Attached files
file | filename |
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EX-32.1 - Mobile Presence Technologies Inc. | v222106_ex32-1.htm |
EX-31.1 - Mobile Presence Technologies Inc. | v222106_ex31-1.htm |
EX-31.2 - Mobile Presence Technologies Inc. | v222106_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
¨
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011
or
¨
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from __________________ to __________________
Commission file number: 333-147666
CHINA SHANDONG INDUSTRIES INC.
(Name of registrant as specified in its charter)
Delaware
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20-8545693
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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No. 2888 Qinghe Road, Development Zone Cao County
Shandong Province, China 274400
(Address of principal executive offices)(Zip Code)
(86) 530-3431658
(Registrant’s telephone number, including area code)
Indicate by check mark 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. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes¨ No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨
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Accelerated filer¨
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Non-accelerated filero (Do not check if smaller reporting company)
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Smaller reporting companyx
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨ Nox
TABLE OF CONTENTS
Page
No.
|
|||
PART I. - FINANCIAL INFORMATION
|
|||
Item 1.
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Financial Statements
|
1
|
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Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 (Audited)
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3
|
||
Unaudited Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2011 and 2010
|
4 | ||
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
|
5 | ||
Notes to Unaudited Consolidated Financial Statements
|
6 | ||
Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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17 | |
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
|
24 | |
Item 4
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Controls and Procedures
|
24 | |
Item 1.
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Legal Proceedings
|
25 | |
Item 1A.
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Risk Factors
|
25 | |
Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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25 | |
Item 3.
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Defaults Upon Senior Securities
|
25 | |
Item 4.
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(Removed and Reserved)
|
25 | |
Item 5.
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Other Information
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25 | |
Item 6.
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Exhibits
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25 |
ITEM 1.
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FINANCIAL STATEMENTS
|
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011
1
Index to Unaudited Consolidated Financial Statements
Pages
|
|
Unaudited Consolidated Balance Sheets
|
3
|
Unaudited Consolidated Statements of Income and Comprehensive Income
|
4
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Unaudited Consolidated Statements of Cash Flows
|
5
|
Notes to Unaudited Consolidated Financial Statements
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6 – 16
|
2
China Shandong Industries, Inc. and Subsidiaries
|
Unaudited Condensed Consolidated Balance Sheets
|
As of March 31, 2011 and December 31, 2010
|
March 31,
2011
|
December 31,
2010
|
|||||||
ASSETS
|
||||||||
CURRENT ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 3,921,583 | $ | 2,863,692 | ||||
Cash and cash equivalents
|
152,809 | - | ||||||
Trade accounts receivable
|
13,393,519 | 11,037,212 | ||||||
Inventories
|
14,759,465 | 14,758,721 | ||||||
Prepaid expenses
|
4,230,357 | 2,759,060 | ||||||
Other receivables
|
292,500 | 298,570 | ||||||
TOTAL CURRENT ASSETS
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36,750,233 | 31,717,255 | ||||||
FIXED ASSETS
|
||||||||
Property, plant, and equipment
|
24,776,059 | 23,651,008 | ||||||
Accumulated depreciation
|
(3,860,005 | ) | (3,465,278 | ) | ||||
NET FIXED ASSETS
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20,916,054 | 20,185,730 | ||||||
OTHER ASSETS
|
||||||||
Land occupancy rights, net
|
883,489 | 71,541 | ||||||
Construction in progress
|
10,630,565 | 10,413,961 | ||||||
TOTAL OTHER ASSETS
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11,514,054 | 10,485,502 | ||||||
TOTAL ASSETS
|
$ | 69,180,341 | $ | 62,388,487 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT LIABILITIES
|
||||||||
Short-term borrowings
|
$ | 9,932,611 | $ | 9,361,741 | ||||
Accounts payable
|
435,754 | 452,285 | ||||||
Other payables and accrued liabilities
|
540,762 | 584,447 | ||||||
Deposits received in advance
|
118,411 | 118,516 | ||||||
Compensation payable
|
172,550 | 172,550 | ||||||
Taxes payable
|
1,088,562 | 417,936 | ||||||
TOTAL CURRENT LIABILITIES
|
12,288,650 | 11,107,475 | ||||||
TOTAL LIABILITIES
|
12,288,650 | 11,107,475 | ||||||
COMMITMENTS AND CONTINGENCIES
|
||||||||
STOCKHOLDERS' EQUITY
|
||||||||
Preferred stock ($.0001 par value, 5,000,000 authorized, none issued and outstanding as of March 31, 2011 and December 31, 2010, respectively)
|
— | |||||||
Common stock ($.0001 par value, 100,000,000 authorized, 43,058,485 and 43,050,075 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively)
|
4,306 | 4,305 | ||||||
Additional paid in capital
|
8,254,496 | 8,242,947 | ||||||
Statutory and discretionary surplus reserve
|
3,608,243 | 3,608,243 | ||||||
Accumulated other comprehensive income (loss)
|
2,236,437 | 1,879,135 | ||||||
Retained earnings
|
42,788,209 | 37,546,382 | ||||||
TOTAL STOCKHOLDERS' EQUITY
|
56,891,691 | 51,281,012 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 69,180,341 | $ | 62,388,487 |
See accompanying notes to these consolidated financial statements
3
China Shandong Industries, Inc. and Subsidiaries
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Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
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'For the three months ended March 31, 2011 and 2010
|
For the three months ended
|
||||||||
March 31,
2011
|
March 31,
2010
|
|||||||
Revenues
|
||||||||
Sales
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$ | 33,553,916 | $ | 19,406,737 | ||||
Cost of goods sold (exclusive of depreciation and amortization)
|
25,044,268 | 13,483,442 | ||||||
Operating expenses
|
||||||||
Selling and marketing
|
379,903 | 237,577 | ||||||
Research and development expenses
|
233,407 | 251,136 | ||||||
General and administrative
|
899,354 | 581,263 | ||||||
Professional and consulting fee
|
11,550 | — | ||||||
Total Operating Expenses
|
1,524,214 | 1,069,977 | ||||||
Income from operations
|
6,985,434 | 4,853,318 | ||||||
Other income (expenses)
|
||||||||
Finance income (expenses)
|
(225,904 | ) | (247,095 | ) | ||||
Non-operating income (expenses)
|
235,089 | 93,318 | ||||||
