Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2011
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 333-150385
PACIFIC BEPURE INDUSTRY INC.
(Exact name of registrant as specified in its charter)
Delaware 333-150385 26-1272059
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File No.) Identification No.)
No. 78 Kanglong East Road, Yangdaili, Chendai Township
Jinjiang City, Fujian Province, P. R. China
(Address of principal executive offices)
Tel: (86 595) 8677 0999
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] 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 [ ] No [X]
As of May 15, 2011, 15,000,000 shares of the Company's common stock, $0.0001 par
value, were issued and outstanding.
Pacific Bepure Industry Inc.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of March 31, 2011
(unaudited) and December 31, 2010 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended March 31, 2011 and 2010
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2011 and 2010 (unaudited) 5
Condensed Consolidated Statement of Stockholders' Equity 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32
Part II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 3. Defaults upon Senior Securities 32
Item 4. [Removed or reserved] 32
Item 5. Other Information 33
Item 6. Exhibits 33
Signatures 34
2
Pacific Bepure Industry Inc.
Condensed Consolidated Balance Sheets
As of March 31, 2011 and December 31, 2010
(Stated in US Dollars)
As of As of
March 31, December 31,
2011 2010
------------ ------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 6,325,369 $ 5,815,257
Trade receivables 14,588,706 13,094,012
Prepayments and other receivables - Note 5 132,895 249,118
Advances to customers and distributors - Note 6 1,400,874 1,293,733
Inventories - Note 7 1,232,363 1,232,557
------------ ------------
Total current assets 23,680,207 21,684,677
Properties, plant and equipment, net - Note 8 8,683,705 7,592,866
Land use rights - Note 9 6,027,039 6,021,489
Intangible asset - Note 10 176,677 190,505
------------ ------------
TOTAL ASSETS $ 38,567,628 $ 35,489,537
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Trade and bills payables $ 2,265,033 $ 2,988,361
Other payables and accrued expenses - Note 11 4,038,826 3,524,874
Loans payable - Note 12 6,305,247 4,717,870
Amount due to a director - Note 14 2,010,856 1,998,085
Income tax payable 1,646,985 1,248,649
------------ ------------
Total current liabilities 16,266,947 14,477,839
------------ ------------
TOTAL LIABILITIES 16,266,947 14,477,839
------------ ------------
COMMITMENTS AND CONTINGENCIES - Note 15
STOCKHOLDERS' EQUITY
Common stock : par value of $0.0001 per share
Authorized 75,000,000 shares; issued and outstanding
15,000,000 shares in 2011 and 2010 - Note 22 1,500 1,500
Additional paid-in capital 3,311,321 3,234,650
Statutory reserve - Note 23 309,688 309,688
Accumulated other comprehensive income 2,125,217 1,987,222
Retained earnings 16,552,955 15,478,638
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 22,300,681 21,011,698
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,567,628 $ 35,489,537
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
Pacific Bepure Industry Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three months ended March 31, 2011 and 2010
(Stated in US Dollars)
Three months ended
March 31,
-----------------------------------
2011 2010
------------ ------------
(Unaudited) (Unaudited)
Sales revenue $ 6,429,512 $ 4,732,415
Cost of sales 4,365,338 3,049,666
------------ ------------
Gross profit 2,064,174 1,682,749
------------ ------------
Operating expenses
Administrative expenses 427,638 321,013
Selling expenses 71,541 72,976
------------ ------------
499,179 393,989
------------ ------------
Income from operations 1,564,995 1,288,760
Other income - Note 16 39,736 --
Other expenses -- (26,717)
Finance costs - Note 17 (94,753) (61,237)
------------ ------------
Income before income taxes 1,509,978 1,200,806
Income taxes - Note 18 (435,661) (314,825)
------------ ------------
Net income $ 1,074,317 $ 885,981
============ ============
Other comprehensive income/(loss)
Foreign currency translation adjustments 137,995 (36,233)
------------ ------------
Total comprehensive income $ 1,212,312 $ 849,748
============ ============
Earnings per share: - Note 19
- Basic $ 0.072 $ 0.059
- Diluted $ 0.071 $ 0.059
============ ============
Weighted average number of shares: - Note 19
- Basic 15,000,000 15,000,000
- Diluted 15,049,583 15,000,000
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
Pacific Bepure Industry Inc.
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2011 and 2010
(Stated in US Dollars)
Three months ended
March 31,
-----------------------------------
2011 2010
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,074,317 $ 885,981
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 36,207 37,905
Amortization of an intangible asset and
land use rights recognized as expenses 15,262 13,420
Share-based compensation 76,671 --
Changes in operating assets and liabilities:-
Trade receivables (1,406,466) (947,023)
Prepayments and other receivables 117,434 (23,554)
Advances to customers and distributors (98,555) --
Inventories 8,045 91,993
Trade and bills payables (740,030) (400,701)
Other payables and accrued expenses 489,840 (259,684)
Income tax payable 389,098 (177,299)
------------ ------------
Net cash flows used in operating activities (38,177) (778,962)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments to acquire property, plant and equipment (1,042,604) (186,456)
------------ ------------
Net cash flows used in investing activities (1,042,604) (186,456)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank loans (2,023,953) (497,365)
Proceeds from bank loans 3,576,157 2,238,141
Dividend paid -- (228,162)
------------ ------------
Net cash flows provided by financing activities 1,552,204 1,512,614
------------ ------------
Effect of foreign currency translation on cash
and cash equivalents 38,689 (12,320)
------------ ------------
Net increase in cash and cash equivalents 510,112 534,876
Cash and cash equivalents - beginning of period 5,815,257 4,325,176
------------ ------------
Cash and cash equivalents - end of period $ 6,325,369 $ 4,860,052
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
Pacific Bepure Industry Inc.
Condensed Consolidated Statements of Cash Flows (Cont'd)
For the three months ended March 31, 2011 and 2010
(Stated in US Dollars)
Three months ended
March 31,
-----------------------------------
2011 2010
------------ ------------
(Unaudited) (Unaudited)
Supplemental disclosures for cash flow information:-
Cash paid for:-
Interest $ 85,888 $ 62,111
Income taxes $ 46,563 $ 492,124
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
6
Pacific Bepure Industry Inc.
Condensed Consolidated Statement of Stockholder's Equity
(Stated in US Dollars)
Common stock Accumulated
------------------- Additional Statutory other Total
Number of paid-in reserve comprehensive Retained stockholders'
Shares Amount capital (Note 23) income earnings equity
------ ------ ------- --------- ------ -------- ------
Balance, December 31, 2010 15,000,000 $ 1,500 $3,234,650 $ 309,688 $1,987,222 $15,478,638 $21,011,698
Net income -- -- -- -- -- 1,074,317 1,074,317
Foreign currency translation
adjustment -- -- -- -- 137,995 -- 137,995
Share-based compensation -- -- 76,671 -- -- -- 76,671
----------- ------- ---------- --------- ---------- ----------- -----------
Balance, March 31, 2011 15,000,000 $ 1,500 $3,311,321 $ 309,688 $2,125,217 $16,552,955 $22,300,681
=========== ======= ========== ========= ========== =========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements
7
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
1. CORPORATE INFORMATION AND DESCRIPTION OF BUSINESS
Pacific Bepure Industry Inc. (the "Company") was incorporated on October 9,
2007 under the laws of the State of Delaware with authorized share capital
of $7,500, divided into 75,000,000 common shares of $0.0001 par value each.
