We pursue a variety of designs that
offer a diversified product mix and provide a wide range of leather footwear
styles to our customers, which we believe to be vital to attracting customers
and to increases our revenue. Our designers have historically produced more than
200 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, we will monitor demand and adjust our products 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.
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2010
|
|
|
March
31, 2009
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
4,765,812
|
|
|
|
100
|
%
|
|
$
|
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
|
|
|
(557,460
|
)
|
|
|
(75,124
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(42,616
|
)
|
|
|
(1,879,489
|
)
|
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 in investing activities for the three months ended March 31, 2010 was
$557,460 as compared to $75,124 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 $117,360. The cash used in investing activities
during the three months ended March 31, 2009 represents payment used for
construction in progress of $75,124.
Financing
activities
Net
cash used in financing activities for the three months ended March 31,
2010 was $42,616, as compared to $1,879,489 in the same period of 2009. The
cash used in financing activities for the three months ended March 31,
2010 and 2009 represents the cash proceeds from bank loans of $440,100 by
offsetting the distribution to owner of $482,716, and the distribution to owner
of $1,879,489, respectively.
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.
PART II. OTHER
INFORMATION
ITEM
6. EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
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
|
|
|
|
31.2*
|
|
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
|
|
|
|
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
|
|
|
|
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.
|
QINGDAO
FOOTWEAR, INC.
|
|
|
|
|
|
By:
|
/s/ Tao Wang
|
|
|
Tao
Wang
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
Date:
November 4, 2010
|
|
|
|
|
|
|
By:
|
/s/ Joseph Meuse
|
|
|
|
Joseph
Meuse
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
Date: November 4, 2010
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
|
|
|
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
|
|
|
|
31.2*
|
|
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
|
|
|
|
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
|
|
|
|
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)
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net
|
|
|
913,651
|
|
|
|
930,451
|
|
Intangible
assets
|
|
|
206,957
|
|
|
|
208,167
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,358,257
|
|
|
$
|
1,700,534
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS
’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
135,812
|
|
|
$
|
15,727
|
|
Short term
loans
|
|
|
1,158,930
|
|
|
|
718,830
|
|
Taxes
payable
|
|
|
13,876,368
|
|
|
|
12,551,687
|
|
Duet to related
parties
|
|
|
-
|
|
|
|
117
,
360
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
15,171,110
|
|
|
|
13,403,604
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
Total Liabili
ties
|
|
$
|
15,420,500
|
|
|
$
|
13,652,994
|
|
|
|
|
|
|
|
|
|
|
Shareholders
’
Equity
|
|
|
|
|
|
|
|
|
Series A preferred stock, .0001
par value, 10,000,000 shares authorized, none issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, .0001 par value,
100,000,00
0 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)
|
|
|
(
12,266,450
)
|
|
|
|
(
12,713,715
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders
’
Equity
|
|
$
|
(
11,062,243
)
|
|
|
$
|
(
11,952,460
)
|
|
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
|
|
|
Marc
h
31,
2009
|
|
|
|
|
|
|
|
|
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
|
|
|
2
1,998
|
|
|
|
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 cons
olidated
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)
|
|
|
(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
|
)
|
Acc
ounts 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
|
|
|
(
117,360
|
)
|
|
|
|
|
Cash paid for construction in
progress
|
|
|
-
|
|
|
|
(75,124
|
)
|
Net cash used in investing
activities
|
|
|
(
557,460
|
)
|
|
|
(75,124
|
)
|
|
|
|
|
|
|
|
|
|
CAS
H FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Distribution to
shareholders
|
|
|
(
482,716
|
)
|
|
|
(1,879,489
|
)
|
Proceeds from
loans
|
|
|
440,100
|
|
|
|
-
|
|
Net cash
used in
financing
activities
|
|
|
(42,616)
|
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate
chan
ges 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 effecti
v
e.
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 capi
t
al 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 share
h
olders 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 Shoe
s 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 Provinc
e, 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% o
f
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
C
hina.
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. Th
e 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 a
n
d 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
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 o
p
erations 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 ann
u
al 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 Estimat
es
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
liabili
ties 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
e
stimates 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 regio
n. 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 Incom
e”
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 ch
anges 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 merchand
ise. 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
supportin
g
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
d
a
te 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
o
n 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
reta
il 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
as
s
ured. 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
recogn
ized 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
p
otentially dilute future earnings per
share.
