The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America (US GAAP) for financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by US GAAP for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The unaudited consolidated financial statements
of China Longyi Group International Holdings Limited (the Company or China
Longyi) include the accounts of China Longyi and its wholly-owned and
majority-owned subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation.
We are a holding company that only
operates through our indirect Chinese subsidiaries Beijing SOD and Chongqing
SOD. Through our Chinese subsidiaries, we develop, manufacture and market our
SOD products in China. SOD is a naturally occurring enzyme which may act as a
potent antioxidant defense in cells that are exposed to oxygen.
The following chart reflects our
organizational structure as of the date of this report.
Depreciation expense as of March 31,
2016 was $7,359. Accumulate impairment as of March 31, 2016 and December 31,
2015 was $47,802 and $47,563, respectively.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
our financial statements and the notes thereto.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the following
Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements relating to the business of
China Longyi Group International Holdings Limited and its subsidiary companies.
The forward-looking statements include, among others, statements concerning our
expected financial performance and strategic and operational plans, as well as
all assumptions, expectations, predictions, intentions or beliefs about future
events. These statements are based on assumptions and are subject to known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Risks and uncertainties include risks related to new
and existing products; any projections of sales, earnings, revenue, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; any statements regarding future economic
conditions or performance; uncertainties related to conducting business in
China; any statements of belief or intention; and any of the factors mentioned
in the Risk Factors section of the Companys annual report on Form 10-K filed
on April 14, 2016. Given these uncertainties, you should not place undue
reliance on these forward-looking statements. Except as required by law, we
assume no obligation to update any forward-looking statements publicly, or to
update the reasons actual results could differ materially from those anticipated
in any forward-looking statements, even if new information becomes available in
the future.
Use of Certain Defined Terms
Except as otherwise indicated by the context, references in
this report to:
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Beijing SOD are references to Beijing Longyi Biology
Technology Co. Ltd., our indirect, 90% owned subsidiary, a PRC company;
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China and PRC are references to the
Peoples Republic of China;
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China Longyi, we, us, our, or the Company are
references to the combined business of China Longyi Group International
Holdings Limited (formerly known as Minghua Group International Holdings
Limited) and/or its consolidated subsidiaries, as the case may be;
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Chongqing SOD are references to Chongqing JiuZhou
Dismutase Biology Technology Co., Ltd., our indirect, majority-owned
subsidiary, a PRC company;
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Exchange Act means the Securities Exchange
Act of 1934, as amended;
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RMB refers to Renminbi, the legal currency of
China;
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Securities Act means the Securities Act of
1933, as amended;
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Top Time are references to Top Time International
Limited, our indirect wholly-owned subsidiary, a Hong Kong company; and
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U.S. dollar, $ and US$ are to the legal
currency of the United States.
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Overview of our Business
We are a holding company that only operates through our
indirect Chinese subsidiaries Beijing SOD and Chongqing SOD. Through our Chinese
subsidiaries, we develop, manufacture and market our SOD products in China. SOD
is a naturally occurring enzyme which may act as a potent antioxidant defense in
cells that are exposed to oxygen. Certain research has shown that under certain
biological conditions, SOD revitalizes cells and reduces the rate of cell
destruction. It neutralizes the most common free radicalsuperoxide radicalby
converting it into hydrogen peroxide and water. Because superoxide is harmful to
human cells, and certain forms of SOD exist naturally in most humans, many
studies show that SOD is valuable in protecting human cells from the harmful
effects of superoxide. SOD is thought to be more powerful than antioxidant
vitamins as it activates the body's productions of its own antioxidants. As a result, SOD is referred to as the enzyme of
life. Commercially, SOD has a wide range of applications and is widely applied
in foods, drinks, skin care productions, pharmaceuticals, to combat ailments
ranging from sunburn to rheumatoid arthritis.
14
First Quarter of 2016 Financial Performance
Highlights
The following are some financial highlights for the three
months ended March 31, 2016:
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Revenue
: Revenue increased $12,906, to $16,466 for
the three months ended March 31, 2016, from $3,560 for the same period in
2015.
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Expense from operations
: Expense from operations
decreased $35,657, or 25.63%, to $103,486 for the three months ended March
31, 2016, from $139,143 for the same period in 2015.
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Net loss
: Net loss decreased $51,513, or 37.22%,
to $86,894 for the three months ended March 31, 2016, from $138,407 for
the same period in 2015.
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Fully diluted net income per share
: Fully diluted
net loss per share was $0 for the three months ended March 31, 2016, as
compared to $0 for the same period in 2015.
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Provision for Income Taxes
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United States
: China Longyi Group International
Holding Limited is subject to United States tax at a tax rate of 34%. No
provision for income taxes in the United States has been made as China
Longyi Group International Holding Limited had no income subject to United
States taxation in the first quarter of 2016.