The Company's shares are quoted for trading on the Over-the-counter
Bulletin Board in the United States of America.
The Company's primary operations consist of the business and operations of
Peakway Worldwide Limited ("Peakway"), which acts as an investment holding
company and currently has three subsidiaries namely, Alberta Holdings
Limited ("Alberta"), Fuijang Jinjiang Pacific Shoes Company Limited
("Pacific Shoes") and Fujian Baopiao Light Industry Company Limited
("Baopiao").
Peakway was incorporated in the British Virgin Islands (the "BVI") on
November 3, 2006 as a limited liability company with authorized share
capital of $50,000, divided into 50,000 common shares of $1 par value each.
The issued share capital of Peakway is $1,000, divided into 1,000 common
shares of $1 par value each.
Alberta was incorporated in Hong Kong on November 4, 2006 as a limited
liability company with authorized share capital of 10,000 Hong Kong dollars
("HK$"), divided into 10,000 common shares of HK$1 par value each. The
issued share capital of Alberta is HK$1, being 1 common share of HK$1 par
value. Alberta is also a holding company and had no other operation since
its incorporation.
Pacific Shoes was established as a sino-foreign equity joint venture entity
in the People's Republic of China (the "PRC") on April 9, 1993 with
registered capital of 5,000,000 Renminbi ("RMB") (which are not divided
into shares) and its registered capital was fully paid up.
Baopiao was established as a wholly foreign-owned enterprise ("WFOE") in
the PRC on February 15, 2006 with registered capital of HK$50,000,000
(which are not divided into shares). As of March 31, 2011, its paid up
capital was HK$16,370,478 of which HK$15,401,180 was certified. Baopiao had
been under development and had not started commercial operations.
The Company, through its subsidiaries, is engaged in the design,
manufacturing and trading of footwear under the brand names of "BEPURE"
through a network across the PRC. The major target market of the Company's
products is the PRC.
8
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
2. BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements of the Company
and its subsidiaries have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (the "US GAAP") have been condensed or omitted
from these statements pursuant to such rules and regulation and,
accordingly, they do not include all the information and notes necessary
for comprehensive consolidated financial statements and should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2010.
In the opinion of the management of the Company, all adjustments, which are
of a normal recurring nature, necessary for a fair statement of the results
for the three-month periods have been made. Results for the interim period
presented are not necessarily indicative of the results that might be
expected for the entire fiscal year.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash
equivalents, trade receivables and advances to customers and distributors.
As of March 31, 2011 and December 31, 2010, substantially all of the
Company's cash and cash equivalents were held by major financial
institutions located in the PRC, which management believes are of high
credit quality. With respect to trade receivables and advances to customers
and distributors, the Company extends credit based on evaluations of the
customers' and distributors' financial positions. The Company generally
does not require collateral for customers and distributors.
9
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CONCENTRATIONS OF CREDIT RISK (CONT'D)
During the reporting period, customers representing 10% or more of the
Company's consolidated sales are as follows:-
Three months ended March 31,
------------------------------
2011 2010
---------- ----------
(Unaudited) (Unaudited)
Taiwan Quanyi Xingye Co., Ltd. $2,411,561 $1,409,290
========== ==========
Details of customers for 10% or more of the Company's trade receivables
are:-
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Taiwan Quanyi Xingye Co., Ltd. $3,296,345 $1,839,049
========== ==========
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 "Fair Value Measurements and Disclosures" requires the disclosure
of the estimated fair value of financial instruments including those
financial instruments for which the ASC 323 fair value option was not
elected. Except for collateralized borrowings disclosed below, the carrying
amounts of other financial assets and liabilities approximate their fair
values due to short maturities:-
As of March 31, 2011 As of December, 31, 2010
----------------------- ------------------------
Carrying Carrying
amount Fair value amount Fair value
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Audited) (Audited)
Short-term bank loans $6,305,247 $6,317,830 $4,717,870 $4,713,661
========== ========== ========== ==========
The fair values of collateralized borrowings are based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
It is management's opinion that the Company is not exposed to significant
price or credit risks arising from these financial instruments.
10
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS (INCLUDED IN AMENDED TOPIC ASC
860 "TRANSFERS AND SERVICING", PREVIOUSLY STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS ("SFAS") NO. 166, "ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS -
AN AMENDMENT OF FASB NO. 140."). The amended topic addresses information a
reporting entity provides in its financial statements about the transfer of
financial assets; the effects of a transfer on its financial position,
financial performance, and cash flows; and a transferor's continuing
involvement in transferred financial assets. Also, the amended topic
removes the concept of a qualifying special purpose entity, limits the
circumstances in which a transferor derecognizes a portion or component of
a financial asset, defines participating interest and enhances the
information provided to financial statement users to provide greater
transparency. The amended topic is effective for the first annual reporting
period beginning after November 15, 2009 and was effective for us as of
January 1, 2010. The adoption of this amended topic had no material impact
on the Company's financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES - AMENDED (INCLUDED IN AMENDED
TOPIC ASC 810 "CONSOLIDATION", PREVIOUSLY SFAS NO. 167 "AMENDMENTS TO FASB
INTERPRETATION NO. 46(R)"). The amended topic requires an enterprise to
perform an analysis to determine the primary beneficiary of a variable
interest entity; to require ongoing reassessments of whether an enterprise
is the primary beneficiary of a variable interest entity and to eliminate
the quantitative approach previously required for determining the primary
beneficiary of a variable interest entity. The amended topic also requires
enhanced disclosures that will provide users of financial statements with
more transparent information about an enterprise's involvement in a
variable interest entity. The amended topic is effective for the first
annual reporting period beginning after November 15, 2009 and was effective
for us as of January 1, 2010. The adoption of this amended topic had no
material impact on the Company's financial statements.
The FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A
Consensus of the FASB Emerging Issues Task Force." This update provides
application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a
selling price hierarchy for determining the selling price of a deliverable.
The selling price used for each deliverable will be based on
vendor-specific objective evidence, if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific or third-party evidence is available. The
Company was required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011;
however, earlier application is permitted. The adoption of this ASU update
had no material impact on the Company's financial statements.
