UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
September 30,
2011
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to
________________
Commission File Number:
333-144888
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
|
01-0660195
|
(State or Other jurisdiction of Incorporation or
|
(I.R.S. Employer Identification No.)
|
Organization)
|
|
|
|
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)
|
(Zip Code)
|
(86) 028-8548-2277
(Registrants Telephone Number,
Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (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 [X] No [_]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer
[_] Non-accelerated filer [_] Smaller
reporting company [X]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of November 12, 2011, there were a total of 18,600,012
shares of the registrants common stock outstanding, $0.001 par value.
Table of Contents
|
Page
|
PART I - FINANCIAL INFORMATION
|
|
Item 1. Financial Statements.
|
1
|
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
|
2
|
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.
|
9
|
Item 4. Controls and Procedures.
|
9
|
|
|
PART II - OTHER INFORMATION
|
|
Item 1. Legal Proceedings.
|
11
|
Item 1A. Risks Factors.
|
11
|
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
|
23
|
Item 3. Defaults Upon Senior Securities.
|
23
|
Item 4. (Removed and Reserved).
|
23
|
Item 5. Other Information.
|
23
|
Item 6. Exhibits.
|
23
|
|
|
SIGNATURES
|
24
|
i
INTRODUCTION
In this Form 10-Q, unless indicated otherwise, references
to:
-
We, us, our and the Company refer to China SHESAYS Medical
Cosmetology Inc. (China SHESAYS) and its subsidiaries;
-
Securities Act refers to the Securities Act of 1933, as amended, and
Exchange Act refer to Securities Exchange Act of 1934, as amended;
-
China and PRC refer to the People's Republic of China;
-
RMB refers to Renminbi, the legal currency of China; and
-
U.S. dollar, $ and US$ refers to the legal currency of the United
States. For all U.S. dollar amounts reported, the dollar amount has been
calculated on the basis that $1 = RMB 6.591 for its December 31, 2010 audited
balance sheet, and $1 = RMB 6.3780 for its September 30, 2011 unaudited
balance sheet, which were determined based on the currency conversion rate at
the end of each respective period. The conversion rates of $1 = RMB 6.4966 is
used for the condensed consolidated statement of operations and comprehensive
income and consolidated statement of cash flows for the nine months ended
September 30, 2011, and $1= RMB 6.8164 is used for the condensed consolidated
statement of operations and comprehensive income and consolidated statement of
cash flows for the nine months ended September 30, 2010; both of which were
based on the average currency conversion rate for each respective
period
.
ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this report includes some statements
that are not purely historical fact and that are forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are contained principally in the sections titled
Risk Factors and Managements Discussion and Analysis of Financial Condition
and Results of Operations and are generally identifiable by use of the words
may, will, should, expect, anticipate, estimate, believe, intend
or project or the negative of these words or other variations on these words
or comparable terminology.
The forward-looking statements herein represent our
expectations, beliefs, plans, intentions or strategies concerning future events,
including, but not limited to those concerning our future financial performance,
our corporate strategy and operational plans. Our forward-looking statements are
based on our current expectations and beliefs concerning future developments,
and there can be no assurance that any projections or other expectations
included in any forward-looking statements will come to pass. Moreover, our
forward-looking statements are subject to various known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements, including:
(a) those risks and uncertainties related to general economic conditions in
China, including regulatory factors that may affect such economic conditions;
(b) whether we are able to manage our planned growth efficiently and operate
profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenue or obtain financing to sustain and grow our operations; and (d) whether
we are able to successfully fulfill our primary requirements for cash, which are
explained below under Liquidity and Capital Resources.
Except as required by applicable laws, we undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
iii
PART I FINANCIAL INFORMATION
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
(CHINA SHESAYS) AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
(CHINA SHESAYS) AND
SUBSIDIARIES
CONTENTS
|
Pages
|
Unaudited Condensed Consolidated Balance
Sheets as of September 30, 2011 and December 31, 2010 (Restated)
|
F-1
|
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income for the three and nine months ended September 30,
2011 and 2010
|
F-2
|
Unaudited Condensed Consolidated Statements
of Cash Flows for the nine months ended September 30, 2011 and 2010
|
F-3
|
Notes to Unaudited Condensed Consolidated Financial
Statements
|
F-4
|
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
("CHINA SHESAYS") AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
697,222
|
|
$
|
1,029,280
|
|
Restricted cash
|
|
391,972
|
|
|
-
|
|
Inventories, net
|
|
618,264
|
|
|
521,254
|
|
Due from stockholders
|
|
-
|
|
|
52,821
|
|
Other current
assets and prepaid expenses
|
|
1,164,172
|
|
|
626,877
|
|
Total Current Assets
|
|
2,871,630
|
|
|
2,230,232
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
|
|
8,386,829
|
|
|
6,008,198
|
|
|
|
|
|
|
|
|
DEFERRED TAX ASSETS
|
|
725,124
|
|
|
389,847
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
11,983,583
|
|
$
|
8,628,277
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
$
|
849,723
|
|
$
|
725,386
|
|
Notes payable
|
|
1,782,690
|
|
|
910,332
|
|
Deferred revenue
|
|
43,300
|
|
|
24,441
|
|
Other payables and accrued liabilities
|
|
2,407,208
|
|
|
1,757,975
|
|
Income tax payable
|
|
1,058,028
|
|
|
706,450
|
|
Sales tax payable and other taxes payable
|
|
8,239
|
|
|
13,487
|
|
Total Current Liabilities
|
|
6,149,188
|
|
|
4,138,071
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
China Shesays Stockholders' equity
|
|
|
|
|
|
|
Preferred stock,
$0.001 par value, 5,000,000 shares
|
|
|
|
|
|
|
authorized, none issued or outstanding
|
|
|
|
|
|
|
as of September 30, 2011 and December 31, 2010
|
|
-
|
|
|
-
|
|
Common stock, $0.001 par value, 65,849,200 shares
|
|
|
|
|
|
|
authorized, 18,600,012 shares issued as of
|
|
|
|
|
|
|
September 30, 2011 and December 31, 2010
|
|
18,600
|
|
|
18,600
|
|
Additional paid-in
capital
|
|
2,166,401
|
|
|
2,160,485
|
|
Retained earnings
|
|
|
|
|
|
|
Unappropriated
|
|
2,853,041
|
|
|
1,640,050
|
|
Appropriated
|
|
429,566
|
|
|
429,566
|
|
Accumulated other
comprehensive income
|
|
263,610
|
|
|
109,892
|
|
Total China Shesays Stockholders' Equity
|
|
5,731,218
|
|
|
4,358,593
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
103,177
|
|
|
131,613
|
|
Total Equity
|
|
5,834,395
|
|
|
4,490,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
|
$
|
11,983,583
|
|
$
|
8,628,277
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
F-1
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
("CHINA SHESAYS") AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September, 30
|
|
|
September, 30
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic surgery services
|
$
|
1,808,799
|
|
$
|
1,716,431
|
|
$
|
5,033,176
|
|
$
|
4,768,397
|
|
Professional
medical beauty services
|
|
1,992,726
|
|
|
1,199,960
|
|
|
6,058,016
|
|
|
3,688,854
|
|
Cosmetic dentistry services
|
|
54,789
|
|
|
139,043
|
|
|
111,177
|
|
|
371,001
|
|
Sales of goods
|
|
224,312
|
|
|
142,056
|
|
|
665,660
|
|
|
381,913
|
|
Total Revenue
|
|
4,080,626
|
|
|
3,197,490
|
|
|
11,868,029
|
|
|
9,210,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic surgery services
|
|
(335,660
|
)
|
|
(468,101
|
)
|
|
(925,915
|
)
|
|
(1,375,241
|
)
|
Professional
medical beauty services
|
|
(369,938
|
)
|
|
(237,218
|
)
|
|
(1,110,256
|
)
|
|
(593,145
|
)
|
Cosmetic dentistry services
|
|
(33,986
|
)
|
|
(48,964
|
)
|
|
(74,087
|
)
|
|
(127,274
|
)
|
Cost of goods sold
|
|
(89,894
|
)
|
|
(141,814
|
)
|
|
(246,522
|
)
|
|
(193,776
|
)
|
Depreciation
|
|
(128,450
|
)
|
|
(101,957
|
)
|
|
(377,999
|
)
|
|
(248,224
|
)
|
Total Cost of
Revenue
|
|
(957,928
|
)
|
|
(998,054
|
)
|
|
(2,734,779
|
)
|
|
(2,537,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
3,122,698
|
|
|
2,199,436
|
|
|
9,133,250
|
|
|
6,672,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
1,642,474
|
|
|
857,809
|
|
|
3,935,129
|
|
|
2,119,718
|
|
Advertising costs
|
|
1,291,847
|
|
|
520,612
|
|
|
2,941,036
|
|
|
1,205,331
|
|
Professional and consultant
fees
|
|
39,995
|
|
|
152,945
|
|
|
235,758
|
|
|
531,851
|
|
Depreciation
|
|
119,019
|
|
|
44,494
|
|
|
305,459
|
|
|
122,567
|
|
Total Operating Expenses
|
|
3,093,335
|
|
|
1,575,860
|
|
|
7,417,382
|
|
|
3,979,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
29,363
|
|
|
623,576
|
|
|
1,715,868
|
|
|
2,693,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
1,542
|
|
|
24
|
|
|
1,570
|
|
|
641
|
|
Interest income
|
|
250
|
|
|
1,809
|
|
|
796
|
|
|
4,399
|
|
Interest expenses
|
|
(30,862
|
)
|
|
(13,844
|
)
|
|
(56,734
|
)
|
|
(35,450
|
)
|
Imputed interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(247
|
)
|
Other expenses
|
|
(13,044
|
)
|
|
(20,654
|
)
|
|
(38,213
|
)
|
|
(95,623
|
)
|
Total Other Expenses, net
|
|
(42,114
|
)
|
|
(32,665
|
)
|
|
(92,581
|
)
|
|
(126,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM OPERATIONS BEFORE
TAXES
|
|
(12,751
|
)
|
|
590,911
|
|
|
1,623,287
|
|
|
2,566,758
|
|
Add (less):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
(78,478
|
)
|
|
(186,492
|
)
|
|
(438,212
|
)
|
|
(698,565
|
)
|
NET (LOSS) INCOME
|
|
(91,229
|
)
|
|
404,419
|
|
|
1,185,075
|
|
|
1,868,193
|
|
Net loss attributable to
noncontrolling interest
|
|
18,577
|
|
|
3,040
|
|
|
27,916
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME ATTRIBUTABLE TO CHINA SHESAYS
COMMON STOCKHOLDERS
|
|
(72,652
|
)
|
|
407,459
|
|
|
1,212,991
|
|
|
1,871,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign currency translation gain
|
|
62,897
|
|
|
74,071
|
|
|
153,718
|
|
|
90,047
|
|
Less: foreign currency
translation gain attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interest
|
|
(201
|
)
|
|
(54
|
)
|
|
(520
|
)
|
|
(54
|
)
|
Foreign currency translation
gain
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to China Shesays common
stockholders
|
|
62,696
|
|
|
74,017
|
|
|
153,198
|
|
|
89,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME
ATTRIBUTABLE
TO CHINA SHESAYS COMMON STOCKHOLDERS
|
$
|
(9,956
|
)
|
$
|
481,476
|
|
$
|
1,366,189
|
|
$
|
1,961,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share-basic and diluted
|
$
|
(0.01
|
)
|
$
|
0.02
|
|
$
|
0.07
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding during the
period
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic and diluted
|
|
18,600,012
|
|
|
16,377,056
|
|
|
18,600,012
|
|
|
15,428,576
|
|
The accompanying notes are an
integral part of these unaudited condensed consolidated financial
statements
F-2
CHINA SHESAYS MEDICAL COSMETOLOGY
INC.
("CHINA SHESAYS") AND SUBSIDIARIES
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September, 30
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
$
|
1,185,075
|
|
$
|
1,868,193
|
|
Adjusted to reconcile net income to cash
provided
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
Depreciation - cost of
service revenue
|
|
377,999
|
|
|
248,224
|
|
Depreciation - operating expenses
|
|
305,459
|
|
|
122,567
|
|
Deferred income taxes
|
|
(322,255
|
)
|
|
-
|
|
Loss on
disposal of property and equipment
|
|
235
|
|
|
8,769
|
|
Imputed interest
|
|
-
|
|
|
247
|
|
Changes in operating assets
and liabilities
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
Inventories, net
|
|
(78,149
|
)
|
|
(140,305
|
)
|
Other current assets and
prepaid expenses
|
|
(507,587
|
)
|
|
(1,115,989
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
Accounts payable
|
|
98,286
|
|
|
83,039
|
|
Deferred
revenue
|
|
17,713
|
|
|
5,430
|
|
Other payables and
accrued liabilities
|
|
772,279
|
|
|
332,512
|
|
Income
tax payable
|
|
321,997
|
|
|
641,845
|
|
Sales tax payable and
other taxes payable
|
|
(5,594
|
)
|
|
48,127
|
|
Net cash
provided by operating activities
|
|
2,165,458
|
|
|
2,102,659
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Increase in restricted cash
|
|
(391,972
|
)
|
|
-
|
|
Purchase of property and
equipment
|
|
(3,172,641
|
)
|
|
(3,402,876
|
)
|
Proceeds from disposal of property and
equipment
|
|
130,838
|
|
|
-
|
|
Due from stockholders
|
|
52,821
|
|
|
(52,821
|
)
|
Net cash used in
investing activities
|
|
(3,380,954
|
)
|
|
(3,455,697
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Bank loan borrowed
|
|
1,750,146
|
|
|
880,230
|
|
Bank loan repaid
|
|
(923,560
|
)
|
|
(42,789
|
)
|
Due to a related company
|
|
-
|
|
|
(20,618
|
)
|
Contribution by stockholders
|
|
5,916
|
|
|
50,182
|
|
Contribution by a minority
stockholder
|
|
-
|
|
|
149,296
|
|
Net cash provided by
financing activities
|
|
832,502
|
|
|
1,016,301
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH
|
|
50,936
|
|
|
19,507
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(332,058
|
)
|
|
(317,230
|
)
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
1,029,280
|
|
|
1,371,732
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
697,222
|
|
$
|
1,054,502
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest expenses
|
$
|
56,734
|
|
$
|
35,450
|
|
Cash paid for income tax
|
$
|
439,427
|
|
$
|
56,720
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES
$219,891 and $0 of purchases of property and equipment
represent payables to vendors. These transactions are considered as major
non-cash transactions for the nine months ended September 30, 2011 and 2010.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
F-3
CHINA SHESAYS MEDICAL COSMETOLOGY INC.
