As
filed with the Securities and Exchange Commission on August 2,
2010
Registration
No. 333-
167003
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1/A
Pre-Effective Amendment No.1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Qingdao
Footwear, Inc.
(formerly
Datone, Inc.)
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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|
5661
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|
16-1591157
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(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification Number)
|
Qingdao Footwear, Inc.
269 First Huashan Road
Jimo City, Qingdao, Shandong, PRC
86-0532-86595999
|
|
CT Corporation System
4701 Cox Road, Suite 301
Glen Allen, Virginia 23060
(804) 217-7255
|
(Address, including zip code, and telephone number, including
area code, of principal executive offices)
|
|
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
|
Bradley
A. Haneberg, Esq.
Anthony
W. Basch, Esq.
Kaufman &
Canoles, P.C.
Three
James Center, 1051 East Cary Street, 12th Floor
Richmond,
Virginia 23219
(804)
771-5700 – telephone
(804)
771-5777 – facsimile
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
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
|
¨
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Accelerated filer
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¨
|
|
|
Non-accelerated
filer
|
¨
(Do
not check if a smaller reporting company)
|
Smaller reporting company
|
x
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to such Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED AUGUST 2, 2010
Qingdao
Footwear, Inc.
Minimum
Offering: 833,333 Shares of Common Stock
Maximum
Offering: 1,000,000 Shares of Common Stock
We are
offering a minimum of 833,333 and a maximum of 1,000,000 shares of the common
stock of Qingdao Footwear, Inc. We expect that the offering price will be $6.00
per share. None of our officers, directors or affiliates may purchase shares in
this offering.
We are
a reporting company under Section 13 of the Securities Exchange Act of 1934, as
amended. Our common stock is currently quoted on the OTC Bulletin Board under
the symbol “
QING
”
(previously “DATI”). We have applied for approval for quotation of
our common stock on the NASDAQ Capital Market under the symbol “
FOOT
”. Although we have not
yet been advised that our application has been approved, we will not complete
this offering unless and until the NASDAQ Capital Market advises us that our
common stock has been approved for listing upon the closing of this
offering.
Investing
in these shares of common stock involves significant risks. See “Risk Factors”
beginning on page 12 of this prospectus.
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Per Share
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Minimum Offering
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|
Maximum Offering
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Assumed
public offering price
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$
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6.00
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$
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4,999,998
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$
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6,000,000
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Underwriting
discount
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$
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0.42
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$
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350,000
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$
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420,000
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Proceeds
to us, before expenses
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$
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5.58
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$
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4,649,998
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$
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5,580,000
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We
expect our total cash expenses for this offering to be approximately $320,000,
exclusive of the above commissions. In addition, we will pay the underwriter
an
accountable
expense allowance of 1% of the amount of the offering, or
$60,000 (maximum offering, exclusive of shares registered under Rule 462(b)) or
$50,000 (minimum offering).
The
offering will terminate upon the earlier of: (i) a date mutually acceptable
to us and our underwriter after which the minimum offering is sold or
(ii) December 31, 2010. The underwriter is required to use only its best
efforts to sell the securities offered. The underwriter must sell the minimum
number of securities offered (833,333 shares) if any are sold. Until we sell at
least 833,333 shares, all investor funds will be held in an escrow account at
SunTrust Bank, Richmond, Virginia. If we do not sell at least 833,333 shares by
December 31, 2010, all funds will be promptly returned to investors (within one
business day) without interest or deduction. If we complete this offering, net
proceeds will be delivered to our company on the closing date. We will not be
able to use such proceeds in China, however, until we complete certain
remittance procedures in China. If we complete this offering, then on the
closing date, we will issue shares of common stock to investors in the offering
and underwriter warrants to our underwriter exercisable at a rate of one warrant
per share to purchase up to 10% of the aggregate number of shares of common
stock sold in this offering. We have registered these underwriter warrants and
the shares of common stock underlying the underwriter warrants in connection
with this offering.
These
securities have not been approved or disapproved by the Securities and Exchange
Commission or any state securities commission nor has the Securities and
Exchange Commission or any state securities commission passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Anderson &
Strudwick,
Incorporated
Prospectus
dated ,
2010
TABLE
OF CONTENTS
Prospectus
Summary
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1
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Risk
Factors
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7
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Forward-Looking
Statements
|
23
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Use
of Proceeds
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24
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Dividend
Policy
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25
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Exchange
Rate Information
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25
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Capitalization
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26
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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27
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Our
Business
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37
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Description
of Property
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48
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Regulation
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49
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Management
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51
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Related
Party Transactions
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57
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Principal
Shareholders
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58
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Description
of Share Capital
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60
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Shares
Eligible for Future Sale
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63
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Taxation
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65
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Enforceability
of Civil Liabilities
|
70
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Underwriting
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71
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Legal
Matters
|
75
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Experts
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75
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Interests
of Experts and Counsel
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75
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Where You Can Find More Information
|
75
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Financial
Statements
|
F-1
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No
dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
Except
where the context otherwise requires and for purposes of this prospectus
only:
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•
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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.
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|
•
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“shares”
and “common stock” refer to our common stock, $0.001 par value per
share;
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|
•
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“China”
and “PRC” refer to the People’s Republic of China, excluding, for the
purposes of this prospectus only, Macau, Taiwan and Hong Kong;
and
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•
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all
references to “RMB,” “Renminbi” and “¥” are to the legal currency of China
and all references to “USD,” “U.S. dollars,” “dollars,” and “$” are to the
legal currency of the United
States.
|
For the
sake of clarity, this prospectus follows English naming convention of first name
followed by last name, regardless of whether an individual’s name is Chinese or
English. For example, the name of our chief executive officer will be presented
as “Tao Wang”, even though, in Chinese, Mr. Wang’s name would be presented as
“Wang Tao.”
Unless
otherwise indicated, all information in this prospectus assumes:
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•
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no
person will exercise any outstanding
options;
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|
•
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the
sale of 1,000,000 shares of common stock, the maximum number of shares
offered in this offering;
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•
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an
assumed public offering price of $6.00 per share;
and
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|
•
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the
completion of the one-for-twenty-seven (1-for-27) reverse split of the
outstanding shares of our common stock and the conversion of all
outstanding shares of our Series A Convertible Preferred Stock into shares
of common stock at a rate of 970 shares of common stock per share of
preferred stock, which became effective on June 10,
2010.
|
We have
relied on statistics provided by a variety of publicly-available sources and
research reports regarding China’s expectations of growth, China’s demand for
footwear and China’s footwear industry. We did not, directly or indirectly,
sponsor or participate in the publication of such materials; however, we did
purchase certain previously published research reports.
In
particular, we have relied on a September 2009 Industry Profile titled “Footwear
in China” from Datamonitor for information related to China’s footwear
industry. We have also relied on a July 2007 research report from
Gobi International titled “World Statistical Market
Forecast: Footwear.” In addition, we have relied on the
China Statistical Yearbook for a variety of statistics regarding China’s
demographics and economy.
Prospectus
Summary
This
summary highlights information that we present more fully in the rest of this
prospectus. This summary does not contain all of the information you should
consider before buying shares in this offering. This summary contains
forward-looking statements that involve risks and uncertainties, such as
statements about our plans, objectives, expectations, assumptions or future
events. In some cases, you can identify forward-looking statements by
terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,”
“could,” and similar expressions denoting uncertainty or an action that may,
will or is expected to occur in the future. These statements involve estimates,
assumptions, known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from any future results, performances
or achievements expressed or implied by the forward-looking statements. You
should read the entire prospectus carefully, including the “Risk Factors”
section and the financial statements and the notes to those
statements.
Our
Company
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. As urbanization and individual
purchasing power have increased in China, the demand for leather footwear has
also grown.
Our
principal business includes (1) designing and selecting designs for more than
200 unique styles of 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, “Hongguan” (sometimes presented as
“HonGung”). Our designs are on the whole targeted at consumers seeking business
casual and formal leather shoes appropriate for an office
setting. Approximately 60% of our revenues come from men’s footwear,
with women’s footwear making up approximately 40% of our
revenues. Similarly, approximately 60% of our revenues come from
casual shoes, and approximately 40% of our revenues come from formal
shoes.
We do
not manufacture or assemble any shoes and instead outsource manufacturing to
third parties. 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. 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.
Our
company is incorporated in the State of Delaware, but all of our business
operations are conducted through our Hong Kong subsidiary, Glory Reach, and our
Chinese subsidiary, QHS.
Our
Primary Geographic Market
Shandong
Province
Shandong
Province is China’s second largest province (after Guangdong), with a population
of approximately 94 million people. The province is also China’s
second most densely populated province (after Jiangsu), with 587 people per
square kilometer, more than four times the average population density in
China. Gross domestic product (“GDP”) attributable to Shandong ranks
it second among China’s provinces, accounting for more than ten percent of
China’s GDP in 2008. (“List of Administrative Divisions by Population
Density,” en.wikipedia.org; “World Bank Supports Skills Development in Two
Chinese Provinces,” go.worldbank.org)
Qingdao
City
Qingdao
is a sub-provincial city in China comprised of seven districts and five
county-level cities. It is one of China’s twenty largest cities and
one of the two largest cities in Shandong province, with approximately 200,000
more people living in Jinan city than in Qingdao city but more than 1.7 million
more people living in the greater Qingdao administrative area than in Jinan’s
administrative region. Qingdao has a population of approximately 8
million residents, of whom approximately 3.8 million live in the urban
area.
Qingdao’s
per-capita GDP (approximately $7,616 in 2008) is above average in China
(approximately $3,290 in 2008), in part due to the Chinese government’s decision
in 1984 to designate Qingdao as a special economic and technology development
zone. For this reason, Qingdao’s local economy features a variety of
foreign investment, with South Korea and Japan investments being particularly
prominent in the area. (“Qingdao,”
en.wikipedia.org)
Industry
and Market Background
China is
the largest producer of footwear in the world, with at least 25,000 enterprises
employing more than 10 million employees who manufacture more than 10 billion
pairs of shoes per annum. China’s annual production accounts for nearly 70% of
the 14.3 billion pairs of shoes produced worldwide. In 2008, roughly 75% of PRC
production capacity was exported while the remaining 25% were consumed
domestically. Chinese consumption of footwear reached 2.5 billion pairs in 2008.
(Global Footwear, 2nd Edition, www.researchandmarkets.com) We anticipate stable
growth in the domestic footwear market for the next several
years. Beginning with the deterioration in the global economy in 2008
and the collapse of the Chinese textile and footwear export market, a material
number of low margin manufacturers were forced out of business. Domestic
consumption and retail sales within China, however, remained robust throughout
the export downturn and global financial crisis. As we have intentionally
avoided the manufacturing sector, we were able to capitalize on the economic
conditions and maintain our profit margin and by capitalizing on overcapacity in
our sourcing market and growing consumer demand.
China’s
footwear market generated total revenues of approximately $11.7 billion dollars
in 2008. According to Datamonitor, from 2004 through 2008, revenues
grew at a cumulative annual growth rate of approximately 10.7%.
(“Footwear
in China,” www.datamonitor.com)
China’s
footwear market accounts for approximately 34% of the entire Asia-Pacific
footwear market’s value, and China is expected to continue to grow in future
periods by over 8% per year through 2013. (“Footwear in China,”
www.datamonitor.com)
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, shoe consumption
are 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 is likely to continue to grow for the foreseeable
future.
Our
Sales Channels
We
sell our footwear in three ways. First, we have 12 flagship stores,
which bear our Hongguan brand name and exclusively sell our Hongguan
footwear. Second, we have 11 third-party-operated retail outlets that
we do not control but that exclusively sell our Hongguan footwear and that are
branded as Hongguan stores. Third, our footwear is sold at 192
outlets managed by distributors, at which outlets other companies’ footwear may
also be sold. In the year ended December 31, 2009, revenues from flagship
stores, third-party retail outlets and distributor stores constituted
approximately 16%, 10% and 74% of our revenues. In the year ended
December 31, 2008, revenues from flagship stores, third-party retail outlets and
distributor stores constituted approximately 15%, 13% and 72% of our
revenues.
Our
Growth Strategy
We
believe that the market for affordable, high quality footwear in China provides
us with attractive and sustainable growth opportunities. We
intend to pursue the following strategies to achieve our goal:
(1)
|
Continue
our marketing and advertising campaigns in order to gain brand
awareness.
|
(2)
|
Expand
distributor and third party operator stores in prime locations to maximize
profits.
|
(3)
|
Bring
more self-owned stores online to increase higher margin
sales.
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(4)
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Continue
to strive for excellence in quality, customer service and design in order
to attract new and retain repeat customers.
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(5)
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Leverage
our growing purchasing power with manufacturers control
costs.
|
The
Offering
Shares
Offered:
|
|
Minimum:
833,333 shares of common stock
(1)
Maximum:
1,000,000 shares of common stock
(1)
|
|
|
Shares
Outstanding Prior to Completion of Offering:
|
|
10,000,000
shares of common stock s
|
|
|
Shares
to be Outstanding after Offering:
|
|
Minimum:
10,833,333 shares of common stock
Maximum:
11,000,000 shares of common stock
|
|
|
Assumed
Offering Price per Share:
|
|
$6.00
|
|
|
Gross
Proceeds:
|
|
Minimum:
$4,999,998
Maximum:
$6,000,000
|
|
|
Proposed
NASDAQ Capital Market Symbol:
|
|
“FOOT”
(CUSIP No. 23816A103)
|
|
|
|
Corporate
Information:
|
|
Our
principal executive office is located at 269 First Huashan Road, Jimo
City, Qingdao, Shandong, People’s Republic of China.
Our
telephone number is (86) 0532-86595999.
We
do not maintain a corporate website at this
time.
|
|
|
Transfer
Agent:
|
|
Pacific
Stock Transfer Company
4045
S. Spencer Street, Suite 403, Las Vegas, NV 89119
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|
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Risk
Factors:
|
|
Investing
in these securities involves a high degree of risk. As an investor, you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
of this prospectus before deciding to invest in our shares of common
stock.
|
|
|
Closing
of Offering:
|
|
The
offering contemplated by this prospectus will terminate upon the earlier
of: (i) a date mutually acceptable to us and our underwriter after the
minimum offering is sold or (ii) December 31, 2010. If we complete this
offering, net proceeds will be delivered to our company on the closing
date (such closing date being the above mutually acceptable date on or
before December 31, 2010, provided the minimum offering has been sold). We
will not complete this offering unless our application to list on the
NASDAQ Capital Market is approved. We will not be able to use such
proceeds in China, however, until we complete certain remittance
procedures in China. If we complete this offering, then on the closing
date, we will issue shares to investors and underwriter warrants to our
underwriter exercisable at a rate of one warrant per share to purchase up
to 10% of the aggregate number of shares of common stock sold in this
offering. We have registered these underwriter warrants and the shares of
common stock underlying the underwriter warrants in connection with this
offering.
|
Summary
Financial Information
In the
table below, we provide you with summary financial data of our company. This
information is derived from our consolidated financial statements included
elsewhere in this prospectus. Historical results are not necessarily indicative
of the results that may be expected for any future period. When you read this
historical selected financial data, it is important that you read it along with
the historical statements and notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
prospectus.
|
|
For the Fiscal Year ended
December 31,
|
|
|
For the three months ended
March 31,
(Unaudited)
|
|
|
|
2009
|
|
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2008
|
|
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2010
|
|
|
2009
|
|
Gross
profit
|
|
$
|
7,701,113
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|
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$
|
5,657,722
|
|
|
$
|
2,109,057
|
|
|
$
|
1,933,560
|
|
Income
from Operations
|
|
$
|
6,731,468
|
|
|
$
|
4,842,892
|
|
|
$
|
1,388,331
|
|
|
$
|
1,701,880
|
|
Other
Income (Expense)
|
|
$
|
27,318
|
|
|
$
|
4,704
|
|
|
$
|
(819
|
)
|
|
$
|
9,011
|
|
Income
Taxes
|
|
$
|
1,689,697
|
|
|
$
|
1,211,899
|
|
|
$
|
457,531
|
|
|
$
|
427,723
|
|
Net
Income
|
|
$
|
5,069,089
|
|
|
$
|
3,635,697
|
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
Other
Comprehensive Income (loss)
|
|
$
|
3,110
|
|
|
$
|
232,047
|
|
|
$
|
341
|
|
|
$
|
(6,705
|
)
|
Comprehensive
Income
|
|
$
|
5,072,199
|
|
|
$
|
3,867,744
|
|
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$
|
930,322
|
|
|
$
|
1,276,463
|
|
Basic
Earnings per Share (based on 10,000,000, 9,700,000, 9,700,000 and
9,700,000 shares outstanding, on March 31, 2010 and 2009,
December 31, 2009 and 2008, respectively)(1)
|
|
$
|
0.52
|
|
|
$
|
0.37
|
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
|
December 31,
|
|
|
March 31,
(Unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
Total
Assets
|
|
$
|
1,700,534
|
|
|
$
|
5,559,520
|
|
|
$
|
4,358,257
|
|
Total
Liabilities
|
|
$
|
1,208,445
|
|
|
$
|
706,820
|
|
|
$
|
2,871,440
|
|
Shareholders’
Equity
|
|
$
|
492,089
|
|
|
$
|
4,852,700
|
|
|
$
|
1,486,817
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
1,700,534
|
|
|
$
|
5,559,520
|
|
|
$
|
4,358,257
|
|
(1)
|
We
have presented earnings per share after giving retroactive effect to the
1-for-27 reverse share split of our common stock and the conversion of all
shares of our Series A Convertible Preferred Stock into shares of common
stock at a rate of 970 shares of common stock per share of preferred stock
that was completed on or about June 10
2010.
|
Risk
Factors
Investment
in our common stock involves a high degree of risk. You should carefully
consider the risks described below together with all of the other information
included in this prospectus before making an investment decision. The risks
and uncertainties described below represent our known material risks to our
business. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer. In that case,
you may lose all or part of your investment. You should not invest in this
offering unless you can afford to lose your entire investment.
Risks
Related to our Business
We
have a short operating history.
We have
only been in retail business since 2003. We may not succeed in
implementing our business plan successfully because of competition from domestic
and foreign market entrants, failure of the market to accept our products, or
other reasons. Therefore, you should not place undue reliance on our past
performance as they may not be indicative of our future results.
Some of
o
ur
senior management
lacks experience managing a public company and c
omplying with
laws applicable to operating as a U.S. public
company.
Prior
to the completion of this offering, Glory Reach and QHS completed a merger with
Datone, Inc., the result of which was for Glory Reach and QHS to become
wholly-owned subsidiaries of Datone, Inc., a U.S. public company. At
the same time, however, the management of Datone resigned from its positions
within Datone, Inc., and the management of Glory Reach became the management of
our company. While the previous management of Datone, Inc. had
experience in managing a U.S. publicly traded company, the management of Glory
Reach did not. Prior to the completion of that merger, Glory Reach
and QHS were operated as a private company located in China. While our chief
financial officer has experience in working with U.S. public companies,
some of our current senior management has experience managing a U.S. public
company.
As a
result of these transactions, our company will become subject to laws,
regulations and obligations that did not previously apply to it, and our senior
management currently has limited experience in complying with such laws,
regulations and obligations. For example, we will need to comply with the
Delaware laws applicable to companies that are domiciled in that state. By
contrast, such senior management is currently experienced in operating the
business of QHS in compliance with Chinese law. Similarly, by virtue of these
transactions we will be required to file quarterly and annual reports and to
comply with U.S. securities and other laws, which may not have applied to our
company in the past. These obligations can be burdensome and complicated, and
failure to comply with such obligations could have a material adverse effect on
our company. In addition, we expect that the process of learning about such new
obligations as a public company in the United States will require senior
management to devote time and resources to such efforts that might otherwise be
spent on the operation of the business of operating a footwear
business.
While we
have invited three independent directors (Troy Mao, Susan Woo and John Zhang)
with experience in working with China-based companies listed in the United
States to serve on our board and they have agreed to do so following the
completion of this offering, these individuals do not currently serve on our
board. Moreover, they will not join our board until the completion of
this offering. These individuals will not review financial statements
or otherwise exercise board oversight until they join our board of directors, so
we will not benefit from their experience until after such
completion.
We
face risks related to general domestic and global economic conditions and to the
current credit crisis.
Our
current operating cash flows provide us with stable funding capacity. However,
the current uncertainty arising out of domestic and global economic conditions,
including the recent disruption in credit markets, poses a risk to the PRC
economy, and may impact our ability to manage normal relationships with our
customers, suppliers and creditors. If the current situation deteriorates
significantly, our business could be materially negatively impacted, as demand
for our products and services may decrease from a slow-down in the general
economy, or supplier or customer disruptions may result from tighter credit
markets.
Our
business is subject to the health of the PRC economy and our growth may be
inhibited by the inability of potential customers to fund purchases of our
products and services.
Our
products are dependent on the disposable income of PRC citizens, which could be
adversely affected by an economic downturn. Because much of our target consumer
group consists of office workers who have benefitted from growth in the PRC
economy, we believe that a weakening of the Chinese economy would
disproportionately and materially affect our company. First, such a
weakening could hurt consumer spending generally. Second, to the
extent our products would be seen as a luxury by such consumers, we would expect
that demand for our products would be further weakened.
We may be unable to compete
effectively in China
’
s compe
titive footwear
industry.
We face a
variety of competitive challenges from other footwear retailers and wholesalers,
including a number of competitors that have substantially greater financial and
marketing resources than we do. We compete with other footwear retailers on the
basis of:
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developing
fashionable, high-quality merchandise in an assortment of sizes, colors
and styles that appeals to our target
consumers;
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anticipating
and responding to changing consumer demands in a timely
manner;
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ensuring
product availability and optimizing supply chain
effectiveness;
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the
pricing of our merchandise;
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creating
an acceptable value proposition for
consumers;
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providing
an inviting, customer-friendly shopping environment;
and
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using
our sales staff to provide attentive, product knowledgeable customer
service at our flagship locations.
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Competition
in the retail footwear industry has increased. Accordingly, there is substantial
pressure on us to maintain the value proposition of our footwear and the
convenience of our store locations. In addition, it is possible that our
competitors will increase their investment in their retail footwear operations,
thereby achieving greater market penetration and placing additional competitive
pressures on our business. If we are unable to respond effectively to these
competitive pressures, our business, results of operations and financial
condition could be adversely affected.
A majority of our operating expenses
at our flagship stores
are fixed costs that are
not directly depe
ndent
upon our sales performance. As a result, declines in our operating performance
may be magnified if we are unable to reduce expenses in response to a sales
shortfall.
A
majority of our operating expenses at our flagship stores are fixed costs that
are not directly dependent on our sales performance, as opposed to variable
costs, which increase as sales volume increases. These fixed costs include the
leasing and operating costs associated with our flagship stores and, because
flagship stores require minimum staffing levels, the majority of our labor
expenses. If our sales were to decline, we may be unable to reduce or offset
these fixed operating expenses in the short term. Accordingly, the effect of any
sales decline is likely to be magnified because a larger percentage of our
earnings are committed to paying these fixed costs. As a result, our net
earnings and cash flow could be disproportionately negatively affected as a
result of a decline in sales.
We
may have insufficient liquidity and capital resources to meet our obligations as
they become due.
As of
March 31, 2010, we had cash and cash equivalents of $378,219. These cash and
cash equivalents consist primarily of cash on hand and demand
deposits. We require substantial cash flow in order to fund our
operations, to purchase stock or choose, to pay our lease obligations and
employment obligations. The amount of cash and cash equivalents on hand is
insufficient to pay such obligations. In the event our cash
flow decreased or our receivables were paid more slowly than we expect, we might
be unable to pay our obligations as they become due.
We
may have unseasonable weather where our stores are
concentrated.
We
increase our inventory levels to support the increased demand for our products,
as well as to offer styles particularly suited for the relevant season. If the
weather conditions for a particular season vary significantly from those typical
for such season, such as an unusually cold early summer or an unusually warm
winter, consumer demand for the seasonally appropriate merchandise that we have
available in our stores could be adversely affected and negatively affect our
net sales and margins. Lower demand for seasonally appropriate merchandise may
leave us with an excess inventory of our seasonally appropriate products and/or
basic products, forcing us to sell both types of products at significantly
discounted prices and adversely affecting our net sales margins and operating
cash flow. Conversely, if weather conditions permit us to sell our seasonal
product early in the season, this may reduce inventory levels needed to meet our
customers’ needs later in that same season. Consequently, our results of
operations are highly dependent on potentially unpredictable weather
conditions.
We may be unable to adjust to
constantly changing fashion trends.
Our
success depends, in large part, upon our ability to gauge the evolving fashion
tastes of our consumers and to provide merchandise that satisfies such fashion
tastes in a timely manner. China’s footwear retailing industry fluctuates
according to changing fashion tastes and seasons, and merchandise usually must
be ordered in advance of the season, frequently before consumer fashion tastes
are evidenced by consumer purchases. In addition, the cyclical nature of China’s
footwear retailing industry also requires us to maintain substantial levels of
inventory, especially prior to peak selling seasons when we build up our
inventory levels. As a result, if we fail to properly gauge the fashion tastes
of consumers, or to respond in a timely manner, this failure could adversely
affect consumer acceptance of our merchandise and leave us with substantial
unsold inventory. If that occurs, we may be forced to rely on markdowns or
promotional sales to dispose of excess, slow-moving inventory, which would
negatively impact financial results.
The
results of our wholesale businesses are also affected by the buying plans of our
customers, which include footwear retailers. No customer accounts for 10% or
more of our wholesale business. Our wholesale customers may not inform us of
changes in their buying plans until it is too late for us to make the necessary
adjustments to our product lines and marketing strategies. While we believe that
purchasing decisions in many cases are made independently by individual stores
or chains, we are exposed to decisions by the controlling owner of a store chain
that could decrease the amount of footwear products purchased from us. In
addition, the retail industry periodically experiences consolidation. We face a
risk that our wholesale customers may consolidate, restructure, reorganize or
otherwise realign in ways that could decrease the number of stores that carry
our products or the amount of shelf space devoted to our products. We also face
a risk that our wholesale customers could develop in-house brands or utilize the
private labeling of footwear products, which would negatively impact financial
results.
We may be unsuccessful in opening new
stores or relocating existing stores to new locations, adversely affecting our
ability to grow.
Our
growth, in part, is dependent upon our ability to expand our retail operations
by opening and operating new stores, as well as relocating existing stores to
new locations, on a profitable basis.
Our
ability to open new stores and relocate existing stores to new locations on a
timely and profitable basis is subject to various contingencies, some of which
are beyond our control. These contingencies include our ability
to:
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locate
suitable store sites;
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negotiate
acceptable lease terms;
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build-out
or refurbish sites on a timely and cost effective
basis;
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hire,
train and retain qualified managers and
personnel;
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identify
long-term shopping patterns;
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obtain
adequate capital
resources; and
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successfully
integrate new stores into our existing
operations.
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We may be
unsuccessful in opening new stores or relocating existing stores for any of
these reasons. In addition, we cannot assure you that, even if we are successful
in opening new stores or relocating existing stores, those stores will achieve
levels of sales and profitability comparable to our existing
stores.
In
order to grow at the pace expected by management, we will require additional
capital to support our long-term growth strategies. If we are unable to obtain
additional capital in future years, we may be unable to proceed with our plans
and we may be forced to curtail our operations.
We will
require additional working capital to support our long-term growth strategies,
which includes identifying suitable points of market entry for expansion and
growing the number of points of sale for our products, so as to enhance our
product offerings and benefit from economies of scale. Our working capital
requirements and the cash flow provided by future operating activities, if any,
may vary greatly from quarter to quarter, depending on the volume of business
during the period. We may not be able to obtain adequate levels of additional
financing, whether through equity financing, debt financing or other sources.
Additional financings could result in significant dilution to our earnings per
share or the issuance of securities with rights superior to our current
outstanding securities. In addition, we may grant registration rights to
investors purchasing our equity or debt securities in the future. If we are
unable to raise additional financing, we may be unable to implement our
long-term growth strategies, develop or enhance our products and services, take
advantage of future opportunities or respond to competitive pressures on a
timely basis.
We
rely on third parties to manufacture and distribute our
products.
We depend
on contract manufacturers to manufacture the merchandise that we sell. If these
contract manufacturers are unable to secure sufficient supplies of raw
materials, or maintain adequate manufacturing and shipping capacity, they may be
unable to provide us with timely delivery of products of acceptable quality. In
addition, if the prices charged by these contractors increase for reasons such
as increases in the price of raw materials, increases in labor costs or currency
fluctuations, our cost of manufacturing would increase, adversely affecting our
results of operations. We also depend on third parties to transport and deliver
our products. Due to the fact that we do not have any independent transportation
or delivery capabilities of our own, if these third parties are unable to
transport or deliver our products for any reason, or if they increase the price
of their services, including as a result of increases in the cost of fuel, our
operations and financial performance may be adversely
affected.
We
require our contract manufacturers to meet our standards in terms of working
conditions and other matters before we are willing to contract with them to
manufacture our merchandise. As a result, we may not be able to obtain the
lowest possible manufacturing costs. In addition, any failure by our contract
manufacturers to meet these standards, to adhere to labor or other laws or to
diverge from our mandated labor practices, and the potential negative publicity
relating to any of these events, could harm our business and
reputation.
We do not
have long-term agreements with any of our contract manufacturers, and any of
these manufacturers may unilaterally terminate their relationship with us at any
time. There is also substantial competition among footwear retailers for quality
manufacturers. To the extent we are unable to secure or maintain relationships
with quality manufacturers, our business could be harmed.
If
we are unable to attract and retain senior management and qualified technical
and sales personnel, our operations, financial condition and prospects will be
materially adversely affected.
Our
future success depends in part on the contributions of our management team and
key technical and sales personnel and our ability to attract and retain
qualified new personnel. In particular, our success depends on the continuing
employment of our Chief Executive Officer, Mr. Tao Wang, our Chief Operating
Officer, Shi Wenmao; and our Chief Financial Officer, Mr. Joseph Meuse. There is
significant competition in our industry for qualified managerial, technical and
sales personnel and we cannot assure you that we will be able to retain our key
senior managerial, technical and sales personnel or that we will be able to
attract, integrate and retain other such personnel that we may require in the
future. If we are unable to attract and retain key personnel in the future, our
business, operations, financial condition, results of operations and prospects
could be materially adversely affected.
We
do not carry business interruption or other insurance, so we have to bear losses
ourselves.
We are
subject to risk inherent to our business, including equipment failure, theft,
natural disasters, industrial accidents, labor disturbances, business
interruptions, property damage, product liability, personal injury and death. We
do not carry any business interruption insurance or third-party liability
insurance or other insurance to cover risks associated with our business. As a
result, if we suffer losses, damages or liabilities, including those caused by
natural disasters or other events beyond our control and we are unable to make a
claim again a third party, we will be required to bear all such losses from our
own funds, which could have a material adverse effect on our business, financial
condition and results of operations.
A
major failure of our information systems could harm our business.
We depend
on information systems to process transactions, manage inventory, purchase, sell
and ship goods on a timely basis, and maintain cost-efficient operations. Any
material disruption or slowdown of our systems could cause information to be
lost or delayed, which could have a negative effect on our business. We may
experience operational problems with our information systems as a result of
system failures, viruses, computer “hackers” or other causes. We cannot be
assured that our systems will be adequate to support future growth.
Our
quarterly operating results are likely to fluctuate, which may affect our stock
price.
Our
quarterly revenues, expenses, operating results and gross profit margins vary
from quarter to quarter. As a result, our operating results may fall below the
expectations of securities analysts and investors in some quarters, which could
result in a decrease in the market price of our common stock. The reasons our
quarterly results may fluctuate include:
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variations
in profit margins attributable to product
mix;
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changes
in the general competitive and economic
conditions;
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delays
in, or uneven timing in the delivery of, customer orders;
and
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the
introduction of new products by us or our
competitors.
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Period to
period comparisons of our results should not be relied on as indications of
future performance.
Our
limited ability to protect our intellectual property, and the possibility that
our technology could inadvertently infringe technology owned by others, may
adversely affect our ability to compete.
We
believe that our trademarks and other intellectual property are important to our
business and are generally sufficient to permit us to carry on our business as
presently conducted. We cannot, however, know whether we will be able to secure
protection for our intellectual property in the future or whether that
protection will be adequate for future products.
We
rely on a combination of trade secret laws and confidentiality procedures to
protect the patents, copyrights and technological know-how that comprise our
intellectual property. We protect our technological know-how pursuant to
non-disclosure and non-competition provisions contained in our employment
agreements, and agreements with them to keep confidential all information
relating to our customers, methods, business and trade secrets during and after
their employment with us. Our employees are also required to acknowledge and
recognize that all inventions, trade secrets, works of authorship, developments
and other processes made by them during their employment are our property. We
have been granted the use of brand name “Hongguan” (sometimes presented as
“HonGung”).
A
successful challenge to the ownership of our intellectual property could
materially damage our business prospects. Our competitors may assert that our
technologies or products infringe on their patents or proprietary rights. We may
be required to obtain from others licenses that may not be available on
commercially reasonable terms, if at all. Problems with intellectual property
rights could increase the cost of our products or delay or preclude our new
product development and commercialization. If infringement claims against us are
deemed valid, we may not be able to obtain appropriate licenses on acceptable
terms or at all. Litigation could be costly and time-consuming but may be
necessary to protect our technology license positions or to defend against
infringement claims.
Our
business may be subject to seasonal and cyclical fluctuations in
sales.
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 fourth and first
quarters due seasonal purchases. This seasonality limits our ability to make
accurate long-term predictions about our performance and makes it difficult to
compare our revenues across quarters.
Risks
Related to Doing Business in China
Changes
in China’s political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
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Level
of government involvement in the
economy;
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Control
of foreign exchange;
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Methods
of allocating resources;
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Balance
of payments position;
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International
trade restrictions; and
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International
conflict.
