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EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATION - CHINA GLOBAL MEDIA INCsection906cert_ex32z1.htm
EX-32.2 - EXHIBIT 32.2 SECTION 906 CERTIFICATION - CHINA GLOBAL MEDIA INCsection906cert_ex32z2.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION - CHINA GLOBAL MEDIA INCsection302cert_ex31z2.htm
EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION - CHINA GLOBAL MEDIA INCsection302cert_ex31z1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q/A


 X .  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2011


     .. TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE EXCHANGE ACT

For the transition period from ___________ to _____________


TK STAR DESIGN, INC.

(Exact name of small business issuer as specified in its charter)


Nevada 

(State or other jurisdiction of incorporation)


333-156457

04-3626788

(Commission File Number)

(I.R.S. Employer Identification No.)


25-26F Wanxiang Enterprise Building,

No.70 Station North Road,

Changsha, Hunan Province,

China, Postal Code: 410001
(Address of Principal Executive Office)


+86-731-89970899

(Issuer’s Telephone Number)


Copy of Communications To:


Bernard & Yam, LLP 

Attention: Bin Zhou, Esq. 

401 Broadway Suite 1708 

New York, NY 10013 

Tel: 212-219-7783 

Fax: 212-219-3604 


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days. 

Yes  X . No      .


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer

      .

Accelerated filer

      .

Non-accelerated filer

      . (Do not check if a 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      . No  X .


State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 43,485,700 Shares of Common Stock, as of September 30, 2011 and November 10, 2011.








TK STAR DESIGN, INC.


FORM 10-Q

 

SEPTEMBER 30, 2011

 

INDEX


 

 

PART I - FINANCIAL INFORMATION

3

 

 

Item 1. Financial Statements

3

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

21

Item 4. Controls and Procedures

22

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

23

Item 1A. Risk Factors

23

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

23

Item 3. Defaults Upon Senior Securities

24

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

24

Item 5. Other Information

24

Item 6. Exhibits

24

 

 

SIGNATURES

24





2




PART I - FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS



TK STAR DESIGN, INC.


CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2011 AND 2010


(UNAUDITED)





3



TK STAR DESIGN, INC.

Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)


Table of Contents


Page


Report of Independent Registered Public Accounting Firm

5

Consolidated Balance Sheets

6

Consolidated Statements of Operations and Comprehensive Income

7

Consolidated Statements of Stockholders’ Equity

8

Consolidated Statements of Cash Flows

9

Notes to Consolidated Financial Statements

10




4




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders

TK Star Design, Inc.



We have reviewed the accompanying consolidated balance sheet of TK Star Design, Inc. (the “Company”) as of September 30, 2011, and the related consolidated statements of operations and comprehensive income for the three months and nine months ended September 30, 2011 and 2010, stockholders’ equity for the period ended December 31, 2010 and September 30, 2011, and cash flows for the nine months ended September 30, 2011 and 2010. These interim consolidated financial statements are the responsibility of the Company's management.


We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.





/s/ Patrizio & Zhao LLC


Parsippany, New Jersey

November 14, 2011





5



TK STAR DESIGN, INC.

Consolidated Balance Sheets


 

 

September 30,

 

December 31,

 

 

2011

 

2010

Assets

 

(Unaudited)

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

2,375,633

$

797,093

Accounts receivable, net of allowance for doubtful accounts of $146,317 and $141,830 at September 30, 2011 and December 31, 2010, respectively

 

7,899,824

 

3,096,232

Advance payments

 

10,548,219

 

4,522,647

Due from unrelated parties

 

532,532

 

578,396

Due from shareholders

 

287,863

 

413,703

Other current assets

 

761,879

 

126,218

Total current assets

 

22,405,950

 

9,534,289

 

 

 

 

 

Property and equipment, net

 

3,135,598

 

3,165,124

 

 

 

 

 

Total assets

$

25,541,548

$

12,699,413

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable and accrued expenses

$

4,625,212

$

2,063,089

Short-term bank loan

 

313,000

 

303,400

Advances from customers

 

3,227,595

 

768,773

Current maturities of capital lease obligations

 

21,308

 

20,654

Income taxes payable

 

4,151,094

 

2,448,444

Other taxes payable

 

745,227

 

722,518

Warrants liability

 

411,026

 

-

Other current liabilities

 

84,587

 

119,874

Total current liabilities

 

13,579,049

 

6,446,752

 

 

 

 

 

Long-term capital lease obligations

 

53,243

 

67,101

 

 

 

 

 

Total liabilities

 

13,632,292

 

6,513,853

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

Preferred stock, $0.001 par value, 1,000,000 shares authorized, no shares issued and outstanding

 

 -

 

 -

Common stock, $0.001 par value, 99,000,000 shares authorized, 43,485,700 and 36,351,500 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

 

 43,486

 

 36,352

Additional paid-in capital

 

 1,111,041

 

 458,638

Statutory reserve

 

 257,630

 

 257,630

Retained earnings

 

 10,061,796

 

 5,270,514

Accumulated other comprehensive income

 

 435,303

 

 162,426

Total stockholders’ equity

 

 11,909,256

 

 6,185,560

 

 

 

 

 

Total liabilities and stockholders' equity

$

25,541,548

$

12,699,413


The accompanying notes are an integral part of these consolidated financial statements.




6



TK STAR DESIGN, INC.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)


 

 

For the Three Months

 

For the Nine Months

 

 

Ended September 30,

 

Ended September 30,

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Sales

$

9,085,495

$

7,212,304

$

17,729,962

$

11,754,984

 

 

 

 

 

 

 

 

 

Cost of sales

 

4,262,948

 

3,705,649

 

10,623,201

 

6,311,729

 

 

 

 

 

 

 

 

 

Gross profit

 

4,822,546

 

3,506,655

 

7,106,761

 

5,443,255

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

420,817

 

170,214

 

859,678

 

402,529

Total operating expenses

 

420,817

 

170,214

 

859,678

 

402,529

 

 

 

 

 

 

 

 

 

Income from operations

 

4,401,730

 

3,336,441

 

6,247,083

 

5,040,726

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

Interest income (expenses)

 

(7,228)

 

(2,224)

 

(14,053)

 

(2,043)

Non-operating income (expenses)

 

144,938

 

(9,653)

 

143,486

 

(11,882)

Change in fair value of warrants liability

 

15,437

 

-

 

15,437

 

-

Total other income (expense)

 

153,147

 

(11,877)

 

144,870

 

(13,925)

 

 

 

 

 

 

 

 

 

Income before provision for income tax

 

4,554,877

 

3,324,564

 

6,391,953

 

5,026,801

 

 

 

 

 

 

 

 

 

Provision for income tax

 

1,142,435

 

852,588

 

1,600,671

 

1,281,897

 

 

 

 

 

 

 

 

 

Net income

 

3,412,442

 

2,471,976

 

4,791,282

 

3,744,904

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

133,194

 

80,033

 

272,877

 

90,088

 

 

 

 

 

 

 

 

 

Comprehensive income

$

3,545,636

$

2,552,009

$

5,064,159

$

3,834,992

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

Basic

$

0.08

$

0.07

$

0.13

$

0.10

Diluted

$

0.08

$

0.07

$

0.13

$

0.10

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

41,934,787

 

36,351,500

 

38,239,965

 

36,351,500

Diluted

 

41,934,787

 

36,351,500

 

38,239,965

 

36,351,500


The accompanying notes are an integral part of these consolidated financial statements.