(CHINA SHESAYS) AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1
|
BASIS OF PRESENTATION
|
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) for interim financial information and rules
and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly the Company's financial position as of September 30,
2011 and December 31, 2010 (restated), the consolidated results of operations for the three and nine months ended September 30, 2011 and 2010 and consolidated cash flows for the nine months ended September 30, 2011 and 2010. The consolidated results for the
three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited financial statements and footnotes of the Company
for the years ended December 31, 2010 (restated) and 2009 appearing in the Companys Form 10-K/A as filed with the SEC on August 2, 2011 and Form S-1/A as filed with the SEC on November 3, 2011.
SN Strategies Corp. was incorporated under the laws of the State of Nevada on January 18, 2002.
Perfect Support Limited (Perfect Support) was incorporated in the British Virgin Islands (BVI) on January 15, 2010 as an investment holding company. Through its wholly owned subsidiary, Chengdu Boan Investment Management Co.,
Limited (Chengdu Boan), the Company is principally engaged in providing consultancy services on medical beauty services, cosmetic surgery services and cosmetic dentistry services in the Peoples Republic of China (PRC).
Chengdu Boan was incorporated in the PRC as a wholly-owned foreign enterprise on April 27, 2010. In accordance with the business permit, Chengdu Boans right of operation expires on April 27, 2040 and is renewable on expiry.
Sichuan Shesays Cosmetology Hospital Company Limited (Sichuan Shesays) was incorporated in the PRC on May 30, 2005 as a limited liability company. Sichuan Shesays is a clinic providing professional medical beauty services, cosmetic
surgery services and cosmetic dentistry services to customers in PRC. In accordance with its business permit, the Companys right of operation expires on May 30, 2025.
On April 27, 2010, Chengdu Boan entered into a series of contractual agreements (collectively known as the Restructuring Agreements and see note 7) with Sichuan Shesays and the stockholders of Sichuan Shesays in which Chengdu Boan assumed the
management of the business activities of Sichuan Shesays and its subsidiaries, if any, from time to time, Sichuan Shesays and its subsidiaries agreed to pay 100% of its residual return to Chengdu Boan. Through this arrangement, Sichuan Shesays and
its subsidiaries, if any, became contractually controlled subsidiaries of Chengdu Boan. Based on these contractual arrangements, the Company considers Sichuan Shesays and its subsidiaries to be Variable Interest Entities (VIEs) under ASC
810 "Consolidation of Variable Interest Entities, an Interpretation of ARB No.51 and Perfect Support through Chengdu Boan is the primary beneficiary of Sichuan Shesays and its subsidiaries (See note 7). Accordingly, Sichuan Shesays and its
subsidiaries should be consolidated under ASC 810. Immediately prior to the transaction completed on April 27, 2010, both the five directors who owned 90% of Perfect Support and the 100% stockholder of Chengdu Boan owned 100% of the registered
capital of Sichuan Shesays. As Perfect Support, Chengdu Boan, Sichuan Shesays and its subsidiaries were under common control, the contractual arrangements have been accounted for as a reorganization of entities under common control and Chengdu Boan
consolidates Sichuan Shesays and its subsidiaries.
F-4
On June 6, 2010, SN Strategies Corp., the Parent, China Shesays Medical Cosmetology Inc., the Merger Sub, a Nevada corporation, wholly owned by the Parent and incorporated on May 20, 2010, Perfect Support, known as the Acquired Sub, and the
stockholders of the Acquired Sub, entered into an Agreement and Plan of Merger pursuant to which the Merger Sub agreed to acquire 100% of the common stock of the Acquired Sub. In connection with the merger, the Merger Sub issued to the stockholders
of the Acquired Sub 10 shares of its common stock of $0.001 each amounting to $0.01 for 50,000 shares of the Acquired Subs common stock of $1 each amounting to $50,000 which represents 100% of the outstanding shares of the
Acquired Subs common stock. The 10 shares of common stock of the Merger Sub were subsequently converted to 13,500,012 shares of common stock of the Parent Company (the Reverse Merger).
Concurrent with the merger, the Merger Sub merged with and into the Parent at the effective time of the merger. The Merger Sub no longer exists, and the Parents name was subsequently changed to the Merger Subs name.
For financial reporting purposes, the merger has been accounted for as a recapitalization of the Parent whereby the historical financial statements and operations of the Acquired Sub become the historical financial statements of the Company, with no
adjustments to the carrying values of the assets and liabilities. Share and per share amounts reflect the effects of the recapitalization for all periods presented. In addition, the presentation for all periods includes equity transactions of the
Acquired Sub as adjusted for the effects of the recapitalization.
On July 8, 2010, Sichuan Shesays established a PRC limited liability company, Leshan Jiazhou Shesays Junge Cosmetology Company Limited (Leshan Jiazhou Shesays) with a registered capital of $736,594 to which Sichuan Shesays
contributed $265,984 in cash and a set of machinery totaling $470,610 in lieu of cash. Leshan Jiazhou Shesays is a clinic for providing professional medical beauty services and cosmetic surgery services to customers in PRC. In accordance
with its business permit, the Companys right of operation expires on June 17, 2014.
On August 18, 2010, Sichuan Shesays together with a third party established a PRC limited liability company, Yibin Shesays Junge Cosmetology Clinic Company Limited (Yibin Shesays) with a registered capital of $734,981. Sichuan
Shesays contributed $587,985 in cash to the registered capital of Yibin Shesays, representing 80% of the equity of Yibin Shesays. Yibin Shesays is a clinic for providing professional medical beauty services and cosmetic surgery services to
customers in PRC. In accordance with its business permit, the Companys right of operation expires on December 31, 2014.
On October 20, 2010, Sichuan Shesays established a PRC limited liability company, Zigong Shesays Junge Cosmetology Clinic Company Limited (Zigong Shesays) with a registered capital of $751,213. Sichuan Shesays contributed
$244,219 in cash and a set of machinery totaling $506,994 in lieu of cash. Zigong Shesays is a clinic for providing professional medical beauty services and cosmetic surgery services to customers in PRC. In accordance with its business
permit, the Companys right of operation expires on October 19, 2014.
China Shesays, Perfect Support, Chengdu Boan, Sichuan Shesays, Leshan Jiazhou Shesays, Yibin Shesays and Zigong Shesays are hereinafter referred to as (the Company).
NOTE
3
|
RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
|
On July 15, 2011, the Company determined that the Companys financial statements as of December 31, 2010 and for the year then ended should no longer be relied upon and should be restated as a result of certain errors contained therein
regarding the accounting for: (i) pre-operating expenses wrongly recorded as other current assets; (ii) under-provision of rental expenses for clinics not yet commenced business; (iii) income tax expense for the above items; and (iv) foreign
currency translation gain/loss for the above items.
As a result, the accompanying consolidated financial statements as of December 31, 2010 have been restated from the amounts previously reported. The information in the data table below represents only those balance sheet line items affected by the
restatements.
The following tables present the consolidated balance sheet and financial statement line items as reported herein that were impacted by the restatements:
F-5
|
|
As of December 31, 2010
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
previously
|
|
|
|
|
|
As
|
|
|
|
stated
|
|
|
Adjustments
|
|
|
restated
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet accounts
impacted by restatements:
|
|
|
|
|
|
|
|
Other current assets and
prepaid expenses
|
$
|
1,446,837
|
|
$
|
(819,960
|
)
|
$
|
626,877
|
|
Total current assets
|
|
3,050,192
|
|
|
(819,960
|
)
|
|
2,230,232
|
|
Deferred tax assets
|
|
184,857
|
|
|
204,990
|
|
|
389,847
|
|
Total assets
|
|
9,243,247
|
|
|
(614,970
|
)
|
|
8,628,277
|
|
Other payables and accrued
liabilities
|
|
1,554,162
|
|
|
203,813
|
|
|
1,757,975
|
|
Total current liabilities
|
|
3,934,258
|
|
|
203,813
|
|
|
4,138,071
|
|
Retained earnings - unappropriated
|
|
2,438,376
|
|
|
(798,326
|
)
|
|
1,640,050
|
|
Accumulated other comprehensive income
|
|
130,349
|
|
|
(20,457
|
)
|
|
109,892
|
|
Total China Shesays
stockholders' equity
|
|
5,177,376
|
|
|
(818,783
|
)
|
|
4,358,593
|
|
Total equity
|
|
5,308,989
|
|
|
(818,783
|
)
|
|
4,490,206
|
|
Total liabilities and
stockholders' equity
|
|
9,243,247
|
|
|
(614,970
|
)
|
|
8,628,277
|
|
|
|
NOTE 4
|
PRINCIPLES OF
CONSOLIDATION
|
The accompanying unaudited condensed consolidated financial
statements for the three and nine months ended September 30, 2011 and 2010
include the financial statements of China Shesays, its wholly owned
subsidiaries, Perfect Support and Chengdu Boan and the contractually controlled
affiliate, Sichuan Shesays and its wholly owned subsidiaries, Leshan Jiazhou
Shesays , Zigong Shesays and 80% owned subsidiary, Yibin Shesays, The
noncontrolling interest represents the noncontrolling stockholders 20%
proportionate share of the results of Yibin Shesays.
All significant inter-company balances and transactions have
been eliminated in consolidation.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidation financial statements and the reported amounts of revenue and
expenses during the reporting period.
Variable interest entities
Current PRC laws and regulations require any foreign entities
that invest directly in the medical services industry to have direct operations
in the medical industry outside of China. In addition, foreign entity is not
allowed in China to setup wholly-owned medical institute although the foreign
entity is permitted to set a joint venture medical institute at maximum of 70%.
The Company does not currently directly operate medical
services outside of China and cannot qualify under PRC regulations before the
Company commences any such operations outside of China. While the Companys
indirect PRC operating subsidiaries are eligible for the required licenses for
providing medical services in China and some of the indirect PRC operating
subsidiaries have obtained such licenses, the Company has been using and is
expected to continue to use the PRC operating affiliates and their subsidiaries.
Management estimated that the risk of loss in respect of the
Companys current ownership structure or the contractual arrangements is remote.
F-6
|
|
NOTE 6
|
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
|
In September 2011, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80) Disclosures about an Employers
Participation in a Multiemployer Plan. The amendments in this Update require additional disclosures about an employer's participation in a multiemployer plan. The amendments in this Update are effective for annual periods for fiscal years
ending after December 15, 2011, with early adoption permitted. Management currently expects that this ASU will not have a material impact on the Companys consolidated financial statements.
In September 2011, FASB issued ASU 2011-08 Intangibles-Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it
is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that
it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual
and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. Management currently expects that this ASU will not have a material impact on the Companys consolidated financial
statements.
In July 2011, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance
for Doubtful Accounts for Certain Health Care Entities, which requires that certain health care entities change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service
revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). In addition, the amendments also require enhanced disclosure about policies for recognizing revenue and assessing bad debts
and disclosures of qualitative and quantitative information about changes in the allowance for doubtful accounts. This ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early
adoption permitted. Management currently expects that this ASU will not have a material impact on the Companys consolidated financial statements.
Other than listed above, there have been no significant changes in accounting pronouncements as compared to the recent accounting pronouncements described in our audited consolidated financial statements included in our Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2010.
NOTE 7
|
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;
|
F-7
|
(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. Under the PRC Property Rights Law, the Company is required to register with the relevant government authority the security interests on the equity interests in Sichuan Shesays granted to the Company under the equity pledge agreements.
The Company is currently in the process of registering these security interests. Until the Company finalizes such registration, the Company may not be able to enforce the security interests granted under the equity pledge agreements.
|
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 the Company in the process of registering its equity pledge agreements, the Company faces the potential risk of not being able to enforce the security interests granted under the equity pledge agreements until such registration is complete.
Consequently, if Sichuan Shesays and its equity owners were to breach their obligations under the equity pledge agreement or other contractual arrangement agreements prior to the Company finalizing the registration of such security interests, the
Company could lose its assets and may have to de-consolidate its PRC operations if the Company lose control over Sichuan Shesays.
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.
F-8
Securities purchase agreement
On November 5, 2010, the Company completed on a private placement financing pursuant to a Securities Purchase Agreement (the Purchase Agreement) with a group of accredited investors (investors). The Company received
$1,200,000 from the investors (as defined under Rule 501 (a) of Regulation D promulgated under the Securities Act) for an issue of 600,000 shares of restricted common stock of the Company at $2 each.
Under the Purchase Agreement, if the Companys after-tax net income for the fiscal year ending December 31, 2011 is less than the Companys after-tax net income for the fiscal year ended December 31, 2010, or if any Chinese governmental
agency challenges or otherwise takes any action that adversely affects the Companys listing of securities and the Company is unable to address such adverse effect to the reasonable satisfaction of the investors, then the Company must pay to
each investor, as liquidated damages, an amount equal to that investors purchase price plus compound interest at a rate of 8%. In addition, for a period of three years after the Closing, if the Company issues any shares of common stock for
less than $2 per share or for no consideration (the Additional Shares), then the per share price under the Purchase Agreement shall be reduced to the lowest price per share at which such Additional Shares are issued, granted or sold.
