CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
China
Dongsheng International, Inc. (“the Company” or “CDSG”) was incorporated under
the laws of the State of Delaware in October, 1991 and formerly known as
Paperclip Software, Inc.
On
November 9, 2006, the Company acquired 100% of the issued and outstanding
capital stock of American Sunrise international, Inc. (“ASI”), a Delaware
corporation, thereby making ASI a wholly-owned subsidiary of the Company, in
consideration for a cash payment of $280,000 and in exchange for the issuance of
(i) 18,153,934 shares of the Company's common stock and (ii) 1,762,472 shares of
the Company's newly-designated Series B Convertible Preferred Stock, of which
series each share can be convert into 500 shares of the Company's common stock.
After giving effect to the transactions contemplated by the Share Exchange
Agreement (the "Transaction"), the ASI Shareholders and the former shareholders
of the Company own 98.7% and 1.3%, respectively, of the Company's common stock
on a fully-diluted basis, thereby resulting in a substantial dilution to the
Company's shareholders of record as of November 6, 2006 (the "Historic PaperClip
Shareholders") and constituting a change in control of the Company.
For
accounting purposes, the transaction described above has been accounted for as a
reverse acquisition under the purchase method of accounting. Accordingly, ASI is
treated as the continuing entity for accounting purposes
The
Company operates its business primarily through its wholly-owned subsidiary,
Jilin Dongsheng Weiye Science and Technology Co., Ltd. (“Dongsheng”), which is
engaged in the manufacturing and distributing of nutritional supplements, beauty
care products and other alternative health care products.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Item 310 of Regulation
S-B. 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 for a fair presentation have
been included. Operating results for the three months ended December
31, 2007 are not necessarily indicative of the results that may be expected for
the full year.
CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006 (UNAUDITED)
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT
ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
effect 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.
Actual results could differ from those estimates.
PRINCIPLES
OF CONSOLIDATION
The
accompanying consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries, American Sunrise International, Inc.,
Jilin Dongsheng Weiye Science and Technology Co., Ltd. Inter-company
transactions and balances have been eliminated in consolidation and
combination.
ADVANCES
TO SUPPLIERS
The Company makes advances to certain vendors’ inventory purchases and
purchase of construction equipments. The total advances to suppliers were
$
301,712
as of December 31, 2007.
UNEARNED
REVENUE
Unearned
revenue represents payments received from customers for goods and services that
have not been delivered or preformed.
CONCENTRATIONS
OF CREDIT RISK
After
merging with ASI, the principle operations of the Company are now located in the
People’s Republic of China (“PRC”). Accordingly, the Company’s business,
financial condition, and results of operations may be influenced by the
political, economic, and legal environments in the PRC, in addition to the
general state of the PRC economy. The Company's operations in the PRC are
subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environments
legal environments and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other
things.
CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006 (UNAUDITED)
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN
CURRENCY TRANSLATION
The
functional currency for the Company’s operations in China is the Renminbi
(“RMB”). Foreign currency transactions are translated at the applicable rates of
exchange in effect at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at
the applicable rates of exchange in effect at that date. Revenues and expenses
are translated at the average exchange rates in effect during the reporting
period.
Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated Other
Comprehensive Income". Gains and losses resulting from foreign
currency translations are included in Accumulated Other Comprehensive
Income.
NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157 “Fair Value
Measurements,” which provides a definition of fair value, establishes a
framework for measuring fair value and requires expanded disclosures about fair
value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The provisions of SFAS No. 157
should be applied prospectively. The Company is currently analyzing whether this
new standard will have impact on its financial position and results of
operations.
In
September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans”, which amends
SFAS No. 87 “Employers’ Accounting for Pensions”
(SFAS No. 87), SFAS No. 88 “Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits” (SFAS No. 88), SFAS No. 106
“Employers’ Accounting for Postretirement Benefits Other Than Pensions”
(SFAS No. 106), and SFAS No. 132R “Employers’ Disclosures
about Pensions and Other Postretirement Benefits (revised 2003)”
(SFAS No. 132R). This Statement requires companies to recognize an
asset or liability for the overfunded or underfunded status of their benefit
plans in their financial statements. SFAS No. 158 also requires the
measurement date for plan assets and liabilities to coincide with the sponsor’s
year end. The standard provides two transition alternatives related to the
change in measurement date provisions. The recognition of an
asset and
liability related to the funded status provision is effective for fiscal year
ending after December 15, 2006 and the change in measurement date
provisions is effective for fiscal years ending after December 15, 2008 The
implementation of this standard did not have a material impact on the Company’s
financial position, results of operations or cash flows.
CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006 (UNAUDITED)
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of
FASB Statement No. 115,” which is effective for fiscal years beginning
after November 15, 2007. This statement permits an entity to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses on items for
which the fair value option has been elected will be reported in earnings. We
are currently evaluating the potential impact of this statement.
NOTE
3. INVENTORY
Inventory
is valued at the lower of cost or market. Cost is determined on a first-in,
first-out basis and includes all expenditures incurred in bringing the goods to
the point of sale and putting them in a sellable condition. At
December 31, 2007, the Company’s inventory consists of finished goods and
packing materials.
