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 September 30, 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 119,445,571 shares of Common Stock outstanding as of November 15,
2008.
|
|
|
CHINA
SHOE HOLDINGS, INC
(Unaudited)
Condensed
Consolidated Financial Statements
For
The Nine Months Ended September 30,
2008
|
CHINA
SHOE HOLDINGS, INC
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
Page
|
|
|
|
|
|
Condensed
Consolidated
Balance
Sheets as of September 30, 2008 and December 31, 2007
|
|
F-2
|
|
|
|
|
|
Condensed
Consolidated
Statement
s
of
Operations And Comprehensive (Loss) Income for the three and nine
months
ended September 30, 2008 and 2007
|
|
F-3
|
|
|
|
|
|
Condensed
Consolidated
Statements
of Cash Flows
for the nine months ended September 30, 2008 and 2007
|
|
F-4
|
|
|
|
|
|
Condensed
Consolidated
Statement
of
Stockholders’ Equity for the nine months ended September 30,
2008
|
|
F-5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statement
s
|
|
F-6
to F-21
|
CHINA
SHOE HOLDINGS,
INC
CONDENSED
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”)
,
except for number of shares)
(Unaudited)
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Unaudited)
|
|
(audited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
470,381
|
|
$
|
706,823
|
|
|
Accounts
receivable, trade
|
|
|
1,523,554
|
|
|
1,071,037
|
|
|
Inventories,
net
|
|
|
-
|
|
|
529,574
|
|
|
Other
receivables and prepayments
|
|
|
156,025
|
|
|
560,227
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,149,960
|
|
|
2,867,661
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,552,514
|
|
|
1,717,719
|
|
|
TOTAL
ASSETS
|
|
$
|
3,702,474
|
|
$
|
4,585,380
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
bank borrowings
|
|
$
|
51,205
|
|
$
|
170,903
|
|
|
Accounts
payable, trade
|
|
|
261,241
|
|
|
500,491
|
|
|
Income
tax payable
|
|
|
35,442
|
|
|
-
|
|
|
Amounts
due to directors
|
|
|
135,843
|
|
|
76,049
|
|
|
Amount
due to a related party
|
|
|
45,354
|
|
|
-
|
|
|
Other
payables and accrued liabilities
|
|
|
530,971
|
|
|
386,208
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,060,056
|
|
|
1,133,651
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; no shares
issued
and outstanding as of September 30, 2008 and December 31,
2007
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $0.001 par value; 300,000,000 shares authorized; 119,445,571
and
100,000,000 shares issued and outstanding as of September 30, 2008
and
December 31, 2007
|
|
|
119,445
|
|
|
100,000
|
|
|
Additional
paid-in capital
|
|
|
2,937,150
|
|
|
1,883,364
|
|
|
Deferred
compensation cost
|
|
|
(463,096
|
)
|
|
-
|
|
|
Accumulated
other comprehensive income
|
|
|
448,734
|
|
|
225,226
|
|
|
(Accumulated
deficit) retained earnings
|
|
|
(399,815
|
)
|
|
1,243,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,642,418
|
|
|
3,451,729
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
3,702,474
|
|
$
|
4,585,380
|
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SHOE HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
605,621
|
|
$
|
2,299,786
|
|
$
|
5,269,683
|
|
$
|
5,428,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
312,010
|
|
|
1,724,617
|
|
|
3,525,625
|
|
|
4,025,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
293,611
|
|
|
575,169
|
|
|
1,744,058
|
|
|
1,403,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12,730
|
|
|
2,408
|
|
|
37,791
|
|
|
14,919
|
|
|
Stock-based
compensation
|
|
|
36,667
|
|
|
-
|
|
|
60,135
|
|
|
15,185
|
|
|
Selling
and marketing
|
|
|
17,116
|
|
|
-
|
|
|
55,586
|
|
|
-
|
|
|
Impairment
charge on buildings
|
|
|
107,236
|
|
|
-
|
|
|
107,236
|
|
|
-
|
|
|
Provision
for inventory losses
|
|
|
2,389,602
|
|
|
-
|
|
|
2,389,602
|
|
|
-
|
|
|
General
and administrative
|
|
|
261,891
|
|
|
285,643
|
|
|
676,069
|
|
|
683,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,825,242
|
|
|
288,051
|
|
|
3,326,419
|
|
|
713,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME FROM OPERATIONS
|
|
|
(2,531,631
|
)
|
|
287,118
|
|
|
(1,582,361
|
)
|
|
689,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,160
|
|
|
651
|
|
|
3,657
|
|
|
1,176
|
|
|
Interest
expense
|
|
|
(4,038
|
)
|
|
(24,011
|
)
|
|
(12,299
|
)
|
|
(41,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
|
(1,878
|
)
|
|
(23,360
|
)
|
|
(8,642
|
)
|
|
(40,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE INCOME TAX
|
|
|
(2,533,509
|
)
|
|
263,758
|
|
|
(1,591,003
|
)
|
|
649,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(31,766
|
)
|
|
-
|
|
|
(51,951
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
$
|
(2,565,275
|
)
|
$
|
263,758
|
|
$
|
(1,642,954
|
)
|
$
|
649,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain (loss)
|
|
|
(62,243
|
)
|
|
178,575
|
|
|
223,508
|
|
|
180,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
(LOSS) INCOME
|
|
$
|
(2,627,518
|
)
|
$
|
442,333
|
|
$
|
(1,419,446
|
)
|
$
|
829,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share – Basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic and diluted
|
|
|
119,445,571
|
|
|
100,000,001
|
|
|
110,466,840
|
|
|
80,077,235
|
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SHOE HOLDINGS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS
OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1,642,954
|
)
|
$
|
649,210
|
|
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
176,792
|
|
|
146,440
|
|
|
Impairment
charge on buildings
|
|
|
107,236
|
|
|
-
|
|
|
Provision
for inventory losses
|
|
|
2,389,602
|
|
|
-
|
|
|
Stock-based
compensation
|
|
|
60,135
|
|
|
15,185
|
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(368,628
|
)
|
|
(479,587
|
)
|
|
Inventories,
net
|
|
|
(1,836,174
|
)
|
|
(672,118
|
)
|
|
Other
receivables and prepayments
|
|
|
433,087
|
|
|
(83,039
|
)
|
|
Value-added
tax receivable
|
|
|
-
|
|
|
41,011
|
|
|
Accounts
payable, trade
|
|
|
(267,905
|
)
|
|
269,368
|
|
|
Income
tax payable
|
|
|
34,612
|
|
|
(20,535
|
)
|
|
Amount
due to directors
|
|
|
56,395
|
|
|
144,438
|
|
|
Amount
due to related party
|
|
|
44,293
|
|
|
-
|
|
|
Other
payables and accrued liabilities
|
|
|
126,602
|
|
|
233,464
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(686,907
|
)
|
|
243,837
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(5,129
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,129
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
(Repayment