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The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy and weak corporate governance and a lack of flexible currency
exchange policy still prevail in China. As a result of these differences, we may
not develop in the same way or at the same rate as might be expected if the
Chinese economy was similar to those of the OECD member countries.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries in
the PRC and Hong Kong. Our principal operating subsidiary, QHS, is subject to
laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to foreign-invested enterprises. The PRC legal
system is based on written statutes, and prior court decisions may be cited for
reference but have limited precedential value. Since 1979, a series of new PRC
laws and regulations have significantly enhanced the protections afforded to
various forms of foreign investments in China. However, since the PRC legal
system continues to evolve rapidly, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involve uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may be protracted
and result in substantial costs and diversion of resources and management
attention. In addition, all of our executive officers and all of our directors
are residents of China and not of the United States, and substantially all the
assets of these persons are located outside the United States. As a result, it
could be difficult for investors to affect service of process in the United
States or to enforce a judgment obtained in the United States against our
Chinese operations and subsidiaries.
You
may have difficulty enforcing judgments against us, as almost all of our assets
and all of our officers and directors are located outside the United
States.
We are
a Delaware holding company, but Glory Reach is a Hong Kong company, and our
principal operating subsidiary, QHS, is located in the PRC. Almost all of our
assets are located outside the United States, and our current operations are
conducted in the PRC. In addition, our directors and officers are nationals and
residents of countries other than the United States. A substantial portion of
the assets of these persons is located outside the United States. As a result,
it may be difficult for you to effect service of process within the United
States upon these persons. It may also be difficult for you to enforce in U.S.
courts judgments predicated on the civil liability provisions of the U.S.
federal securities laws against us and our officers and directors, most of whom
are not residents in the United States and the substantial majority of whose
assets are located outside the United States. In addition, there is uncertainty
as to whether the courts of the PRC would recognize or enforce judgments of U.S.
courts. The recognition and enforcement of foreign judgments are provided for
under the PRC Civil Procedures Law. Courts in China may recognize and enforce
foreign judgments in accordance with the requirements of the PRC Civil
Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have
any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a
foreign judgment against us or our directors and officers if they decide that
the judgment violates basic principles of PRC law or national sovereignty,
security or the public interest. So it is uncertain whether a PRC court would
enforce a judgment rendered by a court in the United
States.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business in
China.
In
recent years, the Chinese economy has experienced periods of rapid expansion and
highly fluctuating rates of inflation. During the past ten years, the rate of
inflation in China has been as high as 20.7% and as low as -2.2%. These factors
have led to the adoption by the Chinese government, from time to time, of
various corrective measures designed to restrict the availability of credit or
regulate growth and contain inflation. High inflation may in the future cause
the Chinese government to impose controls on credit and/or prices, or to take
other action, which could inhibit economic activity in China, and thereby harm
the market for our products and our company. (“China Inflation Rate,”
www.tradingeconomics.com)
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in RMB and U.S. dollars, and any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make
dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell
or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not
impose more stringent restrictions on the convertibility of the
RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value
of the RMB 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. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s
Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate
or depreciate significantly in value against the U.S. dollar in the medium to
long term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
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. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Restrictions
under PRC law on our PRC subsidiary’s ability to make dividends and other
distributions could materially and adversely affect our ability to grow, make
investments or acquisitions that could benefit our business, pay dividends to
you, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by QHS, our PRC subsidiary. PRC regulations
restrict the ability of our PRC subsidiary to make dividends and other payments
to its offshore parent company. PRC legal restrictions permit payments of
dividend by our PRC subsidiary only out of its accumulated after-tax profits, if
any, determined in accordance with PRC accounting standards and regulations. Our
PRC subsidiary is also required under PRC laws and regulations to allocate at
least 10% of our annual after-tax profits determined in accordance with PRC GAAP
to a statutory general reserve fund until the amounts in said fund reaches 50%
of our registered capital status. Allocations to these statutory
reserve funds can only be used for specific purposes and are not transferable to
us in the form of loans, advances or cash dividends. Any limitations on the
ability of our PRC subsidiary to transfer funds to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our business, pay dividends and otherwise fund and conduct our
business.
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident shareholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.
In
October 2005, SAFE, issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or
SPV, for the purpose of engaging in an equity financing outside of China on the
strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the
establishment or acquisition of control by PRC residents of offshore entities
which merely acquire “control” over domestic companies or assets, even in the
absence of legal ownership; (2) adding requirements relating to the source of
the PRC resident’s funds used to establish or acquire the offshore entity;
covering the use of existing offshore entities for offshore financings; (3)
purporting to cover situations in which an offshore SPV establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets in
China; and (4) making the domestic affiliate of the SPV responsible for the
accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing
and the use of proceeds. Amendments to registrations made under Circular 75 are
required in connection with any increase or decrease of capital, transfer of
shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and
Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic
company or assets, before the implementation date of Circular 75, a retroactive
SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also
required that the registrant establish that all foreign exchange transactions
undertaken by the SPV and its affiliates were in compliance with applicable laws
and regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV’s affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from engaging
in other transfers of funds into or out of China.
We have
advised our shareholders who are PRC residents, as defined in Circular 75, to
register with the relevant branch of SAFE, as currently required, in connection
with their equity interests in us and our acquisitions of equity interests in
our PRC subsidiaries. However, we cannot provide any assurances that their
existing registrations have fully complied with, and they have made all
necessary amendments to their registration to fully comply with, all applicable
registrations or approvals required by Circular 75. Moreover, because of
uncertainty over how Circular 75 will be interpreted and implemented, and how or
whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiaries’ ability to conduct foreign exchange activities,
such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with Circular 75 by our PRC resident beneficial
holders. In addition, such PRC residents may not always be able to complete the
necessary registration procedures required by Circular 75. We also have little
control over either our present or prospective direct or indirect shareholders
or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident shareholders to comply with Circular
75, if SAFE requires it, could subject these PRC resident beneficial holders to
fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries’ ability to make distributions or pay
dividends or affect our ownership structure, which could adversely affect our
business and prospects.
Our
business and financial performance may be materially adversely affected if the
PRC regulatory authorities determine that our acquisition of QHS constitutes a
Round-trip Investment without MOFCOM approval.
On August
8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A
Rule, which became effective on September 8, 2006. According to the 2006 M&A
Rule, when a PRC business that is owned by PRC individual(s) is sold to a
non-PRC entity that is established or controlled, directly or indirectly, by
those same PRC individual(s) it must be approved by the Ministry of Commerce, or
MOFCOM, and any indirect arrangement or series of arrangements which achieves
the same end result without the approval of MOFCOM is a violation of PRC
law.
The
general manager of QHS, our chief executive officer, Mr. Tao Wang, as a PRC
citizen, entered into a option agreement (“Incentive Option Agreement”) and an
entrustment agreement (“Entrustment Agreement”) with Renhuan Shi, a Korean
passport holder. Mr. Shi currently holds all of the equity of Swift Dynamic
Limited (“Swift Dynamic”), the majority shareholder of Glory Reach. This equity
is held by a non-Chinese citizen in order to comply with Chinese law. Shi is
obligated under the terms of the Incentive Option Agreement to transfer the
equity of Swift Dynamic to Mr. Wang in the event Mr. Wang exercises his option
to purchase such equity after such option vests. Vesting will occur
at a rate of 1/3 per year for the next three years so long as our company meets
revenue targets of RMB95,200,000 in 2009 (approximately $13,965,907),
RMB96,150,000 in 2010 (approximately $14,105,282) and RMB97,100,000 in 2011
(approximately $14,244,638) and Mr. Wang has been retained as our chief
executive officer and a director of our company for at least three
years. In connection with the Incentive Option Agreement, Mr. Shi may
not transfer the equity of Swift Dynamic other than to Mr. Wang or Mr. Wang’s
designees. Under the terms of the Entrustment Agreement, Mr. Shi has
granted to Mr. Wang the right to control the voting of Swift
Dynamic. Because of the rights granted to Mr. Wang under these
agreements, Mr. Wang is deemed the beneficial owner.
After Mr.
Wang exercises this option, he will, through his ownership of Swift Dynamic, be
our controlling stockholder. His acquisition of our equity interest, or the
Acquisition, is required to be registered with the competent Administration of
Industry and Commerce authorities, or AIC, in Beijing. Mr. Wang will also be
required to make filings with the SAFE to register the Company and its non-PRC
subsidiaries to qualify them as SPVs, pursuant to Circular 75 and Circular
106.
The PRC
regulatory authorities may take the view that the Acquisition and the Share
Exchange Agreement are part of an overall series of arrangements which
constitute a Round-trip Investment, because at the end of these transactions,
Mr. Wang will become the majority owner and effective controlling party of a
foreign entity that acquired ownership of our Chinese subsidiaries. The PRC
regulatory authorities may also take the view that the registration of the
Acquisition with the relevant AIC in Beijing and the filings with the SAFE may
not be evidence that the Acquisition has been properly approved because the
relevant parties did not fully disclose to the AIC, SAFE or MOFCOM the overall
restructuring arrangements, the existence of the Share Exchange Agreement and
its link with the Acquisition. If the PRC regulatory authorities take the view
that the Acquisition constitutes a Round-trip Investment under the 2006 M&A
Rules, we cannot assure you that we will be able to obtain the approval required
from MOFCOM.
If the
PRC regulatory authorities take the view that the Acquisition constitutes a
Round-trip Investment without MOFCOM approval, they could invalidate our
acquisition and ownership of our Chinese subsidiaries. Additionally, the PRC
regulatory authorities may take the view that the Acquisition constitutes a
transaction which requires the prior approval of the China Securities Regulatory
Commission, or CSRC, before MOFCOM approval is obtained. If this takes place, we
may be able to find a way to re-establish control of our Chinese subsidiaries’
business operations through a series of contractual arrangements rather than an
outright purchase of our Chinese subsidiaries. We cannot, however, assure you
that such contractual arrangements will be protected by PRC law or that the
registrant can receive as complete or effective economic benefit and overall
control of our Chinese subsidiaries’ business as if the Company had direct
ownership of our Chinese subsidiaries. In addition, we cannot assure you that
such contractual arrangements can be successfully effected under PRC law. If we
cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory
authorities to do so, and if we cannot put in place or enforce relevant
contractual arrangements as an alternative and equivalent means of control of
our Chinese subsidiaries, our business and financial performance will be
materially adversely affected.
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our
ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also known as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans that are so
covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of who are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of any equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.
Under
the New EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and our
non-PRC shareholders.
Under the
New EIT Law effective on January 1, 2008, an enterprise established outside
China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the New
EIT Law define de facto management as “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of the enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice Concerning
Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the New EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a “non-domestically incorporated resident
enterprise” if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We may be
deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax
authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC
enterprise income tax at a rate of 25%. Second, although under the New EIT Law
and its implementing rules dividends paid to us from our PRC subsidiaries would
qualify as “tax-exempt income,” we cannot guarantee that such dividends will not
be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance
with respect to the processing of outbound remittances to entities that are
treated as resident enterprises for PRC enterprise income tax purposes. Finally,
it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC shareholders from transferring our
shares. We are actively monitoring the possibility of “resident enterprise”
treatment for the 2009 tax year.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and
Chinese anti-corruption laws, and any determination that we violated these laws
could have a material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute, for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and we make most of our sales in
China. PRC also strictly prohibits bribery of government officials. Our
activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents or distributors of our
Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be
less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in
which we invest or that we acquire.
Risks
Associated with this Offering
We
must remit the offering proceeds to China before they may be used to benefit our
business in China, and this process may take a number of months.
The
proceeds of this offering must be sent back to the PRC, and the process for
sending such proceeds back to the PRC may take several months after the closing
of this offering. We may be unable to use these proceeds to grow our business
until we receive such proceeds in the PRC. In order to remit the offering
proceeds to China, we will take the following actions:
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First, we will open a special
foreign exchange account for capital account transactions. To open this
account, we must submit to SAFE certain application forms, identity
documents, transaction documents, form of foreign exchange registration of
overseas investments of the domestic residents, and foreign exchange
registration certificate of the invested
company.
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Second, we will remit the
offering proceeds into this special foreign exchange
account.
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Third, we will apply for
settlement of the foreign exchange. In order to do so, we must submit to
SAFE certain application forms, identity documents, payment order to a
designated person, and a tax
certificate.
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The
timing of the process is difficult to estimate because the efficiencies of
different SAFE branches can vary materially. Ordinarily the process takes
several months but is required to be accomplished within 180 days of application
by law.
You
will experience immediate and substantial dilution upon completion of this
offering.
The
offering price of our shares is expected to be substantially higher than the pro
forma net tangible book value per share of our common stock. Assuming the
completion of the minimum offering, if you purchase shares in this offering, you
will incur immediate dilution of approximately $5.49 in the pro forma net
tangible book value per share from the price per share that you pay for the
shares. Assuming the completion of the maximum offering, if you purchase
shares in this offering, you will incur immediate dilution of approximately
$5.41 in the pro forma net tangible book value per share from the price per
share that you pay for the common shares. Accordingly, if you purchase
shares in this offering, you will incur immediate and substantial dilution of
your investment.
Provisions
in our Certificate of Incorporation and Bylaws or Delaware law might discourage,
delay or prevent a change of control of us or changes in our management and,
therefore depress the trading price of the common stock.
Our
certificate of incorporation authorizes our board of directors to issue up to
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
the board of directors without further action by stockholders. These terms may
include preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
In
addition, Delaware corporate law and our certificate of incorporation and Bylaws
also contain other provisions that could discourage, delay or prevent a change
in control of our Company or changes in its management that our stockholders may
deem advantageous. These provisions:
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deny
holders of our common stock cumulative voting rights in the election of
directors, meaning that stockholders owning a majority of our outstanding
shares of common stock will be able to elect all of our
directors;
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require
any stockholder wishing to properly bring a matter before a meeting of
stockholders to comply with specified procedural and advance notice
requirements; and
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allow
any vacancy on the board of directors, however the vacancy occurs, to be
filled by the directors.
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We
do not intend to pay dividends for the foreseeable future.
For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Accordingly, investors must be prepared to rely
on sales of their common stock after price appreciation to earn an investment
return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will
be made at the discretion of our board of directors and will depend on our
results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
Our
controlling stockholder holds a significant percentage of our outstanding voting
securities, which could hinder our ability to engage in significant corporate
transactions without his approval.
Swift
Dynamic, which is run by Mr. Tao Wang, is the beneficial owner of approximately
63% of our outstanding voting securities. As a result, Swift Dynamic and Mr. Tao
Wang possess significant influence, giving them the ability, among other things,
to elect a majority of our board of directors and to authorize or prevent
proposed significant corporate transactions. Their ownership and control may
also have the effect of delaying or preventing a future change in control,
impeding a merger, consolidation, takeover or other business combination or
discourage a potential acquirer from making a tender offer.
Since
public trading in our common stock is limited and sporadic, there can be no
assurance that our stockholders will be able to liquidate their holdings of our
common stock.
Our
common stock price is currently quoted on the OTC Bulletin Board under the
symbol “QING” (previously “DATI”). However, trading has been limited and
sporadic and we can provide no assurance that the market for our common stock
will be sustained. We cannot guarantee that any stockholder will find a willing
buyer for our common stock at any price, much less a price that will result in
realizing a profit on an investment in our shares. There may be limited
opportunity for stockholders to liquidate any of their holdings in common stock
of the Company. Trading volume may be insignificant and stockholders may be
forced to hold their investment in Company shares for an extended period of
time. The lack of liquidity may also cause stockholders to lose part or all of
their investment in our common stock.
Since
public trading in our common stock is limited and sporadic, the market price of
our common stock may be subject to wide fluctuations.
There is
currently a limited public market for our common stock and we can provide no
assurance that the market for our common stock will be sustained. If a market is
sustained, however, we anticipate that the market price of our common stock will
be subject to wide fluctuations in response to several factors,
including:
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(1)
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actual
or anticipated variations in our results of
operations;
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(2)
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our
ability or inability to generate new
revenues;
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(3)
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increased
competition; and
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(4)
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conditions
and trends in the shoe industry.
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Further,
our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations, may adversely affect the
market price of our common stock.
An
active, liquid trading market for our common stock may not develop following
this offering.
Although
we have applied for listing of our common stock on the NASDAQ Capital Market,
investors will commit funds prior to the commencement of trading on the NASDAQ
Capital Market. An active trading market for our common stock may not
develop or be sustained following this offering. You may not be able to
sell your shares at the market price, if at all, if trading in our shares is not
active. The offering price was determined by negotiations between us and
the underwriter based upon a number of factors. The public offering price
may not be indicative of prices that will prevail in the trading
market.
Investors
risk loss of use of funds allocated for purchases, with no right of return,
during the offering period.
We
cannot assure you that all or any shares will be sold. Anderson &
Strudwick, our underwriter, is offering our shares on a “best efforts,
minimum-maximum basis.” We have no firm commitment from anyone to purchase all
or any of the shares offered. If offers to purchase a minimum of 833,333
shares are not received on or before December 31, 2010, escrow provisions
require that all funds received be promptly refunded. If refunded,
investors will receive no interest on their funds. During the offering
period, investors will not have any use or right to return of the
funds. None of our officers, directors or affiliates may purchase shares in
this offering.
The
market price for our common stock may be volatile, which could result in
substantial losses to investors.
The
market price for our common stock is likely to be volatile and subject to wide
fluctuations in response to factors including the following:
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in the Chinese economy;
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announcements
by our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital
commitments;
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additions
or departures of key personnel; or
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In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. As a result, to the extent shareholders sell our
shares in negative market fluctuation, they may not receive a price per share
that is based solely upon our business performance. We cannot guarantee
that shareholders will not lose some of their entire investment in our common
stock.
If
our financial condition deteriorates, we may not meet initial objective listing
standards related to net income on the NASDAQ Capital Market (or, if we are
listed at such time, continued listing standards) and our shareholders could
find it difficult to sell our shares.
We have
applied to list our common stock for trading on the NASDAQ Capital Market. We
have not yet been informed that our common stock will trade on the NASDAQ
Capital Market and can provide no assurance that our NASDAQ Capital Market
listing application will be approved. Additionally, we will not complete this
offering unless our application to list on the NASDAQ Capital Market is
approved. In order to qualify for initial listing on the NASDAQ Capital Market
upon the completion of this offering, we must meet the following
criteria:
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(i) We
must have been in operation for at least two years, must have shareholder
equity of at least $5,000,000 and must have a market value for our
publicly held securities of at least $15,000,000; or (ii) we must
have shareholder equity of at least $4,000,000, must have a market value
for our publicly held securities of at least $15,000,000 and must have a
market value of our listed securities of at least $50,000,000; OR
(iii) we must have net income from continuing operations in our last
fiscal year (or two of the last three fiscal years) of at least $750,000,
must have shareholder equity of at least $4,000,000 and must have a market
value for our publicly held securities of at least $5,000,000;
and
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The
market value of our shares held by non-affiliates must be at least
$1,000,000;
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The
market value of our shares must be at least
$5,000,000;
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The
minimum bid price for our shares must be at least $4.00 per
share;
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We
must have at least 300 round-lot
shareholders;
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We
must have at least 3 market makers;
and
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We
must have adopted NASDAQ-mandated corporate governance measures, including
a Board of Directors comprised of a majority of independent directors, an
Audit Committee comprised solely of independent directors and the adoption
of a code of ethics among other
items.
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As to the
first objective listing requirement, we have applied for listing on the NASDAQ
Capital Market in reliance on the third test (“net income from continuing
operations in our last fiscal year (or two of the last three fiscal years) of at
least $750,000, must have shareholder equity of at least $4,000,000 and must
have a market value for our publicly held securities of at least $5,000,000”).
While our net income for 2009 and 2008 satisfied this objective requirement, a
deterioration in our financial status combined with a protracted registration
and offering period could cause us to fail to meet this
requirement.
The
NASDAQ Capital Market also requires companies to fulfill specific requirements
in order for their shares to continue to be listed. In order to qualify for
continued listing on the NASDAQ Capital Market, we must meet the following
criteria:
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Our
shareholders’ equity must be at least $2,500,000; or the market value of
our listed securities must be at least $35,000,000; or our net income from
continuing operations in our last fiscal year (or two of the last three
fiscal years) must have been at least
$500,000;
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The
market value of our shares held by non-affiliates must be at least
$500,000;
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The
market value of our shares must be at least
$1,000,000;
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The
minimum bid price for our shares must be at least $1.00 per
share;
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We
must have at least 300
shareholders;
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We
must have at least 2 market makers;
and
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We
must have adopted NASDAQ-mandated corporate governance measures, including
a Board of Directors comprised of a majority of independent directors, an
Audit Committee comprised solely of independent directors and the adoption
of a code of ethics among other
items.
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Although
we have applied to have our common stock trade on the NASDAQ Capital Market upon
closing of this offering, investors should be aware that they will be required
to commit their investment funds prior to the approval or disapproval of our
listing application by the NASDAQ Capital Market. We will not close this
offering unless our listing application is approved. If our shares are delisted
from the NASDAQ Capital Market at some later date, our shareholders could find
it difficult to sell our shares.
In
addition, we have relied on an exemption to the blue sky registration
requirements afforded to “covered securities”. Securities listed on the NASDAQ
Capital Market are “covered securities.” If we were unable to meet the NASDAQ
Capital Market’s listing standards, then we would be unable to rely on the
covered securities exemption to blue sky registration requirements and we would
need to register the offering in each state in which we planned to sell shares.
Consequently, we will not complete this offering unless we meet the NASDAQ
Capital Market’s listing requirements.
In
addition, if our common stock is delisted from the NASDAQ Capital Market at some
later date, we may apply to have our common stock quoted on the Bulletin Board
or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The
Bulletin Board and the “pink sheets” are generally considered to be less
efficient markets than the NASDAQ Capital Market. In addition, if our common
stock is not so listed or is delisted at some later date, our common stock may
be subject to the “penny stock” regulations. These rules impose additional sales
practice requirements on broker-dealers that sell low-priced securities to
persons other than established customers and institutional accredited investors
and require the delivery of a disclosure schedule explaining the nature and
risks of the penny stock market. As a result, the ability or willingness of
broker-dealers to sell or make a market in our common stock might decline. If
our common stock is not so listed or is delisted from the NASDAQ Capital Market
at some later date or were to become subject to the penny stock regulations, it
is likely that the price of our shares would decline and that our shareholders
would find it difficult to sell their shares.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding common stock in
the public marketplace could reduce the price of our common stock.
The
market price of our shares could decline as a result of sales of substantial
amounts of our shares in the public market, or the perception that these sales
could occur. In addition, these factors could make it more difficult for us
to raise funds through future offerings of our common stock. An aggregate
of 10,000,000 shares will be outstanding before the consummation of this
offering and 11,000,000 shares will be outstanding immediately after this
offering, if the maximum offering is raised. All of the shares sold in the
offering will be freely transferable without restriction or further registration
under the Securities Act. The remaining shares will be “restricted
securities” as defined in Rule 144. These shares may be sold in the future
without registration under the Securities Act to the extent permitted by Rule
144 or other exemptions under the Securities Act. See “Shares Eligible for
Future Sale.”
We
have not determined a specific use for a significant portion of the proceeds
from this offering, and we may use the proceeds in ways with which you may not
agree.
Our
management will have considerable discretion in the application of the net
proceeds received by us. We have allocated 10% of the net proceeds from this
offering to working capital. In addition, in the event we are unable
to locate favorable locations for additional sales points, we have reserved the
right to re-allocate funds currently allocated to that purpose to our general
working capital. If that were to happen, then our management would have
significant discretion over even more of the net proceeds to be received by our
company in this offering. You will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being used
appropriately. You must rely on the judgment of our management regarding the
application of the net proceeds of this offering. The net proceeds may be used
for corporate purposes that do not improve our efforts to achieve profitability
or increase our stock price. The net proceeds from this offering may be placed
in investments that do not produce income or that lose value. See “Use of
Proceeds.”
Entities
controlled by our employees, officers and/or directors will control a majority
of our common stock, decreasing your influence on shareholder
decisions.
Assuming
the sale of the maximum offering, entities controlled by our employees, officers
and/or directors will, in the aggregate, beneficially own approximately 60% of
our outstanding shares, including those shares owned by our current director,
Lanhai Sun, who is expected to resign upon completion of the
offering. Assuming the sale of the minimum offering, entities controlled by
our employees, officers and/or directors will, in the aggregate, beneficially
own approximately 61% of our outstanding common stock, including those shares
owned by our current director, Lanhai Sun, who is expected to resign upon
completion of the offering. As a result, our employees, officers and
directors will possess substantial ability to impact our management and affairs
and the outcome of matters submitted to shareholders for approval. These
shareholders, acting individually or as a group, could exert control and
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. This concentration of
ownership and voting power may also discourage, delay or prevent a change in
control of our company, which could deprive our shareholders of an opportunity
to receive a premium for their shares as part of a sale of our company and might
reduce the price of our common stock. These actions may be taken even if they
are opposed by our other shareholders, including those who purchase shares in
this offering. See “Principal Shareholders.”
We
will have an ongoing relationship with our underwriter that may impact our
ability to obtain additional capital.
In
connection with this offering, we will, for a nominal amount, sell our
underwriter warrants exercisable at a rate of one warrant per share to purchase
up to ten percent of the shares sold in the offering. We have registered
these underwriter warrants and the shares of common stock underlying the
underwriter warrants in connection with this offering. These warrants are
exercisable for a period of five years from
the
effective date
at a price equal to 120% of the price of the shares in
this offering. During the term of the warrants, the holders thereof will be
given the opportunity to profit from a rise in the market price of our common
stock, with a resulting dilution in the interest of our other
shareholders. The term on which we could obtain additional capital during
the life of these warrants may be adversely affected because the holders of
these warrants might be expected to exercise them when we are able to obtain any
needed additional capital in a new offering of securities at a price greater
than the exercise price of the warrants. See
“Underwriting.”
Forward-Looking Statements
We
have made statements in this prospectus, including under “Prospectus Summary,”
“Risk Factors,” “Capitalization,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” “Our Business” and elsewhere
that constitute forward-looking statements. Forward-looking statements involve
risks and uncertainties, such as statements about our plans, objectives,
expectations, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,”
“may,” “should,” “will,” “could” and similar expressions denoting uncertainty or
an action that may, will or is expected to occur in the future. These statements
involve estimates, assumptions, known and unknown risks, uncertainties and other
factors that could cause actual results to differ materially from any future
results, performances or achievements expressed or implied by the
forward-looking statements.
Examples
of forward-looking statements include:
|
•
|
the
timing of the development of future
products;
|
|
•
|
projections
of revenue, earnings, capital structure and other financial
items;
|
|
•
|
the
development of future company-owned and franchised
stores;
|
|
•
|
statements
of our plans and objectives;
|
|
•
|
statements
regarding the capabilities of our business
operations;
|
|
•
|
statements
of expected future economic
performance;
|
|
•
|
statements
regarding competition in our market;
and
|
|
•
|
assumptions
underlying statements regarding us or our
business.
|
The
ultimate correctness of these forward-looking statements depends upon a number
of known and unknown risks and events. We discuss our known material risks under
the heading “Risk Factors” above. Many factors could cause our actual results to
differ materially from those expressed or implied in our forward-looking
statements. Consequently, you should not place undue reliance on these
forward-looking statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
After
deducting the estimated underwriting discount and offering expenses payable by
us, we expect to receive net proceeds of approximately $4,279,998 from this
offering if the minimum offering is sold and $5,200,000 if the maximum offering
is sold. The net proceeds from this offering must be remitted to China before we
will be able to use the funds to grow our business. The procedure to remit funds
may take several months after completion of this offering, and we will be unable
to use the funds in China until remittance is completed. See “Risk Factors – We
must remit the offering proceeds to China before they may be used to benefit our
business in China, and this process may take a number of
months.”
We intend
to use the net proceeds of this offering as follows after we complete the
remittance process, and we have ordered the specific uses of proceeds in order
of priority. We do not expect that our priorities for fund allocation would
change if the amount we raise in this offering exceeds the size of the minimum
offering but is less than the maximum offering.
|
|
Percentage of
Net Proceeds
|
Increase
the number of sales points
|
|
|
50
|
%
|
Advertising
|
|
|
20
|
%
|
Increase
inventory
|
|
|
20
|
%
|
Working
capital
|
|
|
10
|
%
|
Total
|
|
|
100
|
%
|
We
anticipate using one-half of the proceeds of this offering to increase the
number of sales points for our products. We currently sell our
products through distributors, flagship stores and third-party operators, and we
believe it is important to our growth strategy to continue to expand the number
of locations our products are available in our area of
competition. We have focused our efforts on growing our sales in
Shandong province generally and Qingdao city in particular, and we expect to
devote much of the proceeds from this offering to increasing the number of sales
points for our products in our region. In our experience,
establishing a new sales point such as a company-owned flagship store in Qingdao
typically requires approximately three months and costs approximately
$120,000.
To the
extent we are unable to locate suitable locations for sales points on terms that
are acceptable to our company, we reserve the right to allocate such unused
funds to our general working capital purposes. We currently believe
we will be able to locate such suitable locations; however, if we are unable to
do so, we expect that we will allocate these working capital funds to purchase
footwear stock from suppliers, to advertise our products, to continue to build
our brand recognition and to develop new product designs. We have not
determined the amount of such re-allocated funds to devote to each of these
purposes, and we would have significant flexibility in such
decisions. See “Risk Factors – We have not determined a specific use
for a significant portion of the proceeds from this offering, and we may use the
proceeds in ways with which you may not agree.”
Pending
use of the net proceeds, we intend to invest our net proceeds in short-term,
interest bearing, investment-grade obligations.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our board of
directors does not anticipate declaring a dividend in the foreseeable future.
Should we decide in the future to pay dividends, as a holding company, our
ability to do so and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiary and other holdings and
investments. In addition, our operating subsidiary in the PRC, from time to
time, may be subject to restrictions on their ability to make distributions to
us, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. Although none of our current loan
agreements prohibit the payment of dividends, we cannot guarantee that any
future loan agreements will permit such payments. Payments of
dividends by WFOE to our company are subject to the requirement that foreign
invested enterprises may only buy, sell and/or remit foreign currencies at those
banks authorized to conduct foreign exchange business. Further, such remittances
would require WFOE to provide an application for remittance that includes, in
addition to the application form, a foreign registration certificate, board
resolution, capital verification report, audit report on profit and stock
bonuses, and a tax certificate. In the event of our liquidation, dissolution or
winding up, holders of our common stock are entitled to receive, ratably, the
net assets available to shareholders after payment of all
creditors. See “Risk Factors – Restrictions under PRC law on
our PRC subsidiary’s ability to make dividends and other distributions could
materially and adversely affect our ability to grow, make investments or
acquisitions that could benefit our business, pay dividends to you, and
otherwise fund and conduct our businesses” and “- Under the New EIT Law, we may
be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC
shareholders.”
Exchange
Rate Information
Our
business is primarily conducted in China. While our functional currency is the
RMB, we use the U.S. dollar as our reporting currency; therefore, periodic
reports made to shareholders will include current period amounts translated into
U.S. dollars using the then-current exchange rates, for the convenience of the
readers. Our financial statements have been translated into U.S. dollars in
accordance with Accounting Standards Codification (“ASC”) 830-10, “Foreign
Currency Matters.” We have translated our asset and liability accounts using the
exchange rate in effect at the balance sheet date. We translated our statements
of operations using the average exchange rate for the period. We reported the
resulting translation adjustments under other comprehensive income. Unless
otherwise noted, we have translated balance sheet amounts with the exception of
equity at December 31, 2009 at ¥6.8166 to $1.00 as compared to ¥6.8166 to
$1.00 at December 31, 2008. The average translation rates applied to income
statement accounts for the year ended December 31, 2009 and the year ended
December 31, 2008 were ¥6.8208 and ¥6.9372, respectively.
We
make no representation that any RMB or U.S. dollar amounts could have been, or
could be, converted into U.S. dollars or RMB, as the case may be, at any
particular rate, or at all. The PRC government imposes control over its foreign
currency reserves in part through direct regulation of the conversion of RMB
into foreign exchange and through restrictions on foreign trade. On July 23,
2010, the interbank rate was ¥6.7881 to $1.00. The Company does not currently
engage in currency hedging transactions.
The
following table sets forth information concerning exchange rates between the RMB
and the U.S. dollar for the periods indicated.
|
|
Interbank Rate
|
|
|
|
Period-End
|
|
|
Average
|
|
|
High
|
|
|
Low
|
|
|
|
(RMB
per U.S. Dollar)
|
|
2004
|
|
|
8.2865
|
|
|
|
8.2872
|
|
|
|
8.2870
|
|
|
|
8.2365
|
|
2005
|
|
|
8.0734
|
|
|
|
8.2033
|
|
|
|
8.2666
|
|
|
|
8.0566
|
|
2006
|
|
|
7.8175
|
|
|
|
7.9819
|
|
|
|
8.0715
|
|
|
|
7.7845
|
|
2007
|
|
|
7.3141
|
|
|
|
7.6172
|
|
|
|
7.8062
|
|
|
|
7.2941
|
|
2008
|
|
|
6.8542
|
|
|
|
6.9623
|
|
|
|
7.2941
|
|
|
|
6.7480
|
|
2009
|
|
|
6.8372
|
|
|
|
6.8409
|
|
|
|
6.8430
|
|
|
|
6.7880
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8369
|
|
|
|
6.8347
|
|
|
|
6.8295
|
|
|
|
6.7836
|
|
February
|
|
|
6.8367
|
|
|
|
6.8377
|
|
|
|
6.8336
|
|
|
|
6.7941
|
|
March
|
|
|
6.8361
|
|
|
|
6.8359
|
|
|
|
6.8268
|
|
|
|
6.8136
|
|
April
|
|
|
6.8358
|
|
|
|
6.8329
|
|
|
|
6.8280
|
|
|
|
6.7471
|
|
May
|
|
|
6.8315
|
|
|
|
6.8365
|
|
|
|
6.8408
|
|
|
|
6.8360
|
|
June
|
|
|
6.8086
|
|
|
|
6.8309
|
|
|
|
6.8433
|
|
|
|
6.8022
|
|
July
(through July 23, 2010)
|
|
|
6.7881
|
|
|
|
6.7857
|
|
|
|
6.7933
|
|
|
|
6.7816
|
|
The
following table sets forth our capitalization as of March 31, 2010 on a pro
forma as adjusted basis giving effect to the sale of the minimum and maximum
offering at an assumed public offering price of $6.00 per share and to reflect
the application of the proceeds after deducting the estimated underwriting fees.
