China America Holdings, Inc.Ziyang Ceramics Corporation (the “Company”, “we,” “us,” or “ours,”) is a Florida corporation formed on July 13, 1998. Prior to June 27, 2007, our core business was the design, development, manufacture and sale of fingerprint-based identification products and systems that verify a person's identity. We had also licensed certain patented technology designed to detect chemical vapors and unexploded ordnance including bombs, grenades, shells, rockets, and other explosive devices.

Effective June 27, 2007, we entered into a membership interest exchange agreement with Shanghai AoHong Chemical Co., Ltd., a Chinese limited liability (“AoHong Chemical”), and its sole members Mr. Aihua Hu and his wife, Mrs. Ying Ye. Under the terms of the agreement, we acquired 56.08% of the membership interests of AoHong Chemical from that company in exchange for $3,380,000 to be invested in AoHong Chemical between September 30, 2007 and July 27, 2009.  As part of the transaction, 12,500,000 shares of our common stock valued at $1,187,500 were issued to Mr. Hu.  As of September 30, 2010 $1,780,000 remained outstanding to AoHong Chemical from this transaction, which was accounted for as an intercompany transaction.  On December 9, 2010 we borrowed $1,780,000 from Glodenstone Development Limited, a British Virgin Islands company (“Glodenstone”), an unrelated third party, in order to allow us to pay the remaining portion of our obligation to contribute capital to AoHong Chemical as we negotiated the terms to sell our interest in AoHong Chemical to Glodenstone.  On December 10, 2010 we made the required payment to AoHong Chemical.  On December 23, 2010 we entered into a Membership Interest Sale Agreement with Glodenstone, Mr. Hu and Ms. Ye to sell our 56.08% membership interest in AoHong Chemical to Glodenstone for aggregate consideration of $3,508,340, payable by cancellation of our $1,780,000 debt to Glodenstone and Glodenstone’s issuance to us at closing of a promissory note in the principal amount of $1,728,340.  On June 9, 2011, our shareholders approved the sale of our 56.08% interest in AoHong Chemical. We recorded a provision for the loss on the disposal of our investment in AoHong Chemical in the amount of $3.5 million.

On June 30, 2011, we entered into a Share Exchange Agreement (the “Share Exchange”) to acquire all of the issued and outstanding capital stock of China Ziyang Technology Co., Limited, a Hong Kong company (“China Ziyang Technology”). China Ziyang Technology acquired 100% of the capital stock of Ziyang Ceramic Company Limited, a Chinese company (“Ziyang Ceramics”) on June 29, 2011 in exchange for payment to the former shareholders of Ziyang Ceramics of RMB 50,000,00 (approximately $7,632,000). Ziyang Ceramics is a manufacturer and distributer of porcelain tiles used for residential and commercial flooring and walling in the PRC. Under the terms of the Share Exchange, we exchanged 236,013,800 shares of our common stock (the “Pre-Reverse Split Shares”), representing approximately 54.0% of our issued and outstanding shares, and a Convertible Promissory Note in the principal amount of $14,739,932 which bears interest at the rate of 3% per annum and will automatically convert into 7,369,966 shares of our common stock, after giving effect to a then proposed 400 for 1 reverse stock split of our common stock (the “Post-Reverse Split Shares”), for 100% of the outstanding shares of China Ziyang Technology. Because we did not have a sufficient number of authorized shares at the time the transaction was completed to issue the full amount of shares required for the acquisition of China Ziyang Technology, we issued the convertible note which automatically converts into the Post Reverse Split Shares once the aforementioned reverse stock split becomes effective. The Pre-Reverse SplitOn January 27, 2012, the above mentioned 400 for 1 reverse stock split became effective and Post-Reverse Split Shares, when issued, will represent approximatelythe Convertible Promissory Note automatically converted into 7,369,966 shares of our common stock, which resulted in the former shareholders of Ziyang Ceramics owning 79.6% of our issued and outstanding common stock. As a result of the consummation of the Share Exchange, China Ziyang Technology and Ziyang Ceramics are now our wholly-owned subsidiaries. The transaction was accounted for as a reverse merger and recapitalization of China Ziyang Technology whereby China Ziyang Technology is considered the acquirer for accounting purposes. Effective as of June 30, 2011, our Board of Directors elected to change our fiscal year from September 30, to December 31, consistent with the fiscal year end of Ziyang Ceramics.

