Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K/A
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of
Report (Date of Earliest Event Reported): February 12, 2010
Qingdao
Footwear, Inc.
(Formerly
Datone, Inc.)
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
000-53075
|
|
16-1591157
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(Commission
File Number)
|
|
(IRS
Employer Identification
No.)
|
Qingdao
Footwear, Inc.
269 First
Huashan Road
Jimo
City, Qingdao
Shandong,
PRC
Telephone:
86-0532-8659 5999
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General Instruction A.2. below):
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a -12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d -2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e -4(c))
Explanatory
Note:
This
first amendment to the Form 8-K filed February 12, 2010 is being filed in order
to address the following issues:
(1) Although
the Registrant previously filed audited financial statements for the year ended
December 31, 2009 for Glory Reach International Limited for the year ended
December 31, 2009 with its proxy on May 6, 2010, the Registrant had not filed
such financial statement in a Form 8-K. This filing amends the
previously filed financial information to include such financial
statements.
(2)
The Registrant has filed pro forma financial statements to provide separate
columns depicting (i) the spin-off of the net assets of Datone, Inc. and (ii)
the reverse merger and recapitalization agreement entered into with Glory Reach
International Limited.
(3) The
Registrant has revised to present pro forma and historical basic and diluted
earnings per share on the fact of the pro forma statements of
operations.
Except as
amended hereby, the Registrant is not amending the previously filed Form
8-K.
ITEM
9.01
FINANCIAL
STATEMENTS AND EXHIBITS
(a)
Financial
Statements of Business Acquired
Filed
herewith are the following:
1. Audited
consolidated financial statements of the Registrant and subsidiaries for the
fiscal year ended December 31, 2009.
(b)
Pro
Forma Financial Information
Filed
herewith is the unaudited pro forma condensed consolidated financial information
of the Registrant and its subsidiaries for the requisite
periods.
(d)
Exhibits
|
Exhibit
No.
|
|
Description
|
|
*2.1
|
|
Share
Exchange Agreement, dated February 12, 2010, among Datone, Glory
Reach International Limited, Qingdao Shoes, the shareholders of Glory
Reach International Limited, and Greenwich Holdings
LLC.
|
|
**3.1
|
|
Amended
and Restated Certificate of Incorporation.
|
|
**3.2
|
|
Bylaws
|
|
*3.3
|
|
Certificate
of Designation of Series A Voting Convertible Preferred Stock, as filed
with the Delaware Secretary of State on February 11,
2010.
|
|
*10.1
|
|
Form
of Distributer Contract (translated)
|
|
*10.2
|
|
Form
of Purchase Contract (translated)
|
|
*10.3
|
|
Asset
Transfer Agreement between Qingdao Shoes and Tao Wang
(translated)
|
|
*10.4
|
|
Form
of Director Indemnification Agreement
|
|
*10.5
|
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations
|
|
**21
|
|
Subsidiaries
of the Registrant
|
|
*
|
|
Previously
filed
|
|
**
|
|
Filed
as an exhibit to the Registrant registration statement on Form 10-SB,
as filed with the Securities and Exchange Commission on February 1, 2008,
and incorporated herein by reference
|
|
***
|
|
Filed
as an exhibit to the Registrant registration statement on Form S-1,
as filed with the Securities and Exchange Commission on May 21, 2010, and
incorporated herein by
reference
|
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 hereunto
duly authorized.
Date: August
2, 2010
|
|
Qingdao
Footwear, Inc.
|
|
|
(Registrant)
|
| |
|
|
|
|
|
|
/s/Tao
Wang
|
|
|
*Signature
|
|
|
|
|
|
Chief
Executive Officer
|
|
|
Title
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Qingdao
Footwear, Inc.
Qingdao,
PRC
We have
audited the accompanying consolidated balance sheets of Qingdao Footwear, Inc.