The FASB issued ASU 2010-06, Improving Disclosures about Fair Value
Measurements. ASU 2010-06 amends ASC Topic 820 to require the following
additional disclosures regarding fair value measurements: (i) the amounts
of transfers between Level 1 and Level 2 of the fair value hierarchy; (ii)
reasons for any transfers in or out of Level 3 of the fair value hierarchy
and (iii) the inclusion of information about purchases, sales, issuances
and settlements in the reconciliation of recurring Level 3 measurements.
ASU 2010-06 also amends ASC Topic 820 to clarify existing disclosure
requirements, requiring fair value disclosures by class of assets and
liabilities rather than by major category and the disclosure of valuation
techniques and inputs used to determine the fair value of Level 2 and Level
3 assets and liabilities. With the exception of disclosures relating to
purchases, sales, issuances and settlements of recurring Level 3
measurements, ASU 2010-06 was effective for interim and annual reporting
periods beginning after December 15, 2009. The disclosure requirements
related to purchases, sales, issuances and settlements of recurring Level 3
measurements will be effective for financial statements for annual
reporting
11
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT'D)
periods beginning after December 15, 2010. The adoption of this ASU had no
material impact on the Company's financial statements.
5. PREPAYMENTS AND OTHER RECEIVABLES
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Prepayments to suppliers $ 68,917 $ 131,846
Advances to staff 63,978 117,272
---------- ----------
$ 132,895 $ 249,118
========== ==========
6. ADVANCES TO CUSTOMERS AND DISTRIBUTORS
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Interest-free loans advanced to
customers and distributors $1,400,874 $1,293,733
========== ==========
In order to improve the market shares and increase the number of retailing
points in the PRC, the management advanced cash to the potential retailers
for them to increase the number of retail shops and distribution points in
the related provinces in which they are located. The amounts are
interest-free, unsecured and payable upon demand.
7. INVENTORIES
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Raw materials $ 409,906 $ 227,572
Work-in-progress 448,963 445,249
Finished goods 373,494 559,736
---------- ----------
$1,232,363 $1,232,557
========== ==========
12
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
8. PROPERTIES, PLANT AND EQUIPMENT
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Costs:
Plant and machinery $ 992,429 $ 985,609
Office equipment 115,795 115,060
Buildings 1,346,104 1,337,557
----------- -----------
2,454,328 2,438,226
Accumulated depreciation (1,306,074) (1,261,688)
Construction-in-progress 7,535,451 6,416,328
----------- -----------
$ 8,683,705 $ 7,592,866
=========== ===========
During the reporting period, depreciation is included in:-
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
Cost of sales and overheads $ 19,573 $ 22,151
Administrative expenses 16,634 15,754
----------- -----------
$ 36,207 $ 37,905
=========== ===========
Notes: -
As of March 31, 2011 and December 31, 2010, buildings with carrying value
of $846,976 and $852,833 respectively, construction-in-progress with
carrying amount of $4,505,490 and nil respectively, were pledged for the
collateralized bank loans (Note 12b).
Construction-in-progress consist mainly the new factory and warehouse under
construction.
13
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
9. LAND USE RIGHTS
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Cost $ 6,455,383 $ 6,414,392
Accumulated amortization (428,344) (392,903)
----------- -----------
$ 6,027,039 $ 6,021,489
=========== ===========
The Company obtained the rights from the relevant PRC land bureau for a
period of 50 years to use the land on which the office premises, production
facilities and warehouse of the Company are situated.
As of March 31, 2011 and December 31, 2010, the land use rights with
carrying value of $6,027,039 and $6,021,489 respectively, was pledged for
collateralized bank loans (Note 12b).
During the three months ended March 31, 2011 and 2010, amortization for the
land use rights amounted to $32,824 and $31,552 of which $32,559 and
$31,298 have been capitalized in construction-in-progress, respectively.
The estimated aggregate amortization expenses for the land use rights for
the five succeeding years are as follows :-
Year
----
2011 $ 127,347
2012 127,347
2013 127,347
2014 127,347
2015 127,347
----------
$ 636,735
==========
14
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
10. INTANGIBLE ASSET
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Software
Cost $ 334,346 $ 332,223
Accumulated amortization (157,669) (141,718)
----------- -----------
$ 176,677 $ 190,505
=========== ===========
This software represents integrated software in designing footwear and
purchased by Pacific Shoes. Pursuant to the management experience, this
software estimated useful life was 5 years. Since its acquisition, an
annual impairment review was performed by management and no impairment was
identified.
During the three months ended March 31, 2011 and 2010, amortization for
intangible asset amounted to $14,997 and $13,166, respectively.
The estimated aggregate amortization expenses for software for the three
succeeding years are as follows :-
Year
2011 $ 59,800
2012 59,800
2013 57,077
-----------
$ 176,677
==========
15
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
11. OTHER PAYABLES AND ACCRUED EXPENSES
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Value added tax and other tax payable $2,383,742 $1,712,724
Staff welfare payables (Note (a)) 1,109,548 1,046,724
Accrued expenses and other payables 267,054 536,147
Salaries payable 278,482 229,279
---------- ----------
$4,038,826 $3,524,874
========== ==========
Notes:-
(a) Staff welfare payable represents accrued staff medical, industry
injury claims, labor and unemployment insurances. All of which are
covered by 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.
12. LOANS PAYABLE
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Collateralized short-term bank
loans (Note (b)) $4,778,553 $3,079,510
Uncollateralized short-term bank
loans 1,526,694 1,638,360
---------- ----------
$6,305,247 $4,717,870
========== ==========
Notes:-
(a) The bank loans are denominated in RMB and carried average interest
rate as of March 31, 2011 and December 31, 2010 at 6.09% and 5.82%
respectively.
During the reporting period, there was no covenant requirement under
the banking facilities granted to the Company.
(b) These bank loans were collateralized by the buildings,
construction-in-progress and land use right with carrying values of
$846,976 (Note 8), $4,505,490 (Note 8) and $6,027,039 (Note 9),
respectively, and guaranteed by Mr. Li Haiting, the sole director of
the Company and his brother and a third party.
16
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
13. SHARE-BASED COMPENSATION
The Company granted share options to employees and a director to reward for
services.
On December 6, 2010, the Company has granted 3 tranches of share option.
The option granted was designated as Incentive Stock Option. The Board of
Directors adopted the Pacific Bepure Industry Inc. Stock Option Plan (the
"2010 Plan") and the plan was approved in the Annual General Meeting on
January 14, 2011. The 2010 Plan authorized the issuance of 560,000 options
of the Company's common stock. The exercise price of the options granted,
pursuant to the 2010 Plan, must be at least equal to the market value of
the Company's common stock at the date of grant.
Pursuant to the Plan, the Company issued 560,000 options with an exercise
price of $1.75 per share on December, 6, 2010. The 3 tranches of options
will vest and become exercisable from the date of January 5, 2011 to
January 5, 2013.
