ITEM 1. FINANCIAL
STATEMENTS
QINGDAO FOOTWEAR,
INC.
CONSOLIDATED BALANCE
SHEETS
AS OF JUNE 30, 2010 AND DECEMBER 31,
2009
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
(Restated)
|
|
|
(Re
stated)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
|
|
$
|
414,350
|
|
|
$
|
61,131
|
|
Accounts
receivable
|
|
|
360,934
|
|
|
|
98,962
|
|
Notes
receivable
|
|
|
460,313
|
|
|
|
-
|
|
Inventories
|
|
|
557,031
|
|
|
|
344,512
|
|
Prepaid
expenses
|
|
|
651,854
|
|
|
|
5
7,311
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
2,444,482
|
|
|
|
561,916
|
|
|
|
|
|
|
|
|
|
|
Long term prepaid
expenses
|
|
|
1,668,725
|
|
|
|
-
|
|
Property, plant and equipment,
net
|
|
|
1,022,594
|
|
|
|
930,451
|
|
Intangible
assets
|
|
|
3,873,744
|
|
|
|
2
08,167
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
9,009,545
|
|
|
$
|
1,700,534
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS
’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
21,261
|
|
|
$
|
15,727
|
|
Accrue
d
liabilities
|
|
|
1,056,441
|
|
|
|
-
|
|
Short term
loans
|
|
|
1,163,670
|
|
|
|
718,830
|
|
Taxes
payable
|
|
|
15,639,453
|
|
|
|
12,551,687
|
|
|
|
|
|
|
|
|
|
|
Due
to related
parties
|
|
|
-
|
|
|
|
117,360
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
17,880,825
|
|
|
|
13,403,604
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
250,410
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
18,131,235
|
|
|
$
|
13,652,994
|
|
|
|
|
|
|
|
|
|
|
Shareholders
’
Equity
|
|
|
|
|
|
|
|
|
Series A preferred stock, .0001
par value, 10,000,000 shares authorized, none issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, .0001 par value,
100,000,000 shares authorized,
10,000,000 and 9,700,000 shares
issued and outstanding, respectively
|
|
|
1,000
|
|
|
|
970
|
|
Additional paid-in
capital
|
|
|
762,091
|
|
|
|
319,510
|
|
Accumulated other comprehensive
income
|
|
|
455,031
|
|
|
|
440,775
|
|
Retained earnings
(deficits)
|
|
|
(
10,339,812
|
)
|
|
|
(
12,713,715
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders
’
Equity
|
|
$
|
(
9,121,690
|
)
|
|
$
|
(
11,952,460
|
)
|
Total Liabilities and
Shareholders' Equity
|
|
$
|
9,009,545
|
|
|
$
|
1,700,534
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
QINGDAO FOOTWEAR,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2010 AND 2009
UNAUDITED
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,483,625
|
|
|
$
|
5,143,578
|
|
|
$
|
11,249,437
|
|
|
$
|
9,599,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
|
3,422,563
|
|
|
|
2,923,413
|
|
|
|
6,079,318
|
|
|
|
5,445,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
3,061,062
|
|
|
|
2,220,165
|
|
|
|
5,170,119
|
|
|
|
4,153,725
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
402,142
|
|
|
|
230,913
|
|
|
|
1,104,863
|
|
|
|
449,460
|
|
Depreciation and Amortization
Expense
|
|
|
41,312
|
|
|
|
13,125
|
|
|
|
59,317
|
|
|
|
26,258
|
|
Income from
operations
|
|
|
443,454
|
|
|
|
1,976,127
|
|
|
|
4,005,939
|
|
|
|
3,678,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
|
22,009
|
|
|
|
21,994
|
|
|
|
44,007
|
|
|
|
43,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
18,498
|
|
|
|
180
|
|
|
|
18,587
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(26,261
|
)
|
|
|
(13,892
|
)
|
|
|
(49,167
|
)
|
|
|
(27,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
2,631,854
|
|
|
|
1,984,409
|
|
|
|
4,109,366
|
|
|
|
3,695,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
657,964
|
|
|
|
494,902
|
|
|
|
1,115,495
|
|
|
|
922,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,973,890
|
|
|
$
|
1,489,507
|
|
|
$
|
2,903,871
|
|
|
$
|
2,772
,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic and
diluted
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding-basic and diluted
|
|
|
10,000,000
|
|
|
|
9,700,000
|
|
|
|
10,
000,000
|
|
|
|
9,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,973,890
|
|
|
$
|
1,489,507
|
|
|
$
|
2,903,871
|
|
|
$
|
2,772,675
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
|
|
|
13,915
|
|
|
|
(1,234
|
)
|
|
|
14,256
|
|
|
|
(7,939
|
)
|
Comprehensive
income
|
|
$
|
1,987,805
|
|
|
$
|
1,488,273
|
|
|
$
|
2,918,127
|
|
|
$
|
2,764,736
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
QINGDAO FOOTWEAR,
INC.
CONSOLIDATED STATEM
ENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010
AND 2009
UNAUDITED
|
|
Six Months Ended
|
|
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
2,903,871
|
|
|
$
|
2,772
,675
|
|
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
59,317
|
|
|
|
26,258
|
|
Stock based
compensation
|
|
|
442,611
|
|
|
|
-
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(261,567
|
)
|
|
|
(40,637
|
)
|
Accrued interest on notes
receivable
|
|
|
(18,413
|
)
|
|
|
-
|
|
Inventories
|
|
|
(211,109
|
)
|
|
|
(39,869
|
)
|
Prepaid
expenses
|
|
|
(2,263,033
|
)
|
|
|
(50,912
|
)
|
Accounts payable and accrued
liabi
lities
|
|
|
38,456
|
|
|
|
17,105
|
|
Tax payable
|
|
|
3,040,504
|
|
|
|
2,681,288
|
|
Net cash provided by operating
activities
|
|
|
3,730,637
|
|
|
|
5,365,908
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Loan made to
other
|
|
|
(441,9
00
|
)
|
|
|
-
|
|
Advance to related
party
|
|
|
(117,840
|
)
|
|
|
-
|
|
Cash paid for property and
equipment
|
|
|
(130,127
|
)
|
|
|
(373,302
|
)
|
Cash paid for intangible
asset
|
|
|
(2,659,045
|
)
|
|
|
-
|
|
Net cash used in investing
activities
|
|
|
(3,
348,912
|
)
|
|
|
(3
73
,
30
2
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Distribution to
shareholders
|
|
|
(
483,143
|
)
|
|
|
(
4,854,72
8
|
)
|
Proceeds from
loans
|
|
|
441,900
|
|
|
|
-
|
|
Net cash
used
in
financing
activities
|
|
|
(
41
,
243
|
)
|
|
|
(
4,854,72
8
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
12,737
|
|
|
|
(1,498
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in
cash
|
|
$
|
353,219
|
|
|
$
|
136,380
|
|
|
|
|
|
|
|
|
|
|
Cash, be
ginning of
period
|
|
|
61,131
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
Cash, end of
period
|
|
$
|
414,350
|
|
|
$
|
254,914
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
49,167
|
|
|
$
|
27,391
|
|
Income tax
paid
|
|
$
|
1,149
|
|
|
$
|
1,052
|
|
The accompanying notes are an integral
part of these consolidated financial
statements.
