UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For the
Quarterly Period Ended March 31, 2010
¨
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For the
Transition Period from ______ to ______
Commission
File Number: 000-53075
Qingdao
Footwear, Inc.
(formerly
Datone, Inc.)
(Exact name of
registrant as specified in its charter)
|
Delaware
|
|
16-1591157
|
|
(State or other jurisdiction of incorporation or
organization)
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|
(I.R.S. Employer Identification Number)
|
Qingdao
Footwear, Inc.
269
First Huashan Road
Jimo
City, Qingdao, Shandong, PRC
(Address
of principal executive office and zip code)
86-532-86595999
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
¨
No
¨
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
¨
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Accelerated
filer
¨
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Non-accelerated
filer
¨
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|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Class
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Outstanding
at August 2, 2010
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Common
Stock, $0.0001 par value per share
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10,000,000
shares
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Explanatory
Note
The
purpose of this Quarterly Report on Form 10-Q/A is to amend Part I, Items 1, 2
and 4 and Part II, Items 2 and 6 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2010, which was filed with the Securities and Exchange
Commission (the “SEC”) on May 10, 2010 (the “March 2010 10-Q”).
Part I,
Items 1, 2 and 4 and Part II, Items 2 and 6 of our March 2010 10-Q have been
amended and restated in their entirety. Except as stated herein, this Form
10−Q/A does not reflect events occurring after the filing of the March 2010 10-Q
on May 10, 2010 and no attempt has been made in this Quarterly Report on Form
10-Q/A to modify or update other disclosures as presented in the March 2010
10-Q. Accordingly, this Form 10−Q/A should be read in conjunction with our
filings with the SEC subsequent to the filing of the March 2010
10-Q.
Throughout
this report, the terms “we,” “us,” “our company,” “our” and “Qingdao Footwear”
refer to the combined business of Qingdao Footwear, Inc., formerly Datone, Inc.,
and its wholly owned direct and indirect subsidiaries, (i) Glory Reach
International Limited, or “Glory Reach,” a Hong Kong limited company; and (ii)
Qingdao Hongguan Shoes Co., Ltd., a PRC limited company, or “QHS,” as the case
may be.
TABLE
OF CONTENTS
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PART
I.
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FINANCIAL
INFORMATION
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3
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ITEM
1.
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FINANCIAL
STATEMENTS
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3
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ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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3
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ITEM
4.
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CONTROLS
AND PROCEDURES
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14
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PART
II.
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OTHER
INFORMATION
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15
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ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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15
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ITEM
6.
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EXHIBITS
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16
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SIGNATURES
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17
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PART I: FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
The
Company’s financial statements follow the signature page of this report and are
incorporated herein by reference.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
Quarterly Report on Form 10-Q for the three months ended March 31, 2010 contains
“forward-looking statements” within the meaning of Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements that include the
words “believes,” “expects,” “anticipates,” or similar expressions. These
forward-looking statements include, among others, statements concerning our
expectations regarding our working capital requirements, financing requirements,
business, growth prospects, competition and results of operations, and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements in this Quarterly Report on
Form 10-Q for the three months ended March 31, 2010 involve known and unknown
risks, uncertainties and other factors that could cause our actual results,
performance or achievements to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
The
discussion of the results of operations below are of Qingdao Footwear and its
subsidiaries, Glory Reach and QHS, and have been derived from the financial
statements that are included elsewhere in this prospectus. Glory Reach is deemed
to be the accounting acquirer in the share exchange transaction consummated as
of February 12, 2010, which is further described in the section, “Our Corporate
Structure” in this prospectus. Since there is common control between the Glory
Reach and Qingdao Shoes, for accounting purposes, the acquisitions of Qingdao
Shoes has been treated as a recapitalization with no adjustment to the
historical basis of their assets and liabilities.
The
restructuring has been accounted for using the “as if” pooling method of
accounting and the operations were consolidated as if the restructuring had
occurred as of the beginning of the earliest period presented in our
consolidated financial statements and the current corporate structure had been
in existence throughout the periods covered by our consolidated financial
statements.
Overview
We are a
designer and retailer of branded footwear in Northern China. We were organized
to service what we believe is an unmet and increasing demand for high quality
formal and casual footwear throughout the PRC. We are focused on providing
footwear that rises to the style, quality and comfort demands of a high-end
consumer at affordable prices within reach of middle market office employees.
Our products can be divided into men’s and women’s casual and formal footwear.
Along with the growth in urbanization and individual purchasing power in China,
the demand for leather footwear has also grown. Since our organization in 2003,
we have grown rapidly throughout Shandong province, a province that has
approximately one-third the number of people of the United States.
Our
principal business includes (1) designing and selecting designs for men’s and
women’s leather shoe lines; (2) sourcing and purchasing contract-manufactured
footwear; and (3) selling these lines of footwear under our proprietary brand,
“
红冠
”
(Hongguan, sometimes presented as “HonGung”). We do not manufacture or assemble
any shoes. We operate a number of flagship stores throughout greater Qingdao.
Our products are also brought to market through our extensive distribution
network of authorized independent distributors as well as through third party
retailers selected to operate exclusive Hongguan brand stores on our behalf. We
believe that the sale of our products through distributors and third parties has
enabled us to grow by exploiting their local retail expertise and economies of
scale while minimizing our expenditure on fixed asset and human resources. Our
company headquarters and main sales office is located in Shandong province in
northern China, in the city of Jimo, less than 25 miles from the major urban
center of Qingdao.
Principal
Factors Affecting Our Financial and Operational Results
Our
financial results of operations have been and will continue to be affected by a
number of factors, including but not limited to the following
factors:
Growth
in the broader PRC economy
Our
financial condition and results of operations have been driven by macro-economic
conditions, increased disposable income and consumer spending in the PRC. Since
our formation, we have derived 100% of our income from operations in China.
Along with growth in the economy as a whole, Chinese domestic consumption has
increased in line with rapid urbanization and increases in disposable income
over the past 15 years. Per capita urban disposable income has increased by an
annualized rate of 12.9% over the 5 years ending in 2008 and is anticipated to
top $2,000 in 2012. The urban population as a percentage of the total population
increased from 40.6% in 2003 to 46.6% at the end of 2009, and this trend is
expected to continue into the future. (National Bureau of Statistics of China,
www.stats.gov.cn
)
The United
Nations estimates that China’s population is likely to be evenly split between
rural and urban areas by 2015. (“Urbanization in the People’s Republic of
China,” www.wikipedia.org) We expect that financial performance will continue to
be driven by the positive trends in retail consumption, urbanization and
increased consumer spending in the future.
Increased
consumer demand for leather footwear products in the PRC
Consumer
demand for leather footwear products in the PRC is a key driver of our continued
growth. The success of our enterprise depends in large part on the growth in the
PRC consumer market, particularly consumer demand for high quality, affordable
leather shoes. As average living standards in the PRC continue to improve and a
larger percentage of employment opportunities become available in an urban
office or service economy setting, we expect consumer demand in the PRC to shift
increasingly towards footwear appropriate to such settings, such as fine leather
footwear. While Chinese per capita footwear consumption is lower than a number
of other countries, China surpassed the United States in 2008 as the country
that purchases the most pairs of footwear in the aggregate. Because the average
Chinese consumer purchases an average of two pairs of shoes annually, far fewer
than consumption levels in Korea, Japan or the West, China’s shoe consumption
rate is expected to approach levels of other nations with similar cultural
consumption characteristics if China’s consumer wealth continues to grow.
