UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
For the
Quarterly Period Ended June 30, 2010
Commission
File Number: 000-53075
QINGDAO
FOOTWEAR, INC.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
16-1591157
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification Number)
|
269
First Huashan Road
Jimo
City, Qingdao, Shandong, PRC
(Address
of principal executive office and zip code)
86-532-86595999
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
Non-accelerated
filer
o
|
|
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
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at August 15, 2010
|
Common
Stock, $0.0001 par value per share
|
|
10,000,179
shares
|
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
3
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
13
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
22
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
22
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
23
|
ITEM 1A
|
RISK FACTORS
|
23
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
24
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
24
|
ITEM
4.
|
RESERVED
|
24
|
ITEM
5.
|
OTHER
INFORMATION
|
24
|
ITEM
6.
|
EXHIBITS
|
24
|
|
|
|
SIGNATURES
|
25
|
PART I: FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF JUNE 30, 2010 AND DECEMBER 31, 2009
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$
|
414,350
|
|
|
$
|
61,131
|
|
Accounts
receivable
|
|
|
360,934
|
|
|
|
98,962
|
|
Notes
receivable
|
|
|
460,313
|
|
|
|
-
|
|
Inventories
|
|
|
557,031
|
|
|
|
344,512
|
|
Prepaid
expenses
|
|
|
651,854
|
|
|
|
57,311
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,444,482
|
|
|
|
561,916
|
|
|
|
|
|
|
|
|
|
|
Long
term prepaid expenses
|
|
|
1,668,725
|
|
|
|
-
|
|
Property,
plant and equipment, net
|
|
|
1,022,594
|
|
|
|
930,451
|
|
Intangible
assets
|
|
|
3,873,744
|
|
|
|
208,167
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
9,009,545
|
|
|
$
|
1,700,534
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
21,261
|
|
|
$
|
15,727
|
|
Accrued liabilities
|
|
|
1,056,441
|
|
|
|
-
|
|
Short
term loans
|
|
|
1,163,670
|
|
|
|
718,830
|
|
Taxes
payable
|
|
|
3,043,141
|
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
Duet
to related parties
|
|
|
-
|
|
|
|
221,871
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
5,284,513
|
|
|
|
959,055
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
250,410
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
5,534,923
|
|
|
$
|
1,208,445
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Series
A preferred stock, .0001 par value, 10,000,000 shares authorized, none
issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, .0001 par value, 100,000,000 shares authorized, 10,000,000 and
9,700,000 shares issued and outstanding, respectively
|
|
|
1,000
|
|
|
|
970
|
|
Additional
paid-in capital
|
|
|
762,091
|
|
|
|
319,510
|
|
Accumulated
other comprehensive income
|
|
|
455,031
|
|
|
|
440,775
|
|
Retained
earnings (deficits)
|
|
|
2,256,500
|
|
|
|
(269,166
|
)
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
$
|
3,474,622
|
|
|
$
|
492,089
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
9,009,545
|
|
|
$
|
1,700,534
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE TRHEE MONTHS AND SIX MONTHS ENDED JUNE 30, 2010 and 2009
UNAUDITED
|
|
Three
Months
Ended
|
|
|
Six
Months
Ended
|
|
|
|
June
30,
2010
|
|
|
June
30,
2009
|
|
|
June
30,
2010
|
|
|
June
30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
6,483,625
|
|
|
$
|
5,143,578
|
|
|
$
|
11,249,437
|
|
|
$
|
9,599,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
3,422,563
|
|
|
|
2,923,413
|
|
|
|
6,079,318
|
|
|
|
5,445,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
3,061,062
|
|
|
|
2,220,165
|
|
|
|
5,170,119
|
|
|
|
4,153,725
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
844,753
|
|
|
|
230,913
|
|
|
|
1,104,863
|
|
|
|
449,460
|
|
Depreciation
and Amortization Expense
|
|
|
41,312
|
|
|
|
13,125
|
|
|
|
59,317
|
|
|
|
26,258
|
|
Income
from operations
|
|
|
2,174,997
|
|
|
|
1,976,127
|
|
|
|
4,005,939
|
|
|
|
3,678,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
|
22,009
|
|
|
|
21,994
|
|
|
|
44,007
|
|
|
|
43,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
18,498
|
|
|
|
180
|
|
|
|
18,587
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(26,261
|
)
|
|
|
(13,892
|
)
|
|
|
(49,167
|
)
|
|
|
(27,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,189,243
|
|
|
|
1,984,409
|
|
|
|
4,109,366
|
|
|
|
3,695,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
657,964
|
|
|
|
494,902
|
|
|
|
1,115,495
|
|
|
|
922,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,531,279
|
|
|
$
|
1,489,507
|
|
|
$
|
2,903,871
|
|
|
$
|
2,772,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic and diluted
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-basic and diluted
|
|
|
10,000,000
|
|
|
|
9,700,000
|
|
|
|
10,000,000
|
|
|
|
9,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,531,279
|
|
|
$
|
1,489,507
|
|
|
$
|
2,903,871
|
|
|
$
|
2,772,675
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
13,
915
|
|
|
|
(1,234
|
)
|
|
|
1
4
,
256
|
|
|
|
(7,939
|
)
|
Comprehensive
income
|
|
$
|
1,545,194
|
|
|
$
|
1,488,273
|
|
|
$
|
2,918,127
|
|
|
$
|
2,764,736
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
UNAUDITED
|
|
Six Months Ended
|
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,903,871
|
|
|
$
|
2,772,675
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
59,317
|
|
|
|
26,258
|
|
Stock
based compensation
|
|
|
442,611
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(261,567
|
)
|
|
|
(40,637
|
)
|
Accrued
interest on notes receivable
|
|
|
(18,413
|
)
|
|
|
-
|
|
Inventories
|
|
|
(211,109
|
)
|
|
|
(39,869
|
)
|
Prepaid
expenses
|
|
|
(2,263,033
|
)
|
|
|
(50,912
|
)
|
Accounts
payable and accrued liabilities
|
|
|
38,456
|
|
|
|
17,105
|
|
Tax
payable
|
|
|
3,040,504
|
|
|
|
2,681,288
|
|
Net
cash provided by operating activities
|
|
|
3,730,637
|
|
|
|
5,365,908
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Loan
made to other
|
|
|
(441,900
|
)
|
|
|
-
|
|
Advance
to related party
|
|
|
(222,778
|
)
|
|
|
(3,243,228
|
)
|
Cash
paid for property and equipment
|
|
|
(130,127
|
)
|
|
|
(373,302
|
)
|
Cash
paid for intangible asset
|
|
|
(2,659,045
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(3,453,850
|
)
|
|
|
(3,616,530
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(378,205
|
)
|
|
|
(1,611,500
|
)
|
Proceeds
from loans
|
|
|
441,900
|
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
63,695
|
|
|
|
(1,611,500
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
12,737
|
|
|
|
(1,498
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
353,219
|
|
|
$
|
136,380
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
61,131
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
414,350
|
|
|
$
|
254,914
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
49,167
|
|
|
$
|
27,391
|
|
Income
tax paid
|
|
$
|
1,149
|
|
|
$
|
1,052
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 - ORGANIZATION AND BUSINESS OPERATIONS
Qingdao Footwear, Inc.