of) proceeds from short-term bank borrowings
|
|
|
(128,592
|
)
|
|
421,614
|
|
|
Proceeds
from private placement
|
|
|
550,000
|
|
|
-
|
|
|
Repayment
of restricted cash
|
|
|
-
|
|
|
(174,949
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
421,408
|
|
|
246,665
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate change on cash and cash equivalents
|
|
|
34,186
|
|
|
24,426
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(236,442
|
)
|
|
514,928
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
706,823
|
|
|
335,474
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
470,381
|
|
|
850,402
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
Cash
paid for income taxes
|
|
$
|
51,951
|
|
$
|
-
|
|
|
Cash
paid for interest expenses
|
|
$
|
12,299
|
|
$
|
41,523
|
|
See
accompanying notes to condensed consolidated financial statements
CHINA
SHOE HOLDINGS,
INC
CONDENSED
CONSOLIDATED
STATEMENT
OF STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
|
|
|
Common Stock
|
|
|
|
Deferred
|
|
Accumulated
other
|
|
Retained
earnings
|
|
Total
|
|
|
|
|
No. of shares
|
|
Amount
|
|
Additional
paid-in capital
|
|
compensation
cost
|
|
comprehensive
income
|
|
(accumulated
deficit)
|
|
stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2008
|
|
|
100,000,001
|
|
$
|
100,000
|
|
$
|
1,883,364
|
|
$
|
-
|
|
$
|
225,226
|
|
$
|
1,243,139
|
|
$
|
3,451,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued under private placement on January 30, 2008
|
|
|
4,230,769
|
|
|
4,231
|
|
|
545,769
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for payment of commitment fees, non-cash
|
|
|
571,429
|
|
|
571
|
|
|
39,429
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued under Equity Incentive Plan
|
|
|
14,643,372
|
|
|
14,643
|
|
|
468,588
|
|
|
(463,096
|
)
|
|
-
|
|
|
-
|
|
|
20,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,642,954
|
)
|
|
(1,642,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
223,508
|
|
|
-
|
|
|
223,508
|
|
|
Balance
as of September 30, 2008
|
|
|
119,445,571
|
|
$
|
119,445
|
|
$
|
2,937,150
|
|
$
|
(463,096
|
)
|
$
|
448,734
|
|
$
|
(399,815
|
)
|
$
|
2,642,418
|
|
See
accompanying notes to condensed consolidated financial statements
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
-
1
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”), and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.
In
the
opinion of management, the consolidated balance sheet as of December 31, 2007
which has been derived from audited financial statements and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended September 30, 2008 are not
necessarily indicative of the results to be expected for the entire fiscal
year
ending December 31, 2008 or for any future period.
These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2007.
NOTE
-
2
ORGANIZATION
AND BUSINESS BACKGROUND
China
Shoe Holdings, Inc. (the “Company” or “CHSH”) was incorporated in the State of
Nevada on January 24, 2005 as Indigo Technologies, Inc. On June 6, 2007, CHSH
changed its name to China Shoe Holdings, Inc. The principal activity of CHSH,
through its subsidiaries, is engaged in the manufacturing of ladies fashion
footwear for shoe retailers in Japan and China. Meanwhile, the Company also
produces various types of shoe soles for the domestic market in the
PRC.
On
February 21, 2008, the Company, through its subsidiary, Shanghai Kanghong
Yunheng Enterprise Development Company Limited, has established a company
namely, Shanghai Kangjiesi Shoes Co., Ltd. to conduct the retail 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).
Details
of the Company’s subsidiaries are described below:
|
Name
|
|
Place
of
incorporation
and
kind
of legal entity
|
|
Principal
activities
and
place of
operation
|
|
Particulars
of
issued/
registered
share
capital
|
|
Effective
interest
held
|
|
|
|
|
|
|
|
|
|
|
|
Wholly
Success Technology Group Limited (“WSTG”)
|
|
British
Virgin Islands, a limited liability company
|
|
Investment
holding
|
|
994,500
issued shares of $1 each
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
Kanghong Yunheng Enterprise Development Company Limited
(“SKYEDC”)
|
|
PRC,
a limited liability company
|
|
Shoe
manufacturing
|
|
RMB
15,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
Kangjiesi Shoes Co., Ltd. (“SKSCL”)
|
|
PRC,
a limited liability company
|
|
Shoe
retailing
|
|
RMB
500,000
|
|
100%
|
All
the
companies above are collectively known as “the Company” in these condensed
consolidated financial statements.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
-
3
GOING
CONCERN UNCERTAINTY
The
accompanying condensed consolidated financial statements have been prepared
on
the basis that the Company will continue as a going concern which assumes the
realization of assets and settlement of liabilities in the normal course of
business. For the period ended September 30, 2008, the Company incurred a net
loss of $1,642,954 and generated a negative cash flow of $686,907 from operating
activities. At September 30, 2008, the Company had an accumulated deficit of
$399,815. The Company is experiencing difficulty in generating sufficient cash
flow to meet its obligations and sustain its operations, which raises
substantial doubt about its ability to continue as a going concern. The
condensed consolidated financial statements do not include any adjustments
that
might result from the outcome of this uncertainty.
In
order
to improve the Company's liquidity, the Company is actively pursing additional
equity and or debt financing through discussions with investment bankers and
private investors. There can be no assurance the Company will be successful
in
its effort to secure additional equity and or debt financing.
NOTE
-
4
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
In
preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheets and revenues and expenses during the period
reported. Actual results may differ from these estimates.
The
condensed consolidated financial statements include the financial statements
of
CHSH and its subsidiaries.
All
significant inter-company balances and transactions within the Company have
been
eliminated upon consolidation.
|
l
|
Cash
and cash equivalents
|
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
|
l
|
Accounts
receivable, trade
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of September 30, 2008, the
Company recorded no allowance for doubtful accounts.
