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 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 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 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.
Results
of Operations
Comparison of Years 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
|
|
|
% of Net
Sales
|
|
|
Amount
|
|
|
% of Net
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 be 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 be 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.
Income Before
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
|
|
|
(384,655
|
)
|
|
|
(37,944
|
)
|
Net
cash used in financing activities
|
|
|
(9,522,757
|
)
|
|
|
(7,660,033
|
)
|
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 of $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 levels to ensure timely deliveries at the request of major
distributors as of the end of the 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 $384,655
as compared to $37,944 for the year ended December 31, 2008. The cash
used for investing activities in 2009 represents cash advanced to our chief
executive officer of $323 and purchase of property and equipment of
$384,332. The cash used in investing activities of 2008 represents the cash
used for purchase of property and equipment.
Financing
activities
Net cash
used in financing activities for the year ended December 31, 2009 was
$9,522,757, as compared to $7,660,033 for the year ended December 31,
2008. The cash used in financing activities of 2009 resulted
from the distribution to shareholders of $9,786,817, 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. The cash used in
financing activities of 2008 represents the distribution to
shareholders.
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.
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.
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. 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 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 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.
1. Audited consolidated financial statements of the Registrant and
Subsidiaries for the fiscal year ended December 31, 2009.
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.
The
Company restated its Balance Sheets, Statements of Cash Flows and
Statements of Shareholders’ Equity to reflect the tax liabilities (including
value added tax and income tax). There were no changes to reported earnings. The
Company determined that additional disclosure was required to disclose its
significant tax liabilities and the related risks in its consolidated financial
statements. See Notes 13 and 17.
/s/
MALONEBAILEY, LLP
MALONEBAILEY,
LLP
www.malonebailey.com
Houston,
Texas
April 16,
2010 (except for Notes 13 and 17 which are dated
November
3
, 2010)
QINGDAO
FOOTWEAR, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
|
|
2009
|
|
|
2008
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
561,916
|
|
|
|
370,093
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
930,451
|
|
|
|
602,831
|
|
Intangible
assets
|
|
|
208,167
|
|
|
|
213,008
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,700,534
|
|
|
$
|
1,185,932
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
718,830
|
|
|
$
|
704,160
|
|
Accounts
payable
|
|
|
15,727
|
|
|
|
546
|
|
Taxes
payable
|
|
|
12,551,687
|
|
|
|
7,601,709
|
|
Due
to related parties
|
|
|
117,360
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
13,403,604
|
|
|
|
8,306,415
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
13,652,994
|
|
|
$
|
8,306,415
|
|
|
|
|
|
|
|
|
|
|
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
deficits
|
|
|
(12,713,715
|
)
|
|
|
(7,878,628
|
)
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
$
|
(11,952,460
|
)
|
|
$
|
(7,120,483
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
1,700,534
|
|
|
$
|
1,185,932
|
|
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
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
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
|
|
|
(323
|
)
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(384,332
|
)
|
|
|
(37,944
|
)
|
Net
cash used in investing activities
|
|
|
(384,655
|
)
|
|
|
(37,944
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(9,786,817
|
)
|
|
|
(7,660,033
|
)
|
Proceeds
from loans
|
|
|
1,701,720
|
|
|
|
850,860
|
|
Repayments
on loans
|
|
|
(1,437,660
|
)
|
|
|
(850,860
|
)
|
Net
cash used in financing activities
|
|
|
(9,522,757
|
)
|
|
|
(7,660,033
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
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
(RESTATED)
|
|
Common Stock
|
|
|
Additional Paid-
in Capital
|
|
|
Accumulated Other
Comprehensive
Income
|
|
|
Retained Earnings
|
|
|
Total Shareholders'
Equity
|
|
Balance,
December 31, 2007
|
|
$
|
970
|
|
|
$
|
319,510
|
|
|
$
|
205,618
|
|
|
$
|
(3,514,546
|
)
|
|
$
|
(2,988,448)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,999,779
|
)
|
|
|
(7,999,779
|
)
|
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
|
|
|
$
|
(7,878,628
|
)
|
|
$
|
(7,120,483)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,904,176
|
)
|
|
|
(9,904,176
|
)
|
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
|
|
|
$
|
(12,713,715
|
)
|
|
$
|
(11,952,460
|
)
|
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 Measurem
ents 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 “
Amen
dments 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
Codificat
ion
(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.