The following pro forma capitalization discussion is forward-looking in nature,
and we make no representation that we will be able to complete the minimum,
maximum or any offering between the minimum and maximum
offering.
You
should read this table in conjunction with our financial statements and related
notes appearing elsewhere in this prospectus and “Use of Proceeds” and
“Description of Capital Stock.”
Minimum
Offering (833,333 shares of common stock)
U.S.
Dollars
March
31, 2010
|
|
As Reported
|
|
|
Pro Forma
Adjusted for Offering
(1)
|
|
|
COMMON
STOCK
|
|
|
|
|
|
|
|
Shares
|
|
|
10,000,000
|
|
|
|
10,833,333
|
|
|
Amount
|
|
$
|
1,000
|
|
|
$
|
1,083
|
|
|
Additional
Paid-In Capital
|
|
$
|
762,091
|
|
|
$
|
5,042,006
|
(4)
|
|
Retained
Earnings
|
|
$
|
282,610
|
|
|
$
|
282,610
|
|
|
Accumulated
Other Comprehensive Income
|
|
$
|
441,116
|
|
|
$
|
441,116
|
|
|
Total
Shareholders’ Equity
|
|
$
|
1,486,817
|
|
|
$
|
5,766,815
|
|
|
Total
Liabilities
|
|
$
|
2,871,440
|
|
|
$
|
2,871,440
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
4,358,257
|
|
|
$
|
8,638,255
|
|
|
Maximum
Offering (1,000,000 shares of common stock)
U.S.
Dollars
March
31, 2010
|
|
|
|
|
|
|
|
|
|
As Reported
(1)
|
|
|
Pro Forma
Adjusted for Offering
(2)
|
|
|
COMMON
STOCK
|
|
|
|
|
|
|
|
Shares
|
|
|
10,000,000
|
|
|
|
11,000,000
|
|
|
Amount
|
|
$
|
1,000
|
|
|
$
|
1,100
|
|
|
Additional
Paid-In Capital
|
|
$
|
762,091
|
|
|
$
|
5,961,991
|
(2)
|
|
Retained
Earnings
|
|
$
|
282,610
|
|
|
$
|
282,610
|
|
|
Accumulated
Other Comprehensive Income
|
|
$
|
441,116
|
|
|
$
|
441,116
|
|
|
Total
Shareholders’ Equity
|
|
$
|
1,486,817
|
|
|
$
|
6,686,817
|
|
|
Total
Liabilities
|
|
$
|
2,871,440
|
|
|
$
|
2,871,440
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
4,358,257
|
|
|
$
|
9,558,257
|
|
|
(2)
|
Gives
effect to the sale of the minimum offering and the maximum offering, as
applicable, at an assumed public offering price of $6.00 per share and to
reflect the application of the proceeds after deducting the estimated
underwriting discounts and our estimated offering
expenses.
|
(4)
|
Pro
forma adjusted for offering additional paid in capital reflects the net
proceeds we expect to receive if we complete the applicable offering,
after deducting a 7% underwriting discount, a 1%
accountable
expense allowance and approximately $320,000 in expenses. In a minimum
offering, we expect to receive net proceeds of $4,279,998 ($4,999,998
offering, less underwriting discount of $350,000,
accountable
expense allowance of $50,000 and offering expenses of $320,000). In a
maximum offering, we expect to receive net proceeds of $5,200,000
($6,000,000 offering, less underwriting discount of $420,000,
accountable
expense allowance of $60,000 and offering expenses of
$320,000).
|
Management’s Discussion
and Analysis of
Financial
Condition and Results of Operations
Disclaimer
Regarding Forward-Looking Statements
Our
discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the Risk
Factors, Cautionary Notice Regarding Forward-Looking Statements and Business
sections in this registration statement. We use terms such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements. The following discussion of the financial condition
and results of operation of the Company for the three months ended March 31,
2010 and the fiscal years ended December 31, 2009 and 2008, should be read in
conjunction with the selected financial data, the financial statements and the
notes to those statements that are included elsewhere in this registration
statement.
The
discussion of the results of operations below are of Qingdao Footwear and its
subsidiaries, Glory Reach and QHS, and have been derived from the financial
statements that are included elsewhere in this prospectus. Glory Reach is deemed
to be the accounting acquirer in the share exchange transaction consummated as
of February 12, 2010, which is further described in the section, “Our Corporate
Structure” in this prospectus.
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.
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 incorpor
ate into our shoes and always meet the
highest and most popular styles for our customers. In the coming
years, w
e will monitor
demand and adjust our product
s
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
Year
s
Ended December 31, 2009 and
December 31, 2008
The
following table sets forth key components of our results of operations during
the twelve months periods ended December 31, 2009 and 2008, both in dollars and
as a percentage of our net sales. As the reverse acquisition of Glory Reach was
entered into after December 31, 2009 and during the periods indicated QHS was
the only entity in our combined business that had operations, the results of
operations below refer only to that of QHS.
|
|
Year Ended
December 31, 2009
|
|
|
Year Ended
December 31, 2008
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
17,863,891
|
|
|
|
100
|
%
|
|
$
|
13,904,314
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
10,162,778
|
|
|
|
57
|
%
|
|
|
8,246,592
|
|
|
|
59
|
%
|
Gross
profit
|
|
|
7,701,113
|
|
|
|
43
|
%
|
|
|
5,657,722
|
|
|
|
41
|
%
|
Selling,
General and Administrative Expenses
|
|
|
969,645
|
|
|
|
5
|
%
|
|
|
814,830
|
|
|
|
6
|
%
|
Operating
Income
|
|
|
6,731,468
|
|
|
|
38
|
%
|
|
|
4,842,892
|
|
|
|
35
|
%
|
Other
income & interest expense
|
|
|
27,318
|
|
|
|
0
|
%
|
|
|
4,704
|
|
|
|
0
|
%
|
Income
Before Income Taxes
|
|
|
6,758,786
|
|
|
|
38
|
%
|
|
|
4,847,596
|
|
|
|
35
|
%
|
Income
taxes
|
|
|
1,689,697
|
|
|
|
9
|
%
|
|
|
1,211,899
|
|
|
|
9
|
%
|
Net
income
|
|
$
|
5,069,089
|
|
|
|
28
|
%
|
|
$
|
3,635,697
|
|
|
|
26
|
%
|
Net Sales
.
Our net sales increased to $17,863,891 in the year ended December 31, 2009 from
$13,904,314 in 2008, representing a 28% increase year-over-year. In
2009, due to increased competition in the shoe manufacturing industry, we were
able to adopt discounted prices to expand our brand’s
penetration. The average selling price per pair was lowered by 11.1%
to $16.00 in 2009, as opposed $17.99 in 2008. We consider the sales
incentive to successful as the volume of footwear sold increased 44.5% to 1.1
million pairs in 2009, up from 780 thousand pairs in 2008. We will
continue to actively monitor the market and adjust our pricing policy according
with our revenue and profit goals. We expect continued positive
growth trends in PRC retail sales and the market as a whole will support our
further growth.
Included
in our net sales for fiscal 2009 were net sales of $15,071,745 attributable to
our wholesale operations (including third party stores and distributor’s stores)
and net sales of $2,792,146 attributable to our retail
operations. Net sales from our wholesale operations increased
$3,216,960, or approximately 27.1%, to $15,071,745 in 2009 compared to sales of
$11,854,785 in fiscal 2008. Net sales from our retail operations
increased $742,617, or 36.2% to $2,792,146 in fiscal 2009, compared to sales of
$2,049,529 in 2008. The average selling price per pair within our
wholesale operations decreased to $15.07 per pair for 2009 from $16.91 in 2008,
a decrease of 10.9% while the average selling price per pair within our retail
operations decreased to $23.95 per pair for 2009 from $28.47 in 2008, a decrease
of 15.9%.
Cost of
Sales
. For the year ended December 31, 2009, cost of sales grew
23.2% to $10,162,778 or approximately 56.9% of net revenues as compared to cost
of sales of $8,246,592, approximately 59.3% of net revenues for the year ended
December 31, 2008. The primary component of our cost of sales by
dollar volume was the purchase of footwear. The increase in cost of
sales was largely caused by more footwear purchases. The average unit
cost per pair decreased to $9.10 per pair for 2009 from $10.67 in 2008, a
decrease of 14.7%. Due to the impact of the global slowdown and
subsequent slump in PRC footwear exports, the footwear manufacturing environment
is extremely competitive. As a result, we believe we will able to continue to
source high quality products at low costs.
Gross Profit and
Gross Margin
.
Our gross profit
increased to $7,701,113 in the year ended December 31, 2009 from $5,657,722 in
2008. Gross profit as a percentage of net revenue was 43% and 41% for the year
ended December 31, 2009 and 2008, respectively. The increase is mainly due to
the changes described above. The sales in own stores contributed
15.6% of sales in 2009, up from 15% in 2008. The self owned-stores’
gross profit margin is approximately 60%, compared with 40% for third party and
distributor sales.
Selling, General
and Administrative Expenses
. Our selling, general and administration grew
slightly to $969,645 in the year ended December 31, 2009 from $814,830 in year
2008. This increase was mainly due to our rapid growth as we increased sales
volume.
Other
Income
. Other income increased to $27,318 in the year ended December 31,
2009 from $4,704 in 2008.
In
come
B
efore
Income
Taxes
. Our income before income taxes increased to $6,758,786 in the year
ended December 31, 2009 from $4,847,596 in 2008. This increase was due to the
general expansion in our operational scope.
Income
Taxes
. Income tax increased to $1,689,697 in the year ended December 31,
2009 from $1,211,899 in 2008. The increase was due to an increase in income, as
our income tax rate remained the same.
Net
Income
. In the year ended December 31, 2009, we generated a net income of
$5,069,089, an increase from $3,635,697 in 2008. This increase was primarily due
to successful scaling out of our business model.
Liquidity
and Capital Resources
At
December 31, 2009, we had cash and cash equivalents of $61,131, as compared to
cash and cash equivalents of $118,534 at December 31, 2008, 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.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flows
(all
amounts in U.S. dollars)
|
|
Year Ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$
|
9,846,859
|
|
|
$
|
7,746,685
|
|
Net
cash used in investing activities
|
|
|
(6,107,882
|
)
|
|
|
(5,823,377
|
)
|
Net
cash used in financing activities
|
|
|
(3,799,530
|
)
|
|
|
(1,874,600
|
)
|
Effects
of Exchange Rate Change on Cash
|
|
|
3,150
|
|
|
|
35,218
|
|
Net
Increase (Decrease) in Cash
|
|
|
(57,403
|
)
|
|
|
83,926
|
|
Cash
at Beginning of the Year
|
|
|
118,534
|
|
|
|
34,608
|
|
Cash
at End of the Year
|
|
|
61,131
|
|
|
|
118,534
|
|
Operating
activities
Net
cash provided from operating activities was $9,846,859 for the fiscal year ended
December 31, 2009, as compared to $7,746,685 of net cash provided by operating
activities for the fiscal year ended December 31, 2008, an increase of
$2,100,174. Our primary cash flows from net income were realized through the
sale of footwear. Net income after deducting non-cash items provided cash
inflows at $5,069,089 for the fiscal year ended December 31, 2009 as compared to
$3,635,697 for the fiscal year ended December 31, 2008, an increase of
$1,433,392. Cash flows from accounts receivable decreased by $96,456 for the
fiscal year ended December 31, 2009 as compared with the fiscal year ended
December 31, 2008. The increase in accounts receivable was primarily due to
growth in sales. The ending balance of accounts receivable as of December 31,
2009 was consistent with our normal practice. Additionally, we
maintained higher inventory level to ensure timely deliveries at the request of
major distributors as of the end of fiscal year ended December 31, 2009 compared
with the fiscal year 2008. For fiscal year 2009, the operational net cash
outflow included an increase in accounts receivable of $95,428 and inventories
of 154,977 respectively; while offset by an increase in tax payable of
$4,949,978, accounts payable of $15,180 and a decrease of $1,179 in prepaid
expenses. Our other working capital remained stable throughout the
period.
Investing
activities
Net
cash used in investing activities for the year ended December 31, 2009 was
$6,107,882 as compared to $5,823,377 for the year ended December 31,
2008. The cash used for investing activities of 2009 represents cash
advanced to our chief executive officer of $5,723,550 and purchase of property
and equipment of $384,332. This advance was settled before we became
a public company, and we no longer make advances to management.
Financing
activities
Net
cash used in financing activities for the year ended December 31, 2009 was
$3,799,530, as compared to $1,874,600 for the year ended December 31,
2008. The cash used in financing activities of 2009 resulted
from the dividend payment of $4,063,590, and the repayment of bank loans of
$1,437,660 by netting off the proceeds from bank loan of
$1,701,720. In the PRC, short term loans are a commonly-used means of
financing. Short term loans may need to be renewed under new terms at
maturity. Although we have not received any commitments from our
lenders to renew our short term loans, we have no reason to believe that our
short term financing would not be renewed upon
maturity.
Comparison of Three Months
Ended March 31, 2010 and March 31, 2009
The
following table sets forth key components of our results of operations during
the three months ended March 31, 2010 and 2009, both in dollars and as a
percentage of our net sales.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
4,765,812
|
|
|
|
100
|
%
|
|
$
|
4,455,898
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
2,656,755
|
|
|
|
56
|
%
|
|
|
2,522,338
|
|
|
|
57
|
%
|
Gross
profit
|
|
|
2,109,057
|
|
|
|
44
|
%
|
|
|
1,933,560
|
|
|
|
43
|
%
|
Operating
Expenses
|
|
|
720,726
|
|
|
|
15
|
%
|
|
|
231,680
|
|
|
|
5
|
%
|
Operating
Income
|
|
|
1,388,331
|
|
|
|
29
|
%
|
|
|
1,701,880
|
|
|
|
38
|
%
|
Other income & interest expense
|
|
|
(819
|
)
|
|
|
0
|
%
|
|
|
9,011
|
|
|
|
0
|
%
|
Income
Before Income Taxes
|
|
|
1,387,512
|
|
|
|
29
|
%
|
|
|
1,710,891
|
|
|
|
38
|
%
|
Income
taxes
|
|
|
457,531
|
|
|
|
10
|
%
|
|
|
427,723
|
|
|
|
10
|
%
|
Net
income
|
|
$
|
929,981
|
|
|
|
20
|
%
|
|
$
|
1,283,168
|
|
|
|
29
|
%
|
Net Sales
.
Our net sales increased to $4,765,812 in the three months ended March 31, 2010
from $4,455,898 in the same period in 2009, representing 7% revenue
growth. As retail sales trends and broader economic growth in the PRC have
been positive despite a global economic downturn, during the three months ended
March 31, 2010, we increased prices in order to achieve higher gross
profit. The average selling price per pair for the first quarter of
2010 and 2009 was $19.46 and $17.69 respectively, representing an increase of
10.0%. In response to the price increase, the volume of footwear sold
decreased 2.8% to approximately 245 thousand pairs for the three months ended
March 31, 2010 as compared to approximately 252 thousand pairs for the same
period last year. We believe our pricing policy for this quarter was a success
given the overall growth in revenue. In the future, we may
adjust pricing strategy to meet market demand and satisfy our financial
goals.
Net
sales from our wholesale operations increased $144,744, or 3.8%, to $3,924,332
for the three months ended March 31, 2010, from $3,779,588 for the three months
ended March 31, 2009. Net sales from our retail operations increased
$165,170 to $841,480 for the three months ended March 31, 2010, a 24.4% increase
over sales of $676,310 for the three months ended March 31,
2009. The average selling price per pair within our wholesale
operations increased to $18.36 per pair for the three months ended March 31,
2010 from $16.67 per pair in the same period last year, an increase of 10.1%,
primarily due to acceptance of new designs and styles for our in-season
products. The average selling price per pair within our retail operations
increased 0.7% to $27.05 per pair for the three months ended March 31, 2010
compared to $26.85 for the same period in 2009.
Cost of
Sales
. For the three months ended March 31, 2010, cost of
sales amounted to $2,656,755 or approximately 55.7% of net revenues as compared
to cost of sales of $2,522,338 or approximately 56.6% of net revenues for the
same period of 2009. The average unit cost per pair increased to $10.85 for the
first quarter of 2010 from $10.01 for the same period of 2009, an increase
of 8.4%. This was in line with macroeconomic factors including
increased consumer demand driving the use of on-line manufacturing capacity and
general wage increases in the PRC. We believe that the supply of low
cost footwear will remain available in the future as unused capacity comes on
line and lower wage pools are accessed throughout Asia.
Gross Profit and
Gross Margin
.
Gross profit for the
three months ended March 31, 2010 increased $175,497 to $2,109,057 from
$1,933,560 for the same period in 2009. Gross profit as a percentage of net
sales, or gross margin, increased to 44.3% for the three months ended March 31,
2010 from 43.4% for the same period in 2009. The gross margin increase was
primarily attributable to increased margins for both our retail and wholesale
operations.
Gross
profit for wholesale operations increased $95,787, or 6.35%, to $1,605,211 for
the three months ended March 31, 2010 from $1,509,424 for the same period in
2009. Wholesale margins increased to 40.9% for the three months ended March 31,
2010 from 39.9% for the same period in 2009. The increase in wholesale margins
was primarily due to increased selling price of wholesale offset decreased sales
volume resulting from high competitive local footwear market. Gross
profit for retail operations increased $79,710, or 18.8%, to $503,846 for
the three months ended March 31, 2010 from $424,136 for the same period in 2009.
Retail margins decreased to 59.9% for the three months ended March 31, 2010 from
62.7% for the same period in 2009. The decrease in retail margins was due to
seasonal closeout sales in 2010.
Operating
Expenses
. Our selling, general and administrative expenses grew to
$702,721 in the three months ended March 31, 2010 from $218,547 in the same
period in 2009. This was mainly due to a payment of shares to service providers
for services provided in connection with our reverse merger.
Other Income
& Interest Expense
. Other Income & Interest Expense decreased to
($819) in the three months ended March 31, 2010 from $9,011 in the same period
in 2009. Other Income and Interest Expense is a negligible percentage
of our revenue.
Income before
Income Taxes
. Our income before income taxes decreased to $1,387,512 in
the three months ended March 31, 2010 from $1,710,891 in the same period in
2009. While our operational scope expanded, the increased selling, general and
administrative expenses mentioned above resulted in a decrease in taxable
income.
Income
Taxes
. Income tax increased to $457,531 in the three months ended March
31, 2010 from $427,723 in the same period in 2009. The increase was due to an
increase in taxable income, as our tax rate remained constant.
Net
Income
. In the three months ended March 31, 2010, we generated net income
of $929,981, a decrease from $1,283,168 in the same period in 2009. This
decrease was primarily due to the factors discussed above. While our
gross profit increased from $1,933,560 to $2,109,057 quarter over quarter, the
one-time selling, general and administrative expenses mentioned above caused our
net income to decrease.
Liquidity
and Capital Resources
As of
March 31, 2010, we had cash and cash equivalents of $378,219, primarily
consisting of cash on hand and demand deposits. This compares with March 31,
2009, when we had cash and cash equivalents of $240,479, primarily consisting of
cash on hand and demand deposits. The following table provides
detailed information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our
shareholders. We do not expect our daily operations to be constrained
by cash flow; however, without additional capital, we may be limited to a lower
rate of growth.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flows
(all
amounts in U.S. dollars)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash provided by operating activities
|
|
$
|
916,821
|
|
|
$
|
2,076,807
|
|
Net
cash provided by (used in) investing activities
|
|
|
(661,971
|
)
|
|
|
(1,954,613
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
61,895
|
|
|
|
0
|
|
Effects
of Exchange Rate Change in Cash
|
|
|
343
|
|
|
|
(249
|
)
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
317,088
|
|
|
|
121,945
|
|
Cash
and Cash Equivalent at Beginning of the Year
|
|
|
61,131
|
|
|
|
118,534
|
|
Cash
and Cash Equivalent at End of the Year
|
|
|
378,219
|
|
|
|
240,479
|
|
Operating
activities
Net
cash provided by operating activities was $916,821 for the three months ended
March 31, 2010, as compared to $2,076,807 for the same period in 2009.
The
cash provided by operating activities for the three months ended March 31, 2010
was mainly derived from our net profit of $929,981, stock-based compensation of
$442,611, an increase of tax liabilities of $1,324,682, and increase of accounts
payables of $120,086, offset by an increase of accounts receivable of
$1,703,936 and increase of prepayments of $173,854. The
increase of accounts receivable was due to a short-term increased credit period
policy designed to enhance sales following a sales fair held in
February. We have granted short-term credit extensions as a strategic
incentive to our most loyal and profitable distributors to increase our market
share following such a sales fair, largely in order to introduce our new models
of footwear. Generally, we expect such distributors to pay the
purchase prices within sixty days of extension. Because these credit
extensions are made to our most loyal and profitable distributors in order to
incentivize them to purchase our new footwear models, we expect the accounts
receivable to be collectable in the ordinary course, and we encourage such
timely repayment by maintaining regular communication with these distributors.
The accounts receivable associated with this short-term credit policy have been
collected as of May 31, 2010.
The
cash provided by operating activities for the three months ended March 31, 2009
was a result of net profit of $1,283,168, and increase in tax payable of
$1,241,699, offset by the increase of inventory of $323,926.
Investing
activities
Net
cash used by investing activities for the three months ended March 31, 2010 was
$661,971 as compared to $1,954,613 net cash used in investing activities during
the same period of 2009. The cash used by investing activities during
the three months ended March 31, 2010 represents the payment for a note
receivable of $440,100 and advance to owner of $221,871. The cash
used in investing activities during the three months ended March 31, 2009
represents the advance to owner of $1,879,489 and payment used for construction
in progress of $75,124.
Financing
activities
Net
cash provided by financing activities for the three months ended March 31,
2010 was $61,895, as compared to $0 in the same period of 2009. The cash
provided by financing activities represents the cash proceeds from
bank loans of $440,100 by offsetting the distribution to owner of
$378,205.
Bank
loans
Our
bank loans include short-term loans and long-term loans. In our
industry, it is customary to obtain such loans to meet cash flow and inventory
needs.
Short
term loans, totaling $1,158,930 as of March 31, 2010, were issued by Bank of
Qingdao and JiMo Rural Bank, with annual interest rate ranging from 6.372% to
7.965%, and with terms of 12 months which will mature in September, November and
December 2010 respectively. All bank loans were secured either by the
property of the Company or third parties.
A
long-term loan for $249,390, was issued in December 2009 by JiMo Rural Bank,
with 2 years period and annual interest rate of 7.02%. The loan is
guaranteed by the relatives of Mr. Tao Wang, the CEO and major shareholder of
the Company and is collateralized by the property of his
relatives.
Capital
resources
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to
pursue. If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in the industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may experience seasonal fluctuations in our revenue in some
regions in the PRC, based on the seasonal changes in the weather and the
tendency of customers to make purchases relating to their apparel suitable for
the time of year. Any seasonality may cause significant pressure on
us to monitor the development of materials accurately and to anticipate and
satisfy these requirements. Our revenues are usually higher in the first
and fourth quarters due to seasonal purchases.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
We
generate revenues from the retail and wholesale of shoes. Sales revenues are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectability is reasonably assured. Sales are presented net
of value added tax (“VAT”). No return allowance is made as product returns have
been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesales to our
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements. We
do not allow any discounts, credits, rebates or similar
privileges.
We do
not grant any inventory pricing protection or other inventory adjusting policies
to our distributors. The distributors are responsible for their
purchased products types and volumes, unless any quality problems
arise. If quality issues arise with our products, the products will
be fully replaced by our manufacturers in accordance with the purchase
agreement. As a result, we recognize our sales on delivery of our
products to our wholesalers. For the retail customers, we only allow
returns due to quality problems. We do not permit returns based
on any other reason, and we do not believe such liberal return policies are
common in China. Should there be any quality defects, customers have
the right to return the shoes to the stores from which they purchased
them. The stores then return them to our company, and we negotiate an
acceptable solution with the manufacturers, which tends to vary with the facts
in each case. According to our historical data, such returns are at
approximately 0.01% of total sales and are not material to our financial
statements.
In
light of the low level of revenue dilution, we do not generally assess returns
of products, levels of inventory, expected introductions of new products or
external sources.
We
have not experienced any purchases of products in excess of ordinary course of
business levels as a result of any incentives. In our experience,
customers merely purchase their seasonal footwear needs more quickly—but not in
greater numbers—than they might otherwise purchase in the absence of such
incentives. This result is not surprising in an industry like the
footwear industry, which is marked by seasonal sales on, for example, sandals
during summer and boots during winter. As a result of such seasonal
fluctuations, our customers endeavor not to maintain excessive inventory but do
try to purchase seasonally-specific shoes shortly before the
season.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
Impairment of Long-Lived Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying amount of a
long-lived asset or asset group is not recoverable (when carrying amount exceeds
the gross, undiscounted cash flows from use and disposition) and is measured as
the excess of the carrying amount over the asset’s (or asset group’s) fair
value. There was no impairment of long-lived assets for the years ended December
31, 2009 and 2008.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is
determined on a weighted average basis and includes all expenditures incurred in
bringing the goods to the point of sale and putting them in a salable
condition. In assessing the ultimate realization of inventories, the
management makes judgments as to future demand requirements compared to current
or committed inventory levels. Our reserve requirements generally
increase as our projected demand requirements; or decrease due to market
conditions and product life cycle changes. The Company estimates the
demand requirements based on market conditions, forecasts prepared by its
customers, sales contracts and orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company
writes down inventories for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventories and their estimated
market value based upon assumptions about future demand and market
conditions.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company’s other comprehensive income arose from the effect of foreign
currency translation adjustments.
Foreign
Currency Translation
The
Company’s functional currency is Chinese currency Renminbi (“RMB”) and its
reporting currency is the U.S. dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. Exchange gains or losses on transaction are included
in earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income. At December 31, 2009 and 2008, the
cumulative translation adjustment of $440,775 and $437,665 were classified as an
item of accumulated other comprehensive income in the shareholders’ equity
section of the balance sheet respectively. For the years ended
December 31, 2009 and 2008, other comprehensive income was $3,110 and $232,047,
respectively.
Segment
Reporting
We
operate as a single operating segment for purposes of presenting financial
information and evaluating performance. As such, the accompanying consolidated
financial statements present financial information in a format that is
consistent with the internal financial information used by management. We do not
accumulate operating expenses by wholesale and retail operations and, therefore,
it is impractical to present such information.
Recent
Accounting Pronouncements
Fair Value Measurements and
Disclosures (Included in ASC 820, previously FSP No. 157-4,
“
Determining Whether a Market is Not
Active and a Transaction Is Not Distressed
”
).
FSP No. 157-4 clarifies
when markets are illiquid or that market pricing may not actually reflect the
“real” value of an asset. If a market is determined to be inactive
and market price is reflective of a distressed price then an alternative method
of pricing can be used, such as a present value technique to estimate fair
value. FSP No. 157-4 identifies factors to be considered when
determining whether or not a market is inactive. FSP No. 157-4 would
be effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009 and shall be
applied prospectively. The adoption of this standard had no material
effect on the Company’s financial statements.
Interim Disclosures about Fair Value
of Financial Instruments (Included in AS
C 825
“
Financial Instruments
”
, previously FSP SFAS No.
107-1).
This guidance requires
that the fair value disclosures required for all financial instruments within
the scope of SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments”, be included in interim financial statements. This
guidance also requires entities to disclose the method and significant
assumptions used to estimate the fair value of financial instruments on an
interim and annual basis and to highlight any changes from prior
periods. FSP 107-1 was effective for interim periods ending after
September 15, 2009. The adoption of FSP 107-1 had no material impact
on the Company’s financial statements.
Consolidation of Variable Interest
Entities
–
Amended (To be included in ASC
810
“
Consolidation
”
, previously SFAS 167
“
Amendments to FASB Interpretation
No. 46(R)
”
).
SFAS 167 amends FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities,” to require an enterprise to perform an analysis to determine
the primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest
entity. SFAS 167 also requires enhanced disclosures that will provide
users of financial statements with more transparent information about an
enterprise’s involvement in a variable interest entity. SFAS 167 is
effective for the first annual reporting period beginning after November 15,
2009 and will be effective for us as of January 1, 2010. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
FASB Accounting Standards
Codification (Accounting Standards Update
“
ASU
”
2009-1).
In June 2009, the
Financial Accounting Standard Board (“FASB”) approved its Accounting Standards
Codification (“Codification”) as the single source of authoritative United
States accounting and reporting standards applicable for all non-governmental
entities, with the exception of the SEC and its staff. The
Codification is effective for interim or annual financial periods ending after
September 15, 2009 and impacts our financial statements as all future references
to authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our
financial statements or disclosures as a result of implementing the
Codification.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASC Update
2009-05”), an update to ASC 820, Fair Value Measurements and
Disclosures. This update provides amendments to reduce potential
ambiguity in financial reporting when measuring the fair value of
liabilities. Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASC Update 2009-05. ASC Update 2009-05 will become effective for the
Company’s annual financial statements for the year ended December 31, 2009. The
adoption of this standard had no material effect on the Company’s financial
statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) “Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force”. This update provides
application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated
to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be
based on vendor-specific objective evidence, if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific or third-party evidence is
available. The Company will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified after
January 1, 2011; however, earlier application is permitted. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers of
Financial Assets
—
an amendment of FASB Statement No.
140.
The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments
require enhanced disclosures about the risks that a transferor continues to be
exposed to because of its continuing involvement in transferred financial
assets. Comparability and consistency in accounting for transferred financial
assets will also be improved through clarifications of the requirements for
isolation and limitations on portions of financial assets that are eligible for
sale accounting. The management is in the process of evaluating the
impact of adopting this standard on the Company’s financial
statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,
Amendments to FASB Interpretation
No. 46(R)
. The amendments in this Accounting Standards Update
replace the quantitative-based risks and rewards calculation for determining
which reporting entity, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which reporting
entity has the power to direct the activities of a variable interest entity that
most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. An approach that is expected to be primarily
qualitative will be more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity. The
amendments in this Update also require additional disclosures about a reporting
entity’s involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The management
is in the process of evaluating the impact of adopting this standard on the
Company’s financial statements.
In
January 2010, FASB issued
ASU No. 2010-01- Accounting for
Distributions
to
Shareholders with Components of Stock and Cash
. The amendments
in this Update clarify that the stock portion of a distribution to shareholders
that allows them to elect to receive cash or stock with a potential limitation
on the total amount of cash that all shareholders can elect to receive in the
aggregate is considered a share issuance that is reflected in EPS prospectively
and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity
and Earnings Per Share). The management is in the process of evaluating the
impact of adopting this standard on the Company’s financial
statements.
In
January 2010, FASB issued
ASU No. 2010-02
–
Accounting and Reporting for
Decreases in Ownership of a Subsidiary
–
a Scope
Clarification
. The amendments in this Update affect accounting
and reporting by an entity that experiences a decrease in ownership in a
subsidiary that is a business or nonprofit activity. The amendments
also affect accounting and reporting by an entity that exchanges a group of
assets that constitutes a business or nonprofit activity for an equity interest
in another entity. The amendments in this update are effective beginning
in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No.160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments
in this update should be applied retrospectively to the first period that an
entity adopted SFAS No. 160. The management does not expect the adoption
of this ASU to have a material impact on the Company’s financial
statements.
In
January 2010, FASB issued
ASU No. 2010-06
–
Improving Disclosures about Fair
Value Measurements.
This update provides amendments to
Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in
and out of Levels 1 and 2. A reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the
transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number). This update
provides amendments to Subtopic 820-10 that clarifies existing disclosures as
follows: 1) Level of disaggregation. A reporting entity should
provide fair value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs
to use judgment in determining the appropriate classes of assets and
liabilities. 2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. Those disclosures are required for
fair value measurements that fall in either Level 2 or Level
3. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The management does not expect the adoption of this ASU to have a
material impact on the Company’s financial statements.
Our
Business
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. As urbanization and individual
purchasing power has increased in China, the demand for leather footwear has
also grown.
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,
“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. 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.
Corporate
History and Background
Qingdao
Footwear was originally incorporated as Datone, Inc. on August 9, 2000 under the
laws of the State of Delaware. The Company operated as a wholly-owned subsidiary
of USIP.com, Inc., a Utah corporation. On August 24, 2006, USIP.com,
Inc. spun-off its subsidiary companies, one of which was Datone, Inc. On
February 1, 2008, Datone, Inc. filed a Form 10-SB registration statement that
was declared effective on November 13, 2008.
Datone,
Inc. was a provider of both privately owned and company owned payphones and
stations in New York. The Company generates 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, the Company also generated
revenues from the service and repair of privately owned payphones and sales of
payphone units.
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 QHS, 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. These
shares of our Series A Convertible 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
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.
Immediately
following the closing of the reverse acquisition of Glory Reach, one of the
Shareholders transferred 337 of the 874 shares of Series A Convertible Preferred
Stock issued to him under the share exchange to certain persons who provided
services to Glory Reach’s subsidiaries, pursuant to share allocation agreements
that the Shareholder entered into with such service providers. We
have accounted for such transfers as compensation expenses.
Upon
the closing of the reverse acquisition, Craig H. Burton, our president and
director, Joseph J. Passalaqua, our secretary and director, and Joseph Meuse,
our director, submitted resignation letters pursuant to which they resigned from
all offices that they held effective immediately and from their position as our
directors that became effective on the tenth day following the mailing by us of
an information statement to our stockholders that complies with the requirements
of Section 14f-1 of the Exchange Act, was mailed out on March 8, 2010. In
addition, our board of directors on February 12, 2010 appointed Tao Wang
(Chairman), Renwei Ma and Lanhai Sun to fill the vacancies created by such
resignations, which appointments became effective upon the effectiveness of the
resignation of Craig H. Burton, Joseph J. Passalaqua and Joseph Meuse on March
18, 2010, the tenth day following the mailing by us of the information statement
to our stockholders on March 8, 2010. (Subsequent to the resignation of these
individuals, our company retained Mr. Meuse as its Chief Financial Officer on
July 12, 2010.) In addition, our executive officers were replaced by
QHS’ executive officers upon the closing of the reverse acquisition as indicated
in more detail below.