NOTE
4. PROPERTY, PLANT AND EQUIPMENT, NET
Machinery
and Equipment
|
|
$
|
1,048,687
|
|
Vehicle
|
|
|
4.003
|
|
Building
and Plant
|
|
|
35,506,771
|
|
Subtotal
|
|
|
36,559,461
|
|
Less:
Accumulated Depreciation
|
|
|
(653,051
|
)
|
Construction
in progress
|
|
|
7,251,866
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
43,158,276
|
|
Depreciation
expense for the six months ended December 31, 2007 and 2006 was $324,697 and
$84,262, respectively.
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred for the Company’s new operating site and equipments.
Capitalization of these costs ceases and the construction in progress is
transferred to plant and equipment when substantially all the activities
necessary to prepare the assets for their intended use are completed. No
depreciation is provided until it is completed and ready for its intended
use.
CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
NOTE 5.
DEPOSIT ON GINSENG FARM
In
October 2007, The Company reached an agreement with Mr. Qiang Zhang (the
“Seller”), who owns the land use right and operating right of a Ginseng farm in
Jiaohe, Jilin Province. Pursuant to the agreement, the Company agrees to pay the
Seller a total contract price of RMB 67,160,000 (approximately $8,965,900) to
purchase the land use right and operating right of the ginseng farm. The total
purchase price includes the estimated cost of RMB 19,780,800 for the right to
use the land for the remaining 26 years (the original lease term was for 30
years), as well as the cost of RMB 47,379,200 for the planted ginseng crops on
the premise. The harvest cycle for the aforesaid ginseng crops is normally 6-8
years from the planting of the seedlings. The Company does not expect to harvest
the crops in another 4-6 years.
Upon
signing of the agreement, the Company made advance payments in the total amount
of RMB 53,460,000 (approximately US$7,328,709) to the Seller, in order to secure
the deal. Both parties expect to close the transactions in the first quarter of
2008.
NOTE
6. LAND USE RIGHT
The
Company’s operating subsidiary, Dongsheng, purchased the right to use land from
the local government for the period of 30 years to build a new research
facility. The land use right is stated at cost less accumulated amortization.
Amortization is provided using the straight-line method over 30 years. The
amortization expense was $30,365 and $ - 0 – for the six months ended December
31, 2007 and 2006, respectively.
NOTE
7. DEPOSIT ON LAND
In June
2005, the Company’s operating subsidiary also signed an agreement with the Land
Committee of Jilin City Hi-Tech Zone to purchase the land use right for a
planned future manufacturing site. The Company made a deposit on the land
purchase in the amount of RMB 21,000,000.
Due to a
pending dispute with another Company who also wants to claim the same piece of
land, the Company has not yet received the official Certificate of Approval for
the land use right from the local government. The deposit made on the purchase
of land use right was recorded as deposit on land and no amortization on land
use right will be booked until the official approval is received.
CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
NOTE
8. TAXES PAYABLE
The
Company’s operating subsidiary, Dongsheng, is located in China and governed by
the Income Tax Law of China concerning the private-run enterprises, which are
normally subject to income tax at a statutory rate of 33% (30% state income tax
plus 3% local income tax) on its taxable income. Dongsheng has been accruing the
income tax payable since the first year it had profits.
In 2006,
Dongsheng changed its status from the private-run enterprise to foreign-invested
enterprise following the acquisition by ASI. In accordance with Chinese laws,
the subsidiary is eligible for the income tax holiday typically granted to
foreign-invested enterprises. The subsidiary applied for the income tax
exemption from Chinese tax authority and has received the approval for tax
clearance. In the approval notice, it stated that all of the taxes accrued prior
to September 23, 2007 in the amount of $19,392,018 have been cleared and
forgiven. The amount has been included in the Statements of Income for the six
months ended December 31, 2007 as income tax benefit.
On
March 16, 2007, the National People’s Congress of China approved the
Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”),
which is effective from January 1, 2008. Under the new CIT law, the
corporate income tax rate applicable to all Companies, including both domestic
companies or foreign-invested companies, will be 25%, replacing the current
applicable tax rate of 33%.
In light
of the recent changes in the Corporate Income Tax Law, the local tax authority
has called off new approvals on all new applications for the old two-year tax
exemption and three-year 50% tax reduction for all new foreign-invested
enterprises. Therefore, Dongsheng will still be liable for the income taxes on
any net income generated in the third and fourth quarter of 2007 at the current
tax rate of 33% until the new rate of 25% applies in 2008.
The total
taxes payable of $6,077,033 accrued in the Company’s book as of December 31,
2007 includes $3,592,123 in income taxes, $2,413,010 in value-added taxes for
the Company’s operating subsidiary, Dongsheng, and $71,900 accrued income taxes
for the parent company, Paperclip Software, Inc.
CHINA
DONGSHENG INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
NOTE
9. STOCKHOLDERS' EQUITY
On
November 9, 2006, in accordance with the Share Exchange Agreement with ASI, the
Company issued 18,153,934 shares of its common stock and 1,762,472 shares of its
newly-designated Series B Convertible Preferred Stock, of which series each
share will convert into 500 shares of the Company’s common stock (upon the
increase of the Company’s authorized common stock to an appropriate amount to
satisfy full conversion of all Series B Convertible Preferred Stock
shares).
On
February 25, 2007, the Company effectuated a 1-for-37 reverse stock split on all
of its issued and outstanding shares of common stock and preferred stock.
Simultaneously, all preferred stock was converted into common stock at the
designated ratio.
As of
December 31, 2007, there were 31,546,134 shares of Common Stock issued and
outstanding and no preferred stock.