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
|
|
|
$
|
189,535
|
|
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,
2009
|
|
|
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 to
related party
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
During
year 2009, the Company distributed $9,904,176 to its shareholders, Mr. Tao Wang
and Mr. Renwei Ma, in which $9,786,816 was distributed in cash, 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 $7,999,779 to its
shareholders Mr. Tao Wang and Mr. Renwei Ma.
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 and 2008, the Company distributed $9,904,176 and $7,999,779,
respectively, 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
Company did not pay much of its significant value added tax liabilities and
income 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 $12,549,060 and $7,599,595,
respectively, which mainly included VAT tax payable and income tax payable.
However, 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 17. According to PRC tax
law, late or deficient tax payment could subject the Company to significant tax
penalty.
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
accounting purposes, we treated the reverse stock split as being effective and
all shares are retroactively restated to reflect the reverse stock
split.
NOTE
17 – RESTATEMENTS
Subsequent
to the issuance of the Company’s 2009 consolidated financial statements,
the Company’s management determined that corrections were required to the
previously reported financial statements to reflect the Company as the primary
obligor of the tax liabilities (including VAT liabilities and income tax
liabilities). As a result, the consolidated balance sheets as of December 31,
2009 and 2008, the consolidated statements of cash flows for the years ended
December 31, 2009 and 2008, and the consolidated statements of changes in
owners’ equity for the year ended December 31, 2009 and 2008 have
been restated from the amounts previously reported. The restatement has no
effect on operating income, net income or cash flows from operating
activities.
The
effects of the restatements are shown in the following tables.
QINGDAO
FOOTWEAR, INC.
|
CONSOLIDATED
BALANCE
SHEETS
|
|
|
2009
|
|
|
Adjustment
|
|
|
2009
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
61,131
|
|
$
|
|
|
|
$
|
61,131
|
|
Accounts
receivable
|
|
|
98,962
|
|
|
|
|
|
|
98,962
|
|
Inventories
|
|
|
344,512
|
|
|
|
|
|
|
344,512
|
|
Prepaid
expenses
|
|
|
57,311
|
|
|
|
|
|
|
57,311
|
|
Total
current assets
|
|
|
561,916
|
|
|
|
|
|
|
561,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
930,451
|
|
|
|
|
|
|
930,451
|
|
Intangible
assets
|
|
|
208,167
|
|
|
|
|
|
|
208,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,700,534
|
|
|
|
|
|
$
|
1,700,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
718,830
|
|
|
|
|
|
$
|
718,830
|
|
Accounts
payable
|
|
|
15,727
|
|
|
|
|
|
|
15,727
|
|
Taxes
payable
|
|
|
2,627
|
|
|
|
12,549,060
|
|
|
|
12,551,687
|
|
Due
to related parties
|
|
|
221,871
|
|
|
|
(104,511
|
)
|
|
|
117,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
959,055
|
|
|
|
12,444,549
|
|
|
|
13,403,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
249,390
|
|
|
|
|
|
|
|
249,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
1,208,445
|
|
|
|
12,444,549
|
|
|
$
|
13,652,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
440,775
|
|
Retained
deficits
|
|
|
(269,166
|
)
|
|
|
(12,444,549
|
)
|
|
|
(12,713,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
$
|
492,089
|
|
|
|
(12,444,549
|
)
|
|
$
|
(11,952,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
1,700,534
|
|
|
$
|
-
|
|
|
$
|
1,700,534
|
|
As a
result of restatement of the consolidated balance sheet as of December 31, 2009,
total liabilities increased from $1,208,445 as originally reported, to
$13,652,994, an increase of $12,444,549. The increase of total liabilities was
derived from an increase of $12,549,060 in taxes payable, and a decrease of
$104,511 in due to related parties.