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a FIFO. The Company periodically
reviews historical sales activity to determine excess, slow moving items and
potentially obsolete items and also evaluates the impact of any anticipated
changes in future demand. Due to changing marketing conditions in the shoe
industry, the Company has made a provision for inventory losses of $2,389,602
to
charge against operations for the period ended September 30, 2008 to write
down
inventory to net realizable value. This was based on the Company’s best
estimates of product sales prices and customer demand patterns, and its plans
to
transition its products. It is at least reasonably possible that the estimates
used by the Company to determine its provision of inventory losses will be
materially different from the actual amounts or results. These differences
could
result in materially higher than expected inventory provision, which could
have
a materially adverse effect on the Company’s results of operations and financial
position in the near term.
|
l
|
Property,
plant and equipment, net
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values:
|
|
|
Depreciable life
|
|
Residual value
|
|
|
Buildings
|
|
|
20
years
|
|
|
5
|
%
|
|
Plant
and machinery
|
|
|
10
years
|
|
|
5
|
%
|
|
Office
equipments
|
|
|
10
years
|
|
|
5
|
%
|
|
Motor
vehicles
|
|
|
5
years
|
|
|
5
|
%
|
Expenditure
for maintenance and repairs is expensed as incurred. When assets have retired
or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
|
l
|
Impairment
of long-lived assets
|
In
accordance with SFAS No. 144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets”
,
long-lived assets and certain identifiable intangible assets held and used
by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Recoverability
of assets to be held and used is evaluated by a comparison of the carrying
amount of assets to estimated discounted net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment
to
be recognized is measured by the amount by which the carrying amounts of the
assets exceed the fair value of the assets. As of September 30, 2008, the
Company has provided an impairment charge of $107,236 on its
buildings.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
The
Company derives revenues from the sale of self-manufactured products. The
Company recognizes its revenues net of value added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products of Shanghai
at
the rate ranging from 4% to 17% on the invoiced value of sales. Output VAT
is
borne by customers in addition to the invoiced value of sales and input VAT
is
borne by the Company in addition to the invoiced value of purchases to the
extent not refunded for export sales.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104,
Revenue
Recognition
,
the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling
price
is fixed or determinable and collectibility is reasonably assured.
(a)
Sale
of
products
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced
no
product returns and has recorded no reserve for sales returns for the nine
months ended September 30, 2008.
(b)
Interest
income
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
Cost
of
revenues consists primarily of material costs, direct labor, depreciation and
manufacturing overheads, which are directly attributable to the manufacture
of
products.
The
Company accounts for income tax using SFAS No. 109
“Accounting
for Income Taxes”
,
which
requires the asset and liability approach for financial accounting and reporting
for income taxes. Under this approach, deferred income taxes are provided for
the estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss
carry-forwards and provisions, if any. Deferred tax assets and liabilities
are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
condensed consolidated statement of operations and comprehensive income in
the
period of enactment. A valuation allowance is provided to reduce the amount
of
deferred tax assets if it is considered more likely than not that some portion
of, or all of the deferred tax assets will not be realized.
The
Company also adopts Financial Accounting Standards Board ("FASB") Interpretation
No. (FIN) 48,
"Accounting
for Uncertainty in Income Taxes"
and FSP
FIN 48-1, which amended certain provisions of FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the financial
statements in accordance with SFAS No. 109,
“Accounting
for Income Taxes.”
FIN
48
provides
that a tax benefit from an uncertain tax position may be recognized when it
is
more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based
on
the technical merits. Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of
FIN
48
and in
subsequent periods. This interpretation also provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
In
connection with the adoption of FIN 48, the Company analyzed the filing
positions in all of the federal, state and foreign jurisdictions where the
Company and its subsidiaries are required to file income tax returns, as well
as
all open tax years in these jurisdictions. The Company adopted the policy of
recognizing interest and penalties, if any, related to unrecognized tax
positions as income tax expense. The Company did not have any unrecognized
tax
positions or benefits and there was no effect on the financial condition or
results of operations for the period ended September 30, 2008.
The
Company conducts its major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the local and foreign tax
authorities.
|
l
|
Net
income (loss) per share
|
The
Company calculates net income (loss) per share in accordance with SFAS No.
128,
“Earnings
per Share.”
Basic
income (loss) per share is computed by dividing the net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted
income (loss) per share is computed similar to basic income (loss) per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common stock
equivalents had been issued and if the additional common shares were
dilutive.
SFAS
No.
130,
“Reporting
Comprehensive Income”
,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income as defined includes
all changes in equity during a period from non-owner sources. Accumulated
comprehensive income consists of changes in unrealized gains and losses on
foreign currency translation. This comprehensive income is not included in
the
computation of income tax expense or benefit.
|
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of
operations.
The
reporting currency of the Company is the United States dollar ("US$"). The
Company's subsidiaries in the PRC, SKYEDC and SKSCL maintain their books and
records in its local currency, Renminbi Yuan ("RMB"), which is functional
currency as being the primary currency of the economic environment in which
these entities operate.
In
general, for consolidation purposes, assets and liabilities of its
subsidiaries whose functional currency is not the US dollars are
translated into US dollars, in accordance with SFAS No. 52, “
Foreign
Currency Translation”
,
using
the exchange rate on the balance sheet date. Revenues and expenses are
translated at average rates prevailing during the period. The gains and losses
resulting from translation of financial statements of foreign subsidiaries
are
recorded as a separate component of accumulated other comprehensive income
within the statement of stockholders’ equity.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
Translation
of amounts from RMB into
US$
has
been made at the following exchange rates for the respective
period:
|
|
|
2008
|
|
2007
|
|
|
Months
end RMB:US$ exchange rate
|
|
|
6.8351
|
|
|
7.4960
|
|
|
Average
monthly RMB:US$ exchange rate
|
|
|
6.9989
|
|
|
7.5643
|
|
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party
or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
SFAS
No.
131,
“Disclosures
about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on
a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
the financial statements. The Company operates in one principal reportable
segment in Japan and the PRC.
|
l
|
Fair
value of financial instruments
|
The
Company values its financial instruments as required by Statement of Financial
Accounting Standard (SFAS) No. 107, “
Disclosures
about Fair Value of Financial Instruments
”.
The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. The
estimates presented herein are not necessarily indicative of amounts that the
Company could realize in a current market exchange.
The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, other receivables and prepayments, short-term bank loan,
accounts payable, amount due to directors and related party, income tax payable,
other payables and accrued liabilities.
As
of the
balance sheet date, the estimated fair values of the financial instruments
were
not materially different from their carrying values as presented due to the
short term maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective period ends.
|
l
|
Recently
issued accounting
standards
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
"Business
Combinations"
("SFAS
No. 141R"). SFAS No. 141R will change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all
the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will change the accounting
treatment and disclosure for certain specific items in a business combination.