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.
QHS
was established in the PRC on May 11, 2003 for the purpose of engaging in the
development and sales of shoe products. Prior to the acquisition described in
the following paragraph, Mr. Tao Wang owned 80% of the equity interests of
QHS.
Glory
Reach was established in Hong Kong on November 18, 2009 to serve as an
intermediate holding company. Mr. Tao Wang controls and has the right
to receive sole ownership of Swift Dynamic, the majority owner of Glory Reach,
pursuant to the Incentive Option Agreement and Entrustment Agreement entered
into with Renhuan Shi, a Korean passport holder. See “Risk Factors – Our
business and financial performance may be materially adversely affected if the
PRC regulatory authorities determine that our acquisition of QHS constitutes a
Round-trip Investment without MOFCOM approval.” As a result of Mr.
Wang’s ownership of QHS and his control of Glory Reach, the entities are
considered to be under common control.
On
February 8, 2010, pursuant to the restructuring plan and upon issuance of the
Enterprise Corporation Business License by the Jinmo City Administration for
Industry and Commerce, Glory Reach acquired 100% of the equity interests in QHS
from Mr. Tao Wang, our Chief Executive Officer, and other minority shareholders,
who are all PRC residents. On February 4, 2010, the local government of the PRC
issued the certificate of approval regarding the change in shareholding of QHS
and its transformation from a PRC domestic company to a wholly-foreign owned
enterprise.
Since
there is common control between the Glory Reach and QHS, for accounting
purposes, the acquisition of QHS has been treated as a recapitalization with no
adjustment to the historical basis of its 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.
Immediately
following the acquisition of Glory Reach, under an Agreement of Conveyance,
Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance
Agreement”), we transferred all of our pre-acquisition assets and liabilities to
our wholly-owned subsidiary, DT Communications, Inc. The spinoff to
DT Communications, Inc. occurred immediately before the
acquisition. Because the surviving entity for accounting purposes was
the operating company, Glory Reach, the spinoff had no impact on our accounting
for the reverse merger.
On
March 1, 2010, Swift Dynamic, being the record holder of 6,495 shares of our
Series A Preferred Stock, constituting 63.0% of the voting power of our issued
and outstanding shares of our Common Stock and Series A Preferred Stock, voting
together as a single class, consented in writing to an amendment to our
certificate of incorporation to change our name to “Qingdao Footwear,
Inc.”
Our
Corporate Structure
All of
our business operations are conducted through our Hong Kong and Chinese
subsidiaries. The chart below presents our corporate structure.
Our
Industry and Principal Market
China
is the largest producer of footwear in the world, with at least 25,000
enterprises employing more than 10 million employees who manufacture more than
10 billion pairs of shoes per annum. China’s annual production accounts for
nearly 70% of the 14.3 billion pairs of shoes produced worldwide. In 2008,
roughly 75% of PRC production capacity was exported while the remaining 25% were
consumed domestically. Chinese consumption of footwear reached 2.5 billion pairs
in 2008. (Global Footwear, 2nd Edition, www.researchandmarkets.com) We
anticipate stable growth in the domestic footwear market for the next several
years. Beginning with the deterioration in the global economy in 2008
and the collapse of the Chinese textile and footwear export market, a material
number of low margin manufacturers were forced out of business. Domestic
consumption and retail sales within China, however, remained robust throughout
the export downturn and global financial crisis. As we have intentionally
avoided the manufacturing sector, we were able to capitalize on the economic
conditions and maintain our profit margin and by capitalizing on overcapacity in
our sourcing market and growing consumer demand.
PRC
Domestic Consumption
According
to the CIA World Factbook, China’s gross domestic product (“GDP”) growth rate
has exceeded both the United States’ and the world’s GDP growth rate over the
past ten years:
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)
These
trends have driven a boom in retail sales in the PRC, which has grown at an
annual rate ranging from 9.7 to 21.6% over the past ten year
period. It is estimated that retail sales will grow 47% from
2009 to 2014. (China Retail Report Q1 2010,
www.companiesandmarkets.com)
The
retail sales according to the China Statistical Yearbook are displayed
below:
The
PRC Footwear Market
China’s
footwear market generated total revenues of approximately $11.7 billion dollars
in 2008. According to Datamonitor, from 2004 through 2008, revenues
grew at a cumulative annual growth rate of approximately 10.7%. (“Footwear in
China,” www.datamonitor.com)
China’s
footwear market accounts for approximately 34% of the entire Asia-Pacific
footwear market’s value, and China is expected to continue to grow in future
periods by over 8% per year through 2013, while the most valuable market, Japan,
which holds approximately 35.8% of the footwear market value in the region, is
expected to decrease by approximately 0.8% per year over the same period.
(“Footwear in China,” www.datamonitor.com)
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, shoe consumption
are 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 is likely to continue to grow for the foreseeable
future.
Our
Growth Strategy
We
believe that the market for affordable, high quality footwear in China provides
us with attractive and sustainable growth opportunities. We
intend to pursue the following strategies to achieve our goal:
(1)
|
Continue
our aggressive marketing and advertising campaigns in order to gain brand
awareness
.
We
currently advertise and market our products throughout Shandong province
in general and the greater Qingdao region in particular, using a
combination of advertising across a variety of media, sales fairs, and
billboard displays. We expect to continue to focus these
efforts.
|
(2)
|
Expand
distributor and third party operator stores in prime locations to maximize
profits.
We seek to place stores in locations we
consider attractive from a business perspective. Potential attractive
locations are typically in areas that are likely to have a sufficient
population of “window shoppers” in the Registrant’s target demographic
(generally, consumers seeking business casual and formal leather shoes
appropriate for an office setting). We do not currently plan to
expand our geographic footprint beyond what we view as our core market,
Shandong province. In addition, we expect that we will continue
to strengthen our presence in the Qingdao
region.
|
(3)
|
Bring
more self owned stores online to increase higher margin
sales.
Although we have not established a timeline to
increase the number of self owned stores we will open in the near future,
we expect that we will open more self owned stores (and at a faster rate)
if we complete this offering than we will open if we rely only on organic
growth to fund such openings. The reason for this is that we
have found that expanding our distributor network allows us to leverage
our resources more effectively, even though we earn higher margins on our
self owned stores. In the event we complete this offering,
however, we would have free cash available to devote to opening self owned
stores. In our experience, establishing a new sales point such as a
company-owned flagship store in Qingdao typically requires approximately
three months and costs approximately
$120,000.
|
(4)
|
Continue
to strive for excellence in quality, customer service and design in order
to attract new and retain repeat customers.
We have an
in-house product design team, which is responsible for designing our
product lines. We have worked with this team and our
advertising team to develop an image for our Hongguan brand that we
believe will continue to attract customers in our target demographic of
office workers. We recognize employees on a regular basis to
encourage a concerted effort of high quality customer
service.
|
(5)
|
Leverage
our growing purchasing power with manufacturers to lower
costs.
At present, we have found that Chinese shoe
manufacturers have unused manufacturing capacity. To the extent
we have demand from customers for our branded shoes, we believe we benefit
from a favorable market in which to purchase from such
manufacturers. If we continue to grow, we will be able to use
our increased purchasing power and the desire of manufacturers to make use
of such untapped capacity to reduce our costs to purchase
footwear.
|
Our
Products
Our
products consist of men and women’s footwear. Our designs are on the whole
targeted at consumers seeking business casual and formal leather shoes
appropriate for an office setting. Each year we design or commission designs for
more than 200 unique styles. We do not manufacture our products, but instead
outsource manufacturing to third parties. Our designs are split roughly evenly
between men’s and women’s products. Designs are made based on collaboration
between our sales department and design department regarding market demand and
assessment of what will designs be fashionable in the upcoming season. As of
March 31, 2010, men’s footwear constituted approximately 60% of revenue and
women’s footwear the remainder. Approximately 40% of sales were formal shoes,
and the remainder is attributed to casual footwear.
Sourcing
and Purchase of Products
We are a
retailer and designer of footwear products, and as such we fully outsource
production of our footwear to third party manufacturers. Due to excess capacity
in the footwear manufacturing industry in the PRC, we have historically been
able to source our products at competitive prices that allow us to maintain
strong margins in comparison with our competitors. In this way, we avoid what we
perceive to be the risks and lower margins associated with manufacturing
footwear and are able to focus our energies on our brand building and retail
business.
Our
suppliers are selected for their ability to meet our high quality standards,
timely execution of our orders and competitive pricing. As of March 31, 2010, we
had contractual relationships with 60 footwear manufacturers. None of our
suppliers accounted for more than 10% of the total cost of our goods sold in
2009. Our suppliers are mainly located in Wenzhou, Chongqing and various towns
in Jiangsu.
Our
contracts with suppliers are on an as ordered basis, with payment due at the end
of the month of delivery, and are usually for a term of one year. Prices are
negotiated based on a by design basis by our sourcing team. All of our suppliers
are subject to our strict quality control standards, and we are entitled to
return product without payment if it is not according to the quality set forth
in our agreement.
During
the year ended December 31, 2007, purchases from one vendor accounted for 13.2%
of the total merchandise purchases of the Company. There is no such
concentration for the year ended December 31, 2008 and year ended December 31,
2009.
Sales
Channels
The
following diagram details our current distribution
channels:
As of
March 31, 2010, we had 12 flagship stores, 11 exclusive third party managed
retail outlets, and 192 outlets managed by distributors.
The
majority of our sales come through distributors stores. The table
below provides a breakdown of sales by sales channel:
Channel
|
|
2009 Sales
|
|
|
%
|
|
|
2008 Sales
|
|
|
%
|
|
Self
Owned Stores
|
|
$
|
2,792,146
|
|
|
|
16
|
%
|
|
$
|
2,049,529
|
|
|
|
15
|
%
|
Wholesale
(Third party Stores and Distributors)
|
|
$
|
15,071,745
|
|
|
|
84
|
%
|
|
$
|
11,854,785
|
|
|
|
85
|
%
|
Total
Revenue
|
|
$
|
17,863,891
|
|
|
|
100
|
%
|
|
$
|
13,904,314
|
|
|
|
100
|
%
|
We
have experienced rapid growth in our retail presence in the past two
years. The following table details the locations and historical
growth of our sales network:
|
Flagship Stores
|
|
Distributors
|
|
3rd Party Operators
|
|
Total
|
|
2008
|
|
2009
|
|
2010
Q1
|
|
2008
|
|
2009
|
|
2010
Q1
|
|
2008
|
|
2009
|
|
2010
Q1
|
|
2008
|
|
2009
|
|
2010
Q1
|
Shandong
(excluding
Qingdao)
|
0
|
|
0
|
|
0
|
|
42
|
|
155
|
|
155
|
|
0
|
|
6
|
|
6
|
|
42
|
|
161
|
|
161
|
Qingdao
city
(including
Jimo)
|
8
|
|
11
|
|
12
|
|
44
|
|
26
|
|
26
|
|
0
|
|
4
|
|
4
|
|
52
|
|
41
|
|
42
|
Xinjiang
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
|
3
|
|
0
|
|
1
|
|
1
|
|
1
|
|
2
|
|
4
|
Shanxi
|
0
|
|
0
|
|
0
|
|
2
|
|
3
|
|
2
|
|
0
|
|
0
|
|
0
|
|
2
|
|
3
|
|
2
|
Tianjiang
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
Heilongjiang
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
Hebei
|
0
|
|
0
|
|
0
|
|
0
|
|
2
|
|
1
|
|
0
|
|
0
|
|
0
|
|
0
|
|
2
|
|
1
|
Liaoning
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
Henan
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
|
0
|
|
0
|
|
0
|
|
0
|
|
1
|
|
1
|
|
8
|
|
11
|
|
12
|
|
89
|
|
191
|
|
191
|
|
0
|
|
11
|
|
11
|
|
97
|
|
213
|
|
214
|
Shandong
Province
Shandong
Province is China’s second largest province (after Guangdong), with a population
of approximately 94 million people. The province is also China’s
second most densely populated province (after Jiangsu), with 587 people per
square kilometer, more than four times the average population density in
China. Gross domestic product (“GDP”) attributable to Shandong ranks
it second among China’s provinces, accounting for more than ten percent of
China’s GDP in 2008. (“List of Administrative Divisions by Population
Density,” en.wikipedia.org; “World Bank Supports Skills Development in Two
Chinese Provinces,” go.worldbank.org)
Qingdao
City
Qingdao
is a sub-provincial city in China comprised of seven districts and five
county-level cities. It is one of China’s twenty largest cities and
one of the two largest cities in Shandong province, with approximately 200,000
more people living in Jinan city than in Qingdao city but more than 1.7 million
more people living in the greater Qingdao administrative area than in Jinan’s
administrative region. Qingdao has a population of approximately 8
million residents, of whom approximately 3.8 million live in the urban
area.
Qingdao’s
per-capita GDP (approximately $7,616 in 2008) is above average in China
(approximately $3,290 in 2008), in part due to the Chinese government’s decision
in 1984 to designate Qingdao as a special economic and technology development
zone. For this reason, Qingdao’s local economy features a variety of
foreign investment, with South Korea and Japan investments being particularly
prominent in the area. (“Qingdao,”
en.wikipedia.org)
Flagship
Stores
We
directly own or lease and operate all of our flagship stores. All located in
Jimo or greater Qingdao. Each store has an individual sales team and managers
that report to our central office in Qingdao. All sales staff are compensated on
a commission based pay scale. Locations are selected according to management’s
estimation of market opportunity. Our flagship stores bear the Hongguan brand
name and exclusively retail Hongguan brand footwear.
During
the years ended December 31, 2009 and 2008, the sales generated by the Company’s
flagship stores accounted for 16% and 15% of total sales,
respectively.
Hongguan
Flagship Outlets in Jimo:
Stores
Managed by Third Party Operators
In
order to meet consumer demand for our products and efficiently expand of our
business, we also select certain third parties to operate Hongguan (sometimes
presented as “HonGung,” as in the above image) branded outlets. We have
literature and rules regarding the location, size, store layout, interior design
and product display of their Hongguan retail stores. All potential third party
operators require prior approval before opening new stores. We visit potential
locations for new outlets and consider the suitability of such locations before
approval. Furthermore, all third party operators must personally operate their
stores.
These
operators are chosen based on the following criteria:
-
Management experience in retail operations and our confidence in their ability
to effectively meet our sales targets and high standards of
conduct.
- Good
credit and sufficient capital.
-
Proposed store location, size and condition.
After
approval, the third party operators must purchase a fixed amount of footwear
stock at wholesale prices and Hongguan branded decorations for proper interior
and exterior design. Third party operators then continue to pay wholesale prices
for footwear on an on demand basis. Contracts with third party operators are
typically for a period of two years.
Distributors
We
identify suitable distributors and enter into distributorship agreements,
usually for a term of two years. Distributors purchase wholesale priced shoes
and vend them at sales points throughout China. We require our distributors to
implement, monitor compliance with and enforce our retail store guidelines. Our
distributors are independent third parties that do not pay us any fee other than
the purchase price for the purchase of our products, nor do we pay them any
incentives or fees.
Our
distribution contracts usually contain the following terms:
Geographic limitation
— Distributors
must sell our Hongguan branded footwear within a specific authorized
location(s).
Wholesale price
— Distributors pay a
discounted wholesale price for our products.
Payment and credit terms
— Payment and
credit terms are on a case by case basis. The credit period is usually one
month, and 25% percent of our distributors prepay for their
stock.
Performance
— QHS typically retains the right to end the agreement if a
distributor does to meet sales turnover levels comparable to other
distributors.
Exclusivity
— We work with nearly 200 distributors, so the types and sizes of
distributor outlets vary significantly. Many of these outlets are
independent shoe stores, but we are open to the prospect of cooperating with
department stores and larger established retailers. The
distributorship agreements allow our distributors to sell our products under the
Hongguan brand on an exclusive basis. If there are other brands featured at the
distributor’s outlet, Hongguan brand shoes must constitute a certain percentage,
generally a majority, of product on display. Furthermore, the products must be
displayed according to our standards.
Training
— Training and instructional materials are provided to all of our
distributers regarding product display, decoration, and sales
techniques.
Renewal
and termination
— We can renew contracts at our discretion and can
terminate contracts if contractual conditions including sales targets are not
met.
We do
not have a return policy with our distributors, other than a general right to
return defective merchandise. In the event a distributor is unable to sell its
stock, we will attempt—but are not obligated—to help it relocate such stock to a
nearby QHS outlet.
Purchasing
and Sales Prices
We have
historically organized one sales fair per year in which distributors and third
parties operators can view and select upcoming designs. We also maintain several
showrooms in our head office in Jimo with the current and future product lines
which our sales force visits on a regular basis.
We intend
to keep the pricing of our products at reasonable levels in the foreseeable
future in order to stay competitive and maintain product demand. Our wholesale
prices are generally not more than a 50% discount to the sales
price.
Employees
The
table below details the various departments and number of employees in
each. All of these employees are full-time
employees.
Management
and Sales
|
|
|
9
|
|
Design
& Purchasing
|
|
|
3
|
|
Accounting
|
|
|
5
|
|
Warehouse
|
|
|
8
|
|
Administration
|
|
|
7
|
|
Sales
|
|
|
30
|
|
Total
|
|
|
62
|
|
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Unemployment Insurance Law, the PRC Provisional Insurance Measures for Maternity
of Employees, PRC Interim Provisions on Registration of Social Insurance, PRC
Interim Regulation on the Collection and Payment of Social Insurance Premiums
and other related regulations, rules and provisions issued by the relevant
governmental authorities for our operations in the PRC. According to the PRC
Labor Contract Law, we are required to enter into labor contracts with our
employees and to pay them no less than local minimum wage.
Intellectual
Property
Our
products are sold under the Hongguan brand name, which is a registered trademark
in the PRC.
Trademarks (Mandarin)
|
|
Trademarks
|
|
Certificate #
|
|
Valid Term
|
|
|
Hongguan
|
|
3483788
|
|
March 14, 2005 to March 13, 2015
|
Under
current Chinese laws, we may renew our trademark upon expiration for an
unlimited number of successive ten year terms.
Advertising
and Marketing Efforts
Our
sales and marketing department is responsible for the organization of sales
fairs, selection, review, execution and management of contracts with third
parties and distributers, and operation of our own retail outlets. We utilize
television, print media, radio, the internet and outdoor billboard displays to
build brand awareness. Since 2006, Chinese popular television star Ren Quan has
been the face of QHS’ advertising campaign. In 2006, we entered into a contract
with Ren Quan and purchased the rights to use his image for our marketing
purposes. We are contractually obligated to maintain confidentiality as to the
terms at which we acquired his rights. More recently, we have entered into a
contract with another Chinese popular television star, Liu Xiaohu and purchased
the rights to use his image for our marketing purposes, and he is featured in
our television commercials and our various advertisements beginning in
2010. We expect to focus more heavily on advertisements featuring Liu
Xiaohu in the future.
Competition
The
retail and in particular the footwear retail industry are highly competitive in
the PRC. Our competitors are a number of international and domestic enterprises
with shoe sales operations in our target market, including but not limited to
Jinhou Footwear Company, Liangda Leather Company, Haining Leather Footwear
Company and Fude Leather Shoe Company. We expect the competition to become more
intensified due to the entry of new footwear retailers in the PRC and as a
result we may be subject to competitive pricing pressures in the future.
Quality, cutting edge style, brand awareness, customer service, highly motivated
sales force and affordable footwear prices are vital cornerstones to success in
our industry.
Our
market share is small in comparison with the entire China footwear market, which
is a multibillion-dollar industry. According to the recent census
taken in 2008, the cities of Jimo and Qingdao have approximately 1.10 million
and 8 million residents, respectively. While we lack readily
available market research on the footwear market in Qingdao and Jimo, our
management estimates that our products collectively represent a market share of
roughly 20% in Jimo and 6% in Qingdao. This market share is based on
our target market of business casual and formal leather shoes for office
workers.
Design
Team
Our
design team consists of three full time designers that are engaged in creating
new fashionable designs for upcoming seasons. They are also engaged in the
review, selection and alteration of designs proposed by contract manufacturers.
On average, our design team is responsible for the selection or creation 200
models of footwear per year.
Description
of Property
Our
principal executive offices are in Jimo, China.
Certificate
No.
|
Jin
Guo Yong (2007) 534
|
User
of the Land
|
Wang
Tao
|
Location
|
West
#1 Huashan Road., Jimo City, Shandong Province
|
Usage
|
Industrial
|
Area
|
14,225
square meters
|
Form
of Acquisition
|
By
means of transfer
|
Expiration
Date
|
December
28, 2052
|
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the years ended December 31, 2009 and 2008, rent
expense of $17,593 and $17,298, respectively, was included in total rent expense
for the respective years. The Company leases one of its warehouse buildings to
Weidong Liang, brother-in-law of Mr. Tao Wang, for three years starting May
2008. Per the agreement, the lessee shall pay equal amount of advertising
expense on behalf of the lessor as the lease payment. For the year ended
December 31, 2009, the Company recorded other income of $87,966 from leasing the
aforementioned building and advertising expense.
Regulation
Because
our principal operating subsidiary, QHS, is located in the PRC, our business is
regulated by the national and local laws of the PRC. We believe our conduct of
business complies with existing PRC laws, rules and regulations.
General
Regulation of Businesses
We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions issued by
the relevant governmental authorities from time to time, for our operations in
the PRC.
According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.
Foreign
Currency Exchange
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), as amended (2008). Under these Rules, RMB
is freely convertible for current account items, such as trade and
service-related foreign exchange transactions, but not for capital account
items, such as direct investment, loan or investment in securities outside China
unless the prior approval of, and/or registration with, the State Administration
of Foreign Exchange of the People’s Republic of China, or SAFE, or its local
counterparts (as the case may be) is obtained.
Pursuant
to the Foreign Currency Administration Rules, foreign invested enterprises, or
FIEs, in China may purchase foreign currency without the approval of SAFE for
trade and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. They may also retain foreign exchange
(subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or
to pay dividends. In addition, if a foreign company acquires a company in China,
the acquired company will also become an FIE. However, the relevant PRC
government authorities may limit or eliminate the ability of FIEs to purchase
and retain foreign currencies in the future. In addition, foreign exchange
transactions for direct investment, loan and investment in securities outside
China are still subject to limitations and require approvals from, and/or
registration with, SAFE.
Regulation
of Income Taxes
On March
16, 2007, the National People’s Congress of China passed a new Enterprise Income
Tax Law, or the New EIT Law, and its implementing rules, both of which became
effective on January 1, 2008. Before the implementation of the New EIT Law, FIEs
established in the PRC, unless granted preferential tax treatments by the PRC
government, were generally subject to an earned income tax, or EIT, rate of
33.0%, which included a 30.0% state income tax and a 3.0% local income tax. The
New EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all
domestic-invested enterprises and FIEs, unless they qualify under certain
limited exceptions.
In
addition to the changes to the current tax structure, under the New EIT Law, an
enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT
of 25% on its global income. The implementing rules define the term “de facto
management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our
organization’s global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see
“Risk Factors – Risks Related to Our Business – Under the New EIT Law, we may be
classified as a ‘resident enterprise’ of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC
stockholders.”
Our
future effective income tax rate depends on various factors, such as tax
legislation, the geographic composition of our pre-tax income and non-tax
deductible expenses incurred. Our management carefully monitors these legal
developments and will timely adjust our effective income tax rate when
necessary.
Dividend
Distribution
Under
applicable PRC regulations, FIEs in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a FIE in China is required to set aside
at least 10.0% of its after-tax profit based on PRC accounting standards each
year to its general reserves until the accumulative amount of such reserves
reach 50.0% of its registered capital. These reserves are not distributable as
cash dividends. The board of directors of a FIE has the discretion to allocate a
portion of its after-tax profits to staff welfare and bonus funds, which may not
be distributed to equity owners except in the event of liquidation.
The New
EIT Law and its implementing rules generally provide that a 10% withholding tax
applies to China-sourced income derived by non-resident enterprises for PRC
enterprise income tax purposes unless the jurisdiction of incorporation of such
enterprises’ shareholder has a tax treaty with China that provides for a
different withholding arrangement. QHS is considered an FIE and is directly held
by our subsidiary Glory Reach in Hong Kong. According to a 2006 tax treaty
between the Mainland and Hong Kong, dividends payable by an FIE in China to the
company in Hong Kong who directly holds at least 25% of the equity interests in
the FIE will be subject to a no more than 5% withholding tax. We expect that
such 5% withholding tax will apply to dividends paid to Glory Reach by QHS, but
this treatment will depend on our status as a non-resident
enterprise.
Environmental
Matters
Our
operations are not subject to any environmental regulations.
Insurance
Insurance
companies in China offer limited business insurance products. While business
interruption insurance is available to a limited extent in China, we have
determined that the risks of interruption, cost of such insurance and the
difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result, we could
face liability from the interruption of our business as summarized under “Risk
Factors – Risks Related to Our Business – We do not carry business interruption
insurance so we could incur unrecoverable losses if our business is
interrupted.”
Management
Directors
and Executive Officers
Board
of Directors and Officers Prior to Share Exchange
Prior
to the consummation of the share exchange with Glory Reach, our board of
directors consisted of three directors, Craig H. Burton, our former President,
Joseph J. Passalaqua, our former Secretary, and Joseph Meuse (the “Former
Directors”). On February 12, 2010, the Former Directors submitted a letter of
resignation and Tao Wang, Renwei Ma, and Lanhai Sun were appointed to our board
of directors (the “Directors”). The resignation of the Former Directors and
appointment of the Directors both became effective on March 18,
2010.
Current
Board of Directors and Officers
Through
July 11, 2010, Ms. Fang Sui served as our Chief Financial Officer, at which time
she resigned from such role but continues to work with our
company. From July 12, 2010 through present, Mr. Joseph Meuse has
served as our Chief Financial Officer. Our board of directors and
executive officers are currently as listed below.
NAME
|
|
AGE
|
|
POSITION
|
Tao
Wang
|
|
39
|
|
Director
and Chief Executive Officer
|
Renwei
Ma
|
|
43
|
|
Director
and General Counsel
|
|
|
40
|
|
Chief
Financial Officer
|
Wenmao
Shi
|
|
39
|
|
Chief
Operating Officer
|
Lanhai
Sun
|
|
39
|
|
Director
|
Tao Wang.
Mr. Wang
founded QHS in 2003 and has served as its chief executive officer since
March 10, 2003. Mr. Wang served as our Chief Executive Officer
and as Chairman of our Board of Directors since our inception. Before
founding QHS, Mr. Wang was engaged in variety of capacities involving branding,
strategic marketing and sales of footwear since 1992. Mr. Wang has over 18
years’ experience in China’s footwear industry. We have selected Mr.
Wang to serve as a director and as Chairman of the Board because he is our
majority shareholder and has a rich background in the footwear
industry.
Renwei Ma.
Mr. Ma
has been QHS’ legal representative since the founding of QHS in March 2003, and
was an initial investor in the Company. Prior to becoming QHS’s legal
representative, he was self-employed, and was engaged in various entrepreneurial
endeavors in the footwear industry. In 1991 he obtained an associate’s degree in
marketing from Yantai Trade and Industry University. We have selected Mr. Wang
to serve as a director and as Chairman of the Board because he is our legal
representative and a founding investor in the company.
Joseph
Meuse
, Mr. Meuse served as a director of Datone from January 25, 2010
through March 18. 2010. Mr. Meuse founded several companies in the financial
services and securities industries, which he continues to operate. In
2002, Mr. Meuse founded PacWest Stock Transfer LLC and is a majority partner in
Pacific Stock Transfer Company, an independent stock transfer agent that serves
over 1,000 clients, including a number of publicly traded companies that do
business in China. In 2003, Mr. Meuse founded Belmont Partners, LLC,
an international financial consulting firm that provides public shell companies
for use in reverse merger transactions. In 2006, Mr. Meuse founded
Belmont Financial Services and Belmont IT Services, two companies that provide
accounting and information technology services to small businesses in the
Northern Virginia area. Additionally, Mr. Meuse maintains a position
as a board member of the following public companies:
Action
Industries, Inc.; All State Properties Holdings, Inc.; Blue Gem Enterprise;
Cinnabar Ventures, Inc.; Blue Fish Clothing, Inc.; Brite-Strike Tactical
Illumination Productions, Inc.; Comprehensive Healthcare Solutions, Inc.;
Contracted Services, Inc.; Firstar Exploration Corp.; Fresca Worldwide Trading
Company; Geopulse Explorations, Inc.; Hudson’s Grill International, Inc.;
IDcentricx, Inc.; Intercontinental Resources, Inc.; Ivecon Corp.; Jamaica Jim,
Inc.; Jasper Ventures, Inc.; King Resources, Inc.; Lions Petroleum, Inc.;
Madrona Ventures, Inc.; Michael Lambert, Inc.; Miller Diversified Corp.; Network
Capital, Inc.; Recycle Tech, Inc.; Rockport Healthcare Group; Shimmer Gold,
Inc.; Smart Holdings, Inc.; SpectraSource, Inc.; 3DShopping.com, Inc.;
Springfield Company, Inc.; Unidigital, Inc.; Volcanic Gold; WES Consulting,
Inc.; XRG, Inc.; Yzapp International, Inc.; Data Storage Consulting Services,
Inc.; Cienega Creek Holdings, Inc.; and Luke Entertainment,
Inc.
Mr.
Meuse attended the College of William and Mary.
Wenmao Shi.
Mr. Shi
has been served as our Chief Operating Officer since inception in 2003 and is
responsible for QHS advertising, marketing and sales efforts. Prior
to joining QHS, Mr. Shi was a director of sales at Qingdao Double Star Group, a
leading PRC footwear manufacturer. Mr. Shi has over 18 years of sales
experience, and obtained a bachelors degree in economics in 1992 from Wuhan
Southeast University of Economics and Law.
Lanhai Sun
. Mr. Sun has been
working as the Company’s financial consultant since 2005, and he has invested in
and owns several QHS outlets. He served as the general manager at Shandong Huibo
Import & Export Co., Ltd. (2006 through 2008) and Qingdao Xingguang Import
& Export Co., Ltd. (2009 through present) apparel trading companies, as well
as serving as the CEO of SK Investment Group Ltd, a financial consulting firm
(2008 through present). We have selected Mr. Sun to serve as a
director because of his experience in financial consulting and pivotal role
assisting with our listing in the United States.
Anticipated
Board of Directors and Officers upon Closing of this Offering
Upon
closing of this offering, we expect that the board of directors and executive
officers will be as listed below. We expect that Mr. Lanhai Sun will
resign his position as a director in order to allow us to meet NASDAQ’s
requirement that a board of directors consist of a majority of independent
directors. All of our independent director nominees have consented to
serve as independent directors beginning on or before the closing date of this
offering.
NAME
|
|
AGE
|
|
POSITION
|
Tao
Wang
|
|
39
|
|
Director
and Chief Executive Officer
|
Renwei
Ma
|
|
43
|
|
Director
and General Counsel
|
|
|
40
|
|
Chief
Financial Officer
|
Wenmao
Shi
|
|
39
|
|
Chief
Operating Officer
|
Troy
Mao
|
|
34
|
|
Independent
Director (nominee)
|
Susan
Woo
|
|
48
|
|
Independent
Director (nominee)
|
John
Zhang
|
|
39
|
|
Independent
Director (nominee)
|
Troy Mao
. Mr. Mao
has agreed to serve as an independent director upon completion of this
offering. Since 2008, Mr. Mao has served as Chief Financial Officer
of China TransInfo Technology Corp. (NASDAQ: CTFO), a company that develops
information systems technology solutions in China to serve the public
sector. In connection with this position, Mr. Mao has assisted China
TransInfo in completing its listing on the NASDAQ Capital Market and its
transition to the NASDAQ Global Market. From 2006 through 2007, Mr.
Mao served as a senior auditor for Deloitte & Touche Tohmatsu CPA, Ltd.'s
Global Offering Group in Beijing, where he assisted Chinese companies with US
GAAP issues in connection with their listing on US markets. From 2003
through 2006, Mr. Mao worked for Deloitte & Touche LLP as a senior auditor
and senior tax consultant. Mr. Mao earned his bachelor's degree in
Japanese from the University of International Relations in Beijing in
1998. He earned a master's degree in computer science from
Southeastern University in Washington DC in 2002. Mr. Mao earned a
master's degree in accounting in 2003 from the University of North Carolina. We
have asked Mr. Mao to serve as a director because of his experience as a chief
financial officer at a U.S. public company and because of his financial and
auditing experience
Susan Woo.
Ms. Woo
has agreed to serve as an independent director upon completion of this
offering. Since 1994, Ms. Woo has served as an auditor at Frazer
Frost, LLP (formerly Moore Stephens Wurth Frazer and Torbet, LLP). In
connection with her position as an audit partner and director of Asian services
at Frazer Frost, Ms. Woo has worked extensively with both US and Chinese-based
companies in issues related to US GAAP, China GAAP and International
GAAP. She has worked with both public and private companies and has
provided consulting services for Chinese companies to comply with US SOX 404
requirements, for US clients investing in China and for companies interested in
cross-border transactions. Ms. Woo has worked with clients on the New
York Stock Exchange, NASDAQ Global, Global Select and Capital markets, as well
as OTC companies. Ms. Woo earned her bachelor's degree from
California State University, Los Angeles in business administration accounting
in 1993 and her master's degree in international taxation from Golden Gate
University in 1998. We have asked Ms. Woo to serve as a director
because of her experience in advising companies as to the issues related to
being a public company in the United States and because of her financial and
auditing experience.
John Zhang
. Mr.
Zhang has agreed to serve as an independent director upon completion of this
offering. Since 2006, Mr. Zhang has served as the managing director
and founder of JC Global Capital Partners LLC, a consulting firm with expertise
in assisting Chinese companies interested in completing reverse
mergers. From 2003 through 2006, Mr. Zhang was managing director of
FirsTrust China Ltd in Shanghai, a specialty investment banking firm that is a
subsidiary of First Global Capital Corp of Atlanta, Georgia. At
FirsTrust, Mr. Zhang assisted Chinese companies raise capital through private
and public offerings. Mr. Zhang earned his bachelor's degree in
electrical engineering from the University of Alabama in Huntsville in 1993 and
his master's degree in business administration from Goizueta Business School at
Emory University in 2002. We asked Mr. Zhang to serve on our board
because of his experience in assisting relatively young Chinese companies that
are publicly listed in the United States.
