China Ginseng 10Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _____________________ to ______________

China Ginseng Holdings, Inc.

(Exact name of registrant as specified in its charter)

Nevada		20-3348253
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

64 Jie Fang Da Road Ji Yu Building A, Suite 1208 Changchun City, China		130022
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone (01186) 43185790039

SEC File Number: 000-54072

N/A

(Former name, former address and former three months, if changed since last report)

Check whether the issuer (1) 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 o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer		o		Accelerated filer		o
Non-accelerated filer		o		Smaller Reporting Company		o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No o

As of February 8, 2012 there were 44,397,297 shares issued and outstanding of the registrant’s common stock.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			F-1
Item 2. Management’s Discussion and Analysis or Plan of Operation.			1
Item 3. Quantitative and Qualitative Disclosure about Market Risk			17
Item 4. Controls and Procedures.			18
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.			20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			20
Item 3. Defaults Upon Senior Securities			20
Item 4. (Removed and Reserved).			20
Item 5. Other Information.			20
Item 6. Exhibits.			20

PART I — FINANCIAL INFORMATION

Contents

Consolidated Balance Sheets as of December 31, 2011 (Unaudited) and June 30, 2011	F-2

Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended December 31, 2011 and 2010 (Unaudited)	F-3

Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and 2010 (Unaudited)	F-4

Notes to Consolidated Financial Statements (Unaudited)	F-6

F-1

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31, 2011			June 30, 2011
	(Unaudited)

CURRENT ASSETS
Cash	$	63,110		$	69,094
Accounts receivable- net		1,715,297			947,986
Inventory		1,956,031			1,520,094
Ginseng crops, current portion		203,411			769,581
Due from related parties		53,045			176,897
Prepaid expenses		494,440			848,738
Total Current Assets		4,485,334			4,332,390

PROPERTY AND EQUIPMENT, net		2,617,755			2,585,833

OTHER ASSETS
Ginseng crops, non-current portion		2,256,102			2,160,697
Intangible assets-patents, net		4,432			8,037
Receivable from farmers		535,265			449,334
Investment in unconsolidated subsidiaries		40,154			23,643
Deferred income tax asset		200,308			195,025

Total Assets	$	10,139,350		$	9,754,959

CURRENT LIABILITIES
Loan payable to financial institution	$	317,415		$	309,043
Note payable – building purchase		1,269,660			250,000
Notes payable – related parties		1,411,132			830,570
Accounts payable		1,020,115			776,813
Accrued expenses		315,973			345,278
Taxes payable		255,115			221,732
Payments received in advance		268,013			139,584
Total Current Liabilities		4,857,423			2,873,020
OTHER LIABILITIES
Note payable-building purchase, net of current portion		-			986,170
Payable to farmers		837,586			803,214
Total Liabilities		5,695,009			4,662,404
STOCKHOLDERS’ EQUITY
Common Stock, $0.001 par value, 50,000,000
shares authorized; 44,397,297 and 44,196,597
shares issued and outstanding at December 31,
and June 30, 2011, respectively		44,398			44,197
Additional paid-in capital		7,285,352			7,163,705
Accumulated deficit		(3,670,127	)		(2,835,925	)
Accumulated other comprehensive income		784,718			720,578
Total Stockholders’ Equity		4,444,341			5,092,555

Total Liabilities and Stockholders’ Equity	$	10,139,350		$	9,754,959

See accompanying notes to consolidated financial statements.

F-2

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

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


REVENUES	$	1,352,050		$	919,877		$	2,244,455		$	973,175

COSTS AND EXPENSES
Cost of goods sold		1,031,186			819,222			1,754,652			864,481
Selling, general and administrative expenses		625,253			224,172			1,126,816			502,553
Depreciation and amortization		24,166			4,620			30,532			10,613
Total Costs and Expenses		1,680,605			1,048,014			2,912,000			1,377,647

LOSS FROM OPERATIONS		(328,555	)		(128,137	)		(667,545	)		(404,472	)

NON OPERATING EXPENSE
Interest expense		91,128			44,641			147,944			76,759
Net Other Expense		91,128			44,641			147,944			76,759

LOSS BEFORE INCOME TAXES		(419,683	)		(172,778	)		(815,489	)		(481,231	)

PROVISION FOR INCOME TAXES		2,260			16,138			18,713			16,138

NET LOSS	$	(421,943	)	$	(188,916	)	$	(834,202	)	$	(497,369	)

OTHER COMPREHENSIVE INCOME
Translation Adjustment		33,788			54,340			64,403			125,235

COMPREHENSIVE LOSS	$	(388,155	)	$	(134,576	)	$	(769,799	)	$	(372,134	)

NET LOSS PER COMMON SHARE
Basic	$	(0.01	)	$	(0.00	)	$	(0.02	)	$	(0.01	)
Diluted	$	(0.01	)	$	(0.00	)	$	(0.02	)	$	(0.01	)

WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING –
Basic		44,397,297			42,515,237			44,384,208			41,337,249
Diluted		44,397,297			42,515,237			44,384,208			41,337,249

See accompanying notes to consolidated financial statements.

F-3

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months Ended
	December 31,
	2011			2010


Cash Flows from Operating Activities:
Net loss	$	(834,202	)	$	(497,369	)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization		114,996			102,473
Imputed interest		71,908			51,820
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		(767,311	)		(526,450	)
(Increase) decrease in inventory		34,828			(99,160	)
(Increase) decrease in prepaid expense		354,298			(1,369,662	)
(Increase) decrease in due from related parties		123,852			(39,255	)
(Increase) decrease in amounts due from farmers		(85,931	)		(21,196	)
Increase (decrease) in accounts payable		243,302			(229,855	)
Increase (decrease) in taxes payable		33,383			18,599
Increase (decrease) in receivables in advance		128,429			710,698
Increase (decrease) in accrued expenses		(29,305	)		80,845
Net cash provided by (used in)
operating activities		(611,753	)		(1,818,512	)

Cash Flows from Investing Activities:
Investment in unconsolidated subsidiary		(15,871	)		(23,102	)
Purchase of property and equipment		(64,292	)		(4,839	)
Net cash provided by (used in)
investing activities		(80,163	)		(27,941	)

Cash Flows from Financing Activities:
Sale of common stock for cash		49,940			1,819,872
Proceeds from loans payable to farmers		34,372			56,524
Proceeds from loans payable to related parties		580,562			29,781
Repayments of loans payable to related parties		-			(193,433	)
Repayments of notes payable- building		-			(16,000	)
Net cash provided by (used in)
financing activities		664,874			1,696,744

Effect of exchange rate on cash		21,058			112,937

Increase (decrease) in cash		(5,984	)		(36,772	)

Cash at beginning of period		69,094			171,111

Cash at end of period	$	63,110		$	134,339

See accompanying notes to consolidated financial statements.

F-4

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES (CONTINUED)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Months Ended
	December 31,
	2011		2010
Supplemental Disclosure of Cash Flow
Information:

Cash paid for:
Interest	$	-	$	-
Income taxes		-		-

See accompanying notes to consolidated financial statements.

F-5

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE A – PRESENTATION, NATURE OF BUSINESS, AND GOING CONCERN

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. Results for the three and six months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. For further information, refer to the financial statements and footnotes thereto included in the China Ginseng Holdings, Inc. Form 10K for the year ended June 30, 2011.

Nature of Business

China Ginseng Holdings, Inc. and Subsidiaries (the “Company”), was incorporated under the laws of Nevada on June 24, 2004.

On November 24, 2004, the Company acquired 55% of Yanbian Huaxing Ginseng Industry Co. Limited (“Yanbian Huaxing”), which is located in China and, is in the business of farming, processing, distribution, and marketing of Asian Ginseng. In 2010, the Company ceased marketing ginseng and is presently utilizing the harvest to produce a ginseng beverage. However, it continues to buy ginseng for the resale market. On November 24, 2005, the Company acquired the remaining 45% of Yanbian Huaxing.

Yanbian Huaxing controls, through 20 year leases granted by the Chinese Government, approximately 1,500 hectors (3,705 acres) of land used to grow ginseng. The Company had no operations prior to November 24, 2004. These leases expire through 2024.

On August 24, 2005, the Company acquired Jilin Ganzhi Ginseng Produce Co. Limited, whose principal business is the manufacture of ginseng drinks.

On October 19, 2005, the Company incorporated a new company, Jilin Huamei Beverage Co. Limited (“Jilin Huamei”). To date, Jilin Huamei has not had any significant operations.

On March 31, 2008 the Company acquired Tonghua Linyuan Grape Planting Co. Limited (“Tonghua Linyuan”) whose principal activity is the growing, cultivation and harvesting of a grape vineyard. Tonghua Linyuan started wine production through a wine producer in March 2011, but has had only minimal sales to date. As of December 31, 2011, Tonghua Linyuan leased 750 acres of land on which the grapes were planted.

Consolidated Financial Statements

The financial statements include the accounts and activities of China Ginseng Holdings, Inc. and its wholly-owned subsidiaries, Yanbian Huaxing Ginseng Co. Limited, Jilin Huamei Beverage Co. Limited, Jilin Ganzhi Ginseng Products Co. Limited, and Tonghua Linyuan Grape Planting Co. Limited. All intercompany transactions have been eliminated in consolidation.