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British Virgin Islands
: Our wholly owned
subsidiary Top Team Holdings Limited was incorporated in the British
Virgin Islands, or the BVI, and, under the current laws of the BVI, is not
subject to income taxes.
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China
: Before the implementation of the enterprise
income tax, or EIT, Foreign Invested Enterprises or FIEs, established in
the PRC were generally subject to an EIT rate of 33.0%, which includes a
30.0% state income tax and a 3.0% local income tax. On March 16, 2007, the
National Peoples Congress of China passed the new Corporate Income Tax
Law, or EIT Law, and on November 28, 2007, the State Council of China
passed the Implementing Rules for the EIT Law, or Implementing Rules,
which took effect on January 1, 2008. The EIT Law and Implementing Rules
impose a unified EIT of 25.0% on all domestic-invested enterprises and
FIEs, unless they qualify under certain limited exceptions. Therefore,
nearly all FIEs are subject to the new tax rate alongside other domestic
businesses rather than benefiting from the old tax laws applicable to
FIEs, and its associated preferential tax treatments, beginning January 1,
2008.
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Despite these pending changes, the EIT Law gives the FIEs
established before March 16, 2007, or Old FIEs, such as our subsidiaries
Beijing SOD and Chongqing SOD, a five-year grandfather period during which
they can continue to enjoy their existing preferential tax treatments.
During this five-year grandfather period, the Old FIEs which enjoyed tax
rates lower than 25% under the original EIT Law shall gradually increase
their EIT rate by 2% per year until the tax rate reaches 25%. In addition,
the Old FIEs that are eligible for the two-year exemption and three-year
half reduction or five-year exemption and five-year half-reduction
under the original EIT Law, are allowed to remain to enjoy their
preference until these holidays expire. The discontinuation of any such
special or preferential tax treatment or other incentives would have an
adverse effect on any organizations business, fiscal condition and
current operations in China.
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15
In addition to the changes to the
current tax structure, under the EIT Law, an enterprise established outside of
China with de facto management bodies within China is considered a resident
enterprise and will normally be subject to an EIT of 25.0% on its global income.
The Implementing Rules define the term de facto management bodies as an
establishment that exercises, in substance, overall management and control over
the production, business, personnel, accounting, etc., of a Chinese enterprise.
If the PRC tax authorities subsequently determine that we should be classified
as a resident enterprise, then our consolidated global income will be subject to
PRC income tax of 25.0% .
We incurred no income taxes in either the three months ended
March 31, 2016 or the three months ended March 31, 2015.
Results of Operations
Three Months Ended March 31, 2016 Compared to Three
Months ended March 31, 2015
The following table summarizes the results of our operations
for the three months ended March 31, 2016 and 2015 and provides information
regarding the dollar and percentage increase or (decrease) from the three months
ended March 31, 2015 to the same period of 2016.
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Three Months
Ended
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March 31,
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Increase
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% Increase
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Item
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2016
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2015
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(Decrease)
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(% Decrease)
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Revenue
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$
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16,466
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$
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3,560
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$
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12,906
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362.53%
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Cost of Revenue
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16,466
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4,165
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12,301
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295.34%
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Gross Profit
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0
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(605
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605
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100%
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Operating Expenses
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103,486
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139,143
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(35,657
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)
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(25.63%
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)
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Other Income (expense)
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16,592
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1,341
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15,251
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1137.29%
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Provision for Taxes
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-
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-
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-
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-
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Net loss attributable to
China Longyi
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$
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79,377
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$
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130,992
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$
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(51,615
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(39.40%
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)
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Revenues.
Our revenues are derived primarily from sales
of our SOD products. Our revenues increased $12,906, to $16,466 for the three
months ended March 31, 2016, from $3,560 for the same period in 2015. The
increase in revenues was due to more SOD products being sold for the three
months ended March 31, 2016 compared with the same period of 2015.
Cost of Revenues.
Our cost of revenues is primarily
comprised of the costs of our raw materials, labor and overhead. As a result of
our increased manufacturing activities during the first quarter of 2016, our
cost of revenues increased $12,301, to $16,466 for the three months ended March
31, 2016, from $4,165 during the same period in 2015.
Gross Profit.
Our gross profit increased by $605, to $0
for the three months ended March 31, 2016 from $(605) during the same period in
2015. The gross profit increased mainly due to more SOD products being sold for
the three months ended March 31, 2016 compared with the same period of 2015.
Operating Expenses
. Our total operating expenses for the
three months ended March 31, 2016 decreased $35,657, or 25.63%, to $103,486,
from $139,143 for the same period in 2015. This decrease was mainly attributable
to the fact that we paid less professional and financial consultation fees for
the three months ended March 31, 2016 compared with the same period of 2015.
16
Other Income (expense).
Other income was $16,592 during
the three months ended March 31, 2016, an increase of $15,251 from income of
$1,341 during a same period in 2015.
Net Loss attributable to China Longyi.