As of September 30, 2011, the Company believes that it is not probable that the Company will issue any shares of common stock at a price less than $2 per share; the Companys after-tax net income for the fiscal year ending December 31, 2011
will be less than the Companys after-tax net income for the fiscal year ended December 31, 2010; and there will be Chinese governmental agency challenges or otherwise takes any action that adversely affects the Companys listing of
securities. Accordingly, the Company has not accrued for any liquidated damages.
Make good escrow
In connection with the private placement, a majority stockholder of the Company together with the Company entered into a make good escrow agreement with the investors, pursuant to which a total of 600,000 shares of common stock of the Company owned
by the majority stockholder were placed with an escrow agent to secure the Companys obligation under the Purchase Agreement. If the Company fails to achieve $6,400,000 net after tax income for the fiscal year ending December 31, 2011, the
majority stockholder of the Company is obligated to transfer 600,000 shares of common stock of the Company to the investors as additional consideration under the private placement.
Warrants
In November 2010, the Company issued a warrant to a financial advisor to purchase 48,000 shares of common stock of the Company at an exercise price of $2 per share. The warrant is exercisable any time from the date of issue to June 2012.
NOTE 9
|
(LOSSES) EARNINGS PER SHARE
|
Basic (losses) earnings per share are computed by dividing income available to stockholders by the weighted average number of shares outstanding during the period. Diluted (losses) earnings per share is computed similar to basic (losses) earnings
per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the potential shares had been issued and if the additional shares were diluted. For the three and nine months period
ended September 30, 2011, all 48,000 outstanding warrants have been excluded from the calculation of diluted (losses) earnings per share since their effect was anti-dilutive. For the three and nine months ended September 30, 2010, there were no
potentially dilutive securities.
NOTE 10
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
|
For purposes 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. Bank deposits held as collateral for the Companys bank loans are reported
as restricted cash and are not included with cash or cash equivalents on the balance sheet until the lien against such bank deposits has been released. As of September 30, 2011 and December 31, 2010, restricted cash amounted to $391,972 and
$0, respectively.
F-9
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Medical materials
|
$
|
469,326
|
|
$
|
386,634
|
|
Finished goods merchandise
|
|
148,938
|
|
|
134,620
|
|
Less: Provision for obsolescence
|
|
-
|
|
|
-
|
|
|
$
|
618,264
|
|
$
|
521,254
|
|
|
|
NOTE 12
|
OTHER CURRENT ASSETS AND PREPAID EXPENSES
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Other receivables
|
$
|
664,477
|
|
$
|
79,290
|
|
Advances to suppliers
|
|
222,501
|
|
|
98,574
|
|
Prepaid expenses
|
|
277,194
|
|
|
449,013
|
|
|
$
|
1,164,172
|
|
$
|
626,877
|
|
|
|
NOTE 13
|
PROPERTY AND EQUIPMENT, NET
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Buildings
|
$
|
115,538
|
|
$
|
111,804
|
|
Leasehold improvements
|
|
1,468,555
|
|
|
1,314,016
|
|
Medial equipment
|
|
3,528,593
|
|
|
3,319,221
|
|
Motor vehicles
|
|
167,190
|
|
|
290,751
|
|
Office equipment
|
|
605,527
|
|
|
582,302
|
|
Deposits paid for property and equipment
|
|
4,300,516
|
|
|
1,482,309
|
|
|
|
10,185,919
|
|
|
7,100,403
|
|
Less: Accumulated depreciation
|
|
(1,799,090
|
)
|
|
(1,092,205
|
)
|
|
$
|
8,386,829
|
|
$
|
6,008,198
|
|
Depreciation expenses for the three and nine months ended
September 30, 2011 and 2010 were $247,469, $146,451, $683,458 and $370,791
respectively.
As of September 30, 2011 and December 31, 2010, included in
deposits paid for property and equipment are advance payments of renovation
costs paid on behalf of the subsidiary which is still in the process of
incorporation amounting to $4,300,516 and $1,482,309 respectively.
Notes payable consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Note payable to a bank, interest rate of 6%
per annum, guaranteed by a third party, a director and his spouse, due in
March 2012
|
$
|
940,734
|
|
$
|
-
|
|
Note payable to a bank, interest rate of 6% per annum,
guaranteed by a third party, a director, his spouse and charges on the
Companys restricted cash, due in April 2012
|
|
371,589
|
|
|
-
|
|
Note payable to a bank, interest rate of
7.572% per annum, guaranteed by a third party, a director and his spouse,
due in June 2012
|
|
470,367
|
|
|
-
|
|
Note payable to a bank, interest rate of 6%
per annum, guaranteed by a third party, a director and his spouse, due in
February 2011
|
|
-
|
|
|
910,332
|
|
|
$
|
1,782,690
|
|
$
|
910,332
|
|
Interest expense paid for the three and nine months ended
September 30, 2011 and 2010 were $30,862, $13,844, $56,734 and $35,450
respectively.
F-10
The guarantee provided by the third party is secured by
buildings of the Company with net book value totaling $99,853 as of September
30, 2011. Fees paid to the third party guarantor for the three and nine months
ended September 30, 2011 and 2010 was $10,755, $0, $31,863 and $17,650
respectively.
NOTE 15
|
OTHER PAYABLES AND ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Other payable
|
|
$
|
336,427
|
|
$
|
599,724
|
|
|
Deposits from customers
|
|
|
372,294
|
|
|
231,390
|
|
|
Deposits from membership reward
program
|
|
|
321,750
|
|
|
277,010
|
|
|
Accrued liabilities
|
|
|
1,376,737
|
|
|
649,851
|
|
|
|
|
$
|
2,407,208
|
|
$
|
1,757,975
|
|
Deposits from customers represent money received in advance for
cosmetic surgery, beauty and other related services.
Included in other payables are equipment and renovation costs
totaling $152,520 and $363,333 owed to suppliers as of September 30, 2011 and
December 31, 2010 respectively.
The Company is subject to income taxes on an entity basis on
income arising in or derived from the tax jurisdiction in which each entity is
domiciled.
China Shesays was incorporated in the United States and has
incurred operating loss as for income tax purposes for the nine months ended
September 30, 2011 and 2010. As of September 30, 2011, China Shesays had federal
and state net operating loss carry forwards of approximately $177,000 which can
be used to offset future federal income tax. The federal and state net operating
loss carry forwards expire at various dates through 2030. Deferred tax assets
resulting from the net operating losses are reduced by a valuation allowance,
when, in the opinion of management, utilization is not reasonably assured.
Perfect Support was incorporated in the BVI and under current
laws of the BVI, income earned is not subject to income tax.
Chengdu Boan, Sichuan Shesays, Leshan Jiazhou Shesays, Yibin
Shesays and Zigong Shesays were incorporated in the PRC and are subject to PRC
income tax which is computed according to the relevant laws and regulations in
the PRC. The applicable tax rate is 25%. Tax losses, if any, are allowed to
carry forward to offset future net income for five years. As of September 30,
2011, the Companys PRC subsidiaries have total tax losses of $410,751 which
will be expired on December 31, 2015. Deferred tax assets resulting from the net
operating losses are reduced by a valuation allowance, when, in the opinion of
management, utilization is not reasonably assured.
The income tax expenses for the three and nine months ended
2011 and 2010 are summarized as follows:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current PRC
|
$
|
243,555
|
|
$
|
186,492
|
|
$
|
760,467
|
|
$
|
698,565
|
|
Deferred - PRC
|
|
(165,077
|
)
|
|
-
|
|
|
(322,255
|
)
|
|
-
|
|
|
$
|
78,478
|
|
$
|
186,492
|
|
$
|
438,212
|
|
$
|
698,565
|
|
F-11
The tax effects of significant items comprising deferred tax
assets as of September 30, 2011 and December 31, 2010 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(Restated)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Property related, net
|
$
|
(28,152
|
)
|
$
|
67,034
|
|
Deferred revenue
|
|
114,348
|
|
|
42,981
|
|
Pre-operating expenses
|
|
348,211
|
|
|
204,990
|
|
Advances to suppliers
|
|
(11,758
|
)
|
|
-
|
|
Accrued liabilities
|
|
302,475
|
|
|
57,724
|
|
Tax losses
|
|
102,687
|
|
|
17,118
|
|
|
|
827,811
|
|
|
389,847
|
|
Valuation allowance for deferred tax assets
|
|
(102,687
|
)
|
|
-
|
|
|
$
|
725,124
|
|
$
|
389,847
|
|
The reconciliation of income taxes computed at the statutory
income tax rate to total income taxes for the three and nine months ended
September 30, 2011 and 2010 is as follows:
|
|
For the three months
|
|
|
For the nine months
|
|
|
|
ended September 30,
|
|
|
ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
$
|
(12,751
|
)
|
$
|
590,911
|
|
$
|
1,623,287
|
|
$
|
2,566,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed at the PRC tax rate of 25%
|
|
($3,188
|
)
|
$
|
147,728
|
|
$
|
405,822
|
|
$
|
641,689
|
|
Over-provision in prior year
|
|
-
|
|
|
-
|
|
|
(302,842
|
)
|
|
-
|
|
Non-deductible expenses
|
|
17,206
|
|
|
38,764
|
|
|
92,325
|
|
|
56,876
|
|
Others
|
|
(38,227
|
)
|
|
-
|
|
|
140,220
|
|
|
-
|
|
Valuation allowance change
|
|
102,687
|
|
|
-
|
|
|
102,687
|
|
|
-
|
|
|
$
|
78,478
|
|
$
|
186,492
|
|
$
|
438,212
|
|
$
|
698,565
|
|
On November 12, 2010, the Company issued 48,000 warrants with
an exercise price of $2 per share in conjunction with the issuance of 600,000
shares of common stock in a private placement to a professional service provider
pursuant to a Financial Advisory Service Agreement entered into on June 12,
2010. The warrants are exercisable at any time from June 12, 2010 to June 12,
2012. As of September 30, 2011, no warrants have been exercised or cancelled.
The Company evaluates these warrants provided in connection
with the private placement in accordance with ASC 815 and has concluded that
equity classification is appropriate for these warrants, due to the fact that
these warrants are required to be physically settled in shares of the common
stock of the Company and there are no provisions that could require net-cash
settlement. Accordingly, the fair value of the warrants of $7,911 was recognized
as additional paid-in capital and as a reduction of additional paid-in capital
at the date of grant. The fair value of the warrants was estimated using
Black-Scholes Option Pricing Model.
The following assumptions are used to calculate the fair value
of the warrants:
Market price and estimated fair value of common stock
|
$
|
2.00
|
|
Exercise price
|
$
|
2.00
|
|
Remaining contractual life (years)
|
|
1.6
|
|
Dividend yield
|
|
-
|
|
Expected volatility
|
|
16.25%
|
|
Risk-free interest rate
|
|
0.45%
|
|
Expected volatility is based primarily on historical
volatility. Historical volatility was computed using daily pricing observations
for recent periods that correspond to the term of the warrants. The Companys
management believes this method produces an estimate that is representative of
the expectations of future volatility over the expected term of these warrants.
The Company has no reason to believe future volatility over the expected
remaining life of these warrants will likely differ materially from historical
volatility. The expected life is based on the remaining term of the warrants.
The risk-free interest rate is based on U.S. Treasury securities according to
the remaining term of the financial instruments.
F-12
|
|
NOTE 1
8
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
(a)
|
Capital commitments
|
|
|
|
|
|
As of September 30, 2011 and December 31, 2010, the
Company had commitments for capital expenditures on acquisition of
property and equipment amounting to approximately $1,871,000 and
$1,610,000, respectively.
|
|
|
|
|
(b)
|
Operating lease commitments
|
|
|
|
|
|
The Company leases clinic spaces and staff quarters from
third parties under fifty-three separate operating leases which expire
between October 20, 2011 and January 1, 2020.
|
|
|
|
|
|
As of September 30, 2011, the Company had outstanding
commitments with respect to the above operating leases, which are due as
follows:
|
For the fiscal years ending September 30,
|
|
|
|
2012
|
$
|
1,781,784
|
|
2013
|
|
1,739,408
|
|
2014
|
|
1,723,821
|
|
2015
|
|
1,635,840
|
|
2016
|
|
771,415
|
|
Thereafter
|
|
269,611
|
|
|
$
|
7,921,879
|
|
|
(c)
|
Loss contingencies
|
|
|
|
|
|
The Company has not recorded an accrued loss contingency
under ASC 450 in connection with the contingent liability related to the
warranties made to investors in the private placement. Accounting for loss
contingencies pursuant to ASC 450 involves the existence of a condition,
situation or set of circumstances involving uncertainty as to possible
loss that will ultimately be resolved when one or more future event(s)
occur or fail to occur. Additionally, accounting for a loss contingency
requires management to assess each event as probable, reasonably possible
or remote. Probable is defined as the future event or events are likely to
occur. Reasonably possible is defined as the chance of the future event or
events occurring is more than remote but less than probable, while remote
is defined as the chance of the future event or events occurring is
slight. An estimated loss in connection with a loss contingency shall be
recorded by a charge to current operations if both of the following
conditions are met: first, the amount can be reasonably estimated; and
second, the information available prior to issuance of the financial
statements indicates that it is probable that a liability has been
incurred at the date of the financial statements.
|
|
|
|
|
|
The Company has assessed the contingent liability related
to the warranties made to investors in our private placement in accordance
with ASC 450 (1) for a period of three years, if the Company issues any
shares of Common Stock for less than $2.00 per share or for no
consideration (the Additional Shares), then the per share price under
the Securities Purchase Agreement shall be reduced to the lowest price per
share at which such Additional Shares are issued, granted or sold
(Guarantee A); and (2) if the after-tax net income for the fiscal year
ending December 31, 2011 is less than the after- tax net income for the
fiscal year ending December 31, 2010, or if any Chinese government agency
challenges or otherwise takes any action that adversely affects the
listing of securities and the Company is unable to address such adverse
effect to the reasonable satisfaction of the investors, then the Company
must pay to each investor, as liquidated damages, an amount equal to that
investors purchase price plus compound interest at a rate of 8%
(Guarantee B).
|
|
|
|
|
|
The Company has determined that the occurrence of the
contingency of Guarantee A is remote. The Company expects the operating
cash flows are adequate to finance the daily operations and the Company is
not required to issue new shares at a price below $2.00. However, the
Company may issue new shares at a price below $2.00, when the Company is
facing financial distress. Since the Company is unable to estimate the
chance of violating Guarantee A, the Company did not disclose the
estimated loss. The Company did not violate Guarantee A as of the date of
this report. The maximum potential amount of future estimated loss
pertinent to Guarantee A is $1,200,000.
|
The Company has determined that the occurrence of the
contingency of Guarantee B is reasonably possible, since the Companys
performance is subjected to impact of economic factors and many other risk
factors. In accordance with ASC 450, the Company is required to record a charge
to current operations. However, since the Company is unable to estimate the
chance of having the after-tax net income for the fiscal year ending December
31, 2011 is less than the after-tax net income for the fiscal year ending
December 31, 2010 or those challenges stated above, the Company did not disclose
the estimated loss. The Company did not violate Guarantee B as of the date of
this report. Guarantee B did not provide the limitation to the maximum potential
future payments and it stated that the Company is required to pay investors for
violation of Guarantee B, liquidated damages, an amount equal to that investors
purchase price ($1,200,000) plus compound interest at a rate of 8%.
