UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K/A
Amendment No. 1 to
Form 10-K
[X] Annual Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31,
2010
[ ]
Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from
______to_______
Commission file number:
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
(Exact name of small business issuer as specified in its
charter)
NEVADA
|
01-0660195
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification No.)
|
Sichuan SHESAYS Cosmetology Hospital Co., Ltd.
New
No. 83, Xinnan Road, Wuhou District
Chengdu City, Sichuan Province,
P.R. China 610041
(Address of Principal Executive Offices)
(86)-028-8548-2277
(Registrants Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.001
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [x]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [ ]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition for large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer [ ]
|
Non-Accelerated Filer [ ]
|
Accelerated Filer [ ]
|
Smaller Reporting Company [x]
|
Indicate by check mark whether registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes [ ] No [x]
The number of shares outstanding of our common stock as of June
30, 2010, was 18,000,012 shares. The aggregate market value of the common stock
held by non-affiliates (930,000 shares), based on the closing market price ($0.2
per share) of the common stock as of July 7, 2010 was $186,000. As there was no
trading activity of our common stock quoted on the OTC Bulletin Board as of June
30, 2010, and the first available market price of the common stock was $0.2 per
share as of July 7, 2010, we base the calculation of the aggregate market value
of the common stock on the closing market price as of July 7, 2010.
There were a total of 18,600,012 shares of the registrants
common stock outstanding as of March 28, 2011.
Documents Incorporated by Reference:
None
Explanatory Note
This Amendment No. 1 on Form 10-K/A (this Amended 10-K) to
the Annual Report on Form 10-K for the year ended December 31, 2010 (the
Original 10-K) of China Shesays Medical Cosmetology Inc. (the Company,
China Shesays or SHESAYS) is being filed to amend and restate our
consolidated financial statements and related disclosures for the year ended
December 31, 2010 as discussed in Note 3 to the accompanying restated financial
statements.
Background of the Restatement
On July 15, 2011, as a result of the preparation of the
responses to comments the Company received from the Securities and Exchange
Commission (the SEC) in connection with the SECs review of the Companys
Amendment No. 2 to the Registration Statement on Form S-1 filed on May 13, 2011,
after its communications with the Companys auditors, the Company determined
that the Companys financial statements for the year ended December 31, 2010,
and the three months period ended March 31, 2011 should no longer be relied upon
as a result of certain errors regarding: (i) pre-operating expenses wrongly
recorded as other current assets; (ii) under-provisions of rental expenses for
clinics that had not yet commenced business; (iii) income tax expense for the
above items; (iv) foreign currency translation gain or loss for the above items;
and (v) an over statement of payments to acquire property and equipment in cash
flows from investing activities and increases in other payables and accrued
liabilities included in cash flows from operating activities in the statement of
cash flows for the year ended December 31, 2010. An explanation of the error and
its impact on the Company's financial statements is contained in Note 3 to the
financial statements contained in Part II of this report.
Restatement of Other Financial Statements
Along with the filing of this Amended 10-K, we are concurrently
filing an amendment to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2011. The amendment to our Quarterly Report on Form 10-Q
is being filed to restate our unaudited financial statements and related
financial information for the period contained in the report to correct the
errors as set forth above.
Amendments to the Original 10-K
For the convenience of the reader, this Amended 10-K sets forth
the Original 10-K, as modified and superseded where necessary to reflect the
restatement. The following items have been amended principally as a result of,
and to reflect, the restatement:
-
Part II - Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations; and
-
Part IV - Item 15. Exhibits, Financial Statement Schedules.
In accordance with applicable SEC rules, this Amended 10-K
includes certifications from our Chief Executive Officer and Chief Financial
Officer dated as of the date of this filing. Except for the items noted above,
no other information included in the Original 10-K is being amended by this
Amended 10-K. The Amended 10-K continues to speak as of the date of the Original
10-K, and we have not updated the filing to reflect events occurring
subsequently to the Original 10-K date, other than those associated with the
restatement of the Company's financial statements. Accordingly, this Amended
10-K should be read in conjunction with our filings made with the SEC subsequent
to the filing of the Original 10-K.
PART II
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and
Results of Operations, which we refer to as the MD&A, is intended to help
the reader understand our Company, our operations and our present business
environment. The MD&A is provided as a supplement to, and should be read in
conjunction with, our consolidated financial statements and the accompanying
notes.
The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our
audited consolidated financial statements and related notes included elsewhere
in this annual report on Form 10-K. Some of the information contained in this
discussion and analysis constitutes forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed
below and elsewhere in this annual report on Form 10-K particularly under
Special Note Regarding Forward-Looking Statements and Risk Factors.
Unless otherwise specified, references to Notes to our
consolidated financial statements are to the Notes to our audited consolidated
financial statements as of December 31, 2010 and 2009 and for the two-year
period ended December 31, 2010.
This discussion should be read in conjunction with the other
sections of this report, including the related exhibits. The various sections of
this discussion contain a number of forward-looking statements, all of which are
based on our current expectations and could be affected by the uncertainties and
risk factors described throughout this prospectus. See Risk Factors. Our
actual results may differ materially.
Overview
We are a Nevada holding company operating in the cosmetology
industry. Substantially all of our operations are conducted in China through
BOAN, our wholly-owned subsidiary in China, and through our contractual
arrangements with several of our consolidated affiliated entities in China,
including SHESAYS and its subsidiaries.
SHESAYS was established in May 2005 and specializes in
cosmetology treatments, integrating medical treatment and education. At present,
we have such core clinical departments as cosmetic surgery, cosmetic
dermatology, cosmetic dentistry, cosmetic Traditional Chinese Medicine (TCM).
Services provided in cosmetic surgery include eye shaping, facial contour,
rhinoplasty, face shaping, wrinkles elimination, breast surgery,
chiloplasty, liposuction slimming, ear reshaping, gynecology / male plastic
surgery. Cosmetic dermatology department provides services of laser depilation,
acne/pock removal, facelift and wrinkle decrease of Cutera Titan, laser
whitening, pore minimizing, skin rejuvenation etc. Cosmetic dentistry includes
the services of optical fluoride whitening, repair of uneven denture, porcelain
teeth / cercon, orthodontic treatment, comfortable painless teeth cleaning,
complex tooth extraction face-lift surgery, orthodontic caries-prevention and
correction for children, adult orthodontics invisible. Traditional Chinese
Medicine, also known as TCM, is the medical theory and practices of Chinese
culture, especially herbal medicine, acupuncture and osteopathy, for preventing
or treating illness, or promoting health and well-being. Cosmetic TCM is to use
traditional Chinese Medicine, such as acupuncture and moxibustion, to provide
cosmetic services, such as to dispel freckle, lose weight, as well as to enhance
the endocrine system. The major difference of Chinese medicine from Western
medicine is that it focuses on "health" rather than on "healing" because Chinese
medicine promotes overall wellness of an individual, as opposed to the approach
of Western medicine in treating the symptoms of an illness.