SFAS No. 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business
combinations the Company engages in will be recorded and disclosed following
existing GAAP until January 1, 2009. The Company expects SFAS No. 141R will
have
an impact on accounting for business combinations once adopted but the effect
is
dependent upon acquisitions at that time. The Company is still assessing the
impact of this pronouncement.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling
Interests in Consolidated Financial Statements--An Amendment of ARB No. 51,
or
SFAS No. 160"
("SFAS
No. 160"). SFAS No. 160 establishes new accounting and reporting standards
for
the noncontrolling interest in a subsidiary and for the deconsolidation of
a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company believes that SFAS 160 should not have a material
impact on the consolidated financial position or results of
operations.
In
March
2008, the FASB issued SFAS No. 161,
"Disclosures
about Derivative Instruments and Hedging Activities"
("SFAS
No. 161"). SFAS 161 requires companies with derivative instruments to disclose
information that should enable financial-statement users to understand how
and
why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FASB Statement No. 133
"Accounting
for Derivative Instruments and Hedging Activities"
and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. The adoption of this statement is not expected to have a
material effect on the Company's future financial position or results of
operations.
In
May
2008, the FASB issued SFAS No. 162,
“The
Hierarchy of Generally Accepted Accounting Principles”
(“SFAS
No. 162”). This statement identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation
of
financial statements in conformity with generally accepted accounting principles
(GAAP) in the United States. This statement is effective 60 days following
the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411,
“The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”
.
The
Company does not expect the adoption of SFAS No. 162 to have a material
effect on the financial condition or results of operations of the
Company.
In
May
2008, the FASB issued SFAS No. 163,
“Accounting
for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement
No. 60”
("SFAS
No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS No. 163 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, the Company
is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS No.
163 on its financial statements but does not expect it to have an effect on
the
Company's financial position, results of operations or cash flows.
Also
in
May 2008, the FASB issued FSP APB 14-1, "
Accounting
for Convertible Debt Instruments that may be Settled in Cash upon Conversion
(Including Partial Cash Settlement)"
("FSP
APB 14-1"). FSP APB 14-1 applies to
convertible
debt
securities that, upon conversion, may be settled by the issuer fully or
partially in cash. FSP APB 14-1 specifies that issuers of such instruments
should separately account for the liability and equity components in a manner
that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14-1 is effective for
financial statements issued for fiscal years after December 15, 2008, and must
be applied on a retrospective basis. Early adoption is not permitted. The
Company does not expect it to have an effect on the Company's financial
position, results of operations or cash flows.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
In
June
2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1,
"Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities"
("FSP
EITF 03-6-1"). FSP EITF 03-6-1 addresses
whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method as
described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF
03-6-1, unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company does not expect
it to have an effect on the Company's financial position, results of operations
or cash flows.
Also
in
June 2008, the FASB ratified EITF No. 07-5, "
Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own
Stock
"
("EITF
07-5"). EITF 07-5 provides that an
entity
should use a two-step approach to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own
stock,
including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not permitted.
The
Company is assessing the potential impact of this EITF 07-5 on the financial
condition and results of operations and does not expect it to have an effect
on
the Company's financial position, results of operations or cash
flows.
NOTE
-
5
ACCOUNTS
RECEIVABLE, TRADE
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
If
actual collections experience changes, revisions to the allowance may be
required. Based upon the aforementioned criteria, management has determined
that
no allowance for doubtful accounts is required for the nine months ended
September 30, 2008 and 2007.
NOTE
-
6
INVENTORIES,
NET
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,675,692
|
|
$
|
224,795
|
|
|
Work-in-progress
|
|
|
92,311
|
|
|
124,214
|
|
|
Finished
goods
|
|
|
678,850
|
|
|
180,565
|
|
|
|
|
|
2,446,853
|
|
|
529,574
|
|
|
Less:
provision for inventory losses
|
|
|
(2,389,602
|
)
|
|
-
|
|
|
Less:
foreign translation difference
|
|
|
(57,251
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
529,574
|
|
Due
to
changing marketing conditions in the shoe industry, the Company has ceased
the
production lines and made a provision for inventory losses of $2,389,602 to
write down inventory to net realizable value for the period ended September
30,
2008.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
-
7
OTHER
RECEIVABLES AND PREPAYMENTS
Other
receivables and prepayments consisted of the following:
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Advances
to employees
|
|
$
|
43,891
|
|
$
|
41,017
|
|
|
Deposits
and prepayments
|
|
|
55,211
|
|
|
457,973
|
|
|
Other
receivables
|
|
|
56,923
|
|
|
61,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
156,025
|
|
$
|
560,227
|
|
Other
receivables represented temporary advances to various independent third parties
and the Company is expected to collect the receivables within the next twelve
months.
NOTE
-
8
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
403,046
|
|
$
|
403,046
|
|
|
Plant
and machinery
|
|
|
1,822,779
|
|
|
1,822,779
|
|
|
Office
equipment
|
|
|
44,178
|
|
|
38,954
|
|
|
Motor
vehicles
|
|
|
29,452
|
|
|
29,452
|
|
|
Foreign
translation difference
|
|
|
390,124
|
|
|
214,299
|
|
|
|
|
|
2,689,579
|
|
|
2,508,530
|
|
|
Less:
accumulated depreciation
|
|
|
(887,090
|
)
|
|
(726,573
|
)
|
|
Less:
impairment charge
|
|
|
(107,236
|
)
|
|
-
|
|
|
Less:
foreign translation difference
|
|
|
(142,739
|
)
|
|
(64,238
|
)
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
1,552,514
|
|
$
|
1,717,719
|
|
Depreciation
expense for the three months ended September 30, 2008 and 2007 were $53,384
and
$48,813, which included $40,654 and $46,405 in cost of revenue,
respectively.
Depreciation
expense for the nine months ended September 30, 2008 and 2007 were $176,792
and
$146,440, which included $139,001 and $131,521 in cost of revenue,
respectively.
For
the
nine months ended September 30, 2008, the Company tested for impairment under
the SFAS No. 142
.
Based
on
the current real estate market, the market value of the buildings was impaired
and the Company recognized an impairment charge of $107,236 to write down its
carrying value to the fair value at September 30, 2008.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
-
9
SHORT-TERM
BANK BORROWINGS
As
of
September 30, 2008, the short-term bank loans represented an outstanding amount
of RMB350,000 (2007: RMB1,250,000) payable to a financial institution,
guaranteed by an independent third party, with interest rate at 8.748% (2007:
7.38%) per annum payable quarterly, with principals due on October 20,
2008.
During
October 2008, the Company fully repaid the short-term bank loans upon its
maturity.