A summary of share option plan activity for the period ended March 31, 2011
is presented below:-
Number of Exercise price
shares per share
-------- ---------
Outstanding as of January 1, 2011 560,000 $ 1.75
Granted -- --
Exercised -- --
Forfeited -- --
Cancelled -- --
-------- --------
Outstanding as of March 31, 2011 560,000 $ 1.75
======== ========
Exercisable as of March 31, 2011 168,000 $ 1.75
======== ========
The grant-date fair values for tranches 1, 2 and 3 of options granted in
2010 were $0.62, $0.67 and $0.72 per option respectively. Compensation
expense of $76,671 arising from above mentioned share options granted was
recognized for the three months ended March 31, 2011.
The fair values of the above option awards were estimated on the date of
grant using the Black-Scholes Option Valuation Model with the following
assumptions.
Tranche 1 Tranche 2 Tranche 3
--------- --------- ---------
Expected life 2.583 years 3.083 years 3.583 years
Expected dividends Nil Nil Nil
Expected volatility 54.743% 54.743% 54.743%
Risk-free interest rate 1.572% 1.572% 1.572%
14. AMOUNT DUE TO A DIRECTOR
The amount is interest-free, unsecured and repayable on demand. The
directors consider the carrying amount approximates its fair value.
17
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
15. COMMITMENTS AND CONTINGENCIES
a. CAPITAL COMMITMENT
As of March 31, 2011 and December 31, 2010, the Company had capital
commitment in respect of the construction of properties, amounting to
$24,386 and $47,116 respectively, which was contracted but not
provided for in the financial statements.
b. OPERATING LEASE COMMITMENT
As of March 31, 2011, there was no operating lease arrangement for the
Company.
The rental expense was $6,087 for the three months ended March 31,
2011.
c. CONTINGENCIES
In accordance with the PRC tax regulations, the Company's sales are
subject to value added tax ("VAT") at 17% upon the issuance of VAT
invoices to its customers. When preparing these financial statements,
the Company recognized revenue when goods were delivered, and made
full tax provision in accordance with relevant national and local laws
and regulations of the PRC.
The Company follows the practice of reporting its revenue for PRC tax
purposes when invoices are issued. In the local statutory financial
statements prepared under PRC GAAP, the Company recognized revenue on
an "invoice basis" instead of when goods are delivered. Accordingly,
despite the fact that the Company has made full tax provision in the
financial statements, the Company may be subject to a penalty for the
deferred reporting of tax obligations. The exact amount of penalty
cannot be estimated with any reasonable degree of certainty. The
directors consider it is very unlikely that the tax penalty will be
imposed.
16. OTHER INCOME
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
Sales of scrap and materials $ 39,736 $ --
=========== ===========
17. FINANCE COSTS
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
Bank loan interest expenses $ 85,888 $ 62,111
Interest income - net (632) (1,505)
Bank charges 9,497 631
---------- ----------
$ 94,753 $ 61,237
========== ==========
18
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
18. INCOME TAXES
UNITED STATES
Pacific Bepure Industry Inc. is subject to the United States of America Tax
law at tax rate of 34%. No provision for the US federal income taxes has
been made as the Company had no taxable income in this jurisdiction for the
reporting period.
BVI
Peakway was incorporated in the BVI and, under the current laws of the BVI,
is not subject to income taxes.
HONG KONG
Alberta was incorporated in Hong Kong and is subject to profits tax rate of
16.5% (2010 : 16.5%). It is currently not subject to income taxes because
it derived no taxable income during the reporting period.
PRC
On March 16, 2007, the National People's Congress approved the Corporate
Income Tax Law of the People's Republic of China (the "New CIT Law"). The
New CIT Law reduces the standard corporate income tax rate from 33% to 25%
with effect from January 1, 2008. Pursuant to the New CIT Law, Pacific
Shoes and Baopiao have been subjected to EIT at a unified rate of 25% from
January 1, 2008 onwards.
According to the PRC tax laws and regulations, Pacific Shoes and Bapiao
being a sino-foreign equity joint venture entity and a WFOE respectively,
were entitled to, starting from the first profitable year, a two-year
exemption from enterprise income tax followed by a three-year 50% reduction
in its enterprise income tax ("Tax Holiday").
The Tax Holiday of Pacific Shoes commenced in year 1993 and ended in year
1997.
Baopiao has not started commercial operations and had no reportable profit
under China Accounting Regulations since its incorporation on February 15,
2006. Baopiao had not applied for such Tax Holiday to the relevant PRC
authority before the New CIT Law became effective on January 1, 2008.
However, pursuant to the transitional provisions in the New CIT Law,
companies qualified for Tax Holiday must make application prior to January
1, 2008 and the Tax Holiday would be deemed commence on January 1, 2008
regardless of results of operation. Baopiao is therefore not entitled to
Tax Holiday.
19
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
18. INCOME TAXES (CONT'D)
In July 2006, the FASB issued ASC 740-10-25 (previously Interpretation No.
48, "Accounting for Uncertainty in Income Taxes"). This interpretation
requires recognition and measurement of uncertain income tax positions
using a "more-likely-than-not" approach. The Company adopted this ASC
740-10-25 on January 1, 2007. Under the New CIT Law which became effective
on January 1, 2008, the Company might be deemed to be a resident enterprise
by the PRC tax authorities. If the Company was deemed to be resident
enterprise, the Company might be subject to the CIT at 25% on the worldwide
taxable income and dividends paid from the RPC subsidiaries to their
overseas holding companies might be exempted from 10% PRC withholding tax.
Given that all of the Company's income is generated from the PRC and the
PRC subsidiaries do not intend to pay dividends for the foreseeable future
operation, the management considers that the impact arising from resident
enterprise on the Company's financial position is not significant. The
management evaluated the Company's tax positions and considered that no
provision for uncertainty in income taxes is necessary as of March 31,
2011.
The components of the provision for income taxes from continuing operation
are:-
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
Current taxes - PRC $ 435,661 $ 314,825
Deferred taxes - PRC -- --
---------- ----------
$ 435,661 $ 314,825
========== ==========
The effective income tax expenses differ from the PRC statutory income tax
rate from continuing operations in the PRC as follows:-
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
Provision for income taxes at PRC
statutory income tax rate - 25% $ 377,495 $ 300,202
Non-deductible items for tax 58,166 14,623
---------- ----------
$ 435,661 $ 314,825
========== ==========
20
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
19. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") for the periods indicated:-
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
Numerator:-
Net income $ 1,074,317 $ 885,981
=========== ===========
Denominator:-
Weighted average common shares used
to compute basic EPS 15,000,000 15,000,000
Dilutive potential from assumed
exercise of share options 49,583 --
----------- -----------
Weighted average common shares used
to compute diluted EPS 15,049,583 15,000,000
=========== ===========
Earnings per share - Basic $ 0.072 $ 0.059
Earnings per share - Diluted $ 0.071 $ 0.059
=========== ===========
All shares and per share data have been adjusted to reflect the
recapitalization of the Company in the RTO.
