (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.

 

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 was required 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.

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

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 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.

 

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.

 

11.	STATUTORY RESERVES

 

In accordance with the relevant laws and regulations of the PRC and articles of association, the Company is required to appropriate 10% of the net profit as reported in the Company’s PRC statutory financial statements to the statutory reserve fund. For the quarter ended December 31, 2011 and the year ended June 30, 2011, the Company compulsorily contributed $1,093,771 and $921,334, respectively.

 

Further appropriation is optional upon approval from the board of directors or members. For the quarter ended December 31, 2011 and the year ended June 30, 2011, the Company voluntarily contributed $3,281,313 and $2,767,304, respectively.

 

The statutory reserves are not distributable in the form of cash dividends to the Company but can be used for offset against cumulative prior year losses.

  

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

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.

 

12.	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 December 31, 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.

 

The following table reconciles the statutory rates to the Company’s effective tax rates for the quarter ended December 31, 2011 and 2010 and six months ended December 2011, 2010:

 

 

		Quarter ended								Six months ended
		December 31,								December 31,
		2011				2010				2011				2010
PRC statutory rates			25	%			25	%			25	%			25	%
Effect of tax rates in different jurisdiction			(0.09	)%			(0.69	)%			(0.52	)%			(0.58	)%
Effect of non-deductible expenses			53.95	%			63.57	%			57.14	%			60.16	%
Change in valuation allowance			3.37	%			2.61	%			2.73	%			2.19	%
Effect of tax exemption of PRC subsidiary			(82.23	)%			(90.49	)%			(84.35	)%			(86.77	)%
Effective income rate			0	%			0	%			0	%			0	%

 

The Company has not provided deferred tax liabilities of $1,570,458 and $1,491,362 as of December 31, 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.

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

As of December 31, 2011 and June 30, 2011, Man Shing had accumulated net operating loss carryforwards for United States federal income tax purposes of approximately $2,909,476 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 December 31, 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 December 31, 2011 and June 30, 2011:

 

		December 31, 2011				June 30,  2011
Deferred tax assets			1,018,000				885,000
Less: valuation allowance			( 1,018,000	)			(885,000	)
Net deferred tax asset			-				-

 

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.

 

13.	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.

 

The following tables illustrate the computation of basic and diluted earnings per share:

 

		Three months ended December 31,
		2011				2010
Net income for the period		$	2,675,049			$	2,250,923
Determination of shares:
Weighted-average common shares outstanding (Basic)			48,026,958				38,026,958
Assumed conversion of preferred stock			1,767,500				29,874,592
Weighted-average common shares outstanding (Diluted)			49,794,458				67,901,550
Basic earnings per share		$	0.06			$	0.06
Diluted earnings per share		$	0.05			$	0.03

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)  

 

		Six months ended December 31,
		2011				2010
Net income for the period		$	4,733,259			$	4,458,819
Determination of shares:
Weighted-average common shares outstanding (Basic)			48,026,958				38,026,958
Assumed conversion of preferred stock			1,767,500				32,597,336
Weighted-average common shares outstanding (Diluted)			49,794,458				70,624,294
Basic earnings per share		$	0.10			$	0.12
Diluted earnings per share		$	0.10			$	0.06

 

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 December 31, 2011 and 2010.

 

14.	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 the 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 March 31, 2011, the Company entered into a land lease agreement with the local government pursuant to which the Company agreed to lease approximately 2.4 million square meters (3,620 mu) of farmland. The term of the lease is six years, from January 1, 2011 through December 31, 2016 with an annual lease fee of approximately $546,854 (RMB3,475,200).

 

On October 2 and 3, 2011, 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 based on the weight of inventory storage (RMB180 per ton). 

 

Future aggregated annual lease payments are as follows:

 

Year Ending June 30,
2012		$	728,086
2013			1,456,173
2014			1,456,173
2015			1,313,336
2016			1,408,561
Thereafter			6,465,362
TOTAL		$	12,827,691

 

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

As of December 31, 2011, the Company had no capital commitment. As of June 30, 2011, the Company had a capital commitment of $208,957 (RMB 1,352,288) in respect of an environmental equipment installation for construction in progress and two machineries.  