Headquartered in Chengdu, Sichuan province, P.R. China, SHESAYS
aims to expand its business outside of Chengdu. In 2010, SHESAYS established
three new outpatient clinics in the cities of Yibin, Leshan and Zigong, Sichuan
province, and is constructing a new flagship store, a comprehensive cosmetology
hospital in Chengdu.
For the fiscal year ended December 31, 2010, we generated
revenue of $12,173,231 which represents a growth of 37.8% compared to $8,834,673
in the previous fiscal year. This increase in revenue is attributed to our
increased sale to the existing and new customers in 2010. We serviced 25,682
customers in 2010 compared to 20,514 in 2009.
However, our net income decreased from $1,766,442 for 2009 to
$524,960 for 2010, a 70.3% decline. The decrease in net income was mainly due to
our increased expense related to listing on OTCBB and effect of pre-operating
expenses for new clinics and our flagship hospital.
Our business operates in China and financial statements are
denominated in Chinese Renminbi (RMB), but we report our financial results in
our SEC filings in U.S. dollars. The conversion of our financial statements from
RMB to U.S. dollars results in translation adjustments, which are reported as a
line item after net income and before comprehensive income. The net income is
added to the retained earnings on our balance sheet; while the translation
adjustment is added to a line item on our balance sheet labeled accumulated
other comprehensive income, because it is more reflective of changes in the
relative values of U.S. and Chinese currencies than of the success of our
business. For the years ended December 31, 2010 and 2009, we recorded foreign
currency translation gains attributable to SHESAYS common stockholders of
$109,474 and $1,073 respectively.
Major factors that affect our Financial Conditions in
2010
The increase in our operating results in the last two years is
attributable to a number of factors, including the substantial increase of
domestic cosmetology demand and successful brand promotion. We expect our
business to continue to be driven by the following factors:
Increasing domestic spending in Cosmetology
The demand for our cosmetology services is directly related to
consumers cosmetology spending, which is largely determined by the economic
conditions and disposable income of consumers. According to the statistics
released by National Bureau of Statistics of China, Chinas economy has
experienced a rapid growth in the last thirty years. The annual growth rate has
been in the range of 9% to 13% in the last five years. Chinas GDP per capita
has been over $3,000 since 2007, which marks a new starting point in terms of
consumption. With economic growth of a country with 1.3 billion people, Chinas
increased consumption has upgraded many traditional consumption industries and
accelerated development of many new industries, such as medical cosmetic
industry. The national medical cosmetic market reached approximately $439
million last year but compared with $60 billion in the United States, there is
still a huge gap. We believe that the domestic spending in cosmetology will
continue to increase at a fast rate within the next five years as consumers
disposable income continues to grow.
Successful Promotion of Our Brand Name
Mr. Yixiang Zhang, our CEO, owns a trademark registered at the
State Administration for Industry and Commerce of China, namely,
西
婵
(translated as SHESAYS in English). Mr. Zhang has entered into an agreement
with SHESAYS to allow SHESAYS to use the trademark without charge. SHESAYS
will appear as our core brand. In addition, SHESAYS registered a trademark at
the State Administration for Industry and Commerce of China, namely,
钧阁
(translated as Junge in English). Junge will appear in our clinics and
skincare centers.
The logo SHESAYS combines the names of two of the four great
beauties in ancient China, Xi Shi and Diao Chan, and embodies grace and joy,
stimulating people to pursue beauty. The logo conceives rich visual impact and
imagination, which contains profound cultural connotations and is easy to
promote.
Also, in the year of 2010, there are another two factors
affecting our financial conditions. Firstly, we established three clinics and
achieved a steady growth of our revenue of 37.8% with the growth of the number
of our customers. Secondly, we became a public company in US by reverse-merger
with an OTCBB shell company. Therefore, we have incurred expenses related to
this reverse merger and maintaining the status as a public company, this will
negatively affect our bottom line result.
Results of Operations
The following table summarizes the results of our operations in
dollar amounts and percentage of increase (decrease) over previous year during
the fiscal years ended on December 31, 2010 and 2009.