(“Footwear in China,” www.datamonitor.com) For this reason, we expect the market
to continue to grow for the immediate future.
Management
and Expansion of Our Distribution Network
The
majority of our sales are derived through third party distributors. As such,
management of our brand through and collection of receivables from these parties
is paramount to our success and future growth. We manage our brand by
controlling how our products are placed, selecting store locations and
decoration, and other qualitative measures. We regularly visit and inspect third
party stores in order to ensure they meet our high standards for appearance,
quality and service.
In the
past, we had managed receivables from our third parties by requiring full
payment for goods within one month of delivery. Beginning with our sales fair in
February 2010, we extended credit to certain distributors. These distributors
were selected based on outstanding track records in both sales and timely
payments. We extended this credit in order to enhance their ability to increase
sales responsibly and reward them for past success and loyalty. The extension of
credit allows these distributors to grow cost effectively in accordance with our
goal of achieving greater penetration in the Shandong retail market. It also
encourages them to purchase our new models of footwear. We monitor our
receivables carefully and reserve the right to terminate contracts with any
supplier
whose payments are not timely. We have maintained
strong and positive long term relationships with all the distributors that we
extended credit periods to and have rarely encountered any difficulties on
collection of accounts receivable and do not anticipate collection issues in the
future. We encourage such timely repayment by maintaining regular communication
with these distributors. Management believes that it has already taken adequate
measures to ensure timely settlement by the distributors, and the extended
credit period has not and will not materially adversely affected our liquidity
or working capital.
Effective
cost management and quality control in our supply chain
Our
footwear is designed in house, but production of our footwear is entirely
outsourced. To meet production requirements and to remain profitable, we must be
able to count on our suppliers for quality product at reasonable prices
delivered in a timely manner at commercially reasonable prices. Therefore, it is
vital to our success that we are able to maintain control of our supply chain.
We believe that we will be able to offset a portion of any such increased costs
through improvement of production efficiency and use of economies of scale.
Historically, we have been successful in containing cost of goods sold as a
percentage of total cost of sales. For 2008 and 2009 our cost of goods sold
accounted for 59% and 57% of total sales, respectively. We seek to capitalize on
overcapacity in the footwear manufacturing industry in the PRC and leverage our
purchasing power to continue to obtain favorable prices from our major
suppliers. Should costs increase in the markets from which we currently source
products, we are confident that we will be able to find alternative footwear
providers throughout Southeast Asia. We actively work with our suppliers to
maintain quality and reserve the right to return goods that do not meet our
standards.
Competitive
Pricing Points and Attractive Product Designs
We have
been able to maintain strong gross profit margins through competitive pricing of
our products and effective cost management. To increase sales volumes, our
pricing policy is to offer a range of products set at different price points
with the aim of targeting different segments within the mid-range market. In
order to maintain our price competitiveness and sales volumes, we review our
pricing strategy regularly to make adjustments based on various factors,
including the market response to existing recommended retail prices, the level
of sales, the expected product margin on individual products, the prices of our
competitors’ products and the anticipated market trends and expected demand from
customers.
We
pursue a variet
y of designs that offer a
diversified product mix
and
provide
a wide range of
leather footwear styles
to
our customers
,
which we bel ieve to be vital
to
attracting customers
and to increases our revenue.
Our designers have historically
produced more than 2
00
unique designs
annually which vary by
season and target demographic. We strive to find innovative styles and
technologies to incorporate into our shoes and always meet the highest and most
popular styles for our customers. In the coming years, w
e will
monitor demand and adjust our
product
s
accordingly
to maximize
sales and profit
.
Ability
to maintain brand recognition and marketing success
We
believe that brand recognition drives consumer product selection. We will
continue to invest our efforts in brand building and establishing Hongguan as a
quality affordable footwear brand rising to the highest fashion standards while
remaining within reach of a smaller budget consumer. We place great emphasis on
our brand and promote Hongguan products through advertisements in the media,
sales fairs and various other promotional activities. We intend to increase our
marketing budgets for promotional activities in the future in order to further
strengthen our brand and market position.
Previous
Organization and Reverse Acquisition
During
fiscal year 2009, our company’s corporate entity, Datone, Inc., was a provider
of both privately owned and company owned payphones and stations in New York.
Datone, Inc. received revenues from the collection of the payphone coinage, a
portion of usage of service from each payphone and a percentage of long distance
calls placed from each payphone from the telecommunications service providers.
In addition, Datone, Inc. also received revenues from the service and repair of
privately owned payphones, sales of payphone units.
On
February 12, 2010, our company completed a reverse acquisition transaction
through a share exchange with Glory Reach and the shareholders of Glory Reach
(the “Glory Reach Shareholders”), whereby Qingdao Footwear (Datone, Inc. at the
time) acquired 100% of the issued and outstanding capital stock of Glory Reach
in exchange for 10,000 shares of Datone, Inc.’s Series A Preferred Stock. This
preferred stock constituted 97% of our issued and outstanding capital stock on
an as-converted to common stock basis as of and immediately after the
consummation of the reverse acquisition. As a result of the reverse acquisition,
Glory Reach became our wholly-owned subsidiary and the Glory Reach Shareholders
became our beneficially controlling stockholders. The share exchange transaction
with Glory Reach was treated as a reverse acquisition, with Glory Reach as the
acquirer and Datone, Inc. as the acquired party. In connection with this
acquisition, Datone, Inc. changed its name to “Qingdao Footwear, Inc.” and
changed its operations from serving as a provider of payphones and stations in
New York to serving as a holding company for a designer and retailer of branded
footwear in Northern China.
As a
result of our acquisition of Glory Reach, we now own all of the issued and
outstanding capital stock of Glory Reach, which in turn owns all of the
outstanding capital stock of QHS.
Results
of Operations
Comparison of Three Months
Ended March 31, 2010 and March 31, 2009
The
following table sets forth key components of our results of operations during
the three months ended March 31, 2010 and 2009, both in dollars and as a
percentage of our net sales.
|
|
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Three
Months Ended
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Three
Months Ended
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|
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March
31, 2010
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|
|
March
31, 2009
|
|
|
|
|
|
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%
of Net
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|
|
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|
%
of Net
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Amount
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|
|
Sales
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|
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Amount
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|
|
Sales
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Net
Sales
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$
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4,765,812
|
|
|
|
100
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%
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|
$
|
4,455,898
|
|
|
|
100
|
%
|
|
Cost
of sales
|
|
|
2,656,755
|
|
|
|
56
|
%
|
|
|
2,522,338
|
|
|
|
57
|
%
|
|
Gross
profit
|
|
|
2,109,057
|
|
|
|
44
|
%
|
|
|
1,933,560
|
|
|
|
43
|
%
|
|
Operating
Expenses
|
|
|
720,726
|
|
|
|
15
|
%
|
|
|
231,680
|
|
|
|
5
|
%
|
|
Operating
Income
|
|
|
1,388,331
|
|
|
|
29
|
%
|
|
|
1,701,880
|
|
|
|
38
|
%
|
|
Other income & interest expense
|
|
|
(819
|
)
|
|
|
0
|
%
|
|
|
9,011
|
|
|
|
0
|
%
|
|
Income
Before Income Taxes
|
|
|
1,387,512
|
|
|
|
29
|
%
|
|
|
1,710,891
|
|
|
|
38
|
%
|
|
Income
taxes
|
|
|
457,531
|
|
|
|
10
|
%
|
|
|
427,723
|
|
|
|
10
|
%
|
|
Net
income
|
|
$
|
929,981
|
|
|
|
20
|
%
|
|
$
|
1,283,168
|
|
|
|
29
|
%
|
Net Sales
.