F-6

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE A – PRESENTATION, NATURE OF BUSINESS, AND GOING CONCERN (CONTINUED)

Going Concern

As indicated in the accompanying financial statements, the Company had an accumulated deficit of $3,670,127 as of December 31, 2011 and there are existing uncertain conditions the Company foresees relating to its ability to obtain working capital and operate successfully. Management’s plans include the raising of capital through the equity markets to fund future operations and the generating of revenue through its businesses. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations.

Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenues will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE B – PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following at:

	December 31,			June 30,
	2011			2011
Buildings and improvements	$	1,579,139		$	1,535,533
Vineyards		1,216,103			1,185,930
Machinery and equipment		855,719			788,006
Motor vehicles		80,807			59,137
Office equipment		35,909			37,190
		3,767,677			3,605,796
Less accumulated depreciation		(1,149,922	)		(1,019,963	)
	$	2,617,755		$	2,585,833

Total Depreciation was $111,220 and $101,159 for the six months ended December 31, 2011 and 2010, respectively. Depreciation is recorded in the financial statements as follows:

	Six Months Ended
	December 31,
	2011		2010
Depreciation Expense	$	26,756	$	9,299
Capitalized Inventory		45,831		74,252
Capitalized Ginseng Crops		38,633		17,608
	$	111,220	$	101,159

F-7

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE B - PROPERTY AND EQUIPMENT (CONTINUED)

Depreciation expense is included within Deprecation and amortization on the consolidated Statements of Operations. Capitalized Inventory and Ginseng Crops are included within the respective balances on the consolidated Balance Sheets.

NOTE C –INVENTORY

Inventory is comprised of the following at:

	December 31,		June 30,
	2011		2011
Fresh and dried harvested Ginseng	$	120,694	$	-
Raw materials		1,451,360		1,355,747
Finished goods		334,774		116,321
Operating supplies		49,203		48,026
	$	1,956,031	$	1,520,094

At December 31, 2011 and June 30, 2011, there were no shipments of Ginseng at customer locations awaiting inspection and approval that may be subject to invoicing.

NOTE D – GINSENG CROPS

The Company’s business, prior to June 30, 2009, was primarily to harvest and sell fresh and dried Ginseng. The growth period takes approximately 6 years before harvest can commence and up to 8 years for improved harvest and seedling yields. The Company is changing its business model to utilize the harvested Ginseng to manufacture Ginseng juice and other Ginseng beverages. It commenced the juice operation in August 2010. The Company plants selected areas each year and tracks the costs expended each year by planting area. The Chinese government owns all the land in China.

Currently, the Company has land grants from the Chinese government for approximately 1,500 hectors of land (approximately 3,705 acres) to grow Ginseng which were awarded in April and May 2005. These grants are for 20 years and the management of the Company believes that the grants will be renewed as the grants expire in different areas. However, there are no assurances that the Chinese government will continue to renew these grants in the future. The planting of new Ginseng is dependent upon the Company’s cash flow and its ability to raise working capital.

During the past 5 years, the Company has planted approximately 520,000 square meters of land which represents approximately 3% of the total land grants. The Company plans to plant over the next 5 years 100,000 square meters, representing approximately 20,000 square meters per year. In the succeeding five years, the Company plans to harvest approximately 413,000 square meters of ginseng. The harvest plan by year is as follows: 2011- 109,000; 2012-77,000; 2013-90,000; 2016-70,000 and 2017-67,000.

F-8

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE D – GINSENG CROPS (CONTINUED)

An analysis of ginseng crop costs is as follows for each of the applicable periods:

	December 31,			June 30,
	2011			2011
Beginning Crop Costs	$	2,930,278		$	3,836,731
Currency Conversion Adjustment to Beginning Balance		-			156,308
Capitalized Costs During Year:
Utilities		-			1,325
Field clearing and cultivation		-			10,041
Farmer lease fee net of management fee		(63,695	)		(43,348	)
Labor		54,133			-
Depreciation		38,633			11,267
Other		117,946			822
Total Capitalized Costs		147,017			(19,893	)
Less:
Cost of crops harvested		(821,193	)		(1,042,868	)
		(821,193	)		(1,042,868	)

Ending Crop Costs		2,256,102			2,930,278
Less: Current Portion		203,411			769,581
Non-Current Portion of Crop Costs	$	2,052,691		$	2,160,697

The cost of harvest is calculated by reference to the planting area and the detailed costs maintained for each planting area. Based upon the square meters planted by area, a square meter cost is calculated and applied to the square meters harvested, rendering a cost of harvest.

For each financial reporting period, the Ginseng crop harvested is valued at net realizable value. If the net realizable value is lower than carrying value, a write down is made for the difference.

NOTE E – AGREEMENTS WITH FARMERS

The Company has executed agreements with a number of local farmers to grow, cultivate and harvest ginseng utilizing the Company’s land grants. The farming contracts commenced in January 2008. In connection with these agreements, the Company (1) leases sections of the ginseng land grants to the farmers at approximately $0.20 (1.5 RMB) per square meter per year, (2) provides the seeds and fertilizer to the farmers and clears the land of large debris. These costs are capitalized by the Company and included in the Ginseng Crop inventory, (3) pays the farmers a management fee of approximately $0.50 (4.00 RMB) per square meter per year and (4) the farmers are required to produce 2kg of ginseng for each square meter that they manage. The Company pays the farmers market price for their ginseng. If the harvest is below 2kg per square meter, the difference will be deducted from the total payment for ginseng purchased. If the harvest produces more that 2kg per square meter, the Company pays approximately $3.00 for every extra kilo.

The Company has recorded a receivable from the farmers for the rental income of the leased ginseng land grants of $535,265 and $449,334 at December 31, and June 30, 2011, respectively. The Company has also recorded a long-term payable-farmers for the management fee due to the farmers. The liability at December

F-9

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE E – AGREEMENTS WITH FARMERS (CONTINUED)

31, and June 30, 2011 was $837,586 and $803,214, respectively. The receivable and liability balances for the respective areas will be settled at harvest time when the Company purchases the harvest at the current market value for ginseng.

NOTE F – INTANGIBLE ASSETS

Intangible assets consist of the patent rights for Ginseng drinks. The cost and related amortization is as follows:

	December 31,			June 30,
	2011			2011
Cost	$	17,832		$	17,362
Less accumulated amortization		(13,400	)		(9,325	)
	$	4,432		$	8,037

Amortization expense was $3,776 and $1,314 for the six months ended December 31, 2011 and 2010, respectively.

NOTE G – LOAN PAYABLE TO FINANCIAL INSTITUTION

In 2002, the Company’s subsidiary, Tonghua Linyuan Grape Co. Limited, borrowed 2,000,000 RMB from Ji’an Qingshi Credit Corporation at an interest rate of 6.325% per annum with a maturity date of April 4, 2003. The loan is currently in default. In March 2008, the lender verbally agreed that no principal or interest need be paid until the company is generating profits. Interest has been paid on the loan through June 30, 2009 and has been accrued in subsequent periods. The loan is secured by the Company’s inventory and equipment. The loan balance at December 31, and June 30, 2011 is $317,415 and $309,043, respectively.

NOTE H – NOTE PAYABLE – BUILDING PURCHASE

On March 2, 2010, the Company entered into an agreement with Meihekou Hang Yilk Tax Warehousing Logistics, an auctioneer, to purchase office and warehouse facilities. The purchase price was $1,325,479 (RMB 9,000,000). On June 24, 2010, the Company made payment of $73,804 (RMB 500,000) leaving a balance of $1,251,675 (RMB 8,500,000). On September 10, 2010, the Company paid 8,000,000 RMB through the proceeds of a loan with Meihekou City Rural Credit Union. The loan is due on August 10, 2012. The interest rate is a floating rate adjusted upwards by 90%. As of December 31 and June 30, 2011, the Central Bank Rate was 6.56% and 6.31%, respectively. Applying the adjustment factor yields a rate of 12.464% and 11.989%, respectively. The loan is secured by the building. Of the remaining 500,000 RMB to be paid, 100,000 RMB was paid prior to June 30, 2011, and the balance of 400,000 RMB remains unpaid placing the original loan in default. The lender has orally agreed to extend the date of payment to December 31, 2011. The new loan requires 1,600,000 RMB (USD $250,000) to be paid on August 10, 2011 and 6,400,000 RMB (USD $1,008,870) on August 10, 2012. The Company did not pay the 1,600,000 RMB payment due on August 10, 2011 and the the lender has orally agreed to extend the due date of this payment to August 10, 2012.

F-10

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE I – RELATED PARTY TRANSACTIONS

The Company had been financing its operations from loans from individuals, principally residents of China, who are deemed to be related parties because of their ownership interest in the Company (shareholders). The individuals have loaned the Company funds which are interest free, have no specific repayment date, and are unsecured. The funds received are evidenced by receipt of cash acknowledgments. As of December 31, 2011 and June 30 2011 funds borrowed to fund the current operations of the Company were $1,411,132 and $830,570, respectively. In accordance with FASB ASC 835-30, the Company has imputed an interest charge of $71,908 and $51,820 which has been recorded in the financial statements for the six months ended December 31, 2011 and 2010, respectively.

As of December 31, and June 30, 2011, the Company had receivables from related parties aggregating $53,045 and $176,897, respectively. In 2011, the advances to company executives include approximately $137,000 to purchase machinery, equipments and raw materials. These balances were settled in July 2011 and any excess funds were returned to the Company. In 2010, the advances are primarily for unsettled travel expenses.