NOTE
-
10
OTHER
PAYABLES AND ACCRUED LIABILIITES
Other
payables and accrued liabilities consisted of the followings:
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Salaries
and welfare payable
|
|
$
|
-
|
|
$
|
79,347
|
|
|
Advances
from customers
|
|
|
-
|
|
|
13,395
|
|
|
Accrued
expenses
|
|
|
135,992
|
|
|
146,230
|
|
|
Advances
from third parties
|
|
|
385,822
|
|
|
109,378
|
|
|
VAT
payable
|
|
|
9,157
|
|
|
9,355
|
|
|
Other
payables
|
|
|
-
|
|
|
28,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
530,971
|
|
$
|
386,208
|
|
NOTE
-
11
INCOME
TAXES
For
the
period ended September 30, 2008 and 2007, the local (“the United States”) and
foreign components of (loss) income before income taxes were comprised of the
following:
|
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Tax
jurisdictions:
|
|
|
|
|
|
|
|
|
-
Local
|
|
$
|
(143,093
|
)
|
$
|
(24,145
|
)
|
|
-
Foreign
|
|
|
(1,447,910
|
)
|
|
673,355
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
$
|
(1,591,003
|
)
|
$
|
649,210
|
|
The
provision for income taxes consisted of the following:
|
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
-
Local
|
|
$
|
-
|
|
$
|
-
|
|
|
-
Foreign
|
|
|
51,951
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
-
Local
|
|
|
-
|
|
|
-
|
|
|
-
Foreign
|
|
|
-
|
|
|
-
|
|
|
Provision
for income taxes
|
|
$
|
51,951
|
|
$
|
-
|
|
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
The
effective tax rate in the periods presented is the result of the mix of income
earned in various tax jurisdictions that apply a broad range of income tax
rates. The Company has subsidiaries that operate in various countries: U.S.,
British Virgin Islands and the PRC that are subject to tax in the jurisdictions
in which they operate, as follows:
United
States of America
CHSH
is
registered in the State of Nevada
and
is
subject to the tax laws of United States of America.
British
Virgin Islands
Under
the
current BVI law, WSTG is not subject to tax on income. For the periods ended
September 30, 2008 and 2007, WSTG did not generate any operating income or
loss.
The
PRC
All
the
Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by
the Income Tax Law of the PRC. On March 16, 2007, the National People’s Congress
approved the Corporate Income Tax Law of the People’s Republic of China (the
“New CIT Law”). The new CIT Law, among other things, imposes a unified income
tax rate of 25% for both domestic and foreign invested enterprises with effect
from January 1, 2008.
Under
the
New CIT Law, SKYEDC and SKSCL are entitled to the tax rate reduction from 33%
to
25% that may impact the carrying value of deferred tax assets as a result of
new
tax rate. However, SKYEDC is considered a foreign investment enterprise and
is
subject to tax holidays from a full exemption of income tax for the first two
profit making years with a 50% exemption of income tax (that is 30%) for the
next three years. Its ultimate applicable effective tax rate in 2008 and beyond
will depend on many factors, including but not limited to whether certain of
its
legal entity will be subject to a transitional policy under the Corporate Income
Tax Law, whether SKYEDC can continue to enjoy the unexpired tax
holidays.
The
reconciliation of income tax rate to the effective income tax rate for the
nine
months ended September 30, 2008 and 2007
is as
follows:
|
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
(Loss)
income before taxes from PRC operation
|
|
$
|
(1,447,912
|
)
|
$
|
681,844
|
|
|
Statutory
income tax rate
|
|
|
25
|
%
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
Income
tax at statutory tax rate
|
|
|
(361,978
|
)
|
|
225,009
|
|
|
Effect
of tax non-deductible expenses
|
|
|
624,230
|
|
|
-
|
|
|
Effect
from tax holiday
|
|
|
(210,301
|
)
|
|
(225,009
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
51,951
|
|
$
|
-
|
|
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
The
Company adopted the provisions of FIN 48 on January 1, 2007. This interpretation
prescribes a recognition threshold and measurement attribute for the tax
positions taken, or expected to be taken, on a tax return. The Company files
tax
returns in the various tax jurisdictions in which its subsidiaries operate
in
the PRC. The United States tax returns of its tax years 2006 to 2007 remain
open
to examination by IRS. The PRC 2007 tax returns have been filed and
cleared.
NOTE
-
12
AMOUNTS
DUE TO DIRECTORS
The
amounts due to directors represented unsecured advances which are interest-free
and have no fixed terms of repayment.
NOTE
-
13
AMOUNT
DUE TO A RELATED PARTY
The
balance due to the son of Mr. Gu Xianzhong represented unsecured advances which
are interest-free and has no fixed terms of repayment.
NOTE
-
14
CAPITAL
TRANSACTIONS
On
January 30, 2008, the Company entered into a Regulation S Subscription Agreement
(the “Agreement A”) with Mr. Yu Guorui, a resident and national of the PRC (the
“Investor”). Pursuant to the Agreement, the Company issued 4,230,769 shares of
common stock to the Investor for $550,000 at a price of $0.13 per share. The
price
was
negotiated by the parties and based upon the average closing price for the
Company’s common stock at its market quoted price on the closing date during the
month preceding the subscription agreement.
The
Company intends to utilize the funds received primarily on expansion of its
retail store operations in China.
On
March
24, 2008, the Company entered into an Equity Line Agreement (the “ELA”) and a
Registration Rights Agreement (the “RRA”) with Magellan Global Fund, L.P.
(“Magellan”), a Delaware limited partnership, to issue and sell the common stock
of the Company to Magellan up to $2,000,000. Upon execution of the ELA March
24,
2008, the Company issued 571,429 shares of restricted common stock at a price
of
$0.07 per share to ELA for the payment of commitment fees amounted to $40,000.
The price was based on the closing bid price of the Company’s common stock at
its market quoted price on the closing date of the sale of common
stock.
On
April
25, 2008, the Company approved and adopted the 2008 Equity Incentive Plan (the
“EIP”) for the purpose to provide additional incentive to employees, directors
and consultants. The EIP permits the grant of incentive stock options,
non-statutory stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units and performance shares. On May 1, 2008,
the Company issued 14,643,372 shares of restricted common stock under the EIP
with a fair market value of $0.033 per share. The fair market value was based
on
the last trade or closing ask price of the Company’s common stock on the
over
the
counter bulletin board.
As
of
September 30, 2008 and December 31, 2007, the Company has
119,445,571
and
100,000,000 shares of common stocks issued and outstanding.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
-
15
EQUITY
INCENTIVE PLAN
On
April
25, 2008, the Company approved and adopted the 2008 Equity Incentive Plan (the
“EIP”) for the purpose to provide additional incentive to employees, directors
and consultants. The EIP permits the grant of incentive stock options,
non-statutory stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units and performance shares. On May 1, 2008,
the Company granted an aggregate of 14,643,372 shares of restricted common
stock
under the EIP at a fair market value of $0.033 per share. The fair values of
these restricted stock awards are equal to the fair value of the Company’s stock
on the date of grant. Such restricted stock is subject to the risk of forfeiture
upon the occurrence of certain events. During the nine months ended September
30, 2008, the Company recognized $23,468 of compensation expense under the
plan.