QINGDAO FOOTWEAR,
INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BUSINESS
OPERATIONS
Qingdao Footwear, Inc. (formerly
Dat
one, 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 D
a
tone, Inc. On February 1, 2008,
Datone, Inc. filed a registration statement on Form 10-SB, which went effective
on November 13, 2008.
On February 12, 2010, the Company
completed a reverse acquisition transaction through a share exchange with Glory
Reach
International
Limited, a Hong Kong limited company (“
Glory Reach”
), the shareholders of Glory Reach (the
“
Shareholders”
), Greenwich Holdings LLC and Qingdao
Shoes, whereby the Company acquired 100% of the issued and outstanding capital
stock of Glory Reac
h
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.
F
ollowing 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
t
he 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 o
wned 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
bra
n
d 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 consolidate
d
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 stat
e
ments.
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of
Presentation
These accompanying unaudited interim
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the
United States of America and the rules
of the Securities and Exchange Commission, and should be read
in conjunction with the December 31, 2009 audited financial statements of
the Company and the notes thereto as included in the Company
’
s Form PRER14C file
d
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. Th
e
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 Decembe
r
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
ass
ets 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 a
t
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
princip
ally of cash and
trade receivables. As of June 30, 2010 and December 31, 2009,
substantially all of the Company
’
s cash were held by major financial
institutions located in the PRC, which management believes are of high credit
quality. With respect to tr
a
de 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 g
eographic region. Although the PRC
is economically stable, it is always possible that unanticipated events in
foreign countries could disrupt the Company
’
s operations.
Land Use Rights
According to the laws of China, the
government owns all the land in Ch
ina. Companies or individuals are
authorized to possess and use the land only through land use rights granted by
the Chinese government. Land use rights are being amortized using the
straight-line method over the lease term of the rights.
The Company paid
in advance for the lease of two parcels
of land consisting of approximately $243,000 and $3,682,000 for 50-year and
60-year time period, respectively. The lease period began during 2003 and 2010
and expire during 2053 and 2070, respectively. The amount i
s
being amortized and recorded as expense
over the 50-year and 60-year terms of the leases,
respectively.
Comprehensive Income
The Company has adopted the provisions
of ASC 220 “
Reporting
Comprehensive Income”
which
establishes standards for the reporting
and display of comprehensive income,
its components and accumulated balances in a full set of general purpose
financial statements.
ASC 220 defines comprehensive income is
comprised of net income and all changes to the statements of
stockholders
’
equity,
except those due to investments by
stockholders, changes in paid-in capital and distributions to stockholders,
including adjustments to minimum pension liabilities, accumulated foreign
currency translation, and unrealized gains or losses on marketable
se
c
urities. 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 product
s 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
pr
a
ctice 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
d
a
te 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
t
o 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 re
venues 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 v
a
lue 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 pr
oduct is shipped and title passes to the
customer on an FOB shipping point basis. Wholesale prices are predetermined and
fixed based on contractual agreements. The Company does not allow any discounts,
credits, rebates or similar privileges.
Earnings per
Share
Basic earnings per share is computed by
dividing net income by weighted average number of shares of common stock
outstanding during each period. Diluted earnings per share is
computed by dividing net income by the weighted average number of
shares
of common stock,
common stock equivalents and potentially dilutive securities outstanding during
each period. At June 30, 2010 and December 31, 2009, respectively,
the Company had no common stock equivalents that could potentially dilute future
earnings
per share.
NOTE 3
–
NOTES RECEIVABLE
The Company advanced $440,100 to a third
party in January 2010. The note receivable carries annual interest at 10% and
matured in July 2010.
NOTE 4
–
PREPAID EXPENSES
Prepaid expenses consist of the
following as of
June 30,
2010 and December 31, 2009:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
Prepaid
rent
|
|
$
|
693,758
|
|
|
$
|
18,778
|
|
Prepaid advertising
fee
|
|
|
1,237,188
|
|
|
|
-
|
|
Prepaid maintenance
fee
|
|
|
349,838
|
|
|
|
-
|
|
Prepaid miscellaneous
fee
|
|
|
39,795
|
|
|
|
38,533
|
|
|
|
$
|
2,320,579
|
|
|
$
|
57,311
|
|
Minus: current
portion
|
|
|
651,854
|
|
|
|
57,311
|
|
Long term
portion
|
|
|
1,668,725
|
|
|
|
-
|
|
Long term prepaid rent is for a new
15-year retail store lease. The whole amount of the lease was prepaid. Long
te
rm advertising prepayment
is for advertisement contracts with period ranging from two to five years. The
whole contracts amounts were prepaid. Long term maintenance prepayment is for a
five-year landscaping maintenance contract and the whole contract was
p
repaid.
NOTE 5
–
INTANGIBLE ASSETS
Intangible assets consist of the
following land use right as of June 30, 2010 and December 31,
2009:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
Cost of land use
right
|
|
|
3,925,545
|
|
|
|
242,055
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated
amortization
|
|
|
51,801
|
|
|
|
33,888
|
|
|
|
|
|
|
|
|
|
|
Land use rights,
net
|
|
$
|
3,873,744
|
|
|
$
|
208,167
|
|
Amortization expense for the three and
six months ended June 30, 2010 and 2009 was $16,491, $17,70
1, $1,210 and $2,420,
respectively.
Amortization expense for the next five
years and thereafter is as follows:
2010 (for the remaining six
months)
|
|
$
|
32,980
|
|
2011
|
|
|
65,962
|
|
2012
|
|
|
65,962
|
|
2013
|
|
|
65,962
|
|
2014
|
|
|
65,962
|
|
2015
|
|
|
65,962
|
|
Thereafter
|
|
|
3,510,954
|
|
Total
|
|
$
|
3,873,744
|
|
In April 2010, the Company purchased
land use rights in Jimo, Shandong Province for $3,682,500. By June 30, 2010,
$2,659,045 has been paid in cash. The company is still in the process of
obtaining the ti
tle of the
land use right.