(the “Company”) as of December 31, 2009 and 2008, and the related statements of
operations, shareholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements of the Company referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2009 and 2008 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
MALONEBAILEY, LLP
MALONEBAILEY,
LLP
www.malonebailey.com
Houston,
Texas
April 16,
2010
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
|
|
$ |
61,131 |
|
|
$ |
118,534 |
|
|
Accounts
receivable
|
|
|
98,962 |
|
|
|
3,534 |
|
|
Inventories
|
|
|
344,512 |
|
|
|
189,535 |
|
|
Prepaid
expenses
|
|
|
57,311 |
|
|
|
58,490 |
|
|
Due
from related parties
|
|
|
- |
|
|
|
4,373,588 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
561,916 |
|
|
|
4,743,681 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
930,451 |
|
|
|
602,831 |
|
|
Intangible
assets
|
|
|
208,167 |
|
|
|
213,008 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,700,534 |
|
|
$ |
5,559,520 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$ |
718,830 |
|
|
$ |
704,160 |
|
|
Accounts
payable
|
|
|
15,727 |
|
|
|
546 |
|
|
Taxes
payable
|
|
|
2,627 |
|
|
|
2,114 |
|
|
Duet
to related parties
|
|
|
221,871 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
959,055 |
|
|
|
706,820 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$ |
1,208,445 |
|
|
$ |
706,820 |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, .0001 par value, 10,000,000 shares authorized, none issued and
outstanding
|
|
|
- |
|
|
|
- |
|
|
Common
shares, .0001 par value, 100,000,000 shares authorized, 9,700,000 shares
issued and outstanding
|
|
|
970 |
|
|
|
970 |
|
|
Additional
paid-in capital
|
|
|
319,510 |
|
|
|
319,510 |
|
|
Accumulated
other comprehensive income
|
|
|
440,775 |
|
|
|
437,665 |
|
|
Retained
earnings (deficits)
|
|
|
(269,166 |
) |
|
|
4,094,555 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
$ |
492,089 |
|
|
$ |
4,852,700 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
1,700,534 |
|
|
$ |
5,559,520 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
17,863,891 |
|
|
$ |
13,904,314 |
|
|
Cost
of goods sold
|
|
|
10,162,778 |
|
|
|
8,246,592 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
7,701,113 |
|
|
|
5,657,722 |
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
907,807 |
|
|
|
759,470 |
|
|
Depreciation
and Amortization Expense
|
|
|
61,838 |
|
|
|
55,360 |
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
6,731,468 |
|
|
|
4,842,892 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
87,966 |
|
|
|
57,660 |
|
|
Interest
income
|
|
|
1,144 |
|
|
|
8,949 |
|
|
Interest
(expense)
|
|
|
(61,792 |
) |
|
|
(61,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,758,786 |
|
|
|
4,847,596 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,689,697 |
|
|
|
1,211,899 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,069,089 |
|
|
$ |
3,635,697 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic and diluted
|
|
$ |
0.52 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
9,700,000 |
|
|
|
9,700,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,069,089 |
|
|
$ |
3,635,697 |
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
3,110 |
|
|
|
232,047 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
5,072,199 |
|
|
$ |
3,867,744 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
2009
|
|
|
2008
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,069,089 |
|
|
$ |
3,635,697 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
61,838 |
|
|
|
55,360 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(95,428 |
) |
|
|
1,028 |
|
|
Inventories
|
|
|
(154,977 |
) |
|
|
246,700 |
|
|
Prepaid
expenses
|
|
|
1,179 |
|
|
|
10,427 |
|
|
Accounts
payable
|
|
|
15,180 |
|
|
|
(2,527 |
) |
|
Tax
payable
|
|
|
4,949,978 |
|
|
|
3,800,000 |
|
|
Net
cash provided by operating activities
|
|
|
9,846,859 |
|
|
|
7,746,685 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Advance
to related party
|
|
|
(5,723,550 |
) |
|
|
(5,785,433 |
) |
|
Purchase
of property and equipment
|
|
|
(384,332 |
) |
|
|
(37,944 |
) |
|
Net
cash used in investing activities
|
|
|
(6,107,882 |
) |
|
|
(5,823,377 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(4,063,590 |
) |
|
|
(1,874,600 |
) |
|
Proceeds
from loans
|
|
|
1,701,720 |
|
|
|
850,860 |
|
|
Repayments
on loans
|
|
|
(1,437,660 |
) |
|
|
(850,860 |
) |
|
Net
cash used in financing activities
|
|
|
(3,799,530 |
) |
|
|
(1,874,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
3,150 |
|
|
|
35,218 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
$ |
(57,403 |
) |
|
$ |
83,926 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
118,534 |
|
|
|
34,608 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$ |
61,131 |
|
|
$ |
118,534 |
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