Board
of Directors and Board Committees
Our board
of directors currently consists of three (3) directors. We expect that one
current director, Lanhai Sun, will resign after this offering. We further expect
that we will appoint three (3) independent directors, Troy Mao, Susan Woo and
John Zhang, to bring our board to five (5) directors, including a majority of
independent directors. There are no family relationships among any of our
executive officers and directors. Our directors are currently elected each year
at the annual shareholder meeting.
A
director may vote in respect of any contract or transaction in which he is
interested; provided, however that the nature of the interest of any director in
any such contract or transaction shall be disclosed by him at or prior to its
consideration and any vote on that matter. A general notice or disclosure to the
directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof of the nature of a
director’s interest shall be sufficient disclosure and after such general notice
it shall not be necessary to give special notice relating to any particular
transaction. A director may be counted for a quorum upon a motion in respect of
any contract or arrangement which he shall make with our company, or in which he
is so interested and may vote on such motion.
There are
no membership qualifications for directors. Further, there are no share
ownership qualifications for directors unless so fixed by us in a general
meeting.
Upon
completion of this offering, the Board of Directors will maintain a majority of
independent directors who are deemed to be independent under the definition of
independence provided by NASDAQ Listing Rule 5605(a)(15). While they are not
currently on our board of directors, Troy Mao, Susan Woo and John Zhang have
been invited to serve as our independent directors and have agreed to do so upon
the completion of this offering.
There are
no other arrangements or understandings pursuant to which our directors are
selected or nominated.
Mr. Tao
Wang currently holds both the positions of Chief Executive Officer and Chair of
the Board. These two positions have not been consolidated into one position;
Mr. Wang simply holds both positions at this time. We do not have a lead
independent director because of the foregoing reason and also because we believe
our independent directors are encouraged to freely voice their opinions on a
relatively small company board. We believe this leadership structure is
appropriate because we are a smaller reporting company in the process of listing
on a public exchange; as such we deem it appropriate to be able to benefit from
the guidance of Mr. Wang as both our principal executive officer and Chair
of the Board.
Our
Board of Directors plays a key role in our risk oversight. The Board of
Directors makes all relevant Company decisions. As such, it is important for us
to have both our Chief Executive Officer and General Counsel serve on the Board
as they play key roles in the risk oversight or the Company. As a smaller
reporting company with a small board of directors, we believe it is appropriate
to have the involvement and input of all of our directors in risk oversight
matters.
Board
Committees
Currently,
three committees have been established under the board: the audit committee, the
compensation committee and the nominating committee. The audit committee is
responsible for overseeing the accounting and financial reporting processes of
our company and audits of the financial statements of our company, including the
appointment, compensation and oversight of the work of our independent auditors.
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies for our
officers and all forms of compensation, and also administers our incentive
compensation plans and equity-based plans (but our board retains the authority
to interpret those plans). The nominating committee of the board of directors is
responsible for the assessment of the performance of the board, considering and
making recommendations to the board with respect to the nominations or elections
of directors and other governance issues. The nominating committee considers
diversity of opinion and experience when nominating directors.
Troy Mao,
Susan Woo and John Zhang have agreed to serve on each of the nominating, audit
and compensation committees. John Zhang has agreed to serve as chair
of the nominating committee. Susan Woo has agreed to serve as chair
of the compensation committee. Susan Woo has agreed to serve as chair
of the audit committee and as financial expert for audit committee
purposes.
Executive
and Director Compensation Determination
Prior to
our reverse acquisition of Glory Reach, our operating subsidiaries were private
limited companies organized under the laws of the PRC, and in accordance with
PRC regulations, the salary and bonus of our executive officers was determined
by our shareholders.
The
compensation committee of the board of directors annually reviews the
performance and total compensation package for the Company’s executive officers,
including the Chief Executive Officer; considers the modification of existing
compensation, and the adoption of new compensation plans; and recommends
appropriate changes to the board of directors, which votes on such
recommendations.
Section
16(A) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
and executive officers and persons who own more than ten percent of a registered
class of the Company’s equity securities to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file. To the Company’s knowledge,
none of the required parties are delinquent in their Section 16(a)
filings.
Involvement
in Certain Legal Proceedings
The
Company is not aware of any legal proceedings in which any director, officer, or
any owner of record or beneficial owner of more than five percent of any class
of voting securities of the Company, or any affiliate of any such director,
officer, affiliate of the Company, or security holder, is a party adverse to the
Company or has a material interest adverse to the Company.
Executive
Officers and Directors
Summary
Compensation Table
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods. No other executive officer
received total annual salary and bonus compensation in excess of
$100,000.
Name and Principal Position
|
|
Year
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Total ($)
|
|
Tao
Wang, Chief Executive Officer
|
|
2008
|
|
|
8,088
|
|
|
|
3,676
|
|
|
|
11,764
|
|
|
|
2009
|
|
|
8,088
|
|
|
|
3,676
|
|
|
|
11,764
|
|
Craig
Burton, former President
|
|
2008
|
|
|
40,040
|
|
|
|
0
|
|
|
|
40,040
|
|
|
|
2009
|
|
|
40,040
|
|
|
|
0
|
|
|
|
40,040
|
|
(1)
|
On
February 12, 2010, we acquired Glory Reach in a reverse acquisition
transaction that was structured as a share exchange and in connection with
that transaction, Mr. Tao Wang became our Chief Executive Officer. Prior
to the effective date of the reverse acquisition, Mr. Craig Burton served
as President of Datone, Inc.
|
Summary
of Employment Agreements and Material Terms
Prior
to our reverse acquisition of Glory Reach, our operating subsidiaries were
private limited companies organized under the laws of the PRC, and in accordance
with PRC regulations, the salary and bonus of our executives was determined by
the shareholders of QHS. Upon the formation of QHS, Mr. Wang’s salary
was determined by Mr. Wang (as the majority shareholder) in conjunction with
Renwei Ma, the legal representative of QHS. Business and living expenses as well
as market rates were taken into consideration. Upon completion of
this offering, our compensation committee will consider compensation decisions
and will determine market-based salaries for officers and directors commensurate
with their positions with our company.
Other
than the salary and necessary social benefits required by the government, we
currently do not provide other benefits to the officers at this time. Our
executive officers are not entitled to severance payments upon the termination
of their employment agreements or following a change in control.
We have
not provided retirement benefits (other than a state pension scheme in which all
of our employees in China participate) or severance or change of control
benefits to our named executive officers.
Employment
Agreement – Craig Burton
We
retained our previous present, Craig Burton, without an employment
agreement. Mr. Burton served at will in this position until his
resignation from the position on February 12, 2010. Mr. Burton
received no compensation other than a cash salary of $40,040 in each of 2008 and
2009 and received no payment in 2010.
Employment
Agreement – Tao Wang
Effective
February 12, 2010, we retained Mr. Wang to serve as Chief Executive Officer of
Qingdao Footwear. Mr. Wang currently serves in this capacity without
a written employment agreement. Mr. Wang has, however, served as the
chief executive officer of QHS since March 10, 2003. Mr. Wang’s
employment agreement with QHS provides for an employment period beginning on
March 11, 2003 and terminating on March 10, 2023. Mr. Wang’s
compensation is set by QHS and is expected to be between RMB 3,000 and RMB
10,000 (approximately $440 to $1,467) per month. In addition, Mr.
Wang is eligible to receive such performance bonuses as QHS may
determine. QHS is obligated to pay pension funds and applicable
reserves and social insurance as may be required from time to time under Chinese
law. Upon termination of employment, Mr. Wang is entitled only to
those benefits as are required to be paid under Chinese law.
Under
Chinese law, we may only terminate employment agreements without cause and
without penalty by providing notice of non-renewal one month prior to the date
on which the employment agreement is scheduled to expire. If we fail to provide
this notice or if we wish to terminate an employment agreement in the absence of
cause, then we are obligated to pay the employee one month’s salary for each
year we have employed the employee. We are, however, permitted to terminate an
employee for cause without penalty to our company, where the employee has
committed a crime or the employee’s actions or inactions have resulted in a
material adverse effect to us.
We
anticipate that we will enter into a written employment agreement with Mr. Wang
to serve as our chief executive officer prior to completion of this offering and
that such agreement will include customary terms, including confidentiality and
non-competition language, and will be for a period of at least three
years.
Outstanding
Equity Awards at Fiscal Year End
For the
year ended December 31, 2009, no director or executive officer has received
equity compensation from us pursuant to any compensatory or benefit plan. There
is no plan or understanding, express or implied, to pay any compensation to any
director or executive officer pursuant to any compensatory or benefit plan,
although we anticipate that we will compensate our officers and directors for
services to us with stock or options to purchase stock, in lieu of
cash.
Compensation
of Directors
No member
of our board of directors received any compensation for his services as a
director during the year ended December 31, 2009 and currently no compensation
arrangements are in place for the compensation of
directors.
Limitation
of Director and Officer Liability
The
Company’s certificate of incorporation includes provisions that eliminate the
personal liability of its directors for monetary damages for breach of their
fiduciary duty as directors. To the extent Section 102(b)(7) is interpreted, or
the Delaware General Corporation Law is amended, to allow similar protections
for officers of a corporation, such provisions of the Company’s certificate of
incorporation shall also extend to those persons. In addition, we have entered
into Indemnification Agreements with our Directors, which provide for similar
rights.
In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the bylaws, certificate of incorporation and Indemnification Agreements of the
Company provide that:
|
·
|
The
Company shall indemnify its directors and officers for serving the Company
in those capacities or for serving other business enterprises at the
Company’s request, to the fullest extent permitted by Delaware law.
Delaware law provides that a corporation may indemnify such person if such
person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Company and, with
respect to any criminal proceeding, had no reasonable cause to believe
such person’s conduct was unlawful.
|
|
·
|
The
Company may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is permitted by applicable
law.
|
|
·
|
The
Company is required to advance expenses, as incurred, to its directors and
officers in connection with defending a proceeding, except that such
director or officer shall undertake to repay such advances if it is
ultimately determined that such person is not entitled to
indemnification.
|
|
·
|
The
Company will not be obligated pursuant to the bylaws to indemnify a person
with respect to proceedings initiated by that person, except with respect
to proceedings authorized by the Company’s board of directors or brought
to enforce a right to
indemnification.
|
|
·
|
The
rights conferred in the bylaws are not exclusive, and the Company is
authorized to enter into indemnification agreements with its directors,
officers, employees and agents and to obtain insurance to indemnify such
persons.
|
|
·
|
The
Company may not retroactively amend the bylaw provisions to reduce its
indemnification obligations to directors, officers, employees and
agents.
|
These
indemnification provisions may be sufficiently broad to permit indemnification
of the Company’s officers and directors for liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933. The
Company may at the discretion of the board of directors purchase and maintain
insurance on behalf of any person who holds or who has held any position
identified in the paragraph above against any and all liability incurred by such
person in any such position or arising out of his status as
such.
Insofar
as indemnification by us for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling the company pursuant
to provisions of our articles of incorporation and bylaws, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
In the event that a claim for indemnification by such director, officer or
controlling person of us in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Related
Party Transactions
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of 2007, or any
currently proposed transaction, in which we were or are to be a participant and
the amount involved exceeded or exceeds the lesser of $120,000 or one percent of
the average of our total assets at year end for the last two completed fiscal
years, and in which any related person had or will have a direct or indirect
material interest (other than compensation described under “Executive
Compensation”). We believe the terms obtained or consideration that we paid or
received, as applicable, in connection with the transactions described below
were comparable to terms available or the amounts that would be paid or
received, as applicable, in arm’s-length transactions.
Related
Parties
Since
2007, we have entered into transactions with the following people who are
considered related persons on the respective bases listed next to their
names:
Related Person Name
|
|
Related Party
Basis
|
Tao
Wang
|
|
Director,
executive officer and five percent shareholder
|
Renwei
Ma
|
|
Director
and general counsel
|
Weidong
Liang
|
|
Brother-in-law
of Tao Wang
|
Siyou
Wang
|
|
Brother
of Tao Wang
|
Due
from related party
Due
from related party at December 31, 2008 consisted of receivables from Mr. Tao
Wang in the amount of $4,373,588. These borrowings bear no interest and
were repaid in 2009. As of December 31, 2009, the recorded balance of due from
related parties was $0.
Since
January 2007, the maximum amount of the loan was approximately
$7,531,618.
Due
to related party
We
borrowed money from Mr. Tao Wang, which borrowings bear no interest and contain
no repayment terms but are due on demand. As of December 31, 2009 and December
31, 2008, the balances of such loans are $104,511 and $0
respectively. These borrowings were paid off in the first quarter of 2010.
Since
January 2007, the maximum amount of the debt was approximately
$104,511.
We
declared a distribution and paid dividends to the shareholders in
2009.
During
2009, we advanced to Mr. Tao Wang a total amount of $5,723,550.
During
2009, we distributed $9,432,810 to our shareholders, Mr. Tao Wang and Mr. Renwei
Ma, in which $4,063,590 was distributed in cash, $5,251,860 was used to offset
advances to Mr. Tao Wang and the remaining $117,360 was the dividend payable to
Mr. Renwei Ma. This amount was paid off in the first quarter of
2010.
Other
related party transactions
We
lease one of our stores from Mr. Tao Wang under a four-year operating lease
expiring August 2011. For the years ended December 31, 2009 and 2008,
related party rent expense of $17,593 and $17,298, respectively, was included in
total rent expense of the year. For the three months ended March 31, 2010 and
2009, related party rent expense of $4,400 and $4,395, respectively, was
included in total rent expense of the year.
We
lease one of our warehouse buildings to Weidong Liang. This lease is
for a period of three years starting May 2008. Per the agreement, Mr. Liang
shall pay equal amount of advertising expense on behalf of the lessor as the
lease payment. For the year ended December 31, 2009 and 2008, the Company
recorded other income of $87,966 and $57,660, respectively, from leasing the
aforementioned building and advertising expense of the same amount respectively.
For the three months ended March 31, 2010 and 2009, we recorded other income of
$21,998 and $21,977 respectively, from leasing the aforementioned building and
advertising expense of the same amount respectively.
Mr.
Tao Wang entered into the contract with our company to assume fiscal
responsibilities for all unpaid tax liabilities recorded and potential penalties
relating to all tax liabilities before December 31, 2009. As of December 31,
2008 and 2007, the assumed amount was $3,799,872 and $2,620,236, respectively,
which mainly included VAT tax payable and income tax payable. As of September
30, 2009 the assumed amount was $3,464,650. According to PRC tax law, late or
deficient tax payment could subject to significant tax penalty. On December 25,
2009, the local tax authority in Jimo City issued a “Tax Review Report”, stating
that the tax authority reviewed the Company’s income tax, VAT tax, stamp tax and
invoices for the period between June 2006 and November 2009 and noted that the
Company had paid off all its tax liability by December 21,
2009.
A
long-term loan for $249,390, was issued in December 2009 by JiMo Rural Bank,
with a 2 year repayment period and annual interest rate of 7.02%. The
loan is guaranteed by
Siyou
Wang
and is collateralized by Mr.
Wang
’s
property.
Insider
Transactions Policies and Procedures
The
Company does not currently have an insider transaction policy.
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal years.
Additionally, we are not
a shell company for which control persons need be
disclosed.
Principal
Shareholders
The
following table sets forth information regarding beneficial ownership of our
common stock (i) by each person who is known by us to beneficially own more
than 5% of our common stock; (ii) by each of our officers and directors;
and (iii) by all of our officers and directors as a group. Unless otherwise
specified, the address of each of the persons set forth below is in care of the
Company, 269 First Huashan Road, Jimo City, Qingdao, Shandong, China. Except as
indicated in the footnotes to this table and subject to applicable community
property laws, the persons named in the table to our knowledge have sole voting
and investment power with respect to all shares of securities shown as
beneficially owned by them. The information in this table is as of August
2, 2010 based upon 10,000,000 shares of common stock outstanding. As
of the date of the Prospectus, we had 275 shareholders of
record.
Name and
Address
of Beneficial
Owner
|
|
Office, if
Any
|
|
Title of
Class
|
|
Amount and
Nature of
Beneficial
Ownership
|
|
|
Pre-Offering
Percent
Ownership
and
Voting
Power(1)
|
|
|
Post-Minimum
Offering
Percent
Ownership
and
Voting
Power(1)
|
|
|
Post-Maximum
Offering
Percent
Ownership
and
Voting
Power(1)
|
|
Officers
and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tao
Wang
|
|
Chief
Executive Officer, Director
|
|
Common
Stock
|
|
|
6,300,150
|
(2)
|
|
|
63.0
|
%
|
|
|
58.2
|
%
|
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Meuse, 360 Main Street, P.O. Box 393 Washington, Virginia
22747
|
|
Chief
Financial Officer
|
|
Common
Stock
|
|
|
700,340
|
(3)
|
|
|
7.0
|
%
|
|
|
6.5
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renwei
Ma
|
|
Director
|
|
Common
Stock
|
|
|
0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lanhai
Sun
|
|
Director
|
|
Common
Stock
|
|
|
300,700
|
|
|
|
3.0
|
%
|
|
|
2.8
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troy
Mao
|
|
Director
Nominee
|
|
Common
Stock
|
|
|
0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan
Woo
|
|
Director
Nominee
|
|
Common
Stock
|
|
|
0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Zhang
|
|
Director
Nominee
|
|
Common
Stock
|
|
|
0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
officers and directors as a group (7 persons named
above)
|
|
|
|
Common
Stock
|
|
|
7,301,190
|
|
|
|
73.0
|
%
|
|
|
67.4
|
%
|
|
|
66.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swift
Dynamic Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town,
British Virgin Islands
|
|
|
|
Common
Stock
|
|
|
6,300,150
|
(2)
|
|
|
63.0
|
%
|
|
|
58.2
|
%
|
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belmont
Partners, 360 Main Street, P.O. Box 393 Washington, Virginia
22747
|
|
|
|
Common
Stock
|
|
|
700,340
|
(3)
|
|
|
7.0
|
%
|
|
|
6.5
|
%
|
|
|
6.4
|
%
|
* Less
than 1%
(1) Common
Stock shares have one vote per share. Shares are presented on a
post-split/post-conversion basis, as described more fully in the section titled
“Description of Share Capital.”
(2) Based
on 6,300,150 shares of Common Stock held by Swift Dynamic. Tao Wang
serves as Chief Executive Officer and Director of Swift Dynamic and exercises
sole voting and dispositive control over the shares held by Swift
Dynamic.
(3) Based
on 700,340 shares of Common Stock held by Belmont Partners. Joseph
Meuse exercises sole voting and dispositive control over the shares held by
Belmont Partners.
Changes
in Control
On
February 12, 2010, the Company and its stockholders entered into the Exchange
Agreement with Glory Reach, Glory Reach Shareholders, Greenwich Holdings LLC,
and QHS. Pursuant to the Exchange Agreement, the Company acquired all
of the outstanding shares of Glory Reach from the Glory Reach Shareholders (the
“Interests”); and the Glory Reach Shareholders transferred and contributed all
of their Interests to us. In exchange, we issued to the Glory Reach
Shareholders, their designees or assigns, 10,000 shares of our Series A
Convertible 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 transactions contemplated by the Share Exchange
Agreement. Therefore, Glory Reach became a wholly-owned subsidiary of
the Company. The Share Exchange resulted in a change in control of the
Company.
Further
and in connection with the Share Exchange, on February 12, 2010, Craig H.
Burton, our former President and then Director, Joseph J. Passalaqua, our former
Secretary and then Director, and Joseph Meuse, our then Director, submitted a
resignation letter pursuant to which they resigned from all offices that they
held effective immediately and from their position as our directors that became
effective on March 18, 2010. In addition, our board of directors on February 12,
2010 appointed Tao Wang (Chairman), Renwei Ma and Lanhai Sun to fill the
vacancies created by such resignations, which appointments became effective upon
the effectiveness of the resignation of Craig H. Burton, Joseph J. Passalaqua,
and Joseph Meuse on March 18, 2010. Subsequent to the resignation of Messers.
Burton, Passalaqua and Meuse, Mr. Meuse was appointed as the Chief Financial
Officer of our company on July 12, 2010.
Description
of Share Capital
We
were originally incorporated on August 9, 2000 under the laws of the State of
Delaware. As of the date of this prospectus, we are authorized to
issue up to 100,000,000 shares of common stock, par value $0.0001 per share, and
up to 10,000,000 shares of preferred stock, par value $0.0001 per
share. We have 275 shareholders of record, all of whom own shares of
common stock.
The
following are summaries of the material provisions of our amended and restated
certificate of incorporation and by-laws that will be in force at the time of
the closing of this offering and the certain laws of the State of Delaware,
insofar as they relate to the material terms of our common stock. The forms of
our certificate of incorporation and by-laws are filed as exhibits to the
registration statement of which this prospectus is a part.
Common
Stock
We are
authorized to issue up to 100,000,000 shares of common stock, par value $0.0001
per share, of which 10,000,000 are outstanding as of the date of this
prospectus. Each outstanding share of common stock entitles the holder
thereof to one vote per share on all matters. Shareholders do not have
preemptive rights to purchase shares in any future issuance of our common stock.
To the extent that additional shares of our common stock are issued, the
relative interests of existing shareholders will be diluted.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Our board of
directors does not anticipate declaring a dividend in the foreseeable future.
Should we decide in the future to pay dividends, as a holding company, our
ability to do so and meet other obligations depends upon the receipt of
dividends or other payments from our operating subsidiary and other holdings and
investments. In addition, our operating subsidiary in the PRC, from time to
time, may be subject to restrictions on their ability to make distributions to
us, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. There are no such restrictions on
dividends in our existing loan agreements. Payments of dividends by
WFOE to our company are subject to the requirement that foreign invested
enterprises may only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business. Further, such remittances would
require WFOE to provide an application for remittance that includes, in addition
to the application form, a foreign registration certificate, board resolution,
capital verification report, audit report on profit and stock bonuses, and a tax
certificate. In the event of our liquidation, dissolution or winding up, holders
of our common stock are entitled to receive, ratably, the net assets available
to shareholders after payment of all creditors. See “Risk
Factors – Restrictions under PRC law on our PRC subsidiary’s ability to make
dividends and other distributions could materially and adversely affect our
ability to grow, make investments or acquisitions that could benefit our
business, pay dividends to you, and otherwise fund and conduct our businesses”
and “- Under the New EIT Law, we may be classified as a “resident enterprise” of
China. Such classification will likely result in unfavorable tax consequences to
us and our non-PRC shareholders.”
Preferred
Stock
We are
authorized to issue up to 10,000,000 shares of preferred stock, par value
$0.0001 per share, of which none are issued and outstanding. We are
authorized to issue preferred stock in one or more classes or series within a
class as may be determined by our board of directors, who may establish, from
time to time, the number of shares to be included in each class or series, may
fix the designation, powers, preferences and rights of the shares of each such
class or series and any qualifications, limitations or restrictions thereof. Any
preferred stock so issued by the board of directors may rank senior to the
common stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up of us, or both. Moreover, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, under certain circumstances, the issuance of preferred stock
or the existence of the unissued preferred stock might tend to discourage or
render more difficult a merger or other change of control.
Series
A Convertible Preferred Stock
In
accordance with our certificate of incorporation, our Board of Directors
unanimously approved the filing of a Certificate of Designation designating and
authorizing the issuance of up to 10,000 shares of our Series A Convertible
Preferred Stock (“Series A Preferred Stock”). The Certificate of
Designation was filed on February 11, 2010.
The
holders of our Series A Preferred Stock are entitled to vote on all matters
together with all other classes of stock. Holders of Series A
Preferred Stock have protective class voting veto rights on certain matters,
such as increasing the authorized shares of Series A Preferred Stock and
modifying the rights of Series A Preferred Stock.
As of
the date of this prospectus, no shares of our Series A Preferred Stock are
outstanding.
Underwriter
Warrants
As of
the date of this prospectus, no warrants to purchase common or preferred shares
are outstanding.
We
have agreed to sell to the underwriter, on the closing date of this offering, at
a price of $0.001 per warrant, underwriter warrants exercisable at a rate of one
warrant per share to purchase 10% of the number of shares issued by us in
connection with the offering. We have registered these underwriter warrants and
the shares of common stock underlying the underwriter warrants in connection
with this offering. We will issue between 83,333 and 100,000 underwriter
warrants in connection with this offering, depending on the number of shares
sold in this offering. The underwriter warrants will not be freely
tradable.
Each
underwriter warrant will be exercisable to purchase one share of common stock.
The underwriter warrants will be exercisable at 120% the offering price per
share for a period of five years after
the
effective
date of this offering. The underwriter warrants may not be
exercised, sold, transferred, pledged, assigned or hypothecated for a period
of 180 days after the date of effectiveness or commencement of sales of the
public offering, except to officers or partners and shareholders of the
underwriter. This restriction is imposed pursuant to the requirements of FINRA
Rule 5110(g)(1). If we do not complete this offering by selling at least the
minimum number of shares, we will not issue any underwriter warrants to our
underwriter.
The
underwriter warrants also contain anti-dilution provisions, consistent with
applicable FINRA rules, to adjust the terms of the underwriter warrants as
necessary to protect against dilution in the event we reorganize, consolidate,
merge or subdivide our shares. Other material terms of the
underwriter warrants are described in more detail in the section titled
“Underwriting – Underwriter Warrants.”
Anti-takeover
Effects of Our Certificate of Incorporation and By-laws
Our certificate
of incorporation and Bylaws contain certain provisions that may have
anti-takeover effects, making it more difficult for or preventing a third party
from acquiring control of the Company or changing its board of directors and
management. According to our Bylaws and Articles of Incorporation, neither the
holders of the Company’s common stock nor the holders of the Company’s preferred
stock have cumulative voting rights in the election of our directors. The
combination of the present ownership by a few stockholders of a significant
portion of the Company’s issued and outstanding common stock and lack of
cumulative voting makes it more difficult for other stockholders to replace the
Company’s board of directors or for a third party to obtain control of the
Company by replacing its board of directors.
Anti-takeover
Effects of Delaware Law
Delaware
Anti-Takeover Statute.
We are
subject to the provisions of Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging, under certain circumstances, in a
business combination with an interested stockholder for a period of three years
following the date the person became an interested stockholder
unless:
|
·
|
prior
to the date of the transaction, our board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
|
|
·
|
upon
completion of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the
transaction commenced, calculated as provided under Section 203;
or
|
|
·
|
at
or subsequent to the date of the transaction, the business combination is
approved by our board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock which is not
owned by the interested
stockholder.
|
Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
interested stockholder is a person who, together with affiliates and associates,
owns or, within three years prior to the determination of interested stockholder
status, did own 15% or more of a corporation’s outstanding voting stock. We
expect the existence of this provision to have an anti-takeover effect with
respect to transactions our board of directors does not approve in advance. We
also anticipate that Section 203 may also discourage attempts that might result
in a premium over the market price for the shares of common stock held by
stockholders.
The
provisions of Delaware law and the provisions of our amended and restated
certificate of incorporation could have the effect of discouraging others from
attempting hostile takeovers and, as a consequence, they might also inhibit
temporary fluctuations in the market price of our common stock that often result
from actual or rumored hostile takeover attempts. These provisions might also
have the effect of preventing changes in our management. It is possible that
these provisions could make it more difficult to accomplish transactions that
stockholders might otherwise deem to be in their best interests.
Transfer
Agent and Registrar
Our
independent stock transfer agent is Pacific Stock Transfer Company, 4045 S.
Spencer Street, Suite 403, Las Vegas, NV 89119.
Voting rights
Any
action required or permitted to be taken by the shareholders must be effected at
a duly called annual or special meeting of the shareholders entitled to vote on
such action and may be effected by a resolution in writing. At each general
meeting, each shareholder who is present in person or by proxy (or, in the case
of a shareholder being another corporation, by its representative) will have one
vote for each share of common stock which such shareholder holds.
Election of
directors
Delaware
law permits cumulative voting for the election of directors only if expressly
authorized in the certificate of incorporation. Our certificate of incorporation
denies holders of our common stock cumulative voting rights in the election of
directors, meaning that stockholders owning a majority of our outstanding shares
of common stock will be able to elect all of our directors.
We must
provide written notice of all meetings of shareholders, stating the time, place
and, in the case of a special meeting of shareholders, the objective thereof, at
least 10 days before the date of the proposed meeting to each shareholder shown
on our records. Our board of directors shall call a special meeting upon the
written request of shareholders holding at least 25% of our outstanding voting
shares. In addition, our President or board of directors may call a special
meeting of shareholders.
A simple
majority of the capital stock issued and outstanding, represented in person or
by proxy, shall constitute a quorum for the transaction of business at any
shareholders’ meeting.
Rights
and Preferences
Shareholders
have no preemptive, conversion, or other rights, and there are no redemption or
sinking fund provisions applicable to the common stock.
Transfer
of shares
Subject
to the restrictions in the lock-up agreements with our underwriter described in
“Shares Eligible for Future Sale—Lock-Up Agreements” and applicable securities
laws, any of our shareholders may transfer all or any of his or her shares of
common stock. Shares shall be transferable only on our books or the books of our
authorized transfer agent.
Liquidation
Upon our
voluntary involuntary liquidation, dissolution or winding up, our net assets
available for distribution will be distributed pro rata to the holders of our
common stock.
Shares
Eligible for Future Sale
A liquid
trading market for our common stock may not develop or be sustained after this
offering. Future sales of substantial amounts of common stock, including shares
of common stock issued upon exercise of outstanding options and exercise of the
warrants offered in this prospectus in the public market after this offering or
the anticipation of those sales could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital through sales of
our equity securities.
Upon the
completion of the offering, we will have outstanding 11,000,000 shares of common
stock, assuming no exercise of outstanding options, the closing of the maximum
offering and not including any shares underlying the underwriter warrants. Of
these shares, the 1,000,000 shares of common stock sold in this offering
(assuming a maximum offering) will be freely tradable without restriction under
the Securities Act, except that any shares purchased by our “affiliates,” as
that term is defined in Rule 144 of the Securities Act, may generally only be
sold in compliance with the limitations of Rule 144 described below. The
remaining approximately 10,000,000 shares of common stock outstanding will be
restricted shares held by existing shareholders that could be sold pursuant to
Rule 144. We have not agreed to register these restricted shares. We have not
issued any warrants to purchase our common stock or other securities convertible
into our common stock.
Rule
144
In
general, under Rule 144 as currently in effect, beginning 90 days after the
effective date of the registration statement of which this prospectus is a part,
a person (or persons whose shares are aggregated) who is deemed to be an
affiliate of our company at the time of sale, or at any time during the
preceding three months, and who has beneficially owned restricted shares for at
least six months, would be entitled to sell within any three-month period a
number of shares of our common stock that does not exceed the greater of 1% of
the then outstanding common stock or the average weekly trading volume of shares
of common stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are subject to certain manner of sale provisions, notice requirements
and the availability of current public information about our company. See
“Shares Eligible for Future Sale – Lock-Up Agreements”
A person
who has not been our affiliate at any time during the three months preceding a
sale, and who has beneficially owned his or her common stock for at least six
months, would be entitled under Rule 144 to sell such shares without regard to
any manner of sale, notice provisions or volume limitations described above. Any
such sales must comply with the public information provision of Rule 144 until
our common stock has been held for one year.
Rule
701
Securities
issued in reliance on Rule 701 are also restricted and may be sold by
shareholders other than affiliates of our company subject only to manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its six-month holding period requirement.
Lock-Up
Agreements
Each of
our executive officers, directors and individuals who on the effective date of
the registration statement of which this prospectus is a part are the beneficial
owners of more than 5% of our common stock, has agreed not to register, offer,
sell, contract to sell or grant any of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock or any
warrants to purchase our common stock (including, without limitation, securities
of our company which may be deemed to be beneficially owned by such individuals
in accordance with the rules and regulations of the Securities and Exchange
Commission and securities which may be issued upon the exercise of a stock
option or warrant) for a period of (a) as to one-half (
1
/
2
) of the shares of common
stock now or in the future beneficially owned by such individual, ninety
(90) days after the date of effectiveness or commencement of sales of this
public offering and (b) as to the other one-half of such shares of common
stock now or in the future beneficially owned by such individual, one hundred
ninety (190) days after the date of effectiveness or commencement of sales
of this public offering. Upon the expiration of these lock-up agreements,
additional shares of common stock will be available for sale in the public
market.
Summary
of Shares Available for Future Sale
The
following table summarizes the total shares potentially available for future
sale. To the extent we sell a number of shares of common stock between the
minimum and maximum offering, the below tables will be adjusted proportionately
as to numbers of shares available for sale (as to underwriter shares) and
dates on which such shares may be sold (as to currently outstanding
shares).