Our net sales increased to $4,765,812 in the three months ended March 31, 2010
from $4,455,898 in the same period in 2009, representing 7% revenue growth. As
retail sales trends and broader economic growth in the PRC have been positive
despite a global economic downturn, during the three months ended March 31,
2010, we increased prices in order to achieve higher gross profit. The average
selling price per pair for the first quarter of 2010 and 2009 was $19.46 and
$17.69 respectively, representing an increase of 10.0%. In response to the price
increase, the volume of footwear sold decreased 2.8% to approximately 245
thousand pairs for the three months ended March 31, 2010 as compared to
approximately 252 thousand pairs for the same period last year. We believe our
pricing policy for this quarter was a success given the overall growth in
revenue. In the future, we may adjust pricing strategy to meet market demand and
satisfy our financial goals.
Net sales
from our wholesale operations increased $144,744, or 3.8%, to $3,924,332 for the
three months ended March 31, 2010, from $3,779,588 for the three months ended
March 31, 2009. Net sales from our retail operations increased $165,170 to
$841,480 for the three months ended March 31, 2010, a 24.4% increase over sales
of $676,310 for the three months ended March 31, 2009. The average selling price
per pair within our wholesale operations increased to $18.36 per pair for the
three months ended March 31, 2010 from $16.67 per pair in the same period last
year, an increase of 10.1%, primarily due to acceptance of new designs and
styles for our in-season products. The average selling price per pair within our
retail operations increased 0.7% to $27.05 per pair for the three months ended
March 31, 2010 compared to $26.85 for the same period in 2009.
Cost of
Sales
. For the three months ended March 31, 2010, cost of sales amounted
to $2,656,755 or approximately 55.7% of net revenues as compared to cost of
sales of $2,522,338 or approximately 56.6% of net revenues for the same period
of 2009. The average unit cost per pair increased to $10.85 for the first
quarter of 2010 from $10.01 for the same period of 2009, an increase of 8.4%.
This was in line with macroeconomic factors including increased consumer demand
driving the use of on-line manufacturing capacity and general wage increases in
the PRC. We believe that the supply of low cost footwear will remain available
in the future as unused capacity comes on line and lower wage pools are accessed
throughout Asia.
Gross Profit and
Gross Margin
.
Gross profit for the three months ended March 31, 2010 increased $175,497
to $2,109,057 from $1,933,560 for the same period in 2009. Gross profit as a
percentage of net sales, or gross margin, increased to 44.3% for the three
months ended March 31, 2010 from 43.4% for the same period in 2009. The gross
margin increase was primarily attributable to increased margins for both our
retail and wholesale operations.
Gross
profit for wholesale operations increased $95,787, or 6.35%, to $1,605,211 for
the three months ended March 31, 2010 from $1,509,424 for the same period in
2009. Wholesale margins increased to 40.9% for the three months ended March 31,
2010 from 39.9% for the same period in 2009. The increase in wholesale margins
was primarily due to increased selling price of wholesale offset decreased sales
volume resulting from high competitive local footwear market. Gross profit for
retail operations increased $79,710, or 18.8%, to $503,846 for the three months
ended March 31, 2010 from $424,136 for the same period in 2009. Retail margins
decreased to 59.9% for the three months ended March 31, 2010 from 62.7% for the
same period in 2009. The decrease in retail margins was due to seasonal closeout
sales in 2010.
Operating
Expenses
. Our selling, general and administrative expenses grew to
$702,721 in the three months ended March 31, 2010 from $218,547 in the same
period in 2009. This was mainly due to a payment of shares to service providers
for services provided in connection with our reverse merger.
Other Income
& Interest Expense
. Other Income & Interest Expense decreased to
($819) in the three months ended March 31, 2010 from $9,011 in the same period
in 2009. Other Income and Interest Expense is a negligible percentage of our
revenue.
Income before
Income Taxes
. Our income before income taxes decreased to $1,387,512 in
the three months ended March 31, 2010 from $1,710,891 in the same period in
2009. While our operational scope expanded, the increased selling, general and
administrative expenses mentioned above resulted in a decrease in taxable
income.
Income
Taxes
. Income tax increased to $457,531 in the three months ended March
31, 2010 from $427,723 in the same period in 2009. The increase was due to an
increase in taxable income, as our tax rate remained constant.
Net
Income
. In the three months ended March 31, 2010, we generated net income
of $929,981, a decrease from $1,283,168 in the same period in 2009. This
decrease was primarily due to the factors discussed above. While our gross
profit increased from $1,933,560 to $2,109,057 quarter over quarter, the
one-time selling, general and administrative expenses mentioned above caused our
net income to decrease.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $378,219, primarily
consisting of cash on hand and demand deposits. This compares with March 31,
2009, when we had cash and cash equivalents of $240,479, primarily consisting of
cash on hand and demand deposits. The following table provides detailed
information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our shareholders.
We do not expect our daily operations to be constrained by cash flow; however,
without additional capital, we may be limited to a lower rate of
growth.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flows
(all
amounts in U.S. dollars)
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net
cash provided by operating activities
|
|
$
|
916,821
|
|
|
$
|
2,076,807
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(661,971
|
)
|
|
|
(1,954,613
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
61,895
|
|
|
|
0
|
|
|
Effects
of Exchange Rate Change in Cash
|
|
|
343
|
|
|
|
(249
|
)
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
317,088
|
|
|
|
121,945
|
|
|
Cash
and Cash Equivalent at Beginning of the Year
|
|
|
61,131
|
|
|
|
118,534
|
|
|
Cash
and Cash Equivalent at End of the Year
|
|
|
378,219
|
|
|
|
240,479
|
|
Operating
activities
Net cash
provided by operating activities was $916,821 for the three months ended March
31, 2010, as compared to $2,076,807 for the same period in 2009.