61,792 |
|
|
$ |
61,905 |
|
|
Income
tax paid
|
|
$ |
3,763 |
|
|
$ |
2,539 |
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Transfer
of taxes payable to due from related party
|
|
$ |
4,949,466 |
|
|
$ |
3,799,872 |
|
|
Transfer
of shareholder distribution to due from related party
|
|
$ |
5,251,860 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
Common Stock
|
|
|
Additional Paid-
in Capital
|
|
|
Accumulated Other
Comprehensive
Income
|
|
|
Retained Earnings
|
|
|
Total Shareholders'
Equity
|
|
|
Balance,
December 31, 2007
|
|
$ |
970 |
|
|
$ |
319,510 |
|
|
$ |
205,618 |
|
|
$ |
2,333,458 |
|
|
$ |
2,859,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,874,600 |
) |
|
|
(1,874,600 |
) |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,635,697 |
|
|
|
3,635,697 |
|
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
232,047 |
|
|
|
- |
|
|
|
232,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
$ |
970 |
|
|
$ |
319,510 |
|
|
$ |
437,665 |
|
|
$ |
4,094,555 |
|
|
$ |
4,852,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,432,810 |
) |
|
|
(9,432,810 |
) |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,069,089 |
|
|
|
5,069,089 |
|
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
3,110 |
|
|
|
- |
|
|
|
3,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
$ |
970 |
|
|
$ |
319,510 |
|
|
$ |
440,775 |
|
|
$ |
(269,166 |
) |
|
$ |
492,089 |
|
The
accompanying notes are an integral part of these financial
statements
QINGDAO
FOOTWEAR, INC.
NOTES
TO FINANCIAL STATEMENTS
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. 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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
financial statements reflect the financial position, results of operations and
cash flows of the Company and all of its wholly owned and majority owned
subsidiaries as of December 31, 2009 and 2008, and for the years ended December
31, 2009 and 2008. All intercompany items are eliminated during
consolidation.
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.
Risks and
Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
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 December
31, 2009 and 2008, 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.
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.
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 uses the aging method to estimate the
valuation allowance for anticipated uncollectible receivable balances. Under the
aging method, bad debts percentages determined by management based on historical
experience as well as current economic climate are applied to customers’
balances categorized by the number of months the underlying invoices have
remained outstanding. The valuation allowance balance is adjusted to the amount
computed as a result of the aging method. When facts subsequently become
available to indicate that the amount provided as the allowance was incorrect,
an adjustment which classified as a change in estimate is made. The Company
did not experience any bad debt historically and as of December 31, 2009 and
2008, there was no allowance for doubtful accounts recorded based on the aging
method.
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 analysis. 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.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. Major renewals and
betterments are charged to the property accounts while replacements, maintenance
and repairs, which do not improve or extend the lives of the respective assets,
are expensed in the current period.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as set out below.
|
|
Estimated Useful
Life
|
|
Plant
and building
|
20
years
|
|
Office
furniture and equipment
|
5
years
|
|
Transportation
equipment
|
5
years
|
Land Use
Rights
Land use
right is stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the designated terms of the
lease of 50 years obtained from the relevant PRC land authority.
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.
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.
Cost of
Sales
Cost of
sales includes the cost of purchasing merchandise. Receiving and warehousing
costs are included in selling, general and administrative expenses, and these
costs have been insignificant in all periods.
Advertising
Expense
The
Company expenses cost of advertising, including the cost of TV commercials,
outdoor bulletin boards, promotional materials, and in-store displays as
advertising expense, when incurred. Advertising expenses included in
selling, general and administrative expenses were $87,966 and $57,660 for the
years ended December 31, 2009 and 2008, respectively.
Shipping
and Handling
Shipping
and handling costs related to cost of goods sold are included in selling,
general and administrative expense.