As of September 30, 2008, $463,096 of unrecognized compensation expense related
to the nonvested restricted stock is recorded as deferred compensation in equity
and is expected to be recognized over a term of 4 years.
The
following table summarizes the status of the Company’s nonvested restricted
stock awards during the nine months ended September 30, 2008:
|
|
|
Nonvested restricted stock and stock unit
awards
|
|
|
|
|
Number of shares
|
|
Weighted average
grant date fair values
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
|
14,643,372
|
|
|
0.033
|
|
|
Vested
|
|
|
(610,140
|
)
|
|
0.033
|
|
|
Outstanding
at end of period
|
|
|
14,033,232
|
|
$
|
0.033
|
|
NOTE
-
16
SEGMENT
REPORTING, GEOGRAPHICAL INFORMATION
The
Company considers its business activities to constitute one single segment.
The
Company’s chief operating decision makers use these results to make operating
and strategic decisions. The geographic distribution of the Company’s customers
is located in Japan and the PRC.
An
analysis of the Company’s revenues and net assets by region are as follows:
|
|
|
Three months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
-
Japan
|
|
$
|
196,219
|
|
$
|
139,786
|
|
|
-
The PRC
|
|
|
409,402
|
|
|
2,160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
605,621
|
|
$
|
2,299,786
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
-
Japan
|
|
$
|
2,397,665
|
|
$
|
4,384,566
|
|
|
-
The PRC
|
|
|
2,872,018
|
|
|
1,044,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,269,683
|
|
$
|
5,428,658
|
|
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Net
assets (liabilities):
|
|
|
|
|
|
|
|
|
-
U.S.
|
|
$
|
(419,046
|
)
|
$
|
(12,126
|
)
|
|
-
BVI
|
|
|
(63,766
|
)
|
|
(69,352
|
)
|
|
-
The PRC
|
|
|
3,125,230
|
|
|
3,533,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,642,418
|
|
$
|
3,451,729
|
|
NOTE
-
17
CONCENTRATIONS
OF RISK
(a)
Major
customers
For
the
nine months ended September 30, 2008 and 2007, 100% of the Company’s assets were
located in the PRC. 66% and 75% of the Company’s revenues were derived from
customers located in Japan for the three and nine months ended September 30,
2008.
For
the
three months ended September 30, 2008, customers who account for 10% or more
of
revenues are presented as follows:
|
Customers
|
|
Revenues
|
|
Percentage
of revenues
|
|
|
|
Accounts
receivable, trade
|
|
|
Customer
A
|
|
$
|
129,925
|
|
|
22
|
%
|
|
|
|
$
|
264,494
|
|
|
Customer
B
|
|
|
98,707
|
|
|
16
|
%
|
|
|
|
|
94,153
|
|
|
Customer
C
|
|
|
86,322
|
|
|
14
|
%
|
|
|
|
|
267,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
314,954
|
|
|
52
|
%
|
|
Total:
|
|
$
|
626,170
|
|
For
the
nine months ended September 30, 2008, customers who account for 10% or more
of
revenues are presented as follows:
|
Customers
|
|
Revenues
|
|
Percentage
of revenues
|
|
|
|
Accounts
receivable, trade
|
|
|
Customer
A
|
|
$
|
733,504
|
|
|
14
|
%
|
|
|
|
$
|
264,494
|
|
|
Customer
B
|
|
|
739,819
|
|
|
14
|
%
|
|
|
|
|
94,153
|
|
|
Customer
C
|
|
|
587,017
|
|
|
11
|
%
|
|
|
|
|
267,523
|
|
|
Customer
D
|
|
|
792,948
|
|
|
15
|
%
|
|
|
|
|
100,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,853,288
|
|
|
54
|
%
|
|
Total:
|
|
$
|
726,772
|
|
For
the
three months ended September 30, 2007, customers who account for 10% or more
of
revenues are presented as follows:
|
Customers
|
|
Revenues
|
|
Percentage
of revenues
|
|
|
|
Accounts
receivable, trade
|
|
|
Customer
B
|
|
$
|
571,417
|
|
|
25
|
%
|
|
|
|
$
|
192,301
|
|
|
Customer
C
|
|
|
575,039
|
|
|
25
|
%
|
|
|
|
|
168,478
|
|
|
Customer
D
|
|
|
446,593
|
|
|
19
|
%
|
|
|
|
|
205,341
|
|
|
Customer
E
|
|
|
358,765
|
|
|
16
|
%
|
|
|
|
|
198,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
1,951,814
|
|
|
85
|
%
|
|
Total:
|
|
$
|
764,856
|
|
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
For
the
nine months ended September 30, 2007, customers who account for 10% or more
of
revenues are presented as follows:
|
Customers
|
|
Revenues
|
|
Percentage
of revenues
|
|
|
|
Account
s
receivable, trade
|
|
|
Customer
B
|
|
$
|
988,377
|
|
|
18
|
%
|
|
|
|
$
|
192,301
|
|
|
Customer
C
|
|
|
1,019,093
|
|
|
19
|
%
|
|
|
|
|
168,478
|
|
|
Customer
D
|
|
|
715,344
|
|
|
13
|
%
|
|
|
|
|
205,341
|
|
|
Customer
E
|
|
|
734,696
|
|
|
14
|
%
|
|
|
|
|
198,736
|
|
|
Customer
F
|
|
|
927,027
|
|
|
17
|
%
|
|
|
|
|
195,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
4,384,537
|
|
|
81
|
%
|
|
Total:
|
|
$
|
960,741
|
|
(b)
Major
vendors
For
the
three and nine months ended September 30, 2008 and 2007, there was no vendor
who
account for 10% or more of purchases.
(c)
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers’ financial
condition, but does not require collateral to support such
receivables.
(d)
Interest
rate risk
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at variable rates expose the Company to cash flow interest-rate risk.
Borrowings issued at fixed rates expose the Company to fair value interest-rate
risk. Company policy is to maintain approximately all of its borrowings in
fixed
rate instruments. As of September 30, 2008, all of borrowings were at fixed
rates.
(e)
Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against US$, the value of RMB revenues and assets as expressed in US$ financial
statements will decline. The Company does not hold any derivative or other
financial instruments that expose to substantial market risk.
