Attached files
file | filename |
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EX-32.1 - Mobile Presence Technologies Inc. | v201024_ex32-1.htm |
EX-31.2 - Mobile Presence Technologies Inc. | v201024_ex31-2.htm |
EX-31.1 - Mobile Presence Technologies Inc. | v201024_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q/A
Amendment
No. 3
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2010
or
o
|
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
|
20-8545693
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
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)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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.
Yes x No
o
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 o No o
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 o
|
Accelerated
filer o
|
|
Non-accelerated
filer o (Do
not check if smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes o No x
There
were 12,865,013 shares of common stock outstanding as of November 5, 2010.
This
Quarterly Report on Form 10-Q/A is being filed as Amendment No. 3 to our
Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31,
2010. The Form 10-Q was originally filed with the Securities and
Exchange Commission on May 13, 2010, the Amendment No. 1 to the Form 10-Q was
filed on June 28, 2010 and Amendment No. 2 to the Form 10-Q was filed on October
20, 2010.
On June
17, 2010, our management concluded that the unaudited consolidated financial
statements for the fiscal quarter ended March 31, 2010 could no longer be relied
upon because of errors in those financial statements. On June 23, 2010, the
Company filed a Current Report on Form 8-K disclosing the need to restate its
financials and the reasons for the restatement. The Company restated
those financial statements to make the necessary accounting corrections in its
Amendment No. 1 to the Form 10-Q.
This
Amendment No. 3 to our Quarterly Report on Form 10-Q/A for the fiscal quarter
ended March 31, 2010 is being filed to reflect that the restatement of the
Company’s audited financial statements for the fiscal quarter ended March 31,
2010 resulted from ineffective disclosure controls and procedures which in turn
led to ineffective internal control over financial reporting; see Item
4T. In addition, this Amendment No. 3 is being filed to incorporate
certain changes to our financial statements and corresponding amendments to the
Item entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Except as
specifically referenced herein, this Amendment No. 3 to the Quarterly Report on
Form 10-Q/A does not reflect any event occurring subsequent to June 28, 2010,
the filing date of the Company’s Amendment No. 1 to the Quarterly Report on Form
10-Q/A.
TABLE
OF CONTENTS
Page
No.
|
||||
PART
I. - FINANCIAL INFORMATION
|
||||
Item
1.
|
Financial
Statements.
|
3 | ||
Consolidated
Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009
(Audited)
|
3 | |||
Consolidated
Statements of Income for the Three Months Ended March 31, 2010 and 2009
(unaudited)
|
4 | |||
Consolidated
Statements of Cash Flows for Three Months Ended March 31, 2010 and 2009
(unaudited)
|
5 | |||
Notes
to Unaudited Consolidated Financial Statements
|
6 | |||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
22 | ||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
30 | ||
Item
4
|
Controls
and Procedures.
|
30 | ||
PART
II - OTHER INFORMATION
|
||||
Item
1.
|
Legal
Proceedings.
|
31 | ||
Item
1A.
|
Risk
Factors.
|
31 | ||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
31 | ||
Item
3.
|
Defaults
Upon Senior Securities.
|
31 | ||
Item
4T.
|
(Removed
and Reserved)
|
31 | ||
Item
5.
|
Other
Information.
|
31 | ||
Item
6.
|
Exhibits.
|
32 |
FORWARD-LOOKING
INFORMATION
This
Amendment No. 3 contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future events or our future
financial performance. We have attempted to identify forward-looking statements
by terminology including “anticipates”, “believes”, “expects”, “can”,
“continue”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”,
“potential”, “predict”, “should” or “will” or the negative of these terms or
other comparable terminology. These statements are only predictions;
uncertainties and other factors may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels or activity, performance or achievements expressed or implied by
these forward-looking statements. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Our
expectations are as of the date this Form 10-Q/A is filed, and we do not intend
to update any of the forward-looking statements after the date this Amendment
No. 3 is filed to confirm these statements to actual results, unless required by
law.
2
Item
1. Financial Statements.
China
Shandong Industries, Inc. and Subsidiaries
|
|||||||||
Unaudited
Consolidated Balance Sheets
|
|||||||||
As
of March 31, 2010 and December 31,
2009
|
(Restated)
|
(Restated)
|
|||||||
ASSETS
|
March
31, 2010
|
December
31, 2009
|
||||||
(Audited)
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 3,455,275 | $ | 2,185,839 | ||||
Trade
accounts receivable
|
17,788,731 | 16,833,798 | ||||||
Inventories
|
11,048,539 | 10,353,746 | ||||||
Prepaid
expenses
|
642,492 | 375,493 | ||||||
Deposits
|
- | 767,204 | ||||||
Other
receivables
|
166,978 | 295,752 | ||||||
TOTAL
CURRENT ASSETS
|
33,102,014 | 30,811,832 | ||||||
FIXED
ASSETS
|
||||||||
Property,
plant, and equipment
|
10,836,686 | 10,656,454 | ||||||
Accumulated
depreciation
|
(3,509,570 | ) | (3,309,354 | ) | ||||
NET
FIXED ASSETS
|
7,327,116 | 7,347,100 | ||||||
OTHER
ASSETS
|
||||||||
Land
occupancy rights, net
|
75,511 | 76,834 | ||||||
Construction
in progress
|
8,510,258 | 6,940,632 | ||||||
TOTAL
OTHER ASSETS
|
8,585,769 | 7,017,466 | ||||||
TOTAL
ASSETS
|
$ | 49,014,899 | $ | 45,176,398 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
borrowings
|
$ | 7,910,581 | $ | 8,054,831 | ||||
Accounts
payable
|
598,631 | 240,290 | ||||||
Other
payables and accrued liabilities
|
445,388 | 731,329 | ||||||
Deposits
received in advance
|
60,263 | 56,849 | ||||||
Taxes
payable
|
747,163 | 643,476 | ||||||
Deferred
tax liabilities
|
670,006 | 677,909 | ||||||
TOTAL
CURRENT LIABILITIES
|
10,432,032 | 10,404,684 | ||||||
TOTAL
LIABILITIES
|
10,432,032 | 10,404,684 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock ($.0001 par value, 5,000,000 authorized, none
issued and outstanding as of March 31, 2010 and December
31, 2009)
|
- | - | ||||||
Common
stock ($.0001 par value, 100,000,000 authorized, 12,862,501 issued and
outstanding as of March 31, 2010 and December 31, 2009)
|
1,286 | 1,286 | ||||||
Additional
paid in capital
|
7,798,714 | 7,798,714 | ||||||
Statutory
and discretionary surplus reserve
|
3,608,243 | 3,608,243 | ||||||
Accumulated
other comprehensive income (loss)
|
269,557 | (25,022 | ) | |||||
Retained
earnings
|
26,905,067 | 23,388,493 | ||||||
TOTAL
STOCKHOLDERS' EQUITY
|
38,582,867 | 34,771,714 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 49,014,899 | $ | 45,176,398 |
See
accompanying notes to these financial statements and auditors'
report
3
China
Shandong Industries, Inc. and Subsidiaries
|
|||||||
Unaudited
Consolidated Statements of Income and Comprehensive
Income
|
|||||||
For
the Three Months ended March 31, 2010 and
2009
|
For
the three months ended
|
||||||||
March
31, 2010
|
March
31, 2009
|
|||||||
(Restated)
|
||||||||
Revenues
|
||||||||
Sales
|
$ | 19,406,737 | $ | 14,495,795 | ||||
Cost of goods sold (exclusive of depreciation and
amortization)
|
13,801,401 | 11,145,799 | ||||||
Operating
expenses
|
||||||||
Selling and marketing
|
237,577 | 160,238 | ||||||
Research and development expenses
|
251,136 | 150,165 | ||||||
General and administrative
|
263,304 | 108,060 | ||||||
Total
Operating Expenses
|
752,017 | 418,463 | ||||||
Income
from continuing operations
|
4,853,318 | 2,931,533 | ||||||
Other
income (expenses)
|
||||||||
Finance income (costs)
|
(247,095 | ) | (128,885 | ) | ||||
Other operating income(cost)
|
- | 140,721 | ||||||
Non-operating income
|
93,318 | (1,305 | ) | |||||
Total
other income (expense)
|
(153,778 | ) | 10,530 | |||||
Income
from operations before income taxes
|
4,699,541 | 2,942,063 | ||||||
Income
taxes – current
|
(512,960 | ) | (706,635 | ) | ||||
Income
taxes - deferred
|
(670,006 | ) | - | |||||
Net
income
|
$ | 3,516,574 | $ | 2,235,428 | ||||
Other
comprehensive income
|
||||||||
Foreign currency translation adjustment
|
294,579 | 7,194 | ||||||
Comprehensive
income
|
$ | 3,811,153 | $ | 2,242,622 | ||||
Basic and fully diluted net
income per common share
|
$ | 0.28 | $ | 0.18 | ||||
Weighted average common
shares outstanding
|
12,862,501 | 12,862,501 |
See
accompanying notes to these financial statements and auditors'
report.