7



TK STAR DESIGN, INC.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


 

Preferred Stock

Common Stock

Additional

 

 

Accumulated

other

Total

 

Shares

Par

Value

Shares

Par Value

Paid-in

Capital

Statutory

Reserve

Retained

Earnings

Comprehensive

Income

Stockholders’

Equity

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2010

-

$      -

36,351,500

$36,352

$   231,838

$127,167

$     679,541

$                  485

$     1,075,383

 

 

 

 

 

 

 

 

 

 

Net income

-

-

-

-

-

-

4,721,436

-

4,721,436

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

-

-

-

-

-

-

-

161,941

161,941

Comprehensive Income

-

-

-

-

-

-

-

-

4,883,377

 

 

 

 

 

 

 

 

 

 

Statutory reserve

-

-

-

-

-

130,463

(130,463)

-

-

 

 

 

 

 

 

 

 

 

 

Capital contribution from shareholders

-

-

-

-

226,800

-

-

-

226,800

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2010

-

$      -

36,351,500

$36,352

$   458,638

$ 257,630

$ 5,270,514

$           162,426

$     6,185,560

 

 

 

 

 

 

 

 

 

 

Net income

-

-

-

-

-

-

4,791,282

-

4,791,282

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 Foreign currency translation adjustment

-

-

-

-

-

-

-

272,877

272,877

Comprehensive Income

-

-

-

-

-

-

-

-

5,064,159

 

 

 

 

 

 

 

 

 

 

Effects of reverse recapitalization

-

-

649,000

649

(649)

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

-

-

615,000

615

203,081

-

-

-

203,696

 

 

 

 

 

 

 

 

 

 

Conversion of promissory notes

-

-

5,870,200

5,870

(5,870)

-

-

-

-

 

 

 

 

 

 

 

 

 

 

Capital contribution from shareholders

-

-

-

-

455,841

-

-

-

455,841

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2011

-

$      -

43,485,700

$43,486

$1,111,041

$257,630

$10,061,796

$           435,303

$   11,909,256


The accompanying notes are an integral part of these consolidated financial statements.




8



TK STAR DESIGN, INC.

Consolidated Statements of Cash Flows

(Unaudited)


 

 

For the Nine Months Ended

 

 

September 30,

 

 

2011

 

2010

Cash flows from operating activities:

 

 

 

 

Net Income

$

4,791,282

$

3,744,904

Adjustments to reconcile net income to net cash  provided by (used in) operating activities:

 

 

 

 

Depreciation

 

141,840

 

31,873

Provision for bad debts

 

-

 

58,892

Changes in fair value of warrants liability

 

(15,437)

 

 

Changes in current assets and current liabilities:

 

 

 

 

Accounts receivable

 

(4,634,663)

 

(3,508,116)

Advance payments

 

(5,793,762)

 

(3,105,830)

Other current assets

 

(608,062)

 

(66,598)

Accounts payable and accrued expenses

 

2,461,685

 

2,160,069

Advance from customers

 

2,397,785

 

559,539

Income taxes payable

 

1,600,671

 

1,261,591

Other taxes payable

 

(150)

 

19,512

Other current liabilities

 

(55,022)

 

191,056

Total Adjustments

 

(4,505,115)

 

(2,398,012)

 

 

 

 

 

Net cash provided by operating activities

 

286,167

 

1,346,892

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Acquisition of property and equipment

 

(14,121)

 

(17,611)

Due from unrelated parties

 

63,197

 

74,286

Due from shareholders

 

124,112

 

(272,347)

 

 

 

 

 

Net cash provided by (used in) investing activities

 

173,189

 

(215,672)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Proceeds from issuance of securities

 

615,000

 

-

Additional paid in capital – capital contribution from shareholders

 

455,841

 

-

Proceeds from short-term bank loan

 

-

 

294,200

 

 

 

 

 

Net cash provided by financing activities

 

1,070,841

 

294,200

 

 

 

 

 

Effect of foreign currency translation on cash

 

48,343

 

34,482

 

 

 

 

 

Net increase in cash and cash equivalents

 

1,578,541

 

1,459,902

 

 

 

 

 

Cash and cash equivalents – beginning

 

797,093

 

455,466

 

 

 

 

 

Cash and cash equivalents – ending

$

2,375,633

$

1,915,368

 

 

 

 

 

Supplemental schedule of non cash activities:

 

 

 

 

 

 

 

 

 

Capital lease payment made by a shareholder on behalf of the Company  

$

15,740

$

-

 

 

 

 

 

Supplemental disclosure information:

 

 

 

 

Cash paid for interest

$

14,053

$

2,043

Cash paid for income taxes  

$

-

$

-



The accompanying notes are an integral part of these consolidated financial statements.




9






Note 1 – Organization and Nature of Business


TK Star Design, Inc. (“PUBCO” or the “Company”), a publicly traded company, was incorporated under the laws of the State of Nevada on November 3, 2008. TK Star is a reporting company pursuant to the Securities Exchange Act of 1934 and its shares are currently quoted on the OTCQB and OTC Bulletin Board. The primary business of TK Star Design is to repair, maintain and service metal gym and heavy duty weight equipment for commercial gyms and health club facilities located in the Metropolitan New York Area.


On July 20, 2011, PUBCO entered into a Share Exchange Agreement with the shareholders of Phoenix International. Pursuant to the terms of the Share Exchange Agreement, PUBCO agreed to acquire all of the issued and outstanding shares of Phoenix International from the Phoenix International Shareholders in exchange for the issuance by PUBCO to the Phoenix International Shareholders of an aggregate of 36,351,500 newly-issued shares of common stock of PUBCO, $ 0.001 par value per share (the “Share Exchange”), which, upon completion of the transactions contemplated by the Share Exchange Agreement, constitutes a controlling majority of PUBCO’s issued and outstanding shares of common stock. Upon the closing of the share exchange transaction, Phoenix International became the wholly owned subsidiary of PUBCO and PUBCO ceased the business of repairing, maintaining and servicing metal gym and heavy duty weight equipment, and became engaged in the advertising and brand name development business in China through Phoenix International and its subsidiary and affiliated companies in China.