NOTE 6 - SHORT TERM
LOANS
Short-term loans are due to two
financial institutions which are normally due within one year. As of
June 30, 2010 and December 31, 2009, the Company
’
s short term loans consisted of the
following:
|
|
June 30, 2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
JMRB, two 12-month bank loans both
due in November 2010, bears annual interest at 7.965% average, secured by
third parties
|
|
|
294,600
|
|
|
|
293,400
|
|
|
|
|
|
|
|
|
|
|
BOQ, 12-month bank loan due
in September 2010,
bears annual interest at 6.372% average, pledged by Company
’
s building and land use
right
|
|
|
427,170
|
|
|
|
425,430
|
|
|
|
|
|
|
|
|
|
|
JMRB, 12-month bank loan due
in December 2010, bears annual interest at 7.965% average, secured by
third
parties
|
|
|
441,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total short-term
debt
|
|
$
|
1,163,670
|
|
|
$
|
718,830
|
|
The above indebtedness to JMRB at June
30, 2010 and December 31, 2009 has been guaranteed by two unrelated
companies.
NOTE 7
–
LONG TERM LOANS
O
n December 16, 2009, the Company
entered into a 2-year loan agreement with JMRB. The Company borrowed
$250,410 with an annual interest rate equal to 7.02% and is due in December
2011. The loan is guaranteed by the relatives of Mr. Tao Wang, the
CEO and
m
ajor shareholder of the Company and is
collateralized by the property of his relatives.
NOTE 8- RELATED PARTY BALANCES AND
TRANSCATIONS
Due to related party
At December 31, 2009, the dividend
payable to Mr. Renwei Ma, the shareholder of the Company was $117,360, which was
paid off in the first quarter of 2010.
Due to related party at June 30, 2010 is
nil.
Related party
transactions
The Company leases one of its stores
from Mr. Tao Wang under a four-year operating lease expiring August
2011. For the six months ended June 2010 and 2009, related
pa
rty rent expense of
$8,800 and $8,794, respectively, was included in total rent expense of the
year.
The Company leases one of its warehouse
buildings to Weidong, Liang, brother-in-law of Mr. Tao Wang, for three years
starting May 2008. Per the agreement,
the lessee shall pay equal amount of
advertising expense on behalf of the lessor as the lease payment. For the six
months ended June 30, 2010 and 2009, the Company recorded other income of
$44,007 and $43,971 respectively, from leasing the aforementioned
building and advertising expense of the
same amount respectively.
NOTE 9 - INCOME TAX
The Company is governed by the Income
Tax Law of the PRC concerning the private-run enterprises, which are generally
subject to tax at a statutory rate of 25% on incom
e reported in the statutory financial
statements.
|
|
Six Months
Ended June 30,
2010
|
|
|
Six Months
Ended June 30,
2009
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
$
|
4,019,366
|
|
|
$
|
3,695,300
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
1,115,495
|
|
|
$
|
922,
625
|
|
There is no significant temporary
difference between book and tax income.
The Company has no United
States income tax liabilities as of June 30, 2010 and December 31,
2009.
The following table reconciles the U.S.
statutory corporate income rates
to the Company
’
s effective tax rate for the six months
ended June 30, 2010 and 2009:
|
|
Six Months
Ended June 30,
2010
|
|
|
Six Months
Ended June 30,
2009
|
|
|
|
|
|
|
|
|
U.S. statutory
rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized in
the U
.S.
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
PRC statutory
rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Adjustment for expense on U.S.
Shell
|
|
|
2.8
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effective income tax
rate
|
|
|
27.8
|
%
|
|
|
25.0
|
%
|
NOTE 10
–
SHAREHOLDERS
’
EQUITY
During January 2010, the
Com
pany distributed
$
483,143
to its
shareholders.
During February 2010, upon the closing
of the reverse merger, one of the shareholders transferred 338 of the 874 shares
of Series A Convertible Preferred Stock issued to him under the share exchange
to
certain service
providers of the Company. The underlining common shares were valued at $1.35
(post-reverse split common stock price) per share resulting in stock
compensation expense of $442,611 for the six months ended June 30,
2010.
Series A Convertibl
e 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 spli
t
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 Pre
ferred 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
Re
verse 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
treat
ed 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-2
7 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
o
utstanding 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 da
t
e 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 i
n
to one share of common
stock.
For counting purposes, we treated the
reverse stock split as being effective and all shares are retroactively restated
to reflect the reverse stock split.
NOTE 11
–
COMMITMENTS AND
CONTINGENCIES
Guarantees
As of December 3
1, 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 l
o
ans 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 bor
r
owed 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 a
nd therefore no liability for the
guarantor
’
s obligation under the guarantee was
recognized as of December 31, 2009. No fee was paid to Company A and B for their
guarantee.
As of June 30, 2010, two unrelated
companies incorporated in the PRC provided guar
antees for the JMRB bank loans of
$293,400 borrowed by the Company. The guarantees end when the loans become
mature. (See Note 5)
Tax liabilities
The Company did not pay much of its
significant value added tax liabili
ties and income tax
liabilities
.
T
he 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
i
s 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, the assumed amount was $
12,549,060
which mainly included VAT tax payable
and income tax payable. Ho
wever, these tax amounts transferred to
Mr. Tao Wang were never paid to the government. As a result, the historical
financial statements of the Company were restated to reflect the Company as the
primary obligor of the tax liabilities. Please refer to the
restatement
footnote
13
.
According to PRC tax law, late or
deficient tax payment could subject the Company to significant tax penalty.
NOTE 12 - OPERATING
RISKS
(a) Country
risk
The Company has significant investments
in the PRC. The operating results of the Company may be adversely affected by
changes in the political and social condi
tions 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 assu
r
ance 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
economi
c
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 ra
tes. The Company does not
have any derivative financial instruments as of June 30, 2010 and December 31,
2009 and believes its exposure to interest rate risk is not
material.
(d) Deposit
risk
The Company holds certain bank accounts
in its employees
’
na
me in order to better facilitate its
daily cash needs. Balances of these accounts totaled $345,811 at June 30, 2010
and $7,870 at December 31, 2009. Highest total balance of these accounts during
the six months period ended June 30, 2010 was approximately
$1,060,000 and $1,224,000 for the year
ended December 31, 2009. it is possible that the Company could lose these
deposits due to the fact that these accounts are not legally owned by the
Company.
NOTE 13
–
RESTATEMENTS
The
Company restated the statement of operations for the three months ended June 30,
2010 due to an error in the selling, general and administrative expense. The
amount reported previously $844,753 erroneously included the stock compensation
expense for the amount of $442,611 that incurred in the period of three months
ended March 31, 2010. As a result of the restatement, net income of three months
ended June 30, 2010 increased by $442,611 from $1,531,279 to $1,973,890. EPS for
the period increased from $0.15 per share to $0.20 per share.
The effects of the restating the tax
liabilities
are shown
in the following tables.