Store
Opening Costs
Non-capital
expenditures associated with opening new stores are expensed as
incurred.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income
Taxes”. ASC 740 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization
of tax benefits in future years. Under the asset and liability
approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain. There was
no deferred tax asset or liability for the years ended December 31, 2009 and
2008.
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.
VAT on
sales and VAT on purchases amounted to $3,038,726 and $83,851, respectively, for
the year ended December 31, 2009. VAT on sales and VAT on purchases
amounted to $2,405,548 and $81,464, respectively, for the year ended December
31, 2008. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government.
Fair
Value of Financial Instruments
ASC 820
“Fair Value Measurements and Disclosures”, adopted January 1, 2008, defines fair
value, establishes a three-level valuation hierarchy for disclosures of fair
value measurement and enhances disclosure requirements for fair value measures.
The carrying amounts reported in the balance sheets for current receivables and
payables qualify as financial instruments. Management concluded the carrying
values are a reasonable estimate of fair value because of the short period of
time between the origination of such instruments and their expected realization
and if applicable, their stated interest rate approximates current rates
available. The three levels are defined as follows:
· Level
1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
· Level
2 - inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable for the assets
or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
· Level
3 - inputs to the valuation methodology are unobservable and significant to the
fair value.
It is
management’s opinion that as of December 31, 2009 and 2008, the estimated fair
values of the financial instruments were not materially different from their
carrying values as presented on the balance sheets. This is attributed to the
short maturities of the instruments (less than two years) and that interest
rates on the borrowings approximately those that would have been available for
loans of similar remaining maturity and risk profile at respective balance sheet
dates. The carrying amounts of the loans approximately their fair values because
the applicable interest rates approximate current market rates.
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.
NOTE
3 – INVENTORY
As of
December 31, 2009 and 2008, inventory consists of the following:
|
|
|
December 31,
2009
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
344,512 |
|
|
$ |
189,535 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
inventory
|
|
$ |
344,512 |
|
|
$ |
189,535 |
|
NOTE
4 - PREPAID EXPENSES
As of
December 31, 2009 and 2008, the prepaid expenses consisted of the
following:
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
Retail
store rental prepayment
|
|
$ |
18,778 |
|
|
$ |
18,778 |
|
|
Prepaid
to suppliers
|
|
|
38,533 |
|
|
|
39,712 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
prepaid expenses
|
|
$ |
57,311 |
|
|
$ |
58,490 |
|
NOTE
5 - PROPERTY, PLANT AND EQUIPMENT
As of
December 31, 2009 and 2008, property, plant and equipment consisted of the
following:
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
Plant
and building
|
|
$ |
1,096,639 |
|
|
$ |
731,918 |
|
|
Office
furniture and equipment
|
|
|
24,789 |
|
|
|
12,304 |
|
|
Transportation
equipment
|
|
|
155,763 |
|
|
|
148,314 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
at cost
|
|
|
1,277,191 |
|
|
|
892,536 |
|
|
Less:
Accumulated depreciation
|
|
|
(346,740 |
) |
|
|
(289,705
|
) |
|
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
$ |
930,451 |
|
|
$ |
602,831 |
|
Depreciation
for the years ended December 31, 2009 and 2008 was $57,000 and $50,603
respectively.
NOTE
6 - INTANGIBLE ASSETS
The
Company obtained the right from the relevant PRC land authority for fifty years
to use the land on which the office premises and warehouse of the Company are
situated. As of December 31, 2009 and 2008, intangible assets
consisted of the following:
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
Cost
of land use rights
|
|
$
|
242,055
|
|
|
$
|
242,055
|
|
|
Less:
Accumulated amortization
|
|
|
(33,888
|
)
|
|
|
(29,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets, net
|
|
$
|
208,167
|
|
|
$
|
213,008
|
|
Amortization
expense for the years ended December 31, 2009 and 2008 was $4,838 and $4,757
respectively.