F-13
|
|
NOTE 19
|
DEFINED CONTRIBUTION RETIREMENT PLANS
|
As stipulated by the regulations of the PRC government, companies operating in the PRC have defined contribution retirement plans for their employees. The PRC government is responsible for the pension liability to these retired employees. The
Company is required to make specified contributions to the state-sponsored retirement plan based on the basic salary cost of their staff. Each of the employees of the PRC subsidiaries is also required to contribute certain percentage of his/her
basic salary.
Contributions to defined contribution retirement plan for the three and nine months periods ended September 30, 2011 and 2010 were $83,323, $43,936, $224,130 and $118,155 respectively.
NOTE 20
|
RELATED PARTY TRANSACTIONS
|
As of September 30, 2011 and December 31, 2010, certain stockholders owed the Company $0 and $52,821, respectively, which are unsecured, interest-free and repayable on demand. These amounts were advanced prior to the Reverse Merger and were
fully repaid in January 2011.
During the three and nine months ended September 30, 2011 and 2010, total imputed interest expenses recorded as additional paid-in capital amounted to $0, $0, $0 and $247 respectively.
NOTE 21
|
CONCENTRATIONS AND RISKS
|
As of September 30, 2011 and December 31, 2010, 100% of the Companys assets were located in the PRC and Hong Kong and 100% of the Companys revenues were derived from customers located in the PRC.
As of September 30, 2011 and December 31, 2010, financial instruments which potentially expose the Company to concentrations of credit risk are cash and cash equivalents of $638,963 and $925,639 respectively. The Company performs ongoing
evaluations of its cash position and credit evaluations to ensure collections and minimize losses.
These unaudited condensed consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for
the foreseeable future.
As of September 30, 2011, the Company had a working capital deficit of $3,277,558 due to the significant investment in property, plant and equipment.
As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the
Company's ability to continue as a going concern.
F-14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Business Overview
Overview
We are a Nevada holding company operating in the cosmetology
industry. Substantially all of our operations are conducted in China through
Chengdu BOAN Investment Management Co., Ltd (BOAN), our wholly-owned
subsidiary in China, and through our contractual arrangements with several of
our consolidated affiliated entities in China, including Sichuan SHESAYS
Cosmetology Hospital Co., Ltd. (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 such as cosmetic surgery, cosmetic
dermatology, cosmetic dentistry and cosmetic Traditional Chinese Medicine
(TCM). Services provided by the cosmetic surgery department include eye
shaping, facial contour, rhinoplasty, face shaping, wrinkles elimination, breast
surgery,
chiloplasty, liposuction slimming, ear reshaping,
gynecology/male plastic surgery. The cosmetic dermatology department provides
services such as laser depilation, acne/pock removal, facelift and wrinkle
decrease, laser whitening, pore minimizing, skin rejuvenation. 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 invisible orthodontics.
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 service, such as to dispel
freckle, reduce 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" as 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 hospital, a comprehensive
cosmetology hospital in Chengdu.
For three months ended September 30, 2011, we generated
revenue of $4.1 million, which represents a growth of 27.6% compared to $3.2
million for three months ended September 30, 2010. This increase in revenue is
attributed to the growing sales and service fee income generated from our
headquarter hospital and three new clinics in Leshan, Yibin and Zigong, our
continued efforts to launch new services to meet market demand, as well as four
major on-site promotional programs at our headquarter hospital in the third
quarter of 2011. During the third quarter of 2011, a total of 8,213 customers
visited our hospital and clinics, compared to 7,046 in the third quarter of
2010, and we provided services to 5,132 and 4,003 customers in the third quarter
of 2011 and 2010, respectively. Our net income decreased 117.8% from $0.4
million for the three months ended September 30, 2010 to net loss of $72,652 for
the three months ended September 30, 2011. The decrease in net income was mainly
due to the increase for start-up costs of our new flagship hospital in Chengdu
City and marketing and advertising costs in the three months ended September 30,
2011.
Our business operates in China and the financial statements of
our PRC subsidiaries or variable interest entities are denominated in RMB. 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. For three months
ended September 30, 2011 and 2010, we recorded foreign currency translation gain
of $62,897 and $74,071 respectively.
2
Results of Operations
Three Months Ended September 30, 2011, Compared to the Three
Months Ended September 30, 2010:
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Change
|
|
Total revenue
|
$
|
4,080,626
|
|
$
|
3,197,490
|
|
$
|
883,136
|
|
|
27.6%
|
|
Cost of revenue
|
|
957,928
|
|
|
998,054
|
|
|
(40,126
|
)
|
|
-4.0%
|
|
Gross profit
|
|
3,122,698
|
|
|
2,199,436
|
|
|
923,262
|
|
|
42.0%
|
|
Operating expenses
|
|
3,093,335
|
|
|
1,575,860
|
|
|
1,517,475
|
|
|
96.3%
|
|
Total other income (expenses)
|
|
(42,114
|
)
|
|
(32,665
|
)
|
|
(9,449
|
)
|
|
28.9%
|
|
(Loss) income from operations before taxes
|
|
(12,751
|
)
|
|
590,911
|
|
|
(603,662
|
)
|
|
-102.2%
|
|
Income tax expenses
|
|
(78,478
|
)
|
|
(186,492
|
)
|
|
108,014
|
|
|
-57.9%
|
|
Net (loss) income attributable to CHINA SHESAYS common
stockholders
|
|
(72,652
|
)
|
|
407,459
|
|
|
(480,111
|
)
|
|
-117.8%
|
|
Foreign currency translation gain
|
|
62,897
|
|
|
74,071
|
|
|
(11,174
|
)
|
|
-15.1%
|
|
Comprehensive (loss) income attributable to CHINA SHESAYS
common stockholders
|
|
(9,956
|
)
|
|
481,476
|
|
|
(491,432
|
)
|
|
-102.1%
|
|
Total Revenue
Total revenue for the three months ended September 30, 2011
increased by approximately $0.9 million or 27.6% to $4.1 million as compared to
$3.2 million for the three months ended September 30, 2010. Our revenue growth
during the period was driven by the growing sales and service fee income
generated from headquarter hospital and three new clinics in Leshan, Yibin and
Zigong, continued efforts to launch new services to meet market demand, as well
as marketing and promotional programs at our headquarter hospital in the third
quarter of 2011. We increased prices of 10 of our popular services by 31.0% on
average and introduced two new professional medical beauty services which
generated incremental revenue growth during the period. During the third quarter
of 2011, a total of 8,213 customers visited our hospital and clinics, compared
to 7,046 in the third quarter of 2010, and we provided services to 5,132 and
4,003 customers in the third quarter of 2011 and 2010, respectively.
REVENUE
|
|
Three Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
Cosmetic surgery services
|
$
|
1,808,799
|
|
$
|
1,716,431
|
|
$
|
92,368
|
|
|
5.4%
|
|
Professional medical beauty services
|
|
1,992,726
|
|
|
1,199,960
|
|
|
792,766
|
|
|
66.1%
|
|
Cosmetic dentistry services
|
|
54,789
|
|
|
139,043
|
|
|
(84,254
|
)
|
|
-60.6%
|
|
Sales of goods
|
|
224,312
|
|
|
142,056
|
|
|
82,256
|
|
|
57.9%
|
|
Total revenue
|
$
|
4,080,626
|
|
$
|
3,197,490
|
|
$
|
883,136
|
|
|
27.6%
|
|
Compared to the same period in 2010, cosmetic surgery service
revenue increased 5.4% to $1.8 million, professional medical beauty service
revenue increased 66.1% to $2.0 million, cosmetic dentistry service revenue
decreased 60.6% to $55 thousand and sales of goods increased 57.9% to $224
thousand. We have been focusing on professional medical beauty service by
increasing marketing efforts and advertising expenses, as well as on-site
promotional activities. During the third quarter of 2011, we continued to
decrease our marketing efforts on our dentistry service compared to same period
last year. In addition, our dentistry service faced strong competition in
Sichuan from other clinics, which provided comprehensive dentistry services with
very competitive prices.
|
|
Three Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
Sichuan Shesays
|
$
|
3,547,035
|
|
|
86.9%
|
|
$
|
2,977,426
|
|
|
93.1%
|
|
Leshan Jiazhou Shesays
|
|
225,534
|
|
|
5.5%
|
|
|
157,518
|
|
|
4.9%
|
|
Yibin Shesays
|
|
195,621
|
|
|
4.8%
|
|
|
62,546
|
|
|
2.0%
|
|
Zigong Shesays
|
|
112,436
|
|
|
2.8%
|
|
|
-
|
|
|
-
|
|
Total revenue
|
$
|
4,080,626
|
|
|
100.0%
|
|
$
|
3,197,490
|
|
|
100.0%
|
|
3
For the third quarter of 2011, revenue of our current
headquarter hospital increased by 19.1% to $3.5 million, from $3.0 million in
the third quarter of 2010. Three new clinics launched in the second half of 2010
contributed approximately $0.6 million to revenue.
Cost of Revenue
Our cost of revenue for the three months ended September 30,
2011 was $1.0 million, a slight decrease of 4.0% compared to the three months
ended September 30, 2010. The slight decrease in cost of revenue was due to our
efforts to promote services with lower cost and the increased price of 10 of our
popular services during the period. Cost of revenue as a percentage of revenue
decreased from 31.2% to 23.5% as compared to the prior comparative period. Cost
of revenue for cosmetic surgery services decreased by $0.1 million or 28.3% from
$0.5 million to $0.3 million. Cost of revenue for professional medical beauty
services increased by $0.2 million or 55.9% from $0.2 million to $0.4 million.
In the three months ended September 30, 2011, we focused on marketing of
cosmetic surgery services and medical beauty services which utilize less
products compared with other services and therefore, have a lower overall cost
of sales as a percentage to revenue compared to the same period of the previous
year. Cost of revenue for cosmetic dentistry services decreased from $48,964 to
$33,986 as a result of decreased sales of dentistry services. Cost of goods sold
decreased from $141,814 to $89,894 although sales generated by goods sold
increased 57.9% as a result of adjusted products portfolio to focus on higher
margin goods in the third quarter of 2011.
COST OF REVENUE
|
|
Three Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
(Increase)/Decrease
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Cosmetic surgery services
|
$
|
(335,660
|
)
|
$
|
(468,101
|
)
|
$
|
132,441
|
|
|
-28.3%
|
|
Professional medical beauty services
|
|
(369,938
|
)
|
|
(237,218
|
)
|
|
(132,720
|
)
|
|
55.9%
|
|
Cosmetic dentistry services
|
|
(33,986
|
)
|
|
(48,964
|
)
|
|
14,978
|
|
|
-30.6%
|
|
Sales of goods
|
|
(89,894
|
)
|
|
(141,814
|
)
|
|
51,920
|
|
|
-36.6%
|
|
Depreciation
|
|
(128,450
|
)
|
|
(101,957
|
)
|
|
(26,493
|
)
|
|
26.0%
|
|
Total cost of revenue
|
$
|
(957,928
|
)
|
$
|
(998,054
|
)
|
$
|
40,126
|
|
|
-4.0%
|
|
Gross Profit
As a result of the above, we achieved gross profit of
approximately $3.1 million for the three months ended September 30, 2011,
compared to approximately $2.2 million for the same period of the previous year,
representing an approximately 42.0% period to period increase. The increase in
gross profit was mainly due to the increase in total revenue and slight decrease
in cost of revenue. Our overall gross profit margin as a percentage of revenue
was 76.5% for the three months ended September 30, 2011 compared to 68.8% of the
same period of the previous year. The gross margin increased by 7.7% due to
increased prices of popular services and enhanced marketing efforts on more
profitable services such as cosmetic injection services, in addition to faster
growth from new services which carry higher gross margin in the three months
ended September 30, 2011.