The cash
provided by operating activities for the three months ended March 31, 2010 was
mainly derived from our net profit of $929,981, stock-based compensation of
$442,611, an increase of tax liabilities of $1,324,682, and increase of accounts
payables of $120,086, offset by an increase of accounts receivable of $1,703,936
and increase of prepayments of $173,854. The increase of accounts receivable was
due to a short-term increased credit period policy designed to enhance sales
following a sales fair held in February. We have granted short-term credit
extensions as a strategic incentive to our most loyal and profitable
distributors to increase our market share following such a sales fair, largely
in order to introduce our new models of footwear. Generally, we expect such
distributors to pay the purchase prices within sixty days of extension. Because
these credit extensions are made to our most loyal and profitable distributors
in order to incentivize them to purchase our new footwear models, we expect the
accounts receivable to be collectable in the ordinary course, and we encourage
such timely repayment by maintaining regular communication with these
distributors. The accounts receivable associated with this short-term credit
policy have been collected as of May 31, 2010.
The cash
provided by operating activities for the three months ended March 31, 2009 was a
result of net profit of $1,283,168, and increase in tax payable of $1,241,699,
offset by the increase of inventory of $323,926.
Investing
activities
Net cash
used by investing activities for the three months ended March 31, 2010 was
$661,971 as compared to $1,954,613 net cash used in investing activities during
the same period of 2009. The cash used by investing activities during the three
months ended March 31, 2010 represents the payment for a note receivable of
$440,100 and advance to owner of $221,871. The cash used in investing activities
during the three months ended March 31, 2009 represents the advance to owner of
$1,879,489 and payment used for construction in progress of
$75,124.
Financing
activities
Net cash
provided by financing activities for the three months ended March 31, 2010 was
$61,895, as compared to $0 in the same period of 2009. The cash provided by
financing activities represents the cash proceeds from bank loans of $440,100 by
offsetting the distribution to owner of $378,205.
Bank
loans
Our bank
loans include short-term loans and long-term loans. In our industry, it is
customary to obtain such loans to meet cash flow and inventory
needs.
Short
term loans, totaling $1,158,930 as of March 31, 2010, were issued by Bank of
Qingdao and JiMo Rural Bank, with annual interest rate ranging from 6.372% to
7.965%, and with terms of 12 months which will mature in September, November and
December 2010 respectively. All bank loans were secured either by the property
of the Company or third parties.
A
long-term loan for $249,390, was issued in December 2009 by JiMo Rural Bank,
with 2 years period and annual interest rate of 7.02%. The loan is guaranteed by
the relatives of Mr. Tao Wang, the CEO and major shareholder of the Company and
is collateralized by the property of his relatives.
Capital
resources
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in the industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may experience seasonal fluctuations in our revenue in some
regions in the PRC, based on the seasonal changes in the weather and the
tendency of customers to make purchases relating to their apparel suitable for
the time of year. Any seasonality may cause significant pressure on us to
monitor the development of materials accurately and to anticipate and satisfy
these requirements. Our revenues are usually higher in the first and fourth
quarters due to seasonal purchases.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
We
generate revenues from the retail and wholesale of shoes. Sales revenues are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectability is reasonably assured. Sales are presented net
of value added tax (“VAT”). No return allowance is made as product returns have
been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesales to our
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements. We
do not allow any discounts, credits, rebates or similar privileges.
We do not
grant any inventory pricing protection or other inventory adjusting policies to
our distributors. The distributors are responsible for their purchased products
types and volumes, unless any quality problems arise. If quality issues arise
with our products, the products will be fully replaced by our manufacturers in
accordance with the purchase agreement. As a result, we recognize our sales on
delivery of our products to our wholesalers. For the retail customers, we only
allow returns due to quality problems. We do not permit returns based on any
other reason, and we do not believe such liberal return policies are common in
China. Should there be any quality defects, customers have the right to return
the shoes to the stores from which they purchased them. The stores then return
them to our company, and we negotiate an acceptable solution with the
manufacturers, which tends to vary with the facts in each case. According to our
historical data, such returns are at approximately 0.01% of total sales and are
not material to our financial statements.
In light
of the low level of revenue dilution, we do not generally assess returns of
products, levels of inventory, expected introductions of new products or
external sources.
We have
not experienced any purchases of products in excess of ordinary course of
business levels as a result of any incentives. In our experience, customers
merely purchase their seasonal footwear needs more quickly—but not in greater
numbers—than they might otherwise purchase in the absence of such incentives.
This result is not surprising in an industry like the footwear industry, which
is marked by seasonal sales on, for example, sandals during summer and boots
during winter. As a result of such seasonal fluctuations, our customers endeavor
not to maintain excessive inventory but do try to purchase seasonally-specific
shoes shortly before the season.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using the
best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
Impairment
of Long-Lived Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value. There was no impairment of long-lived assets for the years ended December
31, 2009 and 2008.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is determined
on a weighted average basis and includes all expenditures incurred in bringing
the goods to the point of sale and putting them in a salable condition. In
assessing the ultimate realization of inventories, the management makes
judgments as to future demand requirements compared to current or committed
inventory levels. Our reserve requirements generally increase as our
projected demand requirements; or decrease due to market conditions and product
life cycle changes. The Company estimates the demand requirements based on
market conditions, forecasts prepared by its customers, sales contracts and
orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes
down inventories for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventories and their estimated market value
based upon assumptions about future demand and market conditions.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company’s other comprehensive income arose from the effect of foreign
currency translation adjustments.
Foreign
Currency Translation
The
Company’s functional currency is Chinese currency Renminbi (“RMB”) and its
reporting currency is the U.S. dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. Exchange gains or losses on transaction are included
in earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income. At December 31, 2009 and 2008, the
cumulative translation adjustment of $440,775 and $437,665 were classified as an
item of accumulated other comprehensive income in the shareholders’ equity
section of the balance sheet respectively. For the years ended December
31, 2009 and 2008, other comprehensive income was $3,110 and $232,047,
respectively.
Segment
Reporting
We
operate as a single operating segment for purposes of presenting financial
information and evaluating performance. As such, the accompanying consolidated
financial statements present financial information in a format that is
consistent with the internal financial information used by management. We do not
accumulate operating expenses by wholesale and retail operations and, therefore,
it is impractical to present such information.
Recent
Accounting Pronouncements
Fair Value Measurements and
Disclosures (Included in ASC 820, previously FSP No. 157-4, “Determining Whether
a Market is Not Active and a Transaction Is Not Distressed”).
FSP
No. 157-4 clarifies when markets are illiquid or that market pricing may not
actually reflect the “real” value of an asset. If a market is determined
to be inactive and market price is reflective of a distressed price then an
alternative method of pricing can be used, such as a present value technique to
estimate fair value. FSP No. 157-4 identifies factors to be considered
when determining whether or not a market is inactive. FSP No. 157-4 would
be effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009 and shall be
applied prospectively. The adoption of this standard had no material
effect on the Company’s financial statements.
Interim Disclosures about Fair Value
of Financial Instruments (Included in ASC 825 “Financial Instruments”,
previously FSP SFAS No. 107-1).
This guidance requires that the
fair value disclosures required for all financial instruments within the scope
of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, be
included in interim financial statements. This guidance also requires
entities to disclose the method and significant assumptions used to estimate the
fair value of financial instruments on an interim and annual basis and to
highlight any changes from prior periods. FSP 107-1 was effective for
interim periods ending after September 15, 2009. The adoption of FSP 107-1
had no material impact on the Company’s financial statements.