NOTE
7 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of December 31, 2009 and December 31, 2008, the Company’s
short term loans consisted of the following:
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
Jimo
Rural Cooperative Bank of Qingdao (JMRB), two 12-month bank loans both due
in November 2009, bear interest at 10.85% average, secured by third
parties and repaid in November 2009.
|
|
$ |
- |
|
|
$ |
293,400 |
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Qingdao Jimo Branch (BOQ), 12-month bank loan due in September 2009,
bears interest at 8.25% average, pledged by Company's building and land
use right and repaid in August 2009.
|
|
|
- |
|
|
|
410,760 |
|
|
|
|
|
|
|
|
|
|
|
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
|
|
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 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
|
$ |
718,830 |
|
|
$ |
704,160 |
|
The above
indebtedness to JMRB at December 31, 2009 and 2008 has been guaranteed by two
unrelated companies.
NOTE
8 – 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
9 - RELATED PARTY BALANCES AND TRANSACTIONS
Due from
related party
Due from
related party at December 31, 2008 is receivables from Mr. Tao Wang, the CEO and
major shareholder of the Company in the amount of $4,373,588. Theses borrowings
bear no interest and were repaid in 2009. As of December 31, 2009, the recorded
balance of due from related parties was Nil.
Due to
related party
The
Company borrowed money from Mr. Tao Wang, the CEO and major shareholder of the
Company. These borrowings bear no interest and no repayment terms, which is due
on demand. As of December 31, 2009 and December 31, 2008, the balances of such
loans are $104,511 and Nil respectively.
The
Company declared distribution and paid dividends to the shareholders in 2009.
The balance of dividend payable was $117,360 and Nil as of December 31, 2009 and
2008 respectively, which represented the dividend payable to Mr. Renwei Ma, the
shareholder of the Company.
Related
party transactions
Mr. Tao
Wang entered into the contract with the Company to assume fiscal
responsibilities for all tax liabilities recorded and potential penalties
relating to all tax liabilities before December 31, 2009. As of December 31,
2009 and 2008, the assumed amount was $4,949,466 and $3,799,872, respectively,
which mainly included VAT tax payable and income tax payable. According to PRC
tax law, late or deficient tax payment could subject to significant tax
penalty. On December 25, 2009, the local tax authority in Jimo City issued
a “Tax Review Report”, stating that the tax authority reviewed the Company’s
income tax, VAT tax, stamp tax and invoices for the period between June 2006 and
November 2009 and noting that the Company had paid off all its tax liability by
December 21, 2009.
During
year 2009, the Company advanced to Mr. Tao Wang with the total amount of
$5,723,550.
During
year 2009, the Company distributed $9,432,810 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $4,063,590 was distributed in cash, $5,251,860 was
used to offset advance to Mr. Tao Wang and the remaining $117,360 was the
dividend payable to Mr. Renwei Ma that the Company expects to pay in the first
quarter of 2010.
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the years ended December 31, 2009 and 2008,
related party rent expense of $17,593 and $17,298, 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 year ended December 31, 2009 and 2008, the Company
recorded other income of $87,966 and $57,660, respectively, from leasing the
aforementioned building and advertising expense of the same amount
respectively.
NOTE
10 – OPERATING LEASES
The
Company leases store spaces under noncancelable operating leases expiring at
various dates through 2013. Rent expense was $90,165 and $88,652 for the years
ended December 31, 2009 and 2008, respectively.
Future
minimum lease payments at December 31, 2009 are as follows:
|
Year:
|
|
|
|
|
2010
|
|
|
86,647 |
|
|
2011
|
|
|
50,727 |
|
|
2012
|
|
|
8,797 |
|
|
2013
|
|
|
4,398 |
|
|
|
|
$ |
150,569 |
|
NOTE
11 - 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 after appropriated tax
adjustments in 2009 and 2008 respectively.
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$ |
6,758,786 |
|
|
$ |
4,847,596 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
1,689,697 |
|
|
$ |
1,211,899 |
|
There is
no significant temporary difference between book and tax income.
The
Company has no United States corporate income tax liabilities as of December 31,
2009 and 2008.