GROSS PROFIT
|
|
Three Months Ended September 30,
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross Profit
|
|
|
Margin
|
|
|
Gross Profit
|
|
|
Margin
|
|
|
|
|
Cosmetic Surgery Services
|
$
|
1,473,139
|
|
|
81.4%
|
|
$
|
1,248,330
|
|
|
72.7%
|
|
|
18.0%
|
|
Professional medical beauty services
|
|
1,622,788
|
|
|
81.4%
|
|
|
962,742
|
|
|
80.2%
|
|
|
68.6%
|
|
Cosmetic dentistry services
|
|
20,803
|
|
|
38.0%
|
|
|
90,079
|
|
|
64.8%
|
|
|
(76.9%
|
)
|
Sales of goods
|
|
134,418
|
|
|
60.0%
|
|
|
242
|
|
|
0.2%
|
|
|
55,444.6%
|
|
4
Operating Expenses
Our operating expenses increased by approximately $1.5 million
to $3.1 million for the three months ended September 30, 2011 from $1.6 million
for the same period of the previous year. This 96.3% increase was mainly
attributable to the increase in start-up costs of our new flagship hospital,
Chengdu Fanya Cosmetology Hospital, and advertising and promotional efforts to
drive sales and service revenue from existing and new customers, as well as
increase of salary and compensation expenses.
Total Other Income (Expenses)
Other expenses for the three months ended September 30, 2011
was $42,114 compared to other expenses of $32,665 for the same period of the
previous year. The increase was mainly due to the interest expenses of $30,862
for the loans we secured in the first half of 2011.
Net (Loss) Income Attributable to China SHESAYS Common
Stockholders
As a result of the factors described above, we had net loss
attributable to China SHESAYS common stockholders in the amount of $72,652 for
the three months ended September 30, 2011, a decrease of 117.8% as compared with
net income attributable to China SHESAYS common stockholders in the amount of
$0.4 million for the three months September 30, 2010. The decrease in net income
attributable to China SHESAYS common stockholders was mainly due to the
significant increase of operating expenses in the three months ended September
30, 2011.
Foreign Currency Translation Gain
Our business operates primarily in RMB, but we report our
results in U.S. dollars. The conversion of our accounts from RMB to US$ results
in translation adjustments. As a result of a currency translation adjustment
gain, our other comprehensive income was $62,897 for the three months ended
September 30, 2011, as compared with $74,071 for the three months ended
September 30, 2010.
Comprehensive (Loss) Income Attributable to China SHESAYS
Common Stockholders
As a result of the factors described above, we had
comprehensive loss attributable to China SHESAYS common stockholders in the
amount of $9,956 for the three months ended September 30, 2011, as compared with
comprehensive income attributable to China SHESAYS common stockholders in the
amount of $0.5 million for the three months ended September 30, 2010.
Nine Months Ended September 30, 2011, Compared to the Nine
Months Ended September 30, 2010:
|
|
Nine Months Ended September
|
|
|
$
|
|
|
%
|
|
|
|
30,
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
11,868,029
|
|
$
|
9,210,165
|
|
$
|
2,657,864
|
|
|
28.9%
|
|
Cost of revenue
|
|
2,734,779
|
|
|
2,537,660
|
|
|
197,119
|
|
|
7.8%
|
|
Gross profit
|
|
9,133,250
|
|
|
6,672,505
|
|
|
2,460,745
|
|
|
36.9%
|
|
Operating expenses
|
|
7,417,382
|
|
|
3,979,467
|
|
|
3,437,915
|
|
|
86.4%
|
|
Total other income (expenses)
|
|
(92,581
|
)
|
|
(126,280
|
)
|
|
33,699
|
|
|
-26.7%
|
|
Income from operations before taxes
|
|
1,623,287
|
|
|
2,566,758
|
|
|
(943,471
|
)
|
|
-36.8%
|
|
Income tax expenses
|
|
(438,212
|
)
|
|
(698,565
|
)
|
|
260,353
|
|
|
-37.3%
|
|
Net income attributable to CHINA SHESAYS common
stockholders
|
|
1,212,991
|
|
|
1,871,233
|
|
|
(658,242
|
)
|
|
-35.2%
|
|
Foreign currency translation gain
|
|
153,718
|
|
|
90,047
|
|
|
63,671
|
|
|
70.7%
|
|
Comprehensive income attributable to CHINA SHESAYS common
stockholders
|
|
1,366,189
|
|
|
1,961,226
|
|
|
(595,037
|
)
|
|
-30.3%
|
|
5
Total Revenue
Total revenue for the nine months ended September 30, 2011
increased by approximately $2.7 million or 28.9% to $11.9 million as compared to
$9.2 million for the nine months ended September 30, 2010. Our revenue growth
was driven by our efforts to increase number of customers which result in the
increase in sales at our hospitals and clinics, enhanced marketing and
promotional activities and increased prices of popular services in the
period.
REVENUE
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
Cosmetic surgery services
|
$
|
5,033,176
|
|
$
|
4,768,397
|
|
$
|
264,779
|
|
|
5.6%
|
|
Professional medical beauty services
|
|
6,058,016
|
|
|
3,688,854
|
|
|
2,369,162
|
|
|
64.2%
|
|
Cosmetic dentistry services
|
|
111,177
|
|
|
371,001
|
|
|
(259,824
|
)
|
|
-70.0%
|
|
Sales of goods
|
|
665,660
|
|
|
381,913
|
|
|
283,747
|
|
|
74.3%
|
|
Total revenue
|
$
|
11,868,029
|
|
$
|
9,210,165
|
|
$
|
2,657,864
|
|
|
28.9%
|
|
Compared to the same period of 2010, cosmetic surgery service
revenue increased 5.6% to $5.0 million, professional medical beauty service
revenue increased 64.2% to $6.1 million, cosmetic dentistry service revenue
decreased 70.0% to $111,177 and sales of goods increased 74.3% to $0.7
million.
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
Sichuan Shesays
|
$
|
10,670,637
|
|
|
89.9%
|
|
$
|
8,990,101
|
|
|
97.6%
|
|
Leshan Jiazhou Shesays
|
|
504,226
|
|
|
4.3%
|
|
|
157,518
|
|
|
1.7%
|
|
Yibin Shesays
|
|
441,707
|
|
|
3.7%
|
|
|
62,546
|
|
|
0.7%
|
|
Zigong Shesays
|
|
251,459
|
|
|
2.1%
|
|
|
-
|
|
|
-
|
|
Total revenue
|
$
|
11,868,029
|
|
|
100.0%
|
|
$
|
9,210,165
|
|
|
100.0%
|
|
For the nine months ended September 30, 2011, revenue of our
headquarter hospital increased by 18.7% to $10.7 million, from $9.0 million in
the first nine months of 2010. Three new clinics launched in the second half of
2010 contributed approximately $1.2 million to revenue.
Cost of Revenue
Our cost of revenue, which consists of costs of products sold,
costs of services provided and costs of direct labor and overhead, was $2.7
million for the nine months ended September 30, 2011, an increase of 7.8% from
$2.5 million for the nine months ended September 30, 2010. Cost of revenue as a percentage of
revenue decreased from 27.6% to 23.0% as compared to the comparative period. The
increase in cost of revenue in the first nine months of 2011 was due to the
increase in customer service revenue, offset by our efforts to focus and
introduce services with lower cost.
COST OF REVENUE
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
(Increase)/Decrease
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Cosmetic surgery services
|
$
|
(925,915
|
)
|
$
|
(1,375,241
|
)
|
$
|
449,326
|
|
|
-32.7%
|
|
Professional medical beauty services
|
|
(1,110,256
|
)
|
|
(593,145
|
)
|
|
(517,111
|
)
|
|
87.2%
|
|
Cosmetic dentistry services
|
|
(74,087
|
)
|
|
(127,274
|
)
|
|
53,187
|
|
|
-41.8%
|
|
Sales of goods
|
|
(246,522
|
)
|
|
(193,776
|
)
|
|
(52,746
|
)
|
|
27.2%
|
|
Depreciation
|
|
(377,999
|
)
|
|
(248,224
|
)
|
|
(129,775
|
)
|
|
52.3%
|
|
Total cost of revenue
|
$
|
(2,734,779
|
)
|
$
|
(2,537,660
|
)
|
$
|
(197,119
|
)
|
|
7.8%
|
|
6
Gross Profit
Our gross profit for the nine months ended September 30, 2011
was $9.1 million, an increase of $2.4 million or 36.9% from $6.7 million for the
nine months ended September 30, 2010. The increase in gross profit in the nine
months ended September 30, 2011 was mainly due to the increasing revenue and
incremental sales generated by new services we provided. Our overall gross
profit margin as a percentage of revenue was 77.0% for the nine months ended
September 30, 2011 compared to 72.4% of the same period of the previous year.
The gross margin increased by 4.6% due to our strategy to focus on higher margin
services in our service portfolio and enhance profitability since our
headquarter hospital is already in full capacity and our new flagship hospital
has not yet been formally launched as of September 30, 2011. In addition, during
the first nine months of 2011, we introduced several new services with higher
margins, which further helped to increase gross margin during this period.
GROSS PROFIT
|
|
Nine Months Ended September 30,
|
|
|
%
|
|
|
|
2011
|
|
|
2010
|
|
|
change
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross Profit
|
|
|
Margin
|
|
|
Gross Profit
|
|
|
Margin
|
|
|
|
|
Cosmetic surgery services
|
$
|
4,107,261
|
|
|
81.6%
|
|
$
|
3,393,156
|
|
|
71.2%
|
|
|
21.0%
|
|
Professional medical beauty services
|
|
4,947,760
|
|
|
81.7%
|
|
|
3,095,709
|
|
|
83.9%
|
|
|
59.8%
|
|
Cosmetic dentistry services
|
|
37,090
|
|
|
33.4%
|
|
|
243,727
|
|
|
65.7%
|
|
|
(84.8%
|
)
|
Sales of goods
|
|
419,138
|
|
|
63.0%
|
|
|
188,137
|
|
|
49.3%
|
|
|
122.8%
|
|
Operating Expenses
Our operating expenses increased by approximately $3.4 million
to $7.4 million for the nine months ended September 30, 2011 from $4.0 million
for the same period of the previous year. This 86.4% increase was mainly
attributable to increase in the expenses associated with marketing and
advertising activities and increase of salary and compensation expenses, as well
as start-up costs related to our new flagship hospital under construction.
Selling, general and administrative (SG&A) expenses totaled $3.9 million
for the nine months ended September 30, 2011, up approximately 85.6% from the
same period prior year. We spent $2.9 million in advertising costs in the nine
months ended September 30, 2011, a 144.0% increase compared to $1.2 million in
the same period of 2010. We hired and trained additional professional personnel
for preparing the launch of new flagship hospital in the second half of 2011,
which also contributed to the increase of operating expenses in the period.
Total Other Income (Expenses):
Other expenses for the nine months ended September 30, 2011 was
$92,581 compared to other expenses of $126,280 for the same period of the
previous year.
Net Income Attributable to China SHESAYS Common
Stockholders
7
Net income attributable to China SHESAYS common stockholders
for the nine months ended September 30, 2011 was $1.2 million, a decrease of
35.2% as compared with $1.9 million for the nine months September 30, 2010. The
decrease in net income was mainly attributed to the significant increase of
operating expenses in the nine months ended September 30, 2011.
Foreign Currency Translation Gain
Our business operates primarily in RMB, but we report our
results in U.S. dollars. The conversion of our accounts from RMB to U.S.
dollars results in translation adjustments. As a result of a currency
translation adjustment gain, our other comprehensive income was $153,718 for the
nine months ended September 30, 2011, as compared with $90,047 for the nine
months ended September 30, 2010. The increase is due to currency exchange
fluctuation of RMB to U.S. dollars for the period.
Comprehensive Income Attributable to China SHESAYS Common
Stockholders
Comprehensive income attributable to China SHESAYS common
stockholders was $1.4 million for the nine months ended September 30, 2011, as
compared with $2.0 million for the nine months ended September 30, 2010.
Off-Balance Sheet Arrangements
Other than those disclosed in the notes to the unaudited
condensed consolidated financial statements, there were no other off-balance
sheet arrangements during the nine months ended September 30, 2011, that have,
or are reasonably likely to have, a current or future effect on our financial
condition, revenue or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our interests.
Liquidity and Capital Resources
As of September 30, 2011, we had cash and cash equivalents of
$0.7 million. We had a working capital deficit of $3.2 million, that is, our
current assets were $2.9 million and our current liabilities were $6.1 million
as of September 30, 2011. 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 postponement of business expansion will provide sufficient liquidity to
finance our anticipated working capital and capital expenditure requirements of
$4 million for the next 12 months.
Total stockholders' equity as of September 30, 2011 was $5.8
million. The following table provides detailed information regarding our net
cash flow for all financial statement periods presented in this report.
|
|
Nine Months Ended September
30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by operating activities
|
$
|
2,165,458
|
|
$
|
2,102,659
|
|
Net cash used in investing activities
|
|
(3,380,954
|
)
|
|
(3,455,697
|
)
|
Net cash provided by financing activities
|
|
832,502
|
|
|
1,016,301
|
|
Effect of exchange rates on cash
|
|
50,936
|
|
|
19,507
|
|
Net decrease in cash and cash equivalents
|
|
(332,058
|
)
|
|
(317,230
|
)
|
Cash and cash equivalents beginning of period
|
|
1,029,280
|
|
|
1,371,732
|
|
Cash and cash equivalents end of period
|
|
697,222
|
|
|
1,054,502
|
|
Operating Activities
Cash provided by operating activities totaled $2.2 million for
the nine months ended September 30, 2011 as compared with $2.1 million provided
by operating activities for the nine months ended September 30, 2010. Compared
with the same period in 2010, the slight increase in our net cash provided by
operating activities was primarily due to the decrease in other current assets and
prepaid expenses and increase in other payables and accrued liabilities, offset
by the decrease in net income and $0.3 million increase in deferred tax assets.
8
Investing Activities
Cash used in investing activities was $3.4 million for the nine
months ended September 30, 2011 as compared to $3.5 million used in investing
activities for the nine months ended September 30, 2010. We invested
approximately $3.2 million to purchase property and equipment for our existing
hospital and clinics, as well as our new flagship hospital during the nine
months ended September 30, 2011 compared to $3.4 million in the same period of
the previous year.