QINGDAO
FOOTWEAR, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
UNAUDITED
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
June
30,
|
|
|
|
2010
|
|
|
Adjustment
|
|
|
2010
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
414,350
|
|
|
|
|
|
$
|
414,350
|
|
Accounts
receivable
|
|
|
360,934
|
|
|
|
|
|
|
360,934
|
|
Notes
receivable
|
|
|
460,313
|
|
|
|
|
|
|
460,313
|
|
Inventories
|
|
|
557,031
|
|
|
|
|
|
|
557,031
|
|
Prepaid
expenses
|
|
|
651,854
|
|
|
|
|
|
|
651,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,444,482
|
|
|
|
|
|
|
2,444,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term prepaid expenses
|
|
|
1,668,725
|
|
|
|
|
|
|
1,668,725
|
|
Property,
plant and equipment, net
|
|
|
1,022,594
|
|
|
|
|
|
|
1,022,594
|
|
Intangible
assets
|
|
|
3,873,744
|
|
|
|
|
|
|
3,873,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
9,009,545
|
|
|
|
|
|
$
|
9,009,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
21,261
|
|
|
|
|
|
$
|
21,261
|
|
Accrued liabilities
|
|
|
1,056,441
|
|
|
|
|
|
|
1,056,441
|
|
Short
term loans
|
|
|
1,163,670
|
|
|
|
|
|
|
1,163,670
|
|
Taxes
payable
|
|
|
3,043,141
|
|
|
|
12,596,312
|
|
|
|
15,639,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
5,284,513
|
|
|
|
|
|
|
|
17,880,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
250,410
|
|
|
|
|
|
|
|
250,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
5,534,923
|
|
|
$
|
12,596,312
|
|
|
$
|
18,131,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock, .0001 par value, 10,000,000 shares authorized, none
issued and outstanding
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Common
stock, .0001 par value, 100,000,000 shares authorized, 10,000,000 and
9,700,000 shares issued and outstanding, respectively
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
Additional
paid-in capital
|
|
|
762,091
|
|
|
|
|
|
|
|
762,091
|
|
Accumulated
other comprehensive income
|
|
|
455,031
|
|
|
|
|
|
|
|
455,031
|
|
Retained
earnings (deficits)
|
|
|
2,256,500
|
|
|
|
(12,596,312
|
)
|
|
|
(10,339,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
$
|
3,474,622
|
|
|
|
(12,596,312
|
)
|
|
$
|
(9,121,690
|
)
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
9,009,545
|
|
|
|
0
|
|
|
$
|
9,009,545
|
|
As a result of restatement of the
consolidated balan
ce sheet
as of
June 30
, 2010
, total liabilities increased from
$
5,534,923
as originally reported, to
$
18,131,235
, an increase of $
12,596,312
. The increase of total liabilities was
derived from
the
increase of
taxes
payable
.
The total stockholders
’
equity was restated from $
3,474,622
as originally reported, to
(
$
9,121,690
)
, a
de
crease of $
12,596,312
. The de
crease of total stockholders
’
equity was derived from
the increase
in
retained deficits due to
a reclassification of
the
amount due from
shareholder to
stockholders
’
equity.
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
Adjustment
|
|
|
2010
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,903,871
|
|
|
|
|
|
$
|
2,903,871
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
59,317
|
|
|
|
|
|
|
59,317
|
|
Stock
based compensation
|
|
|
442,611
|
|
|
|
|
|
|
442,611
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(261,567
|
)
|
|
|
|
|
|
(261,567
|
)
|
Accrued
interest on notes receivable
|
|
|
(18,413
|
)
|
|
|
|
|
|
(18,413
|
)
|
Inventories
|
|
|
(211,109
|
)
|
|
|
|
|
|
(211,109
|
)
|
Prepaid
expenses
|
|
|
(2,263,033
|
)
|
|
|
|
|
|
(2,263,033
|
)
|
Accounts
payable and accrued liabilities
|
|
|
38,456
|
|
|
|
|
|
|
38,456
|
|
Tax
payable
|
|
|
3,040,504
|
|
|
|
|
|
|
3,040,504
|
|
Net
cash provided by operating activities
|
|
|
3,730,637
|
|
|
|
|
|
|
3,730,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Loan
made to other
|
|
|
(441,900
|
)
|
|
|
|
|
|
(441,900
|
)
|
Advance
to related party
|
|
|
(222,778
|
)
|
|
|
104,938
|
|
|
|
(117,840
|
)
|
Cash
paid for property and equipment
|
|
|
(130,127
|
)
|
|
|
|
|
|
|
(130,127
|
)
|
Cash
paid for intangible asset
|
|
|
(2,659,045
|
)
|
|
|
|
|
|
|
(2,659,045
|
)
|
Net
cash used in investing activities
|
|
|
(3,453,850
|
)
|
|
|
104,938
|
|
|
|
(3,348,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(378,205
|
)
|
|
|
(104,938
|
)
|
|
|
(483,143
|
)
|
Proceeds
from loans
|
|
|
441,900
|
|
|
|
|
|
|
|
441,900
|
|
Net
cash provided by (used in) financing activities
|
|
|
63,695
|
|
|
|
(104,938
|
)
|
|
|
(41,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
12,737
|
|
|
|
|
|
|
|
12,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
353,219
|
|
|
|
|
|
|
$
|
353,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
61,131
|
|
|
|
|
|
|
|
61,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
414,350
|
|
|
|
|
|
|
$
|
414,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
49,167
|
|
|
|
|
|
|
$
|
49,167
|
|
Income
tax paid
|
|
$
|
1,149
|
|
|
|
|
|
|
$
|
1,149
|
|
As a result of the rest
atement, the net cash
used in investing activities
de
creased by $
104,
938
from $
3,453,850
as originally reported, to
$
3,348,912
; the net cash
provided by financing activities
de
creased by $
104,
938
from $
6
3
,
6
95
as originally reported, to
(
$
4
1
,
243
).