The total
stockholders’ equity was restated from $492,089 as originally reported, to
($11,952,460), a decrease of $12,444,549. The decrease 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
BALANCE
SHEETS
|
|
|
2008
|
|
|
Adjustment
|
|
|
2008
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
118,534
|
|
|
$
|
|
|
|
$
|
118,534
|
|
Accounts
receivable
|
|
|
3,534
|
|
|
|
|
|
|
|
3,534
|
|
Inventories
|
|
|
189,535
|
|
|
|
|
|
|
|
189,535
|
|
Prepaid
expenses
|
|
|
58,490
|
|
|
|
|
|
|
|
58,490
|
|
Due
from related parties
|
|
|
4,373,588
|
|
|
|
(4,373,588
|
)
|
|
|
-
|
|
Total
current assets
|
|
|
4,743,681
|
|
|
|
(4,373,588
|
)
|
|
|
370,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
602,831
|
|
|
|
|
|
|
|
602,831
|
|
Intangible
assets
|
|
|
213,008
|
|
|
|
|
|
|
|
213,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
5,559,520
|
|
|
$
|
(4,373,588
|
)
|
|
$
|
1,185,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
704,160
|
|
|
$
|
|
|
|
$
|
704,160
|
|
Accounts
payable
|
|
|
546
|
|
|
|
|
|
|
|
546
|
|
Taxes
payable
|
|
|
2,114
|
|
|
|
7,599,595
|
|
|
|
7,601,709
|
|
Total
current liabilities
|
|
|
706,820
|
|
|
|
7,599,595
|
|
|
|
8,306,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
706,820
|
|
|
$
|
7,599,595
|
|
|
$
|
8,306,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
437,665
|
|
|
|
|
|
|
|
437,665
|
|
Retained
earnings (deficits)
|
|
|
4,094,555
|
|
|
|
(11,973,183
|
)
|
|
|
(7,878,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
$
|
4,852,700
|
|
|
$
|
(11,973,183
|
)
|
|
$
|
(7,120,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
5,559,520
|
|
|
$
|
(4,373,588
|
)
|
|
$
|
1,185,932
|
|
As a
result of restatement of the consolidated balance sheet as of December 31, 2008,
total assets decreased from $5,559,520 as originally reported, to $1,185,932, a
decrease of $4,373,588. The decrease of total assets was derived from
the decrease of due from related parties from $4,373,588 as originally
reported to $Nil.
Total
liabilities increased from $706,820 as originally reported, to $8,306,415, an
increase of $7,599,595. The increase of total liabilities was derived from the
increase in taxes payable from $2,114 as originally reported to
$7,601,709.
The total
stockholders’ equity was restated from $4,852,700 as originally reported, to
($7,120,483), a decrease of $11,973,183. The decrease 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.
The total
liabilities and stockholders’ equity was restated from $5,559,520 as originally
reported, to $1,185,932, a decrease of $4,373,588.
QINGDAO
FOOTWEAR, INC.
|
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
2009
|
|
|
Adjustment
|
|
|
2009
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,069,089
|
|
|
|
|
|
$
|
5,069,089
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
61,838
|
|
|
|
|
|
|
61,838
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(95,428
|
)
|
|
|
|
|
|
(95,428
|
)
|
Inventories
|
|
|
(154,977
|
)
|
|
|
|
|
|
(154,977
|
)
|
Prepaid
expenses
|
|
|
1,179
|
|
|
|
|
|
|
1,179
|
|
Accounts
payable
|
|
|
15,180
|
|
|
|
|
|
|
15,180
|
|
Tax
payable
|
|
|
4,949,978
|
|
|
|
|
|
|
4,949,978
|
|
Net
cash provided by operating activities
|
|
|
9,846,859
|
|
|
|
|
|
|
9,846,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Advance
to related party
|
|
|
(5,723,550
|
)
|
|
|
5,723,227
|
|
|
|
(323
|
)
|
Purchase
of property and equipment
|
|
|
(384,332
|
)
|
|
|
|
|
|
|
(384,332
|
)
|
Net
cash used in investing activities
|
|
|
(6,107,882
|
)
|
|
|
5,723,227
|
|
|
|
(384,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(4,063,590
|
)
|
|
|
(5,723,227
|
)
|
|
|
(9,786,817
|
)
|
Proceeds
from loans
|
|
|
1,701,720
|
|
|
|
|
|
|
|
1,701,720
|
|
Repayments
on loans
|
|
|
(1,437,660
|