NOTE J –STOCKHOLDERS’ EQUITY

The Company, through an informal private placement to Chinese national investors, sold 10,000,000 shares of its common stock at approximately $0.25 per share. From April 1, 2010 through June 30, 2011, the Company sold 9,799,300 shares for aggregate gross proceeds of $2,490,624. In July of 2011, the Company sold an additional 200,700 shares pursuant to the private placement for an additional $49,940 in gross proceeds. The placement closed in July 2011, but the 10,000,000 shares were not issued until November 2011.

NOTE K – PROVISION FOR INCOME TAXES

Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

Deferred tax assets consist of the following at:

	December 31,			June 30,
	2011			2011
Timing difference related to inventory provisions	$	200,308		$	195,025
Net operating losses		740,500			453,800
Valuation allowance		(740,500	)		(453,800	)
Deferred tax asset	$	200,308		$	195,025

The deferred tax asset is the result of an inventory provision and related reserve of $788,825 (RMB 5,048,485). Under Chinese tax laws, the Company is not entitled to a deduction for the provision until the inventory is completely discarded.

F-11

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE K – PROVISION FOR INCOME TAXES (CONTINUED)

The Company has a net operating loss carry forward as follows:

	December 31,		June 30,
	2011		2011
International (China)	$	1,542,000	$	1,004,000
United States		1,420,000		1,143,000
	$	2,962,000	$	2,147,000

The operating losses are available to offset future taxable income. The foreign (China) net operating loss carryforwards can only be carried forward for five years and will commence expiring in the year 2013. The Company does not file a consolidated tax return in China. Therefore, the profitability of the individual Chinese companies will determine the utilization of the carryforward losses. The U.S. carryforward losses are available to offset future taxable income for the succeeding 20 years and commence expiring in the year 2027.

The components of loss before taxes are as follows:

	For the Six Months Ended December 31,
	2011			2010
International (China)	$	(678,530	)	$	(152,700	)
United States		(136,959	)		(328,500	)
	$	(815,489	)	$	(481,200	)

A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and Federal statutory rate for the three months ended December 31, 2011 and 2010, respectively, are as follows:

	For the Six Months Ended December 31,
	2011			2010
Federal statutory rate		(34.0	)%		(34.0	)%
State income taxes, net of federal benefit		3.3			3.3
Valuation allowance		30.7			30.7
Earnings taxed at other than US statutory rate		-			-
Effective tax rate		-	%		-	%

NOTE L – INVESTMENT IN UNCONSOLIDATED BUSINESSES

In December 2010, the Company invested $23,102 (153,000 RMB) in Changchun Zhongshen Beverage Co. Ltd. (“Zhongshen”). This investment represented a 17% interest in Zhonghsen. Zhongshen is a retailer of ginseng juice and wine. The Company accounts for this investment utilizing the equity method.

In September 2011, the Company entered into an agreement with three other companies to establish a new entity, Jilin Province Jiliang Beverage Investment Management Co., Ltd (“Jilin Jiliang”). The purpose of Jilin Jiliang is to provide investment and project consultation. Under the agreement, the Company is required to invest a total of 500,000 RMB ($78,679) for a 10% interest in Jilin Jiliang by September 25, 2012. In

F-12

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE L – INVESTMENT IN UNCONSOLIDATED BUSINESSES (CONTINUED)

September 2011, the Company invested 100,000 RMB ($15,736). As of the date of this Report, the Company has not yet invested the remaining 400,000 RMB ($62,943). The Company will account for its investment in Jilin Jiliang using the equity method.

NOTE M – CONCENTRATIONS

In the six months ended December 31, 2011, two customers accounted for 49% of revenues.

In the six months ended December 31, 2010, one customer accounted for 100% of revenues.

NOTE N – COMMITMENTS AND CONTINGENCIES

The Company has a three year employment contract with the Chief Executive Officer expiring on January 1, 2014 aggregating $8,782 per year.

The Company has a three year contract with the Chief Financial Officer expiring on January 1, 2014 aggregating $ 4,567 per year.

The Company has a three year employment contract with a staff accountant expiring on March 1, 2012 aggregating $3,162 per year.

The Company has a three contract with the Chief Marketing Officer expiring on February 1, 2014 aggregating $17,564 per year.

The company has a one year employment contract with a bookkeeper expiring on May 31, 2012 aggregating $ 3,384per year.

The company has a one year employment contract with an office employee expiring on March 1, 2012 aggregating $3,384 per year.

The company has a three year employment contract with an office employee expiring on December 1, 2011 aggregating $2,283 per year.

The company has a two year employment contract with an office employee expiring on November 1, 2012 aggregating $2,256 per year.

The Company has a three year employment contract with the President of the Company expiring on March 20, 2012 aggregating $17,564 per year.

The Company has a one year lease for its corporate offices in China aggregating $26,500 RMB per year (USD $4,140) expiring on February 10, 2011. The Company is currently negotiating a new contract.

The Chinese government owns all the land in China. Currently, the Company has grants from the Chinese government for approximately 1,500 hectors of land (3,705 acres) to grow ginseng. These grants are for 20 years. There is no assurance that the Chinese government will continue to renew these grants in the future. The annual lease fee approximates $93,000.

F-13

CHINA GINSENG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 (UNAUDITED)

NOTE N – COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company has a 15 year lease with the Representative of Group One Farmer, Si’An City, Qingshi, Qingshi Town, Qingshi Village, China to lease 750 acres to grow and harvest grapes. The lease expires December 31, 2014. The annual lease fee is 187,500 RMB or approximately $29,600 per year to lease the acreage. The land and buildings on the premises have a separate lease concurrent with the property lease. There is no lease fee associated with the lease.

In 2008, the Company entered into a 5 year lease to refrigerate and store fresh ginseng. The annual lease fee approximates $15,500 per year.

NOTE O – OPERATING SEGMENTS

The Company presently organizes its business into two reportable farming segments: (1) the cultivation and harvest of Ginseng for the production of Ginseng beverages and (2) the cultivation and harvest of grapes for the eventual production of wine and grape juice.

The Company’s reportable business segments are strategic business units that offer different products. Each segment is managed separately because they require different productions techniques and market to different classes of customers.

Six months ended December 31, 2011:

	Parent Company			Ginseng			Wine			Total
Revenues	$	-		$	2,244,455		$	-		$	2,244,455
Net loss		(276,736	)		(543,363	)		(14,103	)		(834,202	)
Total assets		521,416			7,150,122			2,467,812			10,139,350

Other significant items:
Depreciation and amortization		569			29,523			440			30,532
Interest expense		32,225			106,574			9,145			147,944
Expenditures for fixed assets		-			64,292			-			64,292

Three months ended December 31, 2010:

	Parent Company			Ginseng			Wine			Total
Revenues	$	-		$	973,175		$	-		$	973,175
Net loss		(331,335	)		(128,337	)		(37,697	)		(497,369	)
Total assets		260,172			7,515,455			2,314,883			10,090,510

Other significant items:
Depreciation and amortization		295			9,482			836			10,613
Interest expense		51,820			14,516			10,423			76,759
Expenditures for fixed assets		-			4,839			-			4,839

F-14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Form 10−Q contains forward-looking statements. Our actual results could differ materially from those set forth as a result of general economic conditions and changes in the assumptions used in making such forward-looking statements. The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of China Ginseng Holdings Inc. for the periods ended December 31, 2011 and 2010 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report on Form 10-K for the year ended June 30, 2011.The analysis set forth below is provided pursuant to applicable Securities and Exchange Commission regulations and is not intended to serve as a basis for projections of future events.

Company Overview

Our company, China Ginseng Holdings Inc., was incorporated on June 24, 2004 in the State of Nevada. The Company conducts business through its four wholly-owned subsidiaries located in Northeast China. We have been granted 20-year land use rights to 3,705 acres of lands by the Chinese government for ginseng planting and we control through lease approximately 750 acres of grape vineyards.

Since our inception in 2004, we have been engaged in the business of farming, processing, distribution and marketing of fresh ginseng, dry ginseng, ginseng seeds, and seedlings. In March 2008, we acquired Tonghua Linyuan Grape Planting Co., Ltd. to plant wild mountain grapes. Starting in August 2010, we have gradually shifted the focus of our business from direct sales of ginseng to canned ginseng juice production and wine production.

Since we shifted the focus of our business into the ginseng beverage business and the wine business, we have started to store our raw material and sell very limited self-produced ginseng. We also purchase ginseng from outside sources, and then resell them to generate revenue and those sales are based on the order from the market. However, due to the global recession and local market conditions, demand for ginseng exports declined beginning in 2008, creating a significant oversupply in China. All those factors caused us to have losses in 2009 and 2010. In addition, our new business is in the initial stages, we need to spend capital to promote our new products, and develop our marketing plan. There is no assurance that there will be sufficient demand for our beverages and wine to allow us to operate profitably initially, or at all. We have recurring operating losses and our auditors have raised substantial doubt about our ability to continue as a going concern. As of December 31, 2011, the cash balance on hand for the Company was $[ 63,110 ].

In order to meet the challenge, we are taking the following actions:

–	We raised capital to support our operation through a Regulation S private placement; and
–	We are recruiting distributors for ginseng beverage and wine products and we intend to recruit one general distributor for ginseng juice and one for wine in every city in which we sell our products.