QINGDAO
FOOTWEAR, INC.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
UNAUDITED
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
Adjustment
|
|
|
2009
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,772,675
|
|
|
|
|
|
$
|
2,772,675
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
26,258
|
|
|
|
|
|
|
26,258
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(40,637
|
)
|
|
|
|
|
|
(40,637
|
)
|
Accrued
interest on notes receivable
|
|
|
-
|
|
|
|
|
|
|
-
|
|
Inventories
|
|
|
(39,869
|
)
|
|
|
|
|
|
(39,869
|
)
|
Prepaid
expenses
|
|
|
(50,912
|
)
|
|
|
|
|
|
(50,912
|
)
|
Accounts
payable and accrued liabilities
|
|
|
17,105
|
|
|
|
|
|
|
17,105
|
|
Tax
payable
|
|
|
2,681,288
|
|
|
|
|
|
|
2,681,288
|
|
Net
cash provided by operating activities
|
|
|
5,365,908
|
|
|
|
|
|
|
5,365,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Advance
to related party
|
|
|
(3,243,228
|
)
|
|
|
3,243,228
|
|
|
|
-
|
|
Cash
paid for property and equipment
|
|
|
(373,302
|
)
|
|
|
|
|
|
|
(373,302
|
)
|
Net
cash used in investing activities
|
|
|
(3,616,530
|
)
|
|
|
3,243,228
|
|
|
|
(373,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(1,611,500
|
)
|
|
|
(3,243,228
|
)
|
|
|
(4,854,728
|
)
|
Net
cash used in financing activities
|
|
|
(1,611,500
|
)
|
|
|
(3,243,228
|
)
|
|
|
(4,854,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(1,498
|
)
|
|
|
|
|
|
|
(1,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
136,380
|
|
|
|
|
|
|
$
|
136,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
118,534
|
|
|
|
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
254,914
|
|
|
|
|
|
|
$
|
254,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
27,391
|
|
|
|
|
|
|
$
|
27,391
|
|
Income
tax paid
|
|
$
|
1,052
|
|
|
|
|
|
|
$
|
1,052
|
|
As a result of the restatement, the net
cash
used in investing
activities de
creased by
$
3,243,228
from $
3,
616,530
as originally reported, to $
3
73,302
; the net cash
used in
financing activities
in
creased by $
3,243,228
from $
1,611,500
as originally reported, to
$
4,854,728
.
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 increasing our revenue. Our
designers have historically produced more than 300 unique designs annually
which vary by season and target demographic. We strive to find
innovative styles and technologies to incorporate into our shoes and always meet
the highest and most popular styles for our customers. In the coming
years, we will monitor demand and adjust our products accordingly to
maximize sales and profit.
Ability
to maintain brand recognition and marketing success
We
believe that brand recognition drives consumer product selection. We will
continue to invest our efforts in brand building and establishing Hongguan as a
quality affordable footwear brand rising to the highest fashion standards while
remaining within reach of a smaller budget consumer. We place great
emphasis on our brand and promote Hongguan products through advertisements in
the media, sales fairs and various other promotional activities. We intend to
increase our marketing budgets for promotional activities in the future in order
to further strengthen our brand and market position.
Previous
Organization and Reverse Acquisition
During
fiscal year 2009, our company’s corporate entity, Datone, Inc., was a provider
of both privately owned and company owned payphones and stations in New York.
Datone, Inc. received revenues from the collection of the payphone coinage, a
portion of usage of service from each payphone and a percentage of long distance
calls placed from each payphone from the telecommunications service providers.
In addition, Datone, Inc. also received revenues from the service and repair of
privately owned payphones and 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.
Comparison of Three Months
Ended June 30, 2010 and June 30, 2009
The
following table sets forth key components of our results of operations during
the three months ended June 30, 2010 and 2009, both in dollars and as a
percentage of our net sales.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
6,483,625
|
|
|
|
100
|
%
|
|
$
|
5,143,578
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
3,422,563
|
|
|
|
53
|
%
|
|
|
2,923,413
|
|
|
|
57
|
%
|
Gross
profit
|
|
|
3,061,062
|
|
|
|
47
|
%
|
|
|
2,220,165
|
|
|
|
43
|
%
|
Operating
Expenses
|
|
|
443,454
|
|
|
|
7
|
%
|
|
|
244,038
|
|
|
|
5
|
%
|
Operating
Income
|
|
|
2,617,608
|
|
|
|
40
|
%
|
|
|
1,976,127
|
|
|
|
38
|
%
|
Other
income & interest expense
|
|
|
14,246
|
|
|
|
0
|
%
|
|
|
8,282
|
|
|
|
0
|
%
|
Income
Before Income Taxes
|
|
|
2,631,854
|
|
|
|
41
|
%
|
|
|
1,984,409
|
|
|
|
39
|
%
|
Income
taxes
|
|
|
657,964
|
|
|
|
10
|
%
|
|
|
494,902
|
|
|
|
10
|
%
|
Net
income
|
|
$
|
1,973,890
|
|
|
|
30
|
%
|
|
$
|
1,489,507
|
|
|
|
29
|
%
|
Net Sales
.
Our net sales increased to $6,483,625 in the three months ended June 30, 2010
from $5,143,578 in the same period in 2009, representing 26% revenue growth. As
retail sales trends and broader economic growth in the PRC have been positive
despite a global economic downturn, during the three months ended June 30, 2010,
we promoted higher price products in order to achieve higher gross
profit. In addition, our retail sales contributed 22.5% of total
sales amount during the three months ended June 30, 2010, as compared to 14.6%
of total sales during the same period of 2009. Our retail selling
price is about 40%-50% markup on the selling price to wholesalers. As
a result, the average selling price per pair for the second quarter of 2010 and
2009 was $19.6 and $13.6 respectively, representing an increase of 44%. In
response to the price increase, the volume of footwear sold decreased 12.5% to
approximately 331 thousand pairs for the three months ended June 30, 2010 as
compared to approximately 378 thousand pairs for the same period last year. We
believe our pricing policy for this quarter was a success given the overall
growth in revenue. In the future, we may adjust pricing strategy to meet market
demand and satisfy our financial goals.
Net sales
from our wholesale operations increased $636,999, or 14.5%, to $5,025,547 for
the three months ended June 30, 2010, from $4,388,548 for the three months ended
June 30, 2009. The average selling price per pair within our wholesale
operations increased to $18.1 per pair for the three months ended June 30, 2010
from $12.9 per pair in the same period last year, an increase of 40%, primarily
due to acceptance of new designs and styles for our in-season
products. However, our sales volume decreased 18.1% resulted from the
increase of selling price. We may, from time to time, adjust our
selling price policy to test market to achieve higher gross profit.
Net sales
from our retail operations increased $703,048 to $1,458,078 for the three months
ended June 30, 2010, a 93% increase over sales of $755,030 for the three months
ended June 30, 2009. The average selling price per pair within our
retail operations increased 35% to $27.8 per pair for the three months ended
June 30, 2010 compared to $20.6 for the same period in 2009. The
increase of selling price is mainly resulted from the company’s promotion policy
and high-end products policy during this period, meanwhile, lots of types of
summer shoes with lower price were sold during the same period of
2009. To achieve our sales strategy, we inputted extensive of
advertising in these area. Apart from the increase of selling price,
our sales volume from retail outlets also increased 43% to 52.4 thousand pairs
of shoes during the three months ended June 30, 2010. The increase of
sales volume is mainly resulted from increase of our outlets to 12 during the
three months ended June 30, 2010 from 8 in the same period of 2009, which
represent 50% increase.
The total
size of our stores was 1,170 and 900 square meters as of June 30, 2010 and 2009,
respectively. The average size per store was 98 and 113 square meters as of June
30, 2010 and 2009, respectively. The average size of our newly opened stores is
74 square meters which is lower than our older stores due to limited available
locations. Our sales volume per square meter per month was 15 and 14 pairs for
the three months ended June 30, 2010 and 2009, respectively, representing a 10%
increase. Our sales volume per outlet per month was 1,456 and 1,526 pairs for
the three months ended June 30, 2010 and 2009, respectively.