Phoenix International (China) Limited (“Phoenix International”) was incorporated on October 19, 2009 under the laws of Hong Kong, the People’s Republic of China (“PRC”). On June 7, 2010, Phoenix International invested 100% in Hunan Beiwei International Media Consulting Co., Ltd., a wholly foreign-owned enterprise (“WFOE”) in the county of Changsha, Hunan Province, PRC under the corporate laws of PRC.


On June 15, 2010, the WFOE entered into a series of agreements, the purpose of which was to restructure Changsha Zhongte Trade Advertising Co., Ltd., (“Zhongte”), Changsha North Latitude 30 Cultural Communications Co., Ltd. (“North Latitude”) and Changsha Beichen Cultural Communications Co., Ltd (“Beichen”) in accordance with PRC law such that it could seek capital and grow its business (the “Restructuring”). Zhongte, North Latitude and Beichen were formed on September 27, 2002, August 26, 2003 and June 3, 2008, respectively, in the city of Changsha, Hunan Province, PRC under the corporate laws of PRC. The Agreements, including but not limited to, a Consulting Services Agreement and an Operating Agreement, provide that all business revenues of Zhongte, North Latitude and Beichen will be directed in full by Zhongte, North Latitude and Beichen into bank accounts nominated by the WFOE, and the WFOE agrees to, as the guarantor for Zhongte, North Latitude and Beichen in the contracts, agreements or transactions in connection with Zhongte’s, North Latitude’s and Beichen’s operations with any other third party, provide full guarantee for the performance of such contracts, agreements or transactions. As a result of the above-described agreements, Zhongte, North Latitude, and Beichen became the WFOE’s Variable Interest Entities as defined in FASB ASC 810 (formerly FIN-46R).


Note 2 – Summary of Significant Accounting Policies


Basis of Presentation and Consolidation


As disclosed in Note 1, the WFOE entered into a series of VIE agreement with Zhongte, North Latitude and Beichen. Under FASB ASC 810-10 (formerly FIN 46R), Zhongte, North Latitude, Beichen became the variable interest entities, or VIE, of the WFOE by virtue of the VIE Agreements. As the sole purpose and objective of the VIEs is to provide resources and benefits to the WFOE, the WFOE is the primary beneficiary that can consolidate the VIEs. Therefore, the WFOE and its controlled subsidiaries are consolidated into the Company’s financial statements. All inter-company transactions and balances have been eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by the US GAAP for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.


In preparing the accompanying unaudited consolidated financial statements, we evaluated the period from September 30, 2011 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.



10





Note 2 – Summary of Significant Accounting Policies (continued)


Interim Financial Statements


These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, as not all disclosures required by generally accepted accounting principles in the United States of America for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the year ended December 31, 2010.


Note 3 – Accounts Receivable


Accounts receivable are stated at original invoice amount less allowance for doubtful receivables based on management’s periodic review of aging of outstanding balances and customer credit history. Allowance for doubtful accounts amounted to $146,317 and $141,830 as of September 30, 2011 and December 31, 2010, respectively.


Note 4 – Advance Payments


As a common business practice, the Company is required to make advance payments to certain media for issuing advertisements. As of September 30, 2011 and December 31, 2010, balances on advance payments were $10,548,219 and $4,522,647, respectively.


Note 5 – Due from Unrelated Parties


As of September 30, 2011 and December 31, 2010, the Company had outstanding loans to unrelated parties of $532,532 and $578,396, respectively. These loans are good-faith based, non-interest bearing and payable on demand.


Note 6 – Due from Shareholders


As of September 30, 2011 and December 31, 2010, the Company had outstanding loans to shareholders of $287,863 and $413,703, respectively. These loans are short-term in nature, unsecured and non-interest bearing and payable on demand.


Note 7 – Property and Equipment


Property and equipment as of September 30, 2011 and December 31, 2010 consist of the following:


 

 

September 30,

2011

 

December 31,

2010

 

 

 

 

 

Office equipment and furniture

$

178,610

$

159,234

Vehicles

 

218,340

 

211,644

Vehicles – capital lease

 

149,400

 

144,818

Buildings

 

2,957,850

 

2,867,130

    Subtotal

 

3,504,200

 

3,382,826

Less: accumulated depreciation

 

368,602

 

217,702

 

 

 

 

 

    Total

$

3,135,598

$

3,165,124


Depreciation expense for the three months ended September 30, 2011 and 2010 was $49,868 and $10,846, and for the nine months ended September 30, 2011 and 2010 was $141,840 and $31,873, respectively. Amortization of Vehicles under capital lease included in depreciation expense for the three months ended September 30, 2011 and 2010 was $5,247 and $5,007, and for the nine months ended September 30, 2011 and 2010 was $15,639 and $16,076, respectively.



11






Note 8 – Capital Leases – Future Minimum Lease Payments


The Company leases certain vehicles under agreements that are classified as capital leases. The cost of equipment under capital leases is included in the property and equipment and was $149,400 and $144,818 as of September 30, 2011 and December 31, 2010, respectively. Accumulated amortization of the leased vehicles as of September 30, 2011 and 2010 was $93,884 and $124,121, respectively. Amortization of assets under capital leases is included in depreciation expense.


The future minimum lease payments required under the capital leases and the present values of the net minimum lease payments as of September 30, 2011 are as follows:


Year Ending December 31,

 

Amount

2011

$

7,450

2012

 

20,654

2013

 

11,552

2014

 

4,747

2015

 

4,747

Thereafter

 

25,401

Total minimum lease payments

$

74,551

 

 

 

Less: Current maturities of capital lease obligations

 

(21,308)

Long-term capital lease obligations

$

53,243


Note 9 – Accounts Payable and Accrued Expenses


Accounts payable and accrued expenses consist of the following:


 

 

September 30,

2011

 

December 31,

2010

 

 

 

 

 

Accounts payable

$

4,430,538

$

1,908,089

Accrued expenses

 

194,675

 

155,000

 

 

 

 

 

    Total

$

4,625,212

$

2,063,089


The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.