Although, we have generated only limited revenues from our ginseng beverage and wine businesses, we believe there is future potential to do so because (i) the China ginseng market is recovering now, (ii) the demand and the price is in the uptrend due to Chinese government restrictions on the amount of land available for ginseng farming (land under our Company’s control was not affected by the government restrictions), and (iii) as of the date this filing, we have already entered into binding agreements with 19 distributors to distribute our beverage in different cities and 1 distributor to distribute our ginseng beverage in Singapore, Malaysia, Thailand.

As the impact of the shift in the focus of our business away from the ginseng business and into the ginseng beverage business and the wine business is uncertain and the shift represents a material change in our business, our past revenues and other financial results will not provide a meaningful basis for future performance and there is no guarantee that we will be able to attain profitability in the foreseeable future.

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Our Subsidiaries:

Our business in China is currently conducted through four wholly owned subsidiaries located in Northeast China, the current operational status of each of these businesses as of the date of this filing is as follows:

Yanbian Huaxing Ginseng Industry Co. Limited (“Yanbian Huaxing”) – Ginseng farming and sales

●

On September 8, 2003, we and Jilin Dunhua Huaxing Ginseng Industry Co, Ltd. (“Dunhua Huaxing”, a PRC company) jointly and legally established Yanbian Huaxing as a joint venture company, in which we held 25% equity interest and Dunhua Huaxing held 75% equity interest. We received a certificate of approval issued by the competent local approval authority on September 8, 2003 and a business license issued by the competent local registration authority on September 16, 2003. On November 24, 2004, we and Dunhua Huaxing adjusted the registered capital of Yanbian Huaxing and our respective shareholding percentage in Yanbian Huaxing, and then we held 55% equity interest in Yanbian Huaxing. Subsequently in August, 2005, we acquired the remaining 45% equity interest from Dunhua Huaxing at a purchase of $164,000, and then we hold 100% equity interest in Yanbian Huaxing and changed Yanbian Huaxing from a joint venture into a wholly foreign owned enterprise (“WFOE”). The purchase prices were determined based upon the registered capital of Yanbian Huaxing of $364,000. In October 2005, we increased the registered capital of Yanbian Huaxing by putting in an additional $250,000 in order to meet the requirement for foreign owned enterprises for tax purposes. Now the registered capital of Yanbian Huaxing is $614,000. We applied with the relevant PRC approval and registration authorities for each of the aforesaid changes and have obtained all applicable approvals and registrations for such changes, including a certificate of approval issued by the local approval authority and a renewed business license issued by the local registration authority certifying Yanbian Huaxing as a WFOE lawfully owned by us. Yanbian Huaxing is operated to plant ginseng and our revenue in the past was mainly from the sales of ginseng produced and sold by Yanbian Huaxing. With the shift of business focus to canned ginseng juice, we anticipate a decrease of revenue of direct sales of ginseng while most of the ginseng produced by Yanbian Huaxing has been and will continue to be used as raw material for canned ginseng juice.

Jilin Ganzhi Ginseng Products Co. Ltd. (“Jilin Ganzhi”) - Producing Canned Ginseng Juice.

●

On May 31, 2006, we acquired 100% equity interest in Jilin Ganzhi at a price of $95,691. We received a certificate of approval issued by the competent local approval authority on May 31, 2006 and a business license issued by the competent local registration authority on June 19, 2006. Subsequently on September 26, 2007 and August 31, 2008 we increased Jilin Ganzhi’s registered capital by $50,000 and $20,000 respectively. Now the registered capital of Jilin Ganzhi is $100,000. We applied with the relevant PRC approval and registration authorities for each of the aforesaid capital increases and have obtained all applicable approvals and registrations for such changes, including a renewed certificate of approval issued by the local approval authority and a renewed business license issued by the local registration authority certifying Jilin Ganzhi as a WFOE lawfully owned by us. Jilin Ganzhi is operated to process ginseng and produce canned ginseng juice. Jilin Ganzhi started production of canned ginseng juice in the three months ended December 31, 2010. However, since sales of canned ginseng juice are conducted through Jilin Huamei, Jilin Ganzhi has not and will not generate any revenue.

Tonghua Linyuan Grape Planting Co. (“Tonghua Linyuan”) – Growing grapes and producing wine

●

On January 15, 2008, we acquired 100% equity interest in Tonghua Linyuan from two PRC individual shareholders at a price of $1,000,000. The price was determined by arm’s-length negotiations based upon the appraised net asset value of Tonghua Linyuan at the time of acquisition which was approximately $1,332,248. We received a certificate of approval issued by the competent local approval authority on January 15, 2008 and a business license issued by the competent local registration authority on April 1, 2008 certifying Tonghua Linyuan as a WFOE lawfully owned by us. Now the registered capital of Tonghua Linyuan is RMB10,330,000. Tonghua Linyuan is operated to plant grapes and produce wine. Other than one sale of grapes made by Tonghua Linyuan in 2010, Tonghua Linyuan reserved all the grapes planted for wine production. In addition, Tonghua Linyuan has contracted for the production of wine with a winery producer whereby Tonghua Linyuan provides the producer with grape juice and supplies and the producer charges a processing fee per bottle. Tonghua Linyuan started wine production through a winery producer in March 2011 and sales of wine have been conducted through Jilin Huamei beginning in April 2011. Up to date, Tonghua Linyuan has had only minimal sales of wine.

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Jilin Huamei Beverage Co. Ltd (“Jilin Huamei”) - Marketing of our canned ginseng juice and wine

●

We incorporated Jilin Huamei as a WFOE on October 17, 2005. We received a certificate of approval issued by the competent local approval authority on October 17, 2005 and a business license issued by the competent local registration authority on October 19, 2005 certifying Jilin Huamei as a WFOE lawfully owned by us. The registered capital of Jilin Huamei is $200,000. Jilin Huamei operates as a sales department for our canned ginseng juice and wine, which are produced by our other subsidiaries. We plan to recruit one general distributor for our canned ginseng juice and one general distributor for our wine in each big city in China through Jilin Huamei. As of the date of this filing, Jilin Huamei has signed 19 general distributors for our ginseng beverage and one general distributor for our wine, as well as established one sales branch office in Jiangsu Province. We commenced sales of ginseng beverage in October 2010 and Jilin Huamei started generating revenue in November 2010.

As of the date of this filing, each of our four subsidiaries operates as an essential part of our integrated business and all of our businesses are operational.

Our Products:

Previously, through Yanbian Huaxing, we focused on the farming, processing, distribution and marketing of Asian and American Ginseng and related byproducts in the following varieties:

▪

Fresh Ginseng: For pharmaceutical, health supplement, cosmetic industry and fresh consumption.

▪

Dry Ginseng: Dried form for pharmaceutical and health supplement consumption.

▪

Ginseng Seeds: Selling of ginseng seeds.

▪

Ginseng Seedling: Selling of ginseng seedling.

Ginseng's growing cycle is from April to September, six months a year. Normally we sow the seed in April and harvest in September and October. Ginseng seeds are obtained after the blossom in autumn. The seeds can be sowed in September or next spring. It takes 10 days to germinate and the growing cycle for seedling is 10 days. For every hectare cultivated, we can harvest approximately 18 to 20 kg ginseng. As of December 31, 2011, the planting area for ginseng is 111 acres, and the planting area for grapes is 750 acres.

Since August 2010, we have gradually shifted our business focus from direct sales of ginseng and ginseng byproducts to production and sales of canned ginseng juice and wine.

Through Jilin Ganzhi, we are producing two types of canned ginseng juice:

▪

Ganzhi Asian Ginseng Beverage

▪

Ganzhi American Ginseng Beverage

In addition to canned ginseng juice, we have added wine production to our business focus. We have already grown and crushed the grapes from our vineyards and reserved the juices. We started wine production through a winery producer in March 2011 and sales in April 2011. We contracted for the production of the wine.

We are producing and selling two kinds of wine:

▪

Bingqing Ice Wine

▪

Pearl in the Snow (Red)

-3-

New Focus of Our Business

Canned Ginseng Juice

Currently, there are about 10 kinds of ginseng drinks on the market; all of them are imported from Korea. The price range for those products is 4 –30 RMB per can (about USD $0.60-$ 4.51).

The most important component of ginseng is ginsenoside. Based upon reading our competitors’ product labels, all of their ginseng drinks are blended after extracting ginsenosides through chemical methods. The extraction for ginsenosides will cause damage to its nutritional components. Our technology is different from the traditional method used by our competitors. We squeeze out the natural juice from fresh ginseng, use that as our main ingredient and then add in natural extracts like xylitol, citric acid and steviosides as subsidiary ingredients. We have farming technicians periodically inspect farmers to ensure they follow our growing guidelines to control the quality of the fresh ginseng. We use low residue pesticide and biodegradable fertilizer for ginseng planting. We also use xylitol, which does not cause a sour taste, instead of sugar to lower the calorie content of our drinks.

Squeezing is not commonly used in canned ginseng juice because it requires fresh ginseng, the preservation of which is very difficult. However, our drink formula uses refrigerated ginseng and therefore we are able to preserve its freshness and nutrition in our final products. The drink formula for our ginseng beverages is a registered patent approved by the Chinese government, patent number ZL 03111397.6. This patent was issued on January 23, 2008 and expires 20 years after issuance.