Total other income (expenses)
|
9,185 | (153,777 | ) | |||||
Income before income taxes
|
6,994,619 | 4,699,541 | ||||||
Income taxes - current
|
1,752,792 | 512,960 | ||||||
Income taxes - deferred
|
670,006 | |||||||
Net income
|
$ | 5,241,827 | $ | 3,516,574 | ||||
Other comprehensive income
|
||||||||
Foreign currency translation adjustment
|
357,302 | 294,579 | ||||||
Comprehensive income
|
$ | 5,599,129 | $ | 3,811,153 | ||||
Earnings per common share
|
||||||||
Basic
|
$ | 0.12 | $ | 0.08 | ||||
Fully diluted
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$ | 0.12 | $ | 0.08 | ||||
Weighted average common shares outstanding
|
||||||||
Basic
|
43,056,840 | 42,875,000 | ||||||
Fully diluted
|
44,056,765 | 43,375,000 |
See accompanying notes to these financial statements and auditors' report
4
China Shandong Industries, Inc. and Subsidiaries
|
Unaudited Condensed Consolidated Statements of Cash Flows
|
For the three months ended March 31, 2011 and 2010
|
For the three months ended
|
||||||||
March 31,
2011
|
March 31,
2010
|
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income
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5,241,827 | 3,516,574 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||
Depreciation
|
354,510 | 200,216 | ||||||
Amortization
|
5,454 | 1,323 | ||||||
Warrants granted for services, non-cash
|
— | |||||||
Stock based compensation, non-cash
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11,550 | — | ||||||
Changes in operating assets and liabilities:
|
||||||||
Trade accounts receivable
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(2,211,854 | ) | (952,910 | ) | ||||
Prepaid expense
|
(1,430,470 | ) | 379,367 | |||||
Inventories
|
175,577 | (694,269 | ) | |||||
Other receivables
|
9,605 | 128,844 | ||||||
Accounts payable
|
(21,317 | ) | 358,243 | |||||
Taxes payable
|
662,048 | 103,498 | ||||||
Deferred tax liabilities
|
— | (7,903 | ) | |||||
Other payables and accrued liabilities
|
(50,406 | ) | 122,188 | |||||
Deposits received in advance
|
(1,520 | ) | 3,398 | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
2,745,004 | 3,158,570 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase of property, plant, and equipment
|
(1,939,929 | ) | (180,232 | ) | ||||
Additions to construction in progress
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(91,034 | ) | (1,567,556 | ) | ||||
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(2,030,963 | ) | (1,747,788 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds from short term borrowings
|
7,599,629 | — | ||||||
Principal repayments of short term borrowings
|
(7,143,652 | ) | (146,479 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
455,978 | (146,479 | ) | |||||
Foreign currency adjustment
|
40,681 | 5,134 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
1,210,700 | 1,269,436 | ||||||
CASH AND CASH EQUIVALENTS:
|
||||||||
Beginning of period
|
2,863,692 | 2,185,839 | ||||||
End of period
|
$ | 4,074,392 | $ | 3,455,275 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash paid during the years for:
|
||||||||
Interest
|
$ | 146,346 | $ | 247,096 | ||||
Taxes
|
$ | 2,060,631 | $ | 982,542 |
See accompanying notes to these financial statements and auditors' report
5
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
|
1.
|
BASIS OF PRESENTATION
|
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2010 and 2009 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2010.
|
2.
|
ORGANIZATION AND BUSINESS BACKGROUND
|
China Shandong Industries Inc. (the “Company”) was incorporated on February 13, 2007 under the laws of the State of Delaware as “Mobile Presence Technologies, Inc”. On December 3, 2009, the Company changed its name to China Shandong Industries Inc.
On October 22, 2009, the Company entered into a Stock Exchange and Reorganization Agreement (the “Agreement”), with Tianwei International Development Corporation, an Oregon Corporation (“TIDC”), CAOPU Enterprise Limited, a company organized under the laws of the British Virgin Islands (“Caopu”), London Financial Group Ltd., a company organized under the laws of the British Virgin Islands (“LFG”), Phoebus Vision Investment Developing Group, Ltd., a company organized under the laws of the British Virgin Islands (“Phoebus”) and Timothy Lightman (“TL”), pursuant to which the Company acquired all of the issued and outstanding capital stock of TIDC owned by each of CAOPU, LFG and Phoebus in exchange for an issuance by the Company of an aggregate of 38,587,500 shares of its common stock, par value of $0.0001 per share (the “Common Stock”) to Caopu, LFG and Phoebus. The shares of Common Stock were issued pursuant to the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
In addition, TL, the owner of 24,375,000 shares of Common Stock (“TL’s MBPI Shares”), representing approximately 93% of the 26,162,500 then issued and outstanding shares of the Common Stock, delivered a stock certificate or stock certificates representing 21,875,000 of TL’s MBPI Shares to the Company for cancellation.
On November 5, 2009, pursuant to a separate Assignment and Assumption Agreement by and between the Company and TL, the Company assigned, in fee simple absolute, all of its assets of any kind whatsoever excepting only its rights under the Agreement, including, but not limited to those assets related to its proposed cellular telephone application to TL. TL assumed all of the indebtedness or other obligations of the Company in existence on the date hereof, excluding only its obligation to perform under the Agreement, including, but limited to any obligations for attorney fees, accountant fees, taxes and transfer agent fees and agreed to indemnify and hold the Company harmless against the same provided the Company gave prompt notice of any claim for indemnification.
6
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
The transaction was effectively completed on November 6, 2009, which has been accounted for as a reverse acquisition and recapitalization of the Company, through a wholly-owned subsidiary, TIDC, whereby TIDC is deemed to be the ultimate accounting acquirer (legal acquiree) and the Company to be the ultimate accounting acquiree (legal acquirer). The Company is deemed to be a continuation of the business of TIDC, through its wholly-owned subsidiary, Shandong Caopu Arts & Crafts Co., Ltd. (“SCAC”), a PRC-based company incorporated on August 15, 2000 under the laws of the PRC. Accordingly, the accompanying consolidated financial statements include the following:
|
1.
|
the balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the accounting acquiree at historical cost; and
|
|
2.
|
the financial position, results of operations, and cash flows of the accounting acquirer for all periods presented as if the recapitalization had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of stock exchange transaction.
|
The entities which were party to the reorganization were not related to each other.
The Company is located in the Cao Xian Development Zone, which is near the Beijing-Kowloon railway with the DeShang Highway to the East and Qinghe Road to the West. There are three production areas including sixteen production workshops and staff who work on willow products, craft and wooden furniture.