Financing Activities
Cash provided by financing activities was $0.8 million for the
nine months ended September 30, 2011 as compared to $1.0 million provided by
financing activities for the nine months ended September 30, 2010. Cash used in
financing activities represented the repayment of a short-term loan of $0.9
million to Bank of Chengdu in February 2011. Because of our timely repayment and
our good relationship with the bank, we renewed the loan of $0.9 million on
March 31, 2011 and enter into a new loan of approximately $0.4 million with the
bank on April 20, 2011. In addition, we also secured a loan of approximately
$0.5 million with Huaxia Bank on June 13, 2011. Cash provided by financing also included cash
capital contribution of $5,916 by our stockholders.
Based on our current operating plan, we believe that our
existing resources, including cash generated from operations, as well as bank
loans, will be sufficient to meet our working capital requirement for our
current operations. However, in order to fully implement our business plan and
continue our growth, we may require additional capital either from our
stockholders or from outside sources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
As a smaller reporting company, as defined by Item 10 of
Regulation S-K, the Company is not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining
a system of disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) that is designed to ensure that information required to
be disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commissions rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuers management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company
carried out an evaluation with the participation of the Companys management,
including our Chairman, Chief Executive Officer and President, Yixiang Zhang,
our Chief Financial Officer Wenbin Zhu, of the effectiveness of the Companys
disclosure controls and procedures (as defined under Rule 13a-15(e) under the
Exchange Act) as of September 30, 2011. Based on this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were not effective as of the end of the period covered
by this report.
9
The Companys annual report on Form 10-K for the fiscal year
ended December 31, 2010 and quarterly reports on Form 10-Q for the fiscal
periods ended March 31, 2011 and June 30, 2011 filed with the SEC contained a
conclusion by the management that there are material weaknesses in the Companys
internal control over financial reporting as the following: (i) lack of
sufficient accounting personnel with appropriate understanding of U.S. GAAP and
SEC reporting requirements; (ii) lack of standard chart of accounts and written
accounting manual and closing procedures to facilitate preparation of financial
statements under U.S. GAAP for financial reporting processes; (iii) lack of an
audit committee or other independent oversight over our management and internal
controls; and (iv) lack of independent directors. We believe that the material
weaknesses in our disclosure controls and procedures still exist.
Since December 2010 and through the quarter ended September 30,
2011, we have been working to take corrective steps. Our CFO and accounting
staff regularly supplement their knowledge related to U.S. GAAP and receive
updates regarding changes to or developments in U.S. GAAP. Also, we continue to
search for experienced professionals, independent directors and set up audit
committee when appropriate candidates are identified and sufficient funds are
available to us. As we currently do not maintain an effective system of internal
controls, we may be unable to accurately report our financial results or prevent
fraud, and investor confidence and the market price of our stock may be
adversely impacted. No assurance can be given that we have identified all the
material and significant internal controls weakness and we will be able to
adequately remediate existing deficiencies in our internal controls. We may be
required to expend additional resources to identify, assess and correct any
additional weaknesses in disclosure or internal controls and to otherwise comply
with the internal controls rules under Section 404(a) of the Sarbanes-Oxley
Act.
Changes in Internal Control Over Financial Reporting
Except for the above, our CEO and CFO concluded that no change
occurred in the Company's internal controls over financial reporting during the
quarter ended September 30, 2011 that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures provide our Chief
Executive Officer and Chief Financial Officer with reasonable assurances that
our disclosure controls and procedures will achieve their objectives. However,
our management does not expect that our disclosure controls and procedures or
our internal control over financial reporting can or will prevent all human
error. A control system, no matter how well designed and implemented, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Furthermore, the design of a control system must reflect
the fact that there are internal resource constraints, and the benefit of
controls must be weighed relative to their corresponding costs. Because of the
limitations in all control systems, no evaluation of controls can provide
complete assurance that all control issues and instances of error, if any,
within our company are detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur due to human error or mistake. Additionally, controls, no matter how
well designed, could be circumvented by the individual acts of specific persons
within the organization. The design of any system of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated
objectives under all potential future conditions.
10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently not a party to any legal proceeding and are
not aware of any legal claims that we believe will have a material adverse
effect on our business, financial condition or operating results. However, from
time to time, we may become involved in various lawsuits and legal proceedings
which arise in the ordinary course of business. Litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business.
ITEM 1A. RISK FACTORS.
Risks Relating to Our Business and Industry
Product liability claims or treatment malpractice claims
could harm our business, financial condition and results of
operations.
We face an inherent business risk of exposure to product
liability claims in the event that the use of our products is alleged to have
resulted in adverse effects or our treatments or procedures are claimed to be
malpractice. While we take what we believe are appropriate precautions, we may
not be able to avoid significant product liability exposure. We currently do not
have product liability insurance or malpractice insurance. Although we have yet
to face a product liability claim or a treatment malpractice claim, the
assertion of this type of claim could have a material adverse affect on our
business, financial condition and results of operations.
We have a limited operating history, which may make it
difficult for you to evaluate our business and prospects.
We began our current business operations in May 2005.
Accordingly, we have a limited operating history for our current operations upon
which you can evaluate the viability and sustainability of our business and its
acceptance by consumers. It is also difficult to evaluate the viability of our
business model because we do not have sufficient experience to address the risks
frequently encountered by every level of branches newly established and when
entering new regional markets. These circumstances may make it difficult for you
to evaluate our business and prospects.
Our senior management and employees have worked together
for a short period of time, which may make it difficult for you to evaluate
their effectiveness and ability to address challenges.
Due to our limited operating history and recent additions to
our management team, certain of our senior management and employees have worked
together at our company for only a relatively short period of time. As a result,
it may be difficult for you to evaluate the effectiveness of our senior
management and other key employees and their ability to address future
challenges to our business. Mr. Zhang, the Chairman and CEO of the Company,
founded SHESAYS in 2005. Mr. Wenhui Shao, the President of the Company, the
President and Board of Director of SHESAYS, joined SHESAYS in 2005. Mr. Xingwang
Pu, Chief Technology Officer of the Company, the Board of Director and President
in the Technology Department of SHESAYS, joined SHESAYS in 2005. Ms. Wenbin Zhu,
Chief Financial Officer of the Company, joined SHESAYS in 2007. Since 2010, we
added two new members to our management team of SHESAYS. Meng Hu joined us on
November 11, 2010 and serves as administration director in Cosmetic Surgery
Department. Yan Deng joined the Company on September 1, 2010 and serves as
manager in Customer Service Department.
11
Our medical care personnel may have errors in plastic
surgery operation, which would cause clinic incidents and adversely affect our
ability to generate revenue from our cosmetology services, and our financial
condition and results of operations.
Medical care personnel may have errors in plastic surgery
operation, and clinical test products may be risky. If a serious medical
negligence/malpractice happened, our brand image would be severely impaired,
which would affect our ability to generate revenue from our cosmetology
services, and our financial condition and results of operations.
There may be more advanced appliances and equipment or
diagnosis and treatment methods which may constitute challenge against SHESAYS.
We need to upgrade our techniques and equipment continuously to
keep our technique advantage. In respect of external environment, there may be
more advanced appliances and equipment or diagnosis and treatment methods which
may constitute challenge against SHESAYS. In response to such challenge, we will
continue to strengthen employee training to enhance professional abilities and
also continue to raise our research level, operative skills and update equipment
to maintain our leading status in cosmetology techniques in the region.
Our revenue is particularly sensitive to changes in
economic conditions and cosmetology trends.
Demand for our cosmetology services, and the resulting
cosmetology spending by our clients, is particularly sensitive to changes in
general economic conditions and their disposable income. During periods of
economic downturn, people may reduce the money they spend on cosmetology, which
would materially and adversely affect our ability to generate revenue from our
cosmetology services, and our financial condition and results of operations.
A substantial majority of our revenue are currently
concentrated in Chengdu. If the city experiences an event negatively affecting
its cosmetology industry, our ability to generate adequate cash flow would be
materially and adversely affected.
Though we will expand our business across Sichuan Province,
substantial majority of our revenue are currently concentrated in Chengdu, from
where 96% of the total revenue in 2010 were generated. We expect Chengdu to
continue to be the important sources of our revenue. If the city experiences an
event negatively affecting its cosmetology industry, such as a serious clinical
incident, negative changes in government policy, a natural disaster, our ability
to generate adequate cash flow would be materially and adversely affected.
We may not be able to successfully expand our business
network into new regions which could harm or reverse our growth potential and
our ability to increase our revenue, or even result in a decrease in
revenues.
We are pursuing a strategy to expand our service network into
new regions. Based on the Chengdu headquarters, we aim to expand our business
into other cities of Sichuan province and nationwide. As of date, we have
established a comprehensive cosmetology hospital, three new outpatient clinics
in Yibin city, Leshan city and Zigong city, and are planning to set up the
second flagship hospital in Chengdu.
In the new cities, we may compete with local competitors and
encounter new difficulties, which could harm or reverse our growth potential and
our ability to increase our revenue, or even result in a decrease in revenue.
We face intensive competition, and if we do not compete
successfully against new and existing competitors, we may lose our market share,
and our profitability may be adversely affected.
We compete with some of the largest cosmetology hospitals such
as Huamei Zixin Medical Cosmetology Hospital, Chengdu Dahua Medical Plastic
Hospital in southwest China. We compete for plastic surgery clients primarily on
the basis of network size and coverage, location, price, technique level, the
range and the quality of services that we offer and our brand name. We also
compete for such business as esthetic dentistry, gynecology / male plastic
surgery with private dental clinics and cosmetology departments in regular
public hospitals. Increased competition could reduce our operating margins and
profitability and result in a loss of market share. Some of our existing and
potential competitors may have competitive advantages, such as significantly
greater financial, marketing or other resources and may be able to mimic and
adopt our business model. We cannot assure you that we will be able to
successfully compete against new or existing competitors.
12
We depend on the leadership and services of Mr. Yixiang
Zhang, who is our founder, chairman, and our largest shareholder, and our
business and growth prospects may be severely disrupted if we lose his
services.
Our future success is dependent upon the continued service of
Mr. Yixiang Zhang, our founder and chairman and largest shareholder (pursuant to
two call option agreements Mr. Zhang signed with a major shareholder of the Company on April
27, 2010, Mr. Zhang is able to purchase 8,970,012 shares of the common stock of
our company for a nominal price within 5 years from the date of option and become the largest shareholder of the
Company). We
rely on his industry expertise and experience in our business operations, and in
particular, his business vision, management skills, and working relationships
with our employees, our other major shareholders and many of our customers. If
he was unable or unwilling to continue in his present position, or if he joins a
competitor or forms a competing company in violation of his employment agreement
and non-compete agreement, we may not be able to replace him easily or at all.
As a result, our business and growth prospects may be severely disrupted if we
lose his services.
Our expansion plan would be restricted by the need of
updating our management systems and shortage of human resources.
With the expansion of our business, our management systems and
shortage of human resources may become factors restricting our companys
development. We expand our business with a rapid speed, and our current
management systems may not be timely updated and there might not be enough
talents to be recruited. We will continue to establish and improve our
management systems such as counter-crisis plans and organization & position
design systems. We will also continue to enhance our medical care personnels
training and continue our efforts in recruiting high-quality employees. We
expect a budget of $150,000 to enhance our management systems in 2011. We will
also continue to enhance our medical care personnels training system and
continue our efforts in recruiting high-quality employees with $150,000 estimate
expenditure in 2011. The total estimate amount spent on enhancing the management
systems as well as on training and recruitment in 2011 is expected to be
approximately $300,000. We will pay for the budget from our net earnings and
working capital during 2011.
If we do not continue to expand and maintain an effective
sales and marketing team, it will cause short-term disruptions of our
operations, restrict our sales efforts and negatively affect our cosmetology
services revenue.
Many of our sales and marketing personnel have only worked for
us for a short period of time. We depend on our marketing staff to explain and
introduce our service offerings to our existing and potential customers. We will
need to further increase the size of our sales and marketing staff as our
business continues to grow. We may not be able to hire, retain, integrate or
continue to motivate our current or new marketing personnel which would cause
short-term disruptions of our operations, restrict our sales efforts and
negatively affect our cosmetology services revenue. In 2009 and 2010, we have
recruited 6 and 11 sales and marketing staff respectively. For the first 9
months of 2011, we have recruited 13 sales and marketing staff. For the members
of sales team recruited in 2010, the average time of employment is 11 months as
of September 30, 2011. For those recruited in 2009, the average time of
employment is 21 months as of September 30, 2011. We expect to hire additional 5
sales employees for the rest period of 2011.
We may need additional capital and we may not be able to
obtain it, which could adversely affect our liquidity and financial
position.
To further expand our business into other cities, we opened three new outpatient clinics in Leshan, Yibin and Zigong cities
in Sichuan province in the second half of 2010. The 9,263 square feet clinic in Leshan, the 8,851 square
feet clinic in Yibin and the 13,912 square feet clinic in Zigong primarily
provide a range of customized services including medical cosmetology, cosmetic
surgery, cosmetic dentistry, and cosmetic dermatology. In the future, we plan to
set up more new hospitals and outpatient clinics nationwide. As a result, we may
require additional cash resources. We expect to need approximately $12.0 million
to realize our plans for expansion in the next 3 years. If these sources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain a credit facility. The sale of
convertible debt securities or additional equity securities could result in
additional dilution to our shareholders. The incurrence of indebtedness would
result in increased debt service obligations and could result in operating and
financing covenants that would restrict our operations and liquidity.
13
Our ability to obtain additional capital on acceptable terms is
subject to a variety of uncertainties, including:
-
investors perception of, and demand for, securities of alternative
cosmetology hospital;
-
conditions of the U.S. and other capital markets in which we may seek to
raise funds;
-
our future results of operations, financial condition and cash flows;
-
PRC governmental regulation of foreign investment in cosmetology hospitals
in China;
-
economic, political and other conditions in China; and
-
PRC governmental policies relating to foreign currency borrowings.
