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 June 30, 2008

Commission File Number 333-139910

China Shoe Holdings, Inc.
(Name of small business issuer in its charter)

Nevada
1712
20-2234410
(State or other jurisdiction
of incorporation or organization)
(Primary SIC Code)
(IRS Employer Identification No.)
 
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
 Non-Accelerated Filer o
 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 119,445,571 shares of Common Stock outstanding as of August 15, 2008.
 


Part I Financial Information
 
Item 1. Financial Information

CHINA SHOE HOLDINGS, INC
 
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

   
Page
Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
 
F-2
     
Condensed Consolidated Statements of Operations And Comprehensive Income for the three and six months ended June 30, 2008 and 2007
 
F-3
     
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
 
F-4
     
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2008
 
F-5
     
Notes to Condensed Consolidated Financial Statements
 
F-6 to F-20
     
 
F-1

 
CHINA SHOE HOLDINGS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Currency expressed in United States Dollars (“US$”) , except for number of shares)
(Unaudited)

   
June 30,
2008
 
December 31,
2007
 
   
(Unaudited)
 
(audited)
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
 
$
1,186,539
 
$
706,823
 
Accounts receivable, trade
   
1,476,165
   
1,071,037
 
Inventories
   
1,363,131
   
529,574
 
Other receivables and prepayments
   
476,296
   
560,227
 
               
Total current assets
   
4,502,131
   
2,867,661
 
               
Non-current assets:
             
Property, plant and equipment, net
   
1,724,379
   
1,717,719
 
TOTAL ASSETS
 
$
6,226,510
 
$
4,585,380
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Short-term bank borrowings
 
$
181,903
 
$
170,903
 
Accounts payable, trade
   
354,913
   
500,491
 
Income tax payable
   
20,774
   
-
 
Amount due to a director
   
2,478
   
76,049
 
Amount due to a related party
   
45,111
   
-
 
Other payables and accrued liabilities
   
388,062
   
386,208
 
               
Total current liabilities
   
993,241
   
1,133,651
 
               
Stockholders’ equity:
             
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of June 30, 2008 and December 31, 2007
   
-
   
-
 
Common stock, $0.001 par value; 300,000,000 shares authorized; 119,445,571 and 100,000,000 shares issued and outstanding as of June 30, 2008 and December 31, 2007
   
119,445
   
100,000
 
Additional paid-in capital
   
2,937,150
   
1,883,364
 
Deferred compensation cost
   
(499,763
)
 
-
 
Accumulated other comprehensive income
   
510,977
   
225,226
 
Retained earnings
   
2,165,460
   
1,243,139
 
               
     
5,233,269
   
3,451,729
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
6,226,510
 
$
4,585,380
 

  See accompanying notes to condensed consolidated financial statements.
 
F-2

 
CHINA SHOE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended June 30,
 
Six months ended June 30,
 
   
2008
 
2007
 
2008
 
2007
 
OPERATING REVENUES
 
$
2,306,482
 
$
1,954,897
 
$
4,664,062
 
$
3,128,872
 
                           
COST OF REVENUE
   
1,639,456
   
1,303,201
   
3,132,651
   
2,106,141
 
                           
GROSS PROFIT
   
667,026
   
651,696
   
1,531,411
   
1,022,731
 
                           
OPERATING EXPENSES:
                         
Depreciation
   
53,947
   
5,344
   
106,025
   
12,511
 
Stock-based compensation
   
23,468
   
15,185
   
23,468
   
15,185
 
Selling and marketing
   
38,470
   
-
   
38,470
   
-
 
General and administrative
   
137,263
   
422,546
   
414,178
   
592,596
 
Total operating expenses
   
253,148
   
443,075
   
582,141
   
620,292
 
                           
INCOME FROM OPERATIONS
   
413,878
   
208,621
   
949,270
   
402,439
 
                           
OTHER INCOME (EXPENSE):
                         
Interest income
   
1,099
   
348
   
1,497
   
525
 
Interest expense
   
(4,151
)
 
(12,599
)
 
(8,261
)
 
(17,512
)
                           
Total other expense
   
(3,052
)
 
(12,251
)
 
(6,764
)
 
(16,987
)
                           
INCOME BEFORE INCOME TAXES
   
410,826
   
196,370
   
942,506
   
385,452
 
                           
Income tax expense
   
(20,185
)
 