The Company undertakes joint production with local farmers by purchasing the processing products from them and then by proceeding to finish the products in order to generate sales. The Company has numerous products, such as grass willow products, wooden crafts, indoor/outdoor wooden furniture, office furniture, different kinds of frames and craftwork. The Company also has numerous national patterns for design and utility models.
The Company’s products are sold in various countries and places, including the PRC, the United States, Germany, the United Kingdom, Spain, Holland, Italy, Sweden, Japan, Canada, Denmark, Hong Kong and Taiwan.
The Company’s business model is as an original equipment manufacturer (OEM) for North American and European manufacturers.
A majority of the Company’s sales were from exports. In order to adapt to the international market, the Company passed the ISO9001 international quality management system certification, ISO14001 environmental management system certification, OHSMS18001 Occupational Health and Safety Management System Certification, as well as the CE certification for access to the EU market.
3.
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.
7
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
Fair Value Measurements and Disclosures
In January 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance regarding fair value measures and disclosures. The guidance requires disclosure of significant transfers between level 1 and level 2 fair value measurements along with the reason for the transfer. An entity must also separately report purchases, sales, issuances and settlements within the level 3 fair value rollforward. The guidance further provides clarification of the level of disaggregation to be used within the fair value measurement disclosures for each class of assets and liabilities and clarified the disclosures required for the valuation techniques and inputs used to measure level 2 or level 3 fair value measurements. This new authoritative guidance was effective for the Company in fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not impact the Company’s consolidated results of operations or financial position.
Variable Interest Entities (VIEs)
In June 2009, the FASB issued authoritative guidance changing the approach to determine a VIE’s primary beneficiary and requiring ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. This guidance also requires additional disclosures about a company’s involvement with VIEs and any significant changes in risk exposure due to that involvement. This guidance was adopted January 1, 2010, and did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
4.
|
TRADE ACCOUNTS RECEIVABLE
|
Trade accounts receivable is comprised of the following amounts at the respective dates:
As of
|
||||||||
3/31/2011
|
12/31/2010
|
|||||||
Gross trade accounts receivable from customers
|
$ | 13,798,707 | $ | 11,437,591 | ||||
Allowance for doubtful customer accounts
|
(405,188 | ) | (400,379 | ) | ||||
$ | 13,393,519 | $ | 11,037,212 |
We did not recognize any bad debt expense during the three months ended March 31, 2011. The increase in allowance for doubtful accounts was due to foreign currency translation.
5.
|
INVENTORIES
|
Inventories are comprised of the following amounts at the respective dates:
As of
|
||||||||
3/31/2011
|
12/31/2010
|
|||||||
Raw materials
|
$ | 3,191,160 | $ | 6,169,040 | ||||
Work in process
|
8,644,056 | 3,935,392 | ||||||
Finished goods
|
2,924,249 | 4,654,289 | ||||||
14,759,465 | 14,758,721 | |||||||
Provision for obsolete inventories
|
-0- | -0- | ||||||
$ | 14,759,465 | $ | 14,758,721 |
8
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
6.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment are comprised of the following amounts at the respective dates:
As of
|
||||||||
3/31/2011
|
12/31/2010
|
|||||||
Cost:
|
||||||||
Buildings
|
$ | 19,102,014 | $ | 17,998,450 | ||||
Machinery, equipment and furniture
|
5,674,045 | 5,652,558 | ||||||
24,776,059 | 23,651,008 | |||||||
Accumulated depreciation
|
(3,860,005 | ) | (3,465,228 | ) | ||||
Net
|
$ | 20,916,054 | $ | 20,185,730 |
During the three months ended March 31, 2011 and 2010, depreciation expense was included in the following accounts on the accompanying consolidated income statements:
Three Months ended
|
||||||||
|
3/31/2011
|
3/31/2010
|
||||||
General and administrative expenses
|
$ | 354,510 | $ | 200,216 | ||||
|
$ | 354,510 | $ | 200,216 |
7.
|
LAND OCCUPANCY RIGHTS
|
As of
|
||||||||
3/31/2011
|
12/31/2010
|
|||||||
Land occupancy rights
|
916,318 | 98,887 | ||||||
Less: Accumulated amortization
|
(32,829 | ) | (27,346 | ) | ||||
Land occupancy rights, net
|
$ | 883,489 | $ | 71,541 |
9
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
During the three months ended March 31, 2011 and 2010, amortization expense was included in the following accounts on the accompanying consolidated income statements:
Three Months ended
|
||||||||
|
3/31/2011
|
3/31/2010
|
||||||
General and administrative expenses
|
$ | 5,454 | $ | 1,323 | ||||
|
$ | 5,454 | $ | 1,323 |
8.
|
SHORT-TERM BORROWINGS
|
The Company’s outstanding principal balances on its short-term borrowings are payable as follows:
As of
|
||||||||
3/31/2011
|
12/31/2010
|
|||||||
Bank of China, 6.372% interest rates, due no later than January 17, 2012 (1)
|
3,056,188 | 1,056,971 | ||||||
Laishang Bank, 7.965% interest rate, due no later than April 29, 2011 (2)
|
2,292,141 | 2,264,937 | ||||||
Construction Bank of China (Cao County branch), 4.445% interest rate per annum, due no later than June 27, 2011 (3)
|
4,584,282 | 6,039,833 | ||||||
$ | 9,932,611 | $ | 9,361,741 |
(1) The term of this loan agreement is from January 6, 2011 to January 17, 2012, with an interest rate of 6.372% per annum. The purpose of this loan is to purchase raw materials. Zhongshang Wealth Guarantee Co., Ltd is the guarantor for this loan and has assumed joint and several liability therefor. This loan is also secured by a cash deposit of approximately $152,809 (RMB 1,000,000).
(2) Short term loan. The term of this loan agreement is from April 30, 2010 to April 29, 2011, with an interest rate of 7.965% per annum. The loan is to be used for working capital to purchase raw materials, and we expect it to be repaid from our revenues. Shandong Cao County Shengfeng Food Co., Ltd is the guarantor for this loan and has assumed joint and several liability therefor. This loan is not collateralized.
(3) Short term loan. The term of this loan agreement is from January 28, 2011 to June 27, 2011, with an interest rate of 4.445% per annum. The loan is to be used for working capital, and we expect it to be repaid from our revenues. Heze JXY Food Limited is the guarantor for this loan and has assumed joint and several liability therefor. This loan is not collateralized.