To produce canned ginseng juice, we store our fresh ginseng in refrigerated warehouse space. We are currently renting a refrigerated warehouse (-20 C degree) to store all fresh ginseng inventory necessary for production of the ginseng beverages. Monthly rent for refrigerated warehouse is RMB 4,500 (about USD $676.86). We commenced production in August 2010 and sales in October 2010. However, as we are in the initial stage of the ginseng beverage business, we cannot assure the demands for our ginseng beverage will be high enough to make our business profitable in the short term and there is no guarantee that we will be able to generate the revenue from ginseng beverage business.

We own the production plant. The plant is certified by the Chinese government as a Good Manufacturing Process facility, which is required for our production of these products. Good Manufacturing Process standards cover organization and personnel, building and facilities, equipment, materials, hygiene and sanitation, validation, documentation, production management, quality management, production distribution and recall, complaints and adverse reactions report, and self-inspections.

Wine

Our grapes grow on 750 acres of land leased from a group of individual farmers, paying approximately $37.50 per acre a year for 15 years. This lease expires on December 31, 2014. We have adequate and suitable land for growing grapes. Our vineyard is located in Ji’An City, Jilin Province, North Latitude 41 degree with average temperature 7.5C, annual precipitation 800mm-1000mm, frost free period 150 days out of a year. Ji’An is the largest grape growing area in Asia. Our current estimated grape production is 565 tons annually.

Grape growing cycle is from April to September, six months a year. For grapes, every acre can produce 1500 kg grapes annually and we have planting area for grapes of approximately 750 acres as of December 31, 2011.

As of the date of this filing, Tonghua Linyuan has reserved 1,227.5 tons of grape juice for fermentation stored in 16 stainless holding tanks. The harvesting cycle of grapes take around 5 months, we plant in April and harvest in the middle of September. Last autumn we harvested 115 tons grapes in average and produced 57.50 tons of juice. We let the juice ferment for 40 days and sealed it in barrels in December.

We started producing wine in March 2011 and had one sale in April 2011. Through our subsidiary Tonghua Linyuan, we have a written production agreement with Tonghua Jinyuanshan Winery (“Jinyuanshan Winery”) to produce wine for us from May 20, 2009 to May 19, 2012. Under the terms of the agreement, we provide Jinyuanshan Winery with grape juice, bottling supplies and packaging supplies, and Jinyuanshan Winery produces and bottles the wine with a charge of approximately $0.15-0.22 per bottle (approximately $0.15 a bottle for processing red wine and approximately $0.22 per bottle for processing ice wine).

-4-

Distribution

We intend to recruit one general distributor for our products of ginseng beverage and wine in every city in China. The city level distributor can recruit the second level distributors. In addition to recruiting general distributors, in some major cities, Jilin Huamei will establish sale branch offices to facilitate the local sales. Our direct sales will target customers of high end retailers such as supermarkets, pharmacies, hotels, gift shops, entertainment centers, tourists attractions, airport and high speed trains, etc.

We started negotiating distribution and sales agreements with potential general distributors. Currently, we have signed 19 general distributors for our ginseng beverage, 1 distributor to distribute our ginseng beverage in Singapore, Malaysia, Thailand and 1 general distributor for our wine, as well as established one sales branch office in Jiangsu Province.

Competitive environment

The market for ginseng products and wine is highly competitive. Our operations may be affected by technological advances by competitors, industry consolidation, patents granted to competitors, competitive combination products, new products offered by our competitors, as well as new information provided by other marketed products and/or other post-market studies.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believes to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In addition, starting August 2010, we have gradually shifted our business from farming to producing ginseng juice and wine with our crops as raw materials. Given this shift of focus of our business, past financial results are not indicative of future performance. Furthermore, we cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Inventory

Our inventory consists of fresh and dried ginseng as well as crushed grapes and is stated at the lower of cost or market value. Cost is determined using the First-In, First-Out (FIFO) Method.

-5-

Ginseng Crops and Grape Crops

The Company uses the full absorption costing method to value its ginseng crops and grape crops. Included in crop costs are seeds, labor, applicable overhead including depreciation, and supplies. Common costs are allocated in each period based upon the total number of hectors under cultivation during the period.

The carrying value of the ginseng crops and grape crops is reviewed on a regular basis for any impairment in value using management’s best estimate as to expect future market values, yields and costs to harvest. Costs accumulated on the acres expected to be harvested during the next fiscal year have been classified as a current asset.

Revenue Recognition

The Company’s primary source of revenue has been from the sale of fresh and dried ginseng and in the year ended June 30, 2011, it also included one bulk sale of crushed grapes. Ginseng is planted in Spring (April) and Fall (September) of each year and is generally harvested in September. Currently, the Company is processing the ginseng harvested in September and storing the stock for future juice production. The grape harvest in fiscal year ended June 30, 2011 has been crushed and the juice produced has been stored in storage tanks.

Harvested ginseng can be sold in two ways: (1) fresh ginseng which can be sold immediately and stored in refrigerators for up to 3 years and (2) dried ginseng which is processed and dried via sunlight and steam machines. Drying is a two month process. Dried ginseng can be stored up to 5 years. The Company has focused on selling dried ginseng as it is more profitable than selling fresh ginseng. The Company also started to store fresh ginseng for future juice manufacturing since 2008, and started to shift the business focus to production and sale of ginseng beverage and wine since August 2010.

When the Company sells ginseng, it receives orders prior to harvest. For customers making large orders, 20% to 30% of the invoice is paid upon delivery as payment in advance. The balance is billed after the customer incurs a lengthy inspection process which can take up to 60 days. Until the customer finalizes its inspection and deems the shipment acceptable, the shipment is still the property of the Company. Upon customer completion of inspection and approval, the sale is then recognized and the balance of the invoice price is sent to the Company. For smaller sales, the customers pick up the ginseng from the Company, pay in cash at time of pick up and receive an invoice with appropriate sales tax applied and a cash acknowledgement. On these orders, revenue is recognized upon payment.

Starting from the fourth quarter of 2010, the Company has entered into several distribution agreements to sell ginseng juice and wine. In accordance with these agreements, the distributors will advance funds to the Company for orders to be placed. Upon the placement of orders by the distributor, the Company will ship product to the distributor and title will pass to the distributor. In relation to the distributor for ginseng beverages, it is the Company’s policy to allow distributors to return all unsold products at the end of six months from the shipment date should the product not be sold so long as the product has not exceeded the expiration date. Since these agreements commenced in September 2010, the Company has no established history as to the quantity of the ginseng and wine which may be returned in order to determine if a reserve for returns and allowances is necessary. The Company is currently working closely with the distributors to establish this history. Currently, at each reporting period, the Company is ascertaining from each distributor its current on hand quantity and assessing the situation in order to establish a return allowance, if necessary. For the three months ended December 31, 2011, the Company had ginseng juice sales to distributors which aggregated approximately $22,782, all sales to distributors were sold to end user customers.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist principally of trade receivables. When ginseng is shipped to a customer, the customer pays 20%-30% of the invoice and is entitled to an inspection process which could take up to 60 days. Upon completion of the inspection and approval process, the customer pays the balance of the invoice and notifies the company, and a sale is recorded. The allowance for doubtful accounts represents management’s estimate of the amount of probable credit losses, determined by reviewing past due balances and other information. Account balances are written off against the allowance if management determines the receivable is uncollectible. The Company’s standard terms stipulate payment in 60 days and consider a receivable to be uncollectible after one appropriate collection efforts have been exhausted.

-6-

Vineyard Development Costs

Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. The costs are capitalized within Property and Equipment. When the vineyard becomes commercially productive, annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard, which is estimated to be 40 years. All of the Company’s vineyards are considered commercially productive. Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold.

Income Taxes

The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse.

Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.

Going Concern

As indicated in the accompanying financial statements, the Company has accumulated deficits of $3,670,127 as of December 31, 2011 and there are existing uncertain conditions that the Company foresees relating to its ability to obtain working capital and operate successfully. Management’s plans include raising of capital through the equity markets to fund future operations and the generating of revenue through its business. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations.

Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards. This accounting standard update is effective for the Company beginning in the third quarter of fiscal 2012. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements but does not expect it will have a material impact.

In June 2011, the FASB issued an accounting standard update to provide guidance on increasing the prominence of items reported in other comprehensive income. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This accounting standard update is effective for the Company beginning in the first quarter of fiscal 2013.

-7-

In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2013 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

Result of Operations

The following tables present certain consolidated statement of operations information. Financial information is presented for the three months and six months ended December 31, 2011 and 2010 respectively.

For the Three Months Ended December 31, 2011

							Change
	2011			2010			Amount			%
Revenues	$	1,352,050		$	919,877		$	432,173			47	%
Cost of Goods Sold		1,031,186			819,222			211,964			26	%
Selling ,general and administrative expenses		625,253			224,172			401,081			179	%
Depreciation and amortization		24,166			4,620			19,546			423	%
Interest expense		91,128			44,641			46,487			104	%
Provision for income taxes		2,260			16,138			(13,878	)		(86	%)
Net Loss		(421,943	)		(188,916	)		233,027			123	%

For the Six Months Ended December 31, 2011

							Change
	2011			2010			Amount		%
Revenues	$	2,244,455		$	973,175		$	1,271,280		131	%
Cost of Goods Sold		1,754,652			864,418		$	890,234		103	%
Selling, general and administrative expenses		1,126,816			502,553		$	624,263		124	%
Depreciation and amortization		30,532			10,613			19,919		188	%
Interest expense		147,944			76,759			71,185		93	%
Provision for income taxes		18,713			16,138			2,575		16	%
Net Income (Loss)		(834,202	)		(497,369	)	$	354,833		74	%

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Revenue

	Three Months Ended				2011-2010		2011-2010		2011-2010
	December 31,				Variance of		Variance of		Dollar
Products	2011		2010		Quantity		Price		Variance		% change
Ginseng (Production)	$	861,946	$	510,717		-14,427( kg)	$	8.55	$	351,229		69	%
Ginseng (Purchase for Resale)		467,322		366,340	-9,890(kg)			24		100,982		28	%
Ginseng Beverage		22,782		42,820	-1,076 ( box)			3		-20,038		-47	%
Total	$	1,352,050	$	919,877					$	432,173		47	%

Net revenues are comprised of sales of self-production ginseng, purchased ginseng and ginseng beverage during the three months ended December 31, 2011. Our total revenue increased from $919,877 for the three months ended December 31, 2010 to $1,352,050 for the three months ended December 31, 2011, an increase of $432,173 or 47%. The increase was primarily attributable to the sales of ginseng sales.