NOTE 3
–
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 4 - SHORT TERM
LOANS
S
hort-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% aver
age, 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 5
–
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 6 - RELATED PARTY BALANCES AND
TRANSCATIONS
Due to related party
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, respecti
vely, 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
advertisi
ng 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 sam
e
amount
respectively.
NOTE 7 - 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
fina
ncial
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 8
–
SHAREHOLDERS
’
EQUITY
During January 2010, the
Compa
ny distributed
$
482,716
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 Pref
erred 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 Pr
eferred 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
outstan
d
ing 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
wi
th 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 an
d
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 conv
ertible
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
o
ur 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 o
f
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
f
iled 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 com
m
on 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 9
–
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 borr
o
wed 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
an
d
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 liab
ility 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 Company did not pay much of its
significant value added tax liabili
ties and income 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 uncert
a
in 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, the assumed amount was $
12,549,060,
which mainly included VAT tax payable
and income tax payable. However, these tax amo
unts transferred to Mr. Tao Wang were
never paid to the government. As a result, the historical financial statements
of the Company were restated to reflect the Company as the primary obligor of
the tax liabilities. Please refer to the
restatement footnote
12
.
According to PRC tax law, late or
deficient tax payment could subject the Company to significant tax
penalty.
NOTE 10
–
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).
NOTE
11
–
RESTATEMENTS
The effects of the restatements are
shown in the following tables.
CONSOLIDATED
BALANCE SHEETS
UNAUDITED
|
|
March
31,
|
|
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
Adjustment
|
|
|
2010
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
378,219
|
|
|
|
|
|
$
|
378,219
|
|
Accounts
receivable
|
|
|
1,802,899
|
|
|
|
|
|
|
1,802,899
|
|
Notes
receivable
|
|
|
440,100
|
|
|
|
|
|
|
440,100
|
|
Inventories
|
|
|
385,266
|
|
|
|
|
|
|
385,266
|
|
Prepaid
expenses
|
|
|
231,165
|
|
|
|
|
|
|
231,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,237,649
|
|
|
|
|
|
|
3,237,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
913,651
|
|
|
|
|
|
|
913,651
|
|
Intangible
assets
|
|
|
206,957
|
|
|
|
|
|
|
206,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,358,257
|
|
|
|
|
|
$
|
4,358,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
135,812
|
|
|
|
|
|
$
|
135,812
|
|
Short
term loans
|
|
|
1,158,930
|
|
|
|
|
|
|
1,158,930
|
|
Taxes
payable
|
|
|
1,327,308
|
|
|
|
12,549,060
|
|
|
|
13,876,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,622,050
|
|
|
|
|
|
|
|
15,171,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
2,871,440
|
|
|
$
|
12,549,060
|
|
|
$
|
15,420,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
1,000
|
|
Additional
paid-in capital
|
|
|
762,091
|
|
|
|
|
|
|
|
762,091
|
|
Accumulated
other comprehensive income
|
|
|
441,116
|
|
|
|
|
|
|
|
441,116
|
|
Retained
earnings (deficits)
|
|
|
282,610
|
|
|
|
(12,549,060
|
)
|
|
|
(12,266,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
$
|
1,486,817
|
|
|
$
|
(12,549,060
|
)
|
|
$
|
(11,062,243
|
)
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
4,358,257
|
|
|
$
|
0
|
|
|
$
|
4,358,257
|
|
As a result of restatement of the consolidated balance sheet as
of March 31, 2010, total liabilities increased from $2,871,440 as originally
reported, to $15,420,500, an increase of $12,549,060. The increase of total
liabilities was derived from the increase of taxes payable.