Our business is now conducted through our Ziyang Ceramics subsidiary, which manufactures and distributes porcelain tiles used for interior residential and commercial flooring and walls. Ziyang Ceramics was established in January 2006.

 

The accompanying consolidated financial statements and related notes werehave been prepared in accordance with accounting principles generally accepted inU.S. GAAP and pursuant to the United Statesrules and regulations of America (“U.S. GAAP”the Securities and Exchange Commission (the "SEC").

These unaudited consolidated interim financial statements should be read in conjunction with the financial statements and footnotes for the year ended December 31, 2011 included in our Form 10-K as filed with the SEC. The results of operations and cash flows for the three months ended March 31, 2012 are not necessarily indicative of the results of operations or cash flows which may be reported for future periods or the full fiscal year.

Our functional currency is the Chinese Renminbi (“RMB”).  In accordance with Section 830-20-35 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the financial statements were translated into United States dollars using balance sheet date rates of exchange for assets and liabilities, and average rates of exchange for the period for the income statements.  Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations.  Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in other comprehensive income or loss.

We invest in developing new and high-end products and improving production efficiency both through its internal research and development staff and in partnership with industry consultants from time to time. We developed a new product Pilates flooring tiles, an advanced type of polycrystalline powder porcelain tiles with mixed appearances of ceramic, porcelain, and stone textures.

In October 2011, we applied to register with State Administration for Industry and Commerce of China for our trademark Dameiyinghua that will cover our high-end series of porcelain tile products including interior porcelain wall tiles and Pilates flooring tiles. The registration process usually takes about one year to complete.

 

 For the ninethree months ended September 30,March 31, 2012 and 2011, and 2010, we recorded $23,118$32,393 and $0 of research and development expense, respectively.

We value inventories, consisting of raw materials, supplementary materials, packaging materials and finished goods, at the lower of cost or market. Cost is determined on the weighted average cost method. We regularly review inventories on hand and, when necessary, records a provision for excess or obsolete inventories based primarily on the current selling price. The cost of raw materials which we mine consists of direct mining cost and cost related to shipment to our warehouse.

We follow U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104 for revenue recognition.  Revenue is recognized when earned and is reported net of refunds.  

Since we use recycled raw materials to manufacture its products, the State Administration of Taxation in the PRC has granted us VAT tax exemption on sales of finished goods. The tax exemption is subject to review and approval of the tax authority on an annual basis.

Comprehensive income (loss) consists of net income and foreign currency translation adjustments and is presented in the Consolidated Statements of Operations and Comprehensive Income (Loss) and Stockholders’ Equity.Income.

Prepaid expenses and other current assets at September 30, 2011March 31, 2012 and December 31, 20102011 consist of the following:

On October 29, 2010, Ziyang Ceramics loaned Zhucheng Public Hospital, an unrelated third party, RMB 20,000,000 ($3,130,625)3,130,625 at issuance date). This loan bears interest at the rate of 1% per month and is secured by its land use right, property and fixed assets. The interest is due every six months and the principal due on October 28, 2011. The principal payment on thisOn October 31, 2011, the two parties entered into an agreement to renew the loan of $3,130,625 was received on October 28, 2011 and will be recorded infor another year, extending the fourth quarter of 2011.due date to November 30, 2012.

On June 9, 2011, our shareholders approved the sale of its 56.08% interest in its former subsidiary, AoHong Chemical, to Glodenstone. Following the June 9, 2011 shareholders’ meeting, we completed the sale of its 56.08% interest in AoHong Chemical to Glodenstone for $3,508,340 payable by Glodenstone’s forgiveness of the $1,780,000 debt we owed Glodenstone and the delivery to us of Glodenstone’s promissory note in the principal amount of $1,728,340. The promissory note bearsbore interest at an annual rate of 5%, iswas due December 31, 2011 and iswas secured by Glodenstone’s 56.08% ownership interest in AoHong Chemical. We received the full payment from Glodenstone in early January 2012.

Property, plant and equipment, consists of the following:

As of September 30, 2011March 31, 2012 and December 31, 2010,2011, the net book value of property, plant and equipment pledged as collateral for bank loans was $2,553,781,$1,097,874, and $2,738,019,$1,138,346, respectively. Refer to Note 1110 – Loans Payable for details on the terms and covenants on these loans.