We generated $861,946 or 63% sales from our own farming for the three months ended December 31, 2011, an increase of $351,229, or 69%. These were primarily due to increased market price. The market price increased by $8.55/kg, or 103% compared to the same period time in 2010. National wide inflation resulted ginseng prices going higher in the three months ended December 31, 2011; in this quarter, the quantity of farming ginseng sales decreased 14,427kg compared to the same period in 2010. We decided to reduce the harvest in the three months ended December 31, 2011 with an intention to have some ginseng grow one more year to produce higher quality ginseng for ginseng juice production.

For the three months ended December 31, 2011, approximately $467,322 or 35% of our revenue was the result of resale of ginseng purchased from the market and sold to major customers, 28% increase compared to the same period in 2010. The increase was caused by the increased market price, which was increased by $24/kg, or 129% compared to the three months ended December 31, 2010. And the quantity of purchased ginseng sales decreased 9,890 kg in the three months ended December 31, 2011 compared to the same period in 2010. The decrease was mainly due to one of our major customers reduced its order due to their own medicine production issues.

In addition, for the three months ended December 31, 2011,approxmiately $22,782 or 2% of our revenue was generated from the sales of our ginseng beverage, a decrease of $20,038, or 47% compared to three months ended December 31, 2010. Because of the ginseng harvest in September, in the three months ended December 31, 2011, we were focused on ginseng harvest and limited funds for marketing and sales promotions which caused the decrease. The management anticipates this decrease would be temporary. We did not have any sales of wine in the three months ended December 31, 2011 and up to date, we have had only minimal sales of wine since we started sales of wine in April 2011. However, we believe that there is a significant opportunity for wine sales in China because Chinese wine culture has a long history. Furthermore, our vineyard is located in Changbai Mountain, Jilin Province, which is the largest grape growing area in Asia and is adequate and suitable land for growing grapes. The climate in Changbai Mountain is ideal for growing grapes because of the significant temperature difference during day and night. It contributes to the accumulation of polyphenols and Flavonoids in grapes improving the taste and quality of the wine. Although we anticipate that approximately 20% of our revenue will come from sales of wine in next 3 to 5 years, there can be no assurance that our sales of wine will reach such levels in the anticipated time period, if at all.

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Cost of Goods Sold

Three Months ended December 31,
	December 31, 2011			% of total		December 31, 2010		% of total		2010-2010
	Cost of			cost of		Cost of		cost of		Dollar		%
Products	goods sold			goods sold		goods sold		goods sold		Variance		change
Ginseng (production)		$	554,756		54		498,318		61	$	56,438		11	%
Ginseng (purchase)			464,132		45		286,800		35		177,332		62	%
Ginseng Beverage Production			12,298		1		34,104		4		-21,806		-64	%
Total		$	1,031,186		100		819,222		100		211,964		26	%

Our total cost of goods sold increased from $819,222 for the three months ended December 31, 2010 to $1,031,186 for the three months ended December 31, 2011, an increase of $211,964 or 26%. The primary reasons for the increase were an increase in the cost of our own farming ginseng and purchasing ginseng for resale associated with increased sales.

Our cost of purchasing ginseng for resale increased substantially from $286,800 in the three months ended December 31, 2010 to $464,132 in the three months ended December 31, 2011 primarily because 1) the quality of the ginseng we purchased increased; 2) purchased price increased due to the nationwide inflation and the policy of the Chinese government restricted the amount of land available for ginseng farming (land under our company’s control was not subject to the change in government restrictions).

The cost of our own farming ginseng for sale increased $56,438, or 11% in the three months ended December 31, 2011 compared to the three months ended December 31, 2010. The reason was that the market price of ginseng in China was increased due to the inflation.

Cost of sales as a percentage of revenue decreased from 40% to 35% in the three months ended December 31, 2011 as compared to the three months ended December 31, 2010.

Selling General and Administration Expenses

Sales costs, general expenses and administrative expenses increased significantly from a $224,172 for the three months ended December 31, 2010 to $ 625,253 for the three months ended December 31, 2011, an increase of $401,081 or 179%. The increase is mainly from 1) the rise in general administrative expenses and marketing expenses for our new business– the ginseng juice operation, such as maintenance fee, business travel expense, utility expense, etc, as we continued to promote and try to expand ginseng beverage business 2) The increased salaries paid for increased staff and the increased salaries in Yanbian Huaxin and Jilin Ganzhi.

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Depreciation and Amortization

Depreciation and amortization was $24,166 for the quarter ended December 31, 2011, compared to $4,620 for the quarter ended December 31, 2010, an increase of $19,546 or 423%. The increasing was primarily due to the additional depreciation on property acquired subsequent to December 31, 2010.

Interest Expense

Our Interest expense increased by $46,487, from $44,641 for the quarter ended December 31, 2010 to $91,128 for the quarter ended December 31, 2011, representing a 104% increase. The change in imputed interest to related party loans and the interest paid to bank loans for Ganzhi building is the primary reasons for the increase in interest expense.

Income Tax Expense

Income tax expense for the quarter ended December 31, 2011 is $2,260, a decrease of $13,878 or 86% from $16,138 for the quarter ended December 31, 2010. This income tax expense relates to taxes payable in China by the Company’s subsidiaries, Yanbian Huaxing and Jilin Huamei. The decrease in income tax expense is due to decreased taxable income by Jilin Huamei and Yanbian Huaxing in the quarter ended December 31, 2011.

Net Loss

The Net Loss for the quarter ended December 31, 2011 was $421,943; an increase of $233,027 or 123% compared to a net loss of $188,916 for the quarter ended December 31, 2010. The increase is primarily due to the increase in operating expenses and administrative expenses. There also was an increase in the cost of producing ginseng and in purchasing ginseng for resale.

Other Comprehensive Income

We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is intended to imply that the Renminbi amounts could have been, or could be, converted, realized or settled into USD at the rate on December 31, 2011 or at any other rate.

The value of RMB against U.S. dollar may fluctuate and is affected by changes in political and economic conditions. Our revenues, costs and financial assets are mostly dominated in RMB while our reporting currency is the U.S. dollar. Accordingly, this may result in gains or losses from currency translation on our financial statements.

Translation adjustments resulting from this process amounted to $33,788 and $54,340 for the three months ended December 31, 2011 and 2010, respectively. The assets and liabilities amounts with the exception of equity for the three months ended December 31, 2011 were translated at 6.3009 RMB to 1.00 USD as compared to 6.6227 RMB to 1.00 USD for the three months ended December 31, 2010. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the three months ended December 31, 2011 and 2010 were 6.37990 RMB and 6.7157 RMB, respectively.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. We have currently financed our operations and capital expenditures through loans from individual lenders, including officers, directors and other shareholders of the Company. Our current activities are related to developing our new business strategy: the sale of ginseng juice and wine products.

As of December 31, 2011, we had negative working capital of $ 372,089 compared to a working capital $1,639,488 as of December 31 , 2010.

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As of December 31, 2011, there was no change in our loan payments compared with the three months ended December 31, 2011 since the loans remained constant. As of December 31, 2011, we had outstanding loan of 2,000,000 RMB (about $309,043) to Ji’An Qingshi Credit Cooperatives (“Ji’An Qingshi”). The principal terms of the loan are as follows:

Type of Loan: Short Term Agriculture Loan

Loan Purpose: Planting

Loan Amount: Principal of 2,000,000 RMB (about USD $309,043) with an annual interest of 6.325%

Loan Period: From February 4, 2002 to February 4, 2003; Repayment due date was February 4, 2003

Security: The loan is secured by assets of Tonghua including 14 carbon-steel storage cans; 16 high-speed steel storage cans and 150 tons of grape juice.

We have not paid any principal or interest of the loan; however, Ji’An Qingshi verbally agreed in March 2008 not to call the loan. The material terms for the verbal agreement are: No principal or interest payments are required to be made until the Company is generating profits and interest continues to accrue until we repay the loan. Thus, the debt in Tonghua Linyuan acquisition will not have impact on our liquidity and capital resource before we start to repay the lender. Nevertheless, we had a net loss of $1,108,333 for the year ended June 30, 2011. If we continue operation without generating net income, Ji’An Qingshi might revoke the oral agreement and call the loan. If we can not pay off the loan in the event Ji’An Qingshi revokes the oral agreement, Ji’An Qingshi has the right to sell, initiate an auction sale or take any other methods to liquidate the secured assets and receive the payment of outstanding principal and interests senior to any other party out of the secured assets. As of the date of this filing, Tonghua Linyuan has 31 storage cans in total including 15 carbon-steel cans and 16 high-speed steel storage cans; 2 white-steel transport tanks, 1170 tons of grape juice. Therefore, if Ji’An Qinshi decides to revoke the oral agreement and call the loan, it will not lead to the close of operation and business of Tonghua Linyuan; however, it will cause extra costs for Tonghua Linyuan to rent additional storage cans from third parties.