All amounts, other than percentages, in U.S. dollars
|
|
Year ended December
31,
|
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As a
|
|
|
|
|
|
As
|
|
|
|
|
|
|
percentage
|
|
|
|
|
|
percentage
|
|
|
|
|
|
|
of net
|
|
|
|
|
|
of net
|
|
|
|
All Amounts
|
|
|
revenue
|
|
|
All Amounts
|
|
|
revenue
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic surgery services
|
$
|
6,195,516
|
|
|
50.9%
|
|
$
|
4,835,389
|
|
|
54.7%
|
|
Professional medical beauty services
|
|
4,940,433
|
|
|
40.6%
|
|
|
2,998,806
|
|
|
33.9%
|
|
Cosmetic dentistry services
|
|
427,427
|
|
|
3.5%
|
|
|
579,822
|
|
|
6.6%
|
|
Sales of goods
|
|
609,855
|
|
|
5.0%
|
|
|
420,656
|
|
|
4.8%
|
|
Total Revenue
|
|
12,173,231
|
|
|
100.0%
|
|
|
8,834,673
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic surgery services
|
|
(1,762,733
|
)
|
|
-14.5%
|
|
|
(1,536,779
|
)
|
|
-17.4%
|
|
Professional medical beauty services
|
|
(847,827
|
)
|
|
-7.0%
|
|
|
(517,428
|
)
|
|
-5.9%
|
|
Cosmetic dentistry services
|
|
(164,928
|
)
|
|
-1.4%
|
|
|
(168,547
|
)
|
|
-1.9%
|
|
Cost of goods sold
|
|
(228,078
|
)
|
|
-1.9%
|
|
|
(162,705
|
)
|
|
-1.8%
|
|
Depreciation
|
|
(349,328
|
)
|
|
-2.9%
|
|
|
(206,831
|
)
|
|
-2.3%
|
|
Total Cost of Revenue
|
|
(3,352,894
|
)
|
|
-27.5%
|
|
|
(2,592,290
|
)
|
|
-29.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
8,820,337
|
|
|
72.5%
|
|
|
6,242,383
|
|
|
70.7%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
3,860,858
|
|
|
31.7%
|
|
|
2,680,577
|
|
|
30.3%
|
|
Advertising costs
|
|
3,014,871
|
|
|
24.8%
|
|
|
1,290,545
|
|
|
14.6%
|
|
Professional and consultant fees
|
|
716,910
|
|
|
5.9%
|
|
|
138,292
|
|
|
1.6%
|
|
Depreciation
|
|
197,071
|
|
|
1.6%
|
|
|
125,768
|
|
|
1.4%
|
|
Total Operating Expenses
|
|
7,789,710
|
|
|
64.0%
|
|
|
4,235,182
|
|
|
47.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM
OPERATIONS
|
|
1,030,627
|
|
|
8.5%
|
|
|
2,007,201
|
|
|
22.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
4,574
|
|
|
0.0%
|
|
|
52,714
|
|
|
0.6%
|
|
Interest income
|
|
5,128
|
|
|
0.0%
|
|
|
3,383
|
|
|
0.0%
|
|
Interest expenses
|
|
(48,852
|
)
|
|
-0.4%
|
|
|
(3,224
|
)
|
|
-0.0%
|
|
Imputed interest
|
|
(250
|
)
|
|
0.0%
|
|
|
(1,027
|
)
|
|
-0.0%
|
|
Other expenses
|
|
(41,530
|
)
|
|
-0.3%
|
|
|
(66,489
|
)
|
|
-0.8%
|
|
Total Other Expenses, net
|
|
(80,930
|
)
|
|
-0.7%
|
|
|
(14,643
|
)
|
|
-0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE
TAXES
|
|
949,697
|
|
|
7.8%
|
|
|
1,992,558
|
|
|
22.6%
|
|
Add (less):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
(424,737
|
)
|
|
-3.5%
|
|
|
(226,116
|
)
|
|
-2.6%
|
|
NET INCOME
|
|
524,960
|
|
|
4.3%
|
|
|
1,766,442
|
|
|
20.0%
|
|
Net loss attributable to noncontrolling
interest
|
|
19,607
|
|
|
0.2%
|
|
|
-
|
|
|
0.0%
|
|
NET INCOME
ATTRIBUTABLE TO CHINA
SHESAYS COMMON
STOCKHOLDERS
|
|
544,567
|
|
|
4.5%
|
|
|
1,766,442
|
|
|
20.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign currency translation gain
|
|
108,972
|
|
|
0.9%
|
|
|
1,073
|
|
|
0.0%
|
|
Add: foreign currency
translation loss attributable to noncontrolling interest
|
|
502
|
|
|
0.0%
|
|
|
-
|
|
|
0.0%
|
|
Foreign currency translation gains
attributable to China Shesays common stockholders
|
|
109,474
|
|
|
0.9%
|
|
|
1,073
|
|
|
0.0%
|
|
COMPREHENSIVE INCOME
ATTRIBUTABLE TO CHINA
SHESAYS COMMON
STOCKHOLDERS
|
$
|
654,041
|
|
|
5.4%
|
|
$
|
1,767,515
|
|
|
20.0%
|
|
Year Ended December 31, 2010 Compared with Year Ended
December 31, 2009
Total revenue.
Total revenue increased by approximately
$3.3 million or 37.8% to approximately $12.2 million in 2010 from approximately
$8.8 million in 2009. Our sales growth was driven by sales from our new
outpatient clinics in Leshan, Yibin and Zigong, and our continued efforts to
attract new customers in the headquarter hospital. We serviced approximately
25,682 customers in the headquarter hospital and three clinics in 2010 compared
to approximately 20,514 customers in 2009.
The following table sets the revenue generated from each of our
cosmetology categories for the periods indicated.
REVENUE
|
|
For the year ended December 31,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
%
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
Change
|
|
Cosmetic surgery services
|
$
|
6,195,516
|
|
$
|
4,835,389
|
|
$
|
1,360,127
|
|
|
28.1%
|
|
Professional medical beauty services
|
|
4,940,433
|
|
|
2,998,806
|
|
|
1,941,627
|
|
|
64.7%
|
|
Cosmetic dentistry services
|
|
427,427
|
|
|
579,822
|
|
|
(152,395
|
)
|
|
-26.3%
|
|
Sales of goods
|
|
609,855
|
|
|
420,656
|
|
|
189,199
|
|
|
45.0%
|
|
Total revenue
|
$
|
12,173,231
|
|
$
|
8,834,673
|
|
$
|
3,338,558
|
|
|
37.8%
|
|
Revenue generated from Cosmetic Surgery Services increased
28.1% to $6.2 million in 2010, mainly due to enhanced marketing activities and
increase in number of cosmetic surgery customers. Revenue generated from
Professional Medical Beauty Services increased 64.7% to $4.9 million in 2010 as
we increased investment in advertising for these services during 2010. Revenue
generated from Cosmetic Dentistry Services decreased 26.3% to $0.4 million in
2010. The decrease was primarily due to our strategy in 2010 focusing on
cosmetic surgery services and professional medical beauty services. Revenue
generated from Sales of Goods increased 45.0% to $0.6 million due to increased
efforts of our staff to sell cosmetic products when servicing customers.
For 2010, revenue of our current headquarter hospital increased
by 32.2% to $11.7 million, from $8.8 million in 2009. Three new clinics launched
in 2010 contributed approximately $0.5 million to revenue.
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
Sichuan Shesays
|
$
|
11,676,294
|
|
|
96.0%
|
|
$
|
8,834,673
|
|
|
100.0%
|
|
Leshan Jiazhou Shesays
|
|
272,412
|
|
|
2.2%
|
|
|
-
|
|
|
|
|
Yibin Shesays
|
|
158,336
|
|
|
1.3%
|
|
|
-
|
|
|
|
|
Zigong Shesays
|
|
66,189
|
|
|
0.5%
|
|
|
-
|
|
|
|
|
Total sales
|
$
|
12,173,231
|
|
|
100.0%
|
|
$
|
8,834,673
|
|
|
100.0%
|
|
Cost of revenue.