As a result of
above facts, our net loss decreased by $51,615, or 39.40%, to $79,377 for the
three months ended March 31, 2016, from $130,992 for the same period in 2015.
Liquidity and Capital Resources
We had $22,000 in cash and cash equivalents as of March 31,
2016. As of such date, we also had total current assets of $446,291 and total
assets of $850,399. We had total current liabilities (consisting of accounts
payable, accrued liabilities, due to directors and other payables) in the amount
of $2,057,825. Our stockholders equity as of March 31, 2016 was $(1,207,426).
Since inception, we have accumulated a net loss of $31,076,284.
The following table summarizes the statements of cash flows
from the financial statements for the three months ended March 31, 2016 compared
to the three months ended March 31, 2015:
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Three
Months Ended
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March 31,
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2016
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2015
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Net Cash Provided By/(Used
In) Operating Activities
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$
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(17,428
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$
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60,853
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Net Cash Provided By/(Used In) Investing
Activities
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-
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-
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Net Cash Provided By/(Used
In) Financing Activities
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7,087
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(1,629
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)
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Effect of foreign exchange rate fluctuation
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2,912
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(1,541
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)
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Net increase (decrease) in
Cash and Cash Equivalents
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(7, 429
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)
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57,683
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Cash and Cash Equivalents - Beginning of
Period
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29,429
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46,366
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Cash and Cash Equivalents
End of Period
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22,000
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104,049
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Operating Activities
Net cash used in operating activities was $17,428 for the
three-month period ended March 31, 2016 representing a decrease of $78,281 from
$60,853 of net cash provided by the operating activities for the same period of
2015. The decrease of the cash provided by operating activities was mainly
attributable to the fact that there was a change of other payables and deposits
and prepayment. Cash provided by other payable was $68,474 for the three months
ended March 31, 2016, while the cash provided from other payables was $181,051
in the same period of 2015. Cash used in deposits and prepayment was $(18,377)
for the three months ended March 31, 2016 as compared with $8,147 in the same
period of 2015.
Investing Activities
Net cash used in investing activities for the three-month
period ended March 31, 2016 and 2015 was $0 and $0, respectively.
Financing Activities
Net cash provided by financing activities for the three-month
period ended March 31, 2016 was $7,087 as compared to $1,629 used in financing
activities for the same period in 2015. Such change was attributable to the fact
that we received $7,087 as a loan from one of our directors during the first
quarter of 2016.
The Company did not have any bank loans as of March 31,
2016.
17
We expect to generate approximately $0.15 million to
$0.25million of revenues from the sale of our products during the next 12
months. If our cash on hand and cash flow from operations do not meet our
expected capital expenditure and working capital requirements for the next 12
months, we expect that our directors will provide more cash as loans to the
company. However, we may in the future require additional cash resources due to
changed business conditions, implementation of our strategy to expand our
production capacity or other investments or acquisitions we may decide to
pursue. If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Critical Accounting Policies
Economic and Political Risks
The Company faces a number of risks and challenges as a result
of having primary operations and marketing in the PRC. Changing political
climates in the PRC could have a significant effect on the Companys business.
Foreign Currencies
The company has determined that RMB to be its functional
currency. The accompanying audited consolidated financial statements are
presented in U.S. dollars. The audited consolidated financial statements are
translated into US dollars from RMB at year-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
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March 31,
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December 31,
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2016
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2015
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2015
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RMB
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HK$
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RMB
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HK$
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RMB
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HK$
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Balance sheet items, except
for equity accounts
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6.4612
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7.7542
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6.1422
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7.7544
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6.4936
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7.7510
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Items in the statements of
income and comprehensive income, and the statements of cash flows
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6.5301
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7.7738
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6.1373
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7.7547
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6.2272
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7.7522
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Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant Estimates
Several areas require significant management estimates relating
to uncertainties for which it is reasonably possible that there will be a
material change in the near term. The more significant areas requiring the use
of management estimates related to determination of net realizable value of
inventory, allowance for doubtful accounts, property and equipment, accrued
liabilities and, the useful lives for depreciation.
Restrictions on Transfer of Assets Out of the PRC
Dividend payments by Beijing SOD are limited by certain
statutory regulations in the PRC. No dividends may be paid by Beijing SOD without first receiving prior approval from
the Foreign Currency Exchange Management Bureau. Dividend payments are
restricted to 85% of profits, after tax.
18
Revenue Recognition
The Company recognizes revenue in accordance with Staff
Accounting Bulletin No.104 Revenue recognition (ASC Topic 605). Revenues are
recognized as earned when the following four criteria are met: (1) a customer
issues purchase orders or otherwise agrees to purchase products; (2) products
are delivered to the customer; (3) pricing is fixed or determined in accordance
with the purchase order or agreement; and (4) collectability is reasonably
assured.
Inflation
Inflation does not materially affect our business or the
results of our operations.
Seasonality
We may experience seasonal variations in our future revenues
and our operating costs, however, we do not believe that these variations will
be material.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.