20. RELATED PARTIES TRANSACTIONS
Apart from the transactions as disclosed in Note 12(b) and 14 to the
financial statements, the Company had no material transactions carried out
with related parties during the period.
21. TRADEMARKS
Pacific Shoes, currently owns two trademarks, namely "Chinese Character"
("Bepure"), and "Chinese Character" ("Dilks") which were registered in the
PRC. These trademarks were transferred to the subsidiary from a major
stockholder of the Company for nil consideration during 2008.
22. COMMON STOCK
The Company was incorporated on October 9, 2007 with authorized share
capital of $7,500 divided into 75,000,000 common shares of $0.0001 per
value each.
21
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
23. STATUTORY RESERVE
The Company's statutory reserve comprise of the following:-
As of As of
March 31, December 31,
2011 2010
---------- ----------
(Unaudited) (Audited)
Statutory reserve $ 309,688 $ 309,688
========== ==========
Under PRC regulations, Pacific Shoes and Baopiao may pay dividends only out
of their accumulated profits, if any, determined in accordance with PRC
GAAP. In addition, these companies are required to set aside at least 10%
of their after-tax net profits each year, if any, to fund the statutory
reserves until the individual balance of the reserve reaches 50% of their
corresponding individual registered capital. The statutory reserves are not
distributable in the form of cash dividends to the Company and can be used
to make up cumulative prior year losses.
For the three months ended March 31, 2011 and 2010 respectively, no
appropriation to this statutory reserve was made as the reserve reached 50%
of the Pacific Shoes' registered capital and Baopiao did not make any
profit during the periods.
24. DEFINED CONTRIBUTION PLAN
Pacific Shoes and Baopiao have defined contribution plans for all qualified
employees in the PRC. Pacific Shoes and Baopiao and their employees are
each required to make contributions to the plans at the rates specified in
the plans. The only obligation of Pacific Shoes and Baopiao with respect to
retirement schemes are to make the required contributions under the plans.
No forfeited contribution is available to reduce the contribution payable
in the future years. The defined contribution plan contributions were
charged to the consolidated statements of income and comprehensive income.
The Company contributed $40,825 and $29,006 for the three months ended
March 31, 2011 and 2010 respectively.
25. SEGMENT INFORMATION
The Company uses the "management approach" in determining reportable
operating segments. The management approach considers the internal
organization and reporting used by the Company's chief operating decision
maker for making operating decisions and assessing performance as the
source for determining the Company's reportable segments. Management,
including the chief operating decision maker, reviews operating results
solely by monthly revenue and operating results of the Company and, as
such, the Company has determined that the Company has one operating
segments - footwear, as defined by ASC 280, Segments Reporting".
All of the Company's long-lived assets are located in the PRC. Geographic
information about the revenues, which are classified based on the
customers, is set out as follows:-
Three months ended March 31,
-------------------------------
2011 2010
----------- -----------
(Unaudited) (Unaudited)
PRC $4,368,349 $3,279,645
Taiwan 2,061,163 1,452,770
---------- ----------
$6,429,512 $4,732,415
========== ==========
22
Pacific Bepure Industry Inc.
Notes to Condensed Consolidated Financial Statements
(Stated in US Dollars)
26. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred after March
31, 2011 and through the date the financial statements were issued, and has
determined that there are no material recognizable subsequent events nor
transactions which would require recognition or disclosure in these
condensed consolidated financial statements other than noted therein.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains both historical and "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements, written, oral or otherwise made, represent the
Company's expectation or belief concerning future events. All statements, other
than statements of historical fact, are or may be forward-looking statements.
For example, statements concerning projections, predictions, expectations,
estimates or forecasts, and statements that describe our objectives, future
performance, plans or goals are, or may be, forward-looking statements. These
forward-looking statements reflect management's current expectations concerning
future results and events and can generally be identified by the use of words
such as "may," "will," "should," "could," "would," "likely," "predict,"
"potential," "continue," "future," "estimate," "believe," "expect,"
"anticipate," "intend," "plan," "foresee" and other similar words or phrases, as
well as statements in the future tense.
Forward-looking statements involve known and unknown risks, uncertainties,
assumptions, and other important factors that may cause our actual results,
performance or achievements to be different from any future results, performance
and achievements expressed or implied by these statements. The following
discussion and analysis should be read in conjunction with our consolidated
financial statements and the related notes thereto and other financial
information contained elsewhere in this Form 10-Q. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's opinions only as of the date hereof. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the factors described in the Section
entitled "Risk Factors" on Form 10-K and other documents we file from time to
time with the Securities and Exchange Commission ("SEC").
OUR HISTORY AND CORPORATE STRUCTURE
We are a Delaware corporation that was incorporated on October 9, 2007. We are
headquartered in Fujian Province, China. On November 11, 2009, we completed a
reverse acquisition transaction ("Reverse Merger") with Peakway Worldwide
Limited ("Peakway"), a company incorporated under the laws of the British Virgin
Islands pursuant to the terms of a Share Exchange Agreement dated as of November
5, 2009 ("Share Exchange Agreement"). Alberta Holdings Limited is a Hong Kong
company incorporated on November 4, 2006 and was acquired by Peakway on November
1, 2007. Alberta presently has two wholly-owned subsidiaries: Fujian Jinjiang
Pacific Shoes Co., Limited and Fujian Baopiao Light Industry Co., Limited.
Fujian Jinjiang Pacific Shoes Co., Limited ("Pacific Shoes") was established as
a sino-foreign equity joint venture entity in the PRC on April 9, 1993. On
January 12, 2009, Alberta acquired 100% equity interest in Pacific Shoes.
Currently, all of our revenues have been generated from Pacific Shoes.
Fujian Baopiao Light Industry Co., Limited ("Baopiao ") was established as a
wholly foreign-owned enterprise ("WFOE") in the PRC on February 15, 2006. On
February 26, 2009, Alberta acquired 100% equity interest in Baopiao Shoes. As of
the date of this report, Baopiao is still in its development stage and has not
yet generated any revenue.
We are now a fully reporting issuer with our common stock publicly quoted on the
OTC bulletin board under the symbol "PBEP". As of May 15th, 2011, we had
15,000,000 shares of common stock issued and outstanding.
BUSINESS REVIEW
The Company is mainly engaged in professional design, manufacture and
distribution of sports and casual footwear through its Chinese Subsidiaries. We
target at both female and male customers, particularly the 20-35 years old
female consumers, among whom our Baopaio (or "Bepure") label has witnessed an
increasing recognition. For three months ended March 31, 2011, the Company's
sales revenues increased $1,697,097 or 35.86% to $6,429,512 compared with
$4,732,415 in the same period of 2010.
The revenue growth is mainly attributable to the increasing demand for our sport
and casual footwear products in the PRC market where consumers are in transition
to much healthier and more fashion life styles, supported by stronger purchasing
power and higher demand.
According to the market demand and overall marketing situation of 2010, in the
first quarter of 2011, we targeted products research and development in business
operation in order to achieve the following objectives:
24
* To improve our R&D capabilities. We added R&D personnel to expand the
R&D team.