Note 10 – Short-Term Bank Loan


Short-term bank loan consists of the following:


 

 

September 30,

 

December 31,

 

 

2011

 

2010

On July 5, 2011, the Company signed a loan agreement with Bank of

 

 

 

 

Changsha in the amount of $313,000 with a lien on the Company’s revenue. The loan is to be repaid in full in August, 2012 and the interest is calculated using annual fixed interest rate of 7.98%, paid monthly.

 

 

 

 

The loan is insured by Hunan Furong Surety for Small to Mid-size Enterprise, Ltd.

$

313,000

$

-




12






Note 10 – Short-Term Bank Loan (continued)


 

 

September 30,

 

December 31,

 

 

2011

 

2010

On July 26, 2010, the Company signed a loan agreement with Bank of Changsha in the amount of $305,400, which is to be repaid in full by July 27, 2011, The interest is calculated using annual fixed interest rate of 5.31% and paid monthly. The loan is guaranteed by Hunan Furong Credit Guaranty for Small to Mid-size Enterprise, Ltd.

$

-

$

303,400

 

 

 

 

 

Total short-term bank loan

$

313,000

$

303,400


Note 11 – Advances from Customers


As of September 30, 2011 and December 31, 2010, the Company had advances from customers of $3,227,595 and $768,773, respectively. As a common business practice, the Company requires certain customers to make advance payments for advertisements. Such advances are interest-free and unsecured.


Note 12 – Other Taxes Payable


Other taxes payable consists of the following:


 

 

September 30,

2011

 

December 31,

2010

 

 

 

 

 

Business taxes payable

$

518,067

$

501,108

Fees and surcharges payable

 

227,160

 

221,410

 

 

 

 

 

    Total

$

745,227

$

722,518


Note 13 – Stock Authorization and Issuance


On July 20, 2011, Phoenix International (China) Limited and its shareholders, Guolin Yang, Zhenping Wang, Hongdong Xu, and Jun Liang, (collectively, the “Shareholders”) entered into a Share Exchange Agreement with TK Star Design Inc (“PUBCO”). Pursuant to the terms of the Share Exchange Agreement, PUBCO agreed to acquire all of the issued and outstanding shares of Phoenix International from the Shareholders in exchange for PUBCO to issue an aggregate of 36,351,500 shares of common stock to the Shareholders, at $0.001 par value per share (the “Share Exchange”), which, upon completion of the transactions contemplated by the Share Exchange Agreement, constitutes a controlling majority of PUBCO’s issued and outstanding shares of common stock.  Upon consummation of the Share Exchange, Phoenix International became a wholly-owned subsidiary of PUBCO. 


Immediately upon the entry of the Share Exchange Agreement on July 20, 2011, PUBCO entered into Subscription Agreements with a group of accredited investors (“Investors”).   Pursuant to the Subscription Agreements, the Investors purchased (i) 615,000 shares of the PUBCO’s common stock (the “Purchased Shares”) for the purchase price of $1.00 per share; (ii) Series A share purchase warrants to purchase, individually one share of the PUBCO’s common stock and, collectively, 1,230,000 shares of the PUBCO’s common stock (the “Series A Warrants”); (iii) Series B share purchase warrants to purchase, individually one share of the PUBCO’s common stock and, collectively, 1,230,000 shares of the PUBCO’s common stock (the “Series B Warrants”); (iv) Series C share purchase warrants to purchase, individually one share of the PUBCO’s common stock and, collectively, 615,0000 shares of the PUBCO’s common stock (the “Series C Warrants”); and (v) Series D share purchase warrants  to purchase , individually one share of the PUBCO’s common stock and, collectively, 615,000 shares of the PUBCO’s common stock (the “Series D Warrants”) (collectively, the Series A Warrants, the Series B Warrants, the Series C Warrants and the Series D Warrants, the “Warrants”). Each purchase of a Purchased Shares entitles the Investors to two shares of Series A Warrants, two shares of Series B Warrants, one share of Series C Warrants and one share of Series D Warrants.



13






Note 13 – Stock Authorization and Issuance (continued)


Pursuant to the Subscription Agreements and the related Registration Rights Agreements, PUBCO has agreed to file a resale Registration Statement on Form S-1  within 45 days following the closing of the Subscription Agreements (“Required Filing Date”) registering the Purchased Securities (together the “Registrable Securities”) with the Securities and Exchange Commission (the “SEC”).   In the event PUBCO has not filed the Registration Statement by the Required Filing Date, or the Registration Statement is not declared effective by the SEC by 120 days after the Required Filing Date, PUBCO has agreed to pay liquidated damages to each Investor, from and including the day following such Filing Default until the date that the Registration Statement is filed with the SEC, or until the Registration Statement is declared effective, as applicable, at a rate per month (or portion thereof) equal to 0.50% of the total purchase price of the Shares purchased by such Investor pursuant to the Purchase Agreement.  In no event, however, may the penalties exceed 9% in the aggregate of such total purchase price.


Immediately upon the entry of Share Exchange Agreement and Purchase Agreement on July 20, 2011, PUBCO authorized the conversion of unpaid convertible promissory notes in the total amount of $ 5,870.20 into 5,870,200 shares of common stock, at the conversion price of $ 0.001 per share.


Immediately upon the entry of the Subscription Agreements on July 20, 2011, PUBCO entered into a Communications Services Agreement (‘Services Agreement”) with JOL Group, LLC under which JOL Group, LLC will provide PUBCO with the communications and marketing services and PUBCO will pay $ 400,000 for JOL Group, LLC’s services. $ 260,000 will be paid upon the closing of the said Subscription Agreements and $ 140,000 will be paid by the 105th day following the closing of the Subscription Agreements. Mr. Guolin Yang, a major shareholder of PUBCO upon completion of the share exchange transaction, will have 900,000 shares of common stock owned by him to be placed in an escrow account as collateral for the timely payment of $ 140,000.