10
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
9.
|
OTHER PAYABLES AND ACCRUED LIABILITIES
|
As of
|
||||||||
3/31/2011
|
12/31/2010
|
|||||||
Salary and staff welfare payable
|
$ | 341,765 | $ | 299,821 | ||||
Accrued expenses
|
49,000 | 45,082 | ||||||
Other payables
|
149,997 | 239,544 | ||||||
$ | 540,762 | $ | 584,447 |
Staff welfare payable represents accrued staff medical, industry injury claims, labor and unemployment insurances, all of which are third parties insurance and the insurance premiums are based on certain percentage of salaries. The obligations of the Company are limited to those premiums contributed by the Company.
10.
|
REVERSE STOCK SPLIT
|
On December 22, 2010, the Board of Directors of the Company adopted a resolution approving a 1-for-1.5 reverse split (the “Reverse Split”) of the Company’s Common Stock. Accordingly, the Reverse Split combined the Company’s outstanding Common Stock on the basis of 1.5 outstanding shares being converted into 1 outstanding share. Each shareholder’s percentage ownership in the Company (and relative voting power) remained essentially unchanged as a result of the Reverse Split. All options, warrants, and any other similar instruments convertible into, or exchangeable or exercisable for, shares of Common Stock were proportionally adjusted. The Reverse Split was effective on January 18, 2011.
The consolidated stockholders’ equity and the earnings per share numbers in the consolidated financial statements have been restated per FASB 128 paragraph 134, as if the Reverse Split took effect at the beginning of the periods presented. See Note 22 below.
11.
|
STATUTORY AND DISCRETIONARY SURPLUS RESERVE
|
In accordance with the relevant laws and regulations of the PRC and articles of association, the Company is required to appropriate 10% and a certain other percentage of the net profit as reported in the Company’s PRC statutory consolidated financial statements to the statutory reserve fund and the discretionary surplus reserve fund, respectively, after offsetting prior year’s losses.
When the balance of the statutory reserve fund reaches 50% of the registered capital, and further appropriation is optional. Upon approval from the board of directors or members, the statutory reserve can be used to offset accumulated losses or to increase registered capital.
12.
|
COST OF GOODS SOLD (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
|
Cost of goods sold consists primarily of costs of raw materials and direct labor, and other costs directly attributable to the production of products. Write-down of inventories to lower of cost or market is also recorded in cost of goods sold.
The following table sets forth the breakdown of the Company’s cost of goods sold for the three months ended March 31, 2011 and 2010, respectively.
11
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
Three Months Ended
|
||||||||
|
3/31/2011
|
3/31/2010
|
||||||
Direct Materials
|
$ | 19,618,530 | $ | 10,564,836 | ||||
Indirect Materials
|
3,903,197 | 2,181,754 | * | |||||
Direct Labor
|
1,169,310 | 568,771 | * | |||||
Inbound Freights
|
353,231 | 168,081 | ||||||
Cost of Goods Sold
|
$ | 25,044,268 | $ | 13,483,442 |
* Certain amounts in the prior year have been reclassified to conform to current year information.
The depreciation and amortization expenses, shipping and handling expenses, inspection costs are excluded from cost of goods sold, the amount of which for the three months ended March 31, 2011 and 2010, respectively, are set forth in the following table.
Three Months Ended
|
||||||||
3/31/2011
|
3/31/2010
|
|||||||
Depreciation expenses
|
$ | 354,510 | $ | 200,216 | ||||
Amortizations
|
5,454 | 1,323 | ||||||
Shipping and handling expenses
|
133,228 | 194,071 | ||||||
Inspection costs
|
26,722 | 21,027 |
These excluded expenses are included under Selling, General and Administrative expenses in the accompanying consolidated financial statements.
13.
|
SELLING AND MARKETING EXPENSES
|
Selling and marketing expenses were $379,903 and $237,577 for the three months ended March 31, 2011 and 2010, respectively, including $133,228 and $194,071 in shipping and handling expenses for the periods, respectively. Selling and marketing expenses mainly consist of advertising, shipping and handling costs, exhibition expenses, inspection costs, and the other costs of our distribution network which are expensed as incurred during the selling activities.
14.
|
INCOME TAXES
|
On March 16, 2007, PRC’s legislative body, the National People’s Congress, adopted the unified EIT Law. This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008. Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises. Thus, the Company is subject to corporate income tax at the statutory rate of 25% commencing in 2008.
12
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
Income taxes in the accompanying consolidated statements of income for the reporting periods represent provision for EIT for the Company’s continuing operations in the PRC.
Three Months Ended
|
||||||||
|
3/31/2011
|
3/31/2010
|
||||||
EIT rate in effect for the year
|
25 | % | 25 | % | ||||
Profits before income tax
|
$ | 6,994,619 | $ | 4,699,541 | ||||
Income tax expenses
|
$ | 1,752,792 | $ | 1,182,966 |
The effective income taxes differ from the above PRC statutory EIT rates as follows:
Three Months Ended
|
||||||||
|
3/31/2011
|
3/31/2010
|
||||||
|
||||||||
Provision for income taxes at statutory EIT rate
|
$ | 1,748,655 | $ | 1,174,884 | ||||
Non-deductible items for tax purposes
|
4,137 | 8,082 | ||||||
Income taxes
|
$ | 1,752,792 | $ | 1,182,966 |
Income tax expense is summarized as follows:
Three Months Ended
|
||||||||
3/31/2011
|
3/31/2010
|
|||||||
Current
|
$ | 1,752,792 | $ | 512,960 | ||||
Deferred change
|
- | 670,006 | ||||||
Income tax expense
|
$ | 1,752,792 | $ | 1,182,966 |
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities are as follows:
Current portion:
Three Months Ended
|
||||||||
|
3/31/2011
|
3/31/2010
|
||||||
|
||||||||
Sales cut-off
|
$ | - | $ | (670,006 | ) | |||
Total deferred tax liabilities
|
$ | - | $ | (670,006 | ) | |||
Net deferred tax liabilities
|
$ | - | $ | (670,006 | ) |
13
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
15.
|
STOCK BASED COMPENSATION
|
On July 1, 2010, the Company agreed to issue 8,340 shares of its Common Stock per quarter to two of its independent directors as compensation pursuant to offer letters. The fair value of the shares was $11,550 per quarter determined using the fair value of the Company’s common stock on the grant date, at a market quoted price of $1.38. An aggregate of 8,340 shares were issued on January 18, 2011.