Our cost of revenue, which includes
cost of service revenue, cost of goods sold and depreciation, increased by
approximately $0.8 million, or 29.3% to approximately $3.4 million in 2010 from
approximately $2.6 million in 2009. As a percentage of net revenue, the cost of
goods sold decreased approximately by 1.8% to 27.5% in 2010, from 29.3% in 2009.
The increase in cost of sales was mainly due to the increase in revenue during
the year.
COST OF REVENUE
|
|
For the year ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease/(Increase)
|
|
|
% Change
|
|
Cosmetic surgery services
|
$
|
(1,762,733
|
)
|
$
|
(1,536,779
|
)
|
$
|
(225,954
|
)
|
|
14.7%
|
|
Professional medical beauty services
|
|
(847,827
|
)
|
|
(517,428
|
)
|
|
(330,399
|
)
|
|
63.9%
|
|
Cosmetic dentistry services
|
|
(164,928
|
)
|
|
(168,547
|
)
|
|
3,619
|
|
|
-2.1%
|
|
Sales of goods
|
|
(228,078
|
)
|
|
(162,705
|
)
|
|
(65,373
|
)
|
|
40.2%
|
|
|
|
(3,003,566
|
)
|
|
(2,385,459
|
)
|
|
(618,107
|
)
|
|
25.9%
|
|
Depreciation
|
|
(349,328
|
)
|
|
(206,831
|
)
|
|
(142,497
|
)
|
|
68.9%
|
|
Total cost of revenue
|
$
|
(3,352,894
|
)
|
$
|
(2,592,290
|
)
|
$
|
(760,604
|
)
|
|
29.3%
|
|
Gross profit.
Our gross profit increased by
approximately $2.6 million, or 41.3% to approximately $8.8 million in 2010 from
approximately $6.2 million in 2009. Gross profit as a percentage of net revenue
increased by 1.8% to 72.5% in 2010 as compared to 70.7% in 2009, mainly due to
the increased revenue during the period. Our higher gross margin was primarily
due to economies of scale obtained from business expansion.
Total Operating Expenses.
Our total operating expenses
increased by approximately $3.6 million or 83.9% to approximately $7.8 million
in 2010 from approximately $4.2 million in 2009. As a percentage of net revenue,
total operating expenses increased from 47.9% in 2009 to 64.0% in 2010. The
increase in our total operating expenses was mainly attributed to the increase
of $1.2 million in selling, general and administrative expenses, the increase of
$1.7 million of advertising costs, as well as the increase of $0.6 million in
professional and consultant fees.
Selling, general and administrative expenses.
Our
selling, general and administrative expenses increased by approximately $1.2
million, or 44.0% to approximately $3.9 million in 2010 from approximately $2.7
million in 2009. As a percentage of net revenue, selling, general and
administrative expenses increased by 1.4% to 31.7% in 2010, as compared to 30.3%
in 2009. The increase in expenses was mainly due to the increase in salary cost,
leasing expenses of three new clinics and current headquarter hospital and
pre-operating expenses related to the planned opening of our new flagship
hospital.
Advertising costs.
Our advertising costs increased by
approximately $1.7 million or 133.6% to approximately $3.0 million in 2010 from
approximately $1.3 million in 2009. Advertising costs as a percentage of net
revenue increased by 10.2% to 24.8% in 2010 as compared to 14.6% in 2009. The
increase in our advertising expenses was mainly contributable to the increase in
marketing expenses and promotion of the brand name of SHESAYS in Sichuans
cosmetology market.
Professional and consultant fees.
Our professional and
consultant fees increased by approximately $0.6 million or 418.4% to
approximately $0.7 million in 2010 from approximately $0.1 million in 2009. As a
percentage of net
revenue, professional and consultant fees were increased from 1.6% in 2009 to 5.9% in 2010. The significant increase in our professional and consultant fees was mainly attributed to expenses incurred related to being a public company.
Income from operations.
Our income from operating decreased by approximately $1.0 million or 48.7% to approximately $1.0 million in 2010 from approximately $2.0 million in 2009. As a percentage of net revenue, our income from
operations was 8.5% in 2010 and 22.7% in 2009. This decrease in income from operations was primarily due to the increase in operating expenses offset by the increase in revenue.
Other Income (Expenses).
Other income (expenses), consisting primarily of interest income, interest expenses, imputed interest, and other miscellaneous expenses, increased by $66,287 to $80,930 expenses in 2010 from $14,643
expenses in 2009. The increase was primarily due to the increase in interest expenses as a result of the short term loan of $0.9 million obtained from Bank of Chengdu in 2010.
Income before taxes.
Our income before income taxes decreased by approximately $1.0 million or 52.3% to approximately $0.9 million in 2010 from approximately $2.0 million in 2009. As a percentage of net revenue, our income
before income taxes decreased by 14.8% to 7.8% in 2010, as compared to 22.6% in 2009. This decrease of income before income taxes was primarily attributable to the increase in operating expenses in 2010.
Income taxes.
We incurred income taxes of approximately $0.4 million in 2010, with an increase of approximately $0.2 million or 87.8% over approximately $0.2 million in 2009. The increase was mainly due to the expiration of the
special income tax assessment basis which was calculated based on the net income for income tax purpose assessed at 10% of services revenue with the applicable tax rate of 25% in 2009. From 2010 onwards, China SHESAYS has an income tax rate of 25%.
Net income.
Net income decreased by approximately $1.2 million or 70.3% to approximately $0.5 million in 2010 from approximately $1.8 million in 2009, due to our 83.9% increase in operating expenses, coupled with our 87.8%
increase in income tax expenses.
Liquidity and Capital Resources
As of December 31, 2010, we had cash and cash equivalents of $1.0 million. We had a working capital deficit of $1.9 million, that is, our current assets were $2.2 million and our current liabilities were $4.1 million as of December
31, 2010. Our net working capital deficit may initially raise substantial doubt as to our ability to continue as a going concern. However, we believe that our strong net cash flow from operating activities, cost reduction and delay on capital
expenditure will provide sufficient liquidity to finance our anticipated working capital and capital expenditure requirements for the next 12 months. Total equity as of December 31, 2010, was $4.5 million.
Pursuant to our BOAN’s contractual arrangements with SHESAYS, BOAN provides management and consulting services to SHESAYS and its subsidiaries in exchange for service fees, which shall be equal to 100% of the residual return of SHESAYS and its
subsidiaries and can be waived by BOAN from time to time at its sole discretion.