-
   
(20,185
)
 
-
 
                           
NET INCOME
 
$
390,641
 
$
196,370
 
$
922,321
 
$
385,452
 
                           
Other comprehensive income:
                         
- Foreign currency translation gain (loss)
   
(462,617
)
 
(15,237
)
 
285,751
   
2,172
 
                           
COMPREHENSIVE INCOME
 
$
(71,976
)
$
181,133
 
$
636,570
 
$
387,624
 
                           
Net income per share - Basic and diluted
 
$
(0.001
)
$
0.003
 
$
0.009
 
$
0.010
 
                           
Weighted average shares outstanding - basic and diluted
   
109,299,223
   
70,782,802
   
105,928,141
   
71,139,972
 

See accompanying notes to condensed consolidated financial statements.

F-3

 
CHINA SHOE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

   
Six months ended June 30,
 
   
2008
 
2007
 
Cash flows from operating activities:
           
Net income
 
$
922,931
 
$
385,452
 
Adjustments to reconcile net income to net cash used in operating activities:
             
Depreciation
   
106,025
   
147,665
 
Stock-based compensation
   
23,468
   
15,185
 
Change in operating assets and liabilities:
             
Accounts receivable, trade
   
(326,645
)
 
(391,157
)
Inventories
   
(776,770
)
 
(669,626
)
Other receivables and prepayments
   
116,583
   
47,861
 
Value-added tax receivable
   
-
   
50,502
 
Accounts payable, trade
   
(172,743
)
 
349,135
 
Income tax payable
   
20,185
   
(20,119
)
Amount due to directors
   
(76,202
)
 
-
 
Amount due to related party
   
43,831
   
-
 
Other payables and accrued liabilities
   
(17,504
)
 
(3,747
)
Net cash used in operating activities
   
(137,451
)
 
(88,849
)
               
Cash flows from investing activities:
             
Purchase of property, plant and equipment
   
(5,076
)
 
-
 
               
Net cash used in investing activities
   
(5,076
)
 
-
 
               
Cash flows from financing activities:
             
Advance to a director
   
-
   
105,482
 
Proceeds from short-term bank borrowings
   
-
   
327,381
 
Issuance of share capital
   
550,000
   
-
 
Repayment of restricted cash
   
-
   
(63,736
)
               
Net cash generated from financing activities
   
550,000
   
369,127
 
               
Foreign currency translation adjustment
   
72,243
   
2,172
 
               
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
479,716
   
282,450
 
               
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
706,823
   
335,474
 
 
             
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
1,186,539
   
617,924
 
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
             
Cash paid for income taxes
 
$
20,185
 
$
20,119
 
Cash paid for interest expenses
 
$
8,261
 
$
17,512
 

See accompanying notes to condensed consolidated financial statements
 
F-4

 
CHINA SHOE HOLDINGS, INC
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

   
Common Stock
 
Additional
paid-in capital
 
Deferred Compensation cost
   
Accumulated
other
comprehensive
income
 
Retained earnings
 
Total stockholders’
equity
 
   
No. of shares
 
Amount
               
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 private placement on January 30, 2008
   
4,230,769
   
4,231
   
545,769
   
-
     
-
   
-
   
550,000
 
                                               
Shares issued for payment of commitment fees, non-cash
   
571,429
   
571
   
39,429
   
(36,667
)
   
-
   
-
   
3,333
 
                                               
Shares issued under Equity Incentive Plan
   
14,643,372
   
14,643
   
468,588
   
(463,096
)
   
-
   
-
   
20,135
 
                                               
Net income for the period
   
-
   
-
   
-
   
-
     
-
   
922,931
   
922,931
 
                                               
Foreign currency translation adjustment
   
-
   
-
   
-
   
-
     
285,751
   
-
   
285,751
 
                                               
Balance as of June 30, 2008
   
119,445,571
 
$
119,445
 
$
2,937,150
 
$
(499,763
)
 
$
510,977
 
$
2,165,460
 
$
5,233,269
]

See accompanying notes to condensed consolidated financial statements

F-5

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

NOTE 1   BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the unadjusted balance sheet as of December 31, 2007 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended June 30, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2008 or for any future period.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included 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.  

F-6

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

NOTE 3   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

·    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.

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 June 30, 2008, the Company recorded no allowance for doubtful accounts.

F-7

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

·    Inventories

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 June 30, 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 June 30, 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.

F-8

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)
 
(a)     Sale of products

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 six months ended June 30, 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 revenue

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 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.

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 June 30, 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 local and foreign tax authorities.

F-9

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)
 
·    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 subsidiaries in the PRC, SKYEDC and SKSCL maintain its books and records in their 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
 
6.872
   
7.3141
 
Average monthly RMB:US$ exchange rate
 
7.073
   
7.5633
 
 
F-10

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

·    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 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.
 
F-11

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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.
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” . The Company does not expect the adoption of SFAS No. 162 to have a material effect on the financial condition or results of operations of the Company.

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 six months ended June 30 , 2008 and 2007.

NOTE 5   INVENTORIES

   
June 30,
2008
 
December 31,
2007
 
   
(unaudited)
 
(audited)
 
Raw materials
 
$
705,857
 
$
224,795
 
Work in process
   
507,529
   
124,214
 
Finished goods
   
149,745
   
180,565
 
               
 
$
1,363,131
 
$
529,574
 
 
F-12


CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

For the six months ended June 30 , 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:

   
June 30,
2008
 
December 31,
2007
 
   
(unaudited)
 
(audited)
 
Advances to employees
 
$
43,657
 
$
41,017
 
Prepayments
   
354,922
   
457,973
 
Other receivables
   
77,717
   
61,237
 
               
   
$
476,296
 
$
560,227
 

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 collect the receivables within the next twelve months.

NOTE 7   PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consisted of the following:

   
June 30,
2008
 
December 31,
2007
 
   
(unaudited)
 
(audited)
 
Buildings
 
$
403,046
 
$
403,046
 
Plant and machinery
   
1,822,779
   
1,822,779
 
Office equipment
   
44,178
   
38,954
 
Motor vehicles
   
29,452
   
29,452
 
Foreign translation difference
   
375,760
   
214,299
 
     
2,675,215
   
2,508,530
 
Less: accumulated depreciation
   
(832,598
)
 
(726,573
)
Less: foreign translation difference
   
(118,238
)
 
(64,238
)
               
Property, plant and equipment, net
 
$
1,724,379
 
$
1,717,719
 

Depreciation expense for the three months ended June 30, 2008 and 2007 were $53,947 and $5,344, respectively.

Depreciation expense for the six months ended June 30, 2008 and 2007 were $106,025 and $147,665, respectively.
 
F-13

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

NOTE 8   SHORT-TERM BANK BORROWINGS

As of June 30, 2008, the short-term bank loans consist of three individual bank loans with aggregate amount of RMB1,250,000 (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 June 30, 2008 and December 31, 2007, the short-term bank borrowings were $181,903 and $170,903 respectively.

NOTE 9   OTHER PAYABLES AND ACCRUED LIABILIITES

Other payables and accrued liabilities consisted of the followings:

   
June 30,
2008
 
December 31,
2007
 
   
(unaudited)
 
(audited)
 
Salaries and welfare payable
 
$
86,769
 
$
79,347
 
Advances from customers
   
6,842
   
13,395
 
Accrued expenses
   
73,074
   
146,230
 
Advances from third parties
   
116,418
   
109,378
 
VAT payable
   
93,484
   
9,355
 
Other payables
   
11,475
   
28,503
 
               
   
$
388,062
 
$
386,208
 

NOTE 10 INCOME TAXES

For the period ended June 30, 2008 and 2007, the local (“the United States”) and foreign components of income before income taxes were comprised of the following:

   
Six months ended June 30,
 
   
2008
 
2007
 
   
(unaudited)
 
(unaudited)
 
Tax jurisdictions:
           
- Local
 
$
(23,468
)
$
(15,185
)
- Foreign
   
965,974
   
400,637
 
               
Income before income taxes
 
$
942,506
 
$
385,452
 
 
F-14


CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

The provision for income taxes consisted of the following:
 
   
Six months ended June 30,
 
   
2008
 
2007
 
Current:
           
- Local
 
$
-
 
$
-
 
- Foreign
   
20,185
   
-
 
 
             
Deferred:
             
- Local
   
-
   
-
 
- Foreign
   
-
   
-
 
Provision for income taxes
 
$
20,185
 
$
-
 

The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiaries that operate in various countries: U.S., British Virgin Islands and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

CHSH is registered in the State of Nevada   and is subject to the tax laws of United States of America.

British Virgin Islands

Under the current BVI law, the Company is not subject to tax on income. For the years ended June 30, 2008 and 2007, the Company’s subsidiary did not incurred any income or loss.

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 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 for the six months ended June 30, 2008 and 2007 is as follows:

   
Six months ended June 30,
 
   
2008
 
2007
 
   
(unaudited)
 
(unaudited)
 
Income before taxes from PRC operation
 
$
965,974
 
$
400,637
 
Statutory income tax rate
   
25
%
 
33
%
Income tax expense at statutory tax rate
   
241,493
   
132,210
 
Effect from tax holiday
   
(221,308
)
 
(132,210
)
Income tax expenses
 
$
20,185
 
$
-
 
 
F-15

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

The Company adopted the provisions of FIN 48 on January 1, 2007. This interpretation prescribes a recognition threshold and measurement attribute for the tax positions taken, or expected to be taken, on a tax return. The Company files tax returns in the various tax jurisdictions in which its subsidiaries operate in the PRC. The United States tax returns of its tax years 2006 to 2007 remain open to examination by IRS. The PRC 2007 tax returns have been filed and cleared.

NOTE 11 AMOUNT DUE TO A DIRECTOR

The balance due to director, Mr. Gu Xianzhong represented unsecured advances which are interest-free and has no fixed terms of repayment.

NOTE 12 AMOUNT DUE TO A RELATED PARTY

The balance due to the son of Mr. Gu Xianzhong represented unsecured advances which are interest-free and has no fixed terms of repayment.

NOTE 13 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 at its market quoted price on the closing date during the month preceding the subscription agreement. The Company intends to utilize the funds received primarily on expansion of its retail store operations in China.

On March 24, 2008, the Company entered into an Equity Line Agreement (the “ELA”) and a Registration Rights Agreement (the “RRA”) with Magellan Global Fund, L.P. (“Magellan”), a Delaware limited partnership, to issue and sell the common stock of the Company to Magellan up to $2,000,000. Upon execution of the ELA March 24, 2008, the Company issued 571,429 shares of restricted common stock at a price of $0.07 per share to ELA for the payment of commitment fees amounted to $40,000. The price was based on the closing bid price of the Company’s common stock at its market quoted price on the closing date of the sale of common stock.

On April 25, 2008, the Company approved and adopted the 2008 Equity Incentive Plan (the “EIP”) for the purpose to provide additional incentive to employees, directors and consultants. The EIP permits the grant of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares. On May 1, 2008, the Company issued 14,643,372 shares of restricted common stock under the EIP with a fair market value of $0.033 per share. The fair market value was based on the last trade or closing ask price of the Company’s common stock on the over the counter bulletin board.

As of June 30, 2008 and December 31, 2007, the Company has 119,445,571 and 100,000,000 shares of common stocks issued and outstanding.

F-16


CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

NOTE 14 EQUITY INCENTIVE PLAN

On April 25, 2008, the Company approved and adopted the 2008 Equity Incentive Plan (the “EIP”) for the purpose to provide additional incentive to employees, directors and consultants. The EIP permits the grant of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares. On May 1, 2008, the Company granted an aggregate of 14,643,372 shares of restricted common stock. The shares issued vest over a four-year period, and at issue resulted in total deferred compensation of $483,231. The fair values of these restricted stock awards are equal to the fair value of the Company’s stock on the date of grant. Such restricted stock is subject to the risk of forfeiture upon the occurrence of certain events. During the six months ended June 30, 2008, the Company recognized $20,135 of compensation expense under the plan. As of June 30, 2008, there was $463,096 of unrecognized compensation expense related to the nonvested restricted stock. This cost is expected to be recognized over a four-year period.

The following table summarizes the status of the Company’s nonvested restricted stock awards during the six months ended June 30, 2008: 
 
   
Nonvested restricted stock
and stock unit awards
 
   
Number of shares
 
Weighted average grant date fair values
 
Outstanding at beginning of period
   
-
 
$
-
 
Granted
   
14,643,372
   
0.033
 
Vested
   
(610,140
)
 
0.033
 
               
Outstanding at end of period
   
14,033,232
 
$
0.033
 
 
NOTE 1 5   SEGMENT REPORTING, GEOGRAPHICAL INFORMATION

The Company considers its business activities to constitute one single segment. The Company’s chief operating decision maker use these results to make operating and strategic decisions. The geographic distribution of the Company’s customers is located in Japan and the PRC.

An analysis of the Company’s revenues and net assets by region are as follows:
 
   
Three months ended June 30,
 
   
2008
 
2007
 
Revenue:
             
- Japan
 
$
1,229,939
 
$
1,702,881
 
- The PRC
   
1,076,543
   
252,016
 
               
 
$
2,306,482
 
$
1,954,897
 

F-17

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)
 
   
Six months ended June 30,
 
   
2008
 
2007
 
Revenue:
             
- Japan
 
$
2,201,466
 
$
2,356,990
 
- The PRC
   
2,462,596
   
771,882
 
               
   
$
4,664,062
 
$
3,128,872
 
 
   
As of June 30,
 
   
2008
 
2007
 
Net assets (liabilities):
          
- U.S.
 
$
537,874
 
$
1,966
 
- BVI
   
(68,995
)
 
(5,752
)
- The PRC
   
4,764,390
   
2,885,741
 
               
   
$
5,233,269
 
$
2,881,995
 
 
NOTE 1 6   CONCENTRATION AND RISK

(a) Major customers and vendors

For the three and six months ended June 30, 2008 and 2007, 100% of the Company’s assets were located in the PRC. 49% and 47% of the Company’s revenues were derived from customers located in Japan for the three and six months ended June 30, 2008.

For the three months ended June 30, 2008, customers who account for 10% or more of revenues are presented as follows:

 
Customers
   
Revenues
 
Percentage
of revenues
   
Accounts
receivable, trade
Customer A
   
$
360,922
 
16%
   
$
125,564
Customer B
     
265,048
 
12%
     
97,653
Customer C
     
264,059
 
11%
     
141,877
Customer D
     
246,815
 
11%
     
120,616
Customer E
     
231,710
 
10%
     
183,550
       
 
           
 
Total:
 
$
1,368,554
 
60%
Total:
 
$
669,260

For the six months ended June 30, 2008, customers who account for 10% or more of revenues are presented as follows:

F-18

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

 
Customers
   
Revenues
 
Percentage
of revenues
   
Accounts
receivable, trade
Customer A
   
$
765,861
 
17%
   
$
125,564
Customer B
     
641,111
 
14%
     
153,678
Customer C
     
603,578
 
14%
     
141,877
Customer D
     
500,695
 
11%
     
183,550
Customer E
     
457,863
 
10%
     
120,616
Customer F
     
446,625
 
10%
     
97,653
                     
 
Total:
 
$
3,415,733
 
76%
Total:
 
$
822,938

For the three and six months ended June 30, 2007, there are no customers who account for 10% or more of revenues.

For the three and six months ended June 30, 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 June 30, 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.

F-19

 
CHINA SHOE HOLDINGS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
(Currency expressed in United States Dollars (“US$”))
( Unaudited)

NOTE 17   OPERATING LEASE COMMITMENT

The Company rented offices, factories and retail shops under non-cancelable operating lease agreements. As of June 30, 2008, the future minimum rental payments required for the coming years are as follows:

Period ended June 30 ,
      
2009
   
79,022
 
2010
   
84,348
 
2011
   
55,482
 
Thereafter
   
111,246
 
   
$
330,098
 

For the six months ended June 30, 2008 and 2007, rental expenses were $27,092 and $30,161 respectively.

F-20

 
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-Q, 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-K 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 June 30, 2008 through slightly higher marketing efforts to be placed on the ladies footwear for the domestic market.

Apart from the manufacturing business, during the three months ended June 30, 2006, the Company commenced its retail business in Shanghai region through selling its own developed brands of “Kanggies” and “CCR”.

The Company continued to strengthen its balance sheet in 2007 and for the three months ended of June 30, 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.

We also conduct retail sales of our own developed ladies shoes and leather products in the People’s Republic of China, mainly in the Shanghai region.

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.
 
F-22


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 Company approved and adopted the 2008 Equity Incentive Plan (the “EIP”) for the purpose to provide additional incentive to employees, directors and consultants. The EIP permits the grant of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares.

On May 1, 2008, the Company issued 14,643,372 shares of restricted common stock under the EIP with a fair market value of $0.033 per share. The fair market value was based on the last trade or closing ask price of the Company’s common stock on the over the counter bulletin board.

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.
 
F-23


Results of Operations

(1) The following table summarizes the results of our operations during the three-months period ended June 30 2008 and 2007, and provides information regarding the dollar and percentage increase or (decrease) from the three-months period ended June 30, 2008 to the three months period ended June 30, 2007.

All amount, other than percentages, in millions of U.S dollars
 
   
3 Months Ended June 30,
 
 
 
Item
 
2008
 
2007
 
Increase
(Decrease)
 
% Increase
(% Decrease)
 
Operating Revenues
 
$
2.31
 
$
1.95
 
$
0.36
 
$
18.5
%
Cost of Revenues
   
1.64
   
1.30
   
0.34
   
26.2
%
Gross Profit
   
0.67
   
0.65
   
0.02
   
3.1
%
Operating Expenses
                         
- Depreciation
   
0.05
   
0.01
   
0.04
   
400.0
%
- Stock based compensation
   
0.02
   
0.02
   
-
   
-
 
- Selling & marketing
   
0.04
   
-
   
0.04
   
N/A
 
- General & administrative
   
0.14
   
0.42
   
(0.28
)
 
(66.7
%)
Other Income (Expenses)
   
(0.003
)
 
(0.012
)
 
(0.01
)
 
(75.0
%)
Net Income
   
0.39
   
0.20
   
0.19
   
95.0
%
 
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Revenue: Commencing from the three months ended June 30, 2008, our revenues are generated from manufacturing and retailing business, revenue was $2.31 million for the three months ended June 30, 2008 as compared to $1.95 million for the three months ended June 30, 2007, representing an increase by 18.5%. The increase in revenue was mainly contributed to the increased in the proportion of sales into the domestic sales and the revenue derived from retailing business.

Cost of Revenue and Gross Profit: Cost of revenue and gross profit were respectively $1.64 million and $0.67 million for the three months ended June 30, 2008 as compared to $1.30 million and $0.65 million for the three months ended June 30, 2007, representing an increase by 26.2% and 3.1% respectively. The substantial growth in gross profit was attributable to a tighten control on cost of production.

Operating Expenses: Operating expenses was $0.25 million for the three months ended June 30, 2008 as compared to $0.44 million for the three months ended June 30, 2007, representing a decrease by 43.2%. The decreased was mainly attributable to the decreased in the agency expenses and entertainment expenses connected with serving the Japanese customers as a closer business connection with the Japanese customers have been established in the current period of 2008.
 
F-24


Income Tax Expenses: China Shoe Holdings, Inc. is subject to United States federal income tax rate. No provision for income taxes in the United States has been made as China Shoe Holdings, Inc. had no United States taxable income during the three months ended June 30, 2008.

Our wholly owned subsidiary Wholly Success Technology Group Limited (“WSTG”) was incorporated in the British Virgin Island and, under the current laws of the BVI, is not subject to income taxes.

Starting from the first quarter of 2007, Shanghai Kanghong Yunheng Enterprise Development Company Limited (“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.

Our subsidiary, Shanghai Kangjiesi Shoes Co., Ltd (“SKSCL”) which operates in the PRC, is conducting shoes retailing business in the People’s Republic of China. SKSCL is subject to a corporate income tax rate of 25% .

Income taxes expense was $0.02 million for the three months ended June 30, 2008. The Company started to pay taxes during the three months ended June 30, 2008 because of the commencement of the retail business from SKSCL during the three months ended June 30, 3008.

Net income: Net income was $0.39 million for the three months ended June 30, 2008 as compared to $0.20 million for the three months ended June 30, 2007, representing an increase by 95%, the increase was mainly attributable to the increase in the greater proportion of sales from the domestic market and revenue derived from the retailing business.

(2) The following table summarizes the results of our operations during the six-months period ended June 30 2008 and 2007, and provides information regarding the dollar and percentage increase or (decrease) from the six-months period ended June 30, 2007 to the six months period ended June 30, 2008.
 
