CHSH China Shoe Holdings Inc (CE)

Form 10Q

China Shoe Holdings, Inc. - CHSH

Filed: (period: March 31, 2008)

Quarterly report filed by small businesses

 

 

 

Table of Contents

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15 (d) of

Securities Exchange Act of 1934

For the Period ended March 31, 2008

Commission File Number 333-139910

China Shoe Holdings, Inc.

(Name of small business issuer in its charter)

Nevada	1712	20-2234410
(State or other jurisdiction of incorporation or organization)	(Primary SIC Code)	(IRS Employer Identification No.)

 

488 Wai Qingsong Road,

Waigang, Jiading District, Shanghai

People's Republic of China 201800

 011-86-21-59587756 

(Address, including zip code, and telephone number,

including area code, of registrant's principal executive offices)

Gu Xianzhong, President and CEO

488 Wai Qingsong Road 

Waigang, Jiading District, Shanghai

People's Republic of China 201800

 011-86-21-59587756 

(Mailing Address of Agent for Service)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes x No o

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company x

Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

There were 104,230,770 shares of Common Stock outstanding as of May 15, 2008.

PART I.

ITEM 1. FINANCIAL STATEMENTS

 

 

 

 

 

 

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Special Note Regarding Forward Looking Statements

 

This Quarterly Report on Form 10-QSB, including the following “Management's Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words “believe,” “expect,” “anticipate,”“project,” “targets,” “optimistic,” “intend,” “aim,”“will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors mentioned in the “Risk Factors” section of our “Report of Unscheduled Material Events or Corporate Changes” on Form 8-K for the years ended December 31, 2006 and December 2005, and other risks mentioned in this Form 10-Q. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

 

Use of terms

  

Except as otherwise indicated by the context, references in this Form 10-KSB to “CHSH,” “we,” “us,” “our,” “our Company,” or “the Company” are to China Shoe Holdings, Inc., a Nevada corporation, and its consolidated subsidiaries. Unless the context otherwise requires, all references to (i)“WSTG” are to Wholly Success Technology Group Limited, a limited liability company incorporated in the British Virgin Islands; (ii)“SKYEDC” are to Shanghai Kanghong Yunheng Enterprise Development Company Limited., a limited liability company incorporated in the People's Republic of China; (iii)”SKSCL” are to Shanghai Kangjiesi Shoes Company Limited., a limited liability company incorporated in the People's Republic of China   (iv) “BVI” are to British Virgin Islands; (v) “PRC” and “China” are to the People's Republic of China; (vi) “U.S. dollar,” “$” and “US$” are to United States dollars; (vii) “RMB” are to Yuan of China; (viii) “Securities Act” are to the Securities Act of 1933, as amended; and “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

 

Overview

 

The Company continued to implement its growth strategy for the three months ended March 31, 2008 through slightly higher marketing efforts to be placed on the ladies footwear for the Japanese market.

The Company continued to strengthen its balance sheet in 2007 and for the three months ended of March 31, 2008. Total assets and stockholders' equity have both increased.

Our Business

 

We are an independent, single facility-based, private label designer, manufacturer and marketer of a broad line of woman's shoes in which the footwear are generally sold under its customers' brand names. We also manufactures shoe component such as soles for other shoe manufacturers.

We sold shoes and shoe components to approximately forty customers in Japan and China. Our factory is located in Jiading Township, a suburb of Shanghai in the People's Republic of China.

Recent Development

 

On July 3, 2007, a closing was held pursuant to an Agreement and Plan of Reorganization, dated as of June 29, 2007, (the “Agreement”) by and among the Company, WSTG, a BVI Corporation, and WSTG's shareholders. Pursuant to the Agreement, each shareholder of WSTG exchanged all of his shares in WSTG for shares in The Company with an aggregate of 69,615,000 shares in the Company being issued in exchange for the shares in WSTG. In addition to the stock exchange transaction, CHSH agreed to issue an additional 15,185,000 restricted shares of common stock of the Company to China Venture Partners, Inc. for consulting services at a par value of $0.001 per share. The shares were issued in lieu of cash payment of $60,000 pursuant to a contract for consulting services dated June 1, 2007.