(formerly Datone, Inc.) was originally incorporated on August
9, 2000 under the laws
of the State of Delaware. The Company operated as a wholly-owned subsidiary of
USIP.COM, Inc. On August 24, 2006, USIP decided to spin-off its subsidiary
companies, one of which was Datone, Inc.
On
February 1, 2008, Datone, Inc. filed a registration statement on Form 10-SB,
which went effective on November 13, 2008.
On
February 12, 2010, the Company completed a reverse acquisition transaction
through a share exchange with Glory Reach International Limited, a Hong Kong
limited company (“Glory Reach”), the shareholders of Glory Reach (the
“Shareholders”), Greenwich Holdings LLC and Qingdao Shoes, whereby the Company
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Convertible Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. Following the effectiveness of the Reverse Stock Split
(note 9) and conversion of Series A Preferred Stock into common stock (note 9),
there will be approximately 10,000,000 shares of our common stock issued and
outstanding and no shares of preferred stock issued and outstanding. As a result
of the reverse acquisition, Glory Reach became our wholly-owned subsidiary and
the former shareholders of Glory Reach became our controlling
stockholders. The share exchange transaction with Glory Reach was treated
as a reverse acquisition, with Glory Reach as the acquirer and Datone, Inc. as
the acquired party for accounting and financial reporting purposes. After the
reverse merger, Datone, Inc changed its name to Qingdao Footwear,
Inc.
Datone
spun off all its assets and liabilities to its prior owners before the reverse
merger. For Glory Reach, reverse merger is accounted for as a reverse
merger with a shell company and as a recapitalization.
Glory
Reach International Limited (the “Company”) was established in Hong Kong on
November 18, 2009 to serve as an intermediate holding company. Mr.
Tao Wang, the controlling interest holder of Qingdao Shoes also controls the
Company. On February 8, 2010, also pursuant to the restructuring
plan, the Company acquired 100% of the equity interests in Qingdao
Shoes.
Qingdao
Shoes was incorporated on March 11, 2003 in Jimo County, Qingdao City,
Shandong Province, People’s Republic of China (the “PRC”) with registered
capital of $320,480. Prior to December 18, 2009, Mr. Tao Wang
owned 80% of Qingdao Shoes and the remaining 20% was owned by Mr. Renwei Ma.
Starting from December 18, 2009, Mr. Tao Wang owned 80% of Qingdao Shoes, Mr.
Renwei Ma owned 15% and Mr. Wenyi Chen owned the remaining
5%. Qingdao Shoes is the owner of the brand name “Hongguan” and
principally engaged in the wholesale and retail sales of fashion footwear
primarily in the northeast region of China.
Since
there is common control between the Glory Reach and Qingdao Shoes, for
accounting purposes, the acquisitions of Qingdao Shoes has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
These
accompanying unaudited interim consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission, and should be read in conjunction with the December 31, 2009
audited financial statements of the Company and the notes thereto as included in
the Company’s Form PRER14C filed on April 19, 2010. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for fair presentation of financial position and results of operations
for the interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. Notes to the consolidated financial
statements, which would substantially duplicate the disclosure required in the
Company’s December 31, 2009 annual financial statements have been
omitted.
All
significant inter-company balances and transactions have been eliminated in
consolidation. Certain prior period numbers are reclassified to conform to
current period presentation.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As
of June 30, 2010 and December 31, 2009, substantially all of the Company’s cash
were held by major financial institutions located in the PRC, which management
believes are of high credit quality. With respect to trade
receivables, the Company generally does not require collateral for trade
receivables and has not experienced any credit losses in collecting the trade
receivables.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Land Use
Rights
According
to the laws of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. Land use rights are being amortized
using the straight-line method over the lease term of the rights.
The
Company paid in advance for the lease of two parcels of land consisting of
approximately $243,000 and $3,682,000 for 50-year and 60-year time period,
respectively. The lease period began during 2003 and 2010 and expire during 2053
and 2070, respectively. The amount is being amortized and recorded as expense
over the 50-year and 60-year terms of the leases, respectively.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities. The Company’s other comprehensive income arose from the
effect of foreign currency translation adjustments.
Value
Added Taxes
The
Company is subject to value added tax (“VAT”) for selling
merchandise. The applicable VAT rate is 17% for products sold in the
PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input
VAT). Under the commercial practice of the PRC, the Company pays VAT
based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC
tax authorities dispute the date on which revenue is recognized for tax
purposes, the PRC tax office has the right to assess a penalty based on the
amount of the taxes which are determined to be late or deficient, and will be
expensed in the period if and when a determination is made by the tax
authorities that a penalty is due.
Revenue
Recognition
The
Company generates revenues from the retail and wholesale of shoes. Sales
revenues are recognized when the following four revenue criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the selling
price is fixed or determinable, and collectability is reasonably assured. Sales
are presented net of value added tax (VAT). No return allowance is made as
product returns have been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesale to
its contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements.
The Company does not allow any discounts, credits, rebates or similar
privileges.
Earnings
per Share
Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. At June 30, 2010
and December 31, 2009, respectively, the Company had no common stock equivalents
that could potentially dilute future earnings per share.
NOTE
3 – NOTES RECEIVABLE
The
Company advanced $440,100 to a third party in January 2010. The note receivable
carries annual interest at 10% and matured in July 2010.
NOTE
4 – PREPAID EXPENSES
Prepaid
expenses consist of the following as of June 30, 2010 and December 31,
2009:
|
|
June
30,2010
|
|
|
December
31,
2009
|
|
Prepaid
rent
|
|
$
|
693,758
|
|
|
$
|
18,778
|
|
Prepaid
advertising fee
|
|
|
1,237,188
|
|
|
|
-
|
|
Prepaid
maintenance fee
|
|
|
349,838
|
|
|
|
-
|
|
Prepaid
miscellaneous fee
|
|
|
39,795
|
|
|
|
38,533
|
|
|
|
$
|
2,320,579
|
|
|
$
|
57,311
|
|
Minus:
current portion
|
|
|
651
,
854
|
|
|
|
57
,
311
|
|
Long
term portion
|
|
|
1,668,725
|
|
|
|
-
|
|
Long term
prepaid rent is for a new 15-year retail store lease. The whole amount of the
lease was prepaid. Long term advertising prepayment is for advertisement
contracts with period ranging from two to five years. The whole contracts
amounts were prepaid. Long term maintenance prepayment is for a five-year
landscaping maintenance contract and the whole contract was
prepaid.
NOTE
5 – INTANGIBLE ASSETS
Intangible
assets consist of the following land use right as of June 30, 2010 and December
31, 2009:
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
|
|
|
|
|
|
|
Cost
of land use right
|
|
|
3,925,545
|
|
|
|
242,055
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated amortization
|
|
|
51,801
|
|
|
|
33,888
|
|
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
3,873,744
|
|
|
$
|
208,167
|
|
Amortization
expense for the three and six months ended June 30, 2010 and 2009 was $16,491,
$17,701, $1,210 and $2,420, respectively.