F-25


 All amount, other than percentages, in millions of U.S dollars

   
6 Months Ended June 30,
 
 
 
Item
 
2008
 
2007
 
Increase
(Decrease)
 
% Increase
(% Decrease)
 
Operating Revenues
 
$
4.66
 
$
3.13
 
$
1.53
 
$
48.9
%
Cost of Revenues
   
3.13
   
2.11
   
1.02
   
48.3
%
Gross Profit
   
1.53
   
1.02
   
0.51
   
50.0
%
Operating Expenses
                         
- Depreciation
   
0.11
   
0.01
   
0.10
   
1000.0
%
- Stock based compensation
   
0.02
   
0.02
   
-
   
-
 
- Selling & marketing
   
0.04
   
-
   
0.04
   
N/A
 
- General & administrative
   
0.41
   
0.59
   
(0.18
)
 
(30.5
%)
Other Income (Expenses)
   
(0.007
)
 
(0.017
)
 
(0.01
)
 
(58.8
%)
Net Income
   
0.92
   
0.39
   
0.53
   
135.9
%
 
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Revenue: Commencing from the three months ended June 30, 2008, our revenues are generated from both manufacturing and retailing business, revenue was $4.66 million for the six months ended June 30, 2008 as compared to $3.13 million for the six months ended June 30, 2007, representing an increase by 48.9%. The increase in revenue was mainly contributed to the increased in the proportion of sales into the domestic sales and the revenue derived from retailing business.

Cost of Revenue and Gross Profit: Cost of revenue and gross profit were respectively $3.13 million and $1.53 million for the six months ended June 30, 2008 as compared to $2.11 million and $1.02 million for the six months ended June 30, 2007, representing an increase by 48.3% and 50.0% respectively. The substantial growth in gross profit was attributable to a tighten control on cost of production.

Operating Expenses: Operating expenses was $0.58 million for the six months ended June 30, 2008 as compared to $0.62 million for the six months ended June 30, 2007, representing a decrease by 6.5%. The decreased was mainly attributable to the decreased in the agency expenses and entertainment expenses connected with serving the Japanese customers as a closer business connection with the Japanese customers have been established in the current period of 2008.

Income Tax Expenses: China Shoe Holdings, Inc. is subject to United States federal income tax rate. No provision for income taxes in the United States has been made as China Shoe Holdings, Inc. had no United States taxable income during the six months ended June 30, 2008.
 
Our wholly owned subsidiary Wholly Success Technology Group Limited (“WSTG”) was incorporated in the British Virgin Island and, under the current laws of the BVI, is not subject to income taxes.
 
F-26


Starting from the first quarter of 2007, Shanghai Kanghong Yunheng Enterprise Development Company Limited (“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.

Our subsidiary, Shanghai Kangjiesi Shoes Co., Ltd (“SKSCL”) which operates in the PRC, is conducting shoes retailing business in the People’s Republic of China. SKSCL is subject to a corporate income tax rate of 25% .

Income taxes expense was $0.02 million for the three months ended June 30, 2008. The Company started to pay taxes during the six months ended June 30, 2008 because of the commencement of the retail business from SKSCL during the three months ended June 30, 3008.

Net income: Net income was $0.92 million for the six months ended June 30, 2008 as compared to $0.39 million for the six months ended June 30, 2007, representing an increase by135.9%, the increase was mainly attributable to the increase in the greater proportion of sales from the Japanese market.

Liquidity and Capital Resources

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Operating Activities:

Net cash used in operating activities was $0.14 million for the six months ended June 30, 2008, which is an increase of $0.05 million from $0.09 million as compared with the corresponding period in 2007. The increase was mainly due to the increased in other payables and accrued liabilities, advance to employees and inventories and the decreased in accounts receivables and prepayment.

Investing Activities:

Net cash used in investing activities for the six months ended June 30, 2008 was $0.01 million. The increase was attributable to the acquisition of fixed assets.
 
F-27


Financing Activities:

Net cash provided by financing activities in the six months ended June 30, 2008 totaled $0.55 million as compared to $0.37 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.
 
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.

F-28


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 June 30, 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
 
None.
Item 4. Submission of Matters to a Vote of Security Holders
 
No items during the period covered by this report.
Item 5. Other Information
 
None.
 
Item 6. Exhibits and Reports on Form 8-K

a)
EXHIBITS
 
 
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: August 18, 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
 
August 19, 2008
Gu Xianzhong
 
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ Angus Cheung Ming
 
Chief Financial Officer
 
August 19, 2008
Angus Cheung Ming
 
(Principal Financial and Accounting Officer)
 
 
 
F-31

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