On March 2, 2010, the Company entered into an agreement with Meihekou Hang Yilk Tax Warehousing Logistics, an auctioneer, to purchase office and production facilities. The Company obtained an 8 million RMB (about USD $1,236,170) bank loan from Meihekou City Rural Credit Union to pay the seller on November 8, 2010.

The principal terms of the 8 million RMB bank loan agreements are as follows:

▪

Parties: Jilin Ganzhi Ginseng Products Co., Ltd (“Jilin Ganzhi”) and Meihekou City Rural Credit Union (“Meihekou Credit Union”);

▪

Meihekou Credit Union granted a loan of 8 million RMB (about USD $ 1,236,170) to Jilin Ganzhi to be used to pay off its debt and the term of the loan is 23 months from September 10, 2010 to August 10, 2012.

▪

The loan carries an annual floating rate equals to 90% of the which is benchmark interest rate on value date (upward) 90%, the benchmark interest rate changes with the adjustment of national bank rate, the sliding scale will not change, which is payable by 20th day of each month. The monthly interest rate of December, 2011 is 10.153121 and we paid interest of 81,615.87 RMB (about USD $ 12,793) on Dec 20, 2011. Up to date, we have paid interest of approximately $172,162 in total.

▪

The payment shall be made in the order of loan expense, interest and principal. Jilin Ganzhi shall pay 1,600,000 RMB (about USD $250,000) principal on August 10, 2011 and the rest of principal of 6,400,000 RMB (about USD $986,170) on August 10, 2012.

We are current on the payment of interest of this loan. The debt of 8 million RMB to Meihekou Credit Union will not a have material impact on our liquidity and capital resources until such time as we are required to repay the principal. However, as of the date of this report, the 1, 600,000 RMB principal payment is in default, and we received an oral agreement from the bank that allows us to pay the total amount of the loan on August 10, 2012. In addition, there are no financial covenants in the Meihekou Credit Union agreement that place restrictions or limits on our ability to raise capital in the future.

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For the three months ended December 31, 2011, and 2010, we had notes payables of approximately $1,141,132 and $830,570 to related parties, respectively. These amounts are mainly due to the working capital demands of the business. Most of these related parties are our individual shareholders or immediate family members of our shareholders. The individuals loaned us funds which are interest free, have no specific repayment date, and are unsecured. The funds received are evidenced by receipt of cash acknowledgments.

As of December 31, 2011 we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business. We started our ginseng beverage production in August 2010 and sales in October 2010. The Company plan to continue to recruit distributors in different cities; the deposit from our distributors is our another capital resource for our ginseng beverage and wine business.

Comparison of results for the six months ended December 31, 2011 and 2010:

Revenue

	Six Months Ended December 31,
Products	2011		2010		2011-2010 Variance of Quantity			2011-2010		2011-2010
Products	2011		2010		2011-2010 Variance of Quantity		Variance of Price		Dollar Variance		% change
Ginseng (Production)	$	858,202	$	520,654	(15853) kg		$	8.55	$	337,548		65	%
Ginseng (Purchase for Resale)		1,308,905		409,701	3428 kg			31		899,204		219	%
Wine		1,276		--------		--------		-----		1,276		------
Ginseng Beverage		76,072		42,820	1983 box			-3		33,252		78	%
Total	$	2,244,455.00	$	973,175					$	1,271,280		131	%

Our total sales increased from $973,175 for the six months ended December 31, 2010 to $2,244,455 for the six months ended December 31, 2011, an increase of $1,271,280 or 131%. The increase was primarily attributable to the sales of ginseng and ginseng juice and wine sales.

We generated $858,202 or 38% sales from our own farming for the six months ended December 31, 2011, an increase of $337,548, or 65%. These were primarily due to increased market price Nationwide inflation resulted ginseng prices going higher in 2011 and the market price for the six months ended December 31, 2011 increased by $8.55/kg, or 104% compared to the same period in 2010. In the six months ended December 31, 2011, the quantity of farming ginseng sales decreased 15,853 kg, or 32% compared to the six months ended December 31, 2010. The reason of the decrease was that we reduced harvest ginseng from the land in September 2011 to have some ginseng grow one more year to produce higher quality raw material for ginseng juice.

For six months ended December 31, 2011, approximately $1,308,905 or 58% of revenue was the result of resale of ginseng purchased from the market and sold to major customers for the six months ended December 31, 2011, an increase of $ 899,204, or 219% compared to the six months ended December 31, 2010. The increase was caused by increased market orders and market price. The market price for the second half of 2011 increased by $31/kg, or 182% compared to the six months ended December 31, 2010.

▪

of $899,204, or $58,463 increasing was caused by increased market order we received.

▪

% of $899,204, or $ 840,741 increasing was due to increased market selling price of ginseng.

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The policy of the Chinese government restricted the amount of land available for ginseng farming (Land under our company’s control was not affected by the government restrictions) caused market demand and ginseng prices go higher in 2011and the inflation is another main reason to cause a high ginseng price.

In addition, approximately $72,076 or 3% of our revenue was generated from sales of our ginseng beverage for the six months ended December 31, 2011, an increase of $33,252, or 78% compared to the same period in 2010. The increase of sales of ginseng beverage was the result of our marketing efforts and expansion of our distributing channels by obtaining more distributors. We believe that there is a significant opportunity for functional drink in China and there are currently no leading brands in the market. With our unique production technology of ginseng beverage and our focus on high-end consumer, we anticipate that, in the long run, around 70% of our revenue will come from sales of ginseng beverage in next 2-3 years. Nevertheless, there is no assurance that our sales of ginseng beverage will generate 70% of our revenues in the next 2-3 years;

The remaining revenue of $1,276 or 1% was generated from wine sales. We have signed 1 distribution agreement since November, 2010 and with their sales channels we have started to generate revenue from our wine business since April 2011. Since we just started sales of wine in April 2011, the sales of wine was a very small part of our revenue for the six months ended December 31, 2011. However, we believe that there is a significant opportunity for wine business in China because Chinese wine culture has a long history. Furthermore, our vineyard is located in Changbai Mountain, Jilin Province, which is the largest grape growing area in Asia and is adequate and suitable land for growing grapes. The climate in Changbai Mountain is ideal for growing grapes because of the significant temperature difference during day and night. It contributes to the accumulation of polyphenols and Flavonoids in grapes improving the taste and quality of the wine. Therefore we anticipate that around 20% of our revenue will come from sales of wine in next 3-5 years. Nevertheless, there is no assurance that our sales of wine will generate 20% of our revenues in the next 3-5 years.

Cost of Goods Sold

Six Months ended December 31,
Products	2011		% of the total cost of goods sold			2010		% of the total cost of goods sold			2010-2009 dollar variance		% of Change
Ginseng (Farming)	$	554,756		31%		$	505,528		58%			49,228		10%
Ginseng (Purchase for Resale)		1,146,930		65%			324,849		38%			822,081		253%

Wine		1,169		1%			-		-			1,169		-
Ginseng Beverage Production	$	51,797		3%			34,104		4%			17,693		52%
Total	$	1,754,652		100	%	$	864,481		100	%		890,171		103%

Our total cost of goods sold increased from $864,481 for the six months ended December 31, 2010 to $[1,754,652] for the six months ended December 31, 2011, an increase of $890,171 or 103%. The primary reasons for the increase were the following:

We had a cost of $554,756 for ginseng production for the six months ended December 31, 2011, resulting from the ginseng harvest in 2011. The harvest costs include seeds, seedlings, plant sheds, woodland expenses, wages, fertilizer, pesticides, irrigation, transportation fees, and the building of pathways.

We had a cost of $1,146,930 for purchasing ginseng for resale for the six months ended December 31, 2011, an increase of $822,081, or 253% compared to the six months ended December 31, 2010. The increase was due to increased quantity, quality and the price of ginseng we purchased from outside farmer. For the six months ended December 31, 2011, the quality of ginseng we purchased from outside farmer was higher than the same period time of 2010. Additionally, the purchased price and market order increased due to Chinese government’s policy to restrict the amount of land available for ginseng farming and nationwide inflation;

·	We had a cost of $51,797 for ginseng beverage production in the six months ended December 31, 2011, an increase of $17,693, or 52% compared to the six months ended December 31due to increased sales;

·	We had a cost of $1,169 for wine production due to the sales of wine in the six months ended December 31, 2011.There was no cost for wine production for the six months ended December 31, 2010 since there was no wine sales.

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Cost of sales as a percentage of revenue decreased from 89% to 78% as compared to the prior comparative period.

Selling, General and Administrative Costs

Sales costs, general expenses and administrative expenses increased significantly from $502,553 for the six months ended December 31, 2010 to $ 1,126,816 for the six months ended December 31, 2011, an increase of $624,263or 124%. The increase is mainly from 1) the rise in general administrative expenses and marketing expenses for our new business – the ginseng juice and grape wine operation, such as maintenance fee, business travel expense, utility expense, etc. In order to develop our new business and promote our new products, company representatives attended most national agriculture exhibitions and food exhibitions during the period and promoted our ginseng juice through various channels; and 2) the increased salary paid to the workers who participate in the production of ginseng juice and wine.