Cost of
Sales
. For the three months ended June 30, 2010, cost of sales amounted
to $3,422,563 or approximately 52.8% of net revenues as compared to cost of
sales of $2,923,413 or approximately 56.8% of net revenues for the same period
of 2009. The average unit cost per pair increased to $10.4 for the second
quarter of 2010 from $7.7 for the same period of 2009, an increase of
34%. Compared to 35% selling price increase in retail outlets and 40%
selling price increase in wholesale business, it is generally in line with the
increase. The increase is mainly resulted from selling more high-unit
price model products during this period, compared to more low price products
sold during the same period of 2009. We may continue to promote more
high-unit price models, but, we do not expect that the unit price growth in
following periods are as high as this quarter.
Gross Profit and
Gross Margin
.
Gross profit for the three months ended June 30, 2010 increased $840,897
to $3,061,062 from $2,220,165 for the same period in 2009. Gross profit as a
percentage of net sales, or gross margin, increased to 47.2% for the three
months ended June 30, 2010 from 43.2% for the same period in 2009. The gross
margin increase was primarily attributable to increased margins for both our
retail and wholesale operations.
Gross
profit for wholesale operations increased $396,713, or 22.7%, to $2,145,118 for
the three months ended June 30, 2010 from $1,748,405 for the same period in
2009. Wholesale margins increased to 42% for the three months ended June 30,
2010 from 40% for the same period in 2009. The increase in wholesale margins was
primarily due to increased selling price of wholesale offset decreased sales
volume resulting from high competitive local footwear market. In
addition, our wholesale customers chose higher unit selling price product to
sell which contributes higher gross margin. Gross profit for retail
operations increased $444,184, or 94%, to $915,944 for the three months ended
June 30, 2010 from $471,760 for the same period in 2009. Retail
margins
remained
at
63% for both periods ended June 30, 2010 or 2009.
Operating
Expenses
. Our selling, general and administrative expenses grew to
$402,142 in the three months ended June 30, 2010 from $230,913 in the same
period in 2009. This was mainly due to increased advertising costs, rent for
shopping mall spaces and increased payroll due to the expansion of the
Registrant
’
s
business.
Other Income
& Interest Expense
. Other Income & Interest Expense increased to
$14,246 in the three months ended June 30, 2010 from $8,282 in the same period
in 2009. Other Income and Interest Expense is a negligible percentage of our
revenue.
Income before
Income Taxes
. Our income before income taxes increased to $2,631,854 in
the three months ended June 30, 2010 from $1,984,409 in the same period in
2009. The increase is mainly resulted from increase in gross profit
offset by increased operating expenses.
Income
Taxes
. Income tax increased to $657,964 in the three months ended June
30, 2010 from $494,902 in the same period in 2009. The increase was due to an
increase in taxable income, as our tax rate remained constant.
Net
Income
. In the three months ended June 30, 2010, we generated net income
of $1,973,890, a increase from $1,489,507 in the same period in 2009. This
increae was primarily due to the increase in gross profit from $2,220,165 to
$3,061,062 quarter over quartere.
Comparison of Six Months
Ended June 30, 2010 and June 30, 2009
The
following table sets forth key components of our results of operations during
the six months ended June 30, 2010 and 2009, both in dollars and as a percentage
of our net sales.
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
Sales
|
|
$
|
11,249,437
|
|
|
|
100
|
%
|
|
$
|
9,599,476
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
6,079,318
|
|
|
|
54
|
%
|
|
|
5,445,751
|
|
|
|
57
|
%
|
Gross
profit
|
|
|
5,170,119
|
|
|
|
46
|
%
|
|
|
4,153,725
|
|
|
|
43
|
%
|
Operating
Expenses
|
|
|
1,164,180
|
|
|
|
10
|
%
|
|
|
475,718
|
|
|
|
5
|
%
|
Operating
Income
|
|
|
4,005,939
|
|
|
|
36
|
%
|
|
|
3,678,007
|
|
|
|
38
|
%
|
Other
income & interest expense
|
|
|
13,427
|
|
|
|
0
|
%
|
|
|
17,293
|
|
|
|
0
|
%
|
Income
Before Income Taxes
|
|
|
4,019,366
|
|
|
|
36
|
%
|
|
|
3,695,300
|
|
|
|
38
|
%
|
Income
taxes
|
|
|
1,115,495
|
|
|
|
10
|
%
|
|
|
922,625
|
|
|
|
10
|
%
|
Net
income
|
|
$
|
2,903,871
|
|
|
|
26
|
%
|
|
$
|
2,772,675
|
|
|
|
29
|
%
|
Net Sales
.
Our net sales increased to $11,249,437 in the six months ended June 30, 2010
from $9,599,476 in the same period in 2009, representing 17% revenue growth. As
retail sales trends and broader economic growth in the PRC have been positive
despite a global economic downturn, during the six months ended June 30, 2010,
we increased prices by 28% in order to achieve higher gross profit, which
resulted in a decrease in sales volume of 9% as compared to the same period of
2009.
Net sales
from our wholesale operations increased $781,815, or 10%, to $8,949,943 for the
six months ended June 30, 2010, from $8,168,128 for the six months ended June
30, 2009. The average selling price per pair within our wholesale operations
increased to $17.9 per pair for the six months ended June 30, 2010 from $14.4
per pair in the same period last year, an increase of 24%, primarily due to
acceptance of new designs and higher pricing of the products we
promoted. However, it resulted in a sales volume decrease of 12% to
500.7 thousand pairs of shoes during the six months ended June 30,
2010.
Net sales
from our retail operations increased $868,146 to $2,299,494 for the six months
ended June 30, 2010, a 61% increase over sales of $1,431,348 for the six months
ended June 30, 2009. The average selling price per pair within our retail
operations increased 33% to $30.7 per pair for the six months ended June 30,
2010 compared to $23.2 for the same period in 2009. Apart from the increase of
our selling price, our sales volume also contributed a 21% increase as compared
to the same period of 2009, which was mainly the result of an increase in the
number of our sales outlets from 8 as of June 30, 2009 to 12 as of June 30, 2010
respectively. The increase in our unit selling price was mainly the
result of our sales strategy to promote more high-unit price products to the
market to achieve higher gross profit.
The total
size of our stores was 1,170 and 900 square meters as of June 30, 2010 and 2009,
respectively. The average size per store was 98 and 113 square meters as of June
30, 2010 and 2009, respectively. The average size of our newly opened stores is
74 square meters which is lower than our older stores due to limited available
locations. Our sales volume per square meter per month was 10.7 and 11.4 pairs
for the six months ended June 30, 2010 and 2009, respectively. Our sales volume
per outlet per month was 1,041 and 1,288 pairs for the six months ended June 30,
2010 and 2009, respectively.