Amortization
expense for the next five years and thereafter is as follows:
2010
(for the remaining six months)
|
|
$
|
32,980
|
|
2011
|
|
|
65,962
|
|
2012
|
|
|
65,962
|
|
2013
|
|
|
65,962
|
|
2014
|
|
|
65,962
|
|
2015
|
|
|
65,962
|
|
Thereafter
|
|
|
3,510,954
|
|
Total
|
|
$
|
3,873,744
|
|
In April
2010, the Company purchased land use rights in Jimo, Shandong Province for
$3,682,500. By June 30, 2010, $2,659,045 has been paid in cash. The company is
still in the process of obtaining the title of the land use right.
NOTE
6 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of June 30, 2010 and December 31, 2009, the Company’s short
term loans consisted of the following:
|
|
June 30, 2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
|
|
294,600
|
|
|
|
293,400
|
|
|
|
|
|
|
|
|
|
|
BOQ,
12-month bank loan due in September 2010, bears annual interest at 6.372%
average, pledged by Company’s building and land use right
|
|
|
427,170
|
|
|
|
425,430
|
|
|
|
|
|
|
|
|
|
|
JMRB,
12-month bank loan due in December 2010, bears annual interest at
7.965% average, secured by third parties
|
|
|
441,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
|
$
|
1,163,670
|
|
|
$
|
718,830
|
|
The above
indebtedness to JMRB at June 30, 2010 and December 31, 2009 has been guaranteed
by two unrelated companies.
NOTE
7 – LONG TERM LOANS
On
December 16, 2009, the Company entered into a 2-year loan agreement with
JMRB. The Company borrowed $250,410 with an annual interest rate
equal to 7.02% and is due in December 2011. The loan is guaranteed by
the relatives of Mr. Tao Wang, the CEO and major shareholder of the Company and
is collateralized by the property of his relatives.
NOTE
8- RELATED PARTY BALANCES AND TRANSCATIONS
Due to
related party
At
December 31, 2009, the amount due to Mr. Tao Wang, the CEO and major shareholder
of the Company amounted to $104,511. These borrowings bear no interest and were
paid off in first quarter 2010.
At
December 31, 2009, the dividend payable to Mr. Renwei Ma, the shareholder of the
Company was $117,360, which was paid off in the first quarter of
2010.
Due to
related party at June 30, 2010 is nil.
Related
party transactions
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the six months ended June 2010 and
2009, related party rent expense of $8,800 and $8,794, respectively, was
included in total rent expense of the year.
The
Company leases one of its warehouse buildings to Weidong, Liang, brother-in-law
of Mr. Tao Wang, for three years starting May 2008. Per the agreement, the
lessee shall pay equal amount of advertising expense on behalf of the lessor as
the lease payment. For the six months ended June 30, 2010 and 2009, the Company
recorded other income of $44,007 and $43,971 respectively, from leasing the
aforementioned building and advertising expense of the same amount
respectively.
NOTE
9 - INCOME TAX
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements.
|
|
Six
Months
Ended
June
30,
2010
|
|
|
Six
Months
Ended
June
30,
2009
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
4,019,366
|
|
|
$
|
3,695,300
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
1,115,495
|
|
|
$
|
922,625
|
|
There is
no significant temporary difference between book and tax income.
The
Company has no United States income tax liabilities as of June 30, 2010 and
December 31, 2009.
The
following table reconciles the U.S. statutory corporate income rates to the
Company’s effective tax rate for the six months ended June 30, 2010 and
2009:
|
|
Six
Months
Ended
June
30,
2010
|
|
|
Six
Months
Ended
June
30,
2009
|
|
|
|
|
|
|
|
|
U.S.
statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign
income not recognized in the U.S.
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
PRC
statutory rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Adjustment
for expense on U.S. Shell
|
|
|
2
.
8
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
27.
8
|
%
|
|
|
25.0
|
%
|
NOTE
10 – SHAREHOLDERS’ EQUITY
During
January 2010, the Company distributed $378,205 to its
shareholders.
During
February 2010, upon the closing of the reverse merger, one of the shareholders
transferred 338 of the 874 shares of Series A Convertible Preferred Stock issued
to him under the share exchange to certain service providers of the Company. The
underlining common shares were valued at $1.35 (post-reverse split common stock
price) per share resulting in stock compensation expense of $442,611 for the six
months ended June 30, 2010.
Series A
Convertible Preferred Stock
The
Company issued 10,000 shares of our Series A Preferred Stock in February 2010
related to the reverse merger.
Shares of
Series A Preferred Stock had automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 970 shares of common
stock immediately subsequent to the effectiveness of a planned 1-for-27 reverse
split of the Company’s outstanding common stock, which had become effective on
June 10, 2010. Upon the reverse split the 10,000 outstanding shares
of Series A Preferred Stock had automatically convert into 9,700,000 shares of
common stock, which constitutes 97% of the outstanding common stock of the
Company subsequent to the reverse stock split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-27
reverse split (to retroactively take into account the reverse stock
split).
Following
the effectiveness of the Reverse Stock Split and conversion of Series A
Preferred Stock into common stock, there are approximately 10,000,000 shares of
our common stock issued and outstanding and no shares of preferred stock issued
and outstanding.
For
accounting purposes, we treated the series A convertible preferred stock as
being converted fully to common stock on a post reverse stock split
basis.
The
1-for-27 Reverse Stock Split
The
Company’s board of directors unanimously approved, subject to stockholder
approval, the 1-for-27 Reverse Split of our issued and outstanding common stock.
The reverse split will reduce the number of issued and outstanding shares of the
Company’s common stock outstanding prior to the split. The reverse split
increases the total number of issued and outstanding shares of the Company’s
common stock subsequent to the split by triggering the automatic conversion of
the Company’s Series A Preferred Stock into 9,700,000 shares of common stock.
The reverse split had become effective on June 10, 2010, the date when the
Company filed with the Secretary of State of the State of Delaware following the
expiration of the 20 day period mandated by Rule 14c of the Exchange Act. On
June 10, 2010, 27 shares of Common Stock had automatically been combined and
changed into one share of common stock.
For
counting purposes, we treated the reverse stock split as being effective and all
shares are retroactively restated to reflect the reverse stock
split.
NOTE
11 – COMMITMENTS AND
CONTINGENCIES
Guarantees
As of
December 31, 2009, the Company provided corporate guarantees for bank loans
borrowed by two unrelated companies incorporated in the PRC (
“
Company A and
B
”
).
Associated with the corporate guarantee, Company A and B also provided cross
guarantees for the JMRB bank loans of $293,400 borrowed by the Company. If
Company A and B default on the repayment of their bank loans when they fall due,
the Company is required to repay the outstanding balance. As of December
31, 2009, the guarantee provided for the bank loans borrowed by Company A
and B were approximately RMB 1,000,000 ($293,400) and RMB 1,000,000 ($146,700),
respectively.
The
guarantee period is from July 2008 to December 2009. The Company’s
management considered the risk of default by Company A and B is remote and
therefore no liability for the guarantor’s obligation under the guarantee was
recognized as of December 31, 2009. No fee was paid to Company A and B for their
guarantee.
As of
June 30, 2010, two unrelated companies incorporated in the PRC provided
guarantees for the JMRB bank loans of $293,400 borrowed by the Company.