The
following table reconciles the U.S. statutory corporate income rates to the
Company’s effective tax rate for the years ended December 31, 2009 and
2008:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
US
statutory rates
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
Tax
rate difference
|
|
|
(9.0 |
)% |
|
|
(9.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Tax
per financial statements
|
|
|
25.0 |
% |
|
|
25.0 |
% |
NOTE
12 – SHAREHOLDERS’ EQUITY
During
year 2009, the Company distributed $9,432,810 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $4,063,590 was distributed in cash, $5,251,860 was
used to offset advance to Mr. Tao Wang and the remaining $117,360 was the
dividend payable to Mr. Renwei Ma that the Company expects to pay in the first
quarter of 2010.
During
year 2008, the Company distributed $1,874,600 to its two owners, Mr. Tao Wang
and Mr. Renwei Ma.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Social
insurance for employees
According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs. Management believes that due to the transient nature of its
employees, the Company does not need to provide all employees with such social
insurances, and has paid the social insurances for the Company’s employees who
have completed three months’ continuous employment with the
Company.
In the
event that any current or former employee files a complaint with the PRC
government, the Company may be subject to making up the social insurances as
well as administrative fines. As the Company believes that these fines
would not be material, no provision has been made in this regard.
Guarantees
As of
December 31, 2009 and 2008, 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 (Note 7).
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. As of December 31, 2008, the guarantee provided for
the bank loans borrowed by Company A and B were approximately RMB 500,000
($73,350) and RMB 1,200,000 ($176,040), respectively.
The
guarantee period is from January
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.
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.
Mr. Tao
Wang entered into the contract with the Company to assume fiscal
responsibilities for all tax liabilities recorded and potential penalties
relating to all the tax liabilities before December 31, 2009. As of
December 31, 2009 and 2008, the assumed amount was $4,949,466 and $3,799,872,
respectively, which mainly included VAT tax payable and income tax payable.
According to PRC tax law, late or deficient tax payment could subject to
tax penalty. On December 25, 2009, the local tax authority in Jimo City
issued a “Tax Review Report”, stating that the tax authority reviewed the
Company’s income tax, VAT tax, stamp tax and invoices for the period between
June 2006 and November 2009 and noting that the Company had paid off
all its tax liability by December 21, 2009.
NOTE
14 - OPERATING RISKS
(a)
Country risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in a material adverse effect upon the Company’s
business and financial condition.
(b)
Exchange risk
The
Company cannot guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on
changes in the political and economic environments without notice.
(c)
Interest risk
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company
does not have any derivative financial instruments as of December 31, 2009 and
2008 and believes its exposure to interest rate risk is not
material.
NOTE
15 – CONCENTRATION
During
the years ended December 31, 2009 and 2008, the sales generated by the Company’s
owned stores accounted for 15.6% and 15% of total sales,
respectively.
NOTE
16 - SUBSEQUENT EVENTS
On
February 12, 2010, the Company entered into and closed a Share Purchase and
Exchange Agreement (the “Exchange Agreement”) with Datone, Inc., a Delaware
public shell company. Pursuant to the Exchange Agreement, Datone, Inc. acquired
all of the outstanding shares of the Company. In exchange, Datone, Inc. issued
to the Company shareholders, their designees or assigns, 10,000 shares of
its Series A Preferred stock, which constituted 97% of its issued and
outstanding capital stock on an as-converted to common stock basis as of and
immediately after the consummation of the transactions contemplated by the
Exchange Agreement Therefore, the Company became a wholly-owned subsidiary of
Datone, Inc. The share exchange resulted in a change in control of Datone,
Inc. The transaction is deemed as a reverse merger and the Company is
deemed as the accounting acquirer.
The
Company obtained an eleven-month loan from JMRB in January 2010, with principal
amount of $440,100 bearing monthly interest of 0.66375% and matures in December
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.