Other long term assets consists of mining rights that cover fivesix mining areas all located in Zhucheng City of Shandong Province in China. We have obtained the right to mine these areas under the terms of mining right permits that permit us to extract specified quantities of white clay deposits on these properties. We use the extracted material as raw materials in the production of ceramic tiles it manufactureswe manufacture and sells.sell. These mining right permits cover a period of 4 to 68 years which we treat as the useful life, with expiration dates varying from January 2013 to October 2014,2019, with estimated extraction rights of approximately 638,89020,738,716 tons of white clay raw material. We amortize the mining rights on a straight-line basis over the useful life of each individual mining right permit.

We are in compliance with the terms and covenants of the above loans as of September 30, 2011.

On July 1, 2011, we consolidated our notes payable to China Direct Industries,Investments, Inc. (“China Direct”), a Florida companycorporation and a wholly owned subsidiary of CD International Enterprises, Inc., a principal share holdershareholder of our company, into one promissory note in the amount of $987,420,$1,007,420, which is due on December 31, 2011, and bears interest rate of 4% per annum, payable on the due date of the note. We paid the amount in full in January 2012.

At September 30, 2011March 31, 2012 and December 31, 2010,2011, our related party payable to former Ziyang Ceramics shareholders and China Direct,CD International Enterprises, Inc., our corporate management service provider and owner of approximately 13%16.8% of our common stock, was $564,399$0 and $0,$559,325, respectively, comprised of the following:

The interest payable of $10,074$20,149 reflects the accrued interest on the $1,007,420 of promissory notes due to China Direct--seeDirect Investments, Inc. --see Note 1311 – Notes Payable – Related Party.

The professional fees represent legal, auditing, public and investor relations fees that have been paid by China Direct Investments, Inc. on our behalf.

Other payable primarily consists of amounts due for construction services and goods related to the construction of our new porcelain wall tile production line and amounts payable to social security funds in accordance with the Chinese laws and regulations.

On June 30, 2011, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) among us, China Ziyang Technology and its shareholder Best Alliance Worldwide Investments Limited (“BAW”) which owned 100% of the outstanding shares of Ziyang Ceramics.

Under the Share Exchange Agreement, we exchanged 236,013,800590,035 shares of our common stock (the “Pre-Reverse Split Shares”) representing approximately 54.0% of our issued and outstanding shares and a Convertible Promissory Note in the principal amount of $14,739,932 which bearsbore interest at the rate of 3% per annum and iswas automatically convertible into 7,369,966 shares of our common stock after giving effect to and upon completion of the  400 for 1 reverse stock split we planplanned to implement pursuant to the terms of the convertible note (the “Post-Reverse Split Shares”) for 100% of the outstanding shares of China Ziyang Technology. On September 30, 2011 we amended the Convertible Promissory Note issued to BAW to eliminate the requirement for payment of interest. The Pre-Reverse Split and Post-Reverse Split Shares when issued will representrepresented approximately 79.6% of our issued and outstanding common stock and is hereinafter referred to as the “Share Exchange”. As a result of the consummation of the Share Exchange, China Ziyang Technology and Ziyang Ceramics are now our wholly-owned subsidiaries.  

As discussed in Note 1, on June 13, 2011 we entered into a consulting agreement with China Direct Investments, Inc. and its affiliate, (“China Direct”), substantial shareholders of our company, whereby China Direct Investments, Inc. agreed to perform certain consulting services for us, including identifying and evaluating companies for possible acquisition, performance of due diligence, and coordination of legal accounting and SEC filings in connection with possible acquisition targets.  As compensation for China Direct’sDirect Investments, Inc.’s services that were completed on June 30, 2011, we issued China Direct Investments, Inc. a convertible promissory note in the principal amount of $11,075,206 (the “China Direct Investments, Inc. Convertible Note”) and agreed to pay China Direct Investments, Inc. $500,000 in cash upon our receipt of the loan payment proceeds from Glodenstone Development Limited.  The China Direct Investments, Inc. Convertible Note bearsbore interest at the rate of 3% per annum and iswas automatically convertible into 1,538,223 shares of our common stock, after giving effect to and upon completion of the 400 for 1 reverse stock split we plan to implementcompleted in connection with our acquisition of China Ziyang Technology.January 2012. On September 30, 2011 we amended the China Direct Investments, Inc. Convertible Note to eliminate the requirement for payment of interest. Because the terms of the China DirectCD International Enterprises, Inc. Note arewere such that it cancould only be settled through the issuance of our common stock, we accounted for the note as an equity transaction and included it as Additionaladditional paid in capitalcapital.