The guarantees end when the loans become mature. (See Note 5)
Tax
liabilities
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax authority
may take different views about the Company’s tax filings which may lead to
additional tax liabilities.
NOTE
12 - OPERATING RISKS
(a)
Country risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in a material adverse effect upon the Company’s
business and financial condition.
(b)
Exchange risk
The
Company cannot guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on
changes in the political and economic environments without notice.
(c)
Interest risk
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company
does not have any derivative financial instruments as of June 30, 2010 and
December 31, 2009 and believes its exposure to interest rate risk is not
material.
(d)
Deposit risk
The
Company holds certain bank accounts in its employees’ name in order to better
facilitate its daily cash needs. Balances of these accounts totaled $345,811 at
June 30, 2010 and $7,870 at December 31, 2009. Highest total balance of these
accounts during the six months period ended June 30, 2010 was approximately
$1,060,000 and $1,224,000 for the year ended December 31, 2009. it is
possible that the Company could lose these deposits due to the fact that these
accounts are not legally owned by the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
Quarterly Report on Form 10-Q for the three months ended June 30, 2010 contains
“forward-looking statements” within the meaning of Section 21E of the Securities
and Exchange Act of 1934, as amended, including statements that include the
words “believes,” “expects,” “anticipates,” or similar expressions. These
forward-looking statements include, among others, statements concerning our
expectations regarding our working capital requirements, financing requirements,
business, growth prospects, competition and results of operations, and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends, and similar expressions concerning matters that are not
historical facts. The forward-looking statements in this Quarterly Report on
Form 10-Q for the three months ended June 30, 2010 involve known and unknown
risks, uncertainties and other factors that could cause our actual results,
performance or achievements to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
Throughout
this report, the terms “we,” “us,” “our company,” “our” and “Qingdao Footwear”
refer to the combined business of Qingdao Footwear, Inc., formerly Datone, Inc.,
and its wholly owned direct and indirect subsidiaries, (i) Glory Reach
International Limited, or “Glory Reach,” a Hong Kong limited company; and (ii)
Qingdao Hongguan Shoes Co., Ltd., a PRC limited company, or “QHS,” as the case
may be.
Overview
We are a
designer and retailer of branded footwear in Northern China. We were organized
to service what we believe is an unmet and increasing demand for high quality
formal and casual footwear throughout the PRC. We are focused on providing
footwear that rises to the style, quality and comfort demands of a high-end
consumer at affordable prices within reach of middle market office employees.
Our products can be divided into men’s and women’s casual and formal footwear.
Along with the growth in urbanization and individual purchasing power in China,
the demand for leather footwear has also grown. Since our organization in 2003,
we have grown rapidly throughout Shandong province, a province that has
approximately one-third the number of people of the United States.
Our
principal business includes (1) designing and selecting designs for men’s and
women’s leather shoe lines; (2) sourcing and purchasing contract-manufactured
footwear; and (3) selling these lines of footwear under our proprietary brand,
“
红冠
”
(Hongguan, sometimes presented as “HonGung”). We do not manufacture or assemble
any shoes. We operate a number of flagship stores throughout greater Qingdao.
Our products are also brought to market through our extensive distribution
network of authorized independent distributors as well as through third party
retailers selected to operate exclusive Hongguan brand stores on our behalf. We
believe that the sale of our products through distributors and third parties has
enabled us to grow by exploiting their local retail expertise and economies of
scale while minimizing our expenditure on fixed asset and human resources. Our
company headquarters and main sales office is located in Shandong province in
northern China, in the city of Jimo, less than 25 miles from the major urban
center of Qingdao.
Principal
Factors Affecting Our Financial and Operational Results
Our
financial results of operations have been and will continue to be affected by a
number of factors, including but not limited to the following
factors:
Growth
in the broader PRC economy
Our
financial condition and results of operations have been driven by macro-economic
conditions, increased disposable income and consumer spending in the PRC. Since
our formation, we have derived 100% of our income from operations in China.
Along with growth in the economy as a whole, Chinese domestic consumption has
increased in line with rapid urbanization and increases in disposable income
over the past 15 years. Per capita urban disposable income has increased by an
annualized rate of 12.9% over the 5 years ending in 2008 and is anticipated to
top $2,000 in 2012. The urban population as a percentage of the total population
increased from 40.6% in 2003 to 46.6% at the end of 2009, and this trend is
expected to continue into the future. (National Bureau of Statistics of China,
www.stats.gov.cn) The United Nations estimates that China’s population is likely
to be evenly split between rural and urban areas by 2015. (“Urbanization in the
People’s Republic of China,” www.wikipedia.org) We expect that financial
performance will continue to be driven by the positive trends in retail
consumption, urbanization and increased consumer spending in the
future.
Increased
consumer demand for leather footwear products in the PRC
Consumer
demand for leather footwear products in the PRC is a key driver of our continued
growth. The success of our enterprise depends in large part on the growth in the
PRC consumer market, particularly consumer demand for high quality, affordable
leather shoes. As average living standards in the PRC continue to improve and a
larger percentage of employment opportunities become available in an urban
office or service economy setting, we expect consumer demand in the PRC to shift
increasingly towards footwear appropriate to such settings, such as fine leather
footwear. While Chinese per capita footwear consumption is lower than a number
of other countries, China surpassed the United States in 2008 as the country
that purchases the most pairs of footwear in the aggregate. Because the average
Chinese consumer purchases an average of two pairs of shoes annually, far fewer
than consumption levels in Korea, Japan or the West, China’s shoe consumption
rate is expected to approach levels of other nations with similar cultural
consumption characteristics if China’s consumer wealth continues to grow.
(“Footwear in China,” www.datamonitor.com) For this reason, we expect the market
to continue to grow for the immediate future.
Management
and Expansion of Our Distribution Network
The
majority of our sales are derived through third party distributors. As such,
management of our brand through and collection of receivables from these parties
is paramount to our success and future growth. We manage our brand by
controlling how our products are placed, selecting store locations and
decoration, and other qualitative measures. We regularly visit and inspect third
party stores in order to ensure they meet our high standards for appearance,
quality and service.
In the
past, we had managed receivables from our third parties by requiring full
payment for goods within one month of delivery. Beginning with our sales fair in
February 2010, we extended credit to certain distributors. These distributors
were selected based on outstanding track records in both sales and timely
payments. We extended this credit in order to enhance their ability to increase
sales responsibly and reward them for past success and loyalty. The extension of
credit allows these distributors to grow cost effectively in accordance with our
goal of achieving greater penetration in the Shandong retail market. It also
encourages them to purchase our new models of footwear. We monitor our
receivables carefully and reserve the right to terminate contracts with any
supplier whose payments are not timely. We have maintained strong and positive
long term relationships with all the distributors that we extended credit
periods to and have rarely encountered any difficulties on collection of
accounts receivable and do not anticipate collection issues in the future. We
encourage such timely repayment by maintaining regular communication with these
distributors. Management believes that it has already taken adequate measures to
ensure timely settlement by the distributors, and the extended credit period has
not and will not materially adversely affected our liquidity or working
capital.