DECEMBER
31, 2009
GLORY
REACH INTERNATIONAL LIMITED
|
|
|
GLORY REACH
|
|
|
|
|
|
PRO-FORMA
|
|
|
|
PRO-FORMA
|
|
|
|
|
INTERNATIONAL
|
|
|
|
|
|
ADJUSTMENTS
|
|
|
|
CONSOLIDATED
|
|
|
|
|
LIMITED
|
|
|
DATONE, INC
|
|
|
SPIN-OFF
|
|
|
RECAPITALIZATION
|
|
|
|
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
Note
2 (a)
|
|
|
Note
2 (b)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
61,131 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
$ |
61,131 |
|
|
Accounts
receivable
|
|
|
98,962 |
|
|
|
25,046 |
|
|
|
(25,046 |
) |
|
|
- |
|
|
|
|
98,962 |
|
|
Inventories
|
|
|
344,512 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
344,512 |
|
|
Prepaid
expenses
|
|
|
57,311 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
57,311 |
|
|
Due
from related party
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
561,916 |
|
|
|
25,046 |
|
|
|
(25,046 |
) |
|
|
- |
|
|
|
|
561,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
930,451 |
|
|
|
5,016 |
|
|
|
(5,016 |
) |
|
|
- |
|
|
|
|
930,451 |
|
|
Intangible
assets
|
|
|
208,167 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
208,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,700,534 |
|
|
$ |
30,062 |
|
|
$ |
(30,062 |
) |
|
$ |
- |
|
|
|
$ |
1,700,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
15,727 |
|
|
$ |
118,252 |
|
|
$ |
(118,252 |
) |
|
$ |
- |
|
|
|
$ |
15,727 |
|
|
Accounts
payable - related parties
|
|
|
- |
|
|
|
2,095 |
|
|
|
(2,095 |
) |
|
|
- |
|
|
|
|
- |
|
|
Bank
overdraft
|
|
|
- |
|
|
|
8,402 |
|
|
|
(8,402 |
) |
|
|
- |
|
|
|
|
- |
|
|
Accrued
liabilities
|
|
|
- |
|
|
|
76,102 |
|
|
|
(76,102 |
) |
|
|
- |
|
|
|
|
- |
|
|
Taxes
payable
|
|
|
2,627 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
2,627 |
|
|
Due
to related parties
|
|
|
221,871 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
221,871 |
|
|
Short-term
debt - related parties
|
|
|
- |
|
|
|
434,724 |
|
|
|
(434,724 |
) |
|
|
- |
|
|
|
|
- |
|
|
Short-term
loans
|
|
|
718,830 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
718,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
959,055 |
|
|
|
639,575 |
|
|
|
(639,575 |
) |
|
|
- |
|
|
|
|
959,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
249,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,208,445 |
|
|
|
639,575 |
|
|
|
(639,575 |
) |
|
|
- |
|
|
|
|
1,208,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
series A preferred stock, 1,000,000 authorized, 10,000 shares issued and
outstanding, par value $.0001
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
c |
|
|
|
1 |
|
|
Common
Stock
|
|
|
1,290 |
|
|
|
496 |
|
|
|
- |
|
|
|
(1,290 |
) |
|
|
|
496 |
|
|
Additional
paid-in capital
|
|
|
319,190 |
|
|
|
1,754,585 |
|
|
|
609,513 |
|
|
|
(2,363,305 |
) |
|
|
|
319,983 |
|
|
Accumulated
other comprehensive income
|
|
|
440,775 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
440,775 |
|
|
Retained
earnings
|
|
|
(269,166 |
) |
|
|
(2,364,594 |
) |
|
|
- |
|
|
|
2,364,594 |
|
|
|
|
(269,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
492,089 |
|
|
|
(609,513 |
) |
|
|
609,513 |
|
|
|
- |
|
|
|
|
492,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$ |
1,700,534 |
|
|
$ |
30,062 |
|
|
$ |
(30,062 |
) |
|
$ |
- |
|
|
|
$ |
1,700,534 |
|
The
accompanying notes are an integral part of these financial
statements.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATION
FOR
THE YEAR ENDED DECEMBER 31, 2009
GLORY
REACH INTERNATIONAL LIMITED
|
|
|
|
|
|
|
|
|
|
|
|
PRO-FORMA
|
|
|
|
|
GLORY REACH
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
INTERNATIONAL
|
|
|
|
|
|
PRO-FORMA
|
|
|
STATEMENT OF
|
|
|
|
|
LIMITED
|
|
|
DATONE, INC
|
|
|
ADJUSTMENTS
|
|
|
OPERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
17,863,891 |
|
|
$ |
116,439 |
|
|
$ |
(116,439 |
)
a |
|
$ |
17,863,891 |
|
|
Cost
of sales
|
|
|
10,162,778 |
|
|
|
30,687 |
|
|
|
(30,687 |
)
a |
|
|
10,162,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
7,701,113 |
|
|
|
85,752 |
|
|
|
(85,752 |
) |
|
|