 

15.	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 December 31, 2011:

 

Market		% of revenue contribution
PRC (note a)			69	%
UK			7	%
Japan			19	%
Netherlands			4	%
Others			1	%
Total			100	%

For the six months ended December 31, 2011:

Market		% of revenue contribution
PRC (note a)			67	%
UK			7	%
Japan			18	%
Netherlands			4	%
Others			4	%
Total			100	%

 

The Company’s operations are located in the PRC. For the six months ended December 31, 2011 and 2010, 100% of the Company’s assets were located in the PRC.

 

Note (a): The following table sets forth the Company’s PRC customers by designation of delivery:

 

For the three months ended December 31, 2011:

 

Market		% of revenue contribution
Japan			32	%
UK			47	%
Netherlands			20	%
Others			1	%
Total			100	%

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

For the six months ended December 31, 2011:

 

Market		% of revenue contribution
Japan			34	%
UK			47	%
Netherlands			18	%
Others			1	%
Total			100	%

 

16.	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 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 customers that individually comprised 61%, and 24% of net revenue for the three months ended December 31, 2011 and December 31, 2010, respectively.

 

The Company had 5 customers that individually comprised 59%, and 44% of net revenue for the six months ended December 31, 2011 and December 31, 2010, respectively.

 

						Three months ended December 31																				Six months ended December 31
CUSTOMERS						2011 Revenues								2010 Revenues												2011 Revenues								2010 Revenues
Customer A						$	1,192,928				14	%		$	515,525				6	%						$	2,028,051				13	%		$	1073,475			7%
Customer B							1,146,271				13	%			931,380				6	%							1,771,610				11	%			1,590,959			10%
Customer C							1,113,891				13	%			343,456				2	%							1,971,818				12	%			914,586			6%
Customer D							1,059,971				12	%			1,204,943				8	%							2,078,319				13	%			2,276,580			15%
Customer E							829,624				9	%			318,845				2	%							1,574,180				10	%			947,712			6%
			Total:			$	5,342,685				61	%		$	5,795,348				24	%			Total:			$	9,423,978				59	%		$	6,803,312			44%

 

 

 

MAN SHING AGRICULTURAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010
(STATED IN US DOLLARS)

 

 

 

						As of December 31, 2011												As of June 30, 2011
CUSTOMERS						Accounts Receivable												Accounts Receivable
Customer A						$	1,349,821				16	%						$	470,407			7%
Customer B							1,292,687				15	%							583,517			9%
Customer C							1,261,427				15	%							506,479			8%
Customer D							1,195,998				14	%							1,896,141			30%
Customer E							695,415				8	%							374,821			6%
			Total:			$	5,795,348				68	%			Total:			$	3,831,365			60%

 

17.	RECLASSIFICATION

 

Certain prior period amounts have been reclassified to conform to the current presentation. Such reclassifications were limited to the Consolidated Balance Sheet and Consolidated Statement of Cash Flows presentation and did not impact the Consolidated Statement of Operations and Comprehensive Income.

 

As of and for the year ended June 30, 2011, $562,851 was reclassified to” Tax recoverable” out of “Inventories” with corresponding changes made to the Consolidated Statement of Cash Flows within “Cash Flows From Operating Activities” to conform to current year presentation.

 

 

   

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 fruits and vegetables, such as onion and garlic. Our customers are primarily based in Japan and several European countries. 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 our food safety management system, we have met the requirements under Hazard Analysis and Critical Control Point Principles (“HACCP”) promulgated by Moody International Certification Limited. 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 fruits and 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 effects 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

 

 

Frozen Fruits and 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 December 31, 2011. Ginger accounted for approximately 84% of our sales in the quarter ended December 31, 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 December 31, 2011:

 

Top 5 Customers for the Three Months ended December 31, 2011

 

(Total sales revenue for the three months ended December 31, 2011: US$7,181,048)

 

Customer		Revenues								%
1. Customer A			US$			1,192,928				14	%
2. Customer B			US$			1,146,271				13	%
3. Customer C			US$			1,113,891				13	%
4. Customer D			US$			1,059,971				12	%
5. Customer E			US$			829,624				9	%
Total:			US$			5,342,685				61	%

 

The following table sets forth our sales by geographic segmentation:

 

Market		% of revenue contribution
PRC (see note a)			69	%
UK			7	%
Japan			19	%
Netherlands			4	%
Others			1	%
Total			100	%