16.
|
DEFINED CONTRIBUTION PLAN
|
The Company has a defined contribution plan for all of its qualified employees in the PRC. The employer and the employees are each required to make contributions to the plan at the rates specified in the plan. The obligation of the Company with respect to retirement is to make the required contributions under the plan. No forfeited contributions are available to reduce the contribution payable in the future years. The contributions under the defined contribution plan were charged to expense in the accompanying consolidated statements of income. The Company contributed $0 for both three-month periods ended March 31, 2011 and 2010, respectively.
17.
|
CONTINGENCIES
|
The Company had no contingencies existing as of March 31, 2011 and December 31, 2010.
18.
|
RELATED PARTY TRANSACTIONS
|
The Company had no material transactions carried out with its related parties during the three-month periods ended March 31, 2011 and 2010.
19.
|
INCOME PER SHARE
|
The basic earnings per share were calculated using the net income and the weighted average number of shares outstanding during the reporting periods. All share and per share data have been adjusted to reflect the recapitalization of the Company in the Exchange, the forward stock split and the reverse stock splits.
The fully diluted earnings per share were calculated using the net income and the weighted average number of shares outstanding on the fully diluted basis during the reporting periods. The denominator for fully diluted earnings per share calculation includes 500,000 warrants granted for services rendered during the fourth quarter of 2009. All share and per share data have been adjusted to reflect the recapitalization of the Company in the Exchange, the forward stock split and the reverse stock splits.
20.
|
CONCENTRATIONS AND RISKS
|
The Company’s operations are carried out in the People’s Republic of China (“PRC”). Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. The Company’s results may be affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
14
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
In addition, the Company is subject to risks common to companies in the OEM industry, including, but not limited to, litigation, development of new technological innovations and dependence on key personnel.
Major customers
For the three months ended March 31, 2011 and 2010, 100% of the Company’s assets were located in the PRC, and certain customers accounted for greater than 5% in revenues.
The following tables set forth our top three customers individually comprising 27% and 29% of net revenue for the three months ended March 31, 2011 and 2010, respectively.
As of March 31, 2011
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||||
Customer A
|
$ | 4,561,415 | 14 | % | $ | 1,786,135 | ||||||||
Customer B
|
2,267,300 | 7 | % | 792,310 | ||||||||||
Customer C
|
1,868,833 | 6 | % | 444,566 | ||||||||||
Total:
|
$ | 8,697,548 | 27 | % |
Total:
|
$ | 3,023,011 |
As of March 31, 2010
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||||
Customer A
|
$ | 2,563,964 | 13 | % | $ | 926,815 | ||||||||
Customer D
|
1,806,429 | 9 | % | 688,297 | ||||||||||
Customer B
|
1,262,558 | 7 | % | 471,205 | ||||||||||
Total:
|
$ | 5,632,951 | 29 | % |
Total:
|
$ | 2,086,316 |
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.
21.
|
SEGMENTS
|
The Company determined that it does not operate in any material, separately reportable operating segments as of March 31, 2011 and December 31, 2010, respectively.
15
CHINA SHANDONG INDUSTRIES INC. AND SUBSIDIARIES
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2011
|
22.
|
SUBSEQUENT EVENTS
|
On March 24, 2011, the majority shareholders of the Company approved a forward split of common stock of the Company by a ratio of 5 for 1 (the “Forward Split”). The Company filed a certificate of amendment to its certificate of incorporation effectuating the Forward Split on March 25, 2011. All options, warrants, and any other similar instruments convertible into, or exchangeable or exercisable for, shares of Common Stock were proportionally adjusted. The Forward Split became effective on April 12, 2011.
The consolidated statement of stockholders’ equity and the earnings per share numbers in the consolidated financial statements have been restated per FASB 128 paragraph 134, as if the Forward Split took effect at the beginning of the periods presented. See Note 10 above.
16
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Disclosure Regarding Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q (the “Report”) with respect to our financial condition, results of operations and business that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Forward-looking statements can be identified by the use of forward-looking terminology, such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader of the forward-looking statements that any such statements that are contained in this Report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employee, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors discussed in our other filings with the Securities and Exchange Commission, and that these statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this Report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this Report is a statement of our intention as of the date of this Report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
Unless otherwise expressly provided herein, all share and per share numbers set forth herein relating to our common stock reflect (a) a 15 for 1 forward stock split that became effective on December 3, 2009, (b) a 1 for 2 reverse stock split that became effective on August 3, 2010, (c) a 1 for 1.5 reverse stock split that became effective on January 18, 2011, and (d) a 5 for 1 forward stock split that became effective on April 12, 2011.
General
We are engaged in the business of manufacturing and marketing wood furniture, straw and wicker products, and wood handicraft products. Our wood furniture products include items such as coffee tables, cabinets, bed frames and stools. Our straw and wicker products include items such as wicker baskets, bottle holders and planters. Our wood handicraft products include items such as decorative boxes, wood baskets and various storage cabinets.
We produce over 20,000 different products which are sold in more than thirty countries and places, including the PRC, the United States, Germany, the United Kingdom, Spain, Holland, Italy, Sweden, Japan, Canada, Denmark, Hong Kong and Taiwan. Our products are sold through well known retailers such as Trade Point A/S Direct Container, Zara-Home, Habitat UK Ltd., ABM Group Inc., and Fuji Boeki Co. Ltd. We believe that our products are competitively priced and of high quality.
17
Our operations are conducted in the PRC through our subsidiary, Shandong. For the three months ended March 31, 2011, we generated sales and net income of $33,553,916 and $5,241,827, respectively; for the 2010 fiscal year, we generated sales and net income of $83,934,050 and $14,157,889, respectively; and for the 2009 fiscal year, we generated sales and net income of $69,435,044 and $12,021,155, respectively.
For the three months ended March 31, 2011, sales of our wood furniture products, straw-wicker products and handicraft products accounted for approximately $19.5 million, $13.0 million and $1.1 million, respectively, or 58.0%, 38.7% and 3.3% of our revenues; for the 2010 fiscal year, sales of our wood furniture products, straw-wicker products and handicraft products accounted for approximately $47.1 million, $35.4 million and $1.5 million, respectively, or 56.1%, 42.2% and 1.7% of our revenues; and for the 2009 fiscal year, approximately $37.1 million, $31.2 million and $1.1 million, respectively.
Our straw and wicker products as well as our wood handicraft products are high margin products as such products generally are manufactured by local persons in their homes, the raw material costs are low and the production of such products does not require advanced technology.
Based upon our perceived and historical growing demand for our wood furniture product and the changing demographics of the wood furniture industry, we believe we have a unique opportunity to substantially increase our revenues, net income and gross margins by not only expanding the manufacturing capacity of our existing wood furniture business but also producing different types of wood furniture products that we believe there is a large and increasing international demand for.
As a result, while we intend to continue manufacturing and sell our straw, wicker and handicraft products, we intend to devote substantial financial and other resources on our wood furniture products by not only producing new products but also increasing our current manufacturing capacity by renovating and upgrading our current production facilities.
Important Factors Affecting our Results of Operations
We believe significant factors that could affect our operating results are the (i) cost of raw materials, (ii) prices of our products to our international retailers and wholesalers and their markup to the end users, (iii) consumer acceptance of our new wood furniture line, and (iv) general economic conditions in China and global markets.
Critical Accounting Policies
We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and related notes. We periodically evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition
Revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the customers, the selling price is fixed or determinable, and collection is reasonable assured. We generally record revenues when shipments clear the Chinese customs department. We offer varying payment terms for our customers and are generally responsible for paying the delivery cost of its products.
18
Accounts Receivable
Most of our sales were conducted on pre-payment or COD basis. However, during the normal course of business, we extend to some of our customers interest-free, unsecured credit for a term of 90 days depending on a customer’s credit history, as well as local market practices. We review our accounts receivables quarterly and determine the amount of allowances, if any, necessary for doubtful accounts. Historically, we have not had any material bad debt write-offs; however, we provide an arbitrary reserve amount for possible bad debts up to 5% of the accounts receivable balances per year. We review our accounts receivable balances to determine whether specific reserves are required due to such issues as disputed balances with distributors, declines in distributors’ credit worthiness, or unpaid balances exceeding agreed-upon terms. Based upon the results of these reviews, we determine whether a specific provision should be made to provide a reserve for possible bad debt write-offs. We determined that no additional bad debt write offs were necessary or required during the quarter ended March 31, 2011.
As of March 31, 2011, we had outstanding gross accounts receivables of $13,798,707 and allowance for bad debts of $405,188. We believe that these outstanding amounts will be collected pursuant to the terms and conditions within the period agreed with our customers. During the reported periods, neither material problems relating to distributor payments nor specific additional bad debt write-offs occurred. In terms of our liquidity, we reflect the extended interest-free unsecured credit in our cash flows for the reported periods. Therefore, we anticipate no changes from past cash flow patterns.
Inventories
We state inventories, consisting of work in process, raw materials and packaging materials, at the lower of cost or market. Cost is determined on a first in first out basis which includes an appropriate share of production overheads based on normal operating capacity and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. Work in progress includes direct materials, direct production cost and an allocated portion of production overhead. We evaluate inventory periodically for possible obsolescence of our raw materials to determine if a provision for obsolescence is necessary. Our estimates for determining the provision for obsolescence may be affected by technological changes and developments to our product offerings and changes in governmental regulations.
As of March 31, 2011, we had an inventory balance of $14,759,465.
Recently Issued Accounting Standards
Fair Value Measurements and Disclosures
In January 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance regarding fair value measures and disclosures. The guidance requires disclosure of significant transfers between level 1 and level 2 fair value measurements along with the reason for the transfer. An entity must also separately report purchases, sales, issuances and settlements within the level 3 fair value rollforward. The guidance further provides clarification of the level of disaggregation to be used within the fair value measurement disclosures for each class of assets and liabilities and clarified the disclosures required for the valuation techniques and inputs used to measure level 2 or level 3 fair value measurements. This new authoritative guidance became effective for our company beginning with our fiscal year ended December 31, 2010. The adoption of this guidance did not impact our consolidated results of operations, financial position or cash flows.
Variable Interest Entities (VIEs)
In June 2009, the FASB issued authoritative guidance changing the approach to determine a VIE’s primary beneficiary and requiring ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. This guidance also requires additional disclosures about a company’s involvement with VIEs and any significant changes in risk exposure due to that involvement. This guidance was adopted January 1, 2010, and did not have an impact on our consolidated results of operations, financial position or cash flows.
Results of Operations
The following tables set forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
19
All amounts in U.S. dollars, except for the percentages)
|
Three months ended
March 31, 2011
|
Three months ended
March 31, 2010
|
||||||||||||||
Statements of Operations
|
USD
|
% of
Revenue
|
USD
|
% of
Revenue
|
||||||||||||
Revenues
|
$ | 33,553,916 | $ | 19,406,737 | ||||||||||||
Cost of Sales (exclusive of depreciation)
|
$ | (25,044,268 | ) | 74.6 | % | $ | (13,483,442 | ) | 69.5 | % | ||||||
Operating expenses
|
$ | 1,524,214 | 4.5 | % | $ | 1,069,977 | 5.5 | % | ||||||||
Income from operations
|
$ | 6,985,434 | 20.8 | % | $ | 4,853,318 | 25.0 | % | ||||||||
Other expense
|
$ | 9,185 | * | $ | (153,777 | ) | 0.8 | % | ||||||||
Income before income taxes
|
$ | 6,994,619 | 20.8 | % | $ | 4,699,541 | 24.2 | % | ||||||||
Net income
|
$ | 5,241,827 | 15.6 | % | $ | 3,516,574 | 18.1 | % |
* less than 0.1%
Comparison of the three months ended March 31, 2011 and 2010
Revenues
Our revenues consist of the sales of our products, net of returns and allowances. As we do not currently have our own sales force, we sell our products directly to non-related retailers and wholesalers (such as ABM Group) who then sell such products to the ultimate end users. To date, returns and allowances have been virtually non-existent and as such have had no material effect on our revenues.
Our revenues for the three months ended March 31, 2011 were $33,553,916, an increase of $14,147,179, or 72.9%, from $19,406,737 for the comparable period in 2010. During the first quarter of 2011, our main products, wood furniture, straw-wicker products and handicraft products, generated sales of approximately $19.5 million, $13.0 million and $1.1 million, respectively, or 58.0%, 38.7% and 3.3% of our revenues. For the three months ended March 31, 2010, we generated sales of approximately $10.9 million, $7.6 million, and $0.9 million from the sales of wood furniture, straw-wicker, and handicraft products, respectively, or approximately 56.2%, 39.2% and 4.6% of our total revenues.
The increase in our revenues during the first quarter of 2011 compared to the same period in 2010 was primarily attributable to increased orders from our existing customers as a result of the addition of newly-developed products to our production lines. Simultaneously, we were able to continue to obtain new customers, orders from which were already on an upward trajectory, which also contributed to the increase in sales.
Cost of Goods Sold (excluding depreciation and amortization)
Our cost of goods sold consists primarily of costs of direct and indirect raw materials, direct labor, and other costs directly attributable to the production of products, excluding depreciation and amortization expenses, shipping and handling expenses, inspection costs, and other costs of our distribution network, which are included in our Selling, General and Administrative expenses.
Cost of goods sold for the three months ended March 31, 2011 was approximately $25,044,268, an increase of approximately $11,560,826, or approximately 85.7%, from approximately $13,483,442 for the comparable period in 2010. This increase was primarily caused by the increased costs of raw materials and labor, which increase was the result of our greater use of raw materials based on the increase in our orders.
Selling and marketing expenses
Generally, our selling and marketing expenses mainly consist of advertising, shipping and handling costs, exhibition expenses, inspection costs, and the other costs of our distribution network which are expensed as incurred during the selling activities. The expenses incurred by us to market and show our products internationally at trade shows or similar industry exhibitions are examples of our selling and marketing expenses. Such expenses include the expenses to set up exhibition booths for our products, transportation costs to bring our products and representatives to the trade shows and exhibitions, and similar related costs and expenses. All the freight costs of shipping our products internationally to our retailers and wholesalers are borne by such retailers and wholesalers and are not included herein.
20
Our selling and marketing expenses were $379,903 and $237,577 for the three months ended March 31, 2011 and 2010, respectively, including $133,228 and $194,071 in shipping and handling expenses for the respective periods. The increase in our selling and marketing expenses by approximately $142,326 or 59.9% for the three months ended March 31, 2011, compared to the comparable period in 2010, resulted from the increase in transportation fees, port incidental charges and trade inspection fees resulting from our increased sales.
General and administrative expenses
Our general and administrative expenses are principally comprised of 3 items including salaries of our employees not involved in the actual manufacturing of our products, such as our executive officers and internal accounting and book keeping personnel; depreciation of our fixed assets such as our manufacturing facilities, offices and warehouses as well as certain expenses such as amortization of land use rights granted to us by the PRC government agencies and insurance payments paid by us to the PRC government to cover such items as disability, retirement and medical benefits for our employees.
Our general and administrative expenses for the three months ended March 31, 2011 were $899,354, representing an increase of approximately $318,091 or 54.7%, compared to approximately $581,263 for the comparable period in 2010. Such increases in expenses resulted from an increase in depreciation expenses. We purchased machinery and equipment of approximately $400,000, and finished the building construction of approximately $12,000,000 at the end of 2010, the deprecation of which started since the first quarter of 2011. In addition, our office expenses and traveling expenses increased compared to the same period in 2010 due to the increasing workload from increasing orders.
Research and Development
Our research and development expenditures totaled approximately $233,407 and $251,136 for the three months ended March 31, 2011 and 2010, respectively, increasing by approximately $17,729 or 7.1%. The increase was due to our growing investment in research and development of new products, including our proposed new furniture production line. We expect our research and development expenditures to continue to increase as a result of further diversification of our product lines in the future.
Professional and consulting expenses
During the three months ended March 31, 2011, we incurred professional and consulting fees of $11,550, representing non-cash payments from the issuance of shares of our common stock.
We provided two of our three independent directors an offer letter, dated July 1, 2010, pursuant to which we agreed to issue each such independent director 4,170 shares of our common stock per quarter, or 8,340 shares in the aggregate, as compensation for their service as such. The fair value of the shares was $11,550 per quarter determined using the fair value of our common stock on the grant date, at a market quoted price of $1.38. We issued each such director 4,170 shares of our common stock on each of October 29, 2010 and January 18, 2011.
Interest expense
Our interest expenses were approximately $225,904 for the three months ended March 31, 2011, decreased by approximately $21,191 or 8.6%, compared to approximately $247,095 in the comparable period in 2010. The decrease in interest expenses during the first quarter of 2011was attributable to a decrease in the rate of interest payable, the range of which was from 4.445% to 7.965%. Comparatively, the range of interest rates during the comparable period in 2010 was from 5.346% to 9.558%.
Income Tax Expense
Income tax expense for the three months ended March 31, 2011 and 2010 was approximately $1,752,792 and $1,182,966, respectively. The increase in the first quarter of 2011 by approximately $569,826 or 48.2%, compared to the first quarter of 2010, was primarily attributable to the increase in taxable profits as a result of significant increase in sales revenues. Our income taxes are based on a statutory 25% effective tax rate in both periods.
21
There was no deferred income tax for the three months ended March 31, 2011. Comparatively, we had deferred taxes of $670,006 in the first quarter of 2010 due to a temporary difference between book income and taxable income attributable to goods in transit at the end of the period.
Net income
Net income for the three months ended March 31, 2011 was approximately $5,241,827, an increase of approximately $1,725,253 or 49.1%, compared to net income of approximately $3,516,574 for the three months ended March 31, 2010.
Liquidity and Capital Resources
The following table sets forth a summary of our net cash flow information for the periods indicated:
(All amounts in U.S. dollars)
For the three months
|
||||||||
Ended March 31,
|
||||||||
2011*
|
2010*
|
|||||||
(Consolidated,
unaudited)
|
(Consolidated,
unaudited)
|
|||||||
Net cash provided by/(used in) operating activities
|
$ | 2,745,004 | $ | 3,158,570 | ||||
Net cash (used in)/provided by investing activities
|
$ | (2,030,963 | ) | $ | (1,747,788 | ) | ||
Net cash (used in)/provided by financing activities
|
$ | 455,978 | $ | (146,479 | ) | |||
Effect of Foreign currency translation
|
$ | 40,681 | $ | 5,134 | ||||
Net increase (decrease) in cash and equivalents
|
$ | 1,210,700 | $ | 1,269,436 | ||||
Cash and cash equivalents, beginning of period
|
$ | 2,863,692 | $ | 2,185,839 | ||||
Cash and cash equivalents, end of period
|
$ | 4,074,392 | $ | 3,455,275 |
* The above financial data have been derived from our unaudited consolidated financial statements for the three months ended March 31, 2011 and 2010.
Operating Activities
Net cash provided by operating activities was approximately $2,745,004 and $3,158,570 for the three months ended March 31, 2011 and 2010, respectively. Positive cash flows during the three months ended March 31, 2011 were due primarily to net income of $5,241,827, plus the decrease in inventories in the amount of $175,577, the increase in taxes payable by $662,048, partially offset by the increase in trade accounts receivable and prepaid expense by $2,211,854 and $1,430,470, respectively. Positive cash flows during the three months ended March 31, 2010 were due primarily to net income of $3,516,574, the decrease in prepaid expense and other receivable by $379,367 and $128,844, respectively, plus the increase in accounts payable by $358,243, partially offset by the increase in accounts receivable and inventories by $952,910 and $694,269, respectively.
Investing Activities
Cash used in investing activities mainly consists of capital expenditures, purchase of property, plant, and equipment, and additions to construction in progress.
Net cash used in investing activities was approximately $2,030,963 and $1,747,788 for the three months ended March 31, 2011 and 2010, respectively. Negative cash flows during the first quarter of 2011 were primarily attributable to the spending in reconstruction, renewal and expansion of our old workshop buildings and facilities. We incurred $1,939,929 in purchase of property, plant and equipment during the three months ended March 31, 2011, compared to the purchase of property, plant and equipment in the amount of $180,232 during the comparable period in 2010. We also had $91,034 incurred in construction in progress in the three months ended March 31, 2011, compared to $1,567,556 in such expenditures during the comparable period in 2010.
22
Financing Activities
Net cash provided by financing activities was $455,978 for the three months ended March 31, 2011, representing the net between proceeds from short-term borrowings in an amount of $7,599,629, and repayments of $7,143,652. Comparably, we had cash flows of $146,479 used in financial activities during the first quarter of 2010 due primarily to the repayments to the short-term borrowings.
Based upon our present plans, we believe that cash on hand, cash flow from operations and funds available to us through our proposed financing activities will be sufficient to fund our capital needs for at least the next 12 months. We expect that our primary sources of funding for our operations for the next 12 months will result from cash flow from operations, in addition to our proposed financing activity. However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control costs. If we did not have sufficient available cash, we would have to seek additional debt or equity financing through external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, consolidated results of operations and financial condition.
Loan Facilities
We believe that we currently maintain a good business relationship with the banks that have extended loans to us. As of March 31, 2011, our outstanding bank loans that were classified as short term borrowings on the accompanying consolidated balance sheet were as follows:
(All Amounts in U.S. Dollars)
Name
|
Amount
|
Maturity Date
|
||||
Bank of China, Cao County Branch(1)
|
$ | 3,056,188 |
1/17/2012
|
|||
Laishang Bank (A/K/A Commercial Bank (Heze Branch)(2)
|
$ | 2,292,141 |
4/29/2011
|
|||
Construction Bank of China, Cao County Branch(3)
|
$ | 4,584,282 |
6/27/2011
|
|||
Total
|
$ | 9,932,611 |
(1) Short term loan. The term of this loan agreement is from January 6, 2011 to January 17, 2012, with an interest rate of 6.372% per annum. The purpose of this loan is to purchase raw materials. Zhongshang Wealth Guarantee Co., Ltd is the guarantor for this loan and has assumed joint and several liability therefor.
(2) Short term loan. The term of this loan agreement is from April 30, 2010 to April 29, 2011, with an interest rate of 7.965% per annum. The loan is to be used for working capital to purchase raw materials, and we expect it to be repaid from our revenues. Shandong Cao County Shengfeng Food Co., Ltd is the guarantor for this loan and has assumed joint and several liability therefor.
(3) Short term loan. The term of this loan agreement is from January 28, 2011 to June 27, 2011, with an interest rate of 4.445% per annum. The loan is to be used for working capital, and we expect it to be repaid from our revenues. Heze JXY Food Limited is the guarantor for this loan and has assumed joint and several liability therefor.
We anticipate rollovers of all current facilities coming due in the 2011 fiscal year and do not foresee a squeeze on the availability of credit to fund our operations or to meet our growth objectives.
Capital Expenditures
We believe that substantially all of our capital expenditures going forward will be related to our furniture business as we diversify our product base, build component manufacturing facilities and renovate our existing manufacturing facilities.
23
We believe that our existing cash, cash equivalents and cash flows from operations and our credit lines will be sufficient to meet our anticipated cash needs over the next 12 months, including, but not limited to, building our first new production line to manufacture wooden furniture that we believe would enable us to fulfill a great percentage of our overseas demands. We will, however, require substantial additional cash resources to implement the balance of our growth strategy discussed immediately below, including any acquisitions we may decide to pursue.
We intend to use a part of the net proceeds of any financing that we may in the future be able to raise, if any, to construct a new production facility, which we expect will produce higher grade furniture. We estimate the total cost of such production to be approximately $20 million, including but not limited to (i) $5.3 million to construct a 40,000 square meter production line, (ii) $6.7 million to purchase new equipment to be used in the production line, and (iii) $8.0 million to purchase raw materials and other materials used in the manufacturing of products the new production line will produce.
In addition, we also plan to (i) build another new production line to produce high end furniture, which we currently estimate will cost an additional approximately $15 million, (ii) build an R&D center, which we currently estimate will cost approximately $1.4 million, (iii) upgrade our existing facilities and establish new compatible facilities for a complete furniture production line, such as carton, paint and hardware workhouse, which we currently estimate will cost approximately $36.6 million, and (iv) set up overseas sales stores. The timing of the construction of these items will depend upon our ability to raise the required additional capital, for which we do not currently have plans.
We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and private financing.
We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable and accounts payable. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.
Off-Balance Sheet Arrangements
We have not entered into, nor do we expect to enter into, any off-balance sheet arrangements. We also have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. In addition, we have not entered into any derivative contracts that are indexed to our equity interests and classified as stockholders’ equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
24
As of March 31, 2011, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.
Changes in Internal Control over Financial Reporting
We have made no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS
|
None.
ITEM 1A.
|
RISK FACTORS
|
Not applicable.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
None.
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
None.
ITEM 4.
|
(REMOVED AND RESERVED)
|
ITEM 5.
|
OTHER INFORMATION
|
None.
ITEM 6.
|
EXHIBITS
|
Exhibit Number
|
Exhibit Description
|
|
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHINA SHANDONG INDUSTRIES INC.
|
||
May 12, 2011
|
By:
|
/s/ Jinliang Li
|
Jinliang Li, Chief Executive Officer
|
||
(Principal Executive Officer)
|
||
May 12, 2011
|
By :
|
/s/ Yuhong Lei
|
Yuhong Lei, CFO
|
||
(Principal Accounting and Financial Officer)
|
26