* To refine the sophistication and skill of our R&D team. During the
first quarter of 2011, we retained some senior members through
performance appraisal system to enhance our R&D concept to comply with
the prevailing fashion trends , and
* To improve the product quality. We conducted a comprehensive
adjustment among all products to adjust shadesi(cent)materials and
techniques. We improved overall color palette and we put more limits
on the procurement of raw materials to ensure the high quality of the
products.
We innovate because it is critical for us to remain in step with consumers'
tastes, choices and fashions.
BRAND PROMOTION
As of March 31, 2011, a classified promotion was implemented for both the
products online and in retail shops. For the Bepure official online store, we
aimed to improve the brand recognition mainly through advertisement; for the
retail shops, we renewed the unified shop image in all retail locations and
applied environmentally conscious material(such as wood) for products display
shelves.
SALES NETWORK
We design, develop, manufacture and distribute sports and casual footwear in
China and South America through our indirectly owned Chinese subsidiaries. All
of our products are sold under the brand "Chinese Character" ("Baopiao" in
English). We sell our products to consumers in the People's Republic of China
(for purpose of this Form 10-Q, excludes Hong Kong Special Administration
Region, Macau Special Administration Region and Taiwan), or so-called "domestic
market" and South America. In the domestic market, we sell our products
substantially on a wholesale basis to our distributors who are responsible for
distribution to retail outlets. Through our distributors, our sales network
covers 24 provinces and administrative regions in various modes, including
retail outlets, counters in department stores and shopping malls, and wall racks
in large supermarkets. Our products, including our branded products and ODM
(Original Design Manufacture) products, are sold in the South America through
our distributors.
In the domestic (PRC) market, we adopted the sales mode of "four-prong sales",
which is a combination of four retail approaches, including distributor-operated
stores, retailer-operated stores, franchise stores and online stores. At the
distributor-operated stores, distributors sell our product exclusively. At the
retailer operated stores, distributor appointed retailers sell our products
exclusively. We have certain control over these distributor appointed retailers
because when we enter into distribution agreements with distributors, we have
the right to approve or reject the distributor's request to appoint certain
retailers. The franchise stores refer to stores operated by our franchisees
pursuant to franchise agreements with us. As of March 31, 2011, retail locations
increased from 98 to 102, and 1,523 counters in the shopping malls are now
authorized to sell our products and they are under the direct management of our
distributors. We continue to refresh our brand image with in-store advertising
and decorations, so that consumers will enjoy a much happier purchase experience
at the retail outlets.
Through years of effort in expanding the market share, the Company now maintains
a solid distribution base with a retail management system is under development
as well. This enables us to monitor the overall retail situation and respond to
the market changes in a more timely manner. As part of our online marketing and
distribution strategy, we improved our online shopping portal and registered
Bepure official online store with Taobao, a leading Internet destination for
shopping, socializing and information sharing in China.
PRODUCT R&D
The Company consistently aims to develop attractive footwear products to satisfy
the demand of its target market and to interpret fashion trends. To help
accomplish this, the Company has been focused on the R&D and application of new
craftsmanship, new materials and new technologies, to streamline the Company's
innovative brand concept and international sports fashion. We increased the R&D
cost, updated the equipment and introduced additional talents to develop
fashionable and practical products. In addition, the Company keeps adding new
elements into the product designs to earn more selling points and consumer
recognition on the Baopiao brand, thus constantly striving for the fashion
leader position of "Baopiao" in the female sports and casual footwear market.
In order to build an appropriate, scalable and multiple product structure, the
Company has increased the percentage of men's products to the total sales and
divided its products into four categories, namely, the "Free Travel," the
"Business Travel," the "Outdoor Travel" and the "Urban Travel" as discussed
above.
25
CHAIN SUPPLY MANAGEMENT
We have adopted a cost control system in its business operation. Our procurement
team works closely with engaged suppliers and outsourcing companies to shares
the cost trend of main materials. Meanwhile, we are able to decrease both costs
and pollutants by implementing strict production standards at our existing
facilities while outsourcing certain low margin products. We also try to reduce
the cost of raw materials through bulk purchases, in which our outsourcing
partners are co-buyers.
INFORMATION MANAGEMENT
The Company has set up an information management system which consists of
financial management, sales management, supply chain management, production
management, decision-making support and database service functions, which
contributes significantly to the operation development.
This is an integrated IT system that is able to handle the ever-increasing
requirements of business development. The Company will continue to extend the
new system to its sales channels, especially retail outlets.
The Enterprise Resource Planning (ERP) System of the Company was in full
operation at the end of 2010. The system (i) comprehensively records the
information of sales and goods allotment which is the basis for implementation
of sales policies; (ii) provides exact and thorough analysis data for management
of production; (iii) assists the management in planning and decision-making by
providing access to close domination each department.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
In preparing 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
disclosure of contingent assets and liabilities at the date of financial
statements, as well as the reported amounts of revenue and expenses during the
reported period. These amounts and estimates include, but are not limited to,
the valuation of trade and bills receivables, inventories and estimation on
useful lives and residual values of properties, plant and equipment and
intangible asset. Actual results could differ from these estimates.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
on a weighted average basis and includes all expenditures incurred in bringing
the goods to the point of sale and putting them in a saleable condition.
In addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes down the
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and the estimated market value based
upon assumptions about future demand and market conditions.
There were no provision of obsolete inventories made during the reporting
period. Historically, the actual net realizable value is close to the management
estimation.
PROPERTIES, PLANT AND EQUIPMENT
Properties, plant and equipment are stated at cost less accumulated
depreciation. Cost represents the purchase price of the asset and other costs
incurred to bring the asset into its existing use.
Depreciation is provided on a straight-line basis over the assets' estimated
useful lives. The useful lives are as follows:-
26
Estimated
useful lives
------------
Plant and machinery 3 to 8 years
Office equipment 3 to 5 years
Buildings 30 years
Maintenance or repairs are charged to expense as incurred. Upon sale or
disposal, the applicable amounts of asset cost and accumulated depreciation are
removed from the accounts and the net amount less proceeds from disposal is
charged or credited to income.
CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents assets under construction and is stated at
cost. This includes cost of construction of buildings and other direct costs.
Construction-in-progress is not depreciated until such time the relevant assets
are completed and put into use.
INTANGIBLE ASSET
The intangible asset of the Company is comprised of accounting software and
shoes designing software. The software is determined to have useful life of 5
years pursuant to the management experience. The software is stated at cost of
purchase less accumulated amortization and any identified impairment losses in
the annual impairment review.
LAND USE RIGHTS
Land use rights are stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the terms of the lease of 50
years obtained from the relevant PRC land bureau.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company recognizes impairment of long-lived assets in the event
that the net book values of such assets exceed the future undiscounted cash
flows attributable to such assets. During the reporting period, the Company has
not identified any indicators that would require testing for impairment.