Consolidation of Variable Interest
Entities – Amended (To be included in ASC 810 “Consolidation”, previously SFAS
167 “Amendments to FASB Interpretation No. 46(R)”).
SFAS 167 amends
FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities,” to require an enterprise to perform an analysis to determine
the primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest entity.
SFAS 167 also requires enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement
in a variable interest entity. SFAS 167 is effective for the first annual
reporting period beginning after November 15, 2009 and will be effective for us
as of January 1, 2010. The management is in the process of evaluating the
impact of adopting this standard on the Company’s financial
statements.
FASB Accounting Standards
Codification (Accounting Standards Update “ASU” 2009-1).
In June
2009, the Financial Accounting Standard Board (“FASB”) approved its Accounting
Standards Codification (“Codification”) as the single source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the SEC and its staff.
The Codification is effective for interim or annual financial periods ending
after September 15, 2009 and impacts our financial statements as all future
references to authoritative accounting literature will be referenced in
accordance with the Codification. There have been no changes to the
content of our financial statements or disclosures as a result of implementing
the Codification.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASC Update
2009-05”), an update to ASC 820, Fair Value Measurements and Disclosures.
This update provides amendments to reduce potential ambiguity in financial
reporting when measuring the fair value of liabilities. Among other
provisions, this update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using one or more of the
valuation techniques described in ASC Update 2009-05. ASC Update 2009-05
will become effective for the Company’s annual financial statements for the year
ended December 31, 2009. The adoption of this standard had no material effect on
the Company’s financial statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) “Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force”. This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for
each deliverable will be based on vendor-specific objective evidence, if
available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific or third-party
evidence is available. The Company will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified after
January 1, 2011; however, earlier application is permitted. The management
is in the process of evaluating the impact of adopting this standard on the
Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.
The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The management is in the process of evaluating the impact of
adopting this standard on the Company’s financial statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,
Amendments to FASB Interpretation
No. 46(R)
. The amendments in this Accounting Standards Update
replace the quantitative-based risks and rewards calculation for determining
which reporting entity, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which reporting
entity has the power to direct the activities of a variable interest entity that
most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. An approach that is expected to be primarily qualitative
will be more effective for identifying which reporting entity has a controlling
financial interest in a variable interest entity. The amendments in this
Update also require additional disclosures about a reporting entity’s
involvement in variable interest entities, which will enhance the information
provided to users of financial statements. The management is in the
process of evaluating the impact of adopting this standard on the Company’s
financial statements.
In
January 2010, FASB issued
ASU No. 2010-01- Accounting for
Distributions to Shareholders with Components of Stock and Cash
.
The amendments in this Update clarify that the stock portion of a distribution
to shareholders that allows them to elect to receive cash or stock with a
potential limitation on the total amount of cash that all shareholders can elect
to receive in the aggregate is considered a share issuance that is reflected in
EPS prospectively and is not a stock dividend for purposes of applying Topics
505 and 260 (Equity and Earnings Per Share). The management is in the
process of evaluating the impact of adopting this standard on the Company’s
financial statements.
In
January 2010, FASB issued
ASU No. 2010-02 – Accounting and
Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification
. The amendments in this Update affect accounting and
reporting by an entity that experiences a decrease in ownership in a subsidiary
that is a business or nonprofit activity. The amendments also affect
accounting and reporting by an entity that exchanges a group of assets that
constitutes a business or nonprofit activity for an equity interest in another
entity. The amendments in this update are effective beginning in the
period that an entity adopts SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51.” If an
entity has previously adopted SFAS No.160 as of the date the amendments in this
update are included in the Accounting Standards Codification, the amendments in
this update are effective beginning in the first interim or annual reporting
period ending on or after December 15, 2009. The amendments in this update
should be applied retrospectively to the first period that an entity adopted
SFAS No. 160. The management does not expect the adoption of this
ASU to have a material impact on the Company’s financial
statements.
In
January 2010, FASB issued
ASU No. 2010-06 – Improving
Disclosures about Fair Value Measurements.
This update provides
amendments to Subtopic 820-10 that requires new disclosure as follows:
1) Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the
transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic
820-10 that clarifies existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement
disclosures for each class of assets and liabilities. A class is often a subset
of assets or liabilities within a line item in the statement of financial
position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs
and valuation techniques. A reporting entity should provide disclosures
about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level
3. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. The
management does not expect the adoption of this ASU to have a material
impact on the Company’s financial statements.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls.
An
evaluation was conducted under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer (“CEO”), its
principal executive officer, and Chief Financial Officer (“CFO”), its principal
financial officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act) as of March 31, 2010. Based on that
evaluation, the CEO and CFO concluded that there had been improvements of the
Company’s disclosure controls and procedures and the manner in which information
that is required to be disclosed in Exchange Act report is reported within the
time period specified in the SEC’s rule and forms. During the course of
preparing our audited financial statements, our CEO and CFO determined that our
disclosure controls and procedures were not effective as of March 31,
2010.
Conclusion
The
Company did not have sufficient and skilled accounting personnel with an
appropriate level of technical accounting knowledge and experience in the
application of generally accepted accounting principles accepted in the United
States of America commensurate with the Company’s disclosure controls and
procedures requirements, which resulted in a number of deficiencies in
disclosure controls and procedures that were identified as being
significant. The Company’s management believes that the number and nature
of these significant deficiencies, when aggregated, was determined to be a
material weakness. The material weaknesses existed from prior to the
Company’s reverse merger, when the operating company was a privately held
company in China.
Management’s
Plan to Remedy Material Weaknesses
When
management recognized that it lacked personnel with experience and knowledge of
U.S. GAAP, it sought to remedy these deficiencies by retaining third party
consultants and new management personnel with experience in U.S.
GAAP.
While the
Company’s experience was with Chinese GAAP and Chinese legal obligations, the
Company retained third-party accountants with Big 4 U.S. GAAP accounting
experience to assist with the preparation and review of financial
statements. These consultants assisted the Company both with the initial
preparation of financial statements and communication with the Company’s
auditors. In addition to these accounting consultants, the Registrant has
selected an auditor that has experience in reviewing U.S. GAAP financial
statements.
Finally,
after the end of the reporting period, the Company retained a new chief
financial officer who has experience with U.S. GAAP. In addition, the
Company has invited several individuals to serve as independent directors after
completion of a currently contemplated registered public offering of its common
stock. Although there can be no guarantee that the offering will be
completed, the Company believes that the individuals who have agreed to serve as
directors after the offering have the skills and experience necessary to provide
valuable advice regarding these accounting matters.
Despite
the material weaknesses and deficiencies reported above, the Company’s
management believes that its condensed consolidated financial statements
included in this report fairly present in all material respects the Company’s
financial condition, results of operations and cash flows for the periods
presented and that this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report.
Changes
in internal control over financial reporting.