 

Note a: The following table sets forth where our PRC customers designated delivery:

 

Market		% of revenue contribution
Japan			32	%
UK			47	%
Netherlands			20	%
Others			1	%
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:

 

	·	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 fruits and vegetables. For the quarter ended December 31, 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. We can leverage this investment as we continue to produce high quality products which meets the applicable food safety standards;
	·	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 DECEMBER 31, 2011 AND 2010

 

		For the three months ended December 31,
		2011				2010
Sales		$	8,798,455			$	8,147,275
Cost of Sales			4,960,953				4,816,635
Operating Expenses			1,119,425				1,021,825
Other Expenses			(43,028	)			(57,892	)
Income from Operations			2,675,049				2,250,923
Income Taxes			0				0
Net Income			2,675,049				2,250,923
Other Comprehensive Income			227,970				195,326
Total Comprehensive Income		$	2,903,019			$	2,446,249

 

Revenues

 

Net revenues were $8,798,455 and $8,147,275 for the quarters ended December 31, 2011 and 2010, respectively. The increase in revenue of 8% is attributable to the expansion of our business through leasing more farmland, and our marketing strategy of developing customer loyalty which resulted in more business with our customers. We did not record any product returns for the quarters ended December 31, 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 December 31, 2011, we had cost of sales of $4,960,953, or approximately 56% of revenues, versus cost of sales of $4,816,635, or approximately 59% of revenues for the quarter ended December 31, 2010. The cost of sales as a percentage of revenue decreased due primarily to decrease in costs of planting and production.

 

Gross profit

 

We had gross profit of $3,837,502 for the quarter ended December 31, 2011, which increased by $506,862, or 15%, compared to the gross profit of $3,330,640 for the quarter ended December 31, 2010.

 

Gross profit margin increased by 3% from 41% for the quarter ended December 31, 2010 to 44% for the quarter ended December 31, 2011.

 

The increase in gross profit margin for our ginger and agricultural products during the period under review was due primarily to a decrease in cost of planting corps.

 

Expenses

 

Operating expenses for the quarter ended December 31, 2011 were $1,119,425 compared to operating expenses of $1,021,825 for the quarter ended December 31, 2010. The increase in operating expenses was due to an increase in general and administrative expenses by $183,702, partially offset by a decrease in selling and marketing expenses by $86,102.

 

 

Selling and marketing expenses were 7% of revenues for the quarter ended December 31, 2011 and 9% of revenues for the quarter ended December 31, 2010. The decrease in the selling and marketing expenses as a percentage of revenues was due primarily to a decrease in distribution costs.

 

General and administrative expenses were 6% of revenues for the quarter ended December 31, 2011 and 4% of revenues for the quarter ended December 31, 2010. General and administrative expenses consisted of mainly professional fees and office rental expenses. The increase in general and administrative expenses was mainly due to increase in professional fees.

 

Income Taxes

 

We had no income tax expense for the quarters ended December 31, 2011 and 2010, respectively, since the Company is exempted from the Enterprise Income Tax as approved by PRC tax bureau.

 

Income

 

We had net income of $2,675,049 and $2,250,923 for the quarters ended December 31, 2011 and 2010, respectively. Net income margin improved by 2% to 30% for the quarter ended December 31, 2011, as compared to 28% for the quarter ended December 31, 2010. Our net income is a function of revenues, cost of sales and other expenses as described above. The increase in net income is attributable to the expansion of our business and increased sales from our current customers as a result of our marketing strategy.In addition, we were able to maintain expenses at a stable level as a percentage of revenue.

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

 

		For the six months ended December 31,
		2011				2010
Sales		$	15,969,860			$	15,474,501
Cost of Sales			9,231,131				8,974,943
Operating Expenses			1,913,155				1,953,982
Other Expenses			(92,315	)			(86,757	)
Income from Operations			4,733,259				4,458,819
Income Taxes			0				0
Net Income			4,733,259				4,458,819
Other Comprehensive Income			640,252				445,164
Total Comprehensive Income		$	5,373,511			$	4,903,983

 

Revenues

 

Net revenues were $15,969,860 and $15,474,501 for the six months ended December 31, 2011 and 2010, respectively. The increase in revenue is attributable to the expansion of our business through leasing more farmland, and our marketing strategy of developing customer loyalty which has led to increased sales of our products to our customers. We did not record any product returns for the six month periods ended December 31, 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 six months ended December 31, 2011, we had cost of sales of $9,231,132, or approximately 58% of revenues, versus cost of sales of $8,974,943, or approximately 58% of revenues for the six months ended December 31, 2010. The cost of sales as a percentage of revenue remained stable due primarily to good control of costs of planting and production.