CHINA
SHOE HOLDINGS, INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
-
18
OPERATING
LEASE COMMITMENT
The
Company rented offices, factories and retail shops under several non-cancelable
operating lease agreements. As of September 30, 2008, the future minimum rental
payments required for the coming years are as follows:
|
Period
ended September 30,
|
|
|
|
|
|
2009
|
|
|
74,599
|
|
|
2010
|
|
|
81,355
|
|
|
2011
|
|
|
46,494
|
|
|
Thereafter
|
|
|
100,079
|
|
|
|
|
|
|
|
|
|
|
$
|
302,527
|
|
For
the
nine months ended September 30, 2008 and 2007, rental expenses were $63,229
and
$38,991 respectively.
|
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-Q, 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-K 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 faced a worsening operating environment during the third quarter of
2008
as the global financial crisis cut demand and a rising currency eroded profits.
Since our products are mainly sold to the Japanese market, the weakening of
theJapanese economy under the global financial crisis has led to the cut of
major sales order from the Japanese customers. These factors are anticipated
by
management to continue into the foruth quarter of 2008.
Apart
from the manufacturing business, starting from the second quarter of 2008,
the
Company commenced its retail business in Shanghai region through selling its
own
developed brands of “Kanggies” and “CCR”.
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.
We
also
conduct retail sales of our own developed ladies shoes and leather products
in
the People’s Republic of China, mainly in the Shanghai region.
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 Company approved and adopted the 2008 Equity Incentive Plan (the
“EIP”) for the purpose to provide additional incentive to employees, directors
and consultants. The EIP permits the grant of incentive stock options,
non-statutory stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units and performance shares.
On
May 1,
2008, the Company issued 14,643,372 shares of restricted common stock under
the
EIP with a fair market value of $0.033 per share. The fair market value was
based on the last trade or closing ask price of the Company’s common stock on
the over the counter bulletin board.
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
(1)
The
following table summarizes the results of our operations during the three-months
period ended September 30 2008 and 2007, and provides information regarding
the
dollar and percentage increase or (decrease) from the three-months period ended
September 30, 2008 to the three months period ended September 30,
2007.
All
amount, other than percentages, in millions of U.S dollars
|
|
|
3 Months Ended September 30,
|
|
|
|
|
|
|
Item
|
|
2008
|
|
2007
|
|
Increase
(Decrease)
|
|
% Increase
(% Decrease)
|
|
|
Operating
Revenues
|
|
$
|
0.61
|
|
$
|
2.30
|
|
$
|
(1.69
|
)
|
$
|
(73.5
|
)%
|
|
Cost
of Revenues
|
|
|
0.31
|
|
|
1.72
|
|
|
(1.41
|
)
|
|
(82.0
|
)%
|
|
Gross
Profit
|
|
|
0.30
|
|
|
0.58
|
|
|
(0.28
|
)
|
|
(48.3
|
)%
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Depreciation
|
|
|
0.01
|
|
|
0.002
|
|
|
0.008
|
|
|
400.0
|
%
|
|
-
Stock based compensation
|
|
|
0.04
|
|
|
-
|
|
|
0.04
|
|
|
N/A
|
|
|
-
Selling & marketing
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
|
N/A
|
|
|
-
Impairment charge on building
|
|
|
0.11
|
|
|
-
|
|
|
0.11
|
|
|
N/A
|
|
|
-
Provision for inventory loss
|
|
|
2.39
|
|
|
-
|
|
|
2.39
|
|
|
N/A
|
|
|
-
General & administrative
|
|
|
0.26
|
|
|
0.29
|
|
|
(0.03
|
)
|
|
(10.3
|
)%
|
|
Other
expenses
|
|
|
(0.0019
|
)
|
|
(0.023
|
)
|
|
0.021
|
|
|
91.3
|
%
|
|
Income
Tax Expenses
|
|
|
(0.032
|
)
|
|
-
|
|
|
(0.032
|
)
|
|
N/A
|
|
|
Net
(Loss) Income
|
|
|
(2.57
|
)
|
|
0.26
|
|
|
(2.83
|
)
|
|
(1,088.5
|
)%
|
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Revenue:
Starting
from second quarter of 2008, our revenues are generated from manufacturing
and
retailing business. Revenue was $0.61 million for the three months ended
September 30, 2008 as compared to $2.30 million for the three months ended
September 30, 2007, representing a decreased by 73.5%. The dramatic decrease
in
revenue was mainly attributable to the loss of sales orders from a major
Japanese customer.
Cost
of Revenue and Gross Profit:
Cost of
revenue and gross profit were respectively $0.31 million and $0.3 million for
the three months ended September 30, 2008 as compared to $1.72 million and
$0.58
million for the three months ended September 30, 2007, representing a decrease
by 82% and 48.3% respectively. The increased in gross profit was mainly due
to
the higher profit margin derived from the retail business when comparing with
the corresponding period of 30 September 2007.
Operating
Expenses:
Operating expenses was $2.83 million for the three months ended September 30,
2008 as compared to $0.29 million for the three months ended September 30,
2007,
representing an increase by 875.9%. The substantially increased was mainly
attributable to the provision for inventory losses in the current period of
30
September 2008.
Income
Tax Expenses:
China
Shoe Holdings, Inc. is subject to United States federal income tax rate. No
provision for income taxes in the United States has been made as China Shoe
Holdings, Inc. had no United States taxable income during the three months
ended
September 30, 2008.
Our
wholly owned subsidiary Wholly Success Technology Group Limited (“WSTG”) was
incorporated in the British Virgin Islands and, under the current laws of the
BVI, is not subject to income taxes.
Starting
from the first quarter of 2007, Shanghai Kanghong Yunheng Enterprise Development
Company Limited (“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.
Its
ultimate applicable effective tax rate in 2008 and beyond will depend on many
factors, including but not limited to whether certain of its legal entity will
be subject to a transitional policy under the corporate income tax law, whether
SKYEDC can continue to enjoy the unexpired tax holidays.
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 was effective on January 1, 2008. Under the new corporate tax
law, SKYEDC is entitled to the tax rate reduction from 33% to 25% that may
impact the carrying value of deferred tax assets as a result of new tax
rate.
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.
Our
subsidiary, Shanghai Kangjiesi Shoes Co., Ltd (“SKSCL”) which operates in the
PRC, is conducting a retailing shoe business in the People’s Republic of China.
SKSCL is subject to a corporate income tax rate of 25%.
Income
taxes expense was $0.032 million for the three months ended September 30, 2008.
The Company started to pay taxes during the three months ended September 30,
2008 because of the commencement of the retail business from SKSCL during the
three months ended June 30, 3008.