We cannot assure you that financing will 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 could have a material adverse effect
on our liquidity and financial condition.
Our liquidity may be negatively affected by the waiver of
payment of management and service fee for the term of three years.
Pursuant to the contractual arrangements between our
subsidiary, BOAN with SHESAYS and its stockholders, BOAN provides management and
consulting services to SHESAYS and its subsidiaries in exchange for service
fees. The service fees shall be equal to 100% of the residual return of SHESAYS
and its subsidiaries which can be waived by BOAN from time to time at its sole
discretion. Pursuant to the Supplementary Agreement to the Exclusive Service
Agreement on March 22, 2011, BOAN and SHESAYS reached an agreement that, in
order to support the strategic expansion plan of SHESAYS in China, BOAN agreed
to waive 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. As we do not have any other assets and any revenue
from other sources other than our interest in the agreements, our liquidity
could be negatively affected by the waiver of payment of management and service
fee. 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 do not expect to declare any dividend before April 27, 2013,
nor is any other amount expected to be due prior to April 27, 2013. However, if
there is any amount occurred and need to be paid during the period, we can
borrow from SHESAYS to settle such amount.
Currently we do not maintain an effective system of
internal controls and may be unable to accurately report our financial results
or prevent fraud, and investor confidence and the market price of our stock may
be adversely impacted.
Our reporting obligations as a public company will place a
significant strain on our management, operational and financial resources and
systems for the foreseeable future. If we fail to maintain an effective system
of internal controls in the future, we may be unable to accurately report our
financial results or prevent fraud and investor confidence and the market price
of our stock may be adversely impacted. Prior to the consummation of the
business combination on June 7, 2010, we were a shell company with nominal
operations and nominal assets. We declared in 2009 10-K that the internal
controls was ineffective due to lack of proper segregation of functions, duties
and responsibilities with respect to our cash and controls over the
disbursements related thereto due to our very limited staff, including our
accounting personnel. After the restructuring of the company, our internal
controls have been improved with new business and operation. We maintain a
system of internal controls and procedures and prepare our financial reports
according to US GAAP. However, the Company currently does not have an US GAAP
expert in its staff and does not have an audit committee, independent directors,
and has not established independent oversight over our management and internal controls. Thus we
believe our internal controls over financial reporting were not effective as of
December 31, 2010. Since December 2010, we have been working to take corrective
steps. Our CFO and accounting staff regularly supplement their knowledge related
to U.S. GAAP and receive updates regarding changes to or developments in U.S.
GAAP via the Internet. Also, we plan to hire experienced professionals,
independent directors and set up audit committee when appropriate candidates are
identified and sufficient funds are available to us. As we currently do not
maintain an effective system of internal controls, we may be unable to
accurately report our financial results or prevent fraud, and investors
confidence and the market price of our stock may be adversely impacted.
14
Risks Relating to Regulation of Our Business and to Our
Structure
If the PRC government finds that the agreements that
establish the structure for operating our China business do not comply with PRC
governmental restrictions on foreign investment in the medical industry, we
could be subject to severe penalties.
Substantially all of our operations are or will be conducted
through our indirectly wholly-owned operating subsidiaries in China, which we
collectively refer to as our PRC operating subsidiaries, and through our
contractual arrangements with our consolidated affiliated entities in China. PRC
regulations require any foreign entities that invest directly in the medical
services industry to have direct operations in the medical industry outside of
China. In addition, foreign entity is not allowed in China to set up
wholly-owned medical institute although the foreign entity is permitted to set
up a joint venture medical institute with Chinese entities. Foreign investors
are permitted to hold shares of the joint venture medical institute at maximum
of 70%.
We do not currently directly operate medical services outside
of China and cannot qualify under PRC regulations before we commence any such
operations outside of China or until we acquire a company that has directly
operated a medical services business outside of China. Accordingly, since we
have not been involved in the direct operation of medical services business
outside of China, our domestic PRC subsidiary, BOAN, which is considered
foreign-invested, is currently ineligible to apply for the required medical
services licenses in China. While our indirect PRC operating subsidiaries are
eligible for the required licenses for providing medical services in China and
some of our indirect PRC operating subsidiaries have obtained such licenses, we
have been using and are expected to continue to use PRC operating affiliates and
their subsidiaries to operate a significant portion of our medical business for
the foreseeable future. We have entered into contractual arrangements with PRC
operating affiliates and their respective subsidiaries, pursuant to which we,
through our PRC operating subsidiaries or non-PRC subsidiaries, provide
technical support and consulting services to our PRC operating affiliates and
their subsidiaries. In addition, we have entered into agreements with our PRC
operating affiliates and each of their stockholders which provide us with the
substantial ability to control these affiliates and their existing and future
subsidiaries.
If we, our existing or future PRC operating subsidiaries and
affiliates are found to be in violation of any existing or future PRC laws or
regulations or fail to obtain or maintain any of the required permits or
approvals, the relevant PRC regulatory authorities, including the State
Administration for Industry and Commerce, or SAIC, which regulates cosmetology
hospitals, would have broad discretion in dealing with such violations,
including:
-
revoking the business and operating licenses of our PRC subsidiaries and
affiliates;
-
discontinuing or restricting our PRC subsidiaries and affiliates
operations;
-
imposing conditions or requirements with which we or our PRC subsidiaries
and affiliates may not be able to comply;
-
requiring us or our PRC subsidiaries and affiliates to restructure the
relevant ownership structure or operations; or
-
restricting or prohibiting our use of the proceeds of this offering to
finance our business and operations in China.
15
The imposition of any of these penalties would result in a
material and adverse effect on our ability to conduct our business.
We rely on contractual arrangements with SHESAYS and its
subsidiaries and shareholders for a substantial portion of our China operations,
which may not be as effective in providing operational control as direct
ownership.
We rely on contractual arrangements with SHESAYS and its
subsidiaries and shareholders to operate our medical business. For a description
of these contractual arrangements, see PRC Structure. These contractual
arrangements may not be as effective in providing us with control over SHESAYS
as direct ownership. If we had direct ownership of SHESAYS, we would be able to
exercise our rights as a shareholder to effect changes in the board of directors
of SHESAYS which in turn could effect changes, subject to any applicable
fiduciary obligations, at the management level. However, under the current
contractual arrangements, as a legal matter, if SHESAYS or any of its
subsidiaries and shareholders fails to perform its or his respective obligations
under these contractual arrangements, we may have to incur substantial costs and
resources to enforce such arrangements, and rely on legal remedies under PRC
law, including seeking specific performance or injunctive relief, and claiming
damages, which we cannot assure you to be effective.
Many of these contractual arrangements are governed by PRC law
and provide for the resolution of disputes through either arbitration or
litigation in the PRC. Accordingly, these contracts would be interpreted in
accordance with PRC law and any disputes would be resolved in accordance with
PRC legal procedures. The legal environment in the PRC is not as developed as in
other jurisdictions, such as the United States. As a result, uncertainties in
the PRC legal system could limit our ability to enforce these contractual
arrangements. In the event we are unable to enforce these contractual
arrangements, we may not be able to exert effective control over our operating
entities, and our ability to conduct our business may be negatively affected.
Unaffiliated stockholders may have limited recourse
against our affiliates if they do not abide by or terminate the contractual
arrangements that govern our operations, and these relationships may present
potential conflicts of interest.
There are affiliates on both sides of the contractual
agreements. For example, Mr. Zhang is our Chairman and Chief Executive Officer
and may become our largest stockholder (pursuant to an agreement Mr. Zhang
signed with a major stockholder of the Company on April 27, 2010, Mr. Zhang is
able to purchase 8,970,012 shares of the common stock of our company for a
nominal price within 5 years from the execution date of such agreement and then
becomes the largest stockholder of the Company). At the same time, Mr. Zhang is
the CEO and chairman of the board of our Chinese operating company SHESAYS and
hold 45% of equity of SHESAYS.
Since affiliates stand on both sides of the agreements which
are critical to our business operations, it would be easy to terminate or modify
these agreements. As a result, since these agreements and our affiliates are
governed by PRC law, our unaffiliated investors would have little or no recourse
since all of the assets of our operating entities are located in China and we do
not have any other assets an any revenue from other sources other than our
interest in the agreements. Under PRC law, disputes under contractual
arrangements are often resolved through arbitration or litigation. Affected
stockholders may be limited to seeking damages as PRC courts may be reluctant to
order specific performance.
In addition, these relationships may pose potential conflicts
of interest. When the interests of these affiliates diverge from our interests,
they may be required to exercise their influence in the best interests of both
us (or our stockholders) and another related entity and their owners. Some
decisions concerning our operations or finances may present conflicts of
interest between us and the other entity or person or its affiliates. There is
no mechanism in place to resolve these conflicts of interest, and applicable law
may also prohibit a stockholder from successfully challenging a transaction with
an affiliate if the transaction received the requisite vote of our disinterested
directors who received full disclosure of the existence and nature of the
conflict.
16
Contractual arrangements we have entered into among our
subsidiaries and affiliated entities may be subject to scrutiny by the PRC tax
authorities and a finding that we owe additional taxes or are ineligible for our
tax exemption, or both, could substantially increase our taxes owed, and reduce
our net income and the value of your investment.
Under PRC law, arrangements and transactions among related
parties may be subject to audit or challenge by the PRC tax authorities. If any
of the transactions we have entered into among our subsidiaries and affiliated
entities are found not to be on an arms-length basis, or to result in an
unreasonable reduction in tax under PRC law, the PRC tax authorities have the
authority to disallow our tax savings, adjust the profits and losses of our
respective PRC entities and assess late payment interest and penalties. We did
not obtain any tax savings from the contractual arrangements we entered into
amongst our subsidiaries and affiliated entities. We do not expect there will be
any tax saving in the future.
Our business operations may be affected by legislative or
regulatory changes.
The regulatory department of the government may issue new rules
and regulations which may raise higher requirements for operation,
qualifications of employees and hardware levels. Changes in laws and regulations
or the enactment of new laws and regulations governing plastic surgery, our
business licenses or otherwise affecting our business in China may materially
and adversely affect our business prospects and results of operations.
Substantially all of our assets are located in China and substantially all of
our revenue are derived from our operations in China. Accordingly, our business,
financial condition, results of operations and prospects are subject, to a
significant extent, to economic, political and legal developments in China.
The PRCs economic, political and social conditions, as
well as governmental policies, could affect the financial markets in China and
our liquidity and access to capital and our ability to operate our
business.
The PRC economy differs from the economies of most developed
countries in many respects, including the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth over the
past, growth has been uneven, both geographically and among various sectors of
the economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us. For
example, under current PRC regulations, PRC regulations require any foreign
entities that invest directly in the medical services industry to have direct
operations in the medical industry outside of China. In addition, foreign entity
is not allowed in China to set up wholly-owned medical institute although the
foreign entity is permitted to set up a joint venture medical institute with
Chinese entities. Foreign investors are permitted to hold shares of the joint
venture medical institute at maximum of 70%. Moreover, our financial condition
and results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to us.
The PRC economy has been transitioning from a planned economy
to a more market-oriented economy. Although the PRC government has implemented
measures since the late 1970s emphasizing the utilization of market forces for
economic reform, the reduction of state ownership of productive assets and the
establishment of improved corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies. The PRC
government also exercises significant control over Chinas economic growth
through the allocation of resources, controlling payment of foreign currency-
denominated obligations, setting monetary policy and providing preferential
treatment to particular industries or companies. Since late 2003, the PRC
government implemented a number of measures, such as raising bank reserves
against deposit rates to place additional limitations on the ability of
commercial banks to make loans and raise interest rates, in order to slow down
specific segments of Chinas economy which it believed to be overheating. These
actions, as well as future actions and policies of the PRC government, could
materially affect our liquidity and access to capital and our ability to operate
our business.
17
The PRC legal system embodies uncertainties which could
limit the legal protections available to you and us.
The PRC legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which decided legal cases
have little precedential value. In 1979, the PRC government began to promulgate
a comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past 30 years has
significantly enhanced the protections afforded to various forms of foreign
investment in China. Our PRC operating subsidiary, BOAN, is a wholly
foreign-owned enterprise which is an enterprise incorporated in China and
wholly-owned by foreign investors. BOAN is subject to laws and regulations
applicable to foreign investment in China in general and laws and regulations
applicable to wholly foreign-owned enterprises in particular. However, these
laws, regulations and legal requirements change frequently, and their
interpretation and enforcement involve uncertainties. For example, we may have
to resort to administrative and court proceedings to enforce the legal
protection that we enjoy either by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, it may be more difficult to
evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy than in more developed legal systems. For example,
these uncertainties may impede our ability to enforce the contracts we have
entered into with SHESAYS and its subsidiaries. In addition, such uncertainties,
including the inability to enforce our contracts, could materially and adversely
affect our business and operation. In addition, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries. Accordingly, we cannot predict the effect of future
developments in the PRC legal system, particularly with regard to the medical
industry, including the promulgation of new laws, changes to existing laws or
the interpretation or enforcement thereof, or the preemption of local
regulations by national laws. These uncertainties could limit the legal
protections available to us, including our ability to enforce our agreements
with SHESAYS and its subsidiaries, and other foreign investors.
Recent regulations relating to offshore investment
activities by PRC residents may increase the administrative burden we face and
create regulatory uncertainties that could restrict our overseas and
cross-border investment activity, and a failure by our shareholders who are PRC
residents to make any required applications and filings pursuant to such
regulations may prevent us from being able to distribute profits and could
expose us and our PRC resident shareholders to liability under PRC law.
The PRC National Development and Reform Commission, or NDRC,
and SAFE recently promulgated regulations that require PRC residents and PRC
corporate entities to register with and obtain approvals from relevant PRC
government authorities in connection with their direct or indirect offshore
investment activities. These regulations apply to our shareholders who are PRC
residents and may apply to any offshore acquisitions that we make in the future.