WSTG is the owner of all the outstanding shares of SKYEDC, a limited liability company organized under the laws of the People's Republic of China (“PRC”) and a manufacturer of woman's shoes, casual shoes and shoe components.

Under the terms of the Agreement, all of the officers of the Company resigned, WSTG was permitted to appoint two directors, representing 50% of the Company's Board of Directors and WSTG and the Company agreed not to file a registration statement on Form SB-2 allowing for insiders' share sales for a period of one year or to file a registration statement on From S-8 for nine months. CVP provides general business consulting services, specializing in the needs of entities with interests in the PRC.

On January 30, 2008, the Company entered into a Regulation S Subscription Agreement (the “Agreement”) with Mr. Yu Guorui, a resident and national of the PRC (the “Investor”). Pursuant to the Agreement, the Company sold 4,230,769 shares of common stock to the Investor for $550,000 at a market price of $0.13 per share. The Company intends to utilize the funds received primarily on expansion of its planned retail store operations in the PRC.

On February 21, 2008, the Company, through its subsidiary, SKYEDC, has established a company namely, Shanghai Kangjiesi Shoes Co. Ltd., to conduct the sales of shoes and leather products in the PRC. It was incorporated as a limited liability company under the laws of the PRC and its registered capital is amounted to $68,362 (equivalent to RMB 500,000).

On March 17, 2008, the Company entered into an Equity Line Agreement (the “Agreement”) with Magellan Global Fund, L.P., a Delaware limited partnership (the “Investor”), pursuant to which the Company agreed to sell and issue and the Investor agreed to purchase from the Company up to $2,000,000 of the Company’s common stock with a par value of $0.001 per share. Upon the execution of the Agreement, the Company shall issue to the Investor a restricted stock certificate of the Company’s common stock in an amount equal to $40,000 divided by the closing bid price on the closing date (571,429 shares). In addition, upon effectiveness of a registration statement pursuant to the Agreement, the Company will issue an additional $40,000 of common stock to the Investor priced at the closing bid price of the day the registration statement is declared effective by the United States Securities and Exchange Commission. The Company intends to use the funds from this offering for its execution of Company’s retail strategy.

 

On April 25, 2008, the Board of Directors of the Company approved the Employee Incentive Plan. The details of the plan will be attached as exhibit to the S-8 Registration Statement which will be filed shortly.

 

WSTG is the owner of all the outstanding shares of SHKH, a limited liability company organized under the laws of the People's Republic of China (“PRC”) and a manufacturer of woman's shoes, casual shoes and shoe components.

Under the terms of the Agreement, all of the officers of the Company resigned, WSTG was permitted to appoint two directors, representing 50% of the Company's Board of Directors and WSTG and the Company agreed not to file a registration statement on From SB-2 allowing for insiders' share sales for a period of one year or to file a registration statement on From S-8 for nine months. CVP provides general business consulting services, specializing in the needs of entities with interests in the PRC.

Results of Operations

The following table summarizes the results of our operations during the three months ended March 31, 2008 and 2007, and provides information regarding the dollar and percentage increase or (decrease) from the three months ended March 31, 2007 to the three months ended March 31, 2007.

All amount, other than percentages, in millions of U.S dollars

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenue: Revenue was $2.36 million for the three months ended March 31, 2008 as compared to $1.17 million for the three months ended March 31, 2007, representing an increase by 100.7%. The increase in revenue was mainly contributed to the increased in the proportion of sales into the Japanese market.

Cost of Revenue and Gross Profit: Cost of revenue and gross profit were respectively $1.49 million and $0.87 million for the three months ended March 31, 2008 as compared to $0.80 million and $0.37 million for the three months ended March 31, 2007, representing an increase by 86.0% and 135.7% respectively. The substantial growth in gross profit was attributable to the increased in the proportion of sales into the Japanese market that are generally at higher margins than sales within the PRC.

Operating Expenses: Operating expenses was $0.33 million for the three months ended March 31, 2008 as compared to $0.18 million for the three months ended March 31, 2007, representing an increase by 83.3%. The increased was mainly attributable to the hiring of additional staff, increased in entertainment and more vehicle expenses for serving the Japanese customers and professional expenses related to the reverse take-over activities on the over-the counter market.