Net
(loss) income:
Net loss
was $2.57 million for the three months ended September 30, 2008 as compared
to a
net income of $0.26 million for the three months ended September 30, 2007,
mainly attributable to the provision for inventory losses during the current
period of 30 September, 2008.
(2)
The
following table summarizes the results of our operations during the nine-months
period ended September 30 2008 and 2007, and provides information regarding
the
dollar and percentage increase or (decrease) from the nine-months period ended
September 30, 2007 to the nine months period ended September 30,
2008.
All
amount, other than percentages, in millions of U.S dollars
|
|
|
9 Months Ended September 30,
|
|
|
|
|
|
|
Item
|
|
2008
|
|
2007
|
|
Increase
(Decrease)
|
|
% Increase
(% Decrease)
|
|
|
Operating
Revenues
|
|
$
|
5.27
|
|
$
|
5.43
|
|
$
|
(0.16
|
)
|
$
|
(2.9
|
)%
|
|
Cost
of Revenues
|
|
|
3.53
|
|
|
4.03
|
|
|
(0.50
|
)
|
|
(12.4
|
)%
|
|
Gross
Profit
|
|
|
1.74
|
|
|
1.40
|
|
|
0.34
|
|
|
24.3
|
%
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Depreciation
|
|
|
0.04
|
|
|
0.01
|
|
|
0.03
|
|
|
300.0
|
%
|
|
-
Stock based compensation
|
|
|
0.06
|
|
|
0.02
|
|
|
0.04
|
|
|
200.0
|
%
|
|
-
Selling & marketing
|
|
|
0.06
|
|
|
-
|
|
|
0.06
|
|
|
N/A
|
|
|
-
Impairment charge on building
|
|
|
0.11
|
|
|
-
|
|
|
0.11
|
|
|
N/A
|
|
|
-
Provision for inventory loss
|
|
|
2.39
|
|
|
-
|
|
|
2.39
|
|
|
N/A
|
|
|
-
General & administrative
|
|
|
0.68
|
|
|
0.68
|
|
|
-
|
|
|
-
|
|
|
Other
Expenses
|
|
|
(0.009
|
)
|
|
(0.04
|
)
|
|
0.031
|
|
|
77.5
|
%
|
|
Income
Tax Expenses
|
|
|
(0.052
|
)
|
|
-
|
|
|
(0.052
|
)
|
|
N/A
|
|
|
Net
(Loss) Income
|
|
|
(1.64
|
)
|
|
0.65
|
|
|
(2.29
|
|
|
(352.3
|
)%
|
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
Revenue:
Starting
from second quarter of 2008, our revenues are generated from both manufacturing
and retailing business, revenue was $5.27 million for the nine months ended
September 30, 2008 as compared to $5.43 million for the nine months ended
September 30, 2007, representing a decrease by 2.9%. The decrease in revenue
was
mainly attributable to the loss of sales from a major Japanese
customer.
Cost
of Revenue and Gross Profit:
Cost of
revenue and gross profit were respectively $3.53 million and $1.74 million
for
the nine months ended September 30, 2008 as compared to $4.03 million and $1.40
million for the nine months ended September 30, 2007, representing a decrease
by
12.4% and an increased by 24.3% respectively. The increased in gross profit
was
mainly due to the higher profit margin derived from the retail business when
comparing with the corresponding period of 30 September 2007.
Operating
Expenses:
Operating expenses was $3.34 million for the nine months ended September 30,
2008 as compared to $0.71 million for the nine months ended September 30, 2007,
representing an increase by 370.4%. The substantially increased was mainly
attributable to the provision for inventory losses in the current period of
30
September 2008.
Income
Tax Expenses:
China
Shoe Holdings, Inc. is subject to United States federal income tax rate. No
provision for income taxes in the United States has been made as China Shoe
Holdings, Inc. had no United States taxable income during the nine months ended
September 30, 2008.
Our
wholly owned subsidiary Wholly Success Technology Group Limited (“WSTG”) was
incorporated in the British Virgin Islands and, under the current laws of the
BVI, is not subject to income taxes.
Starting
from the first quarter of 2007, Shanghai Kanghong Yunheng Enterprise Development
Company Limited (“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. Its ultimate
applicable effective tax rate in 2008 and beyond will depend on many factors,
including but not limited to whether certain of its legal entity will be subject
to a transitional policy under the corporate income tax law, whether SKYEDC
can
continue to enjoy the unexpired tax holidays.
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. Under the new corporate
tax
law, SKYEDC is entitled to the tax rate reduction from 33% to 25% that may
impact the carrying value of deferred tax assets as a result of new tax
rate.
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.
Our
subsidiary, Shanghai Kangjiesi Shoes Co., Ltd (“SKSCL”) which operates in the
PRC, is conducting shoes retailing business in the People’s Republic of China.
SKSCL is subject to a corporate income tax rate of 25%.
Income
taxes expense was $0.052 million for the nine months ended September 30, 2008.
The Company started to pay taxes during the nine months ended September 30,
2008
because of the commencement of the retail business from SKSCL during the nine
months ended September 30, 3008.
Net
income:
Net loss
was $1.64 million for the nine months ended September 30, 2008 as compared
to
net income of $0.65 million for the nine months ended September 30, 2007,
representing mainly attributable to the provision for inventory losses during
the current period of 30 September, 2008.
Liquidity
and Capital Resources
Cash
Flows
All
amounts in millions of U.S. dollars
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(0.69
|
)
|
$
|
0.24
|
|
|
Net
cash used in investing activities
|
|
|
(0.01
|
)
|
|
-
|
|
|
Net
cash provided by financing activities
|
|
|
0.42
|
|
|
0.25
|
|
|
Foreign
currency translation adjustments
|
|
|
0.04
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
$
|
(0.24
|
)
|
$
|
0.51
|
|
Operating
Activities:
Net
cash
used in operating activities was $0.69 million for the nine months ended
September 30, 2008, as compared with net cash provided by operating activities
of $0.24 million for the corresponding period in 2007. The change was mainly
due
to the increased in inventories, accounts receivable, and the decreased in
accounts payable.
Investing
Activities:
Net
cash
used in investing activities for the nine months ended September 30, 2008 was
$0.01 million. The increase was attributable to the acquisition of fixed
assets.
Financing
Activities:
Net
cash
provided by financing activities in the nine months ended September 30, 2008
totaled $0.42 million as compared to $0.25 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 $0.55
million.
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.
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.
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.
F-29
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:
November 19, 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
|
|
November
19, 2008
|
|
Gu
Xianzhong
|
|
/s/
Angus Cheung Ming
|
|
Chief
Financial Officer
|
|
November
19, 2008
|
|
Angus
Cheung Ming
|
|
(Principal
Financial and Accounting Officer)
|
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