4
China
Shandong Industries, Inc. and Subsidiaries
|
|||||
Unaudited
Consolidated Statements of Cash Flows
|
|||||
For
the Three Months ended March 31, 2010 and
2009
|
For
the three months ended
|
||||||||
March
31, 2010
|
March
31, 2009
|
|||||||
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
(Restated)
|
|||||||
Net income
|
$ | 3,516,574 | $ | 2,235,428 | ||||
Loss of disposal of fixed
assets(loss of net value of fixed assets)
|
||||||||
Adjustments to reconcile net income to net
cash provided by
|
||||||||
(used in) operating
activities:
|
||||||||
Depreciation
|
200,216 | 179,805 | ||||||
Amortization
|
1,323 | 1,323 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
accounts receivable
|
(952,910 | ) | (3,401,142 | ) | ||||
Prepaid
expense
|
379,367 | (95,830 | ) | |||||
Inventories
|
(694,269 | ) | 1,704,333 | |||||
Other
receivables
|
128,844 | (192,729 | ) | |||||
Accounts
payable
|
358,243 | 493,496 | ||||||
Taxes
payable
|
103,498 | (995,609 | ) | |||||
Deferred
tax liabilities
|
(7,903 | ) | - | |||||
Other
payables and accrued liabilities
|
122,188 | (221,633 | ) | |||||
Deposits
received in advance
|
3,398 | 1,158 | ||||||
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
|
3,158,570 | (291,400 | ) | |||||
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
||||||||
Purchase for property, plant, and
equipment
|
(180,232 | ) | - | |||||
Disposals
of property, plant and equipment
|
- | 14,264 | ||||||
Additions to construction in
progress
|
(1,567,556 | ) | (791 | ) | ||||
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
|
(1,747,788 | ) | 13,473 | |||||
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
||||||||
Principal repayments of short term
borrowings
|
(146,479 | ) | - | |||||
Proceeds from short term
borrowings
|
- | 1,391,554 | ||||||
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
(146,479 | ) | 1,391,554 | |||||
Foreign currency
adjustment
|
5,134 | 127 | ||||||
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
|
1,269,436 | 1,113,753 | ||||||
CASH AND CASH
EQUIVALENTS:
|
||||||||
Beginning of period
|
2,185,839 | 1,751,997 | ||||||
End of
period
|
$ | 3,455,275 | $ | 2,865,750 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
|
||||||||
Cash paid during the quarter
for:
|
||||||||
Interest
|
$ | 247,096 | $ | 128,834 | ||||
Taxes
|
$ | 982,542 | $ | 599,403 |
See
accompanying notes to these financial statements and auditors'
report.
5
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
1.
|
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”), by
and among the Company, 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 11,576,250 shares of
Common Stock of the Company, with a par value of $0.0001 per share (the “MBPI
Common Stock”), to Caopu, LFG and Phoebus. The shares of MBPI 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 7,312,500 shares of MBPI Common Stock (“TL’s MBPI
Shares”), representing approximately 93% of the 7,848,750 issued and outstanding
shares of the Company’s Common Stock, delivered a stock certificate or stock
certificates representing 6,562,500 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.
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 accompanying
consolidated financial statements for the fiscal year ended December
31, 2008 are in substance
those of TIDC, including the historical assets and liabilities, and the
historical results and operations of TIDC since it is prior to the date of the
reverse acquisition. The accompanying consolidated financial statements for
the fiscal year ended December 31, 2009 are
in substance those of TIDC, with the assets and liabilities, and revenues and
expenses, of the Company being included effective from the date of stock
exchange transaction. 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 for the fiscal year ended December 31,
2009 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;
|
(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.
|
6
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND
(CONT’D)
|
On
November 6, 2009, concurrent with the Stock Exchange with TIDC, the Company
adopted the fiscal year end of SCAC, the wholly-owned subsidiary of TIDC,
thereby changing the fiscal year end from September 30 to December 31. The
consolidated audited financial statements for the new fiscal year will be
reflected in the Company’s Form 10-K for the year ending December 31,
2009.
China
Shandong Industries Inc., TIDC and SCAC are hereinafter referred to as (the
“Company”).
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 regions, including the United States of America, Germany, the United Kingdom, the Netherlands, Italy, Sweden, Japan, Canada, Denmark, Hong Kong and Taiwan.
The Company’s business model is 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.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with accounting
principles generally
accepted in the United
States of America under the
accrual basis of accounting.
Use of estimates
In preparing consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the
consolidated financial statements, as well as the reported amounts of revenues
and expenses during the reporting periods.
These accounts and estimates include, but are not limited to, the valuation of
trade receivables, other receivables, inventories, income taxes and the
estimation on useful lives of property, plant and equipment. Actual results could differ from these
estimates.
Concentrations of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents, and trade and
other receivables. As of March 31, 2010 and 2009, substantially all of the
Company’s cash and cash equivalents were held by financial institutions located
in the PRC, which the Company’s management believes are of high credit quality.
With respect to trade receivables, the Company extends credit based on an
evaluation of the customer’s financial condition. The Company generally does not
require collateral for trade and other receivables and maintains an allowance
for doubtful accounts of trade and other receivables.
7
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
Cash and cash equivalents
The Company’s cash equivalents are short-term,
highly liquid investments that are both readily convertible to known amounts of
cash and that have insignificant risk of change in value because of changes in
interest rates. The Company’s cash and cash equivalents, as of
March 31, 2010 and 2009, were
principally denominated in Renminbi (“RMB”) and were placed with banks in the PRC.
They are not freely convertible into foreign currencies and the remittance of
these funds out of the PRC is subject to exchange control restrictions
imposed by the PRC government.
For
purposes of the Consolidated Statements of Cash
Flows, the Company considers highly liquid investments with an original maturity
of three months or less to be cash equivalents. In accordance with SFAS No. 95,
the consolidated Statements
of Cash Flows are prepared based on the change in the RMB functional currency
for each account and converted into U.S. dollars at the various exchange rates
at the time.
Allowance for doubtful
accounts
The Company establishes an allowance for
doubtful accounts based on managements’ assessment of the trade receivables
collectibles. Judgment is required in assessing the amount of the allowance. The
Company considers the historical level of credit losses and applies percentages to different
receivables categories. The Company makes judgments about the creditworthiness
of each customer based on ongoing credit evaluations, and monitors current
economic trends that might impact the level of credit losses in the future. If the financial condition
of the customers were to deteriorate, resulting in their inability to make
payments, a larger allowance may be required.
Based on the above assessment, during
the reporting periods, management establishes the general provisioning policy to make an
allowance equivalent to 5% of the gross amount of trade receivables. Additional
specific provision is made against trade receivables to the extent which they
are considered to be doubtful.
Bad debts are written off when
identified. The Company
does not accrue interest on trade receivables.
Historically, losses from uncollectible
accounts have not significantly deviated from the general allowance estimated by
management and no significant additional bad debts have been written off directly to net income. This
general provisioning policy has not changed in the past since establishment and
management considers that the aforementioned general provisioning policy is
adequate, not excessive and does not expect to change this established policy in the near
future.
Inventories
Inventories (finished goods, work in
process, raw materials and packaging materials) are stated 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. In assessing the ultimate
realization of inventories, management makes judgments as to future demand
requirements compared to current or committed inventory levels. The Company
estimates the demand requirements based on market conditions, forecasts prepared
by its customers, sales contracts and orders in hand.
In addition, the Company estimates net realizable
value based on intended use, current market value and contract terms. The
Company writes down the inventories for estimated obsolescence, slow moving or
unmarketable inventories equal to the difference between the cost of inventories and the estimated
market value based upon assumptions about future demand and market
conditions.
8
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
Property, plant and
equipment
Property, plant and equipment are
comprised of buildings, machinery, equipment and furniture. Property, plant
and equipment are stated at
cost less accumulated depreciation. Cost represents the purchase price of
the respective fixed asset and other costs incurred to bring the fixed asset
into its existing use. Depreciation is computed over the
estimated useful lives of
the respective fixed assets utilizing the straight-line basis method. Buildings
are depreciated over a period of twenty years with a residual value of 10%.
Machinery, equipment and furniture are depreciated over a period of ten years
with a residual value of 10%. Maintenance or repairs
are charged to expense as incurred. Upon sale or disposition, the applicable
amounts of the fixed asset’s cost and related accumulated depreciation are
removed from the accounts and the net amount less proceeds from the disposal is
charged or credited to operations.
The
Company recognizes an impairment loss on property, plant and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through sale.
Measurement of the impairment loss is based on the fair value of the
assets.
Land
occupancy right, net
Land use
right is recorded at cost less accumulated amortization. Amortization is
provided over the term of the land use right agreement on a straight-line basis
over the term of the agreement, which is 20 years.
Impairment of Long-lived assets
The
Company evaluated the recoverability of its property, plant, equipment, and
other assets in accordance with FASB Accounting Standards Codification 360
“Property, Plant and Equipment” (formerly SFAS 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”), which requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceed the estimated future undiscounted cash flows attributable to such assets
or the business to which such intangible assets relate.
Earnings per share
The
Company reports earnings (loss) per share in accordance with FASB Accounting
Standards Codification 260 “Earnings per Share” (formerly SFAS 128, “Earnings
per Share”). This statement requires dual presentation of basic and diluted
earnings (loss) with a reconciliation of the numerator and denominator of the
loss per share computations. Basic earnings per share amounts are based on the
weighted average shares of common outstanding. If applicable, diluted earnings
per share assume the conversion, exercise or issuance of all common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. Accordingly, this
presentation has been adopted for the periods presented. There were no
adjustments required to net income for the period presented in the computation
of diluted earnings per share. There were no common stock equivalents (CSE)
necessary for the computation of diluted loss per share.
Construction in
progress
Construction in progress is recorded
using the cost method, which later transfers to fixed assets in achieving the
expected usable condition. Interest costs on borrowings related to construction
in progress are capitalized before achieving the expected usable
condition.
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. The
Company generally records revenues when shipments clear the Chinese customs
department. The Company offers varying payment terms for its customers and is
generally responsible for paying the delivery cost of its
products.
9
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
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
depreciation and amortization expenses, shipping and handling expenses,
inspection costs, and the other costs of our distribution network are excluded
from cost of goods sold.
Selling expenses
Selling 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.
General and administrative
expenses
General and administrative expenses consist of
depreciation and amortization expenses, office expenses, staff welfare,
utilities, labor protection and salaries which are expensed as incurred at the
administrative level.
Income taxes
The
Company adopts the ASC Topic 740, “Income Taxes” regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.
For the
years ended December 31, 2009 and 2008, the Company did not have any interest
and penalties associated with tax positions. As of December 31, 2009 and 2008,
the Company did not have any significant unrecognized uncertain tax
positions.
The
Company conducts major business in the PRC and is subject to tax in that
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of income in the period that
includes the enactment date. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefits, or that future deductibility is
uncertain. Also see Note 14.
Comprehensive income
The Company adopted FASB Accounting
Standards Codification 220 “Comprehensive Income” (formerly SFAS No. 130, Reporting
Comprehensive income”,
which establishes standards for reporting and display of comprehensive income,
and its components in the consolidated financial statements. Components
of comprehensive income include net income and foreign currency translation
adjustments. The Company has presented consolidated statements of income which
includes other comprehensive income or loss.
10
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
Fair value of financial instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, trade accounts and other receivables, inventories, prepaid
expenses, accounts payable, other payables and accrued liabilities, deposits
received in advance, dividends payable, taxes payable, short term borrowings and
current portion of notes payable approximate their fair values due to the
short-term maturity of such instruments.
It is
managements’ opinion that the Company is not exposed to significant price,
credit, foreign currency or interest rate risks arising from these financial
instruments.
Advertising expense
Advertising
is charged to expense as incurred. The Company does not incur any
direct-response costs.
Commitments and contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources, if applicable, are recorded when it is probable
that a liability has been incurred and the amount of the assessment can be
reasonably estimated.
Foreign currency
translation
The
functional currency of the Company is the Renminbi (“RMB”) and RMB is not freely
convertible into foreign currencies. The Company maintains its consolidated
financial statements in the functional currency. Monetary assets and liabilities
denominated in currencies other than the functional currency are translated into
the functional currency at rates of exchange prevailing at the balance sheet
date. Transactions denominated in currencies other than the functional currency
are translated into the functional currency at the exchanges rates prevailing at
the dates of the transaction. Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the
respective periods.
For
financial reporting purposes, the consolidated financial statements of the
Company, which are prepared using the functional currency, have been translated
into United States dollars. Current assets and liabilities are translated at the
exchange rates at the balance sheet dates and revenue and expenses are
translated at the average exchange rates while fixed assets and stockholders’
equity is translated at historical exchange rates. Any translation
adjustments resulting are not included in determining net income but are
included in foreign exchange adjustment to other comprehensive income, a
component of stockholders’ equity. The exchange rates in effect as of March 31,
2010 and 2009 were RMB1 for $0.1465 and $0.1466, respectively. The average
exchange rates for the three months ended March 31, 2010 and 2009 were RMB1 for
$0.1464 and $0.1439, respectively. There is no significant fluctuation in
exchange rate for the conversion of RMB to US dollars after the balance sheet
date.
Off-balance sheet arrangements
The Company does not have any
off-balance sheet arrangements.
Recent
Accounting Pronouncements
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.
11
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
FASB
Accounting Standards Codification
(Accounting
Standards Update (“ASU”) 2009-01)
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s consolidated financial statements as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of the Company’s
financial statements or disclosures as a result of implementing the Codification
during the prior fiscal year just ended.
As a
result of the Company’s implementation of the Codification during the prior
fiscal year just ended, previous references to new accounting standards and
literature are no longer applicable. In the current annual consolidated
financial statements, the Company will provide reference to both new and old
guidance to assist in understanding the impacts of recently adopted accounting
literature, particularly for guidance adopted since the beginning of the current
fiscal year but prior to the Codification.
Subsequent Events
(Included
in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously
SFAS No. 165 “Subsequent Events”)
SFAS
No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the consolidated
financial statements are issued or available to be issued (“subsequent events”).
An entity is required to disclose the date through which subsequent events have
been evaluated and the basis for that date. For public entities, this is the
date the consolidated financial statements are issued. SFAS No. 165 does
not apply to subsequent events or transactions that are within the scope of
other GAAP and did not result in significant changes in the subsequent events
reported by the Company. SFAS No. 165 became effective for interim or
annual periods ending after June 15, 2009 and did not impact the Company’s
consolidated financial statements. The Company evaluated for subsequent events
through the issuance date of the Company’s consolidated financial statements. No
recognized or non-recognized subsequent events were noted.
Determination
of the Useful Life of Intangible Assets
(Included
in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS
No. 142-3 “Determination of the Useful Lives of Intangible
Assets”)
FSP SFAS
No. 142-3 amended the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under previously issued goodwill and intangible
assets topics. This change was intended to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under topics related to
business combinations and other GAAP. The requirement for determining useful
lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to
all intangible assets recognized as of, and subsequent to, the effective date.
FSP SFAS No. 142-3 became effective for consolidated financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not
impact the Company’s consolidated financial statements.
12
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
Noncontrolling
Interests
(Included
in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB
No. 51”)
SFAS
No. 160 changed the accounting and reporting for minority interests such
that they will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 160 became effective for fiscal years
beginning after December 15, 2008 with early application prohibited. The
Company implemented SFAS No. 160 at the start of fiscal 2009 and no longer
records an intangible asset when the purchase price of a noncontrolling interest
exceeds the book value at the time of buyout. The adoption of SFAS No. 160
did not have any other material impact on the Company’s financial
statements.
Consolidation
of Variable Interest Entities — Amended
(To
be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”)
SFAS
No. 167 amends FASB Interpretation No. 46(R) “Consolidation of
Variable Interest Entities regarding certain guidance for determining whether an
entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. SFAS
No. 167 is effective for the first annual reporting period beginning after
November 15, 2009, with earlier adoption prohibited. The Company
implemented SFAS No. 167 in fiscal 2010, which does not have any material impact
on our consolidated financial statements.