BOAN and SHESAYS reached an agreement that, in order to support the strategic expansion plan of SHESAYS in China, BOAN waived the service fees to be paid by SHESAYS for three years commencing from April 27, 2010 so that SHESAYS can execute its
business expansion plan, launch the flagship hospital in Chengdu and establish the cosmetology hospitals in various locations in China. Therefore, no service fees have been paid to BOAN by SHESAYS up to date. Based on our expansion plan and past
experience with respect to the new clinics launched in 2010, we believe that we need to retain our existing cash reserves and cash flow from operations in SHESAYS to support annual growth in the number of customers and number of new outpatient
clinics and our planed new flagship hospital openings in fiscal 2011. BOAN and our company have never received any service fee from SHESAYS, the operating company and we expect to receive service fees commencing on April 28, 2013. Boan and we
don’t expect to declare any dividend before the April 27, 2013, nor does any other amount expected to due prior to April 27, 2013. However, if there is extra expense occurred
and need to be paid during the period, we can borrow from SHESAYS to settle such
amount.
The following table provides detailed information regarding our
net cash flow for all financial statement periods presented in this report.
|
|
December 31,
|
|
(in US dollars)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities
|
|
1,983,221
|
|
|
2,116,493
|
|
Net cash used in investing activities
|
|
(4,469,361
|
)
|
|
(747,484
|
)
|
Net cash provided by (used
in) financing activities
|
|
2,129,555
|
|
|
(38,107
|
)
|
Effect of foreign currency translation on
cash and cash equivalents
|
|
14,133
|
|
|
419
|
|
Net (decrease) increase in
cash and cash equivalents
|
|
(342,452
|
)
|
|
1,331,321
|
|
Cash and cash equivalents beginning of year
|
|
1,371,732
|
|
|
40,411
|
|
Cash and cash equivalents
end of year
|
|
1,029,280
|
|
|
1,371,732
|
|
Pursuant to our BOANs contractual arrangements with SHESAYS,
BOAN provides management and consulting services to SHESAYS and its subsidiaries
in exchange for service fees, which shall be equal to 100% of the residual
return of SHESAYS and its subsidiaries and can be waived by BOAN from time to
time at its sole discretion. BOAN and SHESAYS reached an agreement that, in order to support
the strategic expansion plan of SHESAYS in China, BOAN waived the service fees
to be paid by SHESAYS for three years commencing from April 27, 2010 so that
SHESAYS can execute its business expansion plan, launch the flagship hospital in
Chengdu and establish the cosmetology hospitals in various locations in China.
Therefore, no service fees have been paid to BOAN by SHESAYS up to date. Based
on our expansion plan and past experience with respect to the new clinics
launched in 2010, we believe that we need to retain our existing cash reserves
and cash flow from operations in SHESAYS to support annual growth in the number
of customers and number of new outpatient clinics and our planed new flagship
hospital openings in fiscal 2011.
Operating Activities
Net cash provided by operating activities in 2010 amounted to
$2.0 million, with a decrease of $0.1 million from net cash inflows from
operating activities of $2.1 million in 2009. The slight decrease in our cash
provided by operations was primarily due to a decrease in net income, offsetting
by an increase in our income tax payable and other payables and accrued
liabilities .
Inventories. Our inventories increased by approximately $0.19
million or 55.17% to approximately $0.52 million in 2010 from approximately
$0.34 million in 2009. The increase in our inventory was mainly attributed to
our increase in revenue and customers.
Other current assets and prepaid expenses. Our other current
assets and prepaid expense increased by 19% from $527 thousand in 2009 to $627
thousand in 2010. The increase was mainly due to the increase in rental deposits
and prepayments, which we prepaid for leasing premises for our new clinics in Leshan, Yibin and Zigong.
Income tax payable: Our income tax payable increased by 1,198%
from $54,428 to $706,450. The increase was mainly due to the difference in
income tax assessment method. In 2009, the tax bureau approved Sichuan Shesays
to assess its income tax based on the 10% of its revenue generated. In 2010,
Sichuan Shesays need to assess its income tax based on 25% applicable tax rate
on its assessable net income.
Other payables and accrued liabilities: Other payables and
accrued liabilities increased from $0.7 million in 2009 to $1.8 million in 2010,
which was 168.0% increase in percentage. The increase was mainly due to $0.5 million increase in other payables, which were the equipment
and renovation costs owed to suppliers due to our opening of 3 clinics as well
as the beginning of the renovation of flagship hospital, and $0.5 million
increase in accrued liabilities, which consists of the accrued advertising
expense and accrued rental expense of flagship hospital as well as accrued
professional expense related to listing.
Other payables and accrued liabilities at December 31, 2010 and
2009 consisted of the following:
|
|
2010
|
|
|
2009
|
|
|
|
(Restated)
|
|
|
|
|
|
|
(consolidated)
|
|
|
(combined)
|
|
|
|
|
|
|
|
|
Other payables
|
$
|
599,724
|
|
$
|
62,615
|
|
Deposits from customers
|
|
231,390
|
|
|
215,618
|
|
Deposits from membership
reward program
|
|
277,010
|
|
|
221,059
|
|
Accrued liability for membership reward
program
|
|
18,586
|
|
|
56,497
|
|
Accrued liabilities
|
|
631,265
|
|
|
100,124
|
|
|
$
|
1,757,975
|
|
$
|
655,913
|
|
Investing Activities
Net cash used in investing activities in the year 2010 was $4.5
million, with a significant increase of $3.7 million from net cash used in
investing activities of $0.7 million in 2009. We invested $4.4 million in
purchase of property and equipment for 2010 as compared to $0.8 million in 2009.
The investments were a part of our development plans, which include continuous
expansion of our cosmetic services and expansion of new chain clinics. We paid
$2.7 million cash for renovation and equipment for three new clinics launched in
late 2010. For the year 2010, $0.9 million was paid for new equipment at
existing headquarter hospital compared to $0.8 million for the year 2009. In
addition, $0.9 million was paid for renovation of the new flagship hospital in Chengdu in 2010.
Financing Activities
Net cash provided by financing activities was $2.1 million in
2010, compared to net cash used in financing activities of $38,107 in 2009. On
November 5, 2010, we entered into a Stock Purchase Agreement with certain
institutional and accredited investors relating to a private placement of
600,000 shares of our common stock, for net proceeds of approximately $1.1
million.