Effective
cost management and quality control in our supply chain
Our
footwear is designed in house, but production of our footwear is entirely
outsourced. To meet production requirements and to remain profitable, we must be
able to count on our suppliers for quality product at reasonable prices
delivered in a timely manner at commercially reasonable prices. Therefore, it is
vital to our success that we are able to maintain control of our supply chain.
We believe that we will be able to offset a portion of any such increased costs
through improvement of production efficiency and use of economies of scale.
Historically, we have been successful in containing cost of goods sold as a
percentage of total cost of sales. For 2008 and 2009 our cost of goods sold
accounted for 59% and 57% of total sales, respectively. We seek to capitalize on
overcapacity in the footwear manufacturing industry in the PRC and leverage our
purchasing power to continue to obtain favorable prices from our major
suppliers. Should costs increase in the markets from which we currently source
products, we are confident that we will be able to find alternative footwear
providers throughout Southeast Asia. We actively work with our suppliers to
maintain quality and reserve the right to return goods that do not meet our
standards.
Competitive
Pricing Points and Attractive Product Designs
We have
been able to maintain strong gross profit margins through competitive pricing of
our products and effective cost management. To increase sales volumes, our
pricing policy is to offer a range of products set at different price points
with the aim of targeting different segments within the mid-range market. In
order to maintain our price competitiveness and sales volumes, we review our
pricing strategy regularly to make adjustments based on various factors,
including the market response to existing recommended retail prices, the level
of sales, the expected product margin on individual products, the prices of our
competitors’ products and the anticipated market trends and expected demand from
customers.
We pursue
a variety of designs that offer a diversified product mix and provide a wide
range of leather footwear styles to our customers, which we believe to be vital
to attracting customers and to increases our revenue. Our designers have
historically produced more than 200 unique designs annually which vary by season
and target demographic. We strive to find innovative styles and technologies to
incorporate into our shoes and always meet the highest and most popular styles
for our customers. In the coming years, we will monitor demand and adjust our
products accordingly to maximize sales and profit.
Ability
to maintain brand recognition and marketing success
We
believe that brand recognition drives consumer product selection. We will
continue to invest our efforts in brand building and establishing Hongguan as a
quality affordable footwear brand rising to the highest fashion standards while
remaining within reach of a smaller budget consumer. We place great emphasis on
our brand and promote Hongguan products through advertisements in the media,
sales fairs and various other promotional activities. We intend to increase our
marketing budgets for promotional activities in the future in order to further
strengthen our brand and market position.
Previous
Organization and Reverse Acquisition
During
fiscal year 2009, our company’s corporate entity, Datone, Inc., was a provider
of both privately owned and company owned payphones and stations in New York.
Datone, Inc. received revenues from the collection of the payphone coinage, a
portion of usage of service from each payphone and a percentage of long distance
calls placed from each payphone from the telecommunications service providers.
In addition, Datone, Inc. also received revenues from the service and repair of
privately owned payphones, sales of payphone units.
On
February 12, 2010, our company completed a reverse acquisition transaction
through a share exchange with Glory Reach and the shareholders of Glory Reach
(the “Glory Reach Shareholders”), whereby Qingdao Footwear (Datone, Inc. at the
time) acquired 100% of the issued and outstanding capital stock of Glory Reach
in exchange for 10,000 shares of Datone, Inc.’s Series A Preferred Stock. This
preferred stock constituted 97% of our issued and outstanding capital stock on
an as-converted to common stock basis as of and immediately after the
consummation of the reverse acquisition. As a result of the reverse acquisition,
Glory Reach became our wholly-owned subsidiary and the Glory Reach Shareholders
became our beneficially controlling stockholders. The share exchange transaction
with Glory Reach was treated as a reverse acquisition, with Glory Reach as the
acquirer and Datone, Inc. as the acquired party. In connection with this
acquisition, Datone, Inc. changed its name to “Qingdao Footwear, Inc.” and
changed its operations from serving as a provider of payphones and stations in
New York to serving as a holding company for a designer and retailer of branded
footwear in Northern China.
As a
result of our acquisition of Glory Reach, we now own all of the issued and
outstanding capital stock of Glory Reach, which in turn owns all of the
outstanding capital stock of QHS.
Results
of Operations
Comparison of Three Months
Ended June 30, 2010 and June 30, 2009
The
following table sets forth key components of our results of operations during
the three months ended June 30, 2010 and 2009, both in dollars and as a
percentage of our net sales.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
6,483,625
|
|
|
|
100
|
%
|
|
$
|
5,143,578
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
3,422,563
|
|
|
|
53
|
%
|
|
|
2,923,413
|
|
|
|
57
|
%
|
Gross
profit
|
|
|
3,061,062
|
|
|
|
47
|
%
|
|
|
2,220,165
|
|
|
|
43
|
%
|
Operating
Expenses
|
|
|
886,065
|
|
|
|
14
|
%
|
|
|
244,038
|
|
|
|
5
|
%
|
Operating
Income
|
|
|
2,174,997
|
|
|
|
34
|
%
|
|
|
1,976,127
|
|
|
|
38
|
%
|
Other
income & interest expense
|
|
|
14,246
|
|
|
|
0
|
%
|
|
|
8,282
|
|
|
|
0
|
%
|
Income
Before Income Taxes
|
|
|
2,189,243
|
|
|
|
34
|
%
|
|
|
1,984,409
|
|
|
|
39
|
%
|
Income
taxes
|
|
|
657,964
|
|
|
|
10
|
%
|
|
|
494,902
|
|
|
|
10
|
%
|
Net
income
|
|
$
|
1,531,279
|
|
|
|
24
|
%
|
|
$
|
1,489,507
|
|
|
|
29
|
%
|
Net Sales
.
Our net sales increased to $6,483,625 in the three months ended June 30, 2010
from $5,143,578 in the same period in 2009, representing 26% revenue growth. As
retail sales trends and broader economic growth in the PRC have been positive
despite a global economic downturn, during the three months ended June 30, 2010,
we promoted higher price products in order to achieve higher gross
profit. In addition, our retail sales contributed 22.5% of total
sales amount during the three months ended June 30, 2010, as compared to 14.6%
of total sales during the same period of 2009. Our retail selling
price is about 40%-50% markup on the selling price to wholesalers. As
a result, the average selling price per pair for the second quarter of 2010 and
2009 was $19.6 and $13.6 respectively, representing an increase of 44%. In
response to the price increase, the volume of footwear sold decreased 12.5% to
approximately 331 thousand pairs for the three months ended June 30, 2010 as
compared to approximately 378 thousand pairs for the same period last year. We
believe our pricing policy for this quarter was a success given the overall
growth in revenue. In the future, we may adjust pricing strategy to meet market
demand and satisfy our financial goals.
Net sales
from our wholesale operations increased $636,999, or 14.5%, to $5,025,547 for
the three months ended June 30, 2010, from $4,388,548 for the three months ended
June 30, 2009. The average selling price per pair within our wholesale
operations increased to $18.1 per pair for the three months ended June 30, 2010
from $12.9 per pair in the same period last year, an increase of 40%, primarily
due to acceptance of new designs and styles for our in-season
products. However, our sales volume decreased 18.1% resulted from the
increase of selling price. We may, from time to time, adjust our
selling price policy to test market to achieve higher gross profit.