The total stockholders’ equity was
restated from $1,486,817 as originally reported, to ($11,062,243), a decrease of
$12,549,060. The decrease of total stockholders’ equity was derived from the
increase in retained deficits due to a reclassification of the amount due from
shareholder to stockholders’ equity.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
March
31,
|
|
|
|
2010
|
|
|
Adjustment
|
|
|
2010
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
|
|
|
$
|
929,981
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,005
|
|
|
|
|
|
|
|
18,005
|
|
Stock
based compensation
|
|
|
442,611
|
|
|
|
|
|
|
|
442,611
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,703,936
|
)
|
|
|
|
|
|
|
(1,703,936
|
|
Inventories
|
|
|
(40,754
|
)
|
|
|
|
|
|
|
(40,754
|
|
Prepaid
expenses
|
|
|
(173,854
|
)
|
|
|
|
|
|
|
(173,854
|
|
Accounts
payable and accrued liabilities
|
|
|
120,086
|
|
|
|
|
|
|
|
120,086
|
|
Tax
payable
|
|
|
1,324,682
|
|
|
|
|
|
|
|
1,324,682
|
|
Net
cash provided by operating activities
|
|
|
916,821
|
|
|
|
|
|
|
|
916,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
made to other
|
|
|
(440,100
|
)
|
|
|
|
|
|
|
(440,100
|
)
|
Advance
to related party
|
|
|
(221,871
|
)
|
|
|
104,511
|
|
|
|
(117,360
|
)
|
Net
cash used in investing activities
|
|
|
(661,971
|
)
|
|
|
104,511
|
|
|
|
(557,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(378,205
|
)
|
|
|
(104,511
|
)
|
|
|
(482,716
|
)
|
Proceeds
from loans
|
|
|
440,100
|
|
|
|
|
|
|
|
440,100
|
|
Net
cash provided by (used in) financing activities
|
|
|
61,895
|
|
|
|
(104,511
|
)
|
|
|
(42,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
343
|
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
317,088
|
|
|
|
|
|
|
$
|
317,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
61,131
|
|
|
|
|
|
|
|
61,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
378,219
|
|
|
|
|
|
|
$
|
378,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
22,906
|
|
|
|
|
|
|
$
|
22,906
|
|
Income
tax paid
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
As a
result of the restatement, the net cash used in investing activities decreased
by $104,511 from $661,971 as originally reported, to $557,460; the net cash
provided by financing activities decreased by $104,511 from $61,895 as
originally reported, to ($42,616).
QINGDAO FOOTWEAR,
INC.
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
UNAUDITED
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
Adjustment
|
|
|
2009
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,283,168
|
|
$
|
|
|
|
$
|
1,283,168
|
|
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
13,133
|
|
|
|
|
|
|
13,133
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(101,932
|
)
|
|
|
|
|
|
(101,932
|
)
|
Inventories
|
|
|
(323,926
|
)
|
|
|
|
|
|
(323,926
|
)
|
Prepaid
expenses
|
|
|
(43,140
|
)
|
|
|
|
|
|
(43,140
|
)
|
Accounts payable and accrued
liabilities
|
|
|
7,805
|
|
|
|
|
|
|
7,805
|
|
Tax payable
|
|
|
1,241,699
|
|
|
|
|
|
|
1,241,699
|
|
Net cash provided by operating
activities
|
|
|
2,076,807
|
|
|
|
|
|
|
2,076,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Advance to related
party
|
|
|
(1,879,489
|
)
|
|
|
1,879,489
|
|
|
|
-
|
|
Cash paid for construction in
progress
|
|
|
(75,124
|
)
|
|
|
|
|
|
|
(75,124
|
)
|
Net cash used in investing
activities
|
|
|
(1,954,613
|
)
|
|
|
1,879,489
|
|
|
|
(75,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to
shareholders
|
|
|
-
|
|
|
|
(1,879,489
|
)
|
|
|
(1,879,489
|
)
|
Net cash used in financing
activities
|
|
|
-
|
|
|
|
(1,879,489
|
)
|
|
|
(1,879,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
(249
|
)
|
|
|
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in
cash
|
|
$
|
121,945
|
|
|
|
|
|
|
$
|
121,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of
period
|
|
|
118,534
|
|
|
|
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of
period
|
|
$
|
240,479
|
|
|
|
|
|
|
$
|
240,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
13,498
|
|
|
|
|
|
|
$
|
13,498
|
|
Income tax
paid
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
As a result of the restatement, the net
cash used in investing activities decreased by $1,879,489 from $1,954,613 as
originally reported, to $75,124; the net cash used in financing activities
increased by $1,879,489 from Nil as original reported, to
$1,879,489.