Under the SAFE regulations, PRC residents who make, or have
previously made, direct or indirect investments in offshore companies will be
required to register those investments. In addition, any PRC resident who is a
direct or indirect stockholder of an offshore company is required to file with
the local branch of SAFE, with respect to that offshore company, any material
change involving capital variation, such as an increase or decrease in capital,
transfer or swap of shares, merger, division, long term equity or debt
investment or creation of any security interest over the assets located in
China. If any PRC stockholder fails to make the required SAFE registration, the
PRC subsidiaries of that offshore parent company may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share
transfer or liquidation, to their offshore parent company, and the offshore
parent company may also be prohibited from injecting additional capital into
their PRC subsidiaries. Moreover, failure to comply with the various SAFE
registration requirements described above could result in liability under PRC
laws for evasion of applicable foreign exchange restrictions.
We cannot assure you that all of our stockholders who are PRC
residents will comply with our request to make or obtain any registrations or
approvals required under these regulations or other related legislation.
Furthermore, as the regulations are relatively new, the PRC government has yet
to publish implementing rules, and much uncertainty remains concerning the
reconciliation of the new regulations with other approval requirements. It is
unclear how these regulations, and any future legislation concerning offshore or
cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. The failure or inability of our PRC resident
shareholders to comply with these regulations may subject us to fines and legal
sanctions, restrict our overseas or cross-border investment activities, limit
our ability to inject additional capital into our PRC subsidiaries and the
ability of our PRC subsidiaries to make distributions or pay dividends, or
materially and adversely affect our ownership structure. If any of the foregoing events occur, our
acquisition strategy and business operations and our ability to distribute
profits to you could be materially and adversely affected.
18
The PRC tax authorities may require us to pay additional
taxes in connection with our acquisitions of offshore entities that conducted
their PRC operations through their affiliates in China.
Our operations and transactions are subject to review by the
PRC tax authorities pursuant to relevant PRC laws and regulations. However,
these laws, regulations and legal requirements change frequently, and their
interpretation and enforcement involve uncertainties. For example, in the case
of some of our acquisitions of offshore entities that conducted their PRC
operations through their affiliates in China, we cannot assure you that the PRC
tax authorities will not require us to pay additional taxes in relation to such
acquisitions. In the event that the sellers failed to pay any taxes required
under PRC law in connection with these transactions, the PRC tax authorities
might require us to pay taxes, together with late-payment interest and
penalties.
If any of our PRC affiliates becomes the subject of a
bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy
those assets, which could reduce the size of our cosmetology services network
and materially and adversely affect our business, ability to generate revenue
and the market price of our stock.
To comply with PRC laws and regulations relating to foreign
ownership restrictions in the medical business, we currently conduct our
operations in China through contractual arrangements with SHESAYS, its
shareholders and subsidiaries. As part of these arrangements, SHESAYS and its
subsidiaries hold certain of the assets that are important to the operation of
our business. If any of these entities goes bankrupt and all or part of their
assets become subject to liens or rights of third-party creditors, we may be
unable to continue some or all of our business activities, which could
materially and adversely affect our business, financial condition and results of
operations. If any of SHESAYS and its subsidiaries undergoes a voluntary or
involuntary liquidation proceeding, its shareholders or unrelated third-party
creditors may claim rights to some or all of these assets, thereby hindering our
ability to operate our business, which could materially and adversely affect our
business, our ability to generate revenue and the market price of our stock.
Restrictions on currency exchange may limit our ability
to utilize our revenue effectively.
Substantially all of our revenue and operating expenses are
denominated in Renminbi. The Renminbi is currently convertible under the
current account, which includes dividends, trade and service-related foreign
exchange transactions, but not under the capital account, which includes
foreign direct investment and loans. Currently, BOAN may purchase foreign
exchange for settlement of current account transactions, including payment of
dividends to us, without the approval of the State Administration of Foreign
Exchange. However, we cannot assure you that the relevant PRC governmental
authorities will not limit or eliminate our ability to purchase foreign
currencies in the future. Since a significant amount of our future revenue will
be denominated in Renminbi, any existing and future restrictions on currency
exchange may limit our ability to utilize revenue generated in Renminbi to fund
our business activities outside China, if any, or expenditures denominated in
foreign currencies. Foreign exchange transactions under the capital account are
still subject to limitations and require approvals from, or registration with,
the State Administration of Foreign Exchange and other relevant PRC governmental
authorities. This could affect BOANs ability to obtain foreign exchange through
debt or equity financing, including by means of loans or capital contributions
from us.
Fluctuations in exchange rates could result in foreign
currency exchange losses.
Because our earnings and cash and cash equivalent assets are
denominated in Renminbi fluctuations in exchange rates between the U.S. dollars
and Renminbi will affect the relative purchasing power of our revenue and our
balance sheet and earnings per share in U.S. dollars. In addition, appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. Since July
2005 the Renminbi is no longer pegged solely to the U.S. dollar. Instead, it is
reported to be pegged against a basket of currencies, determined by the Peoples
Bank of China, against which it can rise or fall by as much as 0.3% each day.
This change in policy has resulted in the gradual increase in the value of the Renminbi
against the U.S. dollar over time. Between July 2005, when China began its
Renminbi exchange rate reform, and the end of 2009, the value of the Renminbi
has appreciated by 21.21 percent against the U.S. dollar and up by 2.21 percent
against the Euro. The Renminbi may appreciate or depreciate significantly in
value against the U.S. dollar in the long term, depending on the fluctuation of
the basket of currencies against which it is currently valued or it may be
permitted to enter into a full float, which may also result in a significant
appreciation or depreciation of the Renminbi against the U.S. dollar.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we might issue in the future which will be exchanged into U.S. dollars
and earnings from and the value of any U.S. dollar-denominated investments we
make in the future.
19
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign
currency exchange risk. We do not intend to enter into any hedging transactions.
Even if we may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our currency
exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert Renminbi into foreign currency.
Because our funds are held in banks in uninsured PRC bank
accounts, the failure of any bank in which we deposit our funds could affect our
ability to continue our business.
Funds on deposit at banks and other financial institutions in
the PRC are often uninsured. A portion of our assets are in the form of cash
deposited with banks in the PRC, and in the event of a bank failure, we may not
have access to our funds on deposit. Depending upon the amount of money we
maintain in a bank that fails, our inability to have access to our cash could
impair our operations, and, if we are not able to access funds to pay our
suppliers, employees and other creditors, we may be unable to continue in
business. At the end of 2010, our deposit of fund in three banks, including Bank
of Chengdu, Citic Bank, Shenzhen Development Bank, Bank of China and Agriculture
Bank of China, is 0.45% of our total assets. There is low possibility that these
banks fails, and we believe the failure of any single bank could not affect our
ability to continue our business as our business has little accounts payable and
has great capability to generate cash revenue on a day-to-day basis.
Failure to comply with the U.S. foreign corrupt practices
act and Chinese anti-corruption laws could subject us to penalties and other
adverse consequences.
Our executive officers, employees and other agents may violate
applicable law in connection with the marketing or sale of our products,
including Chinas anti-corruption laws and the U.S. Foreign Corrupt Practices
Act, or the FCPA, which generally prohibits United States companies from
engaging in bribery or other prohibited payments to foreign officials for the
purpose of obtaining or retaining business. In addition, we are required to
maintain records that accurately and fairly represent our transactions and have
an adequate system of internal accounting controls. Foreign companies, including
some that may compete with us, are not subject to these prohibitions, and
therefore may have a competitive advantage over us. The PRC also strictly
prohibits bribery of government officials. However, corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices occur from time-to-time
in the PRC.
While we intend to implement measures to ensure compliance with
the FCPA and Chinas anti-corruption laws by all individuals involved with our
company, our employees or other agents may engage in such conduct for which we
might be held responsible. If our employees or other agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations. In addition, our brand and reputation, our
sales activities or our stock price could be adversely affected if we become the
target of any negative publicity as a result of actions taken by our employees
or other agents.
20
Risks Relating to Regulation of Our Common Stock
Insiders have substantial control over us, and they could
delay or prevent a change in our corporate control even if our other
stockholders wanted it to occur.
Mr. Yixiang Zhang is our chief executive officer and currently,
the sole member on the Board of Directors. Pursuant to an agreement Mr. Zhang
signed with a major shareholder of the Company on April 27, 2010, Mr. Zhang is
able to purchase 8,970,012 shares of the common stock of our company for a
nominal price within 5 years from the execution date of such agreement and
become the largest shareholder of the Company. See Certain Relationships and
Related Transactions. Accordingly, Mr. Zhang and other executive officers who
hold the Companys common stock are able to control all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This could delay or prevent an outside party
from acquiring or merging with us even if our other stockholders wanted it to
occur.
There is currently a very limited trading market for our
common stock.
The market for our common stock is limited and we cannot assure
you that a larger market will ever be developed or maintained. Currently, our
common stock is traded on the Over-The-Counter Bulletin Board. Securities traded
on the OTC Bulletin Board typically have low trading volumes. Market
fluctuations and volatility, as well as general economic, market and political
conditions, could reduce our market price. As a result, this may make it
difficult or impossible for our shareholders to sell our common stock. Prior to
the fourth quarter ended December 31, 2010, there was no trading activity of our
common stock on the Over-The-Counter Bulletin Board.
We do not intend to pay cash dividends in the foreseeable
future.
We currently intend to retain all future earnings for use in
the operation and expansion of our business. We do not intend to pay any cash
dividends in the foreseeable future but will review this policy as circumstances
dictate. Should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiaries based in the PRC.
Our operating subsidiaries, from time to time, may be subject to restrictions on
its ability to make distributions to us, including restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. See Risks relating to Regulation of Our Business and
to Our Structure above.
Our common stock is subject to the Penny Stock
Regulations.
Our common stock is, and will continue to be subject to the
SECs penny stock rules to the extent that the price remains less than $5.00.
Those rules, which require delivery of a schedule explaining the penny stock
market and the associated risks before any sale, may further limit your ability
to sell your shares.
The SEC has adopted regulations which generally define penny
stock to be an equity security that has a market price of less than $5.00 per
share. Our common stock, when and if a trading market develops, may fall within
the definition of penny stock and subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000, or annual incomes exceeding $200,000 or
$300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchase of such securities and
have received the purchasers prior written consent to the transaction.
Additionally, for any transaction, other than exempt transactions, involving a
penny stock, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealers presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell their common stock in the secondary market.
21
Our common stock is illiquid and subject to price
volatility unrelated to our operations.
The market price of our common stock could fluctuate
substantially due to a variety of factors, including market perception of our
ability to achieve our planned growth, quarterly operating results of other
companies in the same industry, trading volume in our common stock, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
A large number of shares of common stock will be issuable for
future sale which will dilute the ownership percentage of our current holders of
common stock. The availability for public resale of those shares may depress our
stock price.
Also as a result, there will be a significant number of new
shares of common stock on the market in addition to the current public float.
Sales of substantial amounts of common stock, or the perception that such sales
could occur, and the existence of warrants to purchase shares of common stock at
prices that may be below the then current market price of the common stock,
could adversely affect the market price of our common stock and could impair our
ability to raise capital through the sale of our equity securities.
Enforcement against us or our directors and officers may
be difficult.
Because our principal assets are located outside of the U.S.
and a majority of our directors and officers, both present and future, reside
outside of the U.S., it may be difficult for you to enforce your rights based on
U.S. federal securities laws against us and our officers and directors or to
enforce a U.S. court judgment against us or them in the PRC.
In addition, our operating company is located in the PRC and
substantially all of its assets are located outside of the U.S. It may therefore
be difficult for investors in the U.S. to enforce their legal rights based on
the civil liability provisions of the U.S. Federal securities laws against us in
the courts of either the U.S. or the PRC and, even if civil judgments are
obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is
unclear if extradition treaties now in effect between the U.S. and the PRC would
permit effective enforcement against us or our officers and directors of
criminal penalties under the U.S. Federal securities laws or otherwise.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving certain U.S.-listed Chinese
companies, we may have to expend significant resources to investigate and
resolve the matter which could harm our business operations, stock price and
reputation and could result in a loss of your investment in our stock,
especially if such matter cannot be addressed and resolved quickly.
Recently, U.S. public companies that have substantially all of
their operations in China, particularly companies like us which have completed
so-called reverse merger transactions, have been the subject of intense
scrutiny, criticism and negative publicity by investors, short sellers,
financial commentators and regulatory agencies, such as the United States
Securities and Exchange Commission. Much of the scrutiny, criticism and negative
publicity has centered around financial and accounting irregularities and
mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in
many cases, allegations of fraud. As a result of the scrutiny, criticism and
negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become
virtually worthless. Many of these companies are now subject to shareholder
lawsuits, SEC enforcement actions and are conducting internal and external
investigations into the allegations. It is not clear what affect this
sector-wide scrutiny, criticism and negative publicity will have on our company,
our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will
have to expend significant resources to investigate such allegations and/or
defend our company. This situation could be costly and time consuming and
distract our management from growing our company. If such allegations are not
proven to be groundless, our company and business operations will be severely
impacted. It could seriously affect our ability to raise money and our ability to uplist to major stock exchange,
and your investment in our stock could be rendered worthless.
22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
We have not sold any equity securities during the fiscal
quarter ended September 30, 2011.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There were no defaults upon senior securities during the fiscal
quarter ended September 30, 2011.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) Exhibits
23
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.
|
CHINA SHESAYS MEDICAL COSMETOLOGY
INC.
|
|
|
Date: November 14, 2011
|
By:
/s/ Yixiang Zhang
|
|
Name: Yixiang Zhang
|
|
Title: Chief Executive Officer and Chairman
|
|
|
Date: November 14, 2011
|
By:
/s/ Wenbin Zhu
|
|
Name: Wenbin Zhu
|
|
Title: Chief Financial Officer
|
24
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