Minimum
Offering
Shares
|
|
Date Available for Sale
|
Currently Outstanding Shares:
10,000,000
|
|
|
6,349,405
|
|
After
90 days from the date of effectiveness or commencement of sales of the
public offering
|
|
|
3,650,595
|
|
After
190 days from the date of effectiveness or commencement of sales of the
public offering
|
|
|
Shares Underlying Underwriter
Warrants: 83,333
|
|
After
180 days from the date of effectiveness or commencement of sales of the
public offering
|
|
|
Shares
Offered in this Offering: 833,333
|
|
After
the date of this prospectus, these shares will be freely
tradable.
|
|
Maximum
Offering
|
|
|
Shares
|
|
Date Available for Sale
|
Currently Outstanding Shares:
10,000,000
|
|
|
6,349,405
|
|
After
90 days from the date of effectiveness or commencement of sales of the
public offering
|
|
|
3,650,595
|
|
After
190 days from the date of effectiveness or commencement of sales of the
public offering
|
|
|
Shares Underlying Underwriter
Warrants: 100,000
|
|
After
180 days from the date of effectiveness or commencement of sales of the
public offering
|
|
|
Shares
Offered in this Offering: 1,000,000
|
|
After
the date of this prospectus, these shares will be freely
tradable.
|
Taxation
Material
United States Federal Income Tax Considerations
General
The
following is a general summary of certain material U.S. federal income tax
consequences to an investor of the acquisition, ownership and disposition of the
common stock purchased by the investor pursuant to this Offering. This
discussion assumes that an investor will hold each share of our common stock
issued and purchased pursuant to this Offering as a “capital asset” within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
“Code”). This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to an investor in light of that investor’s
particular circumstances. In addition, this discussion does not address (a) U.S.
federal non-income tax laws, such as estate or gift tax laws, (b) state, local
or non-U.S. tax consequences, or (c) the special tax rules that may apply to
certain investors, including, without limitation, banks, insurance companies,
financial institutions, broker-dealers, taxpayers that have elected
mark-to-market accounting, taxpayers subject to the alternative minimum tax
provisions of the Code, tax-exempt entities, governments or agencies or
instrumentalities thereof, regulated investment companies, real estate
investment trusts, persons whose functional currency is not the U.S. dollar,
U.S. expatriates or former long-term residents of the United States, or
investors that acquire, hold, or dispose of our common stock as part of a
straddle, hedge, wash sale, constructive sale or conversion transaction or other
integrated transaction. Additionally, this discussion does not consider the tax
treatment of entities treated as partnerships or other pass-through entities for
U.S. federal income tax purposes or of persons who hold our common stock through
such entities. The tax treatment of a partnership and each partner thereof will
generally depend upon the status and activities of the partnership and such
partner. Thus, partnerships, other pass-through entities and persons holding our
common stock through such entities should consult their own tax
advisors.
This
discussion is based on current provisions of the Code, its legislative history,
U.S. Treasury regulations promulgated under the Code, judicial opinions, and
published rulings and procedures of the U.S. Internal Revenue Service (“IRS”),
all as in effect on the date of this prospectus. These authorities are subject
to differing interpretations or to change, possibly with retroactive effect. We
have not sought, and will not seek, any ruling from the IRS or any opinion of
counsel with respect to the tax consequences discussed below, and there can be
no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained.
As used
in this discussion, the term “U.S. person” means a person that is, for U.S.
federal income tax purposes, (i) an individual citizen or resident of the United
States, (ii) a corporation (or other entity treated as a corporation for U.S.
federal income tax purposes) created or organized (or treated as created or
organized) in or under the laws of the United States or of any state thereof or
the District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or (iv) a trust if (A) a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or (B) it has in effect a valid
election to be treated as a U.S. person under applicable U.S. Treasury
Regulations. As used in this discussion, the term “U.S. holder” means a
beneficial owner of our common stock that is a U.S. person, and the term
“non-U.S. holder” means a beneficial owner of our common stock (other than an
entity that is treated as a partnership or other pass-through entity for U.S.
federal income tax purposes) that is not a U.S. person.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK.
IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN OUR COMMON STOCK IS URGED TO
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX
LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND ANY APPLICABLE TAX
TREATY.
U.S.
Holders
Taxation
of Distributions
If we pay
cash distributions to U.S. holders of shares of our common stock, the
distributions generally will constitute dividends for U.S. federal income tax
purposes to the extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax principles. Distributions
in excess of current and accumulated earnings and profits generally will
constitute a return of capital that will be applied against and reduce (but not
below zero) the U.S. holder’s adjusted tax basis in our common stock. Any
remaining excess generally will be treated as gain from the sale or other
disposition of the common stock and will be treated as described under “U.S.
Holders — Gain or Loss on Sale, Taxable Exchange or Other Taxable
Disposition of Common Stock” below.
Any
dividends we pay to a U.S. holder that is treated as a taxable corporation for
U.S. federal income tax purposes generally will qualify for the
dividends-received deduction if the applicable holding period and other
requirements are satisfied. With certain exceptions, if the applicable holding
period and other requirements are satisfied, dividends we pay to a non-corporate
U.S. holder generally will constitute “qualified dividends” that will be subject
to tax at the maximum tax rate accorded to long-term capital gains for tax years
beginning on or before December 31, 2010, after which the tax rate applicable to
dividends is scheduled to return to the tax rate generally applicable to
ordinary income.
If PRC
taxes apply to any dividends paid to a U.S. holder on our common stock, such
taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations), and a U.S.
holder may be entitled to certain benefits under the income tax treaty between
the United States and the PRC. U.S. holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their eligibility
for the benefits of the income tax treaty between the United States and the
PRC.
Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
In
general, a U.S. holder must treat any gain or loss recognized upon a sale,
taxable exchange, or other taxable disposition of our common stock as capital
gain or loss. Any such capital gain or loss will be long-term capital gain or
loss if the U.S. holder’s holding period for the common stock so disposed of
exceeds one year. In general, a U.S. holder will recognize gain or loss in an
amount equal to the difference between (i) the sum of the amount of cash and the
fair market value of any property received in such disposition and (ii) the U.S.
holder’s adjusted tax basis in the common stock so disposed of. Long-term
capital gain recognized by a non-corporate U.S. holder generally will be subject
to a maximum tax rate of 15 percent for tax years beginning on or before
December 31, 2010, after which the maximum long-term capital gains tax rate is
scheduled to increase to 20 percent. The deduction of capital losses is subject
to various limitations.
If PRC
taxes apply to any gain from the disposition of our common stock by a U.S.
holder, such taxes may be treated as foreign taxes eligible for credit against
such holder’s U.S. federal income tax liability (subject to certain
limitations), and a U.S. holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.
Non-U.S.
Holders
Taxation
of Distributions
In
general, any distribution we make to a non-U.S. holder of our common stock, to
the extent paid out of our current or accumulated earnings and profits (as
determined under U.S. federal income tax principles), will constitute a dividend
for U.S. federal income tax purposes. Provided such dividend is not effectively
connected with the non-U.S. holder’s conduct of a trade or business within the
United States, such dividend generally will be subject to U.S. federal
withholding tax at a rate of 30 percent of the gross amount of the dividend,
unless we are treated as an “80/20 company” for U.S. federal income tax
purposes, as described below, or such non-U.S. holder is eligible for a reduced
rate of withholding tax under an applicable income tax treaty and provides
proper certification of its eligibility for such reduced rate (usually on an IRS
Form W-8BEN). Any distribution not constituting a dividend will be treated first
as reducing the non-U.S. holder’s adjusted tax basis in its shares of our common
stock (but not below zero) and, to the extent such distribution exceeds the
non-U.S. holder’s adjusted tax basis, as gain from the sale or other disposition
of the common stock, which will be treated as described under “Non-U.S.
Holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition
of Common Stock” below.
You
should be aware of the possibility that we may qualify as an “80/20 company” for
U.S. federal income tax purposes. In general, a domestic corporation is an 80/20
company if at least 80 percent of its gross income during an applicable testing
period is, directly or through subsidiaries, “active foreign business income.”
The 80 percent test is applied on a periodic basis. If we qualify as an 80/20
company, a percentage of any dividend paid by us generally will not be subject
to U.S. federal withholding tax. You should consult with your own tax advisors
regarding the amount of any such dividend subject to withholding tax in this
circumstance.
Dividends
we pay to a non-U.S. holder that are effectively connected with such non-U.S.
holder’s conduct of a trade or business within the United States (and, if
certain income tax treaties apply, are attributable to a U.S. permanent
establishment or fixed base maintained by the non-U.S. holder) generally will
not be subject to U.S. withholding tax, provided such non-U.S. holder complies
with certain certification and disclosure requirements (usually by providing an
IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S.
federal income tax, net of certain deductions, at the same graduated individual
or corporate tax rates applicable to U.S. persons. If the non-U.S. holder is a
corporation, dividends that are effectively connected income may also be subject
to a “branch profits tax” at a rate of 30 percent (or such lower rate as may be
specified by an applicable income tax treaty).
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
A
non-U.S. holder generally will not be subject to U.S. federal income tax in
respect of gain recognized on a sale, exchange or other disposition of common
stock, unless:
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the
gain is effectively connected with the conduct of a trade or business by
the non-U.S. holder within the United States. (and, under certain income
tax treaties, is attributable to a U.S. permanent establishment or fixed
base maintained by the non-U.S.
holder);
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the
non-U.S. holder is an individual who is present in the United States for
183 days or more in the taxable year of disposition and certain other
conditions are met; or
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we
are or have been a “United States real property holding corporation”
(“USRPHC”) for U.S. federal income tax purposes at any time during the
shorter of the five year period ending on the date of disposition or the
non-U.S. holder’s holding period for the common stock disposed of, and,
generally, in the case where our common stock is regularly traded on an
established securities market, the non-U.S. holder has owned, directly or
indirectly, more than 5 percent of the common stock disposed of, at any
time during the shorter of the five year period ending on the date of
disposition or the non-U.S. holder’s holding period for the common stock
disposed of. There can be no assurance that our common stock will be
treated as regularly traded on an established securities market for this
purpose.
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Unless an
applicable tax treaty provides otherwise, gain described in the first and third
bullet points above generally will be subject to U.S. federal income tax, net of
certain deductions, at the same tax rates applicable to U.S. persons. Any gains
described in the first bullet point above of a non-U.S. holder that is a foreign
corporation may also be subject to an additional “branch profits tax” at a 30
percent rate (or a lower applicable tax treaty rate). Any U.S. source capital
gain of a non-U.S. holder described in the second bullet point above (which may
be offset by U.S. source capital losses during the taxable year of the
disposition) generally will be subject to a flat 30 percent U.S. federal income
tax (or a lower applicable tax treaty rate).
In
connection with the third bullet point above, we generally will be classified as
a USRPHC if the fair market value of our “United States real property interests”
equals or exceeds 50 percent of the sum of the fair market value of our
worldwide real property interests plus our other assets used or held for use in
a trade or business, as determined for U.S. federal income tax purposes. We
believe that we currently are not a USRPHC, and we do not anticipate becoming a
USRPHC (although no assurance can be given that we will not become a USRPHC in
the future).
Information
Reporting and Backup Withholding
We
generally must report annually to the IRS and to each holder the amount of
dividends and certain other distributions we pay to such holder on our common
stock and the amount of tax, if any, withheld with respect to those
distributions. In the case of a non-U.S. holder, copies of the information
returns reporting those distributions and withholding may also be made available
to the tax authorities in the country in which the non-U.S. holder is a resident
under the provisions of an applicable income tax treaty or agreement.
Information reporting is also generally required with respect to proceeds from
the sales and other dispositions of our common stock to or through the U.S.
office (and in certain cases, the foreign office) of a broker.
In
addition, backup withholding of U.S. federal income tax, currently at a rate of
28 percent, generally will apply to distributions made on our common stock to,
and the proceeds from sales and other dispositions of our common stock by, a
non-corporate U.S. holder who:
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fails
to provide an accurate taxpayer identification
number;
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is
notified by the IRS that backup withholding is required;
or
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in
certain circumstances, fails to comply with applicable certification
requirements.
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A
non-U.S. holder generally may eliminate the requirement for information
reporting (other than with respect to distributions, as described above) and
backup withholding by providing certification of its foreign status, under
penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise
establishing an exemption.
Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. holder’s or a non-U.S.
holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS. Holders are urged to consult their own tax advisors regarding the
application of backup withholding and the availability of and procedure for
obtaining an exemption from backup withholding in their particular
circumstances.
Material
PRC Income Tax Considerations
The
following discussion summarizes the material PRC income tax considerations
relating to the ownership of our common stock following the consummation of this
Offering.
Resident
Enterprise Treatment
On March
16, 2007, the Fifth Session of the Tenth National People’s Congress passed the
Enterprise Income Tax Law of the People’s Republic of China, or the EIT Law,
which became effective on January 1, 2008. Under the EIT Law, enterprises are
classified as “resident enterprises” and “non-resident enterprises.” Pursuant to
the EIT Law and its implementing rules, enterprises established outside China
whose “de facto management bodies” are located in China are considered “resident
enterprises” and subject to the uniform 25% enterprise income tax rate on global
income. According to the implementing rules of the EIT Law, “de facto management
body” refers to a managing body that in practice exercises overall management
control over the production and business, personnel, accounting and assets of an
enterprise.
The EIT
Law and the interpretation of many of its provisions, including the definition
of “resident enterprise,” are unclear. It is also uncertain how the PRC tax
authorities would interpret and implement the EIT Law and its implementing
rules. Generally, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions, which own
a 100% equity interest in a PRC operating entity. Our management is
substantially based in China and expected to be based in China in the future,
although some of our directors are not PRC nationals. It remains uncertain
whether the PRC tax authorities would determine that we are a “resident
enterprise” or a “non-resident enterprise.”
Given the
short history of the EIT law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the PRC tax resident
treatment of a non-PRC company such as us. If the PRC tax authorities determine
that we are a “resident enterprise” for PRC enterprise income tax purposes, a
number of tax consequences could follow. First, we could be subject to the
enterprise income tax at a rate of 25% on our global taxable income. Second, the
EIT Law provides that dividend income between “qualified resident enterprises”
is exempt from income tax. It is unclear whether the dividends we or Glory Reach
receives would constitute dividend income between “qualified resident
enterprises” and would therefore qualify for tax exemption.
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us or Glory Reach.
However, since it is not anticipated that we or Glory Reach would receive
dividends or generate other income in the near future, we and Glory Reach are
not expected to have any income that would be subject to the 25% enterprise
income tax on global income in the near future. We and Glory Reach will consult
with the PRC tax authorities and make any necessary tax payment if we or Glory
Reach (based on future clarifying guidance issued by the PRC), or the PRC tax
authorities, determines that we or Glory Reach is a resident enterprise under
the EIT Law, and if we or Glory Reach were to have income in the
future.
Dividends
from QHS
If we or
Glory Reach is not treated as resident enterprises under the EIT Law, then
dividends that we or Glory Reach receives may be subject to PRC withholding tax.
The EIT Law and the implementing rules of the EIT Law provide that (A) an income
tax rate of 25% will normally be applicable to investors that are “non-resident
enterprises,” or non-resident investors, which (i) have establishments or
premises of business inside China, and (ii) the income in connection with their
establishment or premises of business is sourced from China or the income is
earned outside China but has actual connection with their establishments or
places of business inside China, and (B) an income tax rate of 10% will normally
be applicable to dividends payable to investors that are “non-resident
enterprises,” or non-resident investors, which (i) do not have an establishment
or place of business in the PRC or (ii) have an establishment or place of
business in the PRC, but the relevant income is not effectively connected with
the establishment or place of business, to the extent such dividends are derived
from sources within the PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions, on a
case-by-case basis. We and Glory Reach are holding companies and substantially
all of our income and that of Glory Reach may be derived from dividends. Thus,
if we or Glory Reach is considered a “non-resident enterprise” under the EIT Law
and the dividends paid to us and Glory Reach are considered income sourced
within China, such dividends received may be subject to the income tax described
in the foregoing paragraph.
The State
Council of the PRC or a tax treaty between China and the jurisdictions in which
the non-PRC investors reside may reduce such income tax. Pursuant to the Double
Tax Avoidance Arrangement between Hong Kong and Mainland China, if the Hong Kong
resident enterprise owns more than 25% of the equity interest in a company in
China, the 10% withholding tax on the dividends the Hong Kong resident
enterprise received from such company in China is reduced to 5%. We are a U.S.
holding company, and we have a subsidiary Hong Kong (Glory Reach), which in
turns owns a 100% equity interest in QHS. If Glory Reach is considered a Hong
Kong resident enterprise under the Double Tax Avoidance Arrangement and is
considered as a “non-resident enterprise” under the EIT Law, the dividends paid
to Glory Reach by the QHS may be subject to the reduced income tax rate of 5%
under the Double Tax Avoidance Arrangement. However, based on the Notice on
Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax
Treaties, issued on February 20, 2009 by the State Administration of Taxation,
if the relevant PRC tax authorities determine, in their discretion, that a
company benefits from such reduced income tax rate due to a structure or
arrangement that is primarily tax-driven, such PRC tax authorities may adjust
the preferential tax treatment.
As of the
date of this prospectus, there has not been a definitive determination as to the
“resident enterprise” or “non-resident enterprise” status of us or Glory Reach.
As indicated above, however, QHS is not expected to pay any dividends in the
near future. We and Glory Reach will consult with the PRC tax authorities and
make any necessary tax withholding if, in the future, QHS were to pay any
dividends and we or Glory Reach (based on future clarifying guidance issued by
the PRC), or the PRC tax authorities, determines that we or Glory Reach is a
non-resident enterprise under the EIT Law.
Dividends
that Non-Resident Investors Receive From Us; Gain on the Sale or Transfer of Our
Common Stock
If
dividends payable to (or gains recognized by) our non-resident investors are
treated as income derived from sources within the PRC, then the dividends that
non-resident investors receive from us and any such gain on the sale or transfer
of our common stock, may be subject to taxes under PRC tax laws.
Under the
EIT Law and the implementing rules of the EIT Law, PRC income tax at the rate of
10% is applicable to dividends payable to investors that are “non-resident
enterprises,” or non-resident investors, which (i) do not have an establishment
or place of business in the PRC or (ii) have an establishment or place of
business in the PRC but the relevant income is not effectively connected with
the establishment or place of business, to the extent that such dividends have
their sources within the PRC. Similarly, any gain realized on the transfer of
common stock by such investors is also subject to 10% PRC income tax if such
gain is regarded as income derived from sources within the PRC.
The
dividends paid by us to non-resident investors with respect to our common stock,
or gain non-resident investors may realize from sale or the transfer of our
common stock, may be treated as PRC-sourced income and, as a result, may be
subject to PRC tax at a rate of 10%. In such event, we also may be required to
withhold a 10% PRC tax on any dividends paid to non-resident investors. In
addition, non-resident investors in our common stock may be responsible for
paying PRC tax at a rate of 10% on any gain realized from the sale or transfer
of our common stock after the consummation of the Offering if such non-resident
investors and the gain satisfies the requirements under the EIT Law and its
implementing rules. However, under the EIT Law and its implementing rules, we
would not have an obligation to withhold income tax in respect of the gains that
non-resident investors (including U.S. investors) may realize from the sale or
transfer of our common stock from and after the consummation of this
Offering.
If we
were to pay any dividends in the future, we would again consult with the PRC tax
authorities and if we (based on future clarifying guidance issued by the PRC),
or the PRC tax authorities, determine that we must withhold PRC tax on any
dividends payable by us under the EIT Law, we will make any necessary tax
withholding on dividends payable to our non-resident investors. If non-resident
investors as described under the EIT Law (including U.S. investors) realized any
gain from the sale or transfer of our common stock and if such gain were
considered as PRC-sourced income, such non-resident investors would be
responsible for paying 10% PRC income tax on the gain from the sale or transfer
of our common stock. As indicated above, under the EIT Law and its implementing
rules, we would not have an obligation to withhold PRC income tax in respect of
the gains that non-resident investors (including U.S. investors) may realize
from the sale or transfer of our common stock from and after the consummation of
this Offering.
Penalties
for Failure to Pay Applicable PRC Income Tax
Non-resident
investors in us may be responsible for paying PRC tax at a rate of 10% on any
gain realized from the sale or transfer of our common stock after the
consummation of this Offering if such non-resident investors and the gain
satisfies the requirements under the EIT Law and its implementing rules, as
described above.
According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
“Tax Administration Law”) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by
non-resident investors from the sale or transfer of our Securities is subject to
any income tax in China, and such non-resident investors fail to file any tax
return or pay tax in this regard pursuant to the Tax Related Laws, they may be
subject to certain fines, penalties or punishments, including without
limitation: (1) if a non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
tax authorities shall order it to do so within the prescribed time limit and may
impose a fine up to RMB 2,000, and in egregious cases, may impose a fine ranging
from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to file a tax
return or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax amount payable, a
surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue
amount, beginning from the day the deferral begins), and a fine ranging from 50%
to 500% of the unpaid amount of the tax payable; (3) if a non-resident investor
fails to file a tax return or pay the tax within the prescribed time limit
according to the order by the PRC tax authorities, the PRC tax authorities may
collect and check information about the income items of the non-resident
investor in China and other payers (the “Other Payers”) who will pay amounts to
such non-resident investor, and send a “Notice of Tax Issues” to the Other
Payers to collect and recover the tax payable and impose overdue fines on such
non-resident investor from the amounts otherwise payable to such non-resident
investor by the Other Payers; (4) if a non-resident investor fails to pay the
tax payable within the prescribed time limit as ordered by the PRC tax
authorities, a fine may be imposed on the non-resident investor ranging from 50%
to 500% of the unpaid tax payable; and the PRC tax authorities may, upon
approval by the director of the tax bureau (or sub-bureau) of, or higher than,
the county level, take the following compulsory measures: (i) notify in writing
the non-resident investor’s bank or other financial institution to withhold from
the account thereof for payment of the amount of tax payable, and (ii) detain,
seal off, or sell by auction or on the market the non-resident investor’s
commodities, goods or other property in a value equivalent to the amount of tax
payable; or (5) if the non-resident investor fails to pay all or part of the
amount of tax payable or surcharge for overdue tax payment, and can not provide
a guarantee to the tax authorities, the tax authorities may notify the frontier
authorities to prevent the non-resident investor or their legal representative
from leaving China.
Enforceability
of Civil Liabilities
Substantially
all of our assets are located outside the United States. In addition, a majority
of our directors and officers are nationals and/or residents of countries other
than the United States, and all or a substantial portion of such persons’ assets
are located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon us or such
persons or to enforce against them or against us, judgments obtained in United
States courts, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state
thereof.
We have
appointed CT Corporation System, 4701 Cox Road, Suite 301, Glen Allen, Virginia
23060, as our agent upon whom process may be served in any action brought
against us under the securities laws of the United States.
AllBright
Law Offices, our counsel as to Chinese law, has advised us that there is
uncertainty as to whether the courts of China would (1) recognize or
enforce judgments of United States courts obtained against us or such persons
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or (2) be competent to hear original
actions brought in each respective jurisdiction, against us or such persons
predicated upon the securities laws of the United States or any state
thereof.
AllBright
Law Offices has advised us that the recognition and enforcement of foreign
judgments are provided for under the Chinese Civil Procedure Law. Chinese courts
may recognize and enforce foreign judgments in accordance with the requirements
of the Chinese Civil Procedure Law based either on treaties between China and
the country where the judgment is made or in reciprocity between jurisdictions.
China does not have any treaties or other agreements with the United States that
provide for the reciprocal recognition and enforcement of foreign judgments. As
a result, it is uncertain whether a Chinese court would enforce a judgment
rendered by a court in either of these two jurisdictions.
We
have engaged Anderson & Strudwick, Incorporated to conduct this
offering on a “best efforts, minimum/maximum” basis. The offering is being made
without a firm commitment by the underwriter, which has no obligation or
commitment to purchase any of our shares. None of our officers, directors or
affiliates may purchase shares in this offering.
Unless
sooner withdrawn or canceled by either us or the underwriter, the offering will
continue until the earlier of (i) a date mutually acceptable to us and our
underwriter after which the minimum offering is sold or (ii) December 31,
2010 (the “Offering Termination Date”). The underwriter has agreed in accordance
with the provisions of SEC Rule 15c2-4 to cause all funds received by the
underwriter for the sale of the shares of common stock to be promptly deposited
in an escrow account maintained by SunTrust Bank (the “Escrow Agent”) as escrow
agent for the investors in the offering. The Escrow Agent will exercise
signature control on the escrow account and will act based on joint instructions
from our company and the underwriter. On the closing date for the offering, net
proceeds in the escrow account maintained by the Escrow Agent will be delivered
to our company. We will not be able to use such proceeds in China, however,
until we complete certain remittance procedures in China. If we do not complete
this offering before the Offering Termination Date, all amounts will be promptly
returned as described below. If we complete this offering, then on the closing
date, we will issue shares to investors and underwriter warrants to our
underwriter exercisable at a rate of one warrant per share to purchase up to 10%
of the aggregate number of shares of common stock sold in this offering. We have
registered these underwriter warrants and the shares of common stock underlying
the underwriter warrants in connection with this offering. In the
event of any dispute between our company and the underwriter, including about
whether the minimum offering has been sold and whether and how funds are to be
reimbursed, the escrow agent is entitled to petition a court of competent
jurisdiction to resolve any such dispute.
Investors
must pay in full for all shares at the time of investment. Payment for the
shares of common stock may be made (i) by check, bank draft or money order
made payable to “SunTrust Bank” and delivered to the underwriter no less than
four business days before the date of closing, or (ii) by authorization of
withdrawal from securities accounts maintained with the underwriter. If payment
is made by authorization of withdrawal from securities accounts, the funds
authorized to be withdrawn from a securities account will continue to accrue
interest, if any interest is to accrue on such amounts, at the contractual rates
until closing or termination of the offering, but a hold will be placed on such
funds, thereby making them unavailable to the purchaser until closing or
termination of the offering. If a purchaser authorizes the underwriter to
withdraw the amount of the purchase price from a securities account, such
underwriter will do so as of the date of closing. The underwriter will inform
prospective purchasers of the anticipated date of closing. If payment is made by
check, investors should make all checks payable to the Escrow
Agent.
Proceeds
deposited in escrow with the Escrow Agent may not be withdrawn by investors
prior to the earlier of the closing of the offering or the Offering Termination
Date. If the offering is withdrawn or canceled or if the 833,333 share minimum
offering is not reached and proceeds therefrom are not received by us on or
prior to the Offering Termination Date, all proceeds will be promptly returned
by the Escrow Agent without interest or deduction to the persons from which they
are received (within one business day) in accordance with applicable securities
laws. All such proceeds will be placed in a non-interest bearing account pending
such time.
Pursuant
to that certain underwriting agreement by and between the underwriter and us,
the obligations of the underwriter to solicit offers to purchase the shares and
of investors solicited by the underwriter to purchase our shares of common stock
are subject to approval of certain legal matters by counsel to the underwriter.
The underwriter’s ability to complete this “best efforts minimum/maximum”
transaction is dependent upon the existence of stable U.S. trading markets. As
such, the underwriter’s obligations under the underwriting agreement are also
subject to various conditions which are customary in transactions of this type,
including that, as of the closing of the offering, there shall not have occurred
(i) a suspension or material limitation in trading in securities generally
on the New York Stock Exchange or the publication of quotations on the NASDAQ
Stock Market (National Market System or Capital Market); (ii) a general
moratorium on commercial banking activities in the State of New York or China;
(iii) the engagement by the United States or China in hostilities which
have resulted in the declaration of a national emergency or war if any such
event would have a material adverse effect, in the underwriter’s reasonable
judgment, as to make it impracticable or inadvisable to proceed with the
solicitation of offers to consummate the offering with respect to investors
solicited by the underwriter on the terms and conditions contemplated
herein.
We
have agreed to indemnify the underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments the
underwriter may be required to make in respect of those
liabilities.
The
underwriter is offering the shares of common stock, subject to prior sale, when,
as and if issued to and accepted by it, subject to conditions contained in the
underwriting agreement, such as the receipt by the underwriter of officers’
certificates and legal opinions. The underwriter reserves the right to withdraw,
cancel or modify offers to the public and to reject orders in whole or in part
in the event (i) our representations or warranties are incorrect or
misleading or we fail to fulfill our agreements with the underwriter;
(ii) a material adverse change occurs affecting our business, management,
property, assets, results of operations, condition or prospects;
(iii) trading is suspended on any national securities exchange;
(iv) war is declared; (v) a banking moratorium is declared in
Virginia, New York or the U.S.; or (vi) any laws, regulations, court or
administrative order or other governmental or agency act causes the underwriter
to believe that our business or the U.S. securities markets will be materially
adversely affected. The underwriter’s discretion in this regard is
broad.
The
underwriter intends to offer our common stock to its retail customers only in
states in which we are permitted to offer our common stock. We have relied on an
exemption to the blue sky registration requirements afforded to “covered
securities”. Securities listed on the NASDAQ Capital Market, along with
securities that will be listed on the NASDAQ Capital Market at the conclusion of
an offering, are “covered securities.” If our common stock were unable to be
listed on the NASDAQ Capital Market at the conclusion of this offering, then we
would be unable to rely on the covered securities exemption to blue sky
registration requirements and we would need to register the offering in each
state in which we planned to sell shares. Consequently, we will not complete
this offering unless and until the NASDAQ Capital Market advises us that our
common stock has been approved for listing upon the closing of this
offering.
In
connection with this offering, the underwriter or certain of the securities
dealers may distribute prospectuses electronically. No forms of prospectus other
than printed prospectuses and electronically distributed prospectuses that are
printable in Adobe PDF format will be used in connection with this
offering.
Foreign
Regulatory Restrictions on Purchase of our Shares
We have
not taken any action to permit a public offering of our shares outside the
United States or to permit the possession or distribution of this prospectus
outside the United States. People outside the United States who come into
possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of our shares and the distribution of
this prospectus outside the United States.
Commissions
and Discounts
The
underwriter has advised us that it proposes to offer the common stock to the
public at the public offering price on the cover page of this prospectus. The
following table shows the public offering price, underwriter fee to be paid by
us to the underwriter and the proceeds, before expenses, to
us.
|
|
Per Share
|
|
|
Minimum Offering
|
|
|
Maximum Offering
|
|
Assumed
public offering price
|
|
$
|
6.00
|
|
|
$
|
4,999,998
|
|
|
$
|
6,000,000
|
|
Underwriting discount
|
|
$
|
0.42
|
|
|
$
|
350,000
|
|
|
$
|
420,000
|
|
Proceeds
to us, before expenses
|
|
$
|
5.58
|
|
|
$
|
4,649,998
|
|
|
$
|
5,580,000
|
|
We
expect our total cash expenses for this offering to be approximately $320,000,
exclusive of the above commissions. In addition, we will pay the underwriter
an
accountable
expense allowance of 1% of the amount of the offering, or
$60,000 (maximum offering, exclusive of shares registered under Rule 462(b)) or
$50,000 (minimum offering). The underwriter must sell the minimum number of
securities offered 833,333 shares) if any are sold. The underwriter is required
to use only its best efforts to sell the securities offered. The offering will
terminate upon the earlier of: (i) a date mutually acceptable to us and our
underwriter after which the minimum offering is sold or (ii) December 31,
2010. Until we sell at least 833,333 shares, all investor funds will be held in
an escrow account at SunTrust Bank. If we do not sell at least 833,333 shares by
December 31, 2010, all funds will be promptly returned to investors (within one
business day) without interest or deduction. If we complete this offering, then
on the closing date, we will issue shares to investors and underwriter warrants
to our underwriter.
Underwriter
Warrants
We
have agreed to sell to the underwriter, on the closing date of this offering, at
a price of $0.001 per warrant, underwriter warrants exercisable at a rate of one
warrant per share to purchase 10% of the number of shares issued by us in
connection with the offering. We have registered these underwriter warrants and
the shares of common stock underlying the underwriter warrants in connection
with this offering. We will issue between 83,333 and 100,000 underwriter
warrants in connection with this offering, depending on the number of shares
sold in this offering. Each underwriter warrant will be exercisable to purchase
one share of common stock. The underwriter warrants will be exercisable at 120%
the offering price per share for a period of five years after
the
effective
date of this offering. The underwriter warrants may not be
exercised, sold, transferred, pledged, assigned or hypothecated for a period
of 180 days after the date of effectiveness or commencement of sales of the
public offering, except to officers or partners of the underwriter. This
restriction is imposed pursuant to the requirements of FINRA Rule 5110(g)(1). If
we do not complete this offering by selling at least the minimum number of
shares, we will not issue any underwriter warrants to our
underwriter.
For
the life of the underwriter warrants, the holders thereof are given, at nominal
costs, the opportunity to profit from a rise in the market price of our shares
of common stock with a resulting dilution in the interest of other shareholders.
Further, the holders may be expected to exercise the underwriter warrants at a
time when we would, in all likelihood, be able to obtain equity capital on terms
more favorable than those provided in the underwriter warrants.
We are
required for the life of the underwriter warrants to reserve sufficient shares
of common stock to deliver upon exercise of the warrants and to take all
necessary actions to ensure that we may validly and legally issue fully paid and
non-assessable shares on exercise of the warrants.
The
underwriter has a right to demand registration of the shares of common stock in
the event registered shares are not available at the time of exercise and an
exemption from such registration is not otherwise available. If this happens, we
will be required to file the registration statement within ninety (90) days
after demand and to pay the costs associated with the registration other than
the underwriter’s counsel fees and any underwriting or selling commissions. We
are required to seek the listing of the shares on the same exchange on which our
shares trade, if any.
To the
extent we are unable to register the shares, the underwriter may exercise the
warrant with a cashless exercise, which is designed to give the underwriter the
economic benefit of exercising the underwriter warrants. A cashless exercise,
however, would not result in the payment of any exercise price to
us.
The
underwriter warrants also contain anti-dilution provisions, consistent with
applicable FINRA rules, to adjust the terms of the underwriter warrants as
necessary to protect against dilution in the event we reorganize, consolidate,
merge or subdivide our shares.
Market
and Pricing Considerations
The
CUSIP number for our common stock is 23816A103. Our common stock is quoted under
the symbol “QING” (previously “DATI”) on the Electronic Bulletin Board
maintained by the Financial Industry Regulatory Authority; however, there have
only been limited or sporadic quotations and only a very limited public trading
market for our common stock. Indeed, our common stock has been traded
publicly on less than 20% of the trading days in 2010. The Electronic Bulletin
Board is a significantly more limited market than established trading markets
such as the New York Stock Exchange or NASDAQ.
The
closing bid price for our common stock on June 22, 2010 was $5.00 per share, as
reported by www.quotemedia.com. The common stock has not traded
publicly since that date. We expect that upon completion of this offering, our
common stock will be listed on the NASDAQ Capital Market under the symbol
“FOOT”. The underwriter warrants registered in this offering will not publicly
trade.