The 400 for 1 reverse stock split of our issued and outstanding common stock was effective on January 27, 2012. As a result, the Convertible Promissory Note issued to BAW and the China Direct Investments, Inc. Convertible Note were automatically converted to 7,369,966 and 1,538,223 shares of our balance sheet as of June 30, 2011.common stock, respectively.

The Convertible Promissory Note issued to BAW and the China Direct Investments, Inc. Convertible Note were structured in the manner of a recapitalization such that the notes will be settled only in shares of our common stock. The terms of the promissory notes provided that, immediately following the date on which we shall have filed Articles of Amendment to its Articles of Incorporation with the Secretary of State of Florida increasing the number of its authorized shares of Common Stock or upon completion of a reverse stock split so that there are a sufficient number of authorized shares of our common stock to permit a full conversion of the principal amount of these notes, all amounts will automatically convert into shares of our Common Stock at the predetermined conversion price without any action of the holders. In addition, as the shareholders of BAW and Ziyang Ceramics are the same individuals, who became our controlling interest holders, approval from shareholders to increase authorized shares or to reverse split currently outstanding common stock is deemed within our control. Accordingly, the Convertible Promissory Notes were accounted for as additional paid in capital.

At September 30, 2011,March 31, 2012, we had 10,450,00120,875 warrants outstanding that were subject to the most favored nations’ provision and a related derivative liability of $33,851.$25,021.  Our assumptions under the Black Scholes Option Pricing Model for the warrants valued at September 30, 2011March 31, 2012 were as follows:

Entities in China are generally required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve equals 50% of the entity’s registered capital or members’ equity. Appropriations to the statutory public welfare fund are at a minimum of 5% of the after tax net income determined in accordance with PRC GAAP.  Commencing on January 1, 2006, the new PRC regulations waived the requirement for appropriating retained earnings to the welfare fund.

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and equivalents. As of September 30, 2011,March 31, 2012, substantially all of our cash and equivalents were held by major financial institutions located in the PRC, none of which are insured. However, we have not experienced losses on these accounts and management believes that we are not exposed to significant risks on such accounts.

We cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that we could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of RMB converted to U.S. dollars on that date.  The exchange rate could fluctuate depending on changes in the political and economic environments without notice.

On October 7, 2010, we entered into a guarantee agreement with the China Agriculture Bank Zhucheng Branch, under which we guaranteed repayment of thea loan in the amount of RMB 15,000,000 (approximately $2,308,000) that the bank issued to Zhucheng Chunguang Electronics Co., a third party, for a term of two years. In the event that the borrower, Zhucheng Chunguang Electronics Co., defaults on the loan, we are liable to repay the full principal, accrued interest, penalty and/or related litigation expenses, if any.

The following discussion should be read in conjunction with the preceding unaudited consolidated financial statements and our Annual Report on Form 10-K for the related footnotes, and Form 8-K (Amendment No.3) filed with the SEC on October 26,year ended December 31, 2011.

In August 2011, Ziyang Ceramicswe launched the productionsproduction of a newly built line of interior porcelain wall tiles with annual production capacity of approximately 80 million square feet. In third quarter of 2011, we also made an investment of approximately $90,000 to build a fully automated packaging line that has significantly improved our packaging efficiency and quality while reducing labor cost. In addition, we also invested approximately $125,000 to upgrade our warehouse logistics system which will substantially reduce labor cost and overhead expenses. Ziyang CeramicsWe also ownsown mining rights to extract approximately 638,000 tons of white clay raw material which it plans towe use for itsour own production and sell to third parties.

Ziyang CeramicOur operations are in the PRC and we are able to take advantage of certain tax benefits which improve our net income. Our sales of its finished goods are exempt from a 17% value added tax and iswe are entitled to a deduction from income taxes in an amount equal to 10% of itsour revenues because itwe recycles gas and heat and uses certain types of raw materials in the manufacture of itsour products. Eligibility for these tax benefits is subject to review every two years with the next renewal date on January 1, 2013.