Other
than the efforts described above to improve its internal controls both before
and after the end of the reporting period, there were no changes in the
Company’s internal control over financial reporting during the quarter ended
March 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER
INFORMATION
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On
February 10, 2010, we issued 3,136,768 shares of common stock to our landlord to
extinguish approximately $47,052 of debt owed to Callaway Properties, our pre
reverse acquisition landlord. Callaway Properties’ sole shareholder is Mary
Passalaqua, wife of the Company’s former director and former secretary Joseph
Passalaqua.
On
February 12, 2010, we issued 10,000 shares of our Series A Convertible Preferred
stock (“Series A Preferred Stock”) to the shareholders of Glory Reach. The total
consideration for the 10,000 shares of our Series A Convertible Preferred stock
was 10,000 ordinary shares of Glory Reach, which is all the issued and
outstanding capital stock of Glory Reach. The number of our shares issued to the
shareholders of Glory Reach was determined based on an arms-length
negotiation. The issuance of our shares to these shareholders was made in
reliance on the exemption provided by Section 4(2) of the Securities Act for the
offer and sale of securities not involving a public offering and Regulation D
promulgated thereunder.
We issued
securities on February 10 and 12, 2010 in reliance upon Rule 506 of Regulation D
of the Securities Act. These shareholders who received the securities in such
instances made representations that (a) the shareholder is acquiring the
securities for his, her or its own account for investment and not for the
account of any other person and not with a view to or for distribution,
assignment or resale in connection with any distribution within the meaning of
the Securities Act, (b) the shareholder agrees not to sell or otherwise
transfer the purchased shares unless they are registered under the Securities
Act and any applicable state securities laws, or an exemption or exemptions from
such registration are available, (c) the shareholder has knowledge and
experience in financial and business matters such that he, she or it is capable
of evaluating the merits and risks of an investment in us, (d) the
shareholder had access to all of our documents, records, and books pertaining to
the investment and was provided the opportunity ask questions and receive
answers regarding the terms and conditions of the offering and to obtain any
additional information which we possessed or were able to acquire without
unreasonable effort and expense, and (e) the shareholder has no need for
the liquidity in its investment in us and could afford the complete loss of such
investment. Management made the determination that the investors in instances
where we relied on Regulation D are accredited investors (as defined in
Regulation D) based upon management’s inquiry into their sophistication and net
worth. In addition, there was no general solicitation or advertising for
securities issued in reliance upon Regulation D.
In
instances described above where we indicate that we relied upon Section 4(2) of
the Securities Act in issuing securities, our reliance was based upon the
following factors: (a) the issuance of the securities was an isolated
private transaction by us which did not involve a public offering;
(b) there were only a limited number of offerees; (c) there were no
subsequent or contemporaneous public offerings of the securities by us;
(d) the securities were not broken down into smaller denominations; and
(e) the negotiations for the sale of the stock took place directly between
the offeree and us.
ITEM
6. EXHIBITS
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Exhibit
No.
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|
Description
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31.1*
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Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and
Rule15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
|
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31.2*
|
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Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
|
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32.1*
|
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
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32.2*
|
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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QINGDAO
FOOTWEAR, INC.
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By:
|
/s/ Tao Wang
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|
Tao
Wang
|
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Chief
Executive Officer
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Date:
August 2, 2010
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By:
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/s/ Joseph Meuse
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Joseph
Meuse
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Chief
Financial Officer
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Date: August
2,
2010
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EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
|
|
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|
|
|
31.1*
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and
Rule15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
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31.2*
|
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Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
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32.1*
|
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Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
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32.2*
|
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith.
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009
UNAUDITED
|
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
|
(Restated)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
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Current
assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
378,219
|
|
|
$
|
61,131
|
|
|
Accounts
receivable
|
|
|
1,802,899
|
|
|
|
98,962
|
|
|
Notes
receivable
|
|
|
440,100
|
|
|
|
-
|
|
|
Inventories
|
|
|
385,266
|
|
|
|
344,512
|
|
|
Prepaid
expenses
|
|
|
231,165
|
|
|
|
57,311
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,237,649
|
|
|
|
561,916
|
|
|
|
|
|
|
|
|
|
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|
|
Property,
plant and equipment, net
|
|
|
913,651
|
|
|
|
930,451
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|
|
Intangible
assets
|
|
|
206,957
|
|
|
|
208,167
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,358,257
|
|
|
$
|
1,700,534
|
|
|
|
|
|
|
|
|
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|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
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|
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|
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|
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|
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|
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Current
liabilities
|
|
|
|
|
|
|
|
|
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Accounts
payable and accrued liabilities
|
|
$
|
135,812
|
|
|
$
|
15,727
|
|
|
Short
term loans
|
|
|
1,158,930
|
|
|
|
718,830
|
|
|
Taxes
payable
|
|
|
1,327,308
|
|
|
|
2,627
|
|
|
Duet
to related parties
|
|
|
-
|
|
|
|
221,871
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,622,050
|
|
|
|
959,055
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
2,871,440
|
|
|
$
|
1,208,445
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
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Series
A preferred stock, .0001 par value, 10,000,000 shares authorized, none
issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, .0001 par value, 100,000,000 shares authorized, 10,000,000 and
9,700,000 shares issued and outstanding, respectively
|
|
|
1,000
|
|
|
|
970
|
|
|
Additional
paid-in capital
|
|
|
762,091
|
|
|
|
319,510
|
|
|
Accumulated
other comprehensive income
|
|
|
441,116
|
|
|
|
440,775
|
|
|
Retained
earnings (deficits)
|
|
|
282,610
|
|
|
|
(269,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
$
|
1,486,817
|
|
|
$
|
492,089
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
4,358,257
|
|
|
$
|
1,700,534
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
UNAUDITED
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
|
(Restated)
|
|
|
|
|
|
Net
sales
|
|
$
|
4,765,812
|
|
|
$
|
4,455,898
|
|
|
Cost
of sales
|
|
|
2,656,755
|
|
|
|
2,522,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,109,057
|
|
|
|
1,933,560
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
702,721
|
|
|
|
218,547
|
|
|
Depreciation
and Amortization Expense
|
|
|
18,005
|
|
|
|
13,133
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,388,331
|
|
|
|
1,701,880
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
|
21,998
|
|
|
|
21,977
|
|
|
Interest
income
|
|
|
89
|
|
|
|
533
|
|
|
Interest
expense
|
|
|
(22,906
|
)
|
|
|
(13,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,387,512
|
|
|
|
1,710,891
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
457,531
|
|
|
|
427,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
Weighted
average shares outstanding-basic and diluted
|
|
|
10,000,000
|
|
|
|
9,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
341
|
|
|
|
(6,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
930,322
|
|
|
$
|
1,276,463
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
UNAUDITED
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
2010
|
|
|
March
31,
2009
|
|
|
|
|
(Restated)
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,005
|
|
|
|
13,133
|
|
|
Stock
based compensation
|
|
|
442,611
|
|
|
|
-
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,703,936
|
)
|
|
|
(101,932
|
)
|
|
Inventories
|
|
|
(40,754
|
)
|
|
|
(323,926
|
)
|
|
Prepaid
expenses
|
|
|
(173,854
|
)
|
|
|
(43,140
|
)
|
|
Accounts
payable and accrued liabilities
|
|
|
120,086
|
|
|
|
7,805
|
|
|
Tax
payable
|
|
|
1,324,682
|
|
|
|
1,241,699
|
|
|
Net
cash provided by operating activities
|
|
|
916,821
|
|
|
|
2,076,807
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Loan
made to other
|
|
|
(440,100
|
)
|
|
|
-
|
|
|
Advance
to related party
|
|
|
(221,871
|
)
|
|
|
(1,879,489
|
)
|
|
Cash
paid for construction in progress
|
|
|
-
|
|
|
|
(75,124
|
)
|
|
Net
cash used in investing activities
|
|
|
(661,971
|
)
|
|
|
(1,954,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(378,205
|
)
|
|
|
-
|
|
|
Proceeds
from loans
|
|
|
440,100
|
|
|
|
-
|
|
|
Net
cash provided by financing activities
|
|
|
61,895
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
343
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
317,088
|
|
|
$
|
121,945
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
61,131
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
378,219
|
|
|
$
|
240,479
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
22,906
|
|
|
$
|
13,498
|
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 - ORGANIZATION AND BUSINESS OPERATIONS
Qingdao
Footwear, Inc. (formerly Datone, Inc.) was originally incorporated on August 9,
2000 under the laws of the State of Delaware. The Company operated as a
wholly-owned subsidiary of USIP.COM, Inc. On August 24, 2006, USIP decided to
spin-off its subsidiary companies, one of which was Datone, Inc. On February 1,
2008, Datone, Inc. filed a Form 10-SB registration statement. On November 13,
2008, Datone, Inc. went effective.