The
following table sets forth, for the periods indicated, the high and low closing
prices of our common stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions. The trading price for all days prior to the completion
of our reverse split and conversion of preferred stock into common stock has
been adjusted to account for such events.
|
|
Closing Bid Prices
|
|
|
|
High
|
|
|
Low
|
|
Year
Ended December 31, 2010
|
|
($)
|
|
|
($)
|
|
First
Quarter
|
|
|
16.20
|
|
|
|
2.16
|
|
Second
Quarter
|
|
|
14.85
|
|
|
|
5.00
|
|
Third
Quarter (no trading since June 22, 2010)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First
Quarter (from March 30, 2009)
|
|
|
0.27
|
|
|
|
0.27
|
|
Second
Quarter
|
|
|
1.62
|
|
|
|
0.27
|
|
Third
Quarter
|
|
|
1.35
|
|
|
|
1.35
|
|
Fourth
Quarter
|
|
|
1.35
|
|
|
|
1.35
|
|
We
negotiated with our underwriter to determine the offering price of our shares in
this offering to be the lesser of a multiple of our after-tax net income for the
fiscal year ended December 31, 2009, divided by the number of shares of
common stock outstanding on the date of this registration statement, or a
discount to our five-day average closing price prior to the date of this
registration statement. Noting past offerings completed by our underwriter, we
believe that this multiple approximates the valuation multiples utilized in
similar offerings for similarly-sized companies.
In
addition to prevailing market conditions, the factors considered in determining
the applicable multiples were:
|
•
|
The
history of, and the prospects for, our company and the industry in which
we compete;
|
|
•
|
An
assessment of our management, its past and present operation, and the
prospects for, and timing of, our future
revenues;
|
|
•
|
The
present state of our development;
and
|
|
•
|
The
factors listed above in relation to market values and various valuation
measures of other companies engaged in activities similar to
ours.
|
An active
trading market for our common stock may not develop. It is possible that after
this offering the shares will not trade in the public market at or above the
offering price.
The
exercise price for the underwriter warrants issued to our underwriter in
connection with, and conditional on the closing of, this offering has been
negotiated between our company and the underwriter. The exercise price (120% of
the offering price of shares in this offering), along with the length of time
the underwriter must wait before exercise (at least 180 days after the closing
of this offering) are influenced by the valuation attributed by FINRA in its
calculation of the acceptability of aggregate underwriting
consideration.
Discretionary
Shares
The
underwriter will not sell any shares in this offering to accounts over which it
exercises discretionary authority, without first receiving written consent from
those accounts.
Application
for Listing on the NASDAQ Capital Market
We
have applied to list our common stock on the NASDAQ Capital Market under the
symbol “FOOT.” As this offering is a best-efforts offering, the NASDAQ Capital
Market has indicated that it is unable to admit our shares of common stock for
listing until the completion of the offering and, consequently, the satisfaction
of NASDAQ Capital Market listing standards. If so admitted, we expect our common
stock to begin trading on the NASDAQ Capital Market on the day following the
closing of this offering. If our shares are eventually listed on the NASDAQ
Capital Market, we will be subject to continued listing requirements and
corporate governance standards. We expect these new rules and regulations to
significantly increase our legal, accounting and financial compliance
costs.
Price
Stabilization, Short Positions and Penalty Bids
In
order to facilitate the offering of the shares of common stock, the underwriter
may engage in transactions that stabilize, maintain or otherwise affect the
price of the shares. In order to facilitate the offering, the underwriter may,
but is not required to, bid for, and purchase, shares in the open market to
stabilize the price of the shares. These activities may raise or maintain the
market price of the shares above independent market levels or prevent or retard
a decline in the market price of the shares. The underwriter is not required to
engage in these activities, and may end any of these activities at any time. We
and the underwriter have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
We and
the underwriter have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
Legal
Matters
Certain
matters as to Delaware law and U.S. federal law in connection with this offering
will be passed upon for us and for the underwriter by Kaufman &
Canoles, P.C. Certain legal matters relating to the offering as to Chinese law
will be passed upon for us by AllBright Law Offices, People’s Republic of China.
Kaufman & Canoles, P.C. may rely upon AllBright Law Offices with
respect to matters governed by PRC law.
Experts
Financial
statements as of December 31, 2009 and 2008, and for the years then ended
appearing in this prospectus, have been included herein and in the registration
statement in reliance upon the report of MaloneBailey, LLP, an independent
registered public accounting firm, appearing elsewhere herein, and upon the
authority of that firm as experts in accounting and auditing.
Interests
of Experts and Counsel
Attorneys
with Kaufman and Canoles, P.C., representing our company with respect to this
offering beneficially own 75,000 shares of common stock as of the date of this
prospectus.
Where
You Can Find More Information
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
of 1933 with respect to our shares of common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. For
further information regarding us and our shares of common stock offered hereby,
please refer to the registration statement and the exhibits filed as part of the
registration statement.
In
addition, we file periodic reports with the SEC, including quarterly reports and
annual reports which include our audited financial statements. This registration
statement, including exhibits thereto, and all of our periodic reports may be
inspected without charge at the Public Reference Room maintained by the SEC at
100 F Street, NE, Washington, D.C. 20549. You may obtain copies of the
registration statement, including the exhibits thereto, and all of our periodic
reports after payment of the fees prescribed by the SEC. For additional
information regarding the operation of the Public Reference Room, you may call
the SEC at 1-800-SEC-0330. The SEC also maintains a website which provides
on-line access to reports and other information regarding registrants that file
electronically with the SEC at the address: www.sec.gov.
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009
UNAUDITED
|
|
March
31,
2010
|
|
|
December
31, 2009
|
|
|
|
(Restated)
|
|
|
|
|
ASS
ETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$
|
378,219
|
|
|
$
|
61,131
|
|
Accounts
receivable
|
|
|
1,802,899
|
|
|
|
98,962
|
|
Notes
receivable
|
|
|
440,100
|
|
|
|
-
|
|
Inventories
|
|
|
385,266
|
|
|
|
344,512
|
|
Prepaid
expenses
|
|
|
231,165
|
|
|
|
57,311
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,237,649
|
|
|
|
561,916
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
913,651
|
|
|
|
930,451
|
|
Intangible
assets
|
|
|
206,957
|
|
|
|
208,167
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,358,257
|
|
|
$
|
1,700,534
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
135,812
|
|
|
$
|
15,727
|
|
Short
term loans
|
|
|
1,158,930
|
|
|
|
718,830
|
|
|
|
|
1,327,308
|
|
|
|
2,627
|
|
Duet
to related parties
|
|
|
-
|
|
|
|
221,871
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,622,050
|
|
|
|
959,055
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
2,871,440
|
|
|
$
|
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
|
|
|
441,116
|
|
|
|
440,775
|
|
Retained
earnings (deficits)
|
|
|
282,610
|
|
|
|
(269,166
|
)
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
$
|
1,486,817
|
|
|
$
|
492,089
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
4,358,257
|
|
|
$
|
1,700,534
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
UNAUDITED
|
|
Three Months Ended
|
|
|
|
March 31,
2010
|
|
|
March 31,
2009
|
|
|
|
(Restated)
|
|
|
|
|
Net
sales
|
|
$
|
4,765,812
|
|
|
$
|
4,455,898
|
|
Cost
of sales
|
|
|
2,656,755
|
|
|
|
2,522,338
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,109,057
|
|
|
|
1,933,560
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
702,721
|
|
|
|
218,547
|
|
Depreciation
and Amortization Expense
|
|
|
18,005
|
|
|
|
13,133
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,388,331
|
|
|
|
1,701,880
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Rental
income
|
|
|
21,998
|
|
|
|
21,977
|
|
Interest
income
|
|
|
89
|
|
|
|
533
|
|
Interest
expense
|
|
|
(22,906
|
)
|
|
|
(13,499
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,387,512
|
|
|
|
1,710,891
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
457,531
|
|
|
|
427,723
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
Weighted
average shares outstanding-basic and diluted
|
|
|
10,000,000
|
|
|
|
9,700,000
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
341
|
|
|
|
(6,705
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
930,322
|
|
|
$
|
1,276,463
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
UNAUDITED
|
|
Three
Months
Ended
|
|
|
|
March
31,
2010
|
|
|
March
31,
2009
|
|
|
|
(Restated)
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
929,981
|
|
|
$
|
1,283,168
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,005
|
|
|
|
13,133
|
|
Stock
based compensation
|
|
|
442,611
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,703,936
|
)
|
|
|
(101,932
|
)
|
Inventories
|
|
|
(40,754
|
)
|
|
|
(323,926
|
)
|
Prepaid
expenses
|
|
|
(173,854
|
)
|
|
|
(43,140
|
)
|
Accounts
payable and accrued liabilities
|
|
|
120,086
|
|
|
|
7,805
|
|
Tax
payable
|
|
|
1,324,682
|
|
|
|
1,241,699
|
|
Net
cash provided by operating activities
|
|
|
916,821
|
|
|
|
2,076,807
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Loan
made to other
|
|
|
(440,100
|
)
|
|
|
-
|
|
Advance
to related party
|
|
|
(221,871
|
)
|
|
|
(1,879,489
|
)
|
Cash
paid for construction in progress
|
|
|
-
|
|
|
|
(75,124
|
)
|
Net
cash used in investing activities
|
|
|
(661,971
|
)
|
|
|
(1,954,613
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(378,205
|
)
|
|
|
-
|
|
Proceeds
from loans
|
|
|
440,100
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
61,895
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
343
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
317,088
|
|
|
$
|
121,945
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning
of period
|
|
|
61,131
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
Cash,
end
of period
|
|
$
|
378,219
|
|
|
$
|
240,479
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
22,906
|
|
|
$
|
13,498
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 - ORGANIZATION AND BUSINESS OPERATIONS
Qingdao
Footwear, Inc. (formerly Datone, Inc.) was originally incorporated on August 9,
2000 under the laws of the State of Delaware. The Company operated as a
wholly-owned subsidiary of USIP.COM, Inc. On August 24, 2006, USIP decided to
spin-off its subsidiary companies, one of which was Datone, Inc. On February 1,
2008, Datone, Inc. filed a Form 10-SB registration statement. On November 13,
2008, Datone, Inc. went effective.
On
February 12, 2010, the Company completed a reverse acquisition transaction
through a share exchange with Glory Reach International Limited, a Hong Kong
limited company (“Glory Reach”), the shareholders of Glory Reach (the
“Shareholders”), Greenwich Holdings LLC and Qingdao Shoes, whereby the Company
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Convertible Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. 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 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The
unaudited consolidated financial statements included in our Quarterly Report on
Form 10-Q for the three months ended March 31, 2010 should no longer be relied
upon. Specifically, the Company’s general and administrative expenses were
understated by $442,611 for the period due to the fact that compensation expense
relates to shares transfers by a shareholder to service providers upon the
closing of the reverse merger on February 12, 2010 were not recorded in the
original filing. Accordingly, all the financial statements for the quarter ended
March 31, 2010 are restated.
The
following table sets forth all the accounts in the original amounts and restated
amounts, respectively.
|
|
Original
|
|
|
Adjustment
|
|
|
Restated
|
|
As
of March 31, 2010
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
319,480
|
|
|
|
442,611
|
|
|
|
762,091
|
|
Retained
Earnings
|
|
|
725,221
|
|
|
|
(442,611
|
)
|
|
|
282,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
260,110
|
|
|
|
442,611
|
|
|
|
702,721
|
|
Income
from operations
|
|
|
1,830,942
|
|
|
|
(442,611
|
)
|
|
|
1,388,331
|
|
Income
before income taxes
|
|
|
1,830,123
|
|
|
|
(442,611
|
)
|
|
|
1,387,512
|
|
Net
income
|
|
|
1,372,592
|
|
|
|
(442,611
|
)
|
|
|
929,981
|
|
Net
income per share
|
|
|
0.14
|
|
|
|
(0.05
|
)
|
|
|
0.09
|
|
Comprehensive
income
|
|
|
1,372,933
|
|
|
|
(442,611
|
)
|
|
|
930,322
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,372,592
|
|
|
|
(442,611
|
)
|
|
|
929,981
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
442,611
|
|
|
|
442,611
|
|
NOTE
3 - 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 March 31, 2010 and December 31, 2009, substantially all of the Company’s cash
were held by major financial institutions located in the PRC, which management
believes are of high credit quality. With respect to trade
receivables, the Company generally does not require collateral for trade
receivables and has not experienced any credit losses in collecting the trade
receivables.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC
220 defines comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
securities. The Company’s other comprehensive income arose from the
effect of foreign currency translation adjustments.
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 March 31, 2010
and December 31, 2009, respectively, the Company had no common stock equivalents
that could potentially dilute future earnings per
share.
NOTE
4 – NOTES RECEIVABLE
The
Company advanced $440,100 to a third party in January 2010. The note receivable
carries annual interest at 10% and matures in July 2010.
NOTE
5 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of March 31, 2010 and December 31, 2009, the Company’s short
term loans consisted of the following:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
|
|
|
|
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
|
|
293,400
|
|
|
|
293,400
|
|
|
|
|
|
|
|
|
|
|
BOQ,
12-month bank loan due in September 2010, bears annual interest at 6.372%
average, pledged by Company’s building and land use
right
|
|
|
425,430
|
|
|
|
425,430
|
|
|
|
|
|
|
|
|
|
|
JMRB,
12-month bank loan due in December 2010, bears annual interest at
7.965% average, secured by third parties
|
|
|
440,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
|
$
|
1,158,930
|
|
|
$
|
718,830
|
|
The above indebtedness to JMRB at March
31, 2010 and December 31, 2009 has been guaranteed by two unrelated
companies.
NOTE
6 – LONG TERM LOANS
On
December 16, 2009, the Company entered into a 2-year loan agreement with
JMRB. The Company borrowed $249,390 with an annual interest rate
equal to 7.02% and is due in December 2011. The loan is guaranteed by
the relatives of Mr. Tao Wang, the CEO and major shareholder of the Company and
is collateralized by the property of his relatives.
NOTE
7 - 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.
Related
party transactions
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the three months ended March 31, 2010
and 2009, related party rent expense of $4,400 and $4,395, 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 three months ended March 31, 2010 and 2009, the
Company recorded other income of $21,998 and $21,977 respectively, from leasing
the aforementioned building and advertising expense of the same amount
respectively.
NOTE
8 - 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.
|
|
Three
Months
Ended
March
31,
2010
|
|
|
Three
Months
Ended
March
31,
2009
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
1,387,512
|
|
|
$
|
1,710,891
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
457,531
|
|
|
$
|
427,723
|
|
Effective
tax rate
|
|
|
33
|
%
|
|
|
25
|
%
|
There
is no significant temporary difference between book and tax
income.
The
Company has no United States income tax liabilities as of March 31, 2010
and December 31, 2009.
NOTE
9 – 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
three month ended March 31, 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
10 – COMMITMENTS AND
CONTINGECIES
Guarantees
As of
December 31, 2009, the Company provided corporate guarantees for bank loans
borrowed by two unrelated companies incorporated in the PRC (“Company A and
B”). Associated with the corporate guarantee, Company A and B also
provided cross guarantees for the JMRB bank loans of $293,400 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 guaranto
r’s
obligation under the guarantee was recognized as of December 31, 2009. No fee
was paid to Company A and B for their guarantee.
As of
March 31, 2010, two unrelated companies incorporated in the PRC provided
guarantees for the JMRB bank loans of $293,400 borrowed by the Company.
The guarantees end when the loans become mature. (See Note 5)
Tax
liabilities
The
tax authority of
the PRC
Government conducts periodic and ad hoc tax filing reviews on business
enterprises operating in the PRC after those en
te
rp
ri
ses had completed their relevant tax
filings, hence the Company’s tax filings may not be finalized.
It
i
s therefore uncertain as to whether the
PRC tax authority may take different views about
t
he
C
ompany’s tax filings which may lead to
additional tax liabil
it
ie
s.
NOTE
11 – SUBSEQUENT EVENTS
In
April 2010, the Company entered into an agreement to obtain the land use right
on a piece of land located in JiMo city for $3.6 million (RMB 25
million).
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Qingdao
Footwear, Inc.
Qingdao,
PRC
We have
audited the accompanying consolidated balance sheets of Qingdao Footwear, Inc.
(the “Company”) as of December 31, 2009 and 2008, and the related statements of
operations, shareholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements of the Company referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2009 and 2008 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/
MALONEBAILEY, LLP
MALONEBAILEY,
LLP
www.malonebailey.com
Houston,
Texas
April 16,
2010
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$
|
61,131
|
|
|
$
|
118,534
|
|
Accounts
receivable
|
|
|
98,962
|
|
|
|
3,534
|
|
Inventories
|
|
|
344,512
|
|
|
|
189,535
|
|
Prepaid
expenses
|
|
|
57,311
|
|
|
|
58,490
|
|
Due
from related parties
|
|
|
-
|
|
|
|
4,373,588
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
561,916
|
|
|
|
4,743,681
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
930,451
|
|
|
|
602,831
|
|
Intangible
assets
|
|
|
208,167
|
|
|
|
213,008
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,700,534
|
|
|
$
|
5,559,520
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
718,830
|
|
|
$
|
704,160
|
|
Accounts
payable
|
|
|
15,727
|
|
|
|
546
|
|
Taxes
payable
|
|
|
2,627
|
|
|
|
2,114
|
|
Duet
to related parties
|
|
|
221,871
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
959,055
|
|
|
|
706,820
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
1,208,445
|
|
|
$
|
706,820
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, .0001 par value, 10,000,000 shares authorized, none issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
shares, .0001 par value, 100,000,000 shares authorized, 9,700,000 shares
issued and outstanding
|
|
|
970
|
|
|
|
970
|
|
Additional
paid-in capital
|
|
|
319,510
|
|
|
|
319,510
|
|
Accumulated
other comprehensive income
|
|
|
440,775
|
|
|
|
437,665
|
|
Retained
earnings (deficits)
|
|
|
(269,166
|
)
|
|
|
4,094,555
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
$
|
492,089
|
|
|
$
|
4,852,700
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
1,700,534
|
|
|
$
|
5,559,520
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
17,863,891
|
|
|
$
|
13,904,314
|
|
Cost
of goods sold
|
|
|
10,162,778
|
|
|
|
8,246,592
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
7,701,113
|
|
|
|
5,657,722
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
907,807
|
|
|
|
759,470
|
|
Depreciation
and Amortization Expense
|
|
|
61,838
|
|
|
|
55,360
|
|
|
|
|
|
|
|
|
|
|
Profit
from operations
|
|
|
6,731,468
|
|
|
|
4,842,892
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
87,966
|
|
|
|
57,660
|
|
Interest
income
|
|
|
1,144
|
|
|
|
8,949
|
|
Interest
(expense)
|
|
|
(61,792
|
)
|
|
|
(61,905
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,758,786
|
|
|
|
4,847,596
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,689,697
|
|
|
|
1,211,899
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,069,089
|
|
|
$
|
3,635,697
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic and diluted
|
|
$
|
0.52
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
9,700,000
|
|
|
|
9,700,000
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,069,089
|
|
|
$
|
3,635,697
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
3,110
|
|
|
|
232,047
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
5,072,199
|
|
|
$
|
3,867,744
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,069,089
|
|
|
$
|
3,635,697
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
61,838
|
|
|
|
55,360
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(95,428
|
)
|
|
|
1,028
|
|
Inventories
|
|
|
(154,977
|
)
|
|
|
246,700
|
|
Prepaid
expenses
|
|
|
1,179
|
|
|
|
10,427
|
|
Accounts
payable
|
|
|
15,180
|
|
|
|
(2,527
|
)
|
Tax
payable
|
|
|
4,949,978
|
|
|
|
3,800,000
|
|
Net
cash provided by operating activities
|
|
|
9,846,859
|
|
|
|
7,746,685
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advance
to related party
|
|
|
(5,723,550
|
)
|
|
|
(5,785,433
|
)
|
Purchase
of property and equipment
|
|
|
(384,332
|
)
|
|
|
(37,944
|
)
|
Net
cash used in investing activities
|
|
|
(6,107,882
|
)
|
|
|
(5,823,377
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(4,063,590
|
)
|
|
|
(1,874,600
|
)
|
Proceeds
from loans
|
|
|
1,701,720
|
|
|
|
850,860
|
|
Repayments
on loans
|
|
|
(1,437,660
|
)
|
|
|
(850,860
|
)
|
Net
cash used in financing activities
|
|
|
(3,799,530
|
)
|
|
|
(1,874,600
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
3,150
|
|
|
|
35,218
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
$
|
(57,403
|
)
|
|
$
|
83,926
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
118,534
|
|
|
|
34,608
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
61,131
|
|
|
$
|
118,534
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
61,792
|
|
|
$
|
61,905
|
|
Income
tax paid
|
|
$
|
3,763
|
|
|
$
|
2,539
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Transfer
of taxes payable to due from related party
|
|
$
|
4,949,466
|
|
|
$
|
3,799,872
|
|
Transfer
of shareholder distribution to due from related party
|
|
$
|
5,251,860
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
Common Stock
|
|
|
Additional Paid-
in Capital
|
|
|
Accumulated Other
Comprehensive
Income
|
|
|
Retained Earnings
|
|
|
Total Shareholders'
Equity
|
|
Balance,
December 31, 2007
|
|
$
|
970
|
|
|
$
|
319,510
|
|
|
$
|
205,618
|
|
|
$
|
2,333,458
|
|
|
$
|
2,859,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,874,600
|
)
|
|
|
(1,874,600
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,635,697
|
|
|
|
3,635,697
|
|
Foreign
currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
232,047
|
|
|
|
-
|
|
|
|
232,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
$
|
970
|
|
|
$
|
319,510
|
|
|
$
|
437,665
|
|
|
$
|
4,094,555
|
|
|
$
|
4,852,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,432,810
|
)
|
|
|
(9,432,810
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,069,089
|
|
|
|
5,069,089
|
|
Foreign
currency translation gain
|
|
|
-
|
|
|
|
-
|
|
|
|
3,110
|
|
|
|
-
|
|
|
|
3,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
$
|
970
|
|
|
$
|
319,510
|
|
|
$
|
440,775
|
|
|
$
|
(269,166
|
)
|
|
$
|
492,089
|
|
The
accompanying notes are an integral part of these financial
statements
QINGDAO
FOOTWEAR, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BUSINESS OPERATIONS
Qingdao
Footwear, Inc. (formerly Datone, Inc.) was originally incorporated on August 9,
2000 under the laws of the State of Delaware. The Company operated as a
wholly-owned subsidiary of USIP.COM, Inc. On August 24, 2006, USIP decided to
spin-off its subsidiary companies, one of which was Datone, Inc. On February 1,
2008, Datone, Inc. filed a Form 10-SB registration statement. On November 13,
2008, Datone, Inc. went effective.
On
February 12, 2010, the Company completed a reverse acquisition transaction
through a share exchange with Glory Reach International Limited, a Hong Kong
limited company (“Glory Reach”), the shareholders of Glory Reach (the
“Shareholders”), Greenwich Holdings LLC and Qingdao Shoes, whereby the Company
acquired 100% of the issued and outstanding capital stock of Glory Reach in
exchange for 10,000 shares of our Series A Convertible Preferred Stock which
constituted 97% of our issued and outstanding capital stock on an as-converted
to common stock basis as of and immediately after the consummation of the
reverse acquisition. As a result of the reverse acquisition, Glory Reach became
our wholly-owned subsidiary and the former shareholders of Glory Reach became
our controlling stockholders. The share exchange transaction with Glory Reach
was treated as a reverse acquisition, with Glory Reach as the acquirer and
Datone, Inc. as the acquired party for accounting and financial reporting
purposes. After the reverse merger, Datone, Inc changed its name to Qingdao
Footwear, Inc.
Datone
spun off all its assets and liabilities to its prior owners before the reverse
merger. For Glory Reach, reverse merger is accounted for as a reverse
merger with a shell company and as a recapitalization.
Glory
Reach International Limited (the “Company”) was established in Hong Kong on
November 18, 2009 to serve as an intermediate holding company. Mr.
Tao Wang, the controlling interest holder of Qingdao Shoes also controls the
Company. On February 8, 2010, also pursuant to the restructuring
plan, the Company acquired 100% of the equity interests in Qingdao
Shoes.
Qingdao
Shoes was incorporated on March 11, 2003 in Jimo County, Qingdao City,
Shandong Province, People’s Republic of China (the “PRC”) with registered
capital of $320,480. Prior to December 18, 2009, Mr. Tao Wang owned
80% of Qingdao Shoes and the remaining 20% was owned by Mr. Renwei Ma. Starting
from December 18, 2009, Mr. Tao Wang owned 80% of Qingdao Shoes, Mr. Renwei Ma
owned 15% and Mr. Wenyi Chen owned the remaining 5%. Qingdao Shoes is
the owner of the brand name “Hongguan” and principally engaged in the
wholesale and retail sales of fashion footwear primarily in the northeast region
of China.
Since
there is common control between the Glory Reach and Qingdao Shoes, for
accounting purposes, the acquisitions of Qingdao Shoes has been treated as a
recapitalization with no adjustment to the historical basis of their assets and
liabilities. The restructuring has been accounted for using the “as if” pooling
method of accounting and the operations were consolidated as if the
restructuring had occurred as of the beginning of the earliest period presented
in our consolidated financial statements and the current corporate structure had
been in existence throughout the periods covered by our consolidated financial
statements.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
financial statements reflect the financial position, results of operations and
cash flows of the Company and all of its wholly owned and majority owned
subsidiaries as of December 31, 2009 and 2008, and for the years ended December
31, 2009 and 2008. All intercompany items are eliminated during
consolidation.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made. However, actual
results could differ materially from those estimates.
Risks and
Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade receivables. As of December
31, 2009 and 2008, substantially all of the Company’s cash were held by major
financial institutions located in the PRC, which management believes are of
high credit quality. With respect to trade receivables, the Company generally
does not require collateral for trade receivables and has not experienced any
credit losses in collecting the trade receivables.
The
Company operates principally in the PRC and grants credit to its customers in
this geographic region. Although the PRC is economically stable, it is always
possible that unanticipated events in foreign countries could disrupt the
Company’s operations.
Comprehensive
Income
The
Company has adopted the provisions of ASC 220 “Reporting Comprehensive Income”
which establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220
defines comprehensive income is comprised of net income and all changes to the
statements of stockholders' equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable securities.
The Company’s other comprehensive income arose from the effect of foreign
currency translation adjustments.
Foreign
Currency Translation
The
Company’s functional currency is Chinese currency Renminbi (“RMB”) and its
reporting currency is the U.S. dollar. Transactions denominated in foreign
currencies are translated into U.S. dollar at exchange rate in effect on the
date of the transactions. Exchange gains or losses on transaction are included
in earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income. At December 31, 2009 and
2008, the cumulative translation adjustment of $440,775 and $437,665 were
classified as an item of accumulated other comprehensive income in the
shareholders’ equity section of the balance sheet respectively. For the years
ended December 31, 2009 and 2008, other comprehensive income was $3,110 and
$232,047, respectively.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company uses the aging method to estimate the
valuation allowance for anticipated uncollectible receivable balances. Under the
aging method, bad debts percentages determined by management based on historical
experience as well as current economic climate are applied to customers’
balances categorized by the number of months the underlying invoices have
remained outstanding. The valuation allowance balance is adjusted to the amount
computed as a result of the aging method. When facts subsequently become
available to indicate that the amount provided as the allowance was incorrect,
an adjustment which classified as a change in estimate is made. The Company did
not experience any bad debt historically and as of December 31, 2009 and 2008,
there was no allowance for doubtful accounts recorded based on the aging
method.
Inventories
Merchandise
inventories are stated at the lower of cost or market. Cost is determined on a
weighted average basis and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a salable condition. In assessing
the ultimate realization of inventories, the management makes judgments as to
future demand requirements compared to current or committed inventory levels.
Our reserve requirements generally increase as our projected demand
requirements; or decrease due to market conditions and product life cycle
changes. The Company estimates the demand requirements based on market
conditions, forecasts prepared by its customers, sales contracts and orders in
hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analysis. The Company writes down
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and their estimated market value
based upon assumptions about future demand and market
conditions.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. Major renewals and
betterments are charged to the property accounts while replacements, maintenance
and repairs, which do not improve or extend the lives of the respective assets,
are expensed in the current period.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as set out below.
|
|
Estimated Useful
Life
|
Plant
and building
|
|
20
years
|
Office
furniture and equipment
|
|
5
years
|
Transportation
equipment
|
|
5
years
|
Land Use
Rights
Land use
right is stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the designated terms of the
lease of 50 years obtained from the relevant PRC land authority.
Impairment
of Long-Lived Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is event or
circumstance that indicate the carrying value of the asset may not be
recoverable. An impairment loss is recognized when the carrying
amount of a long-lived asset or asset group is not recoverable (when carrying
amount exceeds the gross, undiscounted cash flows from use and disposition) and
is measured as the excess of the carrying amount over the asset’s (or asset
group’s) fair value. There was no impairment of long-lived assets for
the years ended December 31, 2009 and 2008.
Revenue
Recognition
The
Company generates revenues from the retail and wholesale of shoes. Sales
revenues are recognized when the following four revenue criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the selling
price is fixed or determinable, and collectability is reasonably assured. Sales
are presented net of value added tax (VAT). No return allowance is made as
product returns have been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesale to
its contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements.
The Company does not allow any discounts, credits, rebates or similar
privileges.
Cost of
Sales
Cost
of sales includes the cost of purchasing merchandise. Receiving and warehousing
costs are included in selling, general and administrative expenses, and these
costs have been insignificant in all periods.
Advertising
Expense
The
Company expenses cost of advertising, including the cost of TV commercials,
outdoor bulletin boards, promotional materials, and in-store displays as
advertising expense, when incurred. Advertising expenses included in
selling, general and administrative expenses were $87,966 and $57,660 for the
years ended December 31, 2009 and 2008, respectively.
Shipping
and Handling
Shipping
and handling costs related to cost of goods sold are included in selling,
general and administrative expense.
Store
Opening Costs
Non-capital
expenditures associated with opening new stores are expensed as
incurred.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740 “Income
Taxes”. ASC 740 requires an asset and liability approach for
financial accounting and reporting for income taxes and allows recognition and
measurement of deferred tax assets based upon the likelihood of realization
of tax benefits in future years. Under the asset and liability
approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain. There was
no deferred tax asset or liability for the years ended December 31, 2009 and
2008.
Value
Added Taxes
The
Company is subject to value added tax (“VAT”) for selling
merchandise. The applicable VAT rate is 17% for products sold in the
PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less VAT
paid on purchases made with the relevant supporting invoices (input
VAT). Under the commercial practice of the PRC, the Company pays VAT
based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC
tax authorities dispute the date on which revenue is recognized for tax
purposes, the PRC tax office has the right to assess a penalty based on the
amount of the taxes which are determined to be late or deficient, and will be
expensed in the period if and when a determination is made by the tax
authorities that a penalty is due.
VAT on
sales and VAT on purchases amounted to $3,038,726 and $83,851, respectively, for
the year ended December 31, 2009. VAT on sales and VAT on purchases
amounted to $2,405,548 and $81,464, respectively, for the year ended December
31, 2008. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government.
Fair
Value of Financial Instruments
ASC 820
“Fair Value Measurements and Disclosures”, adopted January 1, 2008, defines fair
value, establishes a three-level valuation hierarchy for disclosures of fair
value measurement and enhances disclosure requirements for fair value measures.
The carrying amounts reported in the balance sheets for current receivables and
payables qualify as financial instruments. Management concluded the carrying
values are a reasonable estimate of fair value because of the short period of
time between the origination of such instruments and their expected realization
and if applicable, their stated interest rate approximates current rates
available. The three levels are defined as follows:
l
Level
1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
l
Level
2 - inputs to the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable for the assets
or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
l
Level
3 - inputs to the valuation methodology are unobservable and significant to the
fair value.
It is
management’s opinion that as of December 31, 2009 and 2008, the estimated fair
values of the financial instruments were not materially different from their
carrying values as presented on the balance sheets. This is attributed to the
short maturities of the instruments (less than two years) and that interest
rates on the borrowings approximately those that would have been available for
loans of similar remaining maturity and risk profile at respective balance sheet
dates. The carrying amounts of the loans approximately their fair values because
the applicable interest rates approximate current market rates.
Segment
Reporting
We
operate as a single operating segment for purposes of presenting financial
information and evaluating performance. As such, the accompanying consolidated
financial statements present financial information in a format that is
consistent with the internal financial information used by management. We do not
accumulate operating expenses by wholesale and retail operations and, therefore,
it is impractical to present such information.
Recent
Accounting Pronouncements
Fair Value Measurements and
Disclosures
(Included
in ASC 820, previously FSP No. 157-4, “
Determining Whether a Market is Not
Active and a Transaction Is Not Distressed”
).
FSP
No. 157-4 clarifies when markets are illiquid or that market pricing may not
actually reflect the “real” value of an asset. If a market is
determined to be inactive and market price is reflective of a distressed price
then an alternative method of pricing can be used, such as a present value
technique to estimate fair value. FSP No. 157-4 identifies factors to
be considered when determining whether or not a market is
inactive. FSP No. 157-4 would be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009 and shall be applied prospectively. The
adoption of this standard had no material effect on the Company's financial
statements.
Interim Disclosures about Fair Value
of Financial Instruments (Included in ASC 825 “
Financial Instruments”
, previously FSP SFAS No.
107-1).
This guidance requires that the fair value
disclosures required for all financial instruments within the scope of SFAS No.
107, “Disclosures about Fair Value of Financial Instruments”, be included in
interim financial statements. This guidance also requires entities to
disclose the method and significant assumptions used to estimate the fair value
of financial instruments on an interim and annual basis and to highlight any
changes from prior periods. FSP 107-1 was effective for interim
periods ending after September 15, 2009. The adoption of FSP 107-1
had no material impact on the Company’s financial statements.
Consolidation of Variable Interest
Entities
–
Amended (To be included in ASC 810
“
Consolidation”
, previously SFAS 167 “
Amendments to FASB
Interp
retation No.
46(R)”
).
SFAS 167 amends
FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities,” to require an enterprise to perform an analysis to determine
the primary beneficiary of a variable interest entity; to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity and to eliminate the quantitative approach previously required
for determining the primary beneficiary of a variable interest
entity. SFAS 167 also requires enhanced disclosures that will provide
users of financial statements with more transparent information about an
enterprise’s involvement in a variable interest entity. SFAS 167 is
effective for the first annual reporting period beginning after November 15,
2009 and will be effective for us as of January 1, 2010. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
FASB Accounting Standards
Codification (Accounting Stand
ards Update “
ASU”
2009-1).