7,701,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
907,807 |
|
|
|
173,064 |
|
|
|
- |
|
|
|
1,080,871 |
|
|
Depreciation
and amortization expense
|
|
|
61,838 |
|
|
|
- |
|
|
|
- |
|
|
|
61,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
6,731,468 |
|
|
|
(87,312 |
) |
|
|
(85,752 |
) |
|
|
6,558,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
87,966 |
|
|
|
4,845 |
|
|
|
- |
|
|
|
92,811 |
|
|
Interest
income
|
|
|
1,144 |
|
|
|
- |
|
|
|
- |
|
|
|
1,144 |
|
|
Interest
expense
|
|
|
(61,792 |
) |
|
|
(61,923 |
) |
|
|
- |
|
|
|
(123,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,758,786 |
|
|
|
(144,390 |
) |
|
|
(85,752 |
) |
|
|
6,528,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,689,697 |
|
|
|
- |
|
|
|
- |
|
|
|
1,689,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,069,089 |
|
|
$ |
(144,390 |
) |
|
$ |
(85,752 |
) |
|
$ |
4,838,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share – basic
|
|
$ |
507 |
|
|
$ |
(0.03 |
) |
|
|
|
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
10,000 |
|
|
|
4,963,226 |
|
|
|
|
|
|
|
4,963,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share –diluted
|
|
$ |
507 |
|
|
$ |
(0.03 |
) |
|
|
|
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
10,000 |
|
|
|
4,963,226 |
|
|
|
|
|
|
|
5,933,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
3,110 |
|
|
|
- |
|
|
|
- |
|
|
|
3,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
5,072,199 |
|
|
$ |
9,782,062 |
|
|
$ |
(85,752 |
) |
|
$ |
4,842,057 |
|
The
accompanying notes are an integral part of these financial
statements.
NOTES TO
THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 –
BASIS OF PRESENTATION
In
February 2010, Glory Reach International Limited (the “Company”) completed a
reverse acquisition transaction through a share exchange with Datone, Inc.
(“Datone”), whereby Datone acquired 100% of the issued and outstanding capital
stock of the Company in exchange for 10,000 shares of the Series A
Convertible Preferred Stock of Dadone. As a result of the reverse acquisition,
the Company became Datone’s wholly-owned subsidiary and the former shareholders
of the Company became controlling stockholders of
Datone. The share exchange transaction with Datone was treated
as a reverse acquisition, with the Company as the accounting acquirer and Datone
as the acquired party.
Consequently,
the assets and liabilities and the historical operations that will be reflected
in the consolidated financial statements for periods prior to the Share Exchange
Agreement will be those of the Company and will be recorded at the historical
cost basis. After the completion of the Share Exchange Agreement, the
Company’s consolidated financial statements will include the assets and
liabilities of the Company and Datone, the historical operations of the Company
and the operations of Datone from the closing date of the Share Exchange
Agreement.
These pro
forma consolidated financial statements are prepared assuming the above
transaction occurred on December 31, 2009 (as to the balance sheet) and on
January 1, 2009 (as to the income statements).
Audited
financial statements of the Company and Datone have been used in the preparation
of these pro forma consolidated financial statements. These pro forma
consolidated financial statements should be read in conjunction with the
historical financial statements of Datone and the Company.
Note 2 –
PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
|
(a)
|
To
reflect the spinoff of Datone, Inc.’s assets and liabilities to Glory
Reach International Limited. As part of the agreement, the assets and
liabilities of Datone, Inc. will be spun off to Glory Reach International
after the reverse merger.
|
|
(b)
|
To
eliminate the equity of the accounting acquiree, Datone, Inc., and to
reflect the recapitalization of the common stock and additional paid in
capital of the Company as a result of the reverse
merger.
|
|
(c)
|
To
reflect the issuance of the convertible Series A preferred stock of 10,000
shares per the Share Exchange
Agreement.
|