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

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

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

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

 

The accompanying consolidated financial statements and related notes werehave been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”).

These unaudited consolidated interim financial statements should be read in conjunction with the financial statements and footnotes for the year ended December 31, 2011 included in our Form 10-K as filed with the SEC. The results of operations and cash flows for the six months ended June 30, 2012 are not necessarily indicative of the results of operations or cash flows which may be reported for future periods or the full fiscal year.

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

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into United States dollars (“("$”") was made at the following exchange rates for the respective periods:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include the estimated useful lives of property and equipment, the allowance for doubtful accounts and the fair value of embedded derivatives related to the outstanding warrants to purchase our common stock.  Actual results could differ from those estimates.

We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash and equivalents. As of SeptemberJune 30, 2011,2012, we held $5,838,181of$5,756,529 of our cash and cash equivalents with commercial banking institutions in the People's Republic of China ("PRC"), and $11,378$624 with banks in the United States. As of December 31, 2010, we held $4,851,436 of our cash and cash equivalents with commercial banking institution in PRC, and none in the United States. In China, there is no equivalent federal deposit insurance as in the United States, so the amounts held in banks in China are not insured. We have not experienced any losses in such bank accounts through SeptemberJune 30, 2011.2012.

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

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

 

In the third quarter of 2011, we submitted an application for the Patent of Utility Model State Intellectual Property Office of China for technical improvements to increase production efficiency that werewas developed by our research and development team. The application review, verification and approval process is expected to take approximately one yea.year.

 For the ninesix months ended SeptemberJune 30, 20112012 and 2010,2011, we recorded $23,118$38,079 and $0$22,965 of research and development expense, respectively.

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in general and administrative expense, if any.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of SeptemberJune 30, 20112012 and December 31, 2010,2011, bad debt allowance balances were zero. There is no bad debt expense during the ninesix months ended SeptemberJune 30, 20112012 and 2010.2011.

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

Prepaid expenses and other assets consist of (i) advance to suppliers for merchandise that had not yet been shipped, and (ii) other receivables.

Property, plant and equipment are recorded at cost.  Expenditures for major additions and betterments are capitalized. Maintenance and repairs are expensed as incurred.  Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives.  Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.  Leasehold improvements, if any, are amortized on a straight-line basis over the lease period or the estimated useful life, whichever is shorter.  Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts. Certain property, plant and equipment is pledged as collateral to secure loans to commercial banks.

We evaluate our convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)FASB ASC Sections 810-10-05-4 and 815-40-25.  The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability.  In the event that the fair value is recorded as a liability, the change in fair value is recorded in the Statement of Operations as other income or expense.  Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and the related fair value is reclassified to equity.  We perform a mark-to-market valuation on a quarterly basis using the Black-Scholes Option Pricing Model with gains and losses to be recognized in current earnings.

Advance from customers represent prepayments to us for merchandise that had not yet been shipped to customers.

We adopted ASC Topic 820, “Fair Value Measurements”, for its financial instruments.  The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, prepayments and other current assets, accounts payable, accrued expenses and other current liabilities, approximate their fair values because of the short maturity of these instruments.

We follow U.S.the guidance of ASC 605, "Revenue Recognition,” and the Securities and Exchange Commission’sCommission's Staff Accounting Bulletin (“SAB”) No. 104 and SAB Topic 13 for revenue recognition. RevenueIn general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is recognized when earnedfixed or determinable, and collectability is reported net of refunds.  reasonably assured.

We account for income taxes in accordance with ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Since 2008, the statutory income tax rate for all businesses in China has been 25%, although certain special tax treatment is granted by the tax authority. According to the tax special treatment policy to encourage more efficient utilization of natural resources established by the State Administration of Taxation of PRC in its 2009 Correspondence No. 185, and approved by the Administration of Taxation of Zhucheng City in Shangdong Province, where our operations are located, 10% of our income from sales of finished goods is exempt from income tax.tax calculation.

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

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, our management has not determined whether implementation of such proposed standards would be material to its consolidated financial statements.

Inventories at SeptemberJune 30, 20112012 and December 31, 20102011 consist of the following:

Prepaid expenses and other current assets at SeptemberJune 30, 20112012 and December 31, 20102011 consist of the following:

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

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

Property, plant and equipment, consists of the following:

In August 2011, Ziyang Ceramics completed the construction and installation of a new production line for its new line of interior porcelain wall tiles, which resulted in a reclassification of $1,325,476 from construction in progress to property plant and buildings, and $5,376,476 to machinery and equipment. The production on the new line commenced in August, 2011. As of SeptemberJune 30, 2011,2012, we do not have any construction in progress in our property, plant and equipment.progress.

As of SeptemberJune 30, 20112012 and December 31, 2010,2011, the net book value of property, plant and equipment pledged as collateral for bank loans was $2,553,781,$1,047,726, and $2,738,019,$1,138,346, respectively. Refer to Note 1110 – Loans Payable for details on the terms and covenants on these loans.

Loans payable consisted of the following:

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

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

At SeptemberJune 30, 20112012 and December 31, 2010,2011, our related party payable to former Ziyang Ceramics shareholders and China Direct,CD International Enterprises, Inc., our corporate management service provider and owner of approximately 13%16.8% of our common stock, was $564,399$2,135 and $0,$559,325, respectively, comprised of the following:

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

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

The consulting fees isare our obligation to pay China DirectCD International Enterprises, Inc. $500,000 as compensation for certain consulting services China DirectCD International Enterprises, Inc., provided to us that were completed on June 30, 2011 as discussed in Note 1 – Organization and Operations. We agreed to pay the $500,000 when we receive the proceeds under a note receivable discussed in Note 6 – Notes Receivable.2011.

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

 

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

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

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

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

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