)
|
|
|
|
|
|
|
(1,437,660
|
)
|
Net
cash used in financing activities
|
|
|
(3,799,530
|
)
|
|
|
(5,723,227
|
)
|
|
|
(9,522,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
3,150
|
|
|
|
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
$
|
(57,403
|
)
|
|
|
|
|
|
$
|
(57,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
118,534
|
|
|
|
|
|
|
|
118,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
61,131
|
|
|
|
|
|
|
$
|
61,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
61,792
|
|
|
|
|
|
|
$
|
61,792
|
|
Income
tax paid
|
|
$
|
3,763
|
|
|
|
|
|
|
$
|
3,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of taxes payable to due from related party
|
|
$
|
4,949,466
|
|
|
$
|
(4,949,466
|
)
|
|
$
|
-
|
|
Transfer
of shareholder distribution to due from related party
|
|
$
|
5,251,860
|
|
|
$
|
(5,251,860
|
)
|
|
$
|
-
|
|
As a
result of the restatement, the net cash used in investing activities decreased
by $5,723,227 from $6,107,882 as originally reported, to $384,655; the net cash
used in financing activities increased by $5,723,227 from $3,799,530 as
originally reported, to $9,522,757; Transfer of taxes payable to due from
related party decreased from $4,949,466 as originally reported to $Nil; Transfer
of shareholder distribution to due from related party decreased from $5,251,860
as originally reported to $Nil.
QINGDAO
FOOTWEAR, INC.
|
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
2008
|
|
|
Adjustment
|
|
|
2008
|
|
|
|
(Original)
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,635,697
|
|
|
$
|
|
|
|
$
|
3,635,697
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
55,360
|
|
|
|
|
|
|
|
55,360
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,028
|
|
|
|
|
|
|
|
1,028
|
|
Inventories
|
|
|
246,700
|
|
|
|
|
|
|
|
246,700
|
|
Prepaid
expenses
|
|
|
10,427
|
|
|
|
|
|
|
|
10,427
|
|
Accounts
payable
|
|
|
(2,527
|
)
|
|
|
|
|
|
|
(2,527
|
)
|
Tax
payable
|
|
|
3,800,000
|
|
|
|
|
|
|
|
3,800,000
|
|
Net
cash provided by operating activities
|
|
|
7,746,685
|
|
|
|
|
|
|
|
7,746,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
to related party
|
|
|
(5,785,433
|
)
|
|
|
5,785,433
|
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(37,944
|
)
|
|
|
|
|
|
|
(37,944
|
)
|
Net
cash used in investing activities
|
|
|
(5,823,377
|
)
|
|
|
5,785,433
|
|
|
|
(37,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to shareholders
|
|
|
(1,874,600
|
)
|
|
|
(5,785,433
|
)
|
|
|
(7,660,033
|
)
|
Proceeds
from loans
|
|
|
850,860
|
|
|
|
|
|
|
|
850,860
|
|
Repayments
on loans
|
|
|
(850,860
|
)
|
|
|
|
|
|
|
(850,860
|
)
|
Net
cash used in financing activities
|
|
|
(1,874,600
|
)
|
|
|
(5,785,433
|
)
|
|
|
(7,660,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
35,218
|
|
|
|
|
|
|
|
35,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$
|
83,926
|
|
|
|
|
|
|
$
|
83,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
34,608
|
|
|
|
|
|
|
|
34,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
118,534
|
|
|
|
|
|
|
$
|
118,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY
DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
61,905
|
|
|
|
|
|
|
$
|
61,905
|
|
Income
tax paid
|
|
$
|
2,539
|
|
|
|
|
|
|
$
|
2,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
of taxes payable to due from related party
|
|
$
|
3,799,872
|
|
|
$
|
(3,799,872
|
)
|
|
$
|
-
|
|
As a
result of the restatement, the net cash used in investing activities decreased
by $5,785,433 from $5,823,377 as originally reported, to $37,944; the net cash
used in financing activities increased by $5,785,433 from $1,874,600 as
originally reported, to $7,660,033; Transfer of taxes payable to due from
related party decreased from $3,799,872 as originally reported to
$Nil.