Net sales
from our retail operations increased $703,048 to $1,458,078 for the three months
ended June 30, 2010, a 93% increase over sales of $755,030 for the three months
ended June 30, 2009. The average selling price per pair within our
retail operations increased 35% to $27.8 per pair for the three months ended
June 30, 2010 compared to $20.6 for the same period in 2009. The
increase of selling price is mainly resulted from the company’s promotion policy
and high-end products policy during this period, meanwhile, lots of types of
summer shoes with lower price were sold during the same period of
2009. To achieve our sales strategy, we inputted extensive of
advertising in these area. Apart from the increase of selling price,
our sales volume from retail outlets also increased 43% to 52.4 thousand pairs
of shoes during the three months ended June 30, 2010. The increase of
sales volume is mainly resulted from increase of our outlets to 12 during the
three months ended June 30, 2010 from 8 in the same period of 2009, which
represent 50% increase.
Cost of
Sales
. For the three months ended June 30, 2010, cost of sales amounted
to $3,422,563 or approximately 52.8% of net revenues as compared to cost of
sales of $2,923,413 or approximately 56.8% of net revenues for the same period
of 2009. The average unit cost per pair increased to $10.4 for the second
quarter of 2010 from $7.7 for the same period of 2009, an increase of
34%. Compared to 35% selling price increase in retail outlets and 40%
selling price increase in wholesale business, it is generally in line with the
increase. The increase is mainly resulted from selling more high-unit
price model products during this period, compared to more low price products
sold during the same period of 2009. We may continue to promote more
high-unit price models, but, we do not expect that the unit price growth in
following periods are as high as this quarter.
Gross Profit and
Gross Margin
.
Gross profit for the three months ended June 30, 2010 increased $840,897
to $3,061,062 from $2,220,165 for the same period in 2009. Gross profit as a
percentage of net sales, or gross margin, increased to 47.2% for the three
months ended June 30, 2010 from 43.2% for the same period in 2009. The gross
margin increase was primarily attributable to increased margins for both our
retail and wholesale operations.
Gross
profit for wholesale operations increased $396,713, or 22.7%, to $2,145,118 for
the three months ended June 30, 2010 from $1,748,405 for the same period in
2009. Wholesale margins increased to 42% for the three months ended June 30,
2010 from 40% for the same period in 2009. The increase in wholesale margins was
primarily due to increased selling price of wholesale offset decreased sales
volume resulting from high competitive local footwear market. In
addition, our wholesale customers chose higher unit selling price product to
sell which contributes higher gross margin. Gross profit for retail
operations increased $444,184, or 94%, to $915,944 for the three months ended
June 30, 2010 from $471,760 for the same period in 2009. Retail
margins
remained
at
63% for both periods ended June 30, 2010 or 2009.
Operating
Expenses
. Our selling, general and administrative expenses grew to
$844,753 in the three months ended June 30, 2010 from $230,913 in the same
period in 2009. This was mainly due to a payment of shares to service providers
for services provided in connection with our reverse merger.
Other Income
& Interest Expense
. Other Income & Interest Expense increased to
(put a $ here) $14,246 in the three months ended June 30, 2010 from $8,282 in
the same period in 2009. Other Income and Interest Expense is a negligible
percentage of our revenue.
Income before
Income Taxes
. Our income before income taxes increased to $2,189,243 in
the three months ended June 30, 2010 from $1,984,409 in the same period in
2009. The increase is mainly resulted from increase in gross profit
offset by increased operating expenses.
Income
Taxes
. Income tax increased to $657,964 in the three months ended June
30, 2010 from $494,902 in the same period in 2009. The increase was due to an
increase in taxable income, as our tax rate remained constant.
Net
Income
. In the three months ended June 30, 2010, we generated net income
of $1,531,279, a increase from $1,489,507 in the same period in 2009. This
increae was primarily due to the increase in gross profit from $2,220,165 to
$3,061,062 quarter over quartere.
Comparison of Six Months
Ended June 30, 2010 and June 30, 2009
The
following table sets forth key components of our results of operations during
the six months ended June 30, 2010 and 2009, both in dollars and as a percentage
of our net sales.
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
11,249,437
|
|
|
|
100
|
%
|
|
$
|
9,599,476
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
6,079,318
|
|
|
|
54
|
%
|
|
|
5,445,751
|
|
|
|
57
|
%
|
Gross
profit
|
|
|
5,170,119
|
|
|
|
46
|
%
|
|
|
4,153,725
|
|
|
|
43
|
%
|
Operating
Expenses
|
|
|
1,164,180
|
|
|
|
10
|
%
|
|
|
475,718
|
|
|
|
5
|
%
|
Operating
Income
|
|
|
4,005,939
|
|
|
|
36
|
%
|
|
|
3,678,007
|
|
|
|
38
|
%
|
Other
income & interest expense
|
|
|
13,427
|
|
|
|
0
|
%
|
|
|
17,293
|
|
|
|
0
|
%
|
Income
Before Income Taxes
|
|
|
4,019,366
|
|
|
|
36
|
%
|
|
|
3,695,300
|
|
|
|
38
|
%
|
Income
taxes
|
|
|
1,115,495
|
|
|
|
10
|
%
|
|
|
922,625
|
|
|
|
10
|
%
|
Net
income
|
|
$
|
2,903,871
|
|
|
|
26
|
%
|
|
$
|
2,772,675
|
|
|
|
29
|
%
|
Net Sales
.
Our net sales increased to $11,249,437 in the six months ended June 30, 2010
from $9,599,476 in the same period in 2009, representing 17% revenue growth. As
retail sales trends and broader economic growth in the PRC have been positive
despite a global economic downturn, during the six months ended June 30, 2010,
we increased prices of 28% in order to achieve higher gross profit, which
resulted in a decrease of sales volume of 9% as compared to the same period of
2009.
Net sales
from our wholesale operations increased $781,815, or 10%, to $8,949,943 for the
six months ended June 30, 2010, from $8,168,128 for the six months ended June
30, 2009. The average selling price per pair within our wholesale operations
increased to $17.9 per pair for the six months ended June 30, 2010 from $14.4
per pair in the same period last year, an increase of 24%, primarily due to
acceptance of new designs and high pricing products as we
promoted. However, it resulted in a sales volume decrease of 12% to
500.7 thousand pairs of shoes during the six months ended June 30,
2010.
Net sales
from our retail operations increased $818,146 to $2,299,494 for the six months
ended June 30, 2010, a 61% increase over sales of $1,431,348 for the six months
ended June 30, 2009. The average selling price per pair within our retail
operations increased 33% to $30.7 per pair for the six months ended June 30,
2010 compared to $23.2 for the same period in 2009. Apart from increase of
selling price, our sales volume also contributed 21% increase as compared to the
same period of 2009, which is mainly resulted from increase of sales outlets
from 8 to 12 as of June 30, 2009 and 2010 respectively. The increase
of unit selling price is mainly resulted from our sales strategy which promote
more high-unit price products to the market to achieve higher gross
profit.
Cost of
Sales
. For the six months ended June 30, 2010, cost of sales amounted to
$6,079,318 or approximately 54% of net revenues as compared to cost of sales of
$5,445,751 or approximately 56.7% of net revenues for the same period of 2009.