Cost of
Sales
. For the six months ended June 30, 2010, cost of sales amounted to
$6,079,318 or approximately 54% of net revenues as compared to cost of sales of
$5,445,751 or approximately 56.7% of net revenues for the same period of 2009.
The increase of cost of sales of 12% over the same period of 2009 was mainly
caused by an increase in sales of 17%. The higher increase ratio in
sales was mainly the result of a change in our sales mixture resulting in our
retail sales being 20% of total sales as of June 30, 2010 as compared to 15%
during the same period of 2009. Retail sales contribute approximately
20% more margin than wholesale operations.
Gross Profit and
Gross Margin
.
Gross profit for the six months ended June 30, 2010 increased $1,016,394
to $5,170,119 from $4,153,725 for the same period in 2009. Gross profit as a
percentage of net sales, or gross margin, increased to 46% for the six months
ended June 30, 2010 from 43% for the same period in 2009. The gross margin
increase was primarily attributable to increased margins for both our retail and
wholesale operations and the change in our sales mixture as explained
above.
Gross
profit for wholesale operations increased $405,061, or 12%, to $3,661,821 for
the six months ended June 30, 2010 from $3,256,760 for the same period in 2009.
Wholesale margins increased to 41% for the six months ended June 30, 2010 from
40% for the same period in 2009. The increase in wholesale gross profit was
primarily due to the increased selling price for wholesale operations offset by
decreased sales volume due to the highly competitive local footwear
market.
Gross
profit for retail operations increased $611,333, or 68%, to $1,508,298 for the
six months ended June 30, 2010 from $896,965 for the same period in 2009. Retail
margins increased to 66% for the six months ended June 30, 2010 from 63% for the
same period in 2009. The increase of gross profit was mainly caused by increased
unit selling prices and sales volume in retail operations as explained
above. The increase in gross margin mainly resulted from increased
acceptance of our high-end products in the market, which have higher
margin.
Operating
Expenses
. Our selling, general and administrative expenses grew to
$1,104,863 in the six months ended June 30, 2010 from $449,460 in the same
period in 2009. This was mainly due to a payment of shares to service providers
for services provided in connection with our reverse merger as well as increased
advertising costs, rent for shopping mall space and increased payroll due to the
expansion of our business.
Other Income
& Interest Expense
. Other income and interest expense decreased to
$13,427 in the six months ended June 30, 2010 from $17,293 in the same period in
2009. Other income and interest expense is a negligible percentage of our
revenue.
Income before
Income Taxes
. Our income before income taxes increased to $4,019,366 in
the six months ended June 30, 2010 from $3,695,300 in the same period in 2009.
The increase was mainly due to an increase in gross profit offset by increased
operating expenses.
Income
Taxes
. Income tax increased to $1,115,495 in the six months ended June
30, 2010 from $922,625 in the same period in 2009. The increase was due to an
increase in taxable income, as our tax rate remained constant.
Net
Income
. In the six months ended June 30, 2010, we generated net income of
$2,903,871, an increase from $2,772,675 in the same period in 2009. This
increase was primarily due to increased profit before tax as explained
above.
Liquidity
and Capital Resources
As of
June 30, 2010, we had cash and cash equivalents of $414,350, primarily
consisting of cash on hand and demand deposits. This compares with June 30,
2009, when we had cash and cash equivalents of $254,914, primarily consisting of
cash on hand and demand deposits. The following table provides detailed
information about our net cash flow for all financial statement periods
presented in this report. To date, we have financed our operations primarily
through cash flows from operations and equity contributions by our shareholders.
We do not expect our daily operations to be constrained by cash flow as we are
currently able to fund our operations through our existing cash flow from
operations. However, our future expansion plans (which include increasing the
number of sales points, advertising actively, and increasing inventory) rely
entirely on the completion of an offering of our common stock. If an
offering is not completed then we will need to rely on organic growth or
commercial loans to facilitate our expansion plans and we cannot guarantee that
we will be successful at obtaining loans or growing organically at a rate
sufficient to support our expansion plans.
The
following table sets forth a summary of our cash flows for the periods
indicated:
Cash
Flows
(all
amounts in U.S. dollars)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash provided by operating activities
|
|
$
|
3,730,637
|
|
|
$
|
5,365,908
|
|
Net
cash used in investing activities
|
|
|
(3,348,912
|
)
|
|
|
(373,302
|
)
|
Net
cash used in financing activities
|
|
|
(41,243
|
)
|
|
|
(4,854,728
|
)
|
Effects
of Exchange Rate Change in Cash
|
|
|
12,737
|
|
|
|
(1,498
|
)
|
Net
Increase in Cash and Cash Equivalents
|
|
|
353,219
|
|
|
|
136,380
|
|
Cash
and Cash Equivalent at Beginning of the Period
|
|
|
61,131
|
|
|
|
118,534
|
|
Cash
and Cash Equivalent at End of the Period
|
|
|
414,350
|
|
|
|
254,914
|
|
Operating
activities
Net cash
provided by operating activities was $3,730,637 for the six months ended June
30, 2010, compared to $5,365,908 for the same period in 2009.
The cash
provided by operating activities for the six months ended June 30, 2010 was
mainly derived from our net profit of $2,903,871, stock-based compensation of
$442,611, and an increase of tax liabilities of $3,040,504, offset by an
increase of accounts receivable of $261,567 and an increase of prepayments of
$2,263,033. The increase of accounts receivable was due to an increased credit
period policy designed to enhance sales following a sales fair held in February.
We have granted short-term credit extensions as a strategic incentive to our
most loyal and profitable distributors to increase our market share following
such a sales fair, largely in order to introduce our new models of footwear. In
order to balance our operating cash flow, we also ask for a longer payment term
on our payables, which resulted in an increase of accounts
payables. Increase of prepayment mainly represents payment during the
period for advertising and long term leasing for our newly established
outlets. These prepaid amounts are related to rent for operating
stores, advertisement board and pole and landscaping maintenance contracts.
These prepaid amounts are amortized based on the lease terms (for the prepaid
rent), contracted terms for advertisement board and pole and contract terms for
landscaping maintenance contract. The amortization expense for the
six months ended June 30, 2010 is $230,000.We may choose to lease or buy outlets
in future. We may also continue to do advertising to promote our
sales and increase our brand acceptance.
The cash
provided by operating activities for the six months ended June 30, 2009 was the
result of net profit of $2,772,675, and increase in tax payable of $2,681,288,
offset by the increase of accounts receivable, inventory and prepayment of
$131,418 in total.