3.
|
RESTATEMENTS
OF FINANCIAL STATEMENTS
|
On June
17, 2010, the Company’s management concluded that the Company’s audited
financial statements for the year ended December 31, 2009 and the Company’s
unaudited quarterly financial statements for the quarter ended March 31, 2010
should no longer be relied upon. Specifically, the Company’s revenues
were understated by $9,885,472 for the year ended December 31, 2009 and
overstated by $54,831 for the quarter ended March 31, 2010 with an overstatement
of inventories by $7,173,838 as of December 31, 2009 and $7,150,617 as of March
31, 2010. In addition, the Company’s basic and fully diluted net
income per common share for the year ended December 31, 2009 increased to $.98
per share from original $.78 per share. The impact of the corrections on the
Company’s basic and fully diluted net income per common share for the three
months ended March 31, 2010 was immaterial. The facts underlying the Company’s
original conclusion is that all of such revenues are not recognized until the
Company physically receives the clearance paper from Chinese customs department
(“Customs”). However, there exists a gap between the receiving date and the
approval date by the Customs, which is approximately 30 to 40 days. The Company
believes the approval date by Chinese Customs generally represents the date that
the title of the goods being passed onto to buyers and should be appropriate and
persuasive evidence for revenue recognition. Accordingly, all the financial
statements for the year ended December 31, 2009 and for the quarter ended March
31, 2010 are restated. The Company did not find any understatement in revenues
for the comparative year ended December 31, 2008 and the comparative quarter
ended March 31, 2009.
The following table sets forth all the
accounts in the original amounts and restated amounts,
respectively.
As of March
31, 2010
(Original)
|
(Restated)
|
|||||||
Trade accounts receivable,
net
|
$ | 7,958,089 | $ | 17,788,731 | ||||
Inventories
|
18,199,156 | 11,048,539 | ||||||
Deferred tax
liabilities
|
- | 670,006 | ||||||
Accumulated other comprehensive
income (loss)
|
(17,585 | ) | 269,557 | |||||
Retained
earnings
|
$ | 25,182,191 | $ | 26,905,067 |
13
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
3.
|
RESTATEMENTS
OF FINANCIAL STATEMENTS (CONT’D)
|
For the
three months ended March 31, 2010
(Original)
|
(Restated)
|
|||||||
Sales
|
$ | 19,461,568 | $ | 19,406,737 | ||||
Cost of goods sold (exclusive of
depreciation and amortization)
|
13,824,621 | 13,801,401 | ||||||
Income taxes -
current
|
1,190,869 | 512,960 | ||||||
Income taxes – deferred
|
- | 670,006 | ||||||
Net income
|
3,540,282 | 3,516,574 | ||||||
Basic and fully diluted net income
per common share
|
$ | 0.28 | $ | 0.28 |
Statements
of Retained Earnings
|
2010
(as
restated)
|
|||
Balance,
January 1
|
$ | 21,354,768 | ||
Adjustment
to correct the error of
improper
sales cut-off (net of tax)
|
2,033,725 | |||
Adjusted
balance, January 1
|
$ | 23,388,493 |
4.
|
RESTRICTED
CASH AND CASH EQUIVALENTS
|
According
to the contract between the Company and the bank in which it has loans payable
to, $0 and $246,106 at March 31, 2010 and 2009, respectively, is invested into
certain designated accounts related to guarantees for notes
payable.
5.
|
TRADE
ACCOUNTS RECEIVABLE
|
Trade
accounts receivable is comprised of the following amounts at the respective
dates:
As of
|
||||||||
12/31/09
|
3/31/10
|
|||||||
Audited
|
Unaudited
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Gross
trade accounts receivable from customers
|
$
|
17,204,380
|
$
|
18,159,416
|
||||
Allowance
for doubtful customer accounts
|
(370,582
|
)
|
(370,685
|
)
|
||||
$
|
16,833,798
|
$
|
17,788,731
|
Bad debt
expense of $0 and $0 was recognized during the three months ended March 31, 2010
and 2009, respectively, in the accompanying consolidated income
statements.
14
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
6.
|
INVENTORIES
|
Inventories
are comprised of the following amounts at the respective dates:
As of
|
||||||||
12/31/09
|
3/31/10
|
|||||||
Audited
|
Unaudited
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Raw
materials
|
$
|
1,462,682
|
$
|
1,586,793
|
||||
Packaging
materials
|
23,813
|
30,249
|
||||||
Work
in process
|
2,191,570
|
2,564,759
|
||||||
Finished
goods
|
6,675,681
|
6,866,738
|
||||||
10,353,746
|
11,048,539
|
|||||||
Provision
for obsolete inventories
|
-0-
|
-0-
|
||||||
$
|
10,353,746
|
$
|
11,048,539
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment are comprised of the following amounts at the respective
dates:
As of
|
||||||||
12/31/09
|
3/31/10
|
|||||||
Audited
(Restated)
|
Unaudited
(Restated)
|
|||||||
Cost:
|
||||||||
Buildings
|
$
|
6,158,887
|
$
|
6,108,591
|
||||
Machinery,
equipment and furniture
|
4,497,567
|
4,728,045
|
||||||
10,656,454
|
10,836,686
|
|||||||
Accumulated
depreciation
|
(3,309,354
|
)
|
(3,509,570
|
)
|
||||
Net
|
$
|
7,347,100
|
$
|
7,327,116
|
During
the reporting periods, depreciation expense is included in the following
accounts on the accompanying consolidated income statements:
Three months ended
|
||||||||
3/31/09
|
3/31/10
|
|||||||
General
and administrative expenses
|
$
|
179,805
|
$
|
200,216
|
||||
$
|
179,805
|
$
|
200,216
|
15
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
8.
|
LAND
OCCUPANCY
RIGHTS
|
As of
|
||||||||
12/31/09
|
3/31/10
|
|||||||
Audited
(Restated)
|
Unaudited
(Restated)
|
|||||||
Land
occupancy rights
|
98,887
|
98,887
|
||||||
Less:
Accumulated amortization
|
(22,053
|
)
|
(23,376
|
)
|
||||
Land
occupancy rights, net
|
$
|
76,834
|
$
|
75,511
|
During the reporting periods, amortization expense is
included in the following accounts on the accompanying consolidated income
statements:
Three months ended
|
||||||||
3/31/09
|
3/31/10
|
|||||||
General
and administrative expenses
|
$
|
1,323
|
$
|
1,323
|
||||
$
|
1,323
|
$
|
1,323
|
9.
|
SHORT-TERM
BORROWINGS
|
The
Company’s outstanding principal balances on its short-term borrowings are
payable as follows:
As of
|
||||||||
12/31/09
|
3/31/10
|
|||||||
Audited
|
Unaudited
|
|||||||
Bank
of China, 5.832% to 6.372% interest rates, due no later than November 17,
2010
|
3,514,835
|
3,369,322
|
||||||
Commercial
Bank (Heze branch), 7.965% interest rate, due no later than September 28,
2010
|
4,539,996
|
4,541,259
|
||||||
$
|
8,054,831
|
$
|
7,910,581
|
As of
March 31, 2010, a portion of short-term borrowings from Bank of China are
secured by certain assets of the Company. Specifically, $1,523,519 in short-term
borrowings is secured by the Company’s property with a net book value of
$5,135,679, and $234,388 in short-term borrowings is secured by the Company’s
equipment with a net book value of 1,805,999.
The
effects of imputed interest on the aforementioned below market interest rates
are immaterial to the consolidated financial statements taken as a
whole.
16
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
10.
|
OTHER
PAYABLES AND ACCRUED LIABILITIES
|
As of
|
||||||||
12/31/09
|
3/31/10
|
|||||||
Audited
|
Unaudited
|
|||||||
Salary
and welfare payable
|
$
|
105,246
|
$
|
198,752
|
||||
Accrued
expenses
|
21,818
|
14,188
|
||||||
Other
payables
|
604,265
|
232,447
|
||||||
$
|
731,329
|
$
|
445,388
|
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.
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 our cost of goods sold for the three
months ended March 31, 2009 and 2010, respectively.
Three
months ended
|
||||||||
3/31/2009
|
3/31/2010
|
|||||||
Direct
Materials
|
$ | 8,750,299 | $ | 10,564,836 | ||||
Indirect
Materials
|
1,666,381 | 2,299,238 | ||||||
Direct
Labor
|
565,062 | 769,246 | ||||||
Inbound
Freights
|
164,057 | 168,081 | ||||||
Cost
of Goods Sold
|
$ | 11,145,799 | $ | 13,801,401 |
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, 2009 and 2010, respectively, are set forth in
the following table.
17
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
12.
|
COST
OF GOODS SOLD (EXCLUSIVE OF
DEPRECIATION AND AMORTIZATION) (CONT’D)
|
Three
months ended
|
||||||||
3/31/2009
|
3/31/2010
|
|||||||
Depreciation
expenses
|
$ | 179,805 | $ | 200,216 | ||||
Amortizations
|
1,323 | 1,323 | ||||||
Shipping
and handling expenses
|
115,852 | 194,071 | ||||||
Inspection
costs
|
18,632 | 21,027 |
These
excluded expenses are included under Selling, General and Administrative
expenses in the accompanying financial statements.
13.
|
SELLING AND MARKETING
EXPENSES
|
Selling and marketing expenses were
$160,238 and $237,577 for
the three months ended March 31, 2009 and 2010, respectively, including $115,852
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
|
The
Company is subject to the foreign investment enterprise income tax at the
statutory rate of 15% on the profits as reported in the Company’s PRC statutory
consolidated financial statements as adjusted by profit and loss items that are
not taxable or deductible before 2008.
PRC’s
legislative body, the National People’s Congress, adopted the unified EIT Law on
March 16, 2007. 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.
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
|
||||||||
3/31/2009
|
3/31/2010
(Restate)
|
|||||||
EIT
rate in effect for the year
|
25
|
%
|
25
|
%
|
||||
Profits
before income tax
|
$
|
2,942,063
|
$
|
4,699,541
|
||||
Income
tax
|
$
|
706,635
|
$
|
1,182,966
|
The
effective income taxes differ from the above PRC statutory EIT rates as
follows:
Three months ended
|
||||||||
3/31/2009
|
3/31/2010
(Restate)
|
|||||||
Provision
for income taxes at statutory EIT rate
|
$
|
735,516
|
$
|
1,174,884
|
||||
Non-deductible
and other various items for tax purposes
|
(28,881
|
)
|
8,082
|
|||||
Income
taxes
|
$
|
706,635
|
$
|
1,182,966
|
18
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
14.
|
INCOME
TAXES (CONT’D)
|
Income
tax expense is summarized as follows:
Three
months ended
|
||||||||
3/31/2009
|
3/31/2010
|
|||||||
(restated)
|
||||||||
Current
|
$ | 706,635 | $ | 512,960 | ||||
Deferred
change
|
- | 670,006 | ||||||
Income
taxes expense
|
$ | 706,635 | $ | 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
|
|||||||
3/31/2009
|
3/31/2010
|
|||||||
(restated)
|
||||||||
Sales
cut-off
|
$ | - | $ | (670,006 | ) | |||
Total
deferred tax liabilities
|
$ | - | $ | (670,006 | ) | |||
Net
deferred tax liabilities
|
$ | - | $ | (670,006 | ) |
15.
|
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 defined contribution plan contributions were charged
to expense in the accompanying consolidated statements of income. The Company
contributed $0 for both three-month periods ended March 31, 2009 and 2010,
respectively. The contribution, if any, is included in general and
administrative expenses in the accompanying consolidated income
statements.
16.
|
CONTINGENCIES
|
The
Company had no contingencies existing as of March 31, 2009 and
2010.
17.
|
RELATED
PARTY TRANSACTIONS
|
The
Company had no material transactions carried out with its related parties during
the three months ended March 31, 2009 and 2010.
19
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
18.
|
INCOME
PER SHARE
|
The
following table sets forth the computation of basic earnings per share for the
three months ended March 31, 2009 and 2010 indicated:
Three months ended
|
||||||||
3/31/2009
|
3/31/2010
(Restate)
|
|||||||
Numerator:
|
||||||||
Net
income
|
$
|
2,235,428
|
$
|
3,516,574
|
||||
Denominator:
|
||||||||
Weighted
average number of shares outstanding
|
||||||||
Basic
|
12,862,501
|
12,862,501
|
||||||
Earnings
(loss) per share
|
||||||||
Basic
and fully diluted
|
$
|
0.18
|
$
|
0.28
|
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 split.
The
Company had no dilutive instruments as of March 31, 2009 and 2010.
19.
|
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.
(a)
|
Major
customers
|
For the
three months ended March 31, 2009 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 26%
and 29% of net revenue for the three months ended March 31, 2009 and 2010,
respectively.
For the
three months ended March 31, 2009
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||||
Customer
A
|
$ | 2,174,369 | 15 | % | $ | 1,113,095 | ||||||||
Customer
B
|
869,748 | 6 | % | 502,101 | ||||||||||
Customer
C
|
724,790 | 5 | % | 1,495,222 | ||||||||||
Total:
|
$ | 3,768,907 | 26 | % |
Total:
|
$ | 3,110,419 |
20
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31,
2010
|
19.
|
CONCENTRATIONS
AND RISKS (CONT’D)
|
For the
three months ended March 31, 2010
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||||
Customer
D
|
$ | 2,563,964 | 13 | % | $ | 926,815 | ||||||||
Customer
E
|
1,806,429 | 9 | % | 688,297 | ||||||||||
Customer
F
|
1,262,558 | 7 | % | 471,205 | ||||||||||
Total:
|
$ | 5,632,951 | 29 | % |
Total:
|
$ | 2,086,316 |
(b) 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.
20.
|
SUBSEQUENT
EVENT
|
Subsequent
to the three months ended March 31, 2010, the Company entered into an agreement
to issue 300,000 warrants among other items and recorded a related expense of
$334,702, equal to the estimated fair value of the warrants at the date of the
grant to an unrelated shareholder of the Company. The fair market value was
calculated using the Black-Scholes options pricing model, assuming approximately
5.15% risk-free interest, 0% dividend yield, 65% volatility, and a life of two
years.
On July 30, 2010, Mr. Jinliang Li, the
Chairman and Chief Executive Officer of the Company authorized the effectuation
of a 1-for-2 reverse split (the “Reverse Split”) pursuant to the majority consent
on July 1, 2010. The
reverse split combines the Company’s outstanding Common Stock on the basis of 2
outstanding shares being changed to 1 outstanding share. Each shareholder’s
percentage ownership in the Company (and relative voting power) will remain
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 will be proportionally
adjusted.
The
Reverse Split took effective upon the Company filed a Certificate of
Amendment to the Certificate of Incorporation with the Secretary of State of the
State of Delaware on August 3, 2010.
The
statement of equity and the earnings per share numbers in the financial
statements have been restated per FASB 128 paragraph 134.
21.
|
SEGMENTS
|
The
Company determined that it do not operate in any material, separately reportable
operating segments as of March 31, 2009 and 2010.
21
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Disclosure
Regarding Forward-Looking Statements
The
statements contained in this 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, 2009.
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.
Overview
Unless
otherwise specified or required by context, references to “we,” “our” and “us”
refer collectively to (i) China Shandong Industries, Inc., and our subsidiaries,
Tianwei International Development Corporation, an Oregon corporation and
Shandong Caopu Arts & Crafts Co., Ltd, a wholly foreign-owned enterprise
organized under the laws of the PRC. Specific discussions or comments relating
only to China Shandong Industries, Inc. will reference China Shandong Industries
and those relating only to Shandong Caopu Arts & Crafts Co., Ltd will
reference “Shandong.”
We are a
designer and contract manufacturer of household furniture in the Peoples
Republic of China (“PRC”). We produce a variety of indoor and outdoor
residential furniture and wicker products that are sold and exported to more
than 30 countries. Our products are sold through well known domestic and
international 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 the
product depth and extensive style selections we offer allows us to be a strong
resource for global furniture, retail chains and retailers in the discounted
price range.
Our
operations are conducted through our subsidiary, Shandong, located in Shandong
Province, PRC. Through Shandong, we manufacture over 20,000 different products.
We focus on providing high quality products at competitive prices. For the
fiscal year ended December 31, 2009, approximately 5% of our products were sold
in the PRC and 95% of our products were sold to companies in countries and
regions such as the United States, Germany, England, Italy, Sweden, Canada,
Taiwan.
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.
Our
operating facilities consist of 19 plants located in our existing four
industrial parks in Cao County, Shandong Province, PRC. The existing four
industrial parks have a total area of 162,688.82 square meters, of which
71,708.40 square meters consists of buildings that house our production lines,
warehouses, executive offices and related business items. We were granted an
additional 98,435.32 square meters free land use right by the PRC Government in
December 2006, which will be used to build the fifth industrial park in 2010. As
of March 31, 2010, we have the land use right for a total of 261,124.14 square
meters.
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.
22
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.
The
following chart shows the ownership interests in our operating
subsidiaries.
(1) Of
the shares owned by CAOPU Enterprise Limited (“CAOPU”), shares representing 51%
of our issued and outstanding shares are held for the benefit of Mr. Jinliang Li
and shares representing 35.4% of our issued and outstanding shares are held for
the benefit of nine other minority shareholders (non of whom own more than 4.4%
of our issued and outstanding shares individually). The shares held by CAOPU for
the benefit of Mr. Li and the minority shareholders are held pursuant to the
terms of Agreements between CAOPU and each such shareholder, a form of which is
attached as an exhibit to this Form 10-K. Pursuant to the terms of such
agreements, CAOPU shall continue to hold such shares for the benefit of such
shareholders for a period of 15 months after we complete a public offering of
our securities, unless such time period is extended. Although Mr. Li has no
pecuniary interest in the shares held by CAOPU for the benefit of the nine
minority shareholders, by reason of his sole ownership of CAOPU, Mr. Li has sole
voting and dispositive power over such shares of our common stock.