The increase of cost of sales of 12% over the same period of 2009 is mainly
resulted from the increase of sales of 17%. The higher increase ratio
in sales is mainly resulted from change of sales mixture that our retail sales
take 20% of total sales of June 30, 2010 as compared to 15% during the same
period of 2009, which contributed approximately 20% more margin than that of
wholesale operations.
Gross Profit and
Gross Margin
.
Gross profit for the six months ended June 30, 2010 increased $1,016,394
to $5,170,119 from $4,153,725 for the same period in 2009. Gross profit as a
percentage of net sales, or gross margin, increased to 46% for the six months
ended June 30, 2010 from 43% for the same period in 2009. The gross margin
increase was primarily attributable to increased margins for both our retail and
wholesale operations and change of sales mixture as explained
above.
Gross
profit for wholesale operations increased $405,061, or 12%, to $3,661,821 for
the six months ended June 30, 2010 from $3,256,760 for the same period in 2009.
Wholesale margins increased to 41% for the six months ended June 30, 2010 from
40% for the same period in 2009. The increase in wholesale gross profit was
primarily due to increased selling price of wholesale offset decreased sales
volume resulting from high competitive local footwear market.
Gross
profit for retail operations increased $611,333, or 68%, to $1,508,298 for the
six months ended June 30, 2010 from $896,965 for the same period in 2009. Retail
margins increased to 66% for the six months ended June 30, 2010 from 63% for the
same period in 2009. The increase of gross profit is mainly resulted from
increase of unit selling prices and sales volume in retail operations as
explained above. The increase of gross margin is mainly resulted from
more acceptance of our high-end products in the market which has higher
margin.
Operating
Expenses
. Our selling, general and administrative expenses grew to
$1,104,863 in the six months ended June 30, 2010 from $449,460 in the same
period in 2009. This was mainly due to a payment of shares to service providers
for services provided in connection with our reverse merger.
Other Income
& Interest Expense
. Other Income & Interest Expense decreased to
(put a $ here) $13,427 in the six months ended June 30, 2010 from $17,293 in the
same period in 2009. Other Income and Interest Expense is a negligible
percentage of our revenue.
Income before
Income Taxes
. Our income before income taxes increased to $4,019,366 in
the six months ended June 30, 2010 from $3,695,300 in the same period in 2009.
The increase is mainly resulted from increase in gross profit offset by
increased operating expenses.
Income
Taxes
. Income tax increased to $1,115,495 in the six months ended June
30, 2010 from $922,625 in the same period in 2009. The increase was due to an
increase in taxable income, as our tax rate remained constant.
Net
Income
. In the six months ended June 30, 2010, we generated net income of
$2,903,871, an increase from $2,772,675 in the same period in 2009. This
increase was primarily due to increase of profit before tax as explained
above.
Liquidity
and Capital Resources
As of
June 30, 2010, we had cash and cash equivalents of $414,350, primarily
consisting of cash on hand and demand deposits. This compares with June 30,
2009, when we had cash and cash equivalents of $254,914, primarily consisting of
cash on hand and demand deposits. The following table provides detailed
information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our shareholders.
We do not expect our daily operations to be constrained by cash flow; however,
without additional capital, we may be limited to a lower rate of
growth.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flows
(all
amounts in U.S. dollars)
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash provided by operating activities
|
|
$
|
3,730,637
|
|
|
$
|
5,365,908
|
|
Net
cash used in investing activities
|
|
|
(3,453,850
|
)
|
|
|
(3,616,530
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
63,695
|
|
|
|
(1,611,500
|
)
|
Effects
of Exchange Rate Change in Cash
|
|
|
12,737
|
|
|
|
(1,498
|
)
|
Net
Increase in Cash and Cash Equivalents
|
|
|
353,219
|
|
|
|
136,380
|
|
Cash
and Cash Equivalent at Beginning of the Period
|
|
|
61,131
|
|
|
|
118,534
|
|
Cash
and Cash Equivalent at End of the Period
|
|
|
414,350
|
|
|
|
254,914
|
|
Operating
activities
Net cash
provided by operating activities was $3,730,637 for the six months ended June
30, 2010, as compared to $5,365,908 for the same period in 2009.
The cash
provided by operating activities for the six months ended June 30, 2010 was
mainly derived from our net profit of $2,903,871, stock-based compensation of
$442,611, and an increase of tax liabilities of $3,040,504, offset by an
increase of accounts receivable of $261,567 and increase of prepayments of
$2,263,033. The increase of accounts receivable was due to an increased credit
period policy designed to enhance sales following a sales fair held in February.
We have granted short-term credit extensions as a strategic incentive to our
most loyal and profitable distributors to increase our market share following
such a sales fair, largely in order to introduce our new models of footwear. In
order to balance of our operating cash flow, we also ask for a longer payment
term on our payables, which resulted in increase of accounts
payables. Increase of prepayment mainly represent the payment during
the period for the advertising, long term leasing for our new established
outlets. We may choose to lease or buy outlets in
future. We may also continue to do advertising to promote our sales
and increase of brand acceptance.
The cash
provided by operating activities for the six months ended June 30, 2009 was a
result of net profit of $2,772,675, and increase in tax payable of $2,681,288,
offset by the increase of accounts receivable, inventory and prepayment of
$131,418 in total.
Investing
activities
Net cash
used by investing activities for the six months ended June 30, 2010 was
$3,453,850 as compared to $3,616,530 net cash used in investing activities
during the same period of 2009. The cash used by investing activities during the
six months ended June 30, 2010 represents the payment to acquire the land use
right of $2,659,045, payment for a note receivable of $441,900 and advance to
owner of $222,778. The cash used in investing activities during the six months
ended June 30, 2009 represents the advance to owner of $3,243,228 and payment of
property and equipment of $373,302.
Financing
activities
Net cash
provided by financing activities for the six months ended June 30, 2010 was
$63,695, as compared to $1,611,500 used in the same period of 2009. The cash
provided by financing activities during six months ended June 30, 2010
represents the cash proceeds from bank loans of $441,900 by offsetting the
distribution
to owner of $378,205
. The cash used in financing activities during six
months ended June 30, 2009 represents distribution to owner of
$1,611,500.
Bank
loans
Our bank
loans include short-term loans and long-term loans. In our industry, it is
customary to obtain such loans to meet cash flow and inventory
needs.
Short
term loans, totaling $1,163,670 as of June 30, 2010, were issued by Bank of
Qingdao and JiMo Rural Bank, with annual interest rate ranging from 6.372% to
7.965%, and with terms of 12 months which will mature in September, November and
December 2010 respectively. All bank loans were secured either by the property
of the Company or third parties.
Capital
resources
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in the industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may
experience seasonal fluctuations in our revenue in some regions in the PRC,
based on the seasonal changes in the weather and the tendency of customers to
make purchases relating to their apparel suitable for the time of year. Any
seasonality may cause significant pressure on us to monitor the development of
materials accurately and to anticipate and satisfy these requirements. Our
revenues are usually higher in the first and fourth quarters due to seasonal
purchases.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
We
generate revenues from the retail and wholesale of shoes. Sales revenues are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectability is reasonably assured. Sales are presented net
of value added tax (“VAT”). No return allowance is made as product returns have
been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesales to our
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements. We
do not allow any discounts, credits, rebates or similar privileges.
We do not
grant any inventory pricing protection or other inventory adjusting policies to
our distributors. The distributors are responsible for their purchased products
types and volumes, unless any quality problems arise. If quality issues arise
with our products, the products will be fully replaced by our manufacturers in
accordance with the purchase agreement. As a result, we recognize our sales on
delivery of our products to our wholesalers. For the retail customers, we only
allow returns due to quality problems. We do not permit returns based on any
other reason, and we do not believe such liberal return policies are common in
China. Should there be any quality defects, customers have the right to return
the shoes to the stores from which they purchased them. The stores then return
them to our company, and we negotiate an acceptable solution with the
manufacturers, which tends to vary with the facts in each case. According to our
historical data, such returns are at approximately 0.01% of total sales and are
not material to our financial statements.
In light
of the low level of revenue dilution, we do not generally assess returns of
products, levels of inventory, expected introductions of new products or
external sources.
We have
not experienced any purchases of products in excess of ordinary course of
business levels as a result of any incentives. In our experience, customers
merely purchase their seasonal footwear needs more quickly—but not in greater
numbers—than they might otherwise purchase in the absence of such incentives.
This result is not surprising in an industry like the footwear industry, which
is marked by seasonal sales on, for example, sandals during summer and boots
during winter. As a result of such seasonal fluctuations, our customers endeavor
not to maintain excessive inventory but do try to purchase seasonally-specific
shoes shortly before the season.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
Impairment
of Long-Lived Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value. There was no impairment of long-lived assets for the six months period
ended June 30, 2010 and the year ended December 31, 2009.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is determined
on a weighted average basis and includes all expenditures incurred in bringing
the goods to the point of sale and putting them in a salable condition. In
assessing the ultimate realization of inventories, the management makes
judgments as to future demand requirements compared to current or committed
inventory levels. Our reserve requirements generally increase as our
projected demand requirements; or decrease due to market conditions and product
life cycle changes. The Company estimates the demand requirements based on
market conditions, forecasts prepared by its customers, sales contracts and
orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes
down inventories for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventories and their estimated market value
based upon assumptions about future demand and market conditions.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities. The Company’s other comprehensive income arose from the
effect of foreign currency translation adjustments.
Foreign
Currency Translation
The
Company’s functional currency is Chinese currency Renminbi (“RMB”) and its
reporting currency is the U.S. dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. Exchange gains or losses on transaction are included
in earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income.
Segment
Reporting
We
operate as a single operating segment for purposes of presenting financial
information and evaluating performance. As such, the accompanying consolidated
financial statements present financial information in a format that is
consistent with the internal financial information used by management. We do not
accumulate operating expenses by wholesale and retail operations and, therefore,
it is impractical to present such information.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls.
An
evaluation was conducted under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer (“CEO”), its
principal executive officer, and Chief Financial Officer (“CFO”), its principal
financial officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and
Rule 15d-15(e) of the Exchange Act) as of June 30, 2010. Based on that
evaluation, the CEO and CFO concluded that there had been improvements of the
Company’s disclosure controls and procedures and the manner in which information
that is required to be disclosed in Exchange Act report is reported within the
time period specified in the SEC’s rule and forms. During the course of
preparing our audited financial statements, our CEO and CFO determined that our
disclosure controls and procedures were not effective as of June 30,
2010.
Conclusion
The
Company did not have sufficient and skilled accounting personnel with an
appropriate level of technical accounting knowledge and experience in the
application of generally accepted accounting principles accepted in the United
States of America commensurate with the Company’s disclosure controls and
procedures requirements, which resulted in a number of deficiencies in
disclosure controls and procedures that were identified as being
significant. The Company’s management believes that the number and nature
of these significant deficiencies, when aggregated, was determined to be a
material weakness. The material weaknesses existed from prior to the
Company’s reverse merger, when the operating company was a privately held
company in China.
Management’s
Plan to Remedy Material Weaknesses
When
management recognized that it lacked personnel with experience and knowledge of
U.S. GAAP, it sought to remedy these deficiencies by retaining third party
consultants and new management personnel with experience in U.S.
GAAP.
While the
Company’s experience was with Chinese GAAP and Chinese legal obligations, the
Company retained third-party accountants with Big 4 U.S. GAAP accounting
experience to assist with the preparation and review of financial
statements. These consultants assisted the Company both with the initial
preparation of financial statements and communication with the Company’s
auditors. In addition to these accounting consultants, the Registrant has
selected an auditor that has experience in reviewing U.S. GAAP financial
statements.
Finally,
after the end of the reporting period, the Company retained a new chief
financial officer who has experience with U.S. GAAP. In addition, the
Company has invited several individuals to serve as independent directors after
completion of a currently contemplated registered public offering of its common
stock. Although there can be no guarantee that the offering will be
completed, the Company believes that the individuals who have agreed to serve as
directors after the offering have the skills and experience necessary to provide
valuable advice regarding these accounting matters.
Despite
the material weaknesses and deficiencies reported above, the Company’s
management believes that its condensed consolidated financial statements
included in this report fairly present in all material respects the Company’s
financial condition, results of operations and cash flows for the periods
presented and that this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report.
Changes
in internal control over financial reporting.
Other
than the efforts described above to improve its internal controls both before
and after the end of the reporting period, there were no changes in the
Company’s internal control over financial reporting during the quarter ended
June 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. We are currently not aware of any such
legal proceedings or claims that we expect will have a material adverse affect
on our business, financial condition or operating results. However, 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
During
the three months ended June 30, 2010, there were no material changes to the risk
factors previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2009.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
The
Company’s Board of Directors and our stockholders approved a 1-for-27 reverse
stock split of our issued and outstanding common stock. The reverse stock split
reduced the number of issued and outstanding shares of our common stock
outstanding prior to the split. The reverse stock split triggered the automatic
conversion of our Series A Preferred Stock into 9,700,000 shares of Common
Stock. The Reverse Stock Split went effective on June 10, 2010. The shares of
common stock issued upon the automatic conversion of the Series A Preferred
Stock were issued pursuant to the exemption from registration in Section 3(a)(9)
of the Securities Act of 1933.
For
accounting purposes, all shares are retroactively restated to reflect the
reverse stock split.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. RESERVED
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
31.1*
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and
Rule15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
31.2*
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
32.1*
|
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2*
|
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
QINGDAO
FOOTWEAR, INC.
|
|
|
|
|
|
By:
|
/s/ Tao
Wang
|
|
|
Tao
Wang
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
Date:
August 16, 2010
|
|
|
|
|
|
By:
|
/s/ Joseph
Meuse
|
|
|
Joseph
Meuse
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
Date:
|
August
16,
2010
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
|
|
|
31.1*
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and
Rule15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
31.2*
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
32.1*
|
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2*
|
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith.
Qingdao Footwear (CE) (USOTC:QING)
Historical Stock Chart
From Aug 2024 to Sep 2024
Qingdao Footwear (CE) (USOTC:QING)
Historical Stock Chart
From Sep 2023 to Sep 2024