Depreciation and Amortization

Depreciation and amortization was $30,532 for the six months ended December 31, 2011 compared to $10,613 for the six months ended December 31, 2010, an increase of $19,919 or 188%. The increasing was primarily due to the additional depreciation on property acquired subsequent to December 31, 2010.

Interest Expense

Our Interest expense increased by $71,185 or 93%, from $76,759 for the six months ended December 31, 2010 to $147,944 for the six months ended December 31, 2011. The change in imputed interest on related party loans and the interest paid to bank loans for Jilin Ganzhi building are the primary reasons for the increase in interest expense.

Income Taxes)

Income tax expenses for the six months ended December 31, 2011 was $18,713 compared to $16,138 for the six months ended December 31, 2010. This income tax expense relates to taxes payable in China by the Company’s subsidiary, Yanbian Huaxing and Jilin Huammei. The increase in income tax expense is due to the additional income generated by Jilin Huamei for the three months ended September 30, 2011.

Net Income (Loss)

We had a net loss of $834,202 for the six months ended December 31, 2011 and a net loss of $497,369 for the six months ended December 31, 2010, an increase of $336,833 or 68%. The net loss is primarily due to the increase in operating expenses and administrative expenses. There also was an increase in the cost of producing ginseng, purchasing ginseng for resale and in the cost of ginseng juice, wine production.

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Other Comprehensive Income

Translation adjustments resulting from this process amounted to $64,403 and $125,235 for the six months ended December 31, 2011 and 2010, respectively. The assets and liabilities amounts with the exception of equity for the six months ended December 31, 2011 were translated at 6.3009 RMB to 1.00 USD as compared to 6.6227 RMB to 1.00 USD for the six months ended December 31, 2010. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the six months ended December 31, 2011 and 2010 were 6.37990 RMB and 6.7157 RMB, respectively.

Discussion of Cash Flow

Cash flows results for the six months ended December 31, 2011 and the six months ended December 31, 2010 are summarized as follows:

	December 31, 2011			December 31, 2010
Net cash provided by(used in) operating activities	$	(611,753	)	$	(1,818,512	)
Net cash provided by(used )in investing activities	$	(80,163	)	$	(27,941	)
Net cash provided by financial activities	$	664,874		$	1,696,744

Operating activities

Cash flows used in operating activities decreased by $1,206,759 for the six months ended December 31, 2011 compared to the same period of 2010. This change was primarily the result of an increase in net losses of $ 336,833, in addition to an increase in accounts receivable of $767,311. These amounts were offset by a decrease in inventory of $34,828, a decrease in prepaid expense of $354,298, a decrease in due from related parties of $123,852, an increase in accounts payable of $243,303 and an increase in receivable in advance of $128,429.

The increase in accounts receivable primary was due to the temporarily uncollected amount from the sales of ginseng held by Yanbian Huaxin; an increased accounts payable was due to our raw material purchase during the six months ended December 31, 2011; and an increased in receivable in advance was primary due to the deposit we received from our ginseng customers and ginseng juice distributors.

The inventory decreased due to the ginseng juice production by using reserved raw materials; a decreased in prepaid expense was due to decreased ginseng which purchased by the Company; a decrease in due from related parties was because of advanced expenses for our beverage business which were incurred in the six months ended December 31, 2011.

Investing activities

Cash flows used in investing activities amounted to $80,163 for the six months ended December 31, 2011, which consisted of a long-term investment of $15,871 and a purchase of property and equipment of $64,892. During the three months ended September 30, 2011, Jilin Ganzhi spent $47,716(310,000 RMB) purchasing a Liquid nitrogen machine and Water storage tank for business operation use. Yanbian Huaxing spent $3,775 (24,500 RMB) to purchase a tractor for ginseng farming business and Jilin Huamei spent $8,163 (52,980 RMB) purchasing office supplies, such as computers, printers; office tables; desks, bookcases, chairs and sofa.

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On September 25, 2011, the Company invested $15,871 (100,000 RMB) in Jilin Province Jiliang Beverage Investments Co. Ltd. (“Jilin Jiliang”). This investment represented a 10% interest in Jilin Jiliang. Jilin Jiliang is an investment management company. The Company will account for this investment utilizing the equity method. (The agreement regarding the investment by Jilin Huamei in Jilin Jiliang is filed herewith as Exhibit 10.1.)

Cash flows used in investing activities amounted to $27,941 for the six months ended December 31, 2010, which consisted of a long-term investment of $23,102 and a purchase of property of $4,839. In November 2010, Jilin Huamei spent $4,839 purchasing a MiniVan for business use. In December 2010, the Company invested $23,102 (153,000 RMB) in Changchun Zhongshen Beverage Co. Ltd. (“Zhongshen”). This investment represented a 17% interest in Zhonghsen. Zhongshen is a retailer of ginseng juice and wine. The Company will account for this investment utilizing the equity method.

Financing activities

Cash flows provided by financing activities for the six months ended December 31, 2011 was $664,874, primarily proceeds from sale of common stock of $49,940; proceeds from loans payable to farmers of $34,372; and proceeds from loans payable to related parties of $580,562.

Our cash flows provided by financing activities for the six months ended December 31, 2010 was $1,696,744, which consist of proceeds from sale of common stock of $1,819,872 and proceeds from related party loans of $29,781, proceeds from loans payable to farmers of $56,524, offset by repayment to related party loans of $193,433 and repayment of notes payable –building of $16000.

Cash flows provided by financing activities decreased by $935,509, or 133% in the six months ended December 31, 2011 compared to the same period in 2010.

Commitments and Contingencies

The Company has employment contracts with key individuals including the President of the Company. The total commitment per year was approximately $49,027 in fiscal year 2011 and $36,200 in fiscal year 2010.

The Chinese government owns all the land in China. Currently, the Company has grants from the Chinese government for approximately 1,500 hectares of land (3,705 acres) to grow ginseng. These grants are for twenty years and are set to expire in 2025. These grants can be renewed, although there is no assurance that the Chinese government will renew them in the future.

The Company is obligated to pay back a loan of $292,492 to Ji’An Qingshi Credit Cooperatives (the debt carried from Tonghua Linyuan), secured by all assets of Tonghua Linyuan until the loan is repaid. The loan was due for repayment on February 4, 2003. The Company is currently in default on the loan, but the lender has verbally agreed not to call the loan. We intend to pay off the loan when the ginseng beverage production and wine production business generate sufficient profit.

The Company is required to invest an additional 400,000 RMB ($62,943) in Jilin Jiliang pursuant to the related governing agreement.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

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Item 4. Controls and Procedures.

(a)	Evaluation of disclosure controls and procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were ineffective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

(b)	Management’s assessment of internal control over financial reporting

We do not expect that our controls and procedures will prevent all errors and all instances of fraud. Controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls and procedures are met. Further, the design of controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all controls and procedures, no evaluation of controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Management is responsible for establishing and managing adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and may find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company’s operations and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The objective of this assessment is to determine whether our internal control over financial reporting was effective as of June 30, 2011. Based on our assessment utilizing the criteria issued by COSO, management has concluded that our internal control over financial reporting was not effective as of June 30, 2011 due to the existence of the following material weaknesses:

–	As of June 30, 2011, there was a lack of accounting personnel with the requisite knowledge of Generally Accepted Accounting Principles (“GAAP”) in the U.S. and financial reporting requirements of the Securities and Exchange Commission;

–	As of June 30, 2011, there were insufficient written polities and procedures to ensure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements.

–	As of June 30, 2011, there was a lack of segregation of duties, in that we only had one person performing all accounting related duties;

–	As of June 30, 2011, there was no independent audit committee.

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Notwithstanding the existence of these material weaknesses in our internal control over financial reporting, our management believes that the financial statements included in its reports fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented. We continue to evaluate the effectiveness of internal controls and procedures on an on-going basis. Once our cash flows from operations improve to a level where we are able to hire additional personnel in financial reporting, we plan to improve our internal controls and procedures by hiring an experienced controller and building an internal accounting team with sufficient in-house expertise in US GAAP reporting.

(c)	Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Unregistered Sales of Equity Securities.

During the period ending December 31, 2011, we sold 341,190 shares at $0.2488 per share, pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Regulation S with regard to issuances to non-U.S. citizens or residents.

(b) Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

(a) Exhibits.

Exhibit No.		Document Description
10.1		Export Agency Agreement by and among Jilin Huamei and Changchun Economic & Trade Co., Ltd Asian Poetry, dated November 5, 2011 (Filed herewith)

31.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.

31.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.

32.1		Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxleyact Of 2002

32.2		Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxleyact Of 2002

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 of the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

China Ginseng Holdings, Inc.,

Title		Name		Date		Signature
Principal Executive Officer		Changzhen Liu		February 8, 2012		/s/ Changzhen Liu

In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE	NAME	TITLE	DATE
/s/ Changzhen Liu	Changzhen Liu	Principal Executive Officer and Director	February 8, 2012
/s/ Ren Ying	Ren Ying	Principal Financial Officer and Principal Accounting Officer	February 8, 2012

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

China Ginseng (CSNG) Inactive 10-Q2012 Q2 Quarterly report

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