Loan Facilities
As of December 31, 2010, the Company and its subsidiaries have
the following credit facilities with the following terms:
All amounts, other than
percentages, are in U.S. dollars
|
No
|
Type
|
Contracting Party
|
Valid Date
|
Duration
|
Amount
|
1
|
Loan
|
Bank of Chengdu
|
February 10, 2010
|
1 year
|
$0.46 million
|
2
|
Loan
|
Bank of Chengdu
|
February 23, 2010
|
1 year
|
$0.46 million
|
We have approximately $0.9 million in total loans and $0.46
million and $0.46 million will mature on or before February 9, 2011 and February
22, 2011, On these maturity dates, we have repaid the loans with our working
capital.
Interest expense paid for the above short term loans totaled
$48,852 and $3,224 for 2010 and 2009, respectively. There is no default in
payment in respect of all of our obligations under the terms of the outstanding
loan facilities from Bank of Chengdu and we have not breached any covenant
thereof.
Critical Accounting Policies
Managements discussion and analysis of results of operations
and financial condition are based upon our consolidated financial statements.
These statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. These principles require
management to make certain estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes.
The most significant estimates and assumptions include
valuation of inventories, provisions for income taxes, allowance for doubtful
accounts, and the recoverability of the long-lived assets. Actual results could
differ from these estimates. Periodically, we review all significant estimates
and assumptions affecting the financial statements and record the effect of any
necessary adjustments.
The following critical accounting policies rely upon
assumptions and estimates and were used in the preparation of our consolidated
financial statements:
Variable Interest Entities
The Company accounts for Variable Interest Entities (VIE) in
accordance with ASC 810. As a result of the adoption of ASU 2009-17,
consolidations (Topic 810) Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities, effective January 1, 2010, ASC 810
requires the consolidation of VIEs in which a company has both the power to
direct the activities of the VIEs that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the right to receive
the benefits from the VIEs that could potentially be significant to the VIEs.
The Company has applied the requirements of ASC 810 on a prospective basis from
the date of adoption.
The Company assesses all newly created entities and those with
which the Company becomes involved to determine whether such entities are VIEs
and, if so, whether or not the Company is their primary beneficiary.
On April 27, 2010, the Company through its PRC subsidiary,
Chengdu Boan entered into a series of contractual arrangements consisting of
four agreements with Sichuan Shesays and the stockholders of Sichuan Shesays.
Those four agreements and their consequences are described below.
(i)
|
an exclusive service agreement, pursuant to which Sichuan
Shesays and its subsidiaries irrevocably entrust to Chengdu Boan the right
of management and operation of Sichuan Shesays and its subsidiaries and
the responsibilities and authorities of their stockholders and directors
of Sichuan Shesays and its subsidiaries. In return, Sichuan Shesays and
its subsidiaries agreed to pay 100% of its residual return, if any, from
time to time, as management fee to Chengdu Boan.
|
|
|
|
(ii)
|
a voting rights proxy agreement, pursuant to which the
stockholders of Sichuan Shesays and its subsidiaries have granted the
personnel designated by Chengdu Boan the right to appoint directors and
senior management of Sichuan Shesays and its subsidiaries and to exercise
all of their other voting rights as stockholders of Sichuan Shesays and
its subsidiaries, as the case may be, as provided under the articles of
association of each such entity;
|
|
|
|
(iii)
|
a call option agreement, pursuant to which:
|
|
|
|
|
(a)
|
neither Sichuan Shesays nor any of its subsidiaries may
enter into any transaction that could materially affect its assets,
liabilities, equity or operations without the prior written consent of
Chengdu Boan;
|
|
|
|
|
(b)
|
neither Sichuan Shesays nor any of its subsidiaries will
distribute any dividends without the prior written consent of Chengdu
Boan; and
|
|
|
|
|
(c)
|
Chengdu Boan or its designee has an exclusive option to
purchase all or part of the equity interests in Sichuan Shesays, all or
part of the equity interests in subsidiaries owned by Sichuan Shesays or
its nominee holders, or all or part of the assets of Sichuan Shesays, in
each case when and to the extent permitted by PRC law. In case of Chengdu
Boan exercising the call option in its sole discretion upon the occurrence
of the situation in which such call option exercise become feasible under
the relevant laws in PRC, any additional consideration paid other than $1
which may be required under the laws of PRC to effect such purchase to
comply with such legal formalities shall be either cancelled or returned to Sichuan Shesays
immediately with no additional compensation to the owners; and
|
(iv)
|
an equity pledge agreement pursuant to which each of
stockholders of Sichuan Shesays has pledged his or her equity interest in
Sichuan Shesays and its subsidiaries, as the case may be, to Chengdu Boan
to secure their obligations under the relevant contractual control
agreements, including but not limited to, the obligations of Sichuan Shesays and its subsidiaries under the exclusive services agreement, the
call option agreement, the voting rights proxy agreement described above,
and each of them has agreed not to transfer, sell, pledge, dispose of or
create any encumbrance on their equity interest in Sichuan Shesays or its
subsidiaries without the prior written consent of Chengdu
Boan.
|
In the PRC restructuring transaction described above, the
Company gained indirect control of Sichuan Shesays and its subsidiaries and
Sichuan Shesays and its subsidiaries are considered VIEs of the Company.
As required by ASC 810-10, the Company performs a qualitative
assessment to determine whether the Company is the primary beneficiary of
Sichuan Shesays and its subsidiaries which are identified as VIEs of the
Company. A quality assessment begins with an understanding of the nature of the
risks in the entity as well as the nature of the entitys activities including
terms of the contracts entered into by the entity, ownership interests issued by
the entity and the parties involved in the design of the entity. The Companys
assessment on the involvement with Sichuan Shesays and its subsidiaries reveals
that the Company has the absolute power to direct the most significant
activities that impact the economic performance of Sichuan Shesays and its
subsidiaries. Under the accounting guidance, the Company is deemed to be the
primary beneficiary of Sichuan Shesays and its subsidiaries and the results of
Sichuan Shesays and its subsidiaries are consolidated in the Companys
consolidated financial statements for financial reporting purposes. As of
December 31, 2010, Sichuan Shesays and its subsidiaries had total assets of
$7,621,593 (restated) and total liabilities of $4,059,585 (restated). As of
December 31, 2009, Sichuan Shesays had total assets of $3,863,832 and total
liabilities of $1,313,712.
As of December 31, 2010, the Company agreed to waive the
management fee to be payable by Sichuan Shesays and its subsidiaries for a
period of 3 years from April 27, 2010 to April 26, 2013 due to lack of liquidity
as Sichuan Shesays is launching a new comprehensive hospital in Chengdu City,
Sichuan Province.