Income Tax Expenses:   No income tax was incurred during the three months ended March 31, 2007. Starting from the first quarter of 2007, SKYEDC, a subsidiary of the Company, which operates in the PRC, is exempted from the PRC state and local enterprise income tax for the first two profitable financial years of operation and a 50% relief from the PRC state corporate income tax for the following three years. Accordingly, it was not subject to tax in 2007.

On March 16, 2007, the National People's Congress of the PRC determined to adopt a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises. The new corporate income tax law will be effective on January 1, 2008. According to the new corporate income tax law, the applicable income tax law rate for our operating subsidiaries may be subject to change. As the implementation detail has not yet been announced, we cannot be sure of the potential impact of such new corporate income tax law on our financial position and operating results.

Net income: Net income was $0.54 million for the three months ended March 31, 2008 as compared to $0.19 million for the three months ended March 31, 2007, representing an increase by 184.2%, the increase was mainly attributable to the increase in the greater proportion of sales from the Japanese market.

Liquidity and Capital Resources

 

Cash Flows

All amounts in millions of U.S. dollars

 

		Three months ended
		2008			2007
Net cash (used in) operating activities		$	(0.19	)	$	(0.23	)
Net cash (used in) investing activities			(0.001	)		-
Net cash provided by financing activities			0.55			0.23
Net change in cash and cash equivalents		$	0.36		$	-

 

Operating Activities:

Net cash used in operating activities was $0.19 million for the three months ended March 31, 2008, which is decrease of $0.04 million from $0.23 million as compared with the corresponding period in 2007. The decrease was mainly due to the increased in net income, increased in other payables and accrued liabilities and decreased in accounts payable.

Investing Activities:

Net cash used in investing activities for the three months ended March 31, 2008 was $0.001 million. The increase was attributable to the acquisition of fixed assets.

Financing Activities:

Net cash provided by financing activities in the three months ended March 31, 2008 totaled $0.55 million as compared to $0.23 million in the corresponding period of 2007. The increase of cash provided by financing activities was mainly attributable to the proceeds from newly issued share capital of USD550,000.

Short Term Bank Borrowings:

The Company utilizes short term bank borrowings to provide for its liquidity needs as the Company is typically paid for its product adequate to allow the Company to operate at present levels and to sustain moderate growth.

 

Short-term bank borrowings were as follows:

		March 31, 2008			December 31, 2007
		(unaudited)			(audited)
Short-term bank loans		$	178,007		$	170,903

Management believes that the Company's reputation for quality production will result in more large orders that will be difficult to fill without significant plant expansion and to explore the feasibility of entering the retail shoe market in China. However, the Company does not have any commitments for additional financing and no assurance is given that any additional financing will be available or that, if available, it will be on terms that are favorable to our shareholders.

ITEM 3. CONTROLS AND PROCEDURES

 

Members of our management, including our Chief Financial Officer and Principal Accounting and Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures, as defined by paragraph (e) of Exchange Act Rules 13a-15or 15d-15, as of March 31, 2008, the end of the period covered by this report. Based upon that evaluation, Mr. Gu Xianzhong concluded that our disclosure controls and procedures are effective.

 

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Previously reported on Form 8-K filed February 4, 2008 and Form 8-K A-1 filed May 1, 2008.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No items during the period covered by this report.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits and Reports on Form 8-K

 

a)

EXHIBITS

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

b) REPORTS ON FORM 8-K

 

The Company filed a Form 8-K, dated June 6, 2007. The Company filed additional reports on Form 8-K after the close of the period covered by this report.

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

China Shoe Holdings, Inc.

 

(Registrant)

Date: May 15, 2008	By:	/s/ Gu Xianzhong
		Gu Xianzhong President and CEO

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

NAME		TITLE	DATE
/s/ Gu Xianzhong		President and CEO	May 15, 2008
Gu Xianzhong
/s/ Angus Cheung Ming		Chief Financial Officer	May 15. 2008
Angus Cheung Ming		(Principal Financial and Accounting Officer)