REVENUE RECOGNITION
Revenue from sales of the Company's products is recognized when the significant
risks and rewards of ownership have been transferred to the buyer at the time of
delivery, the sales price is fixed or determinable and collection is reasonably
assured. Returns and exchange require approval from management and discounts are
based on trade terms. The Company reviews and estimates the rates of return and
exchange monthly and made provision for return based on customers' and
distributors' past records. From the past records, the return and exchange are
insignificant.
COST OF SALES
Cost of sales consists primarily of material costs, purchasing and receiving
costs, inspection costs, wages, employees' compensation, depreciation and
related costs, which are directly attributable to the production of products.
Write down of inventory to lower of cost or market value is also recorded in
cost of sales.
SHARE-BASED COMPENSATION
The Company adopted the provisions of ASC 718, which requires the use of the
fair value method of accounting for share-based compensation. Under the fair
value based method, compensation cost related to employee stock options or
similar equity instruments which are equity-classified awards, is measured at
the grant date based on the value of the award and is recognized over the
requisite service period, which is usually the vesting period. ASC 718 also
requires measurement of cost of a liability-classified award based on its
current fair value.
Fair value of share options granted is determined using the Black-Scholes Option
Valuation Model. Under this model, certain assumptions, including the risk-free
interest rate, the expected life of the options and the estimated fair value of
the Company's common stock and the expected volatility, are required to
determine the fair value of the options. If different assumptions had been used,
27
the fair value of the options would have been different from the amount the
Company computed and recorded, which would have resulted in either an increase
or decrease in the compensation expense.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 "Accounting for Income Taxes". Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statements carrying amounts of existing assets and
liabilities and loss carried forward and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31,
2010
The following table summarizes our operating results and key financial ratios
for three months ended March 31, 2011 and March 31, 2010, respectively:
Three months ended March 31, Comparison
---------------------------- --------------------------
2011 2010 Amount %
--------- --------- --------- --------
Sales revenue 6,429,512 4,732,415 1,697,097 35.86%
Cost of sales 4,365,338 3,049,666 1,315,672 43.14%
Gross profit 2,064,174 1,682,749 381,425 22.67%
Gross profit margin 32.10% 35.56% -3.46%
Total operating expenses 499,179 393,989 105,190 26.70%
Income from operations 1,564,995 1,288,760 276,235 21.43%
Other expense (income) -39,736 26,717 -66,453 -248.73%
Finance costs 94,753 61,237 33,516 54.73%
Income before income taxes 1,509,978 1,200,806 309,172 25.75%
Income taxes 435,661 314,825 120,836 38.38%
Net income 1,074,317 885,981 188,336 21.26%
This table below illustrates our key operating results and financial indicators
for the three months ended March 31, 2011 and March 31,2010, respectively:
Three months ended March 31, Comparison
---------------------------- --------------------------
2011 2010 Amount %
--------- --------- --------- --------
Sale revenue 6,429,512 4,732,415 1,697,097 35.86%
Gross profit 2,064,174 1,682,749 381,425 22.67%
Income from operations 1,564,995 1,288,760 276,235 21.43%
Net income 1,074,317 885,981 188,336 21.26%
Gross profit margin 32.10% 35.56% -3.46%
Operating profit margin 24.34% 27.23% -2.89%
Net profit margin 16.71% 18.72% -2.01%
Ratio of general administrative
expenses to revenue 6.65% 6.78% 0.13%
Ratio of selling expenses to
revenue 1.11% 1.54% -0.43%
Average inventory turnover days 25 19 6 31.58%
Turnover days of trade receivable 194 147 47 31.97%
Turnover days of trade payable 54 97 -43 -44.33%
28
REVENUE
For three months ended March 31, 2011, our revenues were $6,429,512, which
represented an increase of $1,697,097 or 35.86%, as compared with $4,732,415 for
the same period in 2010. We attribute this increase mainly to (i) the capacity
increases and the overall improvement of our manufacturing system; (ii) increase
of our sales network; (iii) increase of our foreign market access; and (iv)
effectiveness of our marketing policies in different regions.
GEOGRAPHIC SEGMENTS OF REVENUES IN THE NINE MONTHS ENDED MARCH 31, 2011 AND
2010:
Three months ended Three months ended
March 31, 2011 March 31, 2010 Comparison
----------------------- ----------------------- ----------------------
$ % $ % $ %
---------- ------ ---------- ------ ---------- ------
Foreign markets 2,061,163 32.06% 1,452,770 30.70% 608,393 41.88%
PRC market 4,368,349 67.94% 3,279,645 69.30% 1,088,704 33.20%
The eastern section (1) 1,071,132 16.66% 571,281 12.07% 499,851 87.50%
The northern section (2) 1,992,966 31.00% 1,705,257 36.03% 287,709 16.87%
The southern section (3) 1,304,251 20.29% 1,003,107 21.20% 301,144 30.02%
Total revenues 6,429,512 100.00% 4,732,415 100.00% 1,697,097 35.86%
Note:
1. The eastern section refers to the city of Shanghai and the provinces of
Zhejiang, Jiangsu, Anhui, Hubei, Hunan, Jiangxi and Shandong in the PRC;
2. The northern section refers to the city of Beijing and the provinces of
Xinjiang, Gansu, Ningxia, Hebei, Henan, Tianjin, Shanxi, Inner Mongolia,
Liaoning, Jilin and Heilongjiang in the PRC;
3. The southern section refers to the city of Chongqing and provinces of
Guangdong, Guangxi, Fujian, Hainan, Sichuan, Guizhou, Yunnan and Tibet in
the PRC.
For the three months ended March 31, 2011, $2,061,163 of our sales revenue were
generated from the foreign (non PRC) markets, representing an increase of
41.88% when compared to $1,452,770 from the same period in 2010.
For the three months ended March 31, 2011, the domestic eastern market
contributed $1,071,132 to the Company's sales revenue, representing an increase
of 87.50%, when compared to $571,281 earned in the same period of 2010. The
northern market generated sales revenue of $1,992,966, representing an increase
of 16.87%, when compared to $1,705,257 for the same period in 2010. The southern
market achieved sales revenue of $1,304,251, representing an increase of 30.02%,
when compared to $1,003,107 for the same period in 2010. Such changes are mainly
due to the following:
* The further expanded sales network in Eastern section helps our products to
cover all the markets in cities, towns and villages. In fact, the
purchasing power in relatively more economically developed Eastern section
is stronger than that of other domestic sections, which, we believe, is the
key factor to the revenue increase in this section.
* In the first quarter of 2011, the sales growth in Northern section did not
meet our expectations. We believe this was due to current marketing
approach in that section which we believe needs to be revamped as well as
due to the seasonal varieties.
* The higher sales result in Southern section are mainly because we launched
canvas shoes series and board shoes series which are preferred by young
consumers. To improve our brand recognition, we held various promotion
activities to attract more consumers in this group.
29
GROSS PROFIT AND GROSS PROFIT MARGIN FOR THE THREE MONTHS ENDED MARCH 31, 2011
AND 2010:
Three months ended March 31, Comparison
----------------------------- ----------------------------
2011 2010 Amount %
---------- ---------- ---------- ----------
Sales revenue $6,429,512 $4,732,415 $1,697,097 35.86%
Cost of sales 4,365,338 3,049,666 1,315,672 43.14%
Gross profit 2,064,174 1,682,749 381,425 22.67%
Gross profit margin 32.10% 35.56% -3.46%
For the three months ended March 31, 2011, our gross profit was $2,064,174,
representing an increase of $381,425 or 22.67%, compared to $1,682,749 for the
same period of 2010.
For the three months ended March 31, 2011, our gross profit margin was 32.10%,
representing a decrease of 3.46% compared with 35.56% in the same period of
2010. Such decrease is mainly due to the increase of employee salaries.
OPERATING AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, 2011, our selling expenses were $71,541
representing a decrease of $1,435 or 1.97%, compared to $72,976 for the same
period in 2010. The decrease was mainly because we effectively cut down the cost
of free gifts offered in promotion activities.
For the three months ended March 31, 2011, the administrative expenses were
$427,638, representing an increase of 33.22% compared to $$321,013 of the same
period in 2010. The increase was mainly due to the issuance of stock options
granted to key employees.
FINANCING COST
For the three months ended March 31, 2011, the finance cost was $94,753,
representing an increase of $33,516 or 54.73% comparing to $61,237 for the same
period in 2010. The increase primarily relates to increase in debt servicing
cost on the huge increase in bank loans which were applied to the marketing
expansion, cosolidated construction of retails and the new factory.
NET PROFIT
For the three months ended March 31, 2011, the net profit was $1,074,317,
representing an increase of $188,336 or 21.26% compared to $885,981 for the same
period in 2010, primarily as a result of the growth in revenues and profit
margin.
NET PROFIT MARGIN
For the three months ended March 31, 2011, the net profit margin is 16.71%,
representing a decrease of 2.01% compared to 18.72% for the same period in 2010.
This is mainly attributes to the decrease of gross profit margin and the increse
of administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2011, our total assets were $38,567,628, which consist of cash
and cash equivalents of $6,325,369, trade receivables of $14,588,706,
inventories of $1,232,363, prepayments and other receivable of $132,895,
advances to customers and distributors of $1,400,874, properties, plant and
equipment of $8,683,705, intangible asset of $176,677 and land use rights of
$6,027,039.
30
As of March 31, 2011, total liabilities were $16,266,947. Total liabilities are
composed of trade payables of $2,265,033, short-term loans of $6,305,247, income
tax payable of $ 1,646,985, amount due to a director of $2,010,856 and other
payables and accrued expense of $4,038,826. As of March 31, 2011, stockholders'
equity was $22,300,681. As of March 31, 2011, the gearing ratio is 42.18%.
We offer what we believe to be reasonable credit limits to our customers at
credit terms of 180 days to maintain control of trade receivable. The average
turnover was 194 days for our trade receivable for the three months ended March
31, 2011, while the average turnover was 147 days for our trade receivable in
the same period of 2010.
As of March 31, 2011, the average inventory trade turnover was 25 days for our
inventories which was 19 days for the same period of 2010.
Our cash and bank deposits are mainly denominated in RMB, while the revenue,
expense, assets and liabilities are denominated in RMB and US dollars. The PRC
currency is exchanged to US dollars at a floating rate. It did not have any
substantial impact on our financial condition because we own few assets
denominated in US dollars.
CASH FLOW
As of March 31, 2011, our cash and cash equivalents were $6,325,369,
representing an increase of $510,112, compared to $5,815,257 for the same period
of 2010. We believe our ability to generate cash from operating activities is
one of our fundamental financial strengths. In addition to cash from operating
activities, we also maintain loan arrangements with state-owned banks (e.g.
Agricultural Bank of China, Construction Bank of China, etc.) for our capital
requirements. Our future capital expenditures will include building new
manufacturing facilities, improving and upgrading our existing production
facilities, expanding product lines, research and development capabilities, and
making acquisitions as we deem appropriate. We believe that we have adequate
cash to fund our operations and to meet our anticipated cash requirements for
the next 12 months. If we need additional cash, we may seek to raise capital
either through the issuance of stock or increase our borrowing level with our
lender.
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations and otherwise operate on an
ongoing basis. On an on-going basis, we take steps to identify and plan our
needs for liquidity and capital resources, to fund our operations and day to day
business operations. Our future capital expenditures will include, among others,
expanding product lines, research and development capabilities, and making
acquisitions as deemed appropriate.
Our operating and capital requirements in connection with supporting our
expanding operations and introducing our products to the expanded areas have
been and will continue to be significant to us. We estimate $15 million will be
needed in the fiscal 2011 to fund the foregoing activities and operations. Based
on our current plans for the next 12 months, we anticipate that the revenue
generated from our sales will be the primary organic source of funds for
operating activities in 2011. However, to fund continued expansion of our
operation and extend our reach to broader markets, and to acquire additional
entities, we may rely on bank borrowing, if available as well as capital raises.
As of March 31, 2011, net cash used in operating activities was $38,177. Net
cash used in investing activities was $1,042,604. Such cash was mainly used in
the construction of the new production facility.
As of March 31, 2011, net cash provided by financing activities was $1,552,204.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") 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
(the "Certifying officers"), as appropriate, to allow timely decisions regarding
required disclosure.
As of March 31, 2011, the end of the fiscal quarter covered by this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Certifying officers, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the
foregoing, the Certifying Officers concluded that our disclosure controls and
procedures were effective as of the end of the first fiscal quarter of 2011.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during
the quarter ended March 31, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know of no pending legal proceedings to which we are a party which are
material or potentially material, either individually or in the aggregate. We
are from time to time, during the normal course of our business operations,
subject to various litigation claims and legal disputes. We do not believe that
the ultimate disposition of any of these matters will have a material adverse
effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors as previously described in
our Annual Report on Form 10-K filed with the SEC on March 31, 2011.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2011, the Company did not (i) sell any
unregistered securities, or (ii) repurchase any of its equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. [REMOVED OR RESERVED]
32
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit No. Description
----------- -----------
10.1 Amendment No.1 to Employment Agreement by and between the Company
and Haiting Li, dated as of December 4, 2010*
31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
----------
* Management or compensatory plan, contract or arrangement.
33
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 20, 2011 By: /s/ Haiting Li
--------------------------------------------
Haiting Li
Chief Executive Officer
(Principal Executive Officer)
Date: May 20, 2011 By: /s/ Zhong Zhao
--------------------------------------------
Zhong Zhao
Chief Financial Officer
(Principal Accounting and Financial Officer)
3