Revenue recognition
The Company recognizes revenue in the period in which the
services are performed. The Company recognizes revenue under the provisions of
ASC 605, Revenue Recognition when all of the following have occurred: persuasive
evidence of arrangement with the customer, services has been performed, fees are
fixed or determinable and collectability of the fees is reasonably assured.
These criteria as related to the Companys revenue are considered to have been
met as follows:
Services fees
Revenue from rendering of services is recognized when the
services are rendered. Fees received in advance for prepaid service packages are
recorded as deferred revenue under current liabilities and are recognized on a
systematic basis in accordance with service usage. As the Company is primarily
engaged in providing professional medical beauty and cosmetic services, the
Company is subject to claims from customers, usually in form of demand for
refund of service fee paid. The Companys policy allows for refund only upon the
Companys authorization for reasonable demand. Based on the past experience on
refunds incurred, the Company considers that amount is not material to the
Companys operation. Pursuant to FASB ASC 954-605-25, the Company recognized
refunds and discounts on an accrual basis and deducted from gross service
revenue to determine net service revenue. During the years ended December 31,
2010 and 2009, the amount of refund of service fee was $31,393 and $24,130
respectively.
The service usage is measured by the percentage of service
rendered based on the content of package. For example, if the service package
composed of 3 injections of Botox, the usage of service will be 1/3 when each
injection is applied and the payment rates are determined prospectively.
Sales of goods
The Company recognizes revenue on sales of goods when the goods
are delivered and title to the goods passes to the customers provided that: (i)
there are no uncertainties regarding customer acceptance; persuasive evidence of
an arrangement exists; (ii) the sales price is fixed and determinable; and (iii)
collectability is deemed probable. It is the Companys policy not to allow
return of goods once the goods are inspected by and delivered to the customer.
Accordingly, the Company makes no allowance for potential losses arising from
sales return.
Accrued liability for customer reward program
The Company establishes a membership reward program of which
the membership is free of charge. Under the membership reward program, members
enjoy high discounts on services and accumulate membership credit points that
vary depending on the services rendered. Members are eligible to redeem credit
points to reduce the fees for services rendered by the Company and these credit
points do not have any expiry date. The costs associated with these incentives
are included in deductions from revenue and accrued for as a current liability
as members accumulate credit points. As members redeem credit points, the
accrued liability is reduced correspondingly. As of December 2010 and 2009, the
Companys accrued liability for its customers reward program amounted to $18,586
and $56,497 respectively, based on the estimated liabilities under the customer
reward program.
Cash Coupons
Third parties and the Companys customers may be awarded cash
coupons. The coupons are distributed on a random and discretionary basis to
induce future services and treatments and are redeemable within a short time
period. The cash coupons cannot be renewed or extended. No liability is recorded
when the coupons are distributed, except where redemption of the coupons will
result in the services being sold at a loss. The Company recognizes a reduction
in revenue as a promotional allowance for these cash coupons at the later date
at which the related revenue is recognized or the date at which the coupons are
distributed in accordance with ASC 605-50-25-3. No cash coupons were issued
during 2010.
Cash and cash equivalents
For purpose of the statements of cash flows, cash and cash
equivalents include cash on hand and demand deposits with a bank with a maturity
of less than three months.
Inventories
Inventories represent medical materials and finished goods
merchandise and are stated at the lower of cost or market. Cost represents
invoices value on purchases and is being calculated on the weighted average
basis.
The Company provided inventory allowances based on excess and
obsolete inventories determined principally by demand for these products.
Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Expenditures for additions, major renewals and betterments are
capitalized and expenditures for maintenance and repairs are charged to expense
as incurred.
Depreciation is provided on a straight-line basis, less
estimated residual value over the assets estimated useful lives. The estimated
useful lives are as follows:
Buildings
|
20 Years
|
Leasehold improvements
|
5 Years
|
Medical equipment
|
3 to 10 Years
|
Motor vehicles
|
5 Years
|
Office equipment
|
3 to 10 Years
|
Income taxes
The Company accounts for income taxes under the FASB
Codification Topic 740-10-25 (ASC 740-10-25). Under ASC 740-10-25, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period
included the enactment date.
On January 1, 2007, the Company adopted the provisions of ASC
740-10-25, Accounting for Uncertainty in Income Taxes. ASC 740-10-25
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax
return. This Interpretation also provides guidance on derecognition of income
tax assets and liabilities, classification of current and deferred income tax
assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures. The adoption of ASC 740-10-25 has not resulted in any material
impact on the Companys financial position or results.
The Company was incorporated in the PRC and is subject to PRC
income tax which is computed according to the relevant laws and regulations in
the PRC. The applicable tax rates for 2010 and 2009 are 25%. Prior to 2009,
income tax was calculated by net income with the applicable tax rate. In 2009,
the Company elected to have its net income for income tax purpose assessed at
10% of services revenue and the election was approved by the local tax bureau,
income tax was therefore calculated by 10% of services revenue with the
applicable tax rate. From 2010 onwards, Sichuan Shesayss income tax will be
assessed at the applicable tax rate of 25% on its net income.
Foreign currency transactions
The functional currency of the Company is Renminbi (RMB).
Foreign currency transactions during the year are translated to the functional
currency at the approximate rates of exchange on the dates of transactions.
Monetary assets and liabilities denominated in foreign currencies at the balance
sheet date are translated at the approximate rates of exchange at that date.
Non-monetary assets and liabilities are translated at the rates of exchange
prevailing at the time the asset or liability was acquired. Exchange gains or
losses are recorded in the statement of operations.
The financial statements are translated into United States
Dollars (US$) using the closing rate method. The balance sheet items are
translated into US$ using the exchange rates at the respective balance sheet
dates. The capital and various reserves are translated at historical exchange
rates prevailing at the time of the transactions while income and expenses items
are translated at the average exchange rate for the year. All exchange
differences are recorded within equity.
No presentation is made that RMB amounts have been, or would
be, converted into US$ at the above rates. Although the Chinese government
regulations now allow convertibility of RMB for current account transactions,
significant restrictions still remain. Hence, such translations should not be
construed as representations that RMB could be converted into US$ at that rate
or any other rate.
The value of RMB against US$ and other currencies may fluctuate
and is affected by, among other things, changes in Chinas political and
economic conditions, Any significant revaluation of RMB may materially affect
the Companys financial condition in terms of US$ reporting.