On
February 12, 2010, the Company completed a reverse acquisition transaction
through a share exchange with Glory Reach International Limited, a Hong Kong
limited company (“Glory Reach”), the shareholders of Glory Reach (the
“Shareholders”), Greenwich Holdings LLC and Qingdao Shoes, whereby the Company
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Convertible Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. Following the effectiveness of the Reverse Stock Split
(note 9) and conversion of Series A Preferred Stock into common stock (note 9),
there will be approximately 10,000,000 shares of our common stock issued and
outstanding and no shares of preferred stock issued and outstanding. As a result
of the reverse acquisition, Glory Reach became our wholly-owned subsidiary and
the former shareholders of Glory Reach became our controlling
stockholders. The share exchange transaction with Glory Reach was treated
as a reverse acquisition, with Glory Reach as the acquirer and Datone, Inc. as
the acquired party for accounting and financial reporting purposes. After the
reverse merger, Datone, Inc changed its name to Qingdao Footwear,
Inc.
Datone
spun off all its assets and liabilities to its prior owners before the reverse
merger. For Glory Reach, reverse merger is accounted for as a reverse
merger with a shell company and as a recapitalization.
Glory
Reach International Limited (the “Company”) was established in Hong Kong on
November 18, 2009 to serve as an intermediate holding company. Mr.
Tao Wang, the controlling interest holder of Qingdao Shoes also controls the
Company. On February 8, 2010, also pursuant to the restructuring
plan, the Company acquired 100% of the equity interests in Qingdao
Shoes.
Qingdao
Shoes was incorporated on March 11, 2003 in Jimo County, Qingdao City,
Shandong Province, People’s Republic of China (the “PRC”) with registered
capital of $320,480. Prior to December 18, 2009, Mr. Tao Wang
owned 80% of Qingdao Shoes and the remaining 20% was owned by Mr. Renwei Ma.
Starting from December 18, 2009, Mr. Tao Wang owned 80% of Qingdao Shoes, Mr.
Renwei Ma owned 15% and Mr. Wenyi Chen owned the remaining
5%. Qingdao Shoes is the owner of the brand name “Hongguan” and
principally engaged in the wholesale and retail sales of fashion footwear
primarily in the northeast region of China.
Since
there is common control between the Glory Reach and Qingdao Shoes, for
accounting purposes, the acquisitions of Qingdao Shoes has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated
financial statements.
NOTE
2 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The
unaudited consolidated financial statements included in our Quarterly Report on
Form 10-Q for the three months ended March 31, 2010 should no longer be relied
upon. Specifically, the Company’s general and administrative expenses were
understated by $442,611 for the period due to the fact that compensation expense
relates to shares transfers by a shareholder to service providers upon
the closing of the reverse merger on February 12, 2010 were not recorded in
the original filing. Accordingly, all the financial statements for the quarter
ended March 31, 2010 are restated.
The
following table sets forth all the accounts in the original amounts and restated
amounts, respectively.
|
|
|
Original
|
|
|
Adjustment
|
|
|
Restated
|
|
|
As
of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
319,480
|
|
|
|
442,611
|
|
|
|
762,091
|
|
|
Retained
Earnings
|
|
|
725,221
|
|
|
|
(442,611
|
)
|
|
|
282,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
260,110
|
|
|
|
442,611
|
|
|
|
702,721
|
|
|
Income
from operations
|
|
|
1,830,942
|
|
|
|
(442,611
|
)
|
|
|
1,388,331
|
|
|
Income
before income taxes
|
|
|
1,830,123
|
|
|
|
(442,611
|
)
|
|
|
1,387,512
|
|
|
Net
income
|
|
|
1,372,592
|
|
|
|
(442,611
|
)
|
|
|
929,981
|
|
|
Net
income per share
|
|
|
0.14
|
|
|
|
(0.05
|
)
|
|
|
0.09
|
|
|
Comprehensive
income
|
|
|
1,372,933
|
|
|
|
(442,611
|
)
|
|
|
930,322
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,372,592
|
|
|
|
(442,611
|
)
|
|
|
929,981
|
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
442,611
|
|
|
|
442,611
|
|
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
These
accompanying unaudited interim consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission, and should be read in conjunction with the December 31, 2009 audited
financial statements of the Company and the notes thereto as included in the
Company’s Form PRER14C filed on April 19, 2010. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for fair
presentation of financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the consolidated financial statements, which would
substantially duplicate the disclosure required in the Company’s December 31,
2009 annual financial statements have been omitted.
All
significant inter-company balances and transactions have been eliminated in
consolidation. Certain prior period numbers are reclassified to conform to
current period presentation.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As
of March 31, 2010 and December 31, 2009, substantially all of the Company’s cash
were held by major financial institutions located in the PRC, which management
believes are of high credit quality. With respect to
trade receivables, the Company generally does not require collateral for
trade receivables and has not experienced any credit losses in collecting the
trade receivables.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities. The Company’s other comprehensive income arose from the
effect of foreign currency translation adjustments.
Value
Added Taxes
The
Company is subject to value added tax (“VAT”) for selling
merchandise. The applicable VAT rate is 17% for products sold in the
PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input
VAT). Under the commercial practice of the PRC, the Company pays VAT
based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC
tax authorities dispute the date on which revenue is recognized for tax
purposes, the PRC tax office has the right to assess a penalty based on the
amount of the taxes which are determined to be late or deficient, and will be
expensed in the period if and when a determination is made by the tax
authorities that a penalty is due.