In June 2009, the
Financial Accounting Standard Board (“FASB”) approved its Accounting Standards
Codification (“Codification”) as the single source of authoritative United
States accounting and reporting standards applicable for all non-governmental
entities, with the exception of the SEC and its staff. The
Codification is effective for interim or annual financial periods ending after
September 15, 2009 and impacts our financial statements as all future references
to authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of our
financial statements or disclosures as a result of implementing the
Codification.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (“
ASC Update 2009-05
”), an
update to ASC 820, Fair Value Measurements and Disclosures. This
update provides amendments to reduce potential ambiguity in financial reporting
when measuring the fair value of liabilities. Among other provisions,
this update provides clarification that in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the valuation
techniques described in ASC Update 2009-05. ASC Update 2009-05 will
become effective for the Company’s annual financial statements for the year
ended December 31, 2009. The adoption of this standard had no
material effect on the Company's financial statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605)
“
Multiple Deliverable Revenue
Arrangements - A Consensus of the FASB Emerging Issues Task Force”
.
This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes
a selling price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be
based on vendor-specific objective evidence, if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific or third-party evidence is
available. The Company will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified after
January 1, 2011; however, earlier application is permitted. The
management is in the process of evaluating the impact of adopting this standard
on the Company’s financial statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers of
Financial Assets
—
an amendment of FASB Statement No.
140.
The amendments in this Accounting Standards Update improve
financial reporting by eliminating the exceptions for qualifying special-purpose
entities from the consolidation guidance and the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. In
addition, the amendments require enhanced disclosures about the risks that a
transferor continues to be exposed to because of its continuing involvement in
transferred financial assets. Comparability and consistency in accounting for
transferred financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. The management is in the process of
evaluating the impact of adopting this standard on the Company’s financial
statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,
Amendments to FASB
Interpretation No. 46(R)
. The amendments in this
Accounting Standards Update replace the quantitative-based risks and rewards
calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which reporting entity has the power to direct the activities of a
variable interest entity that most significantly impact the entity’s economic
performance and (1) the obligation to absorb losses of the entity or (2) the
right to receive benefits from the entity. An approach that is
expected to be primarily qualitative will be more effective for identifying
which reporting entity has a controlling financial interest in a variable
interest entity. The amendments in this Update also require
additional disclosures about a reporting entity’s involvement in variable
interest entities, which will enhance the information provided to users of
financial statements. The management is in the process of evaluating
the impact of adopting this standard on the Company’s financial
statements.
In
January 2010, FASB issued
ASU
No. 2010-01- Accounting for Distributions to Shareholders with Components of
Stoc
k and
Cash
. The amendments in this Update clarify that
the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The management is in the process of evaluating the
impact of adopting this standard on the Company’s financial
statements.
In
January 2010, FASB issued
ASU
No. 2010-02
–
Accounting and Reporting for
Decreases in Ownership of a Subsidiary
–
a Scope
Clarification
. The amendments in this Update
affect accounting and reporting by an entity that experiences a decrease in
ownership in a subsidiary that is a business or nonprofit
activity. The amendments also affect accounting and reporting by an
entity that exchanges a group of assets that constitutes a business or nonprofit
activity for an equity interest in another entity. The amendments in this
update are effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No.160 as of
the date the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15,
2009. The amendments in this update should be applied retrospectively
to the first period that an entity adopted SFAS No. 160. The management
does not expect the adoption of this ASU to have a material impact on the
Company’s financial statements.
In
January 2010, FASB issued
ASU
No. 2010-06
–
Improving Disclosures about Fair
Value Measurements.
This update provides amendments to
Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in
and out of Levels 1 and 2. A reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the
transfers. 2) Activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number). This update
provides amendments to Subtopic 820-10 that clarifies existing disclosures as
follows: 1) Level of disaggregation. A reporting entity should
provide fair value measurement disclosures for each class of assets and
liabilities. A class is often a subset of assets or liabilities within a line
item in the statement of financial position. A reporting entity needs
to use judgment in determining the appropriate classes of assets and
liabilities. 2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. Those disclosures are required for
fair value measurements that fall in either Level 2 or Level
3. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The management does not expect the adoption of this ASU to have a
material impact on the Company’s financial statements.
NOTE
3 – INVENTORY
As of
December 31, 2009 and 2008, inventory consists of the following:
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
344,512
|
|
|
$
|
189,535
|
|
|
|
|
|
|
|
|
|
|
Total
inventory
|
|
$
|
344,512
|
|
|
$
|
189,5
35
|
|
NOTE
4 - PREPAID EXPENSES
As of
December 31, 2009 and 2008, the prepaid expenses consisted of the
following:
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Retail
store rental prepayment
|
|
$
|
18,778
|
|
|
$
|
18,778
|
|
Prepaid
to suppliers
|
|
|
38,533
|
|
|
|
39,712
|
|
|
|
|
|
|
|
|
|
|
Total
prepaid expenses
|
|
$
|
57,311
|
|
|
$
|
58,490
|
|
NOTE
5 - PROPERTY, PLANT AND EQUIPMENT
As of
December 31, 2009 and 2008, property, plant and equipment consisted of the
following:
|
|
December
31,
200
9
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Plant
and building
|
|
$
|
1,096,639
|
|
|
$
|
731,918
|
|
Office
furniture and equipment
|
|
|
24,789
|
|
|
|
12,304
|
|
Transportation
equipment
|
|
|
155,763
|
|
|
|
148,314
|
|
|
|
|
|
|
|
|
|
|
Total
at cost
|
|
|
1,277,191
|
|
|
|
892,536
|
|
Less:
Accumulated depreciation
|
|
|
(346,740
|
)
|
|
|
(289,705
|
)
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
$
|
930,451
|
|
|
$
|
602,831
|
|
Depreciation
for the years ended December 31, 2009 and 2008 was $57,000 and $50,603
respectively.
NOTE
6 - INTANGIBLE ASSETS
The
Company obtained the right from the relevant PRC land authority for fifty years
to use the land on which the office premises and warehouse of the Company are
situated. As of December 31, 2009 and 2008, intangible assets
consisted of the following:
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Cost
of land use rights
|
|
$
|
242,055
|
|
|
$
|
242,055
|
|
Less:
Accumulated amortization
|
|
|
(33,888
|
)
|
|
|
(29,047
|
)
|
|
|
|
|
|
|
|
|
|
Total
intangible assets, net
|
|
$
|
208,167
|
|
|
$
|
213,008
|
|
Amortization
expense for the years ended December 31, 2009 and 2008 was $4,838 and $4,757
respectively.
NOTE
7 - SHORT TERM LOANS
Short-term
loans are due to two financial institutions which are normally due within one
year. As of December 31, 2009 and December 31, 2008, the Company’s
short term loans consisted of the following:
|
|
December
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Jimo
Rural Cooperative Bank of Qingdao (JMRB), two 12-month bank loans both due
in November 2009, bear interest at 10.85% average, secured by third
parties and repaid in November 2009.
|
|
$
|
-
|
|
|
$
|
293,400
|
|
|
|
|
|
|
|
|
|
|
Bank
of Qingdao Jimo Branch (BOQ), 12-month bank loan due in September 2009,
bears interest at 8.25% average, pledged by Company's building and land
use right and repaid in August 2009.
|
|
|
-
|
|
|
|
410,760
|
|
|
|
|
|
|
|
|
|
|
JMRB,
two 12-month bank loans both due in November 2010, bears annual interest
at 7.965% average, secured by third parties
|
|
|
293,400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
BOQ,
12-month bank loan due in September 2010, bears annual interest at 6.372%
average, pledged by Company's building and land use right
|
|
|
425,430
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
|
$
|
718,830
|
|
|
$
|
704,160
|
|
The above
indebtedness to JMRB at December 31, 2009 and 2008 has been guaranteed by two
unrelated companies.
NOTE
8 – LONG TERM LOANS
On
December 16, 2009, the Company entered into a 2-year loan agreement with JMRB.
The Company borrowed $249,390 with an annual interest rate equal to 7.02% and is
due in December 2011. The loan is guaranteed by the relatives of Mr. Tao Wang,
the CEO and major shareholder of the Company and is collateralized by the
property of his relatives.
NOTE
9 - RELATED PARTY BALANCES AND TRANSACTIONS
Due from
related party
Due from
related party at December 31, 2008 is receivables from Mr. Tao Wang, the CEO and
major shareholder of the Company in the amount of $4,373,588. Theses borrowings
bear no interest and were repaid in 2009. As of December 31, 2009, the recorded
balance of due from related parties was Nil.
Due to
related party
The
Company borrowed money from Mr. Tao Wang, the CEO and major shareholder of the
Company. These borrowings bear no interest and no repayment terms, which is due
on demand. As of December 31, 2009 and December 31, 2008, the balances of such
loans are $104,511 and Nil respectively.
The
Company declared distribution and paid dividends to the shareholders in 2009.
The balance of dividend payable was $117,360 and Nil as of December 31, 2009 and
2008 respectively, which represented the dividend payable to Mr. Renwei Ma, the
shareholder of the Company.
Related
party transactions
Mr. Tao
Wang entered into the contract with the Company to assume fiscal
responsibilities for all tax liabilities recorded and potential penalties
relating to all tax liabilities before December 31, 2009. As of December 31,
2009 and 2008, the assumed amount was $4,949,466 and $3,799,872, respectively,
which mainly included VAT tax payable and income tax payable. According to PRC
tax law, late or deficient tax payment could subject to significant tax penalty.
On December 25, 2009, the local tax authority in Jimo City issued a “Tax
Review Report”, stating that the tax authority reviewed the Company’s income
tax, VAT tax, stamp tax and invoices for the period between June 2006 and
November 2009 and noting that the Company had paid off all its tax liability by
December 21, 2009.
During
year 2009, the Company advanced to Mr. Tao Wang with the total amount of
$5,723,550.
During
year 2009, the Company distributed $9,432,810 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $4,063,590 was distributed in cash, $5,251,860 was
used to offset advance to Mr. Tao Wang and the remaining $117,360 was the
dividend payable to Mr. Renwei Ma that the Company expects to pay in the first
quarter of 2010.
The
Company leases one of its stores from Mr. Tao Wang under a four-year operating
lease expiring August 2011. For the years ended December 31, 2009 and 2008,
related party rent expense of $17,593 and $17,298, respectively, was included in
total rent expense of the year.
The
Company leases one of its warehouse buildings to Weidong, Liang, brother-in-law
of Mr. Tao Wang, for three years starting May 2008. Per the agreement, the
lessee shall pay equal amount of advertising expense on behalf of the lessor as
the lease payment. For the year ended December 31, 2009 and 2008, the Company
recorded other income of $87,966 and $57,660, respectively, from leasing the
aforementioned building and advertising expense of the same amount
respectively.
NOTE
10 – OPERATING LEASES
The
Company leases store spaces under noncancelable operating leases expiring at
various dates through 2013. Rent expense was $90,165 and $88,652 for the years
ended December 31, 2009 and 2008, respectively.
Future
minimum lease payments at December 31, 2009 are as follows:
Year:
|
|
|
|
2010
|
|
|
86,647
|
|
2011
|
|
|
50,727
|
|
2012
|
|
|
8,797
|
|
2013
|
|
|
4,398
|
|
|
|
$
|
150,569
|
|
NOTE
11 - INCOME TAX
The
Company is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% on
income reported in the statutory financial statements after appropriated tax
adjustments in 2009 and 2008 respectively.
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
6,758,786
|
|
|
$
|
4,847,596
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
1,689,697
|
|
|
$
|
1,211,899
|
|
There is
no significant temporary difference between book and tax income.
The
Company has no United States corporate income tax liabilities as of December 31,
2009 and 2008.
The
following table reconciles the U.S. statutory corporate income rates to the
Company’s effective tax rate for the years ended December 31, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
US
statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Tax
rate difference
|
|
|
(9.0
|
)%
|
|
|
(9.0
|
)%
|
|
|
|
|
|
|
|
|
|
Tax
per financial statements
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
NOTE
12 – SHAREHOLDERS’ EQUITY
During
year 2009, the Company distributed $9,432,810 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $4,063,590 was distributed in cash, $5,251,860 was
used to offset advance to Mr. Tao Wang and the remaining $117,360 was the
dividend payable to Mr. Renwei Ma that the Company expects to pay in the first
quarter of 2010.
During
year 2008, the Company distributed $1,874,600 to its two owners, Mr. Tao Wang
and Mr. Renwei Ma.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Social
insurance for employees
According
to the prevailing laws and regulations of the PRC, the Company is required to
cover its employees with medical, retirement and unemployment insurance
programs. Management believes that due to the transient nature of its
employees, the Company does not need to provide all employees with such social
insurances, and has paid the social insurances for the Company’s employees who
have completed three months’ continuous employment with the
Company.
In the
event that any current or former employee files a complaint with the PRC
government, the Company may be subject to making up the social insurances as
well as administrative fines. As the Company believes that these fines
would not be material, no provision has been made in this
regard.
Guarantees
As of
December 31, 2009 and 2008, the Company provided corporate guarantees for bank
loans borrowed by two unrelated companies incorporated in the PRC (
“
Company A and
B
”
).
Associated with the corporate guarantee, Company A and B also provided cross
guarantees for the JMRB bank loans of $293,400 borrowed by the Company (Note 7).
If Company A and B default on the repayment of their bank loans when they fall
due, the Company is required to repay the outstanding balance. As of
December 31, 2009, the guarantee provided for the bank loans borrowed by Company
A and B were approximately RMB 1,000,000 ($293,400) and RMB 1,000,000
($146,700), respectively. As of December 31, 2008, the guarantee provided for
the bank loans borrowed by Company A and B were approximately RMB 500,000
($73,350) and RMB 1,200,000 ($176,040), respectively.
The
guarantee period is from
January
2008 to December 2009. The
Company’s management considered the risk
of default by Company A and B is remote and therefore no liability for the
guarantor’s obligation under the guarantee was recognized as of December 31,
2009. No fee was paid to Company A and B for their guarantee.
Tax
liabilities
The tax
authority of the PRC Government conducts periodic and ad hoc tax filing reviews
on business enterprises operating in the PRC after those enterprises had
completed their relevant tax filings, hence the Company’s tax filings may not be
finalized. It is therefore uncertain as to whether the PRC tax authority
may take different views about the Company’s tax filings which may lead
to additional tax liabilities.
Mr. Tao
Wang entered into the contract with the Company to assume fiscal
responsibilities for all tax liabilities recorded and potential penalties
relating to all the tax liabilities before December 31, 2009. As of
December 31, 2009 and 2008, the assumed amount was $4,949,466 and $3,799,872,
respectively, which mainly included VAT tax payable and income tax payable.
According to PRC tax law, late or deficient tax payment could subject to tax
penalty. On December 25, 2009, the local tax authority in Jimo City issued
a “Tax Review Report”, stating that the tax authority reviewed the Company’s
income tax, VAT tax, stamp tax and invoices for the period between June 2006 and
November 2009 and noting that the Company had paid off all its tax
liability by December 21, 2009.
NOTE
14 - OPERATING RISKS
(a)
Country risk
The
Company has significant investments in the PRC. The operating results of the
Company may be adversely affected by changes in the political and social
conditions in the PRC and by changes in Chinese government policies with respect
to laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. The
Company can give no assurance that those changes in political and other
conditions will not result in a material adverse effect upon the Company’s
business and financial condition.
(b)
Exchange risk
The
Company cannot guarantee the Renminbi, US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on
changes in the political and economic environments without notice.
(c)
Interest risk
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company
does not have any derivative financial instruments as of December 31, 2009 and
2008 and believes its exposure to interest rate risk is not
material.
NOTE
15 – CONCENTRATION
During
the years ended December 31, 2009 and 2008, the sales generated by the Company’s
owned stores accounted for 15.6% and 15% of total sales,
respectively.
NOTE
16 - SUBSEQUENT EVENTS
On
February 12, 2010, the Company entered into and closed a Share Purchase and
Exchange Agreement (the “Exchange Agreement”) with Datone, Inc., a Delaware
public shell company. Pursuant to the Exchange Agreement, Datone, Inc. acquired
all of the outstanding shares of the Company. In exchange, Datone, Inc. issued
to the Company shareholders, their designees or assigns, 10,000 shares of
its Series A Preferred stock, which constituted 97% of its issued and
outstanding capital stock on an as-converted to common stock basis as of and
immediately after the consummation of the transactions contemplated by the
Exchange Agreement Therefore, the Company became a wholly-owned subsidiary of
Datone, Inc. The share exchange resulted in a change in control of Datone,
Inc. The transaction is deemed as a reverse merger and the Company
is deemed as the accounting acquirer.
The
Company obtained an eleven-month loan from JMRB in January 2010, with principal
amount of $440,100 bearing monthly interest of 0.66375% and matures in December
2010.
Series A
Convertible Preferred Stock
The
Company issued 10,000 shares of our Series A Preferred Stock in February 2010
related to the reverse merger.
Shares of
Series A Preferred Stock had automatically convert into shares of common stock
on the basis of one share of Series A Preferred Stock for 970 shares of common
stock immediately subsequent to the effectiveness of a planned 1-for-27 reverse
split of the Company’s outstanding common stock, which had become effective on
June 10, 2010. Upon the reverse split the 10,000 outstanding shares
of Series A Preferred Stock had automatically convert into 9,700,000 shares of
common stock, which constitutes 97% of the outstanding common stock of the
Company subsequent to the reverse stock split.
Holders
of Series A Preferred Stock vote with the holders of common stock on all matters
on an as-converted to common stock basis, based on an assumed post 1-for-27
reverse split (to retroactively take into account the reverse stock
split).
Following
the effectiveness of the Reverse Stock Split and conversion of Series A
Preferred Stock into common stock, there are approximately 10,000,000 shares of
our common stock issued and outstanding and no shares of preferred stock issued
and outstanding.
For
accounting purposes, we treated the series A convertible preferred stock as
being converted fully to common stock on a post reverse stock split
basis.
The
1-for-27 Reverse Stock Split
The
Company’s board of directors unanimously approved, subject to stockholder
approval, the 1-for-27 Reverse Split of our issued and outstanding common stock.
The reverse split will reduce the number of issued and outstanding shares of the
Company’s common stock outstanding prior to the split. The reverse split
increases the total number of issued and outstanding shares of the Company’s
common stock subsequent to the split by triggering the automatic conversion of
the Company’s Series A Preferred Stock into 9,700,000 shares of common stock.
The reverse split had become effective on June 10, 2010, the date when the
Company filed with the Secretary of State of the State of Delaware
following the expiration of the 20 day period mandated by Rule 14c of the
Exchange Act. On June 10, 2010, 27 shares of Common Stock had automatically been
combined and changed into one share of common stock.
For
counting purposes, we treated the reverse stock split as being effective and all
shares are retroactively restated to reflect the reverse stock
split.
QINGDAO
FOOTWEAR, INC.
Shares
of Common Stock
833,333
Share Minimum
1,000,000
Share Maximum
Prospectus
Anderson &
Strudwick,
Incorporated
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13.
|
Other
Expenses of Issuance and
Distribution.
|
The
estimated expenses payable by us in connection with the offering described in
this registration statement (other than the underwriting discounts and
commissions) will be as follows. With the exception of the filing fees for the
U.S. Securities Exchange Commission, FINRA and NASDAQ, all amounts are
estimates.
U.S.
Securities Exchange Commission registration fee
|
|
$
|
480
|
|
FINRA
filing fee
|
|
$
|
1,173
|
|
NASDAQ
listing fee
|
|
$
|
50,000
|
|
Legal
fees and expenses
|
|
$
|
225,000
|
|
Accounting
fees and expenses
|
|
$
|
15,000
|
|
Printing
fees
|
|
$
|
25,000
|
|
Miscellaneous
|
|
$
|
3,347
|
|
|
|
|
|
|
Total
|
|
$
|
320,000
|
|
Item
14.
|
Indemnification
of Directors and Officers
|
Section
145 of the Delaware General Corporation Law authorizes a corporation’s board of
directors to grant, and authorizes a court to award, indemnity to officers,
directors and other corporate agents.
As
permitted by Section 102(b)(7) of the Delaware General Corporation Law, the
Company’s certificate of incorporation includes provisions that eliminate the
personal liability of its directors for monetary damages for breach of their
fiduciary duty as directors. To the extent Section 102(b)(7) is interpreted, or
the Delaware General Corporation Law is amended, to allow similar protections
for officers of a corporation, such provisions of the Company’s certificate of
incorporation shall also extend to those persons. In addition, we have entered
into Indemnification Agreements with our Directors, which provide for similar
rights.
In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the bylaws, certificate of incorporation and Indemnification Agreements of the
Company provide that:
|
·
|
The
Company shall indemnify its directors and officers for serving the Company
in those capacities or for serving other business enterprises at the
Company’s request, to the fullest extent permitted by Delaware law.
Delaware law provides that a corporation may indemnify such person if such
person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Company and, with
respect to any criminal proceeding, had no reasonable cause to believe
such person’s conduct was
unlawful.
|
|
·
|
The
Company may, in its discretion, indemnify employees and agents in those
circumstances where indemnification is permitted by applicable
law.
|
|
·
|
The
Company is required to advance expenses, as incurred, to its directors and
officers in connection with defending a proceeding, except that such
director or officer shall undertake to repay such advances if it is
ultimately determined that such person is not entitled to
indemnification.
|
|
·
|
The
Company will not be obligated pursuant to the bylaws to indemnify a person
with respect to proceedings initiated by that person, except with respect
to proceedings authorized by the Company’s board of directors or brought
to enforce a right to
indemnification.
|
|
·
|
The
rights conferred in the bylaws are not exclusive, and the Company is
authorized to enter into indemnification agreements with its directors,
officers, employees and agents and to obtain insurance to indemnify such
persons.
|
|
·
|
The
Company may not retroactively amend the bylaw provisions to reduce its
indemnification obligations to directors, officers, employees and
agents.
|
These
indemnification provisions may be sufficiently broad to permit indemnification
of the Company’s officers and directors for liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933. The
Company may at the discretion of the board of directors purchase and maintain
insurance on behalf of any person who holds or who has held any position
identified in the paragraph above against any and all liability incurred by such
person in any such position or arising out of his status as such.
Insofar
as indemnification by us for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling the company pursuant
to provisions of our articles of incorporation and bylaws, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
In the event that a claim for indemnification by such director, officer or
controlling person of us in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item
15.
|
Recent
Sales of Unregistered Securities
|
On
February 10, 2010, we issued 3,136,768 shares of common stock to our landlord to
extinguish approximately $47,052 of debt owed to Callaway Properties, our pre
reverse acquisition landlord. Callaway Properties’ sole shareholder is Mary
Passalaqua, wife of the Company’s former director and former secretary Joseph
Passalaqua.
On
February 12, 2010, we issued 10,000 shares of our Series A Convertible Preferred
stock (“Series A Preferred Stock”) to the shareholders of Glory Reach. The total
consideration for the 10,000 shares of our Series A Convertible Preferred stock
was 10,000 ordinary shares of Glory Reach, which is all the issued and
outstanding capital stock of Glory Reach. The number of our shares issued to the
shareholders of Glory Reach was determined based on an arms-length
negotiation. The issuance of our shares to these shareholders was
made in reliance on the exemption provided by Section 4(2) of the Securities Act
for the offer and sale of securities not involving a public offering and
Regulation D promulgated thereunder.
We
issued securities on February 10 and 12, 2010 in reliance upon Rule 506 of
Regulation D of the Securities Act. These shareholders who received the
securities in such instances made representations that (a) the shareholder
is acquiring the securities for his, her or its own account for investment and
not for the account of any other person and not with a view to or for
distribution, assignment or resale in connection with any distribution within
the meaning of the Securities Act, (b) the shareholder agrees not to sell
or otherwise transfer the purchased shares unless they are registered under the
Securities Act and any applicable state securities laws, or an exemption or
exemptions from such registration are available, (c) the shareholder has
knowledge and experience in financial and business matters such that he, she or
it is capable of evaluating the merits and risks of an investment in us,
(d) the shareholder had access to all of our documents, records, and books
pertaining to the investment and was provided the opportunity ask questions and
receive answers regarding the terms and conditions of the offering and to obtain
any additional information which we possessed or were able to acquire without
unreasonable effort and expense, and (e) the shareholder has no need for
the liquidity in its investment in us and could afford the complete loss of such
investment. Management made the determination that the investors in instances
where we relied on Regulation D are accredited investors (as defined in
Regulation D) based upon management’s inquiry into their sophistication and net
worth. In addition, there was no general solicitation or advertising for
securities issued in reliance upon Regulation D.
In
instances described above where we indicate that we relied upon Section 4(2) of
the Securities Act in issuing securities, our reliance was based upon the
following factors: (a) the issuance of the securities was an isolated
private transaction by us which did not involve a public offering;
(b) there were only a limited number of offerees; (c) there were no
subsequent or contemporaneous public offerings of the securities by us;
(d) the securities were not broken down into smaller denominations; and
(e) the negotiations for the sale of the stock took place directly between
the offeree and us.
On
June 10, 2010, we effected a 1-for-27 reverse split of our outstanding common
stock, which resulted in 8,100,000 shares of common stock being converted into
300,000 shares of common stock, representing 3% of our currently outstanding
common stock. After the completion of the reverse split, shares of
our Series A Preferred Stock automatically converted into shares of common stock
on the basis of 1 share of Series A Preferred Stock for 970 shares of common
stock. This resulted in the automatic conversion of the 10,000 outstanding
shares of Series A Preferred Stock into 9,700,000 shares of common stock,
constituting 97% of our currently outstanding common
stock.
Item
16.
|
Exhibits
and Financial Statement Schedules
|
(a)
Exhibits
The
following exhibits are filed herewith or incorporated by reference in this
prospectus:
|
|
|
|
|
1.1
|
|
Form
of Underwriting Agreement
(1)
|
|
|
2.1
|
|
Share
Exchange Agreement, dated February 12, 2010, among Datone, Glory Reach,
QHS, the shareholders of Glory Reach, and Greenwich Holdings LLC
(2)
|
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the Registrant
(3)
|
|
|
3.2
|
|
Bylaws
of the Registrant
(3)
|
|
|
|
3.3
|
|
Certificate
of Designation of Series A Voting Convertible Preferred Stock, as filed
with the Delaware Secretary of State on February 11, 2010
(2)
|
|
|
|
3.4
|
|
Certificate
of Amendment of Certificate of Incorporation dated June 1, 2010
(1)
|
|
|
4.1
|
|
Specimen
Share Certificate
(4)
|
|
|
4.2
|
|
Form
of Underwriter Warrant (included in Ex. 10.1)
(1)
|
|
|
5.1
|
|
Form
of Opinion of Kaufman & Canoles, P.C., Virginia counsel
(4)
|
|
|
10.1
|
|
Form
of Underwriter Warrant Agreement
(1)
|
|
|
10.2
|
|
Form
of Lock-Up Agreement
(5)
|
|
|
10.3
|
|
Form
of Distributor Contract (translated)
(2)
|
|
|
|
10.4
|
|
Form
of Purchase Contract (translated)
(2)
|
|
|
|
10.5
|
|
Asset
Transfer Agreement between QHS and Tao Wang (translated)
(2)
|
|
|
|
10.6
|
|
Form
of Director Indemnification Agreement
(2)
|
|
|
|
10.7
|
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations
(2)
|
|
|
|
10.8
|
|
Form
of Escrow Agreement
(1)
|
|
|
|
10.9
|
|
Employment
Agreement - Mr. Tao Wang
(1)
|
|
|
|
10.10
|
|
Entrustment
Agreement
(1)
|
|
|
|
10.11
|
|
Incentive
Option Agreement
(1)
|
|
|
|
10.12
|
|
Tax
Liability Agreement
(1)
|
|
|
|
21.1
|
|
Subsidiaries
and Affiliates of the Registrant
(6)
|
|
|
23.1
|
|
Consent
of MaloneBailey, LLP
(1)
|
|
|
23.2
|
|
Consent
of Kaufman & Canoles, Virginia counsel (included in Exhibit 5.1)
(4)
|
|
|
24.1
|
|
Power
of Attorney (included at page II-6)
(5)
|
|
|
99.1
|
|
Code
of Business Conduct and Ethics
(1)
|
|
|
|
99.2
|
|
Consent
of Prospective Directors
(1)
|
(2)
|
Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on February 12, 2010, as amended on
August 2, 2010, and incorporated herein by this
reference.
|
(3)
|
Filed
as an exhibit to the Company’s registration statement on Form 10-SB, as
filed with the Securities and Exchange Commission on February 1, 2008, and
incorporated herein by this
reference.
|
(4)
|
To
be filed by amendment.
|
(5)
|
Previously
filed.
|
(6)
|
Filed
as an exhibit to the Company’s registration statement on Form 10-K, as
filed with the Securities and Exchange Commission on March 30, 2010, as
amended on August 2, 2010, and incorporated herein by this
reference.
|
(b)
Financial Statement Schedules
None.
The
Registrant hereby undertakes:
|
(a)
|
to
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
to:
|
|
(i)
|
include
any prospectus required by section 10(a)(3) of the Securities
Act;
|
|
(ii)
|
reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth
in the “Calculation of Registration Fee” table in the effective
registration statement; and
|
|
(iii)
|
include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration
statement.
|
|
(b)
|
that,
for the purpose of determining any liability under the Securities Act,
each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
|
(c)
|
to
file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the
offering.
|
|
(d)
|
that
insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
SEC, such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registration of expenses incurred or paid by a director, officer or
controlling person to the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such
issue.
|
|
(e)
|
that,
for the purpose of determining liability under the Securities Act to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made
in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to
such first use, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
|
|
(f)
|
that,
for the purpose of determining liability of the Registrant under the
Securities Act to any purchaser in the initial distribution of the
securities, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the Registrant
will be a seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
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(i)
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any
preliminary prospectus or prospectus of the Registrant relating to the
offering filed pursuant to Rule
424;
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(ii)
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any
free writing prospectus relating to the offering prepared by or on behalf
of the Registrant or used or referred to by the
Registrant;
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(iii)
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the
portion of any other free writing prospectus relating to the offering
containing material information about the Registrant or its securities
provided by or on behalf of the Registrant;
and
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(iv)
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any
other communication that is an offer in the offering made by the
Registrant to the purchaser.
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SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the People’s Republic of China, on August 2,
2010.
QINGDAO
FOOTWEAR, INC.
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By:
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/
S
/ Tao Wang
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Name:
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Tao
Wang
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Title:
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Chief
Executive Officer
(Principal
Executive Officer)
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Date:
August
2, 2010
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Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
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Chief
Executive Officer and Director (Principal
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August 2,
2010
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Executive
Officer)
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Chief
Financial Officer (Principal Accounting and
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August 2,
2010
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Financial
Officer)
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Director
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August 2,
2010
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Director
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August 2,
2010
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Lanhai
Sun
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*
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By:
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/s/
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Tao Wang
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Tao
Wang, attorney in fact
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Exhibit
Index
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1.1
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Form
of Underwriting Agreement
(1)
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2.1
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Share
Exchange Agreement, dated February 12, 2010, among Datone, Glory Reach,
QHS, the shareholders of Glory Reach, and Greenwich Holdings LLC
(2)
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3.1
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Amended
and Restated Certificate of Incorporation of the Registrant
(3)
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3.2
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Bylaws
of the Registrant
(3)
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3.3
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Certificate
of Designation of Series A Voting Convertible Preferred Stock, as filed
with the Delaware Secretary of State on February 11, 2010
(2)
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3.4
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Certificate
of Amendment of Certificate of Incorporation dated June 1, 2010
(1)
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4.1
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Specimen
Share Certificate
(4)
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4.2
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Form
of Underwriter Warrant (included in Ex. 10.1)
(1)
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5.1
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Form
of Opinion of Kaufman & Canoles, P.C., Virginia counsel
(4)
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10.1
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Form
of Underwriter Warrant Agreement
(1)
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10.2
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Form
of Lock-Up Agreement
(5)
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10.3
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Form
of Distributor Contract (translated)
(2)
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10.4
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Form
of Purchase Contract (translated)
(2)
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10.5
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Asset
Transfer Agreement between QHS and Tao Wang (translated)
(2)
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10.6
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Form
of Director Indemnification Agreement
(2)
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10.7
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Agreement
of Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations
(2)
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10.8
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Form
of Escrow Agreement
(1)
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10.9
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Employment
Agreement - Mr. Tao Wang
(1)
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10.10
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Entrustment
Agreement
(1)
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10.11
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Incentive
Option Agreement
(1)
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10.12
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Tax
Liability Agreement
(1)
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21.1
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Subsidiaries
and Affiliates of the Registrant
(6)
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23.1
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Consent
of MaloneBailey, LLP
(1)
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23.2
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Consent
of Kaufman & Canoles, Virginia counsel (included in Exhibit 5.1)
(4)
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24.1
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Power
of Attorney (included at page II-6)
(5)
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99.1
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Code
of Business Conduct and Ethics
(1)
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99.2
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Consent
of Prospective Directors
(1)
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(2)
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Filed
as an exhibit to the Company’s current report on Form 8-K, as filed with
the Securities and Exchange Commission on February 12, 2010, as amended on
August 2, 2010, and incorporated herein by this
reference.
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(3)
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Filed
as an exhibit to the Company’s registration statement on Form 10-SB, as
filed with the Securities and Exchange Commission on February 1, 2008, and
incorporated herein by this
reference.
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(4)
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To
be filed by amendment.
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(5)
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Previously
filed.
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(6)
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Filed
as an exhibit to the Company’s registration statement on Form 10-K, as
filed with the Securities and Exchange Commission on March 30, 2010, as
amended on August 2, 2010, and incorporated herein by this
reference.
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Qingdao Footwear (CE) (USOTC:QING)
과거 데이터 주식 차트
부터 5월(5) 2024 으로 6월(6) 2024
Qingdao Footwear (CE) (USOTC:QING)
과거 데이터 주식 차트
부터 6월(6) 2023 으로 6월(6) 2024