 

 

Gross profit

 

We had gross profit of $6,738,792 for the six months ended December 31, 2011, which increased by $239,171, or 4%, when compared to the gross profit of $6,499,558 for the six months ended December 31, 2010.

 

Gross profit margin was 42% for the six month periods ended December 31, 2011 and December 31, 2010.

 

The gross profit margin for our ginger and agricultural products remained stable during the period under review due primarily to management of material costs.

 

Expenses

 

Operating expenses for the six months ended December 31, 2011 were $1,913,155 compared to operating expenses of $1,953,982 for the six months ended December 31, 2010. The decrease in operating expenses was due to a decrease in the selling and marketing expenses by $223,393, partially offset by an increase in general and administrative expenses by $182,566.

 

Selling and marketing expenses were 8% of revenues for the six months ended December 31, 2011 and 10% of revenues for the six months ended December 31, 2010. The decrease in the selling and marketing expenses was due primarily to the decrease in distribution costs.

 

General and administrative expenses were 4% of revenues for the six months ended December 31, 2011 and 3% of revenues for the six months ended December 31, 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 six months ended December 31, 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 $4,733,259 and $4,458,819 for the six months ended December 31, 2011 and 2010, respectively. Net income margin was stable at 30% for the six months ended December 31, 2011, as compared to 29% for the six months ended December 31, 2010. Our net income is a function of revenues, cost of sales and other expenses as described above. The increase in net income is attributable to the expansion of our business through our marketing strategy and our customer loyalty, and increase in sales of our products. In addition, we were able to maintain expenses at a stable level as a percentage of revenue.

 

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 December 31, 2011 and June 30, 2011, cash and cash equivalents totaled $11,841,067 and $7,081,297, respectively.

 

Working capital as of December 31, 2011 and June 30, 2011 amounted to $28,746,142 and $23,612,157, respectively. The increase in working capital was mainly due to increase in cash balances. Net cash provided by  operating activities for the six months ended December 31, 2011 and 2010 amounted to $4,825,434 and $2,227,407, respectively. Cash flows from operations for the six months ended December 31, 2011 were contributed primarily by net income generated from operating activities of $4,733,259, a decrease in prepayment of $150,261, and a decrease in deferred inventory costs of $9,194,858 which was in connection with prepaid rent, supplies and other items used in the growing and packaging of ginger, and an increase in accounts payable of $446,338, partially offset by an increase in inventory of $6,940,634, a increase in tax recoverable of $692,712, and an increase in accounts receivable of $2,053,573.

 

 

Cash flows used in investing activities were $306,761 and $472,957 for the six months ended December 31, 2011 and 2010, respectively.  Net cash used in investing activities for the six months ended December 31, 2011 was due primarily to the increase in fixed assets and purchase of equipment.

 

Net cash provided by financing activities for the six months ended December 31, 2011 and 2010 amounted to $0 and $1,500,129, respectively. No cash was provided by financing activities for the six months ended December 31, 2011 because there were no proceeds from fund raising activities for the six months ended December 31, 2011 as we had sufficient cash flows to meet our operating needs.

 

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 December 31, 2011, the Company had no capital commitment.

 

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 December 31, 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.

 

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, 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. Management 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, 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.

 

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 ASC 718, “Stock Compensation”. 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 December 31, 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 December 31, 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 have 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.

 

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 December 31, 2011, we did not issue any unregistered securities that were not otherwise reported in a Current Report on Form 8-K and neither we nor affiliated purchasers (nor anyone on our or affiliated purchasers’ behalf) made any repurchases of our equity securities.

 

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

 

 

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: February 6, 2012	By:	/s/ Shili Liu
	Name: Shili Liu
	Title: Chief Executive Officer
	(Principal Executive Officer)
Date: February 6, 2012	By:	/s/ Kenny Chow
	Name: Kenny Chow
	Title: Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

 

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