(2) None
of the remaining shareholders has more than 5% shares of our common
stock.
23
Critical
Accounting Policies
Unless
otherwise noted, all translations from RMB to U.S. dollars were made at the
middle rate published by the People’s Bank of China, or the middle rate, as of
March 31, 2010, which was RMB6.8263 to $1.00. We make no representation that the
RMB amounts referred to in this amendment to Quarterly Report on Form 10-Q/A
could have been or could be converted into U.S. dollars at any particular rate
or at all. On May 12, 2010, the middle rate was RMB 6.8271 to
$1.00.
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. The Company generally records revenues
when shipments clear the Chinese customs department. The Company offers varying
payment terms for its customers and is generally responsible for paying the
delivery cost of its products.
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 reviewed our accounts receivables quarterly and
determined the amount of allowances, if any, necessary for doubtful accounts.
Historically, we have not had any material bad debt write-offs and, however, we
provide an arbitrary reserve amount for possible bad debts based upon 5% of the
accounts receivable balances per year. Rather, 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 as of March 31,
2010.
As of
March 31, 2010 and December 31, 2009, we had outstanding gross accounts
receivables of $18,159,416 and $17,204,380, respectively, and allowance for bad
debts of $370,685 and $370,582, respectively. We believe that these outstanding
amounts will be collected pursuant to the terms, conditions, and within the time
frames agreed upon between our customers. During the reported periods, we did
not experience any material problems relating to distributor payments and had no
specific additional bad debt write-offs. 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. Our accounting for inventory is
described in Note 2 to our Notes to Consolidated Financial Statements for March
31, 2010 included elsewhere in this annual report. 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, 2010 and December 31, 2009, we had an inventory balance of $11,048,539
and $10,353,746, respectively.
Recently
Issued Accounting Standards
FASB
Accounting Standards Codification
(Accounting
Standards Update (“ASU”) 2009-01)
In June
2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the Company’s
financial statements as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. There have
been no changes to the content of our consolidated financial statements or
disclosures as a result of implementing the Codification during the prior fiscal
year just ended.
24
As a
result of our implementation of the Codification during the prior fiscal year
just ended, previous references to new accounting standards and literature are
no longer applicable. In the current annual financial statements, we will
provide reference to both new and old guidance to assist in understanding the
impacts of recently adopted accounting literature, particularly for guidance
adopted since the beginning of the current fiscal year but prior to the
Codification.
Subsequent Events
(Included
in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously
SFAS No. 165 “Subsequent Events”)
SFAS No.
165 established general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before the financial statements are
issued or available to be issued (“subsequent events”). An entity is required to
disclose the date through which subsequent events have been evaluated and the
basis for that date. For public entities, this is the date the financial
statements are issued. SFAS No. 165 does not apply to subsequent events or
transactions that are within the scope of other GAAP and did not result in
significant changes in the subsequent events reported by us. SFAS No. 165 became
effective for interim or annual periods ending after June 15, 2009 and did not
impact our consolidated financial statements. We evaluated for subsequent events
through the issuance date of our consolidated financial statements. No
recognized or non-recognized subsequent events were noted.
Determination
of the Useful Life of Intangible Assets
(Included
in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS No. 142-3
“Determination of the Useful Lives of Intangible Assets”)
FSP SFAS
No. 142-3 amended the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under previously issued goodwill and intangible assets topics.
This change was intended to improve the consistency between the useful life of a
recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset under topics related to business
combinations and other GAAP. The requirement for determining useful lives must
be applied prospectively to intangible assets acquired after the effective date
and the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. FSP SFAS No.
142-3 became effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The adoption of FSP SFAS No. 142-3 did not impact our consolidated
financial statements.
Noncontrolling
Interests
(Included
in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51”)
SFAS No.
160 changed the accounting and reporting for minority interests such that they
will be recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 160 became effective for fiscal years beginning
after December 15, 2008 with early application prohibited. We implemented SFAS
No. 160 at the start of fiscal 2009 and no longer record an intangible asset
when the purchase price of a noncontrolling interest exceeds the book value at
the time of buyout. The adoption of SFAS No. 160 did not have any other material
impact on our consolidated financial statements.
Consolidation
of Variable Interest Entities — Amended
(To
be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”)
SFAS No.
167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest
Entities regarding certain guidance for determining whether an entity is a
variable interest entity and modifies the methods allowed for determining the
primary beneficiary of a variable interest entity. The amendments include: (1)
the elimination of the exemption for qualifying special purpose entities, (2) a
new approach for determining who should consolidate a variable-interest entity,
and (3) changes to when it is necessary to reassess who should consolidate a
variable-interest entity. SFAS No. 167 is effective for the first annual
reporting period beginning after November 15, 2009, with earlier adoption
prohibited. We implemented SFAS No. 167 in fiscal 2010, which does not have any
material impact on our consolidated financial statements.
RESULTS
OF OPERATIONS
In 2010,
we intend to continue to focus on the implementation of our strategic plan to
sustain the growth we have experienced since becoming a U.S. public company in
November 2009 through the reverse acquisition of Mobile Presence Technologies,
Inc., a holding company for our China-based subsidiaries. In 2010, we expect to
build a new production line for our high-end furniture products. Through our
aggressive marketing campaign, we also expect to increase our brand awareness
and customer loyalty.
25
The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.
(All
amounts in U.S. dollars, except for the percentages)
Statements
of Operations
|
For the three months ended
March
31, 2010
|
For the three months ended
March
31, 2009
|
||||||||||||||
USD
|
% of
Revenue
|
USD
|
% of
Revenue
|
|||||||||||||
Revenues
|
$
|
19,406,737
|
-
|
%
|
$
|
14,495,795
|
-
|
%
|
||||||||
Cost
of Sales (excluding depreciation)
|
$
|
13,801,401
|
71.1
|
%
|
$
|
11,145,799
|
76.9
|
%
|
||||||||
Operating
expenses
|
$
|
752,017
|
3.9
|
%
|
$
|
418,463
|
2.9
|
%
|
||||||||
Income
from operations
|
$
|
4,853,318
|
25.0
|
%
|
$
|
2,931,533
|
20.2
|
%
|
||||||||
Other
income (expense)
|
$
|
(153,778
|
)
|
0.8
|
%
|
$
|
10,530
|
0.1
|
%
|
|||||||
Net
income before income taxes
|
$
|
4,699,541
|
24.2
|
%
|
$
|
2,942,063
|
20.3
|
%
|
||||||||
Net
income
|
$
|
3,516,574
|
18.1
|
%
|
$
|
2,235,428
|
15.4
|
%
|
Comparison
of Three Months Ended March 31, 2010 and 2009
Revenues
Our
revenues consist of the sale price our products are sold at less 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.
Revenue
for the three months ended March 31, 2010 was $19,406,737, an increase of
$4,910,942, or 33.9%, from $14,495,795 for the comparable period in 2009. For
the three months ended March 31, 2010, our main products, wood furniture,
straw-wicker, and handicraft products, generated sales of approximately $10.9
million, $7.6 million, and $0.9 million, respectively, or approximately 56.2%,
39.2% and 4.6% of our total revenues for the three months ended March 31, 2010.
Sales of our wood furniture, straw-wicker and handicraft products generated
sales of approximately $8.0 million, $6.2 million and $0.3 million,
respectively, for the three months ended March 31, 2009, or approximately 55.2%,
42.8% and 2.1%, respectively, of our total revenues for such
period.
The
increase in our revenues in three months ended March 31, 2010 compared to March
31, 2009 was primarily attributable to the increasing orders from our customers.
We have received orders of approximately $21 million for the three months ended
March 31, 2010, while receiving approximately $15 million for the comparable
period in 2009. We also believe the increase in our revenues for the three
months ended March 31, 2010 is a result of our increased selling price for our
product, the average price of which was $183 per unit in the three months ended
March 31, 2010 and $164 per unit for the comparable period in 2009.
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, 2010 was approximately
$13,801,401, an increase of approximately $2,655,602, or approximately 23.8%,
from approximately $11,145,799 for the comparable period in 2009. Such increase
was due to more consumption of raw materials resulting from increased orders
from our customers.
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 for
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.
26
Our
selling and marketing expenses for the three months ended March 31, 2010 was
approximately $237,577, an increase of approximately $77,339 or 48.3% compared
to approximately $160,238 for the comparable period in 2009. Such expenses
include $194,071 and $115,852 in shipping and handling expenses for the three
months ended March 31, 2010 and 2009, respectively. The increase resulted from
the rise in transportation fee, port incidental charges and trade inspection fee
that increased along with the sales revenue.
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 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, 2010
was approximately $263,304, an increase of approximately $155,244 or 143.7%
compared to approximately $108,060 for the comparable period in 2009. Such
increase in expenses resulted from an increase in legal fees, audit fees and
other professional fees attributable to becoming a publicly traded company in
the United States.
Research
and Development
Our
research and development expenditures totaled $251,136 in the three months ended
March 31, 2010, an increase of approximately $100,971, or 67.2% as compared to
$150,165 in the same period of 2009. The increase was due to our growing
investment in research and development of new products, including our proposed
new furniture line. We expect our research and development expenditures would
continue to increase as a result of further diversification of our product lines
in the future.
Interest
expense
Interest
expense for the three months ended March 31, 2010 was $247,095, an increase of
$118,210 or 91.7%, compared to $128,885 for the comparable period in 2009. The
increase was due to the fact that, as of March 31, 2010, most of our short-term
bank loans were granted by Commerical Bank Heze Branch, which charges a higher
interest than other banks. In view of this situation, we are considering other
banks which will provide lower interest rates based on our good credit record
and strong income growth.
Income
Tax Expense
Income
tax expense for the three months ended March 31, 2010 was approximately
$1,182,966, of which $512,960 was current and $670,006 was deferred. The
deferred tax provision was due to a temporary difference between book
income and taxable income attributable to goods in transit at the end
of the period. An increase of approximately $476,331 or 67.4% for the three
months ended March 31, 2010, compared to the same period of 2009, which was
primarily attributable to the increase in taxable profits as a result of
significant increase in sales revenues. The income taxes are based on a
statutory 25% effective tax rate in both years. There was no deferred income tax
for the three months ended March 31, 2009.
Net
income
Net
income for three months ended March 31, 2010 was approximately $3,516,574, an
increase of $1,281,146, or 57.3% as compared to $2,235,428 for the comparable
period in 2009. Net income as a percentage of our sales revenues increased to
18.1% in the three months ended March 31, 2010 from 15.4% in the comparable
period in 2009. The increase in net income was primarily attributable to our
increased revenue less the effects of a correlative increase in cost of goods
sold in the quarter ended March 31, 2010 versus the quarter ended March 31,
2009. In addition, there was an increase in income taxes in the quarter ended
March 31, 2010 versus the quarter ended March 31, 2009 caused by an increase in
income from operations before income taxes during the quarter ended March 31,
2010. This increase in income taxes lessened the effect of the increase in net
income for the quarter ended March 31, 2010 versus the quarter ended March 31,
2009 just as the increase in cost of goods sold and the increase in operating
expenses during the quarter ended March 31, 2010 versus the quarter ended March
31, 2009 did.
27
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,
|
||||||||
2010*
|
2009*
|
|||||||
(Consolidated,
unaudited)
|
(Consolidated,
unaudited)
|
|||||||
Net
cash provided by/(used in) operating activities
|
$
|
3,158,570
|
$
|
(291,400
|
)
|
|||
Net
cash (used in)/provided by investing activities
|
$
|
(1,747,788
|
)
|
$
|
13,473
|
|||
Net
cash (used in)/provided by financing activities
|
$
|
(146,479
|
)
|
$
|
1,391,554
|
|||
Effect
of Foreign currency translation
|
$
|
5,134
|
$
|
127
|
||||
Net
increase (decrease) in cash and equivalents
|
$
|
1,269,436
|
$
|
1,113,753
|
||||
Cash
and cash equivalents, beginning of period
|
$
|
2,185,839
|
$
|
1,751,997
|
||||
Cash
and cash equivalents, end of period
|
$
|
3,455,275
|
$
|
2,865,750
|
* The above financial data
have been derived from our unaudited consolidated financial statements for the
three months ended March 31, 2010 and 2009.
Operating
Activities
Net cash
provided by operating activities was approximately $3,158,570 for the three
months ended March 31, 2010, compared to net cash outflow of approximately
$291,400 used in operations for the comparable period in 2009. 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. Negative cash flows during
the three months ended March 31, 2009 were due primarily to the increase in
accounts receivables by $3,401,142, the decrease in taxes payable and accrued
liabilities by $995,609 and $221,633, respectively, partially offset by the net
income of $2,235,428 and the decrease in inventories by $1,704,333.
Investing
Activities
Cash used
in investing activities mainly consists of capital expenditures, expenditures
for property, plant, and equipment, and additions to construction in
progress.
Net cash
used in investing activities was $1,747,788 for the three months ended March 31,
2010, compared to cash flows of $13,473 provided by investing activities during
the same period in 2009. Negative cash flows during the first quarter of 2010
were primarily attributable to the spending in reconstruction, renewal and
expansion of our old workshop buildings and facilities. We incurred $180,232 in
expenditures for property, plant and equipment in the three months ended March
31, 2010 compared to an equipment disposal of $14,264, in the comparable period
in 2009. We also had $1,567,556 incurred in construction in progress in the
three months ended March 31, 2010 compared to $791 in such expenditures for the
comparable period in 2009.
Financing
Activities
Net cash
used in financing activities was $146,479 for the three months ended March 31,
2010, due primarily to the repayments to the short-term borrowings. Comparably,
we had cash flows of $1,391,554 provided by financial activities due to the
proceeds from 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.
28
Loan
Facilities
We
believe that we currently maintain a good business relationship with our banks.
As of March 31, 2010, 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)
|
$
|
219,677
|
11/17/2010
|
||
Bank
of China, Cao County Branch (2)
|
$
|
234,321
|
4/16/2010
|
||
Bank
of China, Cao County Branch (3)
|
$
|
512,580
|
10/21/2010
|
||
Bank
of China, Cao County Branch (4)
|
$
|
439,351
|
9/21/2010
|
||
Bank
of China, Cao County Branch (5)
|
$
|
351,484
|
4/22/2010
|
||
Bank
of China, Cao County Branch (6)
|
$
|
102,536
|
2/2/2011
|
||
Laishang
Bank (AKA Commercial Bank (Heze Branch) (7)
|
$
|
1,171,612
|
7/17/2010
|
||
Laishang
Bank (AKA Commercial Bank (Heze Branch) (8)
|
$
|
439,351
|
9/28/2010
|
||
Laishang
Bank (AKA Commercial Bank (Heze Branch) (9)
|
$
|
2,196,817
|
4/29/2010
|
||
Laishang
Bank (AKA Commercial Bank (Heze Branch) (10)
|
$
|
732,257
|
8/31/2010
|
||
China
Construction Bank, Cao County Branch (11)
|
585,917
|
7/8/2010
|
|||
Total
|
$
|
7,910,581
|
(1) Short
term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 011). The term of this loan
agreement is from November 18, 2009 to November 17, 2010, with an interest rate
of 6.372% per annum. The purpose of this loan is to purchase raw materials. The
loan is the master contract of the Maximum Mortgage Contract (No. Year 2009 Di
Xie Zi 001), Shandong is the guarantor for this loan.
(2) Short
term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 010). The term of this loan
agreement is from November 16, 2009 to April 16, 2010, with an interest rate of
5.832% per annum. The purpose of this loan is to purchase raw materials. The
loan is the master contract of the Maximum Mortgage Contract (No. Year 2009 Di
Xie Zi 001) and Maximum Mortgage Contract (No. Year 2009 Di Xie Zi 002),
Shandong is the guarantor for this loan.
(3) Short
term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 006). The term of this loan
agreement is from October 22, 2009 to October 21, 2010, with an interest rate of
6.372% per annum. The purpose of this loan is to purchase raw materials. The
loan is the master contract of the Maximum Mortgage Contract (No. Year 2009 Di
Xie Zi 001), Shandong is the guarantor for this loan.
(4) Short
term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 007). The term of this loan
agreement is from October 22, 2009 to September 21, 2010, with an interest rate
of 6.372% per annum. The purpose of this loan is to purchase raw materials. The
loan is the master contract of the Maximum Mortgage Contract (No. Year 2009 Di
Xie Zi 001), Shandong is the guarantor for this loan.
(5) Short
term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 008). The term of this loan
agreement is from October 22, 2009 to April 22, 2010, with an interest rate of
5.832% per annum. The purpose of this loan is to purchase raw materials.
Shandong is the guarantor for this loan and takes join and several
liabilities.
(6) Short
term loan (No. Year 2010 Cao Zhong Yin Si Dai Zi 001). The term of this loan
agreement is from February 4, 2010 to February 2, 2011, with an interest rate of
6.372% per annum. The purpose of this loan is to purchase raw materials.
Shandong Enterprise Credit Guarantee Co., Ltd is the guarantor for this loan and
takes join and several liabilities.
(7) Short
term loan (No.2009071701210). The term of this loan agreement is from July 17,
2009 to July 17, 2010, with an interest rate of 9.558% per annum. The loan is to
be used as our working fund, which should be repaid from our sales income. Heze
JXY Food Limited is the guarantor for this loan and takes joint and several
liabilities.
(8) Short
term loan (No.2009120701210). The term of this loan agreement is from December
7, 2009 to September 28, 2010, with an interest rate of 9.558% per annum. The
loan is to be used as our working fund, which should be repaid from our sales
income. Heze JXY Food Limited and Shandong Cao Xian Changsheng Arts & Crafts
Company Ltd are the guarantors for this loan and take joint and several
liabilities.
(9) Short
term loan (No.2010043001210). The term of this loan agreement is from April 30,
2010 to April 29, 2011, with an interest rate of 9.558% per annum. The loan is
to be used as our working fund to purchase raw materials, which should be repaid
from our sales income or others. Shandong Cao County Shengfeng Food Limited is
the guarantor for this loan and takes joint and several
liabilities.
(10)
Short term loan (No.2009083101210). The term of this loan agreement is from
August 31, 2009 to August 31, 2010, with an interest rate of 9.558% per annum.
The loan is to be used as our working fund, which should be repaid from our
sales income. Shandong Cao County Shengfeng Food Limited, Shandong Cao County
Senyuan Lvse Food Limited, Shandong Cao County Kangli Yinpin Limited and Cao
County Yangguang Arts & Crafts Limited are the guarantors for this loan and
take joint and several liabilities.
(11)
Short term loan (No. CXCKDDRZ 2010002). The term of this loan agreement is 120
days, from March 9, 2010 to July 8, 2010, with an interest rate of 5.346% per
annum. The loan is to be used for purchasing, manufacturing, transporting and
exporting related products. Shandong Cao County Zhuang Da Food Limited is the
guarantor for this loan.
29
We
anticipate rollovers of all current facilities coming due in the 2010 fiscal
year and do not foresee a squeeze on the availability of credit to fund our
operations and 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.
We
believe that our existing cash, cash equivalents, and cash flows from
operations, and our proposed financing activities will be sufficient to meet our
anticipated cash needs over the next 12 months. We will, however, require
substantial additional cash resources to implement the balance of our growth
strategy discussed elsewhere, including any acquisitions we may decide to
pursue.
We intend
to expand our operations as quickly as reasonably practicable to capitalize on
our perceived demand for our wood furniture products. Our expansion plans will
be implemented in phases based upon the availability of funds. Such expansion
plans include establishing 2 new production lines to manufacture new products as
well as increasing our existing production capacity by upgrading and renovating
our existing facilities.
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 shareholders’ 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.
Seasonality
Our
operating results and cash flows historically have not been subject to seasonal
variations. Although we do not currently anticipate any changes, this pattern
may change, however, as a result of new market opportunities or new product
introductions.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
Not
applicable for a smaller reporting company.
Item 4T. 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.
Our chief
executive officer and chief financial officer evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended) as of March 31, 2010. Based on
such evaluation, our chief executive officer and chief financial officer
concluded at the time that our disclosure controls and procedures were effective
as of March 31, 2010.
However,
on June 17, 2010, our management concluded that our unaudited consolidated
financial statements for the quarter ended March 31, 2010 (as well as our
audited consolidated financial statements for the fiscal year ended December 31,
2009) could no longer be relied upon. On June 23, 2010, we filed a
Current Report on Form 8-K disclosing the need to restate our financials and the
reasons for the restatement. We restated those financial statements
to make the necessary accounting corrections in our Amendment No. 1 to the Form
10-Q, which we filed on June 28, 2010.
As a
result of the conclusion that we needed to restate our financial statements for
the periods ended December 31, 2009 and March 31, 2010, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures were ineffective as of such dates. Further, the conclusion
that our disclosure controls and procedures were ineffective led our chief
executive officer and chief financial officer to conclude that our internal
controls over financial reporting were also ineffective.
We
believe that we have, since the date that the error leading to the restatement
was discovered, improved the effectiveness of our disclosure controls and
procedures, and hence also our internal controls over financial reporting, by
taking certain corrective steps that we believe considerably minimize the
likelihood of a recurrence of such an error. As a result, our chief
executive officer and chief financial officer concluded, in connection with
their evaluation of the Company’s disclosure controls and procedures as of June
30, 2010, that our disclosure controls and procedures were effective as of such
date and therefore made statements to such effect in the Quarterly Report on
Form 10-Q for the quarterly period then ended. This Amendment No. 2 to our
Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2010 does not
amend that conclusion.
30
Inherent
Limitations on Disclosure Controls and Procedures
The
effectiveness of our disclosure controls and procedures is subject to various
inherent limitations, including cost limitations, judgments used in decision
making, assumptions about the likelihood of future events, the soundness of our
systems, the possibility of human error, and the risk of fraud. Moreover,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions
and the risk that the degree of compliance with policies or procedures may
deteriorate over time. Because of these limitations, there can be no assurance
that any system of disclosure controls and procedures will be successful in
preventing all errors or fraud or in making all material information known in a
timely manner to the appropriate levels of management.
Changes
in Internal Control over Financial Reporting
Other
than the corrective steps referred to above, 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.
Inherent
Limitations on Internal Controls
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations, including
the possibility of human error and circumvention by collusion or overriding of
controls. Accordingly, even an effective internal control system may not prevent
or detect material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate. Accordingly, our internal controls and procedures are
designed to provide reasonable assurance of achieving their
objectives.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
1A. Risk Factors.
Not
applicable to smaller reporting company.
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.
(a)
None.
(b)
None.
31
Item
6. Exhibits.
Exhibit Number
|
Exhibit Description
|
|||
3.1
|
Certificate
of Incorporation. (1)
|
|||
3.1(a)
|
Certificate
of Amendment of Certificate of Incorporation. (2)
|
|||
3.2
|
Bylaws
(1)
|
|||
10.1
|
Stock
Exchange and Reorganization Agreement dated October 22, 2009.
(3)
|
|||
10.2
|
Assignment
and Assumption Agreement dated November 5, 2009, by and between
Mobile Presence Technologies, Inc. and Timothy Lightman.
(3)
|
|||
10.
3
|
Form
of Share Holding Agreement, dated September 14, 2009, between us and each
of nine other shareholders. (4)
|
|||
10.4
|
Maximum
Amount Guarantee Agreement dated May 15, 2008, by and between Shandong
Caopu Arts & Crafts Co., Ltd and Bank of Chin, Cao Country
Branch.(3)
|
|||
10.5
|
Maximum
Amount Guarantee Contract (No. Year 2009 Di Xie Zi 001), dated August 25,
2009, by and between Shandong Caopu Arts & Crafts Co., Ltd. and Bank
of Chin, Cao Country Branch. (5)
|
|||
10.6
|
Maximum
Amount Guarantee Contract (No. Year 2009 Di Xie Zi 002), dated November
11, 2009, by and between Shandong Caopu Arts & Crafts Co., Ltd. and
Bank of Chin, Cao Country Branch. (5)
|
|||
10.7
|
Employment
Agreements, by and between Shandong Caopu Arts & Crafts Co., Ltd and
each of Jinliang Li, Jiawei Li, Zhiyu Wang and Zhiqiang Zhong.
(3)
|
|||
21.1
|
List
of Subsidiaries. (3)
|
|||
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
|
(1)
Incorporated by reference to registration statement on Form SB-2 filed with the
SEC on November 28, 2007.
(2)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on January 6, 2010.
(3)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on November 12, 2009.
(4)
Incorporated by reference to our original Annual Report on Form 10-K filed with
the SEC on April 15, 2010.
(5)
Incorporated by reference to our Amendment No. 1 to our Annual Report on Form
10-K/A filed with the SEC on June 28, 2010.
32
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.
|
|||
November
5, 2010
|
By:
|
/s/
Jinliang Li
|
|
Jinliang Li, Chief Executive Officer
|
|||
(Principal Executive Officer)
|
|||
November
5, 2010
|
By :
|
/s/
Yuhong Lei
|
|
Yuhong
Lei, CFO
|
|||
(Principal Accounting and Financial Officer)
|
33