Note 14 – Warrants Liability


The fair value of the warrants liability as of September 30, 2011 was as following:


 

 

September 30,

2011

Series A Warrants issued on July 20, 2011, at fair value

$

166,011

Series B Warrants issued on July 20, 2011, at fair value

 

134,673

Series C Warrants issued on July 20, 2011, at fair value

 

55,171

Series D Warrants issued on July 20, 2011, at fair value

 

55,171

Total

$

411,026


The terms of these warrants issued on July 20, 2011, as described in Note 14, are as follows: (a) Series A warrants with an expected term of 5 years entitles holders to purchase an aggregate of 1,230,000 shares of the PUBCO’s common stock at an exercise price of $0.5 per share; (b) Series B warrants with an expected term of 5 years entitles holders to purchase an aggregate of 1,230,000 shares of the PUBCO’s common stock at an exercise price of $0.75 per share; (c) Series C warrants with an expected term of 5 years entitles holders to purchase an aggregate of 615,000 shares of the PUBCO’s common stock at an exercise price of $1.00 per share; and (d) Series D warrants with an expected term of 5 years entitles holders to purchase an aggregate of 615,000 shares of the PUBCO’s common stock at an exercise price of $1.00 per share. Pursuant to the agreement of these warrants, these warrants may be settled by physical or net share settlement at a choice of the holder. In addition, these warrants are subject to the Registration Rights Agreement as described in Note 14. Under such agreement, the Company agreed to pay liquidated damages to each Investor at a rate per month (or portion thereof) equal to 0.50% of the total purchase price of $615,000 in the event the Company has not filed the Registration Statement by the Required Filing Date, or the Registration Statement is not declared effective by the SEC by 120 days after the Required Filing Date. In no event, however, may the penalties exceed 9% in the aggregate of $615,000. Since the Company has an absolute obligation to make cash payments to the holder of the warrants in the event the Company fails to make timely filings with the SEC, under FASB ASC 815 (formerly EITF 00-19), the series A, B, C, D warrants issued by the Company on July 20, 2011 are accounted for as liability. The Company used the Binomial model in calculating the fair market value of the Warrants. The principal assumptions used in the computation of the Warrants are: expected term of 5 years; a risk-free rate of return of 0.96%; dividend yield of zero percent; and a volatility of 70%.




14






Note 15 – Income Taxes


The Company is a Nevada corporation and conducts all of its business through its Chinese subsidiaries. The Company’s business is conducted solely in the PRC. As the Company is a U.S. holding company, it has not recorded any income from operation for the years ended September 30, 2011 and 2010, there was no provision or benefit for U.S. income tax purpose.


Phoenix International (China) Limited was incorporated in Hong Kong, China. Under the corporate tax laws of Hong Kong, it is not subject to tax on income or capital gains.


The Company’s Chinese subsidiary and affiliated operating companies are governed by the Income Tax Law of the PRC and are subject to statutory income tax rate of 25%. .


On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the New CIT Law), which is effective from January 1, 2008. Under the new tax law, the corporate income tax rate applicable to all Companies, both domestic and foreign-invested companies, is 25%, replacing the previous applicable tax rate of 33%. For the nine months ended September 30, 2011 and 2010, the income taxes provision for the Company was $1,600,671 and $1,281,897, respectively.


On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 or after will be exempt from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.


Note 16 – Earnings Per Share


The Company presents earnings per share on a basic and diluted basis. Basic earnings per share have been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings per share has been computed by dividing net earnings by the weighted average number of shares outstanding including the dilutive effect of equity securities. The weighted average number of shares calculated for Diluted EPS excludes the potential common stock that would be exercised under the warrants granted to investors because of their anti-dilutive effect.


 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2011

 

2010

 

2011

 

2010

Net income

$

3,412,442

$

2,471,976

$

4,791,282

$

3,744,904

 

 

 

 

 

 

 

 

 

Weighted average common shares (denominator for basic earnings per share)

 

41,934,787

 

36,351,500

 

38,239,965

 

36,351,500

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

Weighted average common shares  (denominator for basic earnings per share)

 

41,934,787

 

36,351,500

 

38,239,965

 

36,351,500

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.08

$

0.07

$

0.13

$

0.10

Diluted earnings per share

$

0.08

$

0.07

$

0.13

$

0.10




15






Note 17 – Risk Factors


The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The Company's business may be influenced 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.


Note 18 – Risk of Concentrations and Credit Risk


For the nine months ended September 30, 2011 and 2010, five major media vendors accounted for approximately 75.28% and 58.81% of the Company’s cost for issuing advertisements, respectively. Total advertisements issued by these media vendors were $7,997,495 and $3,711,928 for the nine months ended September 30, 2011 and 2010, respectively.


Two major customers accounted for approximately 25.30% and 19.42% of the Company’s sales for the nine months ended September 30, 2011 and 2010, respectively. Total sales to these customers were $4,485,680 and $2,283,258, for the nine months ended September 30, 2011 and 2010, respectively.


Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.







16






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


The following discussion and analysis of our financial condition and result of operations contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of the other reports we file with the Securities and Exchange Commission. Actual results may differ materially from those contained in any forward-looking statements 


The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of TK Star for the three months ended September 30, 2011 and 2010 and should be read in conjunction with such financial statements and related notes included in this report and the Company’s Annual Report for the year ended December 31, 2010.  


Overview


We mainly engage in the business of advertisement and brand name development in China, especially in Hunan Province and other southern Chinese provinces. Our business operations are carried out through our variable interest entities Changsha North Latitude 30 Cultural Communications Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“North Latitude”); Changsha Beichen Cultural Communications Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Beichen”) and Changsha Zhongte Trade Advertising Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Zhongte”). Each of the North Latitude, Beichen and Zhongte has its own focus area: North Latitude and Beichen are both specialized in automobile industrial advertisement and brank name development while North Latitude focuses on organizing the auto exhibitions and product promotional events and Beichen focuses on the advertisement coverage on regular media such as TV channels, radio and newspaper. Zhongte focuses on advertisement of other industries, especially food and textile industries.


Company History


We were incorporated under the laws of the State of Nevada on November 3, 2008. Originally we engaged in the business of repairing, maintaining and servicing metal gym and heavy duty weight equipment for commercial gyms and health club facilities located in the Metropolitan New York Area


On July 20, 2011, we entered into a Share Exchange Agreement with the shareholders of Phoenix International (China) Limited, a company organized under the laws of Hong Kong (“Phoenix International”). Pursuant to the terms of the Share Exchange Agreement, we acquired all of the issued and outstanding shares of Phoenix International from the Phoenix International Shareholders in exchange for the issuance by us to the Phoenix International Shareholders of an aggregate of 36,351,500 newly-issued shares of common stock, $ 0.001 par value per share (the “Share Exchange”), which, upon completion of the transactions contemplated by the Share Exchange Agreement, constitutes a controlling majority of our issued and outstanding shares of common stock. Upon the closing of the share exchange transaction, Phoenix International became our wholly owned subsidiary and we ceased the business of repairing, maintaining and servicing metal gym and heavy duty weight equipment, and became engaged in the advertising and brand name development business in China through Phoenix International and its subsidiary and affiliated companies in China.


 Phoenix International is a holding company that owns 100% of the equity of Hunan Beiwei. Hunan Beiwei, a PRC company established in June 2010, is a wholly owned subsidiary of Phoenix International.  On June 15, 2010, Hunan Beiwei entered into a set of contractual arrangements with three operating companies in Changsha, Hunan Province, China, which were North Latitude, Beichen and Zhongte. The contractual arrangements are comprised of a series of agreements, including a Consulting Service Agreement and an Operating Agreement, through which Hunan Beiwei has the right to advise, consult, manage and operate North Latitude, Beichen and Zhongte and to collect and own all of North Latitude, Beichen and Zhongte’s net profits and net losses. Additionally, under a Proxy Agreement, the shareholders of North Latitude, Beichen and Zhongte have vested their voting control over North Latitude, Beichen and Zhongte to Hunan Beiwei. In order to further reinforce Hunan Beiwei’s rights to control and operate North Latitude, Beichen and Zhongte, North Latitude, Beichen and Zhongte and its shareholders have granted Hunan Beiwei, under an Option Agreement, the exclusive right and option to acquire all of their equity interests in North Latitude, Beichen and Zhongte, or, alternatively, all of the assets of North Latitude, Beichen and Zhongte. Further, the shareholders of North Latitude, Beichen and Zhongte agreed to pledge all of their rights, titles and interests in North Latitude, Beichen and Zhongte to Hunan Beiwei under an Equity Pledge Agreement.


Upon entry of these contractual arrangements, North Latitude, Beichen and Zhongte became the Variable Interest Entities (“VIE”) of Hunan Beiwei pursuant to FIN 46 (R) and Hunan Beiwei was able to carry out business operations through North Latitude, Beichen and Zhongte.



17






Sales and Marketing


Our business operations are carried out through our variable interest entities North Latitude, Beichen and Zhongte. Each of their customers vary depending on the focus of each of their own business.

 

North Latitude is one of the largest automobile advertising and brand name developing companies in Hunan Province, China. North Latitude is the designated national advertising agency of Changsha Automobile Plant, a local division of FOTON which is one of the largest commercial vehicle manufacturers in Asia. North Latitude is the Hunan Province exclusive advertising agent for over 10 well-known automobile brands, including Faw-Volkswagen, Shanghai Volkswagen, Dongfeng Citroen, Faw Toyota, Guangzhou Honda, SAIC MG and etc. It also represents, on non-exclusive basis, more than 30 other automobile brands in Hunan and neighboring provinces. It has designed and organized hundreds of product exhibitions and promotional events and gained high reputation in automotive industry in Hunan region.


Beichen, like North Latitude, also provides advertising services for automobile industries. Its customers include Faw-Volkswagen, Shanghai Volkswagen, Dongfeng Citroen, Faw Toyota, Guangzhou Honda, SAIC MG and etc.


Zhongte provides comprehensive advertising services for a variety of industries, especially food and textile industries. Its customers include several China’s most famous brands such as SEVEN brand apparel, WangBuLiao apparel, Huang Ye Bing-Lang, Ausnutria Dairy and many others.


Strategy


1. We are the leading advertising and brand name developing company in Hunan Province, China and we occupied more than 73% of the Hunan market for automobile industry advertisement.  Our major competitors, including Hunan Public Channel Automobile Program, Changsha Economics and Trade Television Channel Automobile Program and other scattered automobile advertising companies, only have 27% of the Hunan market.


2. We have a group of highly regarded professionals to serve our customers. We also have a top-level management team who has had more than 10 years experiences in advertising business.


3. We have strong relationship with a number of famous automobile companies which enables us to expand our business to other parts of China by becoming the national and multi-regional advertising agencies for our existing customers.


4. We have access to a lot of high quality media resources, such as television stations, radio, newspaper and magazines. Our strong connections with these media enable us to negotiate better contract terms and prices for the media coverage.


Strategies


We believe that we are well-positioned to address the advertising demands of our clients by securing additional advertising media resources and also entering the new advertisement media areas such as elevator door advertisement. Our strategies are:


1. Expand our business to more regions and the entire China. Currently we own the majority market shares in Hunan. We plan to first expand to Yangtze River delta. Then we will expand to Pearl River delta region and Beijing-Tianjin metro region.


2. Expand and enhance our portfolio of advertising media resources. We plan to enter exclusive advertising coverage contracts with 20 more media programs. These efforts will increase the volume of our media coverage by 35% annually.


3. Enter new advertisement media area and develop our own media programs. We plan to expand the Elevator Door Advertisement business to 7 major cities in South and South-Central China and sign up 21,600 new elevator door locations. We also plan to develop our own media program such as websites.


4. Continue to expand our advertising customer base.


Results of Operations


The following table shows the results of operations of our business.




18





 

Comparison of the three months ended September 30, 2011and2010


Three Months Ended September 30, 2011

 

2011

 

 

2010

 

Sales

 

$

9,085,495

 

 

$

7,212,304

 

Cost of sales

 

$

4,262,948

 

 

$

3,705,649

 

Gross profit

 

$

4,822,546

 

 

$

3,506,655

 

Selling, general and administrative expenses

 

$

420,817

 

 

$

170,214

 

Other income (expense)

 

$

153,147

 

 

$

(11,877

)

Income taxes

 

$

1,142,435

 

 

$

852,588

 

Net income

 

$

3,412,442

 

 

$

2,471,976

 

Foreign currency translation adjustment

 

$

133,194

 

 

$

80,033

 

Comprehensive income

 

$

3,545,636

 

 

$

2,552,009

 


Sales: Our sales for the three months ended September 30, 2011 were $9,085,495, an increase of $1,873,191, or 26% from our sales of $7,212,304 for the three months ended September 30, 2010. Such increase was mainly due to our continued sales and marketing efforts to locate and the new customers also contributed to the sales growth.


Cost of Sales: Our cost of sales for the three months ended September 30, 2011 was $4,262,948, an increase of $557,299, as compared to $3,705,649 for the three months ended September 30, 2010. This increase was primarily due to the expansion of our business. Our cost of sales consists primarily of expenses associated with the service, including fees paid to third parties for advertisements.

 

Gross Profit: As a result of the foregoing, we generated an operating profit of $4,822,546 for three months ended September 30, 2011, a 37.6% increase from comparable period in 2010.


Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were $420,817 for the three months ended September 30, 2011 as compared to $170,214 for the three months ended September 30, 2010, an increase of $250,603. The increase of these major expenses was mainly due to reverse merger costs.


Income Taxes: Our income tax was $1,142,435 for the three months ended September 30, 2011, comparing to $852,588 for the same quarter ended September 30, 2010, an increase of $289,847. Such increase is due to the increased income from operations.


Net Income: Net income for the three months ended September 30, 2011 was $3,412,442, an increase of $940,466 from $2,471,976, compared with that of the three months ended September 30, 2010. This increase was the result of the beginning of normal operations in 2011. Management believes that this trend will continue during our 2011 fiscal year and beyond.


Comprehensive income: The comprehensive income, which adds the currency adjustment to net income, was $133,194 for the three months ended September 30, 2011 as compared with $80,033 for the three months ended September 30, 2010. The increase of comprehensive income was mainly due to increase of our net income.


Comparison of the nine months ended September 30, 2011and2010


Nine Months Ended September 30, 2011

 

2011

 

 

2010

 

Sales

 

$

17,729,962

 

 

$

11,754,984

 

Cost of sales

 

$

10,623,201

 

 

$

6,311,729

 

Gross profit

 

$

7,106,761

 

 

$

5,443,255

 

Selling, general and administrative expenses

 

$

859,678

 

 

$

402,529

 

Other income (expense)

 

$

144,870

 

 

$

(13,925

)

Income taxes

 

$

1,600,671

 

 

$

1,281,897

 

Net income

 

$

4,791,282

 

 

$

3,744,904

 

Foreign currency translation adjustment

 

$

272,877

 

 

$

90,088

 

Comprehensive income

 

$

5,064,159

 

 

$

3,834,992

 


Sales: Our sales for the nine months ended September 30, 2011 were $17,729,962, an increase of $5,974,978, or 50.9% from our sales of $11,754,984 for the nine months ended September 30, 2010. Such increase was mainly due to our continued sales and marketing efforts to locate and the new customers also contributed to the sales growth.


Cost of Sales: Our cost of sales for the nine months ended September 30, 2011 was $10,623,201, an increase of $4,311,472, as compared to $6,311,729 for the nine months ended September 30, 2010. This increase was primarily due to the expansion of our business. Our cost of sales consists primarily of expenses associated with the service, including fees paid to third parties for advertisements.



19





 

Gross Profit: As a result of the foregoing, we generated an operating profit of $7,106,761 for nine months ended September 30, 2011, a 30.6% increase from comparable period in 2010.


Operating Expenses: Operating expenses, including selling expenses, and general and administrative expenses, were $859,678 for the nine months ended September 30, 2011 as compared to $402,529 for the nine months ended September 30, 2010, an increase of $457,149. The increase of these major expenses was due to our commencement of production, distribution activities and reverse merger costs.


Income Taxes: Our income tax was $1,600,671 for the nine months ended September 30, 2011, comparing to $1,281,897 for the same quarter ended September 30, 2010, an increase of $318,774. Such increase is due to the increased income from operations.


Net Income: Net income for the nine months ended September 30, 2011 was $4,791,282, an increase of $1,046,378 from $3,744,904, compared with that of the nine months ended September 30, 2010. This increase was the result of the beginning of normal operations in 2011. Management believes that this trend will continue during our 2011 fiscal year and beyond.


Foreign Currency Translation Adjustment: Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.


Currency translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of stockholders' equity and amounted to $435,303 as of September 30, 2011. The balance sheet amounts with the exception of equity at September 30, 2011 and December 31, 2010 were translated at RMB 6.390 and RMB 6.5920 to 1.00 U.S. dollar. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the nine months ended September 30, 2011 and 2010 were RMB 6.487 and RMB 6.822 to 1.00 U.S. dollar.


Comprehensive income: The comprehensive income, which adds the currency adjustment to net income, was $272,877 for the nine months ended September 30, 2011 as compared with $90,088 for the nine months ended September 30, 2010. The increase of comprehensive income was mainly due to increase of our net income.


Liquidity and Capital Resources


As of September 30, 2011, we had cash and cash equivalents of $2,375,633. Our current assets were $22,405,950 and our current liabilities were $13,579,049 as of September 30, 2011, which resulted in a current ratio of approximately 1.65:1. Total stock holders’ equity as of September 30, 2011 was $11,909,256. 

 

The following table sets forth a summary of our cash flows for the periods indicated:


 

 

For the nine months ended September 30,

 

  

 

2011

 

 

2010

 

Cash flow provided by operating activities

 

$

286,167

 

 

$

1,346,892

 

Cash flow provided by (used in) investing activities

 

 

173,189

 

 

 

(215,672

)

Cash flow provided by financing activities

 

 

1,070,841

 

 

 

294,200

 

 

Net cash provided by operating activities was $286,167 for the nine months ended September 30, 2011, a decrease of $1,060,725 from $1,346,892 for the nine months ended September 30, 2010 primarily as a result of increase in advance payments for certain media.


Net cash provided by investing activities was $173,189 for the nine months ended September 30, 2011, which was an increase of $388,861 from net cash used in investing activities was $215,672 for the nine months ended September 30, 2010.


Net cash provided by financing activities amounted to $1,070,841 for the nine months ended September 30, 2011, compared to net cash provided by financing activities of $294,200 for the nine months ended September 30, 2010. The increase of cash provided by financing activities was primarily results of proceeds from issuance of securities and cash contributed from shareholders for the nine months ended September 30, 2011.


Off -Balance Sheet Arrangements


We do not have any off-balance sheet arrangements.



20






Critical Accounting Policies and Estimates


Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Basis of Presentation and Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations:


Use of Estimates


The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include reserves for accounts receivable and income taxes. Actual results could differ from those estimates.


Revenue Recognition


The Company derives its revenues primarily from designing, producing and distributing advertisements.  Revenue for the Company’s services is recognized when all of the following criteria are satisfied: (a) persuasive evidence of an arrangement exists; (b) the price is fixed or determinable; (c) collectability is reasonably assured; and (d) services have been performed.  Advertising revenue from television advertisement is recognized as the commercials are aired.  Advertising revenue from newspapers is recognized when the advertisements are published.  When the Company receives advance payments from clients, management records these amounts as advances from customers until the revenue is recognized.  Because the Company acts as a principle obligor to its advertising clients, the Company reports revenue on a gross basis.


Cash Equivalents


In accordance with Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows,” codified in ASC Topic 230, the Company considers all highly liquid instruments with original maturities of three months or less to be “cash equivalents”.


Accounts Receivable


Accounts receivable are stated at the amount management expects to collect from balances outstanding at the end of the period.  Based on its assessment of the credit history with customers having outstanding balances and current relationships with them, management makes conclusions whether any realization of losses on balances outstanding at the end of the period will be deemed uncollectible based on the age of the receivables. The Company reserves 5% of accounts receivable balances that have been outstanding for more than six months and less than one year, 20% of accounts receivable balances that have been outstanding for more than one year and less than two years, and 100% of accounts receivable balances that have been outstanding for more than two years.


Property and Equipment


Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets as follows:


 

Vehicles

 

5 to 8 years

 

Office equipment and furniture

 

3 to 5 years

 

Building and improvements

 

10 to 20 years


Cost of repairs and maintenance is expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the consolidated statements of operations.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).




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ITEM 4.  CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'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. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.


Management’s Report on Internal Controls over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.


Our internal control over financial reporting includes those policies and procedures that:


·

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and

·

that our receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.


As of September 30, 2011, our management conducted an assessment of the effectiveness of the Company's internal control over financial reporting.  In making this assessment, management followed an approach based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (known as “COSO”).  Based on this assessment, management believes that the Company's internal control over financial reporting is effective.


This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this quarterly report.


Changes in Internal Controls


     

We have also evaluated our internal controls for financial reporting, and there have been no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting subsequent to the date of last evaluation.





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PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS


Currently we are not aware of any litigation pending or threatened by or against the Company.


ITEM 1A.  RISK FACTORS


Not required for Smaller Reporting Company.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


On July 20, 2011, Thomas P. Kinney and Terry Kowalsky, two major shareholders of TK Star Design Inc (“Company”) entered into a common stock purchase agreement under which Thomas P. Kinney cancelled 10,496,000 shares of common stock he owned in Company and sold remaining 4,000 shares of common stock to Sasha Shemirani (“Purchaser”) for $ 25,000. Terry Kowalsky cancelled 65,000 shares of common stock of Company owned by him. In addition, Catherine. Kowalsky, Justin Kowalsky,and Garret Kowalsky also cancelled  a total of 30,000 shares of common stock of Company. In consideration of the cancellation of 10,496,000 shares of Company held and owned by Thomas P. Kinney, on the same day, July 20, 2011, Company entered into an Assignment and Assumption Agreement with Thomas P. Kinney, under which Company assigned to Thomas P. Kinney all the rights and interests in the assets and business of Company and Thomas P. Kinney assumed all Assumed Liabilities (as defined in the Assignment and Assumption Agreement) of Company.


On the same day,  July 20, 2011, Company entered into a Share Exchange Agreement with Phoenix International (China) Limited, a company organized under the laws of Hong Kong (“Phoenix International”), and Guolin Yang, Zhenping Wang, Hongdong Xu, and Jun Liang, who are shareholders of Phoenix International (collectively, the “Phoenix International Shareholders”) (the “Share Exchange Agreement”).  Pursuant to the terms of the Share Exchange Agreement, Company agreed to acquire all of the issued and outstanding shares of Phoenix International from the Phoenix International Shareholders in exchange for the issuance by Company to the Phoenix International Shareholders of an aggregate of 36,351,500 newly-issued shares of common stock of Company, $ 0.001 par value per share (the “Share Exchange”), which, upon completion of the transactions contemplated by the Share Exchange Agreement, will constitute a controlling majority of Company’s issued and outstanding shares of common stock.  Upon consummation of the Share Exchange, Phoenix International will become a wholly-owned subsidiary of Company. 


Immediately upon the entry of the Share Exchange Agreement on July 20, 2011, Company entered into Subscription Agreements (“Subscription Agreements”) with a group of accredited investors (“Investors”).   Pursuant to the Subscription Agreements, the Investors purchased (i) 615,000 shares of the Company’s common stock (the “Purchased Shares”) for the purchase price of $1.00 per share; (ii) Series A share purchase warrants to purchase, individually one share of the Company’s common stock and, collectively, 1,230,000 shares of the Company’s common stock (the “Series A Warrants”); (iii) Series B share purchase warrants to purchase, individually one share of the Company’s common stock and, collectively, 1,230,000 shares of the Company’s common stock (the “Series B Warrants”); (iv) Series C share purchase warrants to purchase, individually one share of the Company’s common stock and, collectively, 615,0000 shares of the Company’s common stock (the “Series C Warrants”); and (v) Series D share purchase warrants  to purchase , individually one share of the Company’s common stock and, collectively, 615,000 shares of the Company’s common stock (the “Series D Warrants”) (collectively, the Series A Warrants, the Series B Warrants, the Series C Warrants and the Series D Warrants, the “Warrants”).  Each purchase of a Purchased Shares  entitles the Investors to two shares of Series A Warrants, two shares of Series B Warrants, one share of Series C Warrants and one share of Series D Warrants.


Pursuant to the Subscription Agreements and the related Registration Rights Agreements, Company has agreed to file a resale Registration Statement on Form S-1  within 45 days following the closing of the Subscription Agreements (“Required Filing Date”) registering the Purchased Securities (together the “Registrable Securities”) with the Securities and Exchange Commission (the “SEC”).   In the event Company has not filed the Registration Statement by the Required Filing Date, or the Registration Statement is not declared effective by the SEC by 120 days after the Required Filing Date, Company has agreed to pay liquidated damages to each Investor, from and including the day following such Filing Default until the date that the Registration Statement is filed with the SEC, or until the Registration Statement is declared effective, as applicable, at a rate per month (or portion thereof) equal to 0.50% of the total purchase price of the Shares purchased by such Investor pursuant to the Purchase Agreement.  In no event, however, may the penalties exceed 9% in the aggregate of such total purchase price.


Immediately upon the entry of Share Exchange Agreement and Purchase Agreement, on July 20, 2011, Company authorized the conversion of unpaid convertible promissory notes in the total amount of $ 5,870.20 into 5,870,200 shares of common stock, at the conversion price of $ 0.001 per share.




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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES


None


ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS


None.


ITEM 5.  OTHER INFORMATION


None


ITEM 6.  EXHIBITS


(a)

Exhibits


31.1

 

Section 302 Certificate of Chief Executive Officer *

 

 

 

31.2

 

Section 302 Certificate of Chief Financial Officer *

 

 

 

32.1

 

Section 906 Certificate of Chief Executive Officer *

 

 

 

32.2

 

Section 906 Certificate of Chief Financial Officer *

 

 

 

101

 

The following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.

 

 

 

 

 

101.INS**

XBRL Instance


101.SCH**

XBRL Taxonomy Extension Schema


101.CAL**

XBRL Taxonomy Extension Calculation


101.DEF**

 XBRL Taxonomy Extension Definition


101.LAB**

XBRL Taxonomy Extension Labels


101.PRE**

XBRL Taxonomy Extension Presentation


* filed herewith


** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.


Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



SIGNATURES


November 14, 2011

TK Star Design, Inc.

(Registrant)

 

/s/ Guolin Yang                      

Guolin Yang

Title: President and Chief Executive Officer



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