Recent Accounting Pronouncements
In December 2010, FASB issued ASU 2010-29 Business Combinations
(Topic 805)-Disclosure of Supplementary Pro Forma Information for Business
Combinations. The objective of this Update is to address diversity in practice
about the interpretation of the pro forma revenue and earnings disclosure
requirements for business combinations. The amendments in this Update specify
that if a public entity presents comparative financial statements, the entity
should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of
the beginning of the comparable prior annual reporting period only. The
amendments also expand the supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. The amendments in this Update are
effective prospectively for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2010. Early adoption is permitted. Management is currently
evaluating the potential impact of ASU 2010-18 on the Companys consolidated
financial statements.
In February 2010, FASB issued ASU 2010-9 Subsequent Events
(Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU
2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An
entity that is an SEC filer is not required to disclose the date through which
subsequent events have been evaluated. This change alleviates potential
conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is
effective for interim and annual periods ending after June 15, 2010. The Company
does not expect the standard to have any impact on the Companys consolidated
financial position.
In October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangements, now codified under FASB ASC Topic
605, Revenue Recognition, (ASU 2009-13). ASU 2009-13 requires entities to
allocate revenue in an arrangement using estimated selling prices of the
delivered goods and services based on a selling price hierarchy. The amendments
eliminate the residual method of revenue allocation and require revenue to be
allocated using the relative selling price method. ASU 2009-13 should be applied
on a prospective basis for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. The Company does not expect the standard to have any impact
on the Companys consolidated financial position.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010
(CONSOLIDATED)(RESTATED)
AND 2009 (COMBINED)
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
We have audited the accompanying balance sheets of China
Shesays Medical Cosmetology Inc. and subsidiaries as of December 31, 2010
(consolidated) (restated) and 2009 (combined) and the related statements of
operations and comprehensive income, stockholders equity and cash flows for the
years ended December 31, 2010 (consolidated) (restated) and 2009 (combined).
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the 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. An audit
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 of the financial statements provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of China
Shesays Medical Cosmetology Inc. and subsidiaries as of December 31, 2010
(consolidated) (restated) and 2009 (combined), and the results of its operations
and its cash flows for the years ended December 31, 2010 (consolidated)
(restated) and 2009 (combined), in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial
statements, the accompanying consolidated financial statements have been
restated.
Date: March 25, 2011 (except for Notes 1, 2, 6, 8, 10, 13 and 16, and the
effects of the restatement discussed in Note 3, as to which the date is August 2, 2011)
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
("CHINA SHESAYS") AND
SUBSIDIARIES
BALANCE SHEETS
The accompanying notes are an integral part of these
consolidated financial statements
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
("CHINA SHESAYS") AND
SUBSIDIARIES
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
("CHINA SHESAYS") AND
SUBSIDIARIES
STATEMENTS OF CASH FLOWS
$354,255 and $5,847 of purchases of property and equipment
represent payables to vendors. These transactions are considered as major
non-cash transactions for the year ended December 31, 2010 and 2009,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
("CHINA SHESAYS") AND
SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these
consolidated financial statements
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
In the PRC restructuring transaction
described above, the Company gained indirect control of Sichuan Shesays and its
subsidiaries and Sichuan Shesays and its subsidiaries are considered VIEs of the
Company.
As required by ASC 810-10, the Company
performs a qualitative assessment to determine whether the Company is the
primary beneficiary of Sichuan Shesays and its subsidiaries which are identified
as VIEs of the Company. A quality assessment begins with an understanding of the
nature of the risks in the entity as well as the nature of the entitys
activities including terms of the contracts entered into by the entity,
ownership interests issued by the entity and the parties involved in the design
of the entity. The Companys assessment on the involvement with Sichuan Shesays
and its subsidiaries reveals that the Company has the
absolute power to direct the most significant activities that impact the economic performance of Sichuan Shesays and its subsidiaries. Under the accounting guidance, the Company is deemed to be the primary beneficiary of Sichuan Shesays and its
subsidiaries and the results of Sichuan Shesays and its subsidiaries are consolidated in the Company’s consolidated financial statements for financial reporting purposes. As of December 31, 2010, Sichuan Shesays and its subsidiaries had total
assets of $7,621,593 (restated) and total liabilities of $4,059,585 (restated). As of December 31, 2009, Sichuan Shesays had total assets of $3,863,832 and total liabilities of $1,313,712.
As of December 31, 2010, the Company agreed to waive the management fee to be payable by Sichuan Shesays and its subsidiaries for a period of 3 years from April 27, 2010 to April 26, 2013 due to lack of liquidity as Sichuan Shesays is launching a
new comprehensive hospital in Chengdu City, Sichuan Province.
Depreciation expenses for the years
ended December 31, 2010 and 2009 were $546,399 and $332,599 respectively.
As of December 31, 2010 and 2009, included in deposits paid for property and equipment are advance payment of renovation cost paid on behalf of the subsidiary which is still in the process of incorporation amounting to $1,482,309 and $0
respectively.
The tax effects of significant items
comprising deferred tax assets as of December 31, 2010 and 2009 are as follows:
The reconciliation of income taxes
computed at the statutory income tax rate to total income taxes for the years
ended December 31, 2010 and 2009 is as follows:
The Company’s PRC subsidiaries are required to make appropriation to the statutory surplus reserve at 10% of the after-tax net income annually until the total contributions equal to 50% of the entities’ registered capital. The statutory
reserve funds are restricted for use to set off against prior period losses, expansion of production and operations or for the increase in the registered capital of the respective companies. This reserve is therefore not available for distribution
except in liquidation.
During 2010 and 2009, the Company appropriated $278,282 and $151,284 respectively to the reserves funds based on its net income in accordance with the laws and regulations of the PRC.
The following table reconciles
reportable segment profit to the Companys consolidated income before taxes for
the years ended December 31, 2010 and 2009:
The following exhibits are filed with, and as a part of, this
Amendment No. 1 to the Original Annual Report on Form 10-K/A.
The exhibits which are filed with this report or which are
incorporated herein by reference are set forth in the Exhibit Index hereto.
* Filed herewith.
+ Indicates a management contract or compensatory plan or
arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Amendment
No. 1 to the Form 10-K/A to be signed on our behalf by the undersigned,
thereunto duly authorized.
* Filed herewith.
+ Indicates a management contract or compensatory plan or
arrangement.