Investing
activities
Net cash
used in investing activities for the six months ended June 30, 2010 was
$3,348,912 as compared to $373,302 net cash used in investing activities during
the same period of 2009. The cash used by investing activities during the six
months ended June 30, 2010 represents payment of $2,659,045 to acquire land use
rights, payment of property and equipment of $130,127, payment for a note
receivable of $441,900 and advance to owner of $117,840. The cash used in
investing activities during the six months ended June 30, 2009 represents the
payment of property and equipment of $373,302.
Financing
activities
Net cash
used in financing activities for the six months ended June 30, 2010 was $41,243,
as compared to $4,854,728 used in the same period of 2009. The cash used in
financing activities during the six months ended June 30, 2010 represents the
cash proceeds from bank loans of $441,900 offset by the distribution to owner of
$483,143. The cash used in financing activities during the six months ended June
30, 2009 represents distribution to owner of $4,854,728.
Bank
loans
Our bank
loans include short-term loans and long-term loans. In our industry, it is
customary to obtain such loans to meet cash flow and inventory
needs.
Short
term loans, totaling $1,163,670 as of June 30, 2010, were issued by Bank of
Qingdao and JiMo Rural Bank, with annual interest rates ranging from 6.372% to
7.965%, and with terms of 12 months which will mature in September, November and
December 2010 respectively. All bank loans were secured either by the property
of the Company or third parties.
Capital
resources
We
believe that our cash on hand and cash flow from operations will meet part of
our present cash needs and we will require additional cash resources, to meet
our expected capital expenditure and working capital for the next 12 months. We
may, however, in the future, require additional cash resources due to changed
business conditions, implementation of our strategy to ramp up our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are insufficient to satisfy our capital
requirements, we may seek to sell additional equity or debt securities or obtain
additional credit facilities. The sale of additional equity securities could
result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. Financing
may not be available in amounts or on terms acceptable to us, if at all. Any
failure by us to raise additional funds on terms favorable to us, or at all,
could limit our ability to expand our business operations and could harm our
overall business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business and we do not
expect that inflation or changing prices will materially affect our business in
the foreseeable future. However, our management will closely monitor the price
change in the industry and continually maintain effective cost control in
operations.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.
Seasonality
We may experience seasonal fluctuations in our revenue in some
regions in the PRC, based on the seasonal changes in the weather and the
tendency of customers to make purchases relating to their apparel suitable for
the time of year. Any seasonality may cause significant pressure on
us to monitor the development of materials accurately and to anticipate and
satisfy these requirements. Our revenues are usually higher in the first
and fourth quarters due to seasonal purchases.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operation.
Critical accounting policies are those that are most important to the portrayal
of our financial conditions and results of operations and require management’s
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management’s current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Revenue
Recognition
We
generate revenues from the retail and wholesale of shoes. Sales revenues are
recognized when the following four revenue criteria are met: persuasive evidence
of an arrangement exists, delivery has occurred, the selling price is fixed or
determinable, and collectability is reasonably assured. Sales are presented net
of value added tax (“VAT”). No return allowance is made as product returns have
been insignificant in all periods.
Retail
sales are recognized at the point of sale to customers. Wholesales to our
contracted customers are recognized as revenue at the time the product is
shipped and title passes to the customer on an FOB shipping point basis.
Wholesale prices are predetermined and fixed based on contractual agreements. We
do not allow any discounts, credits, rebates or similar privileges.
We do not
grant any inventory pricing protection or other inventory adjusting policies to
our distributors. The distributors are responsible for their
purchased products types and volumes, unless any quality problems
arise. If quality issues arise with our products, the products will
be fully replaced by our manufacturers in accordance with the purchase
agreement. As a result, we recognize our sales on delivery of our
products to our wholesalers. For the retail customers, we only allow
returns due to quality problems. We do not permit returns based
on any other reason, and we do not believe such liberal return policies are
common in China. Should there be any quality defects; customers have
the right to return the shoes to the stores from which they purchased
them. The stores then return them to our company, and we negotiate an
acceptable solution with the manufacturers, which tends to vary with the facts
in each case. According to our historical data, such returns are at
approximately 0.01% of total sales and are not material to our financial
statements.
In light
of the low level of revenue dilution, we do not generally assess returns of
products, levels of inventory, expected introductions of new products or
external sources.
We have
not experienced any purchases of products in excess of ordinary course of
business levels as a result of any incentives. In our experience,
customers merely purchase their seasonal footwear needs more quickly—but not in
greater numbers—than they might otherwise purchase in the absence of such
incentives. This result is not surprising in an industry like the
footwear industry, which is marked by seasonal sales on, for example, sandals
during summer and boots during winter. As a result of such seasonal
fluctuations, our customers endeavor not to maintain excessive inventory but do
try to purchase seasonally-specific shoes shortly before the
season.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the amount of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are
made. However, actual results could differ materially from those
estimates.
Accounts
Receivable
Accounts
receivable consists of unpaid balances due from the whole-sale customers. Such
balances generally are cleared in the subsequent month when the whole-sale
customers place another order. The Company does not provide an allowance for
doubtful accounts because the Company has not experienced any credit losses in
collecting these amounts from whole-sale customers.
Impairment of Long-Lived Assets
The
Company accounts for impairment of property and equipment and amortizable
intangible assets in accordance with ASC 360, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the
Company to evaluate a long-lived asset for recoverability when there is an event
or circumstance that indicates 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 the 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 or for the six month period ended June 30,
2010.
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 Renminbi (“RMB”) and its reporting
currency is the U.S. dollar. Transactions denominated in foreign currencies are
translated into U.S. dollar at exchange rate in effect on the date of the
transactions. Exchange gains or losses on transaction are included in
earnings.
The
financial statements of the Company are translated into United States dollars in
accordance with the provisions of ASC 830 “Foreign Currency Matters”, using the
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues, costs, and expenses and historical rates
for the equity. Translation adjustments resulting from the process of
translating the local currency financial statements into U.S. dollars are
included in determining comprehensive income.
Segment
Reporting
We
operate as a single operating segment for purposes of presenting financial
information and evaluating performance. As such, the accompanying consolidated
financial statements present financial information in a format that is
consistent with the internal financial information used by management. We do not
accumulate operating expenses by wholesale and retail operations and, therefore,
it is impractical to present such information.
PART
II. OTHER INFORMATION
ITEM
6. EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
31.1*
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and
Rule15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
31.2*
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
32.1*
|
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2*
|
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
QINGDAO
FOOTWEAR, INC.
|
|
|
|
|
|
By:
|
/s/ Tao
Wang
|
|
|
Tao
Wang
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
Date: November
4, 2010
|
|
|
|
|
|
By:
|
/s/ Joseph
Meuse
|
|
|
Joseph
Meuse
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
Date:
|
November
4, 2010
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
|
|
|
31.1*
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and
Rule15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
31.2*
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
|
|
|
|
32.1*
|
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2*
|
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith.