Form
10Q
China
Shoe Holdings, Inc. - CHSH
Filed:
(period: March 31, 2008)
Quarterly
report filed by small businesses
PART
I.
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ITEM
1.
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FINANCIAL
STATEMENTS
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ITEM
2.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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ITEM
3.
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PART
II:
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Item
3.
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Defaults
Upon Senior Securities
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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Item
5.
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Other
Information
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Item
6.
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Exhibits
and Reports on Form 8-K
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SIGNATURES
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EX-31.1
(Certifications required under Section 302 of the Sarbanes-Oxley
Act of
2002)
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EX-31.2
(Certifications required under Section 302 of the Sarbanes-Oxley
Act of
2002)
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EX-32
(Certifications required under Section 906 of the Sarbanes-Oxley
Act of
2002)
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U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Quarterly
Report Under Section 13 or 15 (d) of
Securities
Exchange Act of 1934
For
the
Period ended March 31, 2008
Commission
File Number 333-139910
China
Shoe Holdings, Inc.
(Name
of
small business issuer in its charter)
Nevada
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1712
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20-2234410
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(State
or other jurisdiction
of
incorporation or organization)
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(Primary
SIC Code)
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(IRS
Employer Identification No.)
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488
Wai
Qingsong Road,
Waigang,
Jiading District, Shanghai
People's
Republic of China 201800
011-86-21-59587756
(Address,
including zip code, and telephone number,
including
area code, of registrant's principal executive offices)
Gu
Xianzhong, President and CEO
488
Wai
Qingsong Road
Waigang,
Jiading District, Shanghai
People's
Republic of China 201800
011-86-21-59587756
(Mailing
Address of Agent for Service)
Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such
reports), and (2)has been subject to such filing requirements for the past
90
days. Yes
x
No
o
Large
Accelerated Filer
o
|
Accelerated
Filer
o
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Non-Accelerated
Filer
o
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Smaller
Reporting Company
x
|
Check
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
There
were 104,230,770 shares of Common Stock outstanding as of May 15,
2008.
ITEM
1. FINANCIAL STATEMENTS
|
CHINA
SHOE HOLDINGS, INC
(Unaudited)
Condensed
Consolidated Financial Statements
For
The Three Months Ended March 31,
2008
|
CHINA
SHOE HOLDINGS, INC
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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Page
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Condensed
Consolidated
Balance
Sheets as of March 31, 2008 and December 31, 2007
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F-2
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Condensed
Consolidated
Statement
s
of Operations And Comprehensive Income for the three months ended
March
31, 2008 and 2007
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F-3
|
Condensed
Consolidated
Statements
of Cash Flows
for the three months ended March 31, 2008 and 2007
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F-4
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Condensed
Consolidated
Statement
of
Stockholders’ Equity for the three months ended March 31,
2008
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F-5
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Notes
to Condensed Consolidated Financial Statements
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F-6
to F-18
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CHINA
SHOE HOLDINGS,
INC
CONDENSED
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007
(Currency
expressed in United States Dollars (“US$”)
,
except for number of shares)
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March
31, 2008
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December
31, 2007
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(unaudited)
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(audited)
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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1,103,627
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$
|
706,823
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Accounts
receivable, trade
|
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|
1,158,014
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1,071,037
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Advances
to employees
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42,722
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41,017
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Inventories
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1,368,751
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529,574
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Other
receivables and prepayments
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408,408
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519,210
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Total
current assets
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4,081,522
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2,867,661
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Non-current
assets:
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Property,
plant and equipment, net
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1,736,973
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1,717,719
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TOTAL
ASSETS
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$
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5,818,495
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$
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4,585,380
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Short-term
bank borrowings
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$
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178,007
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$
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170,903
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Accounts
payable, trade
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324,712
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500,491
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Amount
due to directors
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42,497
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76,049
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Other
payables and accrued liabilities
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563,004
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386,208
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Total
current liabilities
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1,108,220
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1,133,651
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Stockholders’
equity:
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Preferred
stock, $0.001 par value; 10,000,000 shares authorized; no shares
issued
and outstanding as of March 31, 2008 and December 31, 2007
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-
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-
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Common
stock, $0.001 par value; 300,000,000 shares authorized; 104,230,770
and
100,000,001 shares issued and outstanding as of March 31, 2008
and
December 31, 2007
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104,231
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100,000
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Additional
paid-in capital
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2,429,133
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1,883,364
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Accumulated
other comprehensive income
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402,092
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225,226
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Retained
earnings
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1,774,819
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1,243,139
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4,710,275
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3,451,729
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
|
5,818,495
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$
|
4,585,380
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|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SHOE HOLDINGS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS
OF OPERATIONS AND
COMPREHENSIVE
INCOME
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
Three
months ended March 31,
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|
2008
|
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2007
|
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|
|
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OPERATING
REVENUES
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$
|
2,357,580
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$
|
1,173,975
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COST
OF REVE
NUES (exclusive of depreciation)
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1,493,195
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802,940
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GROSS
PROFIT
|
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|
864,385
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371,035
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OPERATING
EXPENSES
:
|
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|
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|
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|
Depreciation
|
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|
52,078
|
|
|
7,167
|
|
General
and administrative
|
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|
276,915
|
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|
170,050
|
|
|
|
|
|
|
|
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|
Total
operating expenses
|
|
|
328,993
|
|
|
177,217
|
|
|
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INCOME
FROM OPERATIONS
|
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535,392
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193,818
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OTHER
INCOME (EXPENSE):
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Interest
income
|
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|
398
|
|
|
177
|
|
Interest
expense
|
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|
(4,110
|
)
|
|
(4,913
|
)
|
|
|
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Total
other expense
|
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|
(3,712
|
)
|
|
(4,736
|
)
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INCOME
BEFORE INCOME TAXES
|
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|
531,680
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|
189,082
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Income
tax expenses
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
531,680
|
|
$
|
189,082
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
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|
-
Foreign currency translation gain
|
|
|
176,866
|
|
|
17,409
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
708,546
|
|
$
|
206,491
|
|
|
|
|
|
|
|
|
|
Net
income per share- Basic and diluted
|
|
$
|
0.01
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year - Basic and
diluted
|
|
|
102,867,522
|
|
|
994,500
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|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SHOE HOLDINGS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS
OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
531,680
|
|
|
189,082
|
|
Adjustments
to reconcile net income to net cash
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
52,078
|
|
|
48,165
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
(41,548
|
)
|
|
(302,351
|
)
|
Advances
to employees
|
|
|
-
|
|
|
107,725
|
|
Inventories
|
|
|
(799,686
|
)
|
|
(452,450
|
)
|
Other
receivables and prepayments
|
|
|
129,552
|
|
|
(197,128
|
)
|
Value-added
tax receivable
|
|
|
-
|
|
|
66,948
|
|
Accounts
payable, trade
|
|
|
(192,379
|
)
|
|
206,357
|
|
Income
tax payable
|
|
|
-
|
|
|
(20,119
|
)
|
Amount
due to directors
|
|
|
(35,905
|
)
|
|
-
|
|
Other
payables and accrued liabilities
|
|
|
160,456
|
|
|
120,112
|
|
Net
cash used in operating activities
|
|
|
(195,752
|
)
|
|
(233,659
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(1,045
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,045
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
550,000
|
|
|
-
|
|
Proceeds
from short-term bank borrowings
|
|
|
-
|
|
|
295,692
|
|
Payment
to restricted cash
|
|
|
-
|
|
|
(61,886
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
550,000
|
|
|
233,806
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
43,601
|
|
|
17,409
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
396,804
|
|
|
17,556
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
706,823
|
|
|
333,508
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
1,103,627
|
|
|
351,064
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
20,119
|
|
Cash
paid for interest expenses
|
|
$
|
4,110
|
|
$
|
4,913
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements
CHINA
SHOE HOLDINGS,
INC
CONDENSED
CONSOLIDATED
STATEMENT
OF STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
No.
of shares
|
|
Amount
|
|
Additional
paid-in capital
|
|
Accumulated
other comprehensive income
|
|
Retained
earnings
|
|
Total
stockholders’ equity
|
|
Balance
as of
January
1, 2008
|
|
|
100,000,001
|
|
$
|
100,000
|
|
$
|
1,883,364
|
|
$
|
225,226
|
|
$
|
1,243,139
|
|
$
|
3,451,729
|
|
Shares
issued
under
Regulation S Subscription Agreement on January 30, 2008
|
|
|
4,230,769
|
|
|
4,231
|
|
|
545,769
|
|
|
-
|
|
|
-
|
|
|
550,000
|
|
Net
income
for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
531,680
|
|
|
531,680
|
|
Foreign
currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
176,866
|
|
|
-
|
|
|
176,866
|
|
Balance
as of
March
31, 2008
|
|
|
104,230,770
|
|
$
|
104,231
|
|
$
|
2,429,133
|
|
$
|
402,092
|
|
$
|
1,774,819
|
|
$
|
4,710,275
|
|
See
accompanying notes to condensed consolidated financial statements
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE –
1
BASIS
OF
PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with both generally accepted accounting principles
for
interim financial information, and the instructions to Form 10-Q and Rule
10-01
of Regulation S-X. Accordingly, they do not include all of the information
and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals) that are, in the opinion of management, considered necessary for
a
fair presentation of the results for the interim periods presented. Interim
results are not necessarily indicative of results for a full year.
The
condensed consolidated financial statements and related disclosures have
been
prepared with the presumption that users of the interim financial information
have read or have access to our annual audited condensed consolidated financial
statements for the preceding fiscal year. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related notes thereto contained
in the
Annual Report on Form 10-K for the year ended December 31, 2007.
NOTE
–
2
ORGANIZATION
AND BUSINESS BACKGROUND
China
Shoe Holdings, Inc. (the “Company” or “CHSH”) was incorporated in the State of
Nevada on January 24, 2005 as Indigo Technologies, Inc. On June 6, 2007,
CHSH
changed its name to China Shoe Holdings, Inc. The principal activity of CHSH,
through its subsidiaries, is engaged in the manufacturing of ladies fashion
footwear for shoe retailers in Japan and China. Meanwhile, the Company also
produces various types of shoe soles for the domestic market in the PRC.
In
order to maintain a competitive advantage in the shoes manufacturing industry,
the Company has developed the following proprietary technologies: (i) PU
imitational grainy sole, (ii) TPR modified materials and (iii) Viscose water.
The Company has registered and obtained “Utility Model” patent and “Invention”
patent respectively for these innovations from the State Intellectual Property
Office of the PRC in 2006.
On
February 21, 2008, the Company, through its subsidiary, Shanghai Kanghong
Yunheng Enterprise Development Company Limited, has established a company
namely, Shanghai Kangjiesi Shoes Co., Ltd. to conduct the retail sales of
shoes
and leather products in the PRC. It was incorporated as a limited liability
company under the laws of the PRC and its registered capital is amounted
to
$68,362 (equivalent to RMB 500,000).
Details
of the Company’s subsidiaries are described below:
Name
|
|
Place
of incorporation
and
kind of
legal
entity
|
|
Principal
activities
and
place of operation
|
|
Particulars
of issued/
registered
share
capital
|
|
Effective
interest
held
|
|
|
|
|
|
|
|
|
|
Wholly
Success Technology Group Limited (“WSTG”)
|
|
British
Virgin Islands, a limited liability company
|
|
Investment
holding
|
|
994,500
issued shares of $1 each
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shanghai
Kanghong Yunheng Enterprise Development Company Limited
(“SKYEDC”)
|
|
PRC,
a limited liability company
|
|
Shoe
manufacturing
|
|
RMB
15,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shanghai
Kangjiesi Shoes Co., Ltd. (“SKSCL”)
|
|
PRC,
a limited liability company
|
|
Shoe
retailing
|
|
RMB
500,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
All
the
companies above are collectively known as “the Company” in these condensed
consolidated financial statements.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
–
3
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
•
Basis
of
presentation
These
accompanying condensed consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles in the United States
of
America.
•
Use
of
estimates
In
preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheets and revenues and expenses during the period
reported. Actual results may differ from these estimates.
•
Basis
of
consolidation
The
condensed consolidated financial statements include the financial statements
of
CHSH and its subsidiaries, WSTG, Shanghai Kanghong and Shanghai
Kangjiesi.
All
significant inter-company balances and transactions within the Company have
been
eliminated upon consolidation.
•
Cash
and
cash equivalents
Cash
and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
•
Accounts
receivable, trade
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
The
Company extends unsecured credit to its customers in the ordinary course
of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment. As of March 31, 2008, the
Company recorded no allowance for doubtful accounts.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
Inventories
include direct materials, labor and factory overhead and are stated at lower
of
cost or market value, cost being determined on a FIFO. The Company periodically
reviews historical sales activity to determine excess, slow moving items
and
potentially obsolete items and also evaluates the impact of any anticipated
changes in future demand. The Company provides inventory allowances based
on
excess and obsolete inventories determined principally by customer demand.
As of
March 31, 2008, the Company did not record an allowance for obsolete
inventories, nor have there been any write-offs.
•
Property,
plant and equipment, net
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date
on
which they become fully operational and after taking into account their
estimated residual values:
|
Depreciable
life
|
|
Residual
value
|
Buildings
|
20
years
|
|
5%
|
Plant
and machinery
|
10
years
|
|
5%
|
Office
equipments
|
10
years
|
|
5%
|
Motor
vehicles
|
5
years
|
|
5%
|
Expenditure
for maintenance and repairs is expensed as incurred. When assets have retired
or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
•
Impairment
of long-lived assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, long-lived assets and certain identifiable intangible assets
held and used by the Company are reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Recoverability of assets to be held and used is evaluated
by a
comparison of the carrying amount of assets to estimated discounted net cash
flows expected to be generated by the assets. If such assets are considered
to
be impaired, the impairment to be recognized is measured by the amount by
which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of March 31, 2008.
•
Revenue
recognition
The
Company derives revenues from the sale of self-manufactured products. The
Company recognizes its revenues net of value added taxes (“VAT”). The Company is
subject to VAT which is levied on the majority of the products of Shanghai
at
the rate of 17% on the invoiced value of sales. Output VAT is borne by customers
in addition to the invoiced value of sales and input VAT is borne by the
Company
in addition to the invoiced value of purchases to the extent not refunded
for
export sales.
In
accordance with the SEC’s Staff Accounting Bulletin No. 104, Revenue
Recognition, the Company recognizes revenue when persuasive evidence of an
arrangement exists, transfer of title has occurred or services have been
rendered, the selling price is fixed or determinable and collectibility is
reasonably assured.
(a)
Sale
of
products
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced
no
product returns and has recorded no reserve for sales returns for the three
months ended March 31, 2008.
(b)
Interest
income
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
Cost
of
revenues consists primarily of material costs, direct labor, depreciation
and
manufacturing overheads, which are directly attributable to the manufacture
of
products.
•
Income
taxes
The
Company accounts for income taxes in interim periods as required by Accounting
Principles Board Opinion No. 28, “Interim Financial Reporting” and as
interpreted by FASB Interpretation No. 18, “Accounting for Income Taxes in
Interim Periods.” The Company has determined an estimated annual effective tax
rate. The rate will be revised, if necessary, as of the end of each successive
interim period during the Company’s fiscal year to the Company’s best current
estimate. The estimated annual effective tax rate is applied to the year-to-date
ordinary income at the end of the interim period.
The
Company also accounts for income tax using SFAS No. 109 “Accounting for Income
Taxes”, which requires the asset and liability approach for financial accounting
and reporting for income taxes. Under this approach, deferred income taxes
are
provided for the estimated future tax effects attributable to temporary
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the
years
of recovery or reversal and the effect from a change in tax rates is recognized
in the condensed consolidated statement of operations and comprehensive income
in the period of enactment. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not that
some
portion of, or all of the deferred tax assets will not be realized.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
Effective
January 1, 2007, the Company also adopts the provisions of the Financial
Accounting Standards Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosures and transitions. In connection with the adoption
of FIN No. 48, the Company has analyzed the filing positions in all of the
jurisdictions where the Company is required to file income tax returns, as
well
as all open tax years in these jurisdictions. There was no impact on the
condensed consolidated financial statements. The Company did not have any
unrecognized tax benefits and there was no effect on the financial condition
or
results of operations for the period ended March 31, 2008.
The
Company conducts its major businesses in the PRC and is subject to tax in
this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
In
accordance with FIN48, the Company adopted the policy of recognizing interest
and penalties, if any, related to unrecognized tax positions as income tax
expense.
•
Net
income per share
The
Company calculates net income per share in accordance with SFAS No. 128,
“Earnings per Share.” Basic income per share is computed by dividing the net
income by the weighted-average number of common shares outstanding during
the
period. Diluted income per share is computed similar to basic income per
share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common stock
equivalents had been issued and if the additional common shares were
dilutive.
•
Comprehensive
income
SFAS
No.
130, “Reporting Comprehensive Income”, establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income as defined includes all changes in equity during a period
from non-owner sources. Accumulated comprehensive income consists of changes
in
unrealized gains and losses on foreign currency translation. This comprehensive
income is not included in the computation of income tax expense or
benefit.
•
Foreign
currencies translation
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates of
the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency
using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of
operations.
The
functional and reporting currency of the Company is the United States dollars
(“US$”). The accompanying condensed consolidated financial statements have been
expressed in US$. In addition, the Company’s operating subsidiary in the PRC,
TCH maintains its books and records in its local currency, the Renminbi Yuan
(“RMB”), which is functional currency as being the primary currency of the
economic environment in which its operations are conducted.
The
reporting currency of the Company is the United States dollar ("US dollars").
The Company's subsidiaries in the PRC, SKYEDC and SKSCL maintain their books
and
records in its local currency, the Renminbi (“RMB”), which is functional
currency as being the primary currency of the economic environment in which
these entities operate.
In
general, for consolidation purposes, assets and liabilities of its
subsidiaries whose functional currency is not the US dollars are
translated into US dollars, in accordance with SFAS No 52. “Foreign Currency
Translation”, using the exchange rate on the balance sheet date. Revenues and
expenses are translated at average rates prevailing during the period. The
gains
and losses resulting from translation of financial statements of foreign
subsidiaries are recorded as a separate component of accumulated other
comprehensive income within the statement of stockholders’ equity.
Translation
of amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective period:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Months
end RMB:US$ exchange rate
|
|
|
7.022
|
|
|
7.702
|
|
Average
monthly RMB:US$ exchange rate
|
|
|
7.176
|
|
|
7.757
|
|
•
Related
parties
Parties,
which can be a corporation or individual, are considered to be related if
the
Company has the ability, directly or indirectly, to control the other party
or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they
are
subject to common control or common significant influence.
•
Segment
reporting
SFAS
No.
131 “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments
on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers
in
the financial statements. The Company operates in one principal reportable
segment in Japan and the PRC.
•
Fair
value of financial instruments
The
Company values its financial instruments as required by Statement of Financial
Accounting Standard (SFAS) No. 107, “Disclosures about Fair Value of Financial
Instruments”. The estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. The estimates presented herein are not necessarily indicative
of
amounts that the Company could realize in a current market
exchange.
The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivable, receivable from a third party, prepayments and deposits,
short-term bank loan, other payables and accrued liabilities and income tax
payable.
As
of the
balance sheet date, the estimated fair values of the financial instruments
were
not materially different from their carrying values as presented due to the
short term maturities of these instruments and that the interest rates on
the
borrowings approximate those that would have been available for loans of
similar
remaining maturity and risk profile at respective year ends.
•
Recently
issued accounting standards
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or
the
results of its operations.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
required to be reported in earnings at each reporting date. SFAS No. 159
is
effective for fiscal years beginning after November 15, 2007, the provisions
of
which are required to be applied prospectively. The Company believes that
SFAS
159 should not have a material impact on the consolidated financial position
or
results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R will change the accounting
for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items
in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until January 1, 2009. The Company
expects
SFAS No. 141R will have an impact on accounting for business combinations
once
adopted but the effect is dependent upon acquisitions at that time. The Company
is still assessing the impact of this pronouncement.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No.
160"
("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company believes that SFAS 160
should not have a material impact on the consolidated financial position
or
results of operations.
In
March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's future
financial position or results of operations.
NOTE
–
4
ACCOUNTS
RECEIVABLE, TRADE
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible.
If
actual collections experience changes, revisions to the allowance may be
required. Based upon the aforementioned criteria, management has determined
that
no allowance for doubtful accounts is required for the three months ended
March
31, 2008 and 2007.
NOTE
–
5
INVENTORIES
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
709,627
|
|
$
|
224,795
|
|
Work
in process
|
|
|
473,084
|
|
|
124,214
|
|
Finished
goods
|
|
|
186,040
|
|
|
180,565
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,368,751
|
|
$
|
529,574
|
|
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
For
the
three months ended March 31, 2008 and 2007, the Company did not record an
allowance for obsolete inventories, nor have there been any write-offs.
NOTE
–
6
OTHER
RECEIVABLES AND PREPAYMENTS
Other
receivables and prepayments consisted of the following:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Prepayments
|
|
$
|
331,224
|
|
$
|
457,973
|
|
Other
receivables
|
|
|
72,127
|
|
|
61,237
|
|
|
|
|
|
|
|
|
|
|
|
$
|
408,408
|
|
$
|
519,210
|
|
The
prepayments represented the deposits to suppliers for materials consumptions.
The balances are subsequently settled upon the delivery of
materials.
Other
receivables represented temporary advances to various independent third parties
and the Company is expected to recover the receivables within the next twelve
months.
NOTE
–
7
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net, consisted of the following:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
430,538
|
|
$
|
403,046
|
|
Plant
and machinery
|
|
|
2,001,463
|
|
|
1,822,779
|
|
Office
equipment
|
|
|
44,900
|
|
|
38,954
|
|
Motor
vehicles
|
|
|
32,697
|
|
|
29,452
|
|
Foreign
translation difference
|
|
|
104,275
|
|
|
214,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,508,530
|
|
Less:
a
ccumulated
depreciation
|
|
|
(842,889
|
)
|
|
(726,573
|
)
|
Less:
foreign translation difference
|
|
|
(34,011
|
)
|
|
(64,238
|
)
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
1,736,973
|
|
$
|
1,717,719
|
|
Depreciation
expense for the three months ended March 31, 2008 and 2007 were $52,078 and
$48,165, respectively.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
–
8
SHORT-TERM
BANK BORROWINGS
As
of
March 31, 2008, the short-term bank loans consist of three individual bank
loans
with aggregate amount of RMB 1,250,000 (2007: RMB1,250,000) payable to a
financial institution, guaranteed by an independent third party, with interest
rate ranged from 7.29% to 8.21% (2007: 7.38%) per annum payable quarterly,
with
principals due between August 20 to October 20, 2008.
As
of
March 31, 2008 and December 31, 2007, the short-term bank borrowings was
$178,007 and $170,903.
NOTE
–
9
OTHER
PAYABLES AND ACCRUED LIABILIITES
Other
payables and accrued liabilities consisted of the followings:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
|
|
(audited)
|
|
Salaries
payable
|
|
$
|
88,600
|
|
$
|
77,718
|
|
Welfare
payable
|
|
|
-
|
|
|
1,629
|
|
Advances
from customers
|
|
|
-
|
|
|
13,395
|
|
Accrued
expenses
|
|
|
146,324
|
|
|
146,230
|
|
Advances
from third parties
|
|
|
113,924
|
|
|
109,378
|
|
Export
declaration payable
|
|
|
71,203
|
|
|
-
|
|
VAT
payable
|
|
|
96,979
|
|
|
9,355
|
|
Other
payables
|
|
|
45,974
|
|
|
28,503
|
|
|
|
|
|
|
|
|
|
|
|
$
|
563,004
|
|
$
|
386,208
|
|
NOTE
–
10
INCOME
TAXES
The
Company is registered in the United States of America and has operations
in
three tax jurisdictions: the United States of America, British Virgin Islands
(“BVI”) and the PRC. For the three months ended March 31, 2008, the operation in
the United States of America and BVI did not incur any operating income or
losses for income tax purposes. The Company generated substantially its net
income from the operation of its subsidiary in the PRC and subject to the
PRC
tax jurisdiction. The Company did not record any income tax provision for
the
three months ended March 31, 2007 and 2008, respectively.
The
components of income before income taxes separating U.S., BVI and PRC tax
jurisdictions are as follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Tax
jurisdictions from:
|
|
|
|
|
|
Loss
subject
to U.S.
|
|
$
|
-
|
|
$
|
-
|
|
Loss
subject
BVI
|
|
|
-
|
|
|
-
|
|
Income
subject to
the PRC
|
|
|
531,680
|
|
|
189,082
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
531,680
|
|
$
|
189,082
|
|
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
United
States of America
CHSH
is
registered in the State of Nevada and is subject to the tax laws of United
States of America.
As
of
March 31, 2008, the operation in the United States of America did not incur
net
operating losses available for federal tax purposes, which are available
to
offset future taxable income. The net operating loss carry forwards begin
to
expire in 2028, if unutilized.
British
Virgin Islands
Under
the
current BVI law, the Company is not subject to tax on income.
The
PRC
All
the
Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by
the Income Tax Law of the PRC. Effective from January 1, 2008, the Corporate
Income Tax Law of the PRC (the “New CIT Law”) is followed. Under the New CIT
Law, SKYEDC, as a foreign investment enterprise continues to enjoy the unexpired
tax holidays from a full exemption of income tax for the first two profit
making
years with a 50% exemption of income tax (that is 30%) for the next three
years.
SKSCL is a domestic company which is entitled to the tax rate reduction from
33%
to 25%.
The
reconciliation of income tax rate to the effective income tax rate based
on
income before income taxes stated in the statements of operations for the
three
months ended March 31, 2008 and 2007 is as follows:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Income
before
income
taxes
|
|
$
|
531,680
|
|
$
|
189,082
|
|
Statutory
income tax rate
|
|
|
25
|
%
|
|
33
|
%
|
|
|
|
132,920
|
|
|
62,397
|
|
Tax
effect of expenses not deductible for tax purposes:
|
|
|
|
|
|
|
|
-
Effect from tax holiday
|
|
|
(132,920
|
)
|
|
(62,397
|
)
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
$
|
-
|
|
$
|
-
|
|
The
Company’s effective income tax rates for the three months ended March 31, 2008
and 2007 were 0% and 0%.
The
following table sets forth the significant components of the aggregate deferred
tax assets of the Company as of March 31, 2008 and December 31,
2007:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
|
|
(audit
ed)
|
|
Deferred
tax assets:
|
|
|
|
|
|
-
Net operating loss carried forward
|
|
$
|
25,932
|
|
$
|
25,932
|
|
-
Accrued expenses
|
|
|
-
|
|
|
24,802
|
|
Less:
valuation allowance
|
|
|
(25,932
|
)
|
|
(50,734
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
$
|
-
|
|
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
–
11
AMOUNT
DUE TO DIRECTORS
The
balances due to directors, Mr. Gu Xianzhong and Mr. Gu Changhong, represented
unsecured advances which are interest-free and repayable in next twelve
months.
NOTE
–
12
CAPITAL TRANSACTIONS
On
January 30, 2008, the Company entered into a Regulation S Subscription Agreement
(the “Agreement A”) with Mr. Yu Guorui, a resident and national of the PRC (the
“Investor”). Pursuant to the Agreement, the Company issued 4,230,769 shares of
common stock to the Investor for $550,000 at a price of $0.13 per share.
The
price was negotiated by the parties and based upon the average closing price
for
the Company’s common stock on the over the counter bulletin board during the
month preceeding the subscription agreement. The Company intends to utilize
the
funds received primarily on expansion of its retail store operations in
China.
NOTE
–
13
CONCENTRATION
AND RISK
(a)
Major
customers and vendors
For
the
three months ended March 31, 2008 and 2007, 100% of the Company’s assets were
located in the PRC and 85% of the Company’s revenues were derived from customers
located in Japan for the three months ended March 31, 2008.
For
the
three months ended March 31, 2008, customers who account for 10% or more
of
revenues are presented as follows:
Customers
|
|
|
Revenues
|
|
Percentage
of
revenues
|
|
|
Accounts
receivable,
trade
|
|
Customer
A
|
|
|
$
|
419,884
|
|
18%
|
|
|
$
|
51,912
|
|
Customer
B
|
|
|
|
399,125
|
|
17%
|
|
|
|
49,272
|
|
Customer
C
|
|
|
|
356,388
|
|
15%
|
|
|
|
128,217
|
|
Customer
D
|
|
|
|
334,645
|
|
14%
|
|
|
|
115,067
|
|
Customer
E
|
|
|
|
286,520
|
|
12%
|
|
|
|
90,160
|
|
Customer
F
|
|
|
|
265,123
|
|
11%
|
|
|
|
169,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
2,061,685
|
|
87%
|
Total:
|
|
$
|
604,581
|
|
For
the
three months ended March 31, 2007, customers who account for 10% or more
of
revenues are presented as follows:
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
Customers
|
|
|
Revenues
|
|
Percentage
of
revenues
|
|
|
Accounts
receivable,
trade
|
|
Customer
A
|
|
|
$
|
241,296
|
|
21%
|
|
|
$
|
34,292
|
|
Customer
B
|
|
|
|
131,907
|
|
11%
|
|
|
|
78,745
|
|
Customer
F
|
|
|
|
143,342
|
|
12%
|
|
|
|
41,320
|
|
Customer
G
|
|
|
|
117,758
|
|
10%
|
|
|
|
100,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
634,303
|
|
54%
|
Total:
|
|
$
|
255,145
|
|
For
the
three months ended March 31, 2008 and 2007, there are no vendors who account
for
10% or more of purchases.
(b)
Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers’ financial
condition, but does not require collateral to support such
receivables.
(c)
Interest
rate risk
As
the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from short-term borrowings. Borrowings
issued at variable rates expose the Company to cash flow interest-rate risk.
Borrowings issued at fixed rates expose the Company to fair value interest-rate
risk. Company policy is to maintain approximately all of its borrowings in
fixed
rate instruments. As of March 31, 2008, all of borrowings were at fixed
rates.
(d)
Exchange
rate risk
The
reporting currency of the Company is the US dollar, to date the majority
of the
revenues and costs are denominated in RMB and a significant portion of the
assets and liabilities are denominated in RMB. As a result, the Company is
exposed to foreign exchange risk as its revenues and results of operations
may
be affected by fluctuations in the exchange rate between US Dollar and RMB.
If
the RMB depreciates against the US Dollar, the value of the RMB revenues
and
assets as expressed in US Dollar financial statements will decline. The Company
does not hold any derivative or other financial instruments that expose to
substantial market risk.
NOTE
–
15
OPERATING
LEASE COMMITMENT
The
Company rented offices and factories under non-cancelable operating lease
agreements. As of March 31, 2008, the future minimum rental payments required
for the coming years are as follows:
Period
ended March 31,
|
|
|
|
2008
|
|
$
|
189,046
|
|
2009
|
|
|
244,021
|
|
2010
|
|
|
115,339
|
|
2011
|
|
|
36,069
|
|
Thereafter
|
|
|
67,698
|
|
|
|
|
652,173
|
|
For
the three months ended March 31, 2008 and 2007,
rental expenses were $15,932 and $8,528 respectively.
CHINA
SHOE HOLDINGS,
INC
NOTES
TO
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(Currency
expressed in United States Dollars (“US$”))
(
Unaudited)
NOTE
–
16
SUBSEQUENT
EVENT
On
April
25, 2008, the Board of Directors of the Company approved the Employee Incentive
Plan. The details of the plan will be attached as exhibit to the S-8
Registration Statement which will be filed shortly.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Special
Note Regarding Forward Looking Statements
This
Quarterly Report on Form 10-QSB, including the following “Management's
Discussion and Analysis of Financial Condition and Results of Operations,”
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Such statements include, among
others, those concerning our expected financial performance and strategic and
operational plans, as well as all assumptions, expectations, predictions,
intentions or beliefs about future events. You are cautioned that any such
forward-looking statements are not guarantees of future performance and that
a
number of risks and uncertainties could cause actual results of the Company
to
differ materially from those anticipated, expressed or implied in the
forward-looking statements. The words “believe,” “expect,”
“anticipate,”“project,” “targets,” “optimistic,” “intend,” “aim,”“will” or
similar expressions are intended to identify forward-looking statements. All
statements other than statements of historical fact are statements that could
be
deemed forward-looking statements. Risks and uncertainties that could cause
actual results to differ materially from those anticipated include risks related
to new and existing products; any projections of sales, earnings, revenue,
margins or other financial items; any statements of the plans, strategies and
objectives of management for future operations; any statements regarding future
economic conditions or performance; uncertainties related to conducting business
in China; any statements of belief or intention; any of the factors mentioned
in
the “Risk Factors” section of our “Report of Unscheduled Material Events or
Corporate Changes” on Form 8-K for the years ended December 31, 2006 and
December 2005, and other risks mentioned in this Form 10-Q. The Company assumes
no obligation and does not intend to update any forward-looking statements,
except as required by law.
Use
of terms
Except
as
otherwise indicated by the context, references in this Form 10-KSB to “CHSH,”
“we,” “us,” “our,” “our Company,” or “the Company” are to China Shoe Holdings,
Inc., a Nevada corporation, and its consolidated subsidiaries. Unless the
context otherwise requires, all references to (i)“WSTG” are to Wholly Success
Technology Group Limited, a limited liability company incorporated in the
British Virgin Islands; (ii)“SKYEDC” are to Shanghai Kanghong Yunheng Enterprise
Development Company Limited., a limited liability company incorporated in the
People's Republic of China; (iii)”SKSCL” are to
Shanghai
Kangjiesi Shoes Company Limited.,
a
limited
liability company incorporated in the People's Republic of China
(iv)
“BVI” are to British Virgin Islands; (v) “PRC” and “China” are to the People's
Republic of China; (vi) “U.S. dollar,” “$” and “US$” are to United States
dollars; (vii) “RMB” are to Yuan of China; (viii) “Securities Act” are to the
Securities Act of 1933, as amended; and “Exchange Act” are to the Securities
Exchange Act of 1934, as amended.
Overview
The
Company continued to implement its growth strategy for the three months ended
March 31, 2008 through slightly higher marketing efforts to be placed on the
ladies footwear for the Japanese market.
The
Company continued to strengthen its balance sheet in 2007 and for the three
months ended of March 31, 2008. Total assets and stockholders' equity have
both
increased.
Our
Business
We
are an
independent, single facility-based, private label designer, manufacturer and
marketer of a broad line of woman's shoes in which the footwear are generally
sold under its customers' brand names. We also manufactures shoe component
such
as soles for other shoe manufacturers.
We
sold
shoes and shoe components to approximately forty customers in Japan and China.
Our factory is located in Jiading Township, a suburb of Shanghai in the People's
Republic of China.
Recent
Development
On
July
3, 2007, a closing was held pursuant to an Agreement and Plan of Reorganization,
dated as of June 29, 2007, (the “Agreement”) by and among the Company, WSTG, a
BVI Corporation, and WSTG's shareholders. Pursuant to the Agreement, each
shareholder of WSTG exchanged all of his shares in WSTG for shares in The
Company with an aggregate of 69,615,000 shares in the Company being issued
in
exchange for the shares in WSTG.
In
addition to the stock exchange transaction, CHSH agreed to issue an additional
15,185,000 restricted shares of common stock of the Company to China Venture
Partners, Inc. for consulting services at a par value of $0.001 per share.
The
shares were issued in lieu of cash payment of $60,000 pursuant to a contract
for
consulting services dated June 1, 2007.
WSTG
is
the owner of all the outstanding shares of SKYEDC, a limited liability company
organized under the laws of the People's Republic of China (“PRC”) and a
manufacturer of woman's shoes, casual shoes and shoe components.
Under
the
terms of the Agreement, all of the officers of the Company resigned, WSTG was
permitted to appoint two directors, representing 50% of the Company's Board
of
Directors and WSTG and the Company agreed not to file a registration statement
on Form SB-2 allowing for insiders' share sales for a period of one year or
to
file a registration statement on From S-8 for nine months. CVP provides general
business consulting services, specializing in the needs of entities with
interests in the PRC.
On
January 30, 2008, the Company entered into a Regulation S Subscription Agreement
(the “Agreement”) with Mr. Yu Guorui, a resident and national of the PRC (the
“Investor”). Pursuant to the Agreement, the Company sold 4,230,769 shares of
common stock to the Investor for $550,000 at a market price of $0.13 per share.
The Company intends to utilize the funds received primarily on expansion of
its
planned retail store operations in the PRC.
On
February 21, 2008, the Company, through its subsidiary, SKYEDC, has established
a company namely, Shanghai Kangjiesi Shoes Co. Ltd., to conduct the sales of
shoes and leather products in the PRC. It was incorporated as a limited
liability company under the laws of the PRC and its registered capital is
amounted to $68,362 (equivalent to RMB 500,000).
On
March
17, 2008, the Company entered into an Equity Line Agreement (the “Agreement”)
with Magellan Global Fund, L.P., a Delaware limited partnership (the
“Investor”), pursuant to which the Company agreed to sell and issue and the
Investor agreed to purchase from the Company up to $2,000,000 of the Company’s
common stock with a par value of $0.001 per share. Upon the execution of the
Agreement, the Company shall issue to the Investor a restricted stock
certificate of the Company’s common stock in an amount equal to $40,000 divided
by the closing bid price on the closing date (571,429 shares). In addition,
upon
effectiveness of a registration statement pursuant to the Agreement, the Company
will issue an additional $40,000 of common stock to the Investor priced at
the
closing bid price of the day the registration statement is declared effective
by
the United States Securities and Exchange Commission. The Company intends to
use
the funds from this offering for its execution of Company’s retail
strategy.
On
April
25, 2008, the Board of Directors of the Company approved the Employee Incentive
Plan. The details of the plan will be attached as exhibit to the S-8
Registration Statement which will be filed shortly.
WSTG
is
the owner of all the outstanding shares of SHKH, a limited liability company
organized under the laws of the People's Republic of China (“PRC”) and a
manufacturer of woman's shoes, casual shoes and shoe components.
Under
the
terms of the Agreement, all of the officers of the Company resigned, WSTG was
permitted to appoint two directors, representing 50% of the Company's Board
of
Directors and WSTG and the Company agreed not to file a registration statement
on From SB-2 allowing for insiders' share sales for a period of one year or
to
file a registration statement on From S-8 for nine months. CVP provides general
business consulting services, specializing in the needs of entities with
interests in the PRC.
Results
of Operations
The
following table summarizes the results of our operations during the three months
ended March 31, 2008 and 2007, and provides information regarding the dollar
and
percentage increase or (decrease) from the three months ended March 31, 2007
to
the three months ended March 31, 2007.
All
amount, other than percentages, in millions of U.S dollars
|
|
3
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
%
Increase
|
|
Item
|
|
2008
|
|
2007
|
|
(Decrease)
|
|
(%
Decrease)
|
|
Operating
Revenues
|
|
$
|
2.36
|
|
$
|
1.17
|
|
$
|
1.18
|
|
$
|
100.7
|
%
|
Cost
of Revenues
|
|
|
1.49
|
|
|
0.80
|
|
|
0.69
|
|
|
86.0
|
%
|
Gross
Profit
|
|
|
0.87
|
|
|
0.37
|
|
|
0.50
|
|
|
135.7
|
%
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Depreciation
|
|
|
0.05
|
|
|
0.01
|
|
|
0.04
|
|
|
630.3
|
%
|
-
General & administrative
|
|
|
0.28
|
|
|
0.17
|
|
|
0.11
|
|
|
62.7
|
%
|
Other
Income (Expenses)
|
|
|
(0.004
|
)
|
|
(0.005
|
)
|
|
0.03
|
|
|
150.0
|
%
|
Net
Income
|
|
|
0.54
|
|
|
0.19
|
|
|
0.38
|
|
|
184.2
|
%
|
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
Revenue:
Revenue
was $2.36 million for the three months ended March 31, 2008 as compared to
$1.17
million for the three months ended March 31, 2007, representing an increase
by
100.7%. The increase in revenue was mainly contributed to the increased in
the
proportion of sales into the Japanese market.
Cost
of Revenue and Gross Profit:
Cost
of
revenue and gross profit were respectively $1.49 million and $0.87 million
for
the three months ended March 31, 2008 as compared to $0.80 million and $0.37
million for the three months ended March 31, 2007, representing an increase
by
86.0% and 135.7% respectively. The substantial growth in gross profit was
attributable to the increased in the proportion of sales into the Japanese
market that are generally at higher margins than sales within the
PRC.
Operating
Expenses:
Operating
expenses was $0.33 million for the three months ended March 31, 2008 as compared
to $0.18 million for the three months ended March 31, 2007, representing an
increase by 83.3%. The increased was mainly attributable to the hiring of
additional staff, increased in entertainment and more vehicle expenses for
serving the Japanese customers and professional expenses related to the reverse
take-over activities on the over-the counter market.
Income
Tax Expenses:
No
income
tax was incurred during the three months ended March 31, 2007. Starting from
the
first quarter of 2007, SKYEDC, a subsidiary of the Company, which operates
in
the PRC, is exempted from the PRC state and local enterprise income tax for
the
first two profitable financial years of operation and a 50% relief from the
PRC
state corporate income tax for the following three years. Accordingly, it was
not subject to tax in 2007.
On
March
16, 2007, the National People's Congress of the PRC determined to adopt a new
corporate income tax law in its fifth plenary session. The new corporate income
tax law unifies the application scope, tax rate, tax deduction and preferential
policy for both domestic and foreign-invested enterprises. The new corporate
income tax law will be effective on January 1, 2008. According to the new
corporate income tax law, the applicable income tax law rate for our operating
subsidiaries may be subject to change. As the implementation detail has not
yet
been announced, we cannot be sure of the potential impact of such new corporate
income tax law on our financial position and operating results.
Net
income:
Net
income was $0.54 million for the three months ended March 31, 2008 as compared
to $0.19 million for the three months ended March 31, 2007, representing an
increase by 184.2%, the increase was mainly attributable to the increase in
the
greater proportion of sales from the Japanese market.
Liquidity
and Capital Resources
Cash
Flows
All
amounts in millions of U.S. dollars
|
|
Three
months ended
|
|
|
|
2008
|
|
2007
|
|
Net
cash (used in) operating activities
|
|
$
|
(0.19
|
)
|
$
|
(0.23
|
)
|
Net
cash (used in) investing activities
|
|
|
(0.001
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
0.55
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
$
|
0.36
|
|
$
|
-
|
|
Operating
Activities:
Net
cash
used in operating activities was $0.19 million for the three months ended March
31, 2008, which is decrease of $0.04 million from $0.23 million as compared
with
the corresponding period in 2007. The decrease was mainly due to the increased
in net income, increased in other payables and accrued liabilities and decreased
in accounts payable.
Investing
Activities:
Net
cash
used in investing activities for the three months ended March 31, 2008 was
$0.001 million. The increase was attributable to the acquisition of fixed
assets.
Financing
Activities:
Net
cash
provided by financing activities in the three months ended March 31, 2008
totaled $0.55 million as compared to $0.23 million in the corresponding period
of 2007. The increase of cash provided by financing activities was mainly
attributable to the proceeds from newly issued share capital of
USD550,000.
Short
Term Bank Borrowings:
The
Company utilizes short term bank borrowings to provide for its liquidity needs
as the Company is typically paid for its product adequate to allow the Company
to operate at present levels and to sustain moderate growth.
Short-term
bank borrowings were as follows:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(unaudited)
|
|
(audited)
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
178,007
|
|
$
|
170,903
|
|
Management
believes that the Company's reputation for quality production will result in
more large orders that will be difficult to fill without significant plant
expansion and to explore the feasibility of entering the retail shoe market
in
China. However, the Company does not have any commitments for additional
financing and no assurance is given that any additional financing will be
available or that, if available, it will be on terms that are favorable to
our
shareholders.
ITEM
3. CONTROLS AND PROCEDURES
Members
of our management, including our Chief Financial Officer and Principal
Accounting and Financial Officer, have evaluated the effectiveness
of our
disclosure controls and procedures, as defined by paragraph (e) of Exchange
Act
Rules 13a-15or 15d-15, as of March 31, 2008, the end of the period covered
by
this report. Based upon that evaluation, Mr. Gu Xianzhong concluded that our
disclosure controls and procedures are effective.
INTERNAL
CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph
(d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended
March 31, 2008 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
None.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Previously
reported on Form 8-K filed February 4, 2008 and Form 8-K A-1 filed May 1,
2008.
Item
3. Defaults Upon Senior Securities
Item
4. Submission of Matters to a Vote of Security Holders
No
items
during the period covered by this report.
Item
5. Other Information
Item
6. Exhibits and Reports on Form 8-K
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
b)
REPORTS ON FORM 8-K
The
Company filed a Form 8-K, dated June 6, 2007. The Company filed additional
reports on Form 8-K after the close of the period covered by this
report.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
China
Shoe Holdings, Inc.
(Registrant)
|
|
|
|
|
|
|
|
Date:
May 15, 2008
|
By:
|
/s/
Gu
Xianzhong
|
|
Gu
Xianzhong
President
and CEO
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME
|
|
TITLE
|
DATE
|
|
|
|
|
/s/
Gu
Xianzhong
|
|
President
and CEO
|
May
15, 2008
|
Gu
Xianzhong
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Angus
Cheung Ming
|
|
Chief
Financial Officer
|
May
15. 2008
|
Angus
Cheung Ming
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
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