Revenue
Recognition
The
Company generates revenues from the retail and wholesale of shoes. Sales
revenues are recognized when the following four revenue criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the selling
price is fixed or determinable, and collectability is reasonably assured. Sales
are presented net of value added tax (VAT). No return allowance is made as
product returns have been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesale to its
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements.
The Company does not allow any discounts, credits, rebates or similar
privileges.
Earnings
per Share
Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. At March 31, 2010
and December 31, 2009, respectively, the Company had no common stock equivalents
that could potentially dilute future earnings per share.
NOTE
4 – NOTES RECEIVABLE
The
Company advanced $440,100 to a third party in January 2010. The note receivable
carries annual interest at 10% and matures in July 2010.
NOTE
5 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of March 31, 2010 and December 31, 2009, the Company’s short
term loans consisted of the following:
|
|
|
March 31,
2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
|
|
293,400
|
|
|
|
293,400
|
|
|
|
|
|
|
|
|
|
|
|
|
BOQ,
12-month bank loan due in September 2010, bears annual interest at 6.372%
average, pledged by Company’s building and land use right
|
|
|
425,430
|
|
|
|
425,430
|
|
|
|
|
|
|
|
|
|
|
|
|
JMRB,
12-month bank loan due in December 2010, bears annual interest at
7.965% average, secured by third parties
|
|
|
440,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
|
$
|
1,158,930
|
|
|
$
|
718,830
|
|
The above
indebtedness to JMRB at March 31, 2010 and December 31, 2009 has been guaranteed
by two unrelated companies.
NOTE
6 – LONG TERM LOANS
On
December 16, 2009, the Company entered into a 2-year loan agreement with
JMRB. The Company borrowed $249,390 with an annual interest rate
equal to 7.02% and is due in December 2011. The loan is guaranteed by
the relatives of Mr. Tao Wang, the CEO and major shareholder of the Company and
is collateralized by the property of his relatives.
NOTE
7 - RELATED PARTY BALANCES AND TRANSCATIONS
Due to
related party
At
December 31, 2009, the amount due to Mr. Tao Wang, the CEO and major shareholder
of the Company amounted to $104,511. These borrowings bear no interest and were
paid off in first quarter 2010.
At
December 31, 2009, the dividend payable to Mr. Renwei Ma, the shareholder of the
Company was $117,360, which was paid off in the first quarter of
2010.
Related
party transactions
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the three months ended March 31, 2010
and 2009, related party rent expense of $4,400 and $4,395, respectively, was
included in total rent expense of the year.
The
Company leases one of its warehouse buildings to Weidong, Liang, brother-in-law
of Mr. Tao Wang, for three years starting May 2008. Per the agreement, the
lessee shall pay equal amount of advertising expense on behalf of the lessor as
the lease payment. For the three months ended March 31, 2010 and 2009, the
Company recorded other income of $21,998 and $21,977 respectively, from leasing
the aforementioned building and advertising expense of the same amount
respectively.
NOTE
8 - INCOME TAX
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements.
|
|
|
Three
Months
Ended
March
31,
2010
|
|
|
Three
Months
Ended
March
31,
2009
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
1,387,512
|
|
|
$
|
1,710,891
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
457,531
|
|
|
$
|
427,723
|
|
|
Effective
tax rate
|
|
|
33
|
%
|
|
|
25
|
%
|
There is
no significant temporary difference between book and tax income.
The
Company has no United States income tax liabilities as of March 31, 2010
and December 31, 2009.
NOTE
9 – SHAREHOLDERS’ EQUITY
During
January 2010, the Company distributed $378,205 to its
shareholders.
During
February 2010, upon the closing of the reverse merger, one of the shareholders
transferred 338 of the 874 shares of Series A Convertible Preferred Stock issued
to him under the share exchange to certain service providers of the Company. The
underlining common shares were valued at $1.35 (post-reverse split common stock
price) per share resulting in stock compensation expense of $442,611 for the
three month ended March 31, 2010.
Series A
Convertible Preferred Stock
The
Company issued 10,000 shares of our Series A Preferred Stock in February 2010
related to the reverse merger.
Shares of
Series A Preferred Stock had automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 970 shares of common
stock immediately subsequent to the effectiveness of a planned 1-for-27 reverse
split of the Company’s outstanding common stock, which had become effective on
June 10, 2010. Upon the reverse split the 10,000 outstanding shares
of Series A Preferred Stock had automatically convert into 9,700,000 shares of
common stock, which constitutes 97% of the outstanding common stock of the
Company subsequent to the reverse stock split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-27
reverse split (to retroactively take into account the reverse stock
split).
Following
the effectiveness of the Reverse Stock Split and conversion of Series A
Preferred Stock into common stock, there are approximately 10,000,000 shares of
our common stock issued and outstanding and no shares of preferred stock issued
and outstanding.
For
accounting purposes, we treated the series A convertible preferred stock as
being converted fully to common stock on a post reverse stock split
basis.
The
1-for-27 Reverse Stock Split
The
Company’s board of directors unanimously approved, subject to stockholder
approval, the 1-for-27 Reverse Split of our issued and outstanding common stock.
The reverse split will reduce the number of issued and outstanding shares of the
Company’s common stock outstanding prior to the split. The reverse split
increases the total number of issued and outstanding shares of the Company’s
common stock subsequent to the split by triggering the automatic conversion of
the Company’s Series A Preferred Stock into 9,700,000 shares of common stock.
The reverse split had become effective on June 10, 2010, the date when the
Company filed with the Secretary of State of the State of Delaware following the
expiration of the 20 day period mandated by Rule 14c of the Exchange Act. On
June 10, 2010, 27 shares of Common Stock had automatically been combined and
changed into one share of common stock.
For
counting purposes, we treated the reverse stock split as being effective and all
shares are retroactively restated to reflect the reverse stock
split.
NOTE
10 – COMMITMENTS AND CONTINGECIES
Guarantees
As of
December 31, 2009, the Company provided corporate guarantees for bank loans
borrowed by two unrelated companies incorporated in the PRC (
“
Company A and
B
”
).
Associated with the corporate guarantee, Company A and B also provided cross
guarantees for the JMRB bank loans of $293,400 borrowed by the Company. If
Company A and B default on the repayment of their bank loans when they fall due,
the Company is required to repay the outstanding balance. As of December
31, 2009, the guarantee provided for the bank loans borrowed by Company A and B
were approximately RMB 1,000,000 ($293,400) and RMB 1,000,000 ($146,700),
respectively.
The
guarantee period is from July 2008 to December 2009. The Company’s
management considered the risk of default by Company A and B is remote and
therefore no liability for the guarantor’s obligation under the guarantee was
recognized as of December 31, 2009. No fee was paid to Company A and B for their
guarantee.
As of
March 31, 2010, two unrelated companies incorporated in the PRC provided
guarantees for the JMRB bank loans of $293,400 borrowed by the Company.
The guarantees end when the loans become mature. (See Note 5)
Tax
liabilities
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax authority
may take different views about the Company’s tax filings which may lead to
additional tax liabilities.
NOTE
11 – SUBSEQUENT EVENTS
In April
2010, the Company entered into an agreement to obtain the land use right on a
piece of land located in JiMo